UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

[x]     Quarterly Report Pursuant to Section 13 or 15(d) Securities Exchange Act of 1934 for Quarterly Period Ended March 31, 2021

-OR-

 [ ]     Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transaction period from _________ to________

Commission File Number 333-149000

ASTRO AEROSPACE LTD.

 (Exact name of Company as specified in its charter)

Nevada				98-0557091
(State or other jurisdiction of incorporation or organization)				(I.R.S. Employer Identification)

320 W. Main Street, Lewisville, TX 75057

(Address of principal executive offices, including zip code)

(469) 702-8344

(Company's telephone number, including area code)

Indicate by check mark whether the issuer (1) 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 Company was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes [x]   No [ ]

Indicate by check mark whether the Company 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 (section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Company was required to submit and post such files).   Yes [x]   No [ ]

Indicate by check mark whether the Company is a large accelerated filer, an accelerated filer, a non-accelerate filer, or a small reporting company (as defined by Rule 12b-2 of the Exchange Act):

Large accelerated filer [  ]		Non-accelerated filer           [  ]
Accelerated filer          [  ]		Smaller reporting company [x]
		Emerging growth company [  ]

Indicate by check mark whether the Company is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [x]

The number of outstanding shares of the Company's common stock as of May 24, 2021: 8,448,380

ASTRO AEROSPACE LTD.

FORM 10-Q

INDEX

Item 1.  Condensed Consolidated Financial Statements

Page

    Condensed Consolidated Balance Sheets at March 31, 2021 (Unaudited)

       and December 31, 2020

3

    Condensed Consolidated Statements of Operations for the Three Months Ended

       March 31, 2021 and 2020 (Unaudited)

4

    Condensed Consolidated Statements of Comprehensive Loss for the Three Months

       Ended March 31, 2021 and 2020 (Unaudited)

5

    Condensed Consolidated Statements of Stockholders’ Equity (Deficit) for the

       Three Months Ended March 31, 2021 and 2020 (Unaudited)

6

    Condensed Consolidated Statements of Cash Flows for the Three Months Ended

       March 31, 2021 and 2020 (Unaudited)

8

Notes to Condensed Consolidated Financial Statements (Unaudited)

10

Item 2.  Management's Discussion and Analysis of Financial Condition and Results

             of Operations

27

Item 3.  Quantitative and Qualitative Disclosure About Market Risk

31

Item 4.  Controls and Procedures

32

PART II - OTHER INFORMATION

Item 1.  Legal Proceedings

33

Item 1A. Risk Factors

33

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

33

Item 3.  Defaults Upon Senior Securities

33

Item 4.  Mine Safety Disclosures

33

Item 5.  Other Information

33

Item 6.  Exhibits

33

SIGNATURES

34

2

Astro Aerospace Ltd.  and Subsidiary

Condensed Consolidated Balance Sheets

The accompanying Notes are an integral part of the condensed consolidated financial statements

3

Astro Aerospace Ltd. and Subsidiary

Condensed Consolidated Statements of Operations

(Unaudited)

The accompanying Notes are an integral part of the condensed consolidated financial statements

4

Astro Aerospace Ltd. and Subsidiary

Condensed Consolidated Statements of Comprehensive Loss

(Unaudited)

The accompanying Notes are an integral part of the condensed consolidated financial statements

2

2

5

Astro Aerospace Ltd.  and Subsidiary

Condensed Consolidated Statements of Stockholders’ Equity (Deficit)

