Attached files
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM 10-Q
(Mark
One)
ý Quarterly
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For
the quarterly period ended March 31, 2009
o Transition
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For
the transition period from ___________ to __________
Commission
File No. 0-18958
Groen
Brothers Aviation, Inc.
(Exact
Name of Registrant as Specified in Its Charter)
Utah
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87-0489865
|
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(State
or other jurisdiction of
|
(I.R.S.
Employer
|
|
incorporation
or organization)
|
Identification
No.)
|
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2640
West California Avenue
|
||
Salt
Lake City, Utah 84104-4593
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||
(Address
of principal executive offices, including zip code)
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||
(801)
973-0177
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||
(Registrant’s
telephone number, including area
code)
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Indicate
by check mark whether the Registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 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 o No ý
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). The registrant has not yet
been phased into the Interactive Data reporting system.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 o
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Accelerated
filer o
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Non-accelerated
filer o
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Smaller
reporting company ý
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Indicate
by check mark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).Yes o No ý
As of
March 31, 2009 and April 27, 2010, there were 171,416,289 shares of the
Registrant’s common stock, no par value per share, outstanding.
CAUTIONARY
STATEMENT REGARDING THE FILING DATE OF THIS REPORT AND THE ANTICIPATED FUTURE
FILINGS OF ADDITIONAL PAST-DUE REPORTS
This
Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2009 is
first being filed in April 2010. The Company is in the process of
preparing its other periodic reports, including the Form 10-K for the fiscal
year ended June 30, 2009, and plans to file such reports at the earliest
practicable date. Shareholders and others are cautioned that the
financial statements included in this report are over one year old and are not
necessarily indicative of the operating results that may be expected for the
years ending June 30, 2009 or 2010.
GROEN
BROTHERS AVIATION, INC.
FORM
10-Q
FOR
THE QUARTER ENDED MARCH 31, 2009
PART
I - Financial Information
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|
Item
1. Financial Statements (Unaudited)
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Condensed Consolidated Balance
Sheets
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3
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Condensed Consolidated Statements of Operations
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4
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Condensed Consolidated Statements of Cash Flows
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5
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Notes to Condensed Consolidated Financial Statements
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6
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Item
2. Management’s Discussion and Analysis of Financial Condition
and Results of Operations
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17
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Item
3. Quantitative and Qualitative Disclosures About Market
Risk
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28
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Item
4T. Controls and Procedures
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29
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PART
II - Other Information
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Item
1. Legal Proceedings
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30
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Item
1A. Risk Factors
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30
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Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
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30
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Item
3. Defaults Upon Senior Securities
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30
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Item
4. Submission of Matters to a Vote of Security
Holders
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30
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Item
5. Other Information
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30
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Item
6. Exhibits
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32
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Signatures
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33
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2
PART
I - FINANCIAL INFORMATION
Item
1. Financial Statements
GROEN
BROTHERS AVIATION, INC.
|
||||||||
Condensed
Consolidated Balance Sheets
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||||||||
ASSETS
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March
31,
2009
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June
30,
2008
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||||||
(Unaudited)
|
||||||||
Current
assets:
|
||||||||
Cash
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$ | 189,000 | $ | 3,000 | ||||
Accounts
receivable, net of allowance of $7,000
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20,000 | 14,000 | ||||||
Related
party accounts and notes receivable
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2,000 | 5,000 | ||||||
Prepaid
expenses
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13,000 | 6,000 | ||||||
Total
current assets
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224,000 | 28,000 | ||||||
Property
and equipment, net
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92,000 | 133,000 | ||||||
Total
assets
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$ | 316,000 | $ | 161,000 | ||||
LIABILITIES
AND STOCKHOLDERS’ DEFICIT
|
||||||||
Current
liabilities:
|
||||||||
Bank
overdraft
|
$ | - | $ | 22,000 | ||||
Bank
overdraft line of credit
|
- | 47,000 | ||||||
Accounts
payable
|
2,558,000 | 4,232,000 | ||||||
Accrued
expenses
|
11,707,000 | 9,429,000 | ||||||
Notes
payable
|
1,409,000 | 564,000 | ||||||
Related
party notes payable
|
59,278,000 | 17,483,000 | ||||||
Series
B 15% cumulative redeemable non-voting preferred stock, no par value,
50,000,000 shares authorized, 36,411 and 68,095 shares issued and
outstanding, respectively
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36,411,000 | 68,095,000 | ||||||
Total
current liabilities
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111,363,000 | 99,872,000 | ||||||
Long-term
liabilities:
|
||||||||
Accrued
expenses
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5,478,000 | 5,192,000 | ||||||
Deferred
revenue
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25,000 | 25,000 | ||||||
Long-term
debt
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97,000 | 102,000 | ||||||
Related
party long-term debt
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- | 166,000 | ||||||
Dealer
deposits
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2,105,000 | 2,105,000 | ||||||
Total
liabilities
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119,068,000 | 107,462,000 | ||||||
Stockholders’
deficit:
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||||||||
Series
A convertible preferred stock, no par value, 50,000,000 shares authorized,
1,400,000 shares issued and outstanding
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70,000 | 70,000 | ||||||
Common
stock, no par value, 500,000,000 shares authorized, 171,416,289 shares
issued and outstanding
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34,620,000 | 34,390,000 | ||||||
Accumulated
deficit
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(153,442,000 | ) | (141,761,000 | ) | ||||
Total
stockholders’ deficit
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(118,752,000 | ) | (107,301,000 | ) | ||||
Total
liabilities and stockholders’ deficit
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$ | 316,000 | $ | 161,000 | ||||
See
accompanying notes to condensed consolidated financial
statements
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3
GROEN
BROTHERS AVIATION, INC.
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Condensed
Consolidated Statements of Operations
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(Unaudited)
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Three
Months Ended
March
31,
|
Nine
Months Ended
March
31,
|
|||||||||||||||
2009
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2008
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2009
|
2008
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|||||||||||||
Revenues
|
$ | 469,000 | $ | 2,214,000 | $ | 853,000 | $ | 5,783,000 | ||||||||
Costs
and expenses:
|
||||||||||||||||
Cost
of sales
|
227,000 | 2,005,000 | 644,000 | 6,211,000 | ||||||||||||
Research
and development
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81,000 | 70,000 | 246,000 | 746,000 | ||||||||||||
General
and administrative expenses
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238,000 | 889,000 | 693,000 | 2,450,000 | ||||||||||||
Total
costs and expenses
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546,000 | 2,964,000 | 1,583,000 | 9,407,000 | ||||||||||||
Loss
from operations
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(77,000 | ) | (750,000 | ) | (730,000 | ) | (3,624,000 | ) | ||||||||
Other
income (expense):
|
||||||||||||||||
Related
party interest income
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1,000 | 1,000 | 2,000 | 3,000 | ||||||||||||
Interest
and other income
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- | 18,000 | 1,000 | 24,000 | ||||||||||||
Gain
on sale of property and equipment
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- | - | 45,000 | - | ||||||||||||
Gain
on extinguishment of debt
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- | 23,000 | - | 47,000 | ||||||||||||
Interest
expense
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(2,453,000 | ) | (1,131,000 | ) | (5,721,000 | ) | (2,964,000 | ) | ||||||||
Series
B preferred stock interest expense
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(1,316,000 | ) | (2,373,000 | ) | (5,278,000 | ) | (6,863,000 | ) | ||||||||
Total
other income (expense)
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(3,768,000 | ) | (3,462,000 | ) | (10,951,000 | ) | (9,753,000 | ) | ||||||||
Loss
before income taxes
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(3,845,000 | ) | (4,212,000 | ) | (11,681,000 | ) | (13,377,000 | ) | ||||||||
Income
tax benefit
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- | - | - | - | ||||||||||||
Net
loss
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$ | (3,845,000 | ) | $ | (4,212,000 | ) | $ | (11,681,000 | ) | $ | (13,377,000 | ) | ||||
Net
loss per common share – basic and diluted
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$ | (0.02 | ) | $ | (0.03 | ) | $ | (0.07 | ) | $ | (0.09 | ) | ||||
Weighted
average number of common shares outstanding – basic and
diluted
|
166,066,000 | 154,080,000 | 166,066,000 | 151,269,000 | ||||||||||||
See
accompanying notes to condensed consolidated financial
statements
|
4
GROEN
BROTHERS AVIATION, INC.
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||||||||
Condensed
Consolidated Statements of Cash Flows
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||||||||
(Unaudited)
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||||||||
Nine
Months Ended
March
31,
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||||||||
2009
|
2008
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|||||||
Cash
flows from operating activities:
|
||||||||
Net
loss
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$ | (11,681,000 | ) | $ | (13,377,000 | ) | ||
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
||||||||
Depreciation
and amortization expense
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40,000 | 186,000 | ||||||
Common
stock issued for interest expense
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- | 455,000 | ||||||
Common
stock issued for 401(k) expense
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- | 306,000 | ||||||
Stock
options and warrants issued for interest expense
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(6,000 | ) | 98,000 | |||||
Stock
options issued for services
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6,000 | 9,000 | ||||||
Stock-based
compensation
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223,000 | 543,000 | ||||||
Interest
expense accrued on Series B preferred stock
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5,278,000 | 6,863,000 | ||||||
Interest
expense added to debt principal
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2,723,000 | 10,000 | ||||||
Gain
on extinguishment of debt
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- | (1,000 | ) | |||||
Interest
income on related party notes receivable
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- | (3,000 | ) | |||||
(Gain)
loss on sale of property and equipment
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(45,000 | ) | 44,000 | |||||
(Increase)
decrease in:
|
||||||||
Accounts
and notes receivable
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(6,000 | ) | (503,000 | ) | ||||
Prepaid
expenses
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(7,000 | ) | (157,000 | ) | ||||
Inventories
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- | 126,000 | ||||||
Increase
(decrease) in:
|
||||||||
Accounts
payable
|
(788,000 | ) | (108,000 | ) | ||||
Accrued
expenses
|
2,572,000 | 2,803,000 | ||||||
Deferred
revenue
|
- | (328,000 | ) | |||||
Dealer
deposits
|
- | (40,000 | ) | |||||
Net
cash used in operating activities
|
(1,691,000 | ) | (3,074,000 | ) | ||||
Cash
flows from investing activities:
|
||||||||
Purchase
of property and equipment
|
- | (6,000 | ) | |||||
Proceeds
from sale of property and equipment
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27,000 | - | ||||||
Payments
of related party notes receivable
|
2,000 | 2,000 | ||||||
Net
cash provided by (used in) investing activities
|
29,000 | (4,000 | ) | |||||
Cash
flows from financing activities:
|
||||||||
Proceeds
from the issuance of debt
|
2,041,000 | 7,837,000 | ||||||
Repayment
of debt
|
(124,000 | ) | (4,950,000 | ) | ||||
Repayment
of bank overdraft
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(22,000 | ) | - | |||||
Repayment
of bank overdraft line of credit
|
(47,000 | ) | - | |||||
Proceeds
from the issuance of common stock and stock options
|
- | 132,000 | ||||||
Payment
of finders’ compensation on issuance of common stock
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- | (1,000 | ) | |||||
Net
cash provided by financing activities
|
1,848,000 | 3,018,000 | ||||||
Net
increase (decrease) in cash
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186,000 | (60,000 | ) | |||||
Cash,
beginning of period
|
3,000 | 60,000 | ||||||
Cash,
end of period
|
$ | 189,000 | $ | - | ||||
See
accompanying notes to condensed consolidated financial
statements
|
5
GROEN
BROTHERS AVIATION, INC.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Note
1. Basis of Presentation
Organization
and Consolidation
The
unaudited condensed consolidated financial statements include the accounts of
Groen Brothers Aviation, Inc. (the “Company”) and its wholly owned subsidiary,
Groen Brothers Aviation USA, Inc. (“GBA USA”), and include all adjustments
(consisting of normal recurring adjustments) which are, in the opinion of
management, necessary to present fairly the financial position as of March 31,
2009 and the results of operations and cash flows for the three months and nine
months ended March 31, 2009 and 2008. The results of operations for
the nine months ended March 31, 2009 are not necessarily indicative of the
results to be expected for the full fiscal year ending June 30,
2009.