Three Months Ended March 31, 2021 and 2020

	Series A Preferred Stock		Series B Preferred Stock			Common Stock		Additional Paid - In Capital Series A	Additional Paid - In Capital Series B	Additional Paid - In Capital	Accumulated Other Comprehensive	Accumulated	Total Stockholders' Equity
	Shares	Amount	Shares		Amount	Shares*	Amount	Preferred	Preferred	Common	Income (Loss)	Deficit	(Deficit)
Balance at December 31, 2019	1,562,500	$156	10,000	$10		4,880,115	$4,880	$124,844	$7,156,204	$2,263,958	$(20,098)	$(10,316,875)		$(786,921)
Partial Conversion of 8% Senior Secured Convertible Promissory Notes (unaudited)	-	-	-	-		215,285	215	-	-	166,509	-	-	166,724
Puts of Common Stock Under the Equity Purchase Agreement, net of issuance costs of $9,000 (Unaudited)	-	-	-	-		36,667	37	-	-	41,844	-	-	41,881
Foreign Currency Translation Gain (Unaudited)	-	-	-	-		-	-	-	-	-	138,665	-	138,665
Net Loss (Unaudited)	-	-	-	-		-	-	-	-	-	-	(466,130)	(466,130)
Balance at March 31, 2020 (Unaudited)	1,562,500	$156	10,000	$10		5,132,067	$5,132	$ 124,844	$7,156,204	$2,472,311	$118,567	$(10,783,005)	$(905,781)
*Shares have been restated for a 1 for 15 reverse stock split and adjusted for 54 fractional shares
6

Astro Aerospace Ltd.  and Subsidiary

Condensed Consolidated Statements of Stockholders’ Equity (Deficit)

Three Months Ended March 31, 2021 and 2020, Continued

-	Series A Preferred Stock		Series B Preferred Stock			Common Stock		Additional Paid - In Capital Series A	Additional Paid - In Capital Series B	Additional Paid - In Capital	Accumulated Other Comprehensive		Total Stockholders'
	Shares	Amount	Shares		Amount	Shares*	Amount	Preferred	Preferred	Common	Income (Loss)	Accumulated Deficit	Equity (Deficit)
Balance at December 31, 2020	1,562,500	$156	10,000	$10		5,724,312	$5,724	$ 124,844	$7,156,204	$2,899,026	$(75,419)	$(11,502,721)	$(1,392,176)
Issuance of Common Stock for Services (Unaudited)	-	-	-	-		14,493	15	-	-	43,681	-	-	43,696
Partial Conversion of 8% Senior Secured Convertible Promissory Notes (Unaudited)	-	-	-	-		1,745,342	1,745	-	-	1,003,982	-	-	1,005,727
Puts of Common Stock Under the Equity Purchase Agreement, net of issuance costs of $750 (Unaudited)	-	-	-	-		120,000	120	-	-	314,296	-	-	314,416
Partial Conversion of the Series B Convertible Preferred Stock	-	-	(9,500)	(9)		844,233	844	-	(6,798,394)	6,797,559	-	-	-
Fair Value of Beneficial Conversion Feature of the 8% Senior Secured Convertible Promissory Note, Issued March 5, 2021 (Unaudited)	-	-	-	-		-	-	-	-	369,671	-	-	369,671
Fair Value of Beneficial Conversion Feature of the 8% Senior Secured Convertible Promissory Note, Issued March 5, 2021 (Unaudited)	-	-	-	-		-	-	-	-	780,128	-	-	780,128
Foreign Currency Translation Loss (Unaudited)	-	-	-	-		-	-	-	-	-	(32,895)	-	(32,895)
Net Loss (Unaudited)	-	-	-	-		-	-	-	-	-	-	(1,047,165)	(1,047,165)
Balance at March 31, 2021	1,562,500	$156	500	$1		8,448,380	$8,448	$124,844	$357,810	$12,208,343	$(108,314)	$(12,549,886)	$41,402

*Shares have been restated for a 1 for 15 reverse stock split and adjusted for 54 fractional shares

The accompanying Notes are an integral part of the condensed consolidated financial statements

7

Astro Aerospace Ltd.  and Subsidiary

Condensed Consolidated Statements of Cash Flow

(Unaudited)

8

Astro Aerospace Ltd.  and Subsidiary

Condensed Consolidated Statements of Cash Flow, Continued

(Unaudited)

The accompanying Notes are an integral part of the condensed consolidated financial statements

9

Astro Aerospace Ltd. and Subsidiary

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

NOTE 1 – NATURE OF OPERATIONS

Astro Aerospace Ltd. (“Astro” or the “Company”) and its wholly-owned subsidiary, is a developer of self-piloted and autonomous, manned and unmanned, eVTOL (Electric Vertical Take Off and Landing) aerial vehicles. The Company intends to provide the market with a mainstream mode of everyday, aerial transportation for both humans and cargo. Astro currently has a working prototype and is working on ALTA an updated version of the working prototype with engineering and mechanical improvements as well as pods which will be interchangeable with the frame allowing the unit to be used for cargo, passenger and other activities.  

Astro is the successor corporation to CPSM, Inc., which was primarily engaged in providing a full line pool and spa services, and pool resurfacing. On March 14, 2018, MAAB Global Limited (“MAAB”), the majority stockholder and parent of Astro, acquired control of CPSM, Inc. On March 24, 2018 the articles of incorporation were amended to change the name of the Company from CPSM, Inc. to Astro Aerospace Ltd. As of March 31, 2021, the Company has one subsidiary, Astro Aerospace Ltd. (Canada), which is incorporated in Canada and is used to record Canadian dollar expenditures in order to recover refunds of the Goods and Services Tax in Canada.

In 2018, the Company acquired in-process research and development (“IPRD”) consisting of inventory, hardware designs, software designs, and a trademark all pertaining to passenger drone design and use from Confida Aerospace Ltd. The drone is in an early development stage. The Company expects that it will be marketing the aircraft sometime in in the second quarter of 2022. To date, no commercial applications have been found which would accept the product.

Going Concern

The accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of our business. As reflected in the accompanying condensed consolidated financial statements, for the three months ended March 31, 2021 the Company had a net loss of $1,047,165 and used $972,968 cash in operations, and at March 31, 2021, had negative working capital of $955,840, current assets of $642,040, and an accumulated deficit of $12,549,886. The foregoing factors raise substantial doubt about the Company’s ability to continue as a going concern. Ultimately, the ability to continue as a going concern is dependent upon the Company’s ability to attract significant new sources of capital, attain a reasonable threshold of operating efficiencies and achieve profitable operations by licensing or otherwise commercializing products incorporating the Company’s technologies. The condensed consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

The Company acknowledges that its current cash position is insufficient to maintain the current level of operations and research and development, and that the Company will be required to raise substantial additional capital to continue its operations and fund its future business plans. The Company has continued to raise funds through its parent, MAAB and the outstanding note payable balance was $963,203 and there is $286,797 available under the terms of the note at March 31, 2021. The Company has also raised funds through independent capital sources, of which the Company had two Senior Secured Convertible Promissory Notes, both were fully converted in the first quarter of 2021, and another 8% Senior Secured Convertible Promissory Note issued March 5, 2021 for $1,250,000, less $25,000 for commissions and expenses, with an outstanding balance of $241,633, net of discounts, at March 31, 2021.

The Company has also executed an Equity Purchase Agreement whereby the Investor agreed to purchase from the Company up to $5,000,000 of the Company’s common stock (See Note 12, “Equity Purchase Agreement and Registration Rights Agreement”). Through May 24, 2021, the Company put 453,333 shares of common stock at prices ranging from $.515 to $2.85 per share for total proceeds of $601,644.

10

Astro Aerospace Ltd. and Subsidiary

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

NOTE 1 – NATURE OF OPERATIONS, CONTINUED

Astro plans to raise additional capital in the private and public securities markets through 2021.

Reverse Common Stock Split

On October 8, 2020, the Company’s majority stockholder approved a 1-for-15 reverse common stock split (“the Reverse Stock Split”). On February 5, 2021, the Company effected the Reverse Stock Split, reducing the number of common shares outstanding. As a result of the Reverse Stock Split, every 15 shares of issued and outstanding common stock were combined into one issued and outstanding share of common stock, without any change in the par value per share and common shares authorized. All current and prior year share amounts and per share calculations have been retrospectively adjusted to reflect the impact of this reverse stock split and to provide data on a comparable basis. Such restatements include calculations regarding the Company’s weighted average shares and loss per share.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiary. All intercompany balances and transactions have been eliminated.