Basis of Presentation and Going Concern
Uncertainty
The accompanying condensed consolidated
financial statements have been prepared assuming that the Company will continue
as a going concern. Because of recurring operating losses, the excess
of current liabilities over current assets, the stockholders’ deficit, and
negative cash flows from operations, there is substantial doubt about the
Company’s ability to continue as a going concern.
At March
31, 2009, the Company had total current liabilities of $111,363,000 and current
assets of $224,000, resulting in a working capital deficiency of
$111,139,000. At March 31, 2009, the Company had a total
stockholders’ deficit of $118,752,000.
Following
delays in our Heliplane program for the U.S. Defense Advanced Research Projects
Agency (“DARPA”), lower than anticipated results from sales of our SparrowHawk
kits, and negative conditions in capital markets, we effected a substantial
reduction in force and have significantly scaled back the level of our
operations.
Historically,
the Company experienced a negative gross profit on sales of Sparrow Hawk kits
and the number of SparrowHawk kits sold fell below expectations, due in part to
lack of funding to finalize product development and to pay for increased sales
and marketing efforts. In these circumstances, prospects of reaching
a satisfactory profit level in a deteriorating economic climate were not
promising. As importantly, the Company determined that the kit
aircraft business, aimed at customers for their personal use could not be
readily compatible with the design, manufacture and marketing of more
sophisticated aircraft required by military and commercial
customers. Therefore, in May 2008, the Company decided to cease
production of the SparrowHawk and to seek to sell the program to a buyer with
more compatible operating conditions and strategic
interests. Consistent with this decision, and as part of its
reduction in operations, the Company discontinued its SparrowHawk flight
training and other flight operations at Buckeye Airport, Arizona and also
terminated the lease on its primary hangar at that location. The
Company retained its small leased hangar at Buckeye for storage and to maintain
the ability to undertake flight tests or demonstration flights at that airport
if needed.
The
Company has also experienced a negative profit margin on the DARPA contract,
which has reduced cash flows from operations. Subsequent to March 31,
2009, DARPA announced the award of the Heliplane prime contractor position to
the Georgia Institute of Technology (GT) for Phase IB. Since then,
the Company has been engaged as a GT subcontractor for rotor systems work of
Phase IB.
The
Company’s continuation as a going concern is dependent on attaining profitable
operations, obtaining additional outside financing and/or restructuring its debt
obligations, including its Series B Preferred Stock. The Company has
funded losses from operations primarily from the issuance of debt to related
parties (current shareholders and lenders of the Company), the increase in
accounts payable and accrued expenses, and the sale of the Company’s restricted
common stock in private placement transactions, and will require additional
funding from these sources to sustain its future operations.
6
In order
to repay its debt obligations in full or in part when due, the Company will be
required to raise significant capital from other
sources. Alternatively, the Company will be required to negotiate
further extensions of the Series B Preferred Stock maturity date and its notes
payable, as it has accomplished in the past. There is no assurance,
however, that the Company will be successful in these efforts.
During
2006 and 2007, the Company obtained debt financing from the holders of the
Series B Preferred Stock (the “Series B Holders”) in the aggregate principal
amount of $4,400,000 (the “2006/2007 Notes”). The 2006/2007 Notes
provide for the payment of simple interest at the rate of 36% per
annum. The maturity date for the 2006/2007 Notes has been extended
from time to time and currently is May 9, 2010.
Included
in current liabilities and the working capital deficiency at March 31, 2009 is a
$36,411,000 Series B Preferred Stock obligation. The Series B Holders
have agreed to extend the redemption date of the Series B Preferred Stock from
time to time and the current redemption date is May 9, 2010, or such later date
as agreed to in writing by at least 80% of the Series B Holders.
In
October 2008, as part of a Note Purchase Agreement between the Company and the
Series B Holders, the Company issued short-term interest bearing notes in the
principal amount of $36,962,000 in satisfaction of the accrued and unpaid
dividends on the Series B Preferred Stock through October 9, 2008 (the “Dividend
Notes”). Because the Company had paid such dividends in kind by
issuing additional shares of Series B Preferred Stock, the issuance of the
Dividend Notes resulted in the redemption of $36,962,000 of Series B Preferred
Stock. The Dividend Notes provide for the payment of interest at the
rate of 15% per annum, compounded quarterly. The maturity date for
the Dividend Notes has been extended from time to time and currently is May 9,
2010.
The Note
Purchase Agreement, as amended, provides for the periodic sale by the Company to
the lenders of short-term promissory notes in the aggregate principal amount of
up to $5,750,000 to provide the Company with operating capital, as specified in
the draw requests for such notes (the “Note Purchase Notes”). The
draw requests must be approved by the lenders. Through March 31,
2009, the lenders had purchased notes under the Note Purchase Agreement in the
aggregate principal amount of $1,935,000 and the proceeds had been used by the
Company to cover its minimum cash needs in excess of funding provided by
payments from Georgia Tech for the Company’s work on the DARPA
contract. The Note Purchase Notes provide for the payment of simple
interest at the rate of 15% per annum. The maturity date for the Note
Purchase Notes has been extended from time to time and currently is May 9,
2010.
Substantially all assets of the
Company, including its intellectual property, have been pledged as collateral
for the Company’s debt.
There can be no guarantee or assurance
that the Company will be successful in its ability to generate income from
operations or from the DARPA contract, or to raise capital at favorable rates or
at all. The condensed consolidated financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.
7
Reclassifications
Certain amounts in the condensed
consolidated financial statements for the three and nine months ended March 31,
2008 have been reclassified to conform to the current period
presentation.
Note
2: Loss Per Common Share
The
computation of basic net loss per common share is computed using the weighted
average number of common shares outstanding during each period. The
computation of diluted net loss per common share is based on the weighted
average number of shares outstanding during the period plus common stock
equivalents which would arise from the exercise of stock options and warrants
outstanding using the treasury stock method and the average market price per
share during the period, as well as common shares issuable upon the conversion
of debt to common stock. Common stock equivalents were not included
in the diluted loss per share calculation because the effect would have been
anti-dilutive.
The calculation of the weighted average
number of common shares outstanding excludes common shares that have been issued
as collateral for certain notes payable to related parties. These
collateral shares are restricted and bear a legend prohibiting the holder from
selling or transferring the shares at any time. The Company has
assigned no value to these shares, and the terms of the notes payable require
the holder of the collateral shares to return the shares to the Company when the
applicable note and accrued interest are paid in full. At March 31,
2009, the Company had issued 5,350,000 shares of common stock as
collateral.
Note
3: Stock Based Compensation
The
Company accounts for stock-based compensation in accordance with Statement of
Financial Accounting Standards (“SFAS”) No. 123(R), Share Based
Payments. Under the fair value recognition provisions of this
statement, stock-based compensation cost is measured at the grant date based on
the value of the award granted using the Black-Scholes option pricing model, and
recognized over the period in which the award vests. The stock-based
compensation expense for the three-month and nine-month periods ended March 31,
2009 and 2008 has been allocated to the various categories of operating costs
and expenses in a manner similar to the allocation of payroll expense as
follows:
Three
Months Ended
March
31,
|
Nine
Months Ended
March
31,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Cost
of sales
|
$ | 32,000 | $ | 81,000 | $ | 96,000 | $ | 136,000 | ||||||||
Research
and development
|
12,000 | 109,000 | 38,000 | 299,000 | ||||||||||||
General
and administrative
|
30,000 | 8,000 | 89,000 | 108,000 | ||||||||||||
Total
stock-based compensation expense
|
$ | 74,000 | $ | 198,000 | $ | 223,000 | $ | 543,000 |
There was
no stock compensation expense capitalized during the nine months ended March 31,
2009 and 2008.
8
During
the nine months ended March 31, 2009, no new stock options or warrants were
issued. The following table summarizes the stock option and warrant
activity during the nine months ended March 31, 2009:
Options
and
Warrants
|
Weighted
Average
Exercise
Price
|
Weighted
Average
Remaining
Contract
Term
|
Aggregate
Intrinsic
Value
|
|||||||||||
Outstanding
at June 30, 2008
|
73,885,000 | $ 0.28 | ||||||||||||
Granted
|
- | - | ||||||||||||
Exercised
|
- | - | ||||||||||||
Cancelled
|
(9,555,000 | ) | 0.21 | |||||||||||
Expired
|
(10,177,000 | ) | 0.32 | |||||||||||
Outstanding
at March 31, 2009
|
54,153,000 | 0.29 | 1.98 | $ | 0 | |||||||||
Options
and warrants vested and
exercisable at March 31, 2009
|
43,541,000 | 0.32 | 1.33 | $ | 0 |
The
aggregate intrinsic value in the preceding
table represents the total pretax intrinsic value, based on the Company’s
closing stock price of $0.004 as of March 31, 2009, which would have been
received by the holders of in-the-money options had the option holders exercised
their options as of that date.
As of
March 31, 2009, the total future compensation cost related to non-vested
stock-options not yet recognized in the condensed consolidated statements of
operations was approximately $504,000, and the weighted average period over
which these awards are expected to be recognized was 0.87 years.
Note
4: Accrued Expenses
Accrued expenses consisted of the
following at March 31, 2009:
Compensation
and related taxes
|
$ | 584,000 | ||
Related
party interest
|
10,057,000 | |||
Interest
|
672,000 | |||
Customer
deposits
|
260,000 | |||
Consulting
fees
|
36,000 | |||
Finders’
compensation
|
7,000 | |||
Royalties
to related parties
|
32,000 | |||
Other
|
59,000 | |||
Total
|
$ | 11,707,000 |
Accrued related party interest payable
is comprised of interest expense payable on notes payable to related parties,
consisting primarily of stockholders of the Company.
Royalty payments totaling 1% of the
gross sales price of gyroplanes are to be paid to the Company’s founders, David
Groen and the estate of the late Jay Groen. Through March 31, 2009,
royalties payable totaled $16,000 to each of these individuals, which amounts
are accrued as a component of cost of sales in the condensed consolidated
statements of operations.
9
Long-term accrued expenses consisted of
the following at March 31, 2009:
Deferred
compensation
|
$ | 5,003,000 | ||
Accrued
payroll taxes on deferred compensation
|
176,000 | |||
Accrued
interest on deferred compensation
|
299,000 | |||
Total
|
$ | 5,478,000 |
The deferred compensation is payable to
certain current and former officers, directors, and senior management of the
Company, with amounts originating from fiscal year 1998 through the current
fiscal year. In addition to cash compensation, the Company has a
deferred compensation arrangement for executive officers and certain of its
senior management that accrues additional salary. The terms of the
Company’s Series B 15% Preferred Stock preclude the Company from making any
deferred compensation payments until all outstanding amounts due relating to the
Series B 15% Preferred Stock have been paid in full. Absent payment
restrictions related to outstanding Series B 15% Preferred Stock or other
restrictions, the deferred compensation is payable in part or in whole only by
resolution of the Company’s Board of Directors. Through March 31,
2009, the Board of Directors has not authorized payment of any of the deferred
compensation, and will not authorize payments until the Board determines such
payments are allowed under the Company’s outstanding financing agreements and
would be prudent in light of the Company’s financial condition and availability
of cash. In fiscal year 2001, the Company began accruing interest
expense on the deferred compensation at the rate of 8% per annum. The
accrual of interest was permanently discontinued on July 1, 2004. The
deferred compensation and related accrued payroll taxes and interest payable are
classified as long-term liabilities at March 31, 2009 as the Company does not
anticipate payment of any of these amounts in the next twelve
months.
Note
5: Debt
Included in short-term notes payable at
March 31, 2009 are notes payable to vendors and others totaling $523,000,
substantially all of which are in default. The Company continues
ongoing negotiations with certain of the vendors and has, in most instances,
been granted grace periods and extensions without receipt of formal notices of
default or threat of legal action.
Substantially all related party notes
payable of $59,278,000 at March 31, 2009 are payable to stockholders of the
Company who are considered related parties, including the Series B
Holders. The related party notes payable at March 31, 2009 are
comprised of the following:
Series
B Holders:
|
||||
Dividend
Notes
|
$ | 39,670,000 | ||
Note
Purchase Notes
|
1,935,000 | |||
2006/2007
Notes
|
4,400,000 | |||
46,005,000 | ||||
Other
Related Parties
|
13,273,000 | |||
Total
Related Party Notes Payable
|
$ | 59,278,000 |
Dividend
Notes totaling $39,670,000 ($36,962,000 original principal plus $2,708,000 in
accrued interest expense added to note principal) resulted from the redemption
of 36,962 shares of Series B Preferred Stock in October 2008. The
Dividend Notes provide for the payment of interest at the rate of 15% per annum,
compounded quarterly, and a rate of interest of 18% per annum during any period
in which an event of default has occurred and is continuing. The
maturity date for the Dividend Notes has also been extended from time to time
and currently is May 9, 2010.
10
Pursuant to the Note Purchase Agreement
discussed in Note 7, the Company borrowed a total of $1,935,000 from the Series
B Holders during the period October 1, 2008 to March 31, 2009. The
Note Purchase Notes provide for the payment of simple interest at the rate of
15% per annum. The maturity date for the Note Purchase Notes has been
extended from time to time and currently is May 9, 2010.
During
2006 and 2007, the Company also borrowed a total of $4,400,000 through the
issuance of other promissory notes payable to the Series B Holders that provide
for the payment of simple interest at the rate of 36% per annum. The
maturity date for the 2006/2007 Notes has been extended from time to time and
currently is May 9, 2010.
The Company is delinquent in making
payments on related party notes payable totaling $6,207,000. The
Company is also delinquent on making payments of accrued interest payable on
debt of $4,394,000, of which $3,755,000 is payable to related
parties.
Note
6: Dealer Deposits
Dealer deposits consist of amounts
received from the Company’s authorized dealers on aircraft in anticipation of
full-scale production of the Company’s Hawk 4 gyroplane. The deposit
guarantees a delivery sequence number and represents a percentage of the total
estimated purchase price. The Company has also issued common stock to
dealers as partial consideration for the delay in the certification of the Hawk
4 gyroplane. These costs have been charged to interest expense as
incurred. The dealers have been given the opportunity to convert a
portion of their deposits into shares of the Company’s restricted common
stock. Those dealers that have converted deposits into shares and are
now stockholders of the Company are considered related parties. The
Company continues its efforts to obtain the funding to complete the
certification of the Hawk 4. Once such funding is obtained, the
Company estimates the certification process will require two to three years to
complete. Because of the long-term prospects of obtaining the funding
and completing the certification, dealer deposits have been recorded as
long-term liabilities.
Note
7: Preferred Stock
The
Company has authorized 200,000,000 shares of preferred stock having no par
value. There are two series of preferred stock with 50,000,000 shares
authorized within each series. The rights, terms and preferences of
preferred stock are set by the Board of Directors. As of March 31,
2009, the Board of Directors has set rights, terms and preferences of Series A
and Series B Preferred Stock for issue.
Series
A Convertible Preferred Stock
As of
March 31, 2009, 1,400,000 shares of Series A Convertible Preferred Stock were
issued and outstanding, and held by the following: David Groen, President and
member of the Board of Directors, 1,025,000 shares; Robin Wilson, member of the
Board of Directors 125,000 shares; the widow of the late Jay Groen 125,000
shares; and Dennis Gauger, former member of the Board of Directors, 125,000
shares.
The
rights, terms and preferences of the Series A Convertible Preferred Stock, as
amended, are summarized as follows:
|
·
|
Each
share may cast one hundred (100) votes on all matters submitted to the
stockholders for a vote, voting together with the holders of the common
stock of the Company as a single class, effectively giving current voting
control to the Company's founders.
|
|
·
|
The
voting rights expire seven years from the date of
issue.
|
11
|
·
|
Upon,
and only upon, the Company reaching significant revenue milestones, the
shares are convertible into common stock of the Company through payment of
a cash conversion price of $0.50 per share of common stock, convertible on
a one-for-one hundred (1:100) basis (100 shares of common stock for each
share of Series A Convertible Preferred Stock). Conversion is
allowed at the rate of 25% of the preferred shares for each $30 million in
defined cumulative gross sales, for a total of $120 million in
sales. This convertibility is also only available if these
significant revenue milestones are met within seven years from the date of
issue of the Series A Convertible Preferred
Stock.
|
|
·
|
The
shares, including all voting and conversion rights, to the extent not
converted into common shares, will expire seven years from the date of
issue, and will be cancelled by the
Company.
|
|
·
|
Upon
the death or permanent incapacity of a holder of Series A Convertible
Preferred Stock, all shares held by such holder will be divided equally
between the then existing members of the Company’s Board of Directors and
the holder’s survivor(s) (if more than one person, treated collectively as
one person). Upon a temporary mental incapacity of a holder of
Series A Convertible Preferred Stock, all shares will be voted by the
remaining holders of the Series A Convertible Preferred Stock until the
end of the temporary incapacity.
|
|
·
|
The
shares are non-transferable, non-assignable, and have no dividend or
liquidation rights.
|
Series B Preferred Stock
At March 31, 2009, there were 36,411
shares of Series B 15% Cumulative Redeemable Non-Voting Preferred Stock (the
“Series B Preferred Stock”) outstanding. The rights, terms, and
preferences of the outstanding preferred shares, as amended, are as
follows:
|
·
|
The
shares have no voting rights.
|
|
·
|
Each
share’s original Stated Value, upon which unpaid dividends may accumulate,
is $1,000.
|
|
·
|
The
shares have right to dividends at a 15% annual dividend rate, payable in
cash or in kind at the end of each fiscal quarter. Accumulated
but unpaid dividends shall be cumulative and shall be added to the Stated
Value for purposes of subsequent quarterly dividend
calculations.
|
|
·
|
The
shares shall have superior liquidation priority to any other series of the
Company’s capital stock, equal to the Stated Value plus all accrued but
unpaid dividends thereon.
|
|
·
|
The
redemption price of the shares must be paid by the Company in
cash.
|
|
·
|
The
Company may incur indebtedness of up to $18.5 million without consent of
the holders of the shares.
|
|
·
|
The
Company is required to give notice to holders of the shares prior to
making any capital expenditures in excess of
$300,000.
|
|
·
|
The
maturity date of the shares is defined as the first to occur of (a) June
15, 2007, or such later date as agreed to in writing by at least 80% of
the Series B Holders, (b) the occurrence of a defined “liquidation event”,
or (c) the date that is six months following the receipt by the Company or
its affiliates of proceeds from one or more financing transactions in
excess of $50 million.
|
12
|
·
|
If
the Company should default in its obligation under the Series B Preferred
Stock, the Series B Holders may require the Company to redeem the Series B
Preferred Stock by providing written notice three days prior to the
requested redemption date.
|
|
·
|
At
any time after March 1, 2008, the holders of not less than 80% of the
outstanding shares of Series B Preferred Stock may elect from time to time
to have the outstanding shares of Series B Preferred Stock redeemed in
whole or in part.
|
|
·
|
The
Company is required to make pro rata redemptions of the shares in the
event the Company receives proceeds from certain financing transactions
that exceed $20 million in the
aggregate.
|
On October 11, 2005, the Series B
Holders extended the redemption date of the Series B Preferred Stock from
October 31, 2005 to January 1, 2007. The extension required the
following consideration to be paid to the Series B Holders:
|
·
|
The
cancellation on October 11, 2005 of existing warrants issued to the Series
B Holders to purchase 2.5 million shares of the Company’s common stock at
an exercise price of $0.30 per
share.
|
|
·
|
The
issuance on October 11, 2005 of warrants to purchase 6.85 million shares
of the Company’s common stock exercisable through January 1, 2009 at an
exercise price of $0.30 per share.
|
|
·
|
The
issuance of additional shares of Series B Preferred Stock with a
redemption value of $10.7 million face value (10,700 shares) on January 1,
2007, with reductions in the number of shares to be issued allowed for
repayments during the extension period of amounts due to the Series B
Holders in accordance with an agreed-upon
formula.
|
On
February 13, 2007, the Series B Holders further extended the redemption date to
May 1, 2007. On May 10, 2007, the Series B Holders agreed to an
extension of the redemption date of the Series B Preferred Stock to June 16,
2007, or such later date as agreed to in writing by at least 80% of the Series B
Holders. Subsequently, the Series B Holders agreed in writing to an
extension of the redemption date June 16, 2007, to June 30, 2008.