Basis of Presentation

The accompanying unaudited, condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information, and the Securities and Exchange Commission ("SEC") rules for interim financial reporting. Certain information and footnote disclosures normally included in the condensed consolidated financial statements prepared in accordance with GAAP have been omitted pursuant to such rules and regulations. However, in the opinion of management, the accompanying interim condensed consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the Company's condensed consolidated financial position as of March 31, 2021 and the condensed consolidated results of operations and cash flows for the periods presented. The condensed consolidated results of operations for interim periods are not necessarily indicative of the results of operations to be expected for any subsequent interim period or for the fiscal year ended December 31, 2021. The accompanying unaudited, condensed consolidated financial statements and notes thereto should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2020, included in the Company's Form 10-K, which was filed with the SEC on April 15, 2021.

Cash

All highly liquid investments with original maturities of three months or less or money market accounts held at financial institutions are considered to be cash. Substantially all of the cash is placed with one financial institution. From time to time during the year the cash accounts are exposed to credit loss for amounts in excess of insured limits of $250,000 in the event of non-performance by the institution, however, it is not anticipated that there will be non-performance.

11

Astro Aerospace Ltd. and Subsidiary

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED

Promissory Note Receivable

On March 3, 2021, the Company advanced $275,000 to Horizon Aircraft, Inc. (“Borrower”) and received a Promissory Note that is due and payable in one year from the issuance date and bears no interest. The Borrower may repay the Note in whole or in part at any time without a premium or penalty upon giving five business days’ notice.

Further, the Company shall forgive up to $100,000 of the Note upon the Borrower, at least five days prior to the Note’s maturity, providing invoices to the Company of incurred expenses relating to the transactions referenced in the letter of intent between the Company and the Borrower dated February 17, 2021 (See Note 15 “Letter of Intent, Business Advisory and Placement Agent Agreements”).

Intangible Assets – Acquired In-Process Research and Development

Acquired in-process research and development (“IPRD”) consists of acquired drone technology and engineering and trademarks. The Company reviews the IPRD, which currently has an indefinite useful life, for impairment at least annually or more frequently if an event occurs creating the potential for impairment, until such time as the research and development efforts are completed or abandoned.  If the research and development efforts are abandoned, the related costs will be written off in the period of such determination. If the research and development efforts are completed successfully, the related assets will be amortized over the estimated useful life of the underlying products. The Company will amortize the cost of identified intangible assets using amortization methods that reflect the pattern in which the economic benefits of the intangible assets are consumed or otherwise realized. A valuation by an independent third party was performed for the years ended December 31, 2020 and 2019, and no further impairment expense was required.

Stock-Based Compensation

The Company accounts for stock-based compensation under the fair value recognition provisions of GAAP which requires the measurement and recognition of compensation for all stock-based awards made to employees and directors including stock options and restricted stock issuances based on estimated fair values.

In accordance with GAAP, the fair value of stock-based awards is generally recognized as compensation expense over the requisite service period, which is defined as the period during which an employee is required to provide service in exchange for an award. The Company uses a straight-line attribution method for all grants that include only a service condition. Compensation expense related to all awards is included in operations.

Convertible Notes, Warrants and Beneficial Conversion Feature (“BCF”)

The convertible note is recorded at its fair value, limited to a relative fair value based upon the percentage of its fair value to the total fair value including the fair value of the warrants.

Further, the convertible promissory note is examined for any intrinsic BCF of which the convertible price of the note is less than the closing common stock price on date of issuance.

12

Astro Aerospace Ltd. and Subsidiary

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED

If the relative fair value method is used to value the convertible promissory note and there is an intrinsic BCF, a further analysis is undertaken of the BCF using an effective conversion price which assumes the conversion price is the relative fair value divided by the number of shares the convertible debt is converted into by its terms. The BCF value is accounted for as equity.

Warrants issued with the 8% Senior Secured Convertible Promissory Notes are accounted for under the fair value and relative fair value method. The warrant is first analyzed per its terms as to whether it has derivative features or not. If the warrant is determined to be a derivative and not qualify for equity treatment, then it is measured at fair value using the Black Scholes option model and recorded as a liability on the condensed consolidated balance sheet. The warrant is re-measured at its then current fair value at each subsequent reporting date (it is “marked-to-market”).

If the warrant is determined to not have derivative features, it is recorded into equity at its fair value using the Black Scholes option model, however, limited to a relative fair value based upon the percentage of its fair value to the total fair value including the fair value of the convertible note.