On
October 9, 2008, as part of a Note Purchase Agreement between the Company and
the Series B Holders, the Company redeemed 36,962 shares of the Series B
Preferred Stock with a book value of $36,962,000, representing the cumulative
total of dividends paid in kind through October 9, 2008. Short-term,
interest bearing promissory notes totaling $36,962,000 were issued to the Series
B Holders in the redemption. The Series B Holders agreed to an
extension of the redemption date of the remaining Series B Stock from June 30,
2008 to April 9, 2009.
The Note
Purchase Agreement also provides for the periodic sale by the Company to the
lenders of short-term promissory notes to provide the Company with operating
capital, as specified in the draw requests for such notes. The draw
requests must be approved by the lenders. Through March 31, 2009, the
lenders had purchased notes under the Note Purchase Agreement in the aggregate
principal amount of $1,935,000 and the proceeds had been used by the Company to
cover its minimum cash needs in excess of funding provided by payments from
Georgia Tech for the Company’s work on the DARPA contract. Subsequent
to the end of January, 2009, the lenders and the Company have amended the
October 9, 2008 Note Purchase Agreement five times to increase the aggregate
amount of promissory notes that can be purchased to $5,750,000, to provide
funding to meet the Company’s monthly minimum financial needs. The
lenders are not obligated to purchase notes pursuant to the Note Purchase
Agreement and there can be no assurance that the lenders will continue to
purchase notes or otherwise provide funding to the Company.
13
Subsequent
to March 31, 2009, the redemption date of the Series B Preferred Stock has been
extended from time to time and currently is May 9, 2010, or such later date as
agreed to in writing by the holders of at least 80% of the outstanding shares of
Series B Preferred Stock.
In
connection with the execution of the Note Purchase Agreement and the issuance of
the Series B Preferred Stock, substantially all assets of the Company, including
its intellectual property, have been pledged as collateral for the Company’s
debt.
The
Company reviewed the requirements of Emerging Issues Task Force (EITF) No. 02-4,
Determining Whether a Debtor’s
Modification or Exchange of Debt Instruments Is Within the Scope of FASB
Statement 15, and determined that the extension of the redemption date of
the original issuance of the Company’s Series B Preferred Stock in October 2003
met the criteria of a troubled debt restructuring outlined in Statement of
Financial Accounting Standards (SFAS) No. 15, Accounting for Debtors and Creditors
for Troubled Debt Restructurings. No gain or loss was recorded on the
October 2003 extension and subsequent extension of the due date in October
2005. The value of the warrants issued to the Series B Holders in
connection with the extensions of the due dates, estimated by the Black-Scholes
option pricing model, was charged to interest expense. The Series B
Preferred Stock will be classified through its redemption as a troubled debt
restructuring.
Included
in the periodic interest expense on the Series B Preferred Stock is the
accretion of the $10,700,000 obligation to issue 10,700 shares of additional
Series B Preferred Stock on January 1, 2007, calculated on the interest
method. The 10,700 additional shares of Series B Preferred Stock were
issued in January 2007.
As a result of amendments to the
features of the Series B Preferred Stock, if the Company is successful in
raising the levels of funding that it requires to bring its debt obligations
current, fund its planned operations, and complete aircraft certification
requirements for its Hawk 4 gyroplane, significant portions of this funding may
be required to make redemption payments on the Series B Preferred
Stock. At March 31, 2009, the recorded value of the Series B
Preferred Stock was $36,411,000, which was recorded as a current
liability.
Statement of Financial Accounting
Standards No. 150 (SFAS 150), “Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity,” establishes standards for how
an issuer classifies and measures in its statement of financial position certain
financial instruments with characteristics of both liabilities and
equity. SFAS 150 requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in some
circumstances) because that financial instrument embodies an obligation of the
issuer. Many of those instruments were previously classified as
equity. The Company’s Series B Preferred Stock is classified as a
liability because it embodies an obligation of the Company and falls within the
scope of SFAS 150. Preferred Stock accretion and dividends are
expensed as interest expense.
Note
8: Stockholders’ Equity
During
the nine months ended March 31, 2009, the Company did not issue any shares of
its common or any options and warrants to purchase shares of common
stock.
The Company has issued shares of its
common stock as collateral for certain notes payable to related
parties. These collateral shares are restricted and bear a legend
prohibiting the holder from selling or transferring the shares at any
time. The Company has assigned no value to these shares, and the
terms of the notes payable require the holder of the collateral shares to return
the shares to the Company when the applicable note and accrued interest are paid
in full. As of March 31, 2009, Company had issued 5,350,000 shares of
common stock as collateral.
14
Note
9: DARPA Contract
In
January 2009, DARPA awarded the Heliplane prime contractor position to the
Georgia Institute of Technology (GT) for Phase IB of the DARPA contract and the
Company was engaged as a GT subcontractor for rotor systems work. As
of the date of this Report, Phase IB of the DARPA contract had been
completed
Note
10: Supplemental Statement of Cash Flows Information
During the nine months ended March 31,
2009 the Company had the following non-cash investing and financing
activities:
|
·
|
Decreased
related party notes receivable through reduction of accrued expenses
payable to related parties of
$1,000.
|
|
·
|
Decreased
property and equipment and decreased accounts payable by $19,000 for
property and equipment returned to
vendor.
|
|
·
|
Decreased
accrued expenses and increased common stock by $7,000 for changes to
accrued finders’ compensation.
|
|
·
|
Increased
related party notes payable and decreased Series B Preferred Stock by
$36,962,000 upon partial redemption of Series B Preferred
Stock.
|
|
·
|
Increased
related party notes payable and decreased accounts payable by
$867,000.
|
During
the nine months ended March 31, 2008 the Company had the following non-cash
investing and financing activities:
|
·
|
Decreased
related party notes receivable through reduction of accrued expenses
payable to related parties of
$8,000.
|
|
·
|
Increased
property and equipment and decreased inventories by $14,000 for work-in
progress inventories transferred to
construction-in-progress.
|
|
·
|
Acquired
property and equipment through the issuance of accounts payable of
$230,000.
|
|
·
|
Acquired
property and equipment through the issuance of related party notes payable
of $5,000.
|
|
·
|
Issued
shares of common stock in payment of employer 401(k) match of
$306,000.
|
|
·
|
Issued
15,000 shares of common stock in payment of accrued expenses of
$16,000.
|
|
·
|
Decreased
accrued expenses and increased common stock by $17,000 for changes to
accrued finders’ compensation.
|
|
·
|
Decreased
accrued expenses and increased debt by $579,000 for accrued interest
payable added to debt principal.
|
Cash paid
for interest expense was $35,000 and $776,000 for the nine months ended March
31, 2009 and 2008, respectively.
No payments of income taxes were made
during the nine months ended March 31, 2009 and 2008.
15
Note
11: Recently Issued Accounting Pronouncements
In June
2009, the FASB issued SFAS No. 168, The FASB Accounting Standards
Codification™ and the Hierarchy of Generally Accepted Accounting Principles – a
Replacement of FASB Statement No. 162. The Codification will become the
source of authoritative U.S. generally accounting principles (GAAP) recognized
by the FASB to be applied to nongovernmental entities. Rules and
interpretive releases of the Securities and Exchange Commission (SEC) under
authority of federal securities laws are also sources of authoritative GAAP for
SEC registrants. On the effective date of this Statement, the
Codification will supersede all then-existing non-SEC accounting and reporting
standards. All other non-grandfathered non-SEC accounting literature
not included in the Codification will become nonauthoritative. This
statement is effective for financial statements issued for interim and annual
periods ending after September 15, 2009 (our quarter ended September 30,
2009). We are currently unable to determine what impact the future
application of this pronouncement may have on our consolidated financial
statements.
On May
28, 2009, the FASB issued SFAS No. 165, Subsequent
Events. This statement is intended to establish general
standards of accounting for and disclosures of events that occur after the
balance sheet date but before financial statements are issued or are available
to be issued. It requires the disclosure of the date through which an
entity has evaluated subsequent events and the basis for that date—that is,
whether that date represents the date the financial statements were issued or
were available to be issued. This disclosure is intended to alert all
users of financial statements that an entity has not evaluated subsequent events
after that date in the set of financial statements being
presented. The statement is effective for interim and annual periods
ending after June 15, 2009, or our fiscal year ended June 30,
2009. We are currently unable to determine what impact the future
application of this pronouncement may have on our consolidated financial
statements.
Note
12: Subsequent Events
Series B Preferred Stock –
Subsequent to March 31, 2009, the redemption date of the Series B Preferred
Stock has been extended from time to time and currently is May 9, 2010, or such
later date as agreed to in writing by the holders of at least 80% of the
outstanding shares of Series B Preferred Stock.
Subsequent
to the end of January, 2009, the lenders and the Company have amended the
October 9, 2008 Note Purchase Agreement from time to time to increase the
aggregate amount of promissory notes that can be purchased to $5,750,000 to
provide funding to meet the Company’s monthly minimum financial
needs. The lenders are not obligated to purchase notes pursuant to
the Note Purchase Agreement and there can be no assurance that the lenders will
continue to purchase notes or otherwise provide funding to the
Company.
Debt Financing
Subsequent to March 31, 2009 through
April 19, 2010, the Company has received net proceeds from debt financing of
approximately $2.8 million, substantially all of which was funding received
pursuant to the Note Purchase Agreement.
The maturity date for the 2006/2007
Notes, the Dividend Notes and the Note Purchase Notes has been extended from
time to time and currently is May 9, 2010.
16
Item
2. Management’s Discussion and Analysis of Financial Condition and
Results of Operations
Forward
Looking Statements
This management’s discussion and
analysis of financial condition and results of operations and other portions of
this Quarterly Report on Form 10-Q contain forward-looking information that
involves risks and uncertainties. Our actual results could differ
materially from those anticipated by this forward-looking
information. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed or referred to in
the Annual Report on Form 10-K for the year ended June 30, 2008, filed on
November 12, 2009, under the heading “Forward Looking Statements” and
elsewhere. Investors should review this quarterly report on Form 10-Q
in combination with our Annual Report on Form 10-K in order to have a more
complete understanding of the principal risks associated with an investment in
our common stock. This management’s discussion and analysis of
financial condition and results of operations should be read in conjunction with
our unaudited condensed consolidated financial statements and related notes
included elsewhere in this document.
Late
Filing
This
Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2009 is
first being filed in April 2010. The Company is in the process of
preparing its other periodic reports, including the Form 10-K for the fiscal
year ended June 30, 2009, and plans to file such reports at the earliest
practicable date. Shareholders and others are cautioned that the
financial statements included in this report are over one year old and are not
necessarily indicative of the operating results that may be expected for the
years ending June 30, 2009 or 2010.
Background
We are
engaged in the business of designing and developing new technology gyroplane and
gyrodyne rotor-wing aircraft for military and commercial
uses. Following the delays in our Heliplane program for DARPA, lower
than anticipated results from sales of SparrowHawk kits, and negative conditions
in capital markets, we undertook cost-cutting measures that we hope will allow
us to continue to develop our technology on a reduced scale. We
effected a substantial reduction in force and have reduced other operating
expenditures as well.
Significant
Series B Preferred Stock and Debt Obligations
From 2006
through the present, in addition to other debt, the Company has obtained debt
and equity financing from certain lenders who are also stockholders of the
Company. As of March 31, 2009, the Company’s obligations to such
lenders included: 36% promissory notes issued during 2006 and 2007 in the
aggregate principal amount of $4,400,000 (the “2006/2007 Notes”); a $36,411,000
Series B 15% Cumulative Preferred Stock Obligation; 15% secured promissory notes
in the aggregate principal amount of $39,670,000 that were issued in
satisfaction of accrued dividends of $36,962,000 on the Series B Preferred Stock
through October 9, 2008 plus $2,708,000 in interest accrued and added to debt
principal through March 31, 2009 (the “Dividend Notes”); and secured 15%
promissory notes in the aggregate principal amount of $1,935,000 issued pursuant
to the Note Purchase Agreement dated October 9, 2008 (the “Note Purchase
Notes”). As discussed in more detail below, the redemption date of
the Series B Preferred Stock and the maturity dates of the 2006/2007 Notes, the
Dividend Notes and the Note Purchase Notes have been extended to May 9,
2010. The Company is generating limited revenues which are not
adequate to pay the interest accruing on the debt described above and the
Company will be unable to repay such debt when it becomes due on May 9,
2010. Substantially all the Company’s assets have been pledged to
secure its debts and if the lenders should fail to further extend the redemption
dates and maturity dates for such debts as they have done in the past, such
lenders could foreclose on substantially all the assets of the Company and the
Company would be forced to discontinue its operations. No assurances
can be given that the lenders will further extend the redemption and maturity
dates for such preferred stock and debt obligations or that if extended, the
Company will be able to generate revenue or other sources of funds in the
significant amount required in order to service and ultimately repay such
debt.
17
Going
Concern Uncertainty
The accompanying condensed consolidated
financial statements have been prepared assuming that the Company will continue
as a going concern. Because of recurring operating losses, the excess
of current liabilities over current assets, the stockholders’ deficit, and
negative cash flows from operations, there is substantial doubt about the
Company’s ability to continue as a going concern.
At March
31, 2009, the Company had total current liabilities of $111,363,000 and current
assets of $224,000, resulting in a working capital deficiency of
$111,139,000. At March 31, 2009, the Company had a total
stockholders’ deficit of $118,363,000.
Following
delays in our Heliplane program for the U.S. Defense Advanced Research Projects
Agency (“DARPA”), lower than anticipated results from sales of our SparrowHawk
kits, and negative conditions in capital markets, we effected a substantial
reduction in force and have significantly scaled back the level of our
operations.
Historically,
the Company experienced a negative gross profit on sales of Sparrow Hawk kits
and the number of SparrowHawk kits sold fell below expectations, due in part to
lack of funding to finalize product development and to pay for increased sales
and marketing efforts. In these circumstances, prospects of reaching
a satisfactory profit level in a deteriorating economic climate were not
promising. As importantly, the Company determined that the kit
aircraft business, aimed at customers for their personal use could not be
readily compatible with the design, manufacture and marketing of more
sophisticated aircraft required by military and commercial
customers. Therefore, in May 2008, the Company decided to cease
production of the SparrowHawk and to seek to sell the program to a buyer with
more compatible operating conditions and strategic
interests. Consistent with this decision, and as part of its
reduction in operations, the Company discontinued its SparrowHawk flight
training and other flight operations at Buckeye Airport, Arizona and also
terminated the lease on its primary hangar at that location. The
Company retained its small leased hangar at Buckeye for storage and to maintain
the ability to undertake flight tests or demonstration flights at that airport
if needed.
The
Company has also experienced a negative profit margin on the DARPA contract,
which has reduced cash flows from operations. Subsequent to March 31,
2009, DARPA announced the award of the Heliplane prime contractor position to
the Georgia Institute of Technology (GT) for Phase IB. Since then,
the Company has been engaged as a GT subcontractor for rotor systems work of
Phase IB.
The
Company’s continuation as a going concern is dependent on attaining profitable
operations, obtaining additional outside financing and/or restructuring its debt
obligations, including its Series B Preferred Stock. The Company has
funded losses from operations primarily from the issuance of debt to related
parties (current shareholders and lenders of the Company), the increase in
accounts payable and accrued expenses, and the sale of the Company’s restricted
common stock in private placement transactions, and will require additional
funding from these sources to sustain its future operations.
In order
to repay its debt obligations in full or in part when due, the Company will be
required to raise significant capital from other
sources. Alternatively, the Company will be required to negotiate
further extensions of the Series B Preferred Stock maturity date and its notes
payable, as it has accomplished in the past. There is no assurance,
however, that the Company will be successful in these efforts.
18
During
2006 and 2007, the Company obtained debt financing from the Series B Holders in
exchange for 2006/2007 Notes in the aggregate principal amount of
$4,400,000. The 2006/2007 Notes provide for the payment of simple
interest at the rate of 36% per annum. The maturity date for the
2006/2007 Notes has been extended from time to time and currently is May 9,
2010.
Included
in current liabilities and the working capital deficiency at March 31, 2009 is a
$36,411,000 Series B Preferred Stock obligation. The Series B Holders
have agreed to extend the redemption date of the Series B Preferred
Stock from time to time and the current redemption date is May 9, 2010, or such
later date as agreed to in writing by at least 80% of the Series B
Holders.
In
October 2008, as part of a Note Purchase Agreement between the Company and the
Series B Holders, the Company issued short-term interest bearing Dividend Notes
in the principal amount of $36,962,000 in satisfaction of the accrued and unpaid
dividends on the Series B Preferred Stock through October 9,
2008. Because the Company had paid such dividends in kind by issuing
additional shares of Series B Preferred Stock, the issuance of the Dividend
Notes resulted in the redemption of $36,962,000 of Series B Preferred
Stock. The Dividend Notes provide for the payment of interest at the
rate of 15% per annum, compounded quarterly. The maturity date for
the Dividend Notes has been extended from time to time and currently is May 9,
2010.
The Note
Purchase Agreement, as amended, provides for the periodic sale by the Company to
the lenders of short-term Note Purchase Notes in the aggregate principal
amount of up to $5,750,000 to provide the Company with operating capital, as
specified in the draw requests for such notes. The draw requests must
be approved by the lenders. Through March 31, 2009, the lenders had
purchased notes under the Note Purchase Agreement in the aggregate principal
amount of $1,935,000 and the proceeds had been used by the Company to cover its
minimum cash needs in excess of funding provided by payments from Georgia Tech
for the Company’s work on the DARPA contract. The Note Purchase Notes
provide for the payment of simple interest at the rate of 15% per
annum. The maturity date of the Note Purchase Notes has been extended
from time to time and currently is May 9, 2010.
Substantially all assets of the
Company, including its intellectual property, have been pledged as collateral
for the Company’s debt.
There can be no guarantee or assurance
that the Company will be successful in its ability to generate income from
operations or from the DARPA contract, or to raise capital at favorable rates or
at all. The condensed consolidated financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.
DARPA
Contract
On
November 7, 2005, DARPA selected a Company-led team to design a proof of concept
high-speed, long range, VTOL aircraft. This modern rotorcraft, named
the “Heliplane” by DARPA, is intended as a demonstrator aircraft for potential
use in combat search and rescue roles and is designed to fly at a forward speed
of 400 mph which is a speed twice as fast as is typical for helicopters, with a
1,150 mile range, essentially offering the VTOL capability of a helicopter with
the fast forward flight capability of an airplane with the safety, simplicity
and reliability of a GBA gyroplane and is designed to exploit our gyrodyne
technology.
Phase One
of this potential multi-year four-phase Heliplane program began with a 15-month
$6.4 million award to develop the preliminary design and perform key technology
demonstrations. On September 19, 2007, the DARPA contract was
modified, increasing the contract award from $6.4 million to $10.4 million, and
extending the term of Phase One from 15 to 23 months. Substantial
portions of Phase One payments were paid by us to subcontractors and consultants
hired by us. Payments under this contract were conditional upon our
attaining several milestone objectives during the course of Phase One of the
contract.
19
We
completed Phase One of the four phase program with a preliminary design review
(PDR) in November of 2007. In January of 2009, DARPA funded a six
month Heliplane Phase 1B effort to design and evaluate a modification to the
Heliplane’s rotor-blade tip-jets to reduce its sound signature. For
Phase 1B, DARPA chose, at our recommendation, Georgia Tech to lead the program
as prime contractor with the Company as the primary subcontractor for the
critical rotor system. We made this recommendation because of our
inability to fund the cash flow shortfall while waiting to be paid for work
completed. Phase 1B had been completed as of the date of this report,
and we do not know whether Phase 2 will be awarded.
Future
Company Gyrodyne and Gyroplane Aircraft
The Heliplane gyrodyne represents the
possible model for the next generation rotor wing aircraft, meeting economy and
performance goals not considered achievable by any other type of VTOL
aircraft. As our gyrodyne technology is scalable to much larger
aircraft, it has potential applications for both heavy lift, high speed
short-range vertical take-off and landing (“VTOL”) military aircraft and for
runway independent commercial airliners. We have been actively
engaged in discussions with government agencies and potential aerospace
strategic partners in this country with respect to military and commercial
gyrodyne and gyroplane applications, and in Europe, India, Korea and China with
respect to commercial gyroplane applications.
The
gyrodyne technology developed for the Heliplane also has direct application to
the design of short-range VTOL commercial airliners that are runway
independent. We believe that growth in the economy can produce heavy
demand for aircraft that do not require the use of increasingly congested
runways and are not limited by air traffic control constraints, and we
anticipate an opportunity to develop such an aircraft. We believe
that by using the airframe of an existing type-certificated production airplane
and adding our rotor system, gyrodyne airliners can be delivered for
substantially less investment and in less time than would normally be required
to bring a new airliner to market. Our longer-range plans have
identified opportunities for large (18-60 seat) gyrodynes to provide commercial
passenger service in short and medium-range markets.
We believe the proposals that we have
presented, or participated in presenting, have been well received and helped
generate credibility for the value of our technology among key segments of the
aerospace industry. We will continue to seek opportunities to obtain
government research and development contracts for use of our technology in both
military and civilian agency fields where we believe that it can offer
meaningful advantages in performance or cost over competing
technologies. Management believes that it is in the national interest
that our unique gyroplane technology is developed.
Executive
officers and employees of the Company have met in China with government
officials and aerospace executives on several occasions and Company
representatives have made presentations covering the application of our
gyroplane and gyrodyne technologies to China’s commercial needs. The
presentations were well received and resulted in us being invited back to China
to discuss specific proposals for joint ventures or cooperation. We
continue to make progress with the objective of setting up a JV partner to
produce fully-assembled SparrowHawks in China. We have also been
introduced to a potential Light Gyroplane JV partner and we continue to make
progress with that objective.