The warrant and BCF relative fair values are also recorded as a discount to the convertible promissory notes and as additional paid-in-capital. Discount on the convertible notes is amortized to interest expense over the life of the debt.

Research and Development

Research and development costs are expensed as incurred.

Income Taxes

The asset and liability approach is used to recognize deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of asset and liabilities.  Deferred tax assets and liabilities are determined based on the differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.  The effect on deferred tax asset and liabilities of a change in tax rates is recognized in operations in the period that includes the enactment date.

The Company accounts for uncertainties in income tax law under a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns as prescribed by GAAP.  Under GAAP, the tax effects of a position are recognized only if it is “more-likely-than-not” to be sustained by the taxing authority as of the reporting date.  If the tax position is not considered “more-likely-than-not” to be sustained, then no benefits of the position are recognized.  Management believes there are no unrecognized tax benefits or uncertain tax positions as of March 31, 2021 and December 31, 2020.

The Company assessed its earnings history, trends and estimates of future earnings and determined that the deferred tax asset could not be realized as of March 31, 2021 and December 31, 2020. Accordingly, a valuation allowance was recorded against the net deferred tax asset.

The Company recognizes interest and penalties on income taxes as a component of income tax expense, should such an expense be realized.

13

Astro Aerospace Ltd. and Subsidiary

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED

Basic and Diluted Net Loss per Share

The Company computes loss per share in accordance with “ASC-260”, “Earnings per Share” which requires presentation of both basic and diluted loss per share on the face of the condensed consolidated statements of operations. Basic loss per share is computed by dividing net loss available to common stockholders by the weighted average number of outstanding common stock during the period. Diluted loss per share gives effect to all dilutive potential common stock outstanding during the period, computed using the if converted method for convertible notes and preferred stock. Dilutive loss per share excludes all potential common stock if their effect is anti-dilutive. Common stock equivalents are anti-dilutive for the three months ended March 31, 2021 and 2020 due to the net loss during the periods.

The common stock equivalents are the 8% Senior Secured Convertible Promissory Notes and the Series A and Series B Convertible Preferred Stock.

For the three months ended March 31, 2021 and 2020, the basic and diluted net loss per share were computed as follows:

Comprehensive Loss

Comprehensive loss consists of net loss plus the foreign currency translation (loss) gain.

Foreign Currency Translation

The translation of assets and liabilities for the Company’s foreign subsidiary is made at period end exchange rates, while revenue and expense accounts are translated at the average exchange rates during the period transactions occurred.

14

Astro Aerospace Ltd. and Subsidiary

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED

Fair Value Measurement

GAAP establishes a hierarchy to prioritize the inputs of valuation techniques used to measure fair value. The hierarchy gives the highest ranking to the fair values determined by using unadjusted quoted prices in active markets for identical assets (Level 1) and the lowest ranking to fair values determined using methodologies and models with unobservable inputs (Level 3). Observable inputs are those that market participants would use in pricing the assets based on market data obtained from sources independent of the Company. Unobservable inputs reflect the Company’s assumptions about inputs market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The Company has determined the appropriate level of the hierarchy and applied it to its financial assets and liabilities. At March 31, 2021 and December 31, 2020, there were no assets or liabilities carried or measured at fair value.

Use of Estimates and Assumptions

The preparation of condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting year. Actual results could differ from those estimates.

A material estimate that is particularly susceptible to significant change in the near-term relate to the determination of the impairment of IPRD. The Company uses various assumptions and actuarial data it believes to be reasonable under the circumstances to make this estimate. Although considerable variability is likely to be inherent in this estimate, management believes that the amount provided is reasonable. This estimate is continually reviewed and adjusted if necessary. Such adjustments, if any, are reflected in operations.

NOTE 3 – RECENT ACCOUNTING PRONOUNCEMENTS

In August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2020-06, “Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging— Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity”. For convertible instruments, the FASB decided to reduce the number of accounting models for convertible debt instruments and convertible preferred stock. Limiting the accounting models results in fewer embedded conversion features being separately recognized from the host contract as compared with current GAAP. Convertible instruments that continue to be subject to separation models are (1) those with embedded conversion features that are not clearly and closely related to the host contract, that meet the definition of a derivative, and that do not qualify for a scope exception from derivative accounting and (2) convertible debt instruments issued with substantial premiums for which the premiums are recorded as paid-in capital.