20
We believe that Asia represents a
potentially very large market for our products, from the SparrowHawk size
gyroplanes, to the Hawk 4 gyroplane and its variants, to the varying sizes of
tip-jet powered gyrodynes in commuter airline and transport category
aircraft. In addition, we believe that these types of safe,
economical, high performance Ultra-Short and Vertical Takeoff and Landing (USTOL
and VTOL) aircraft can be very important in helping solve the transportation
needs of the burgeoning economies of China, India, Korea and other Asian
nations. However, we have not entered into any definitive agreements
or arrangements for the development or sale of our products in Asia and no
assurances can be given that we will be able to complete development of such
products or be able to sell such products in Asia.
All our
government marketing and therefore our responses to requests for proposals to
participate in research and development programs suited to our technology have
been directed exclusively to the United States Government.
Results
of Operations
Revenues
The Company’s consolidated revenues are
comprised of the following:
Three
Months Ended
March
31,
|
Nine
Months Ended
March
31,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Government
contract
|
$ | 467,000 | $ | 1,972,000 | $ | 830,000 | $ | 5,070,000 | ||||||||
Commercial
subcontract
|
- | - | - | 26,000 | ||||||||||||
SparrowHawk
kits and parts
|
2,000 | 208,000 | 19,000 | 612,000 | ||||||||||||
Flight
training
|
- | 9,000 | 1,000 | 33,000 | ||||||||||||
Other
operating
|
- | 25,000 | 3,000 | 42,000 | ||||||||||||
Total
|
$ | 469,000 | $ | 2,214,000 | $ | 853,000 | $ | 5,783,000 |
Total revenues decreased $1,745,000 to
$469,000 in the three months ended March 31, 2009 from $2,214,000 in the three
months ended March 31, 2008 and decreased $4,930,000 to $853,000 in the nine
months ended March 31, 2009 from $5,783,000 in the nine months ended March 31,
2008. The decrease in revenues in the current fiscal year was
attributed to the decrease in all revenue sources, including the DARPA contract,
sales of SparrowHawk kits and parts, flight training and other operating
revenues. As discussed above, we significantly scaled back the level
of our operations in the fiscal year ended June 30, 2008, including ceasing
production of the SparrowHawk, eliminating substantially all flight training and
reducing the level of our involvement in the DARPA contract.
We
recognize revenue on the DARPA contract as each defined milestone is completed
and the requisite meetings are held and technical data submitted and accepted by
DARPA. At that time, DARPA instructs us to submit an invoice for
payment for the respective milestone at the amount specified in the
contract.
21
Costs
and Expenses
The
Company’s consolidated cost of sales is comprised of the following:
Three
Months Ended
March
31,
|
Nine
Months Ended
March
31,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Government
contract
|
$ | 226,000 | $ | 1,434,000 | $ | 644,000 | $ | 4,524,000 | ||||||||
Commercial
subcontract
|
- | - | - | 73,000 | ||||||||||||
SparrowHawk
kits and parts
|
1,000 | 569,000 | - | 1,605,000 | ||||||||||||
Flight
training
|
- | 2,000 | - | 9,000 | ||||||||||||
Total
|
$ | 227,000 | $ | 2,005,000 | $ | 644,000 | $ | 6,211,000 |
Total
cost of sales decreased $1,778,000 to $227,000 in the three months ended March
31, 2009 from $2,005,000 in the three months ended March 31, 2008 and decreased
$5,567,000 to $644,000 in the nine months ended March 31, 2009 from $6,211,000
in the nine months ended March 31, 2008. As discussed above, we have
significantly scaled back the level of our operations in the current fiscal
year, including ceasing production of the SparrowHawk, eliminating flight
training and reducing the level of our involvement in the DARPA
contract.
Subsequent
to March 31, 2009, DARPA announced the award of the Heliplane prime contractor
position to the Georgia Institute of Technology (GT) for Phase
IB. Since then, we have been engaged as a GT subcontractor for rotor
systems work of Phase IB. Payments to us by GT are expected to be
paid on a monthly basis, significantly reducing our cash flow risk from the
Heliplane program.
Research and development expenses for
the three months ended March 31, 2009 increased to $81,000 from $70,000 for the
three months ended March 31, 2008. However, research and development
expenses decreased to $246,000 for the nine months ended March 31, 2009 from
$746,000 for the nine months ended March 31, 2008 as a result of the reduction
in our level of operations. Research and development activities
include the development of opportunities for subcontract opportunities with
industry partners, variations to the SparrowHawk, fully assembled SparrowHawk
gyroplane derivatives, potential applications of our technology to heavy lift
vertical take-off military aircraft, runway independent short-haul airliners and
other aircraft, including government contract opportunities.
As a result of the reduction in our
level of operations, general and administrative expenses for the three months
ended March 31, 2009 decreased to $238,000 from $889,000 for the three months
ended March 31, 2008 and decreased to $693,000 for the nine months ended March
31, 2009 from $2,450,000 for the nine months ended March 31, 2008.
Other Income and Expenses
As a result of the reduction in our
related party notes receivable, related party interest income is currently
insignificant to our consolidated financial statements. Related party
interest income was $1,000 and $2,000 for the three months and nine months ended
March 31, 2009, respectively, compared to $1,000 and $3,000 for the three months
and nine months ended March 31, 2008, respectively.
Interest and other income decreased to
$0 in the three months ended March 31, 2009 from $18,000 in the three months
ended March 31, 2008 and decreased to $1,000 in the nine months ended March 31,
2009 from $24,000 in the nine months ended March 31, 2008. Interest
and other income is also currently insignificant to our consolidated financial
statements, with the decrease in reported amounts resulting from the reduction
in our level of operations and continued low levels of interest bearing
cash.
22
We realized a gain on the sale of
property and equipment of $45,000 in the nine months ended March 31,
2009. We did not have any sales of property and equipment in the nine
months ended March 31, 2008.
We
realized a gain on extinguishment of debt of $23,000 in the three months ended
March 31, 2008 and $47,000 for the nine months ended March 31,
2008. We had no gain on extinguishment of debt during the three
months and nine months ended March 31, 2009.
Interest expense for the three months
ended March 31, 2009 increased to $2,453,000 from $1,131,000 for the three
months ended March 31, 2008 and increased to $5,721,000 for the nine months
ended March 31, 2009 from $2,964,000 for the nine months ended March 31,
2008. We had a net increase in cash borrowings of $1,917,000 in the
nine months ended March 31, 2009. In addition, in October 2008, we
increased our interest-bearing debt by $36,962,000 through a partial redemption
of our Series B Preferred Stock. However, the increase in interest
expense in the current fiscal year was partially offset by additional interest
expense that was incurred in the prior fiscal year for the value of stock and
stock options issued to lenders in connection with new debt or debt
extensions. No stock or stock options were issued in the current
fiscal year.
Series B Preferred Stock interest
expense for the three months ended March 31, 2009 decreased to $1,316,000 from
$2,373,000 for the three months ended March 31, 2008 and decreased to $5,278,000
for the nine months ended March 31, 2009 from $6,863,000 for the nine months
ended March 31, 2008. This decrease is attributed to the $36,962,000
redemption of Series B Preferred Stock for the Dividend Notes in October
2008. Dividends on the Series B Preferred Stock, which are recorded
as interest expense, have been “paid in kind” with additional shares of Series B
Preferred Stock.
Net Loss
For the three months ended March 31,
2009, the loss from operations was $77,000 compared to the loss from operations
of $750,000 for the three months ended March 31, 2008. For the nine
months ended March 31, 2009, the loss from operations was $730,000 compared to
the loss from operations of $3,624,000 for the nine months ended March 31,
2008. The decrease in the loss from operations in the current fiscal
year resulted primarily from the reduced level of our operations as discussed
above.
The net loss for the three months ended
March 31, 2009 was $3,845,000 compared to $4,212,000 for the three months ended
March 31, 2008. The net loss for the nine months ended March 31, 2009
was $11,681,000 compared to $13,377,000 for the nine months ended March 31,
2008. The decrease in the net loss in the current fiscal year
resulted primarily from the decrease in loss from operations, partially offset
by an increase in interest expense.
Liquidity
and Capital Resources
Series B Preferred Stock
Obligation
At March
31, 2009, we had total current liabilities of $111,363,000 and current assets of
$224,000, resulting in a working capital deficiency of
$111,139,000. Included in current liabilities and the working capital
deficiency at March 31, 2009 is a $36,411,000 Series B Preferred Stock
obligation. On May 10, 2007, we received the approval of the Series B
Holders to extend the redemption date of the Series B Preferred Stock from May
1, 2007 to June 16, 2007, or such later date as agreed to in writing by at least
80% of the Series B Holders. Subsequently, the Series B Holders
agreed in writing to an extension of the redemption date from June 16, 2007, to
June 30, 2008.
23
During
2006 and 2007, the Company obtained debt financing from the Series B Holders in
exchange for 2006/2007 Notes in the aggregate principal amount of
$4,400,000. The 2006/2007 Notes provide for the payment of simple
interest at the rate of 36% per annum. The maturity date of the
2006/2007 Notes has been extended from time to time and currently is May 9,
2010.
In
October 2008, as part of a Note Purchase Agreement between the Company and the
Series B Holders, we redeemed $36,962,000 of the outstanding Series B Stock in
exchange for short-term interest bearing Dividend Notes, and the Series B
Holders agreed to an extension of the redemption date of the remaining Series B
Stock from June 30, 2008 to April 9, 2009. Subsequently, the
redemption date has been extended from time to time and currently is May 9,
2010, or such later date as agreed to in writing by the holders of at least 80%
of the outstanding shares of Series B Preferred Stock. The Dividend
Notes provide for the payment of interest at the rate of 15% per annum,
compounded quarterly. The maturity date of the Dividend Notes has
also been extended from time to time and currently is May 9, 2010.
In
addition, the Note Purchase Agreement, as amended, provides for the periodic
sale by the Company to the lenders of short-term Note Purchase Notes to
provide the Company with operating capital, as specified in the draw requests
for such notes. The draw requests must be approved by the
lenders. Through March 31, 2009, the lenders had purchased notes
under the Note Purchase Agreement in the aggregate principal amount of
$1,935,000 and the proceeds had been used by us to cover our minimum cash needs
in excess of funding provided by payments from Georgia Tech for our work on the
DARPA contract. The Note Purchase Notes provide for the payment of
simple interest at the rate of 15% per annum. The maturity date of
the Note Purchase Notes has been extended from time to time and currently
is May 9, 2010.
The
lenders and the Company have amended the October 9, 2008 Note Purchase Agreement
from time to time to increase the aggregate amount of promissory notes than can
be purchased to $5,750,000 to provide funding to meet our monthly minimum
financial needs. The lenders are not obligated to purchase notes
pursuant to the Note Purchase Agreement and there can be no assurance that the
lenders will continue to purchase notes or otherwise provide funding to the
Company.