The FASB decided to amend the guidance for the derivatives scope exception for contracts in an entity’s own equity to reduce form-over-substance-based accounting conclusions. The FASB observed that the application of the derivatives scope exception guidance results in accounting for some contracts as derivatives while accounting for economically similar contracts as equity. The FASB also decided to improve and amend the related EPS guidance.

The amendments in this ASU are effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Management is currently evaluating the effect on the Company’s condensed consolidated financial statements if and when future convertible securities are issued. The adoption of this ASU is not expected to have a material impact on the Company's condensed consolidated financial statements.

15

Astro Aerospace Ltd. and Subsidiary

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

NOTE 4 – CONCENTRATIONS OF CREDIT RISK

Financial instruments which potentially subject the Company to concentrations of credit risk consist primarily of cash. The Company maintains its cash with high-credit quality financial institutions. At March 31, 2021 the Company did have a cash balance that was $75,923 in excess of federally insured limits. The Company does not anticipate non-performance by its financial institution.

NOTE 5 – FAIR VALUE ESTIMATES

The Company measures financial instruments at fair value in accordance with ASC 820, which specifies a valuation hierarchy based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s own assumptions.

Management believes the carrying amounts of the Company's cash, other receivables, accounts payable and accrued liabilities as of March 31, 2021 and December 31, 2020 approximate their respective fair values because of the short-term nature of these instruments. The Company measures its promissory note receivable, notes payable and loan in accordance with the hierarchy of fair value based on whether the inputs to those valuation techniques are observable or unobservable. The hierarchy is:

Level 1 – Quoted prices for identical instruments in active markets;

Level 2 – Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets; and

Level 3 – Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

16

Astro Aerospace Ltd. and Subsidiary

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

NOTE 5 – FAIR VALUE ESTIMATES, CONTINUED

The estimated fair value of the cash, promissory note receivable, notes payable, and loan at March 31, 2021 and December 31, 2020 were as follows:

NOTE 6 – 8% SENIOR SECURED CONVERTIBLE PROMISSORY NOTES

Note Issuance November 21, 2018

On November 21, 2018, the Company issued an 8% Senior Secured Convertible Promissory Note in the aggregate principal amount of $1,383,636 in exchange for a total investment of $1,200,000, less commissions and expenses, payable in two tranches. The first tranche principal of $701,818 was issued, with an Original Issue Discount (“OID”) of $81,818, a $20,000 financing fee for the lender’s transactional expenses that was expensed and the Company received proceeds of $600,000. The second tranche was issued on February 12, 2019 in the principal amount of $681,818, with an OID of $81,818 and the Company received proceeds of $600,000. Each tranche matured 6 months after the issue date.

The note was convertible into common shares of the Company at a price equal to 75% of the lowest market value in the thirty trading days prior to the conversion date.

The Note had a BCF for both tranches, which were valued, along with the warrants, on a relative fair value method. In the first tranche, the warrant fair value was $171,121 (See Note 10, “Warrants”) and the BCF fair value was $523,326 for a total debt discount of $694,447. During the three months ended March 31, 2020, the Company

17

Astro Aerospace Ltd. and Subsidiary

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

NOTE 6 – 8% SENIOR SECURED CONVERTIBLE PROMISSORY NOTES, CONTINUED

amortized $58,250 of the debt discount to interest expense. Through the year ended December 31, 2020, the remaining debt discount was amortized to interest expense.

In the second tranche, the warrant fair value (See Note 10, “Warrants”) was $121,320 and the BCF fair value was $403,689 for a debt discount of $525,009. During the three months ended March 31, 2020, the Company amortized $115,421 of the debt discount to interest expense. Through the year ended December 31, 2020, the remaining debt discount was amortized to interest expense.

During the three months ended March 31, 2020, the Investor converted $166,724 in principal amount of the Note into 215,285 shares of the Company’s common stock. During the three months ended March 31, 2021, the Investor converted $50,091 in principal amount of the Note into 81,755 shares of the Company’s common stock. Total accrued interest on the Note before full conversion during the three months ended March 31, 2021 was $151,212 and the Company had accrued interest on the Note of $145,606 at December 31, 2020.

Note Issuance December 2, 2019

On December 2, 2019, the Company issued a new 8% Senior Secured Convertible Promissory Note in the aggregate principal amount of up to $575,682. The initial tranche principal of $149,546 was issued, with an OID of $17,046, the pro-rated portion of the $68,182 OID for the entire principal amount of $575,682, a $7,500 financing fee for the lender’s transactional expenses that was expensed and the Company received proceeds of $125,000. The Note matured on June 2, 2020. The Company defaulted on this Note and also again defaulted on November 28, 2020 (See Note 7, “Default and Forbearance on the 8% Senior Secured Convertible Promissory Notes”).

The Note was convertible into common shares of the Company at a price equal to 75% of the lowest market value in the thirty trading days prior to the conversion date.

Amortization of the debt discount into interest expense was $74,131 during the three months ended March 31, 2020. Through the year ended December 31, 2020, the remaining debt discount was amortized to interest expense.

During the three months ended March 31, 2020, there were no conversions of the Note into shares of the Company’s common stock. During the three months ended March 31, 2021, the Investor converted the remaining principal amount, $121,691 plus accrued interest of $12,612, into 298,679 shares of common stock. The Company had accrued interest of $12,073 on the Note as of December 31, 2020.

Partial Sales, Conversions and Final Disposition of the Note

On January 29, 2020, the Original Investor sold $30,000 principal amount of the Note to an independent third party investor. Additionally, the Investor entered into a Note Purchase Agreement with the same independent third party investor to sell $800,000 principal amount of the 8% Senior Secured Convertible Promissory Note in three tranches starting January 15, 2021. The tranches were 30 days apart and the principal amounts sold were $300,000 in the first tranche, $300,000 in the second tranche and $200,000 in the third tranche. With the sale of the third tranche, the Original Investor had completely disposed of its Note holdings.

On January 22, the independent third party investor converted $30,000 in principal amount of the Note at $0.455 into 25,000 shares of the Company’s common stock. Additionally, on January 25, 2021, the same independent third party investor converted $300,000 in principal amount of the Note at $0.60 into 500,000 shares of the Company’s common stock. The independent third party investor subsequently sold $300,000 and $200,000 in principal amount of the Note to SBC Investments Ltd (“SBC”) on February 12, 2021 and March 12, 2021, respectively.

18

Astro Aerospace Ltd. and Subsidiary

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

NOTE 6 – 8% SENIOR SECURED CONVERTIBLE PROMISSORY NOTES, CONTINUED

On February 12, 2021, SBC converted $300,000 principal amount of the Note at $0.60 into 500,000 shares. On March 12, 2021, SBC converted $200,000 in principal amount of the Note and $3,945 in accrued interest at $0.60 per share into 339,908 shares of the Company’s common stock. With this last conversion, the Notes have been completely converted into common stock.

Issuance of 8% Senior Secured Convertible Promissory Note, dated March 5, 2021

On March 5, 2021, the Company issued an 8% Senior Secured Convertible Promissory Note (“Note”) in the aggregate principal amount of $1,250,000, less expenses of $25,000, which was recorded as a discount to the Note. The Note matures in six months on September 5, 2021.

The note is convertible into common shares of the Company at a price which is the lower of: (i) 80% of the lowest volume weighted average price in the five trading days prior to the date of the lender’s notice of conversion and (ii) $4.25. The Company is subject to certain penalties if the shares are not issued within two business days of receiving the conversion notice.  Pursuant to a Security Agreement between the Company and the Investor (the “Security Agreement”), the Company has granted to the Investor a security interest in its assets to secure repayment of the Notes. The Company must reserve an amount of shares equal to 500% of the total amount of shares issuable upon full conversion of the promissory note. The Company meets this requirement since it has 250,000,000 common shares authorized and as of May 24, 2021, 174,034,699 shares are available to be issued.

As additional consideration for the investment, the Company issued warrants to acquire up to an aggregate of 120,000 shares of the Company’s common stock at an exercise price of $5.00 per share. The warrants are exercisable by the Investor beginning on the Effective Date through the fifth year anniversary thereof. The warrants’ fair value of $524,904 was calculated using the Black Scholes Model (See Note 10, Warrants). This fair value was reduced with the relative fair value method when including the BCF of the convertible note to $369,671.

The Note has a BCF, which was valued, along with the warrants, on a relative fair value method. The warrant fair value was $369,671 (limited by the relative fair value calculation) and the BCF fair value was $780,128 for a total debt discount of $1,149,798. The exercise price was $3.50 per share, which converts into 356,704 common shares. The common stock price at the valuation date was $4.66 per share, and the effective conversion price was calculated as $2.47, so that the BCF was calculated to be $2.19 per share valuing the BCF at $780,128.  During the three months ended March 31, 2021, the Company amortized $166,432 of the debt discounts into interest expense. At March 31, 2021, total accrued interest on the Note was $7,123, which is included in accounts payable and accrued liabilities in the accompanying condensed consolidated balance sheets.

NOTE 7 – DEFAULT AND FORBEARANCE ON THE 8% SENIOR SECURED CONVERTIBLE PROMISSORY NOTE

On May 21, 2019, six months after the issuance of the first tranche of the 8% Senior Secured Convertible Promissory Note, the Note matured with $307,798 in principal outstanding and approximately $24,118 in accrued interest. The Company was unable to repay the principal and accrued interest and therefore was in default of the Note. The Note has default provisions permitting default interest of 18% to be charged on the Note as well as to charge a default amount of 150% of the unpaid principal and interest.

The Company and the Investor promptly began negotiations on a Forbearance Agreement and, on September 11, 2019, the Company and the Investor agreed to a Forbearance Agreement. Pursuant to this agreement, the Investor was willing to postpone pursuing its rights and remedies under the agreements, in particular and without limitation with respect to the acceleration of the promissory note and the immediate payment of the default amount and reduce the balance of

19

Astro Aerospace Ltd. and Subsidiary

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

NOTE 7 – DEFAULT AND FORBEARANCE ON THE 8% SENIOR SECURED CONVERTIBLE PROMISSORY NOTE, CONTINUED

the promissory note to the pre-default balance plus accrued non-default interest of $1,062,784. The Company’s outstanding principal amount of the Note, after conversions, and the accrued interest as of the Forbearance Agreement date of September 11, 2019, was $805,649. The Forbearance Agreement for the outstanding principal amount and accrued interest of $1,062,784 produced a forbearance penalty of $257,135. The penalty was amortized over the new maturity of the Note, June 30, 2020. The remaining discount was completely amortized to interest expense during the year ended December 31, 2020, and prior to the second forbearance agreement.

As of June 30, 2020, the 8% Senior Secured Convertible Promissory Note was again in default, with a principal balance of $709,862 and an accrued interest of $116,957. Likewise, the 8% Senior Secured Convertible Promissory Note issued December 2, 2019 (together with the 8% Senior Secured Convertible Promissory Note, the “Notes”) was in default as of June 2, 2020 with a principal balance of $149,546 and accrued interest of $4,910. The Company was unable to repay the principal and accrued interest on both Notes.

On June 30, 2020, the Company and the Investor entered into two New Forbearance Agreements with the same terms for each of the Notes. The Investor also agreed to continue the forbearance from September 11, 2019, the date of previous Forbearance Agreement. The 8% Senior Secured Convertible Promissory Note’s balance was reduced to the pre-default balance plus accrued non-default interest of $852,282, which includes a forbearance penalty of $25,471. Likewise, the 8% Senior Secured Convertible Promissory Note issued December 2, 2019 balance was reduced to the pre-default balance plus accrued non-default interest of $156,276. The maturity of both Notes was extended until November 28, 2020. The penalty was amortized over the new maturity of the Note and was completely amortized to interest expense during the year ended December 31, 2020.

As of November 28, 2020, the Company was again in default on the Notes. Although there was no forbearance agreement in place, both the Investor and Company continued to act according to the terms of the Notes.

As of March 12, 2021, both tranches of the Notes have been completely converted into common stock (See Note 6, “8% Senior Secured Convertible Promissory Notes”).

NOTE 8 – PROMISSORY NOTE