Subsequent
to March 31, 2009 through April 5, 2010, the Company has received net proceeds
from debt financing of approximately $2.0 million, substantially all of which
was funding received pursuant to the Note Purchase Agreement.
In
connection with the execution of the Note Purchase Agreement and the issuance of
the Series B Preferred Stock, substantially all our assets, including our
intellectual property, have been pledged as collateral for our
debt.
In order
to repay these obligations in full or in part when due, we will be required to
raise significant capital from other sources and to meet certain capital
requirements under Utah State law. Alternatively, we will be required
to negotiate another extension of the Series B Preferred Stock redemption date
and the maturity dates of the 2006/2007 Notes, the Dividend Notes and the Stock
Purchase Notes, as we have accomplished in the past. There is no
assurance, however, that we will be successful in raising the capital required
to repay the Series B Preferred Stock and related notes payable obligations or
in obtaining a further extension of the Series B Preferred Stock redemption date
and the related notes payable maturity dates beyond May 9, 2010.
Other
Debt Obligations
Current liabilities at March 31, 2009
also included $59,278,000 notes payable to related parties, including the
following:
Series
B Holders:
|
||||
Dividend
Notes
|
$ | 39,670,000 | ||
Note
Purchase Notes
|
1,935,000 | |||
2006/2007
Notes
|
4,400,000 | |||
46,005,000 | ||||
Other
Related Parties
|
13,273,000 | |||
Total
Related Party Notes Payable
|
$ | 59,278,000 |
24
Of the other related parties notes,
$6,207,000 is in default. In addition, we are delinquent in making
payments of accrued interest payable of $3,755,000 on this related party debt at
March 31, 2009. Most of these related party notes payable are held by
long-time shareholders and lenders of the Company and are payable on demand or
are short-term in nature. There is no assurance that these related
party lenders will not demand payment of this short-term indebtedness in the
near future.
Also included in current liabilities at
March 31, 2009 are notes payable to unrelated parties of $523,000, substantially
all of which is in default. In addition, we are delinquent in making
payments of accrued interest payable of $639,000 on this debt at March 31,
2009. We continue to make some payments on this indebtedness and
continue discussions with many of these vendors and lenders, and have, in most
instances, been granted grace periods and extensions without receipt of formal
notices of default or threat of legal action. There is no assurance
that these vendors and lenders will continue to forebear from collection or
legal action.
Operating,
Investing and Financing Activities
As
discussed above, we have substantially reduced the level of our
operations. Therefore, the amounts of cash provided by or used in
operating, investing and financing activities for the nine months ended March
31, 2009 are generally less than the amounts reported for the nine months ended
March 31, 2008.
Net cash used in operating activities
was $1,691,000 for the nine months ended March 31, 2009 compared to $3,074,000
for the nine months ended March 31, 2008. The net cash used in
operating activities decreased in the current fiscal year primarily because of a
lower net loss further reduced by interest expense accrued on Series B preferred
stock, interest expense added to debt principal and an increase in accrued
expenses.
Net cash provided by investing
activities for the nine months ended March 31, 2009 was $29,000, consisting of
proceeds from the sale of property and equipment of $27,000 and payments of
related party notes receivable of $2,000. Net cash used in investing
activities for the nine months ended March 31, 2008 was $4,000 comprised of the
purchase of property and equipment of $6,000, partially offset by related party
notes receivable repayments received of $2,000.
We have funded losses from operations
and net cash used in investing activities in the current fiscal year primarily
from the issuance of debt to related parties (current shareholders and lenders
of the Company), the increase in accrued expenses, and will require additional
funding from these sources to sustain our future operations.
Net cash provided by financing
activities was $1,848,000 for the nine months ended March 31, 2009, comprised of
a net increase in debt of $1,917,000, partially offset by a repayment of bank
overdraft of $22,000 and repayment of bank overdraft line of credit of
$47,000. Net cash provided by financing activities for the nine
months ended March 31, 2008 was $3,018,000, comprised of a net increase in debt
of $2,887,000 and net proceeds from the issuance of common stock of $132,000,
partially offset by the payment of finders’ compensation of
$1,000.
25
We
currently do not have sufficient cash to sustain our operations for the next
twelve months. We are dependent on the lenders under the Note
Purchase Agreement to continue to fund operating losses in the short-term, or
until revenues grow to the point where they are sufficient to cover operating
costs and expenses. As discussed above, the Note Purchase Agreement
provides for the periodic sale by the Company to the lenders of short-term
promissory notes to provide the Company with operating capital, as specified in
the draw requests for such notes. The draw requests must be approved
by the lenders. Through March 31, 2009, the lenders had purchased
notes under the Note Purchase Agreement in the aggregate principal amount of
$1,935,000 and the proceeds had been used by us to cover our minimum cash needs
in excess of funding provided by payments from Georgia Tech for our work on the
DARPA contract, funding that was completed in September 2009. There
is no assurance that this funding under the Note Purchase Agreement will
continue beyond the current short-term agreement, and there is no assurance that
we will be successful in either raising sufficient capital from other sources or
improving operations.
Management does not anticipate that
revenues or expenses will be materially affected by inflation during the next
twelve months of operations.
Our operations are not subject to
material seasonal fluctuations.
Off
Balance Sheet Commitments
We lease facilities under
non-cancelable operating leases. Future minimum rental payments
required under these leases are as follows:
Years Ending June 30,
|
Amount
|
||||
2009
|
$ | 258,000 | |||
2010
|
271,000 | ||||
2011
|
73,000 | ||||
$ | 602,000 |
Critical
Accounting Policies
Our critical accounting policies
include the following:
Impairment of Long-Lived
Assets - We periodically review our long-lived assets for impairment when
events or changes in circumstances indicate that the carrying value of an asset
may not be recoverable. We evaluate, at each balance sheet date,
whether events and circumstances have occurred which indicate possible
impairment. The carrying value of a long-lived asset is considered impaired when
the anticipated cumulative undiscounted cash flows of the related asset or group
of assets is less than the carrying value. In that event, a loss is
recognized based on the amount by which the carrying value exceeds the estimated
fair market value of the long-lived asset.
Research and Development Costs
- Research and development costs are expensed as incurred in accordance
with SFAS No. 2, “Accounting for Research and Development Costs.” The
costs of materials and other costs acquired for research and development
activities are charged to expense as incurred. Salaries, wages, and
other related costs of personnel, as well as other facility operating costs are
allocated to research and development expense through management’s estimate of
the percentage of time spent by personnel in research and development
activities.
26
Revenue Recognition
- We recognize revenues from goods and services when there is a
binding agreement, the product has been completely shipped or service has been
delivered, collection is reasonably assured, and we have no significant
obligations remaining. Portions of the purchase price of our products
collected from customers in advance of product delivery are recorded as deferred
revenue. Therefore, revenues from the sale of SparrowHawk gyroplane
kits are not recorded until all kit components and parts are delivered to the
customer and collection of any remaining amounts due is reasonably
assured.
We recognize revenue on our current
government contract as each defined milestone is completed and the requisite
meetings are held and technical data submitted and accepted by
DARPA. At that time, DARPA instructs us to submit an invoice for
payment for the respective milestone at the amount specified in the
contract. Contract-related expenses incurred by us for each milestone
of the contract, including its own labor, travel, supplies and other costs, and
the costs of subcontractors and consultants, are deferred as work-in-process
inventory and expensed to cost of sales as the contract revenue for the
milestone is recognized. When a loss on a contract is projected,
however, all contract-related costs and expenses are expensed as
incurred.
We recognize revenue on commercial and
sub-contractor contracts as each scheduled phase of the contract is completed
and invoices are submitted. Contract-related expenses incurred by us
for each phase of the contract, including its own labor, travel, supplies and
other costs, and the costs of subcontractors and consultants, are deferred as
work-in-process inventory and expensed to cost of sales as the contract revenue
for the milestone is recognized. When a loss on a contract is
projected, however, all contract-related costs and expenses are expensed as
incurred.
Stock-Based Compensation – We
have adopted the fair value recognition provisions of SFAS No. 123(R),
Share Based Payments,
which requires us to measure the compensation cost of stock options and other
stock-based awards to employees and directors at fair value at the grant date
and recognize compensation expense over the requisite service period for awards
expected to vest. The grant-date fair value of stock options and
other stock-based awards is estimated using the Black-Scholes option-pricing
model. The stock-based compensation expense has been allocated to the
various categories of costs and expenses in a manner similar to the allocation
of payroll expense. Changes in the assumptions used in the
option-pricing model, including the market price of the Company’s common stock,
risk-free interest rates, estimated forfeitures and life of the options, may
result in fluctuations in the estimated fair value and carrying value of the
consideration recorded for employee stock options.
Non-Employee Stock Options and
Warrants – In accordance with SFAS No. 123, “Accounting for Stock-Based
Compensation”, we estimate the fair value of the consideration recorded for
stock options and warrants issued to non-employees using the Black-Scholes
option-pricing model. For those stock options and warrants that have
variable characteristics, we will continue to use this methodology to
periodically reassess the fair value of the consideration to determine if the
value of the consideration recorded in the consolidated financial statements
requires adjustment. Changes in the assumptions used in the
option-pricing model, including the market price of our common stock and
risk-free interest rates, may result in fluctuations in the estimated fair value
and carrying value of the consideration recorded for variable non-employee stock
options and warrants.
Financial Instruments with
Characteristics of Both Liabilities and Equity - In May 2003, the FASB
issued SFAS No. 150, “Accounting for Certain Instruments with Characteristics of
Both Liabilities and Equity.” This statement establishes standards
for how an issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that an
issuer classify a financial instrument that is within its scope as a liability
(or an asset in some circumstances). Many of those instruments were
previously classified as equity. The statement was effective on July
1, 2003 for financial instruments entered into or modified after May 31, 2003,
and otherwise effective for existing financial instruments entered into before
May 31, 2003. The adoption of SFAS No. 150 resulted in the reporting
of our Series B Preferred Stock as a liability. The carrying value of
the Series B Preferred Stock was the same before and after adoption of SFAS No.
150, and therefore no cumulative effect adjustment was
required.
27
Income Taxes - We account for
income taxes according to the asset and liability method. The asset
and liability method requires the recognition of deferred tax liabilities and
assets for the expected future tax consequences of temporary differences between
tax bases and financial reporting bases of existing assets and
liabilities. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
Recently
Issued Accounting Pronouncements
In June
2009, the FASB issued SFAS No. 168, The FASB Accounting Standards
Codification™ and the Hierarchy of Generally Accepted Accounting Principles – a
Replacement of FASB Statement No. 162. The Codification will become the
source of authoritative U.S. generally accounting principles (GAAP) recognized
by the FASB to be applied to nongovernmental entities. Rules and
interpretive releases of the Securities and Exchange Commission (SEC) under
authority of federal securities laws are also sources of authoritative GAAP for
SEC registrants. On the effective date of this Statement, the
Codification will supersede all then-existing non-SEC accounting and reporting
standards. All other non-grandfathered non-SEC accounting literature
not included in the Codification will become nonauthoritative. This
statement is effective for financial statements issued for interim and annual
periods ending after September 15, 2009 (our quarter ended September 30,
2009). We are currently unable to determine what impact the future
application of this pronouncement may have on our consolidated financial
statements.
On May
28, 2009, the FASB issued SFAS No. 165, Subsequent
Events. This statement is intended to establish general
standards of accounting for and disclosures of events that occur after the
balance sheet date but before financial statements are issued or are available
to be issued. It requires the disclosure of the date through which an
entity has evaluated subsequent events and the basis for that date—that is,
whether that date represents the date the financial statements were issued or
were available to be issued. This disclosure is intended to alert all
users of financial statements that an entity has not evaluated subsequent events
after that date in the set of financial statements being
presented. The statement is effective for interim and annual periods
ending after June 15, 2009, or our fiscal year ended June 30,
2009. We are currently unable to determine what impact the future
application of this pronouncement may have on our consolidated financial
statements.
Item
3. Quantitative and Qualitative Disclosures About Market
Risk
Because
the Company is a Smaller Reporting Company, it is not required to respond to
this Item.
28
Item
4T. Controls and Procedures
Evaluation
of Disclosure Controls and Procedures
Our management, under the supervision
and with the participation of our chief executive officer and chief financial
officer, evaluated the effectiveness of the design and operation of our
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Exchange Act) as of March 31, 2009, the end of the period covered by
this report. Based on that evaluation, and as further discussed
below, our chief executive officer and chief financial officer concluded that
the disclosure controls and procedures employed at the Company as of March 31,
2009 were not effective to ensure that the information required to be disclosed
by us in the reports that we file or submit under the Securities Exchange Act of
1934 is recorded, processed, summarized and reported within the time periods
specified in SEC rules and forms.
Management is responsible for
establishing and maintaining adequate internal control over financial reporting,
as such term is defined under Exchange Act Rules 13a-15(f). Our
internal control system is designed to provide reasonable assurance to our
management and board of directors regarding the preparation and fair
presentation of published financial statements. As provided in Item
9A(T) of our 2008 annual report on Form 10-K, under the supervision and with the
participation of our management, including our principal executive officer and
principal financial officer, we conducted an annual evaluation of the
effectiveness of our internal control over financial reporting based on the
framework in Internal Control – Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Based on our
evaluation under that framework, management concluded that our internal control
over financial reporting was not effective as of June 30,
2008.
As a
result of our decision to cease production of the SparrowHawk, our reduced
involvement in the DARPA contract, and the resulting substantial decrease in our
operations, we eliminated substantially all full time accounting and finance
personnel. We have not, therefore, timely prepared our consolidated
financial statements and filed our periodic reports with the SEC. We
currently utilize primarily former employees, working either as part time
employees or outside consultants, to maintain the financial records of the
Company and to prepare the consolidated financial statements and footnote
disclosures of the Company. This has resulted in less segregation of
accounting duties and less compliance with financial close procedures than had
previously been implemented when a fully staffed accounting and finance
department was in place. This lack of internal oversight and review
resulted in adjusting journal entries not detected by us that were material to
our consolidated financial statements. In addition, the Audit
Committee of our Board of Directors is currently comprised of two individuals
who are not independent directors.
We
concluded that these deficiencies in the design and operation of our internal
control over financial reporting may be considered material
weaknesses. A material weakness is a control deficiency (within the
meaning of the Public Company Accounting Oversight Board (PCAOB) Auditing
Standard No. 2) or combination of control deficiencies, such that there is a
reasonable possibility that a material misstatement of the annual or interim
financial statements will not be prevented or detected. In light of
the material weaknesses described above, we performed additional analyses and
other post-closing procedures and increased the involvement of outside
consultants to ensure our financial statements were prepared in accordance with
generally accepted accounting principles. Accordingly, we believe
that the consolidated financial statements included in this report fairly
present, in all material respects, our financial condition, results of
operations and cash flows for the periods presented. We intend to
continue the involvement of outside consultants and further implement additional
analyses and financial close procedures to ensure that our financial statements
are timely prepared in accordance with generally accepted accounting
procedures.
29
Change
in Internal Control Over Financial Reporting
Other than those matters discussed
above, there was no change in our internal control over financial reporting
during the third quarter of our fiscal year 2009, that materially affected,
or is reasonably likely to materially affect, our internal control over
financial reporting.
PART
II – OTHER INFORMATION
Item
1. Legal Proceedings
We are
not involved in any material pending legal proceedings other than ordinary
routine litigation incidental to our business and, to the best of our knowledge,
no material legal proceedings against the Company have been
threatened. We are subject to the potential of various claims and
legal actions arising in the ordinary course of business, including certain
matters relating to past due amounts to creditors. The past due
amounts are recorded as liabilities in our consolidated financial statements,
and management believes that the amount, if any, that may result from other
claims will not have a material adverse effect on our consolidated financial
statements.
Item
1A. Risk Factors
In
addition to the other information set forth in this report, you should carefully
consider the factors discussed in Item 1A – “Risk Factors” in our Annual Report
on Form 10-K for the year ended June 30, 2008, which could materially affect our
business, financial condition or future results of operations.
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
There
were no sales of unregistered equity securities during the three months ended
March 31, 2009.
Item
3. Defaults Upon Senior Securities
As more fully discussed under
“Liquidity and Capital Resources” above, the Company is delinquent in making
payments on notes payable to vendors and others totaling $523,000, notes payable
to related parties totaling $6,207,000, and $4,394,000 of accrued interest
payable on debt.
Item
4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a
vote of security holders during the three months ended March 31,
2009.
Item
5. Other Information
Amendments
to Note Purchase Agreement
The Note Purchase Agreement dated as of
October 9, 2008 among the Company and the lenders named on the signature page
thereto (the “Lenders”) has been amended from time to time to increase the
aggregate principal amount of the promissory notes that could be purchased under
the agreement to $5,750,000.
30
In connection with the Note Purchase
Agreement, the Company entered into a Security Agreement and Intellectual
Property Security Agreements with the Lenders which were amended and restated on
January 20, 2009 and October 9, 2008, respectively, pursuant to which the
Company and its subsidiaries granted the Lenders security interests in all the
assets of the Company, real and personal, tangible and intangible, specifically
including certain patents, patent applications, trademarks and other
intellectual property.
The foregoing descriptions of the
amendments to the Note Purchase Agreement are qualified in their entirety by
reference to the amendments themselves, copies of which are being filed as
exhibits to this report.
Fifth
Amended and Restated Articles of Incorporation
On
November 24, 2008 the Company filed the Fifth Amended and Restated Articles of
Incorporation (the “Fifth Restated Articles”) with the Utah Division of
Corporations and Commercial Code. The Fifth Restated Articles have
been amended from time to time to extend the mandatory redemption date of the
Series B Preferred Stock. Most recently, the Fifth Amendment was
filed February 26, 2010, which extended the mandatory redemption date of the
Series B Preferred Stock to May 9, 2010, or such
later date as agreed to in writing by the holders of at least 80% of the
outstanding shares of Series B Preferred Stock.
The
foregoing descriptions of the amendments to the Fifth Restated Articles are
qualified in their entirety by reference to such amendments, copies of which are
being filed as exhibits to this report.
31
Item
6. Exhibits
The
following exhibits are filed as part of this report:
Exhibit
No.
|
Description
of Exhibit
|
|
3.1
|
Fifth
Amended and Restated Articles of Incorporation of Groen Brothers Aviation,
Inc. filed November 24, 2008 (1)
|
|
3.2
|
First
Amendment to Fifth Amended and Restated Articles of Incorporation of Groen
Brothers Aviation, Inc. filed March 17, 2009 (1)
|
|
3.3
|
Second
Amendment to Fifth Amended and Restated Articles of Incorporation of Groen
Brothers Aviation, Inc. filed July 1, 2009 (1)
|
|
3.4
|
Third
Amendment to Fifth Amended and Restated Articles of Incorporation of Groen
Brothers Aviation, Inc. filed October 5, 2009 (1)
|
|
3.6
|
Fifth
Amendment to Fifth Amended and Restated Articles of Incorporation of Groen
Brothers Aviation, Inc. filed March 3, 2010 (1)
|
|
10.1
|
Note
Purchase Agreement dated as of October 9, 2008 by and among Groen Brothers
Aviation, Inc. and Lenders named therein (1)
|
|
10.2
|
Form
of Promissory Notes Issued under the Note Purchase Agreement dated as of
October 9, 2008 and the schedule of Notes issued to date
(1)
|
|
10.3
|
Amended
and Restated Security Agreement dated as of January 20, 2009 among the
Company and the Lenders under the Note Purchase Agreement
(1)
|
|
10.4
|
Amended
and Restated IP Security Agreements dated as of October 9, 2008 among the
Company and the Lenders under the Note Purchase Agreement
(1)
|
|
10.5
|
Form
of Promissory Notes Issued under the Note Purchase Agreement dated as of
October 9, 2008 in payment of Series B Preferred Stock dividends and the
schedule of Notes issued to date (1)
|
|
10.6
|
First
Amendment to Promissory Notes between Groen Brothers Aviation, Inc. and
the lender named therein dated as of October 9, 2008 with regard to the
2006/2007 Notes (1)
|
|
10.7
|
First
Amendment to Promissory Notes between Groen Brothers Aviation, Inc. and
the lender named therein dated as of October 9, 2008 with regard to 2007
Notes (1)
|
|
10.8
|
Second
Amendment to Promissory Notes between Groen Brothers Aviation, Inc. and
the lender named therein dated as of March 2, 2009 with regard to the
2006/2007 Notes*
|
|
10.9
|
Second
Amendment to Promissory Notes between Groen Brothers Aviation, Inc. and
the lender named therein dated as of March 2, 2009 with regard to 2007
Notes*
|
|
10.10 | First Amendment to Note Purchase Agreement dated as of March 2, 2009 among Groen Brothers Aviation, Inc., Groen Brothers Aviation USA, Inc. and the lenders named therein* | |
31.1
|
Section
302 Certification of Chief Executive and Chief Financial
Officer*
|
|
32.1
|
Section
1350 Certification of Chief Executive Officer and Chief Financial
Officer*
|
*
Exhibits filed with this report.
(1)
Exhibits filed with the Company’s Quarterly Report on Form 10-Q for the quarter
ended December 31, 2008 and incorporated herein by reference.
32
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
GROEN
BROTHERS AVIATION, INC.
|
|
/s/ David
Groen
|
|
David
Groen, President, Chief Executive Officer
|
|
and
Chief Financial Officer
|
|
(Principal
Executive and Principal Financial Officer)
|
|
Date: April
30, 2010
|
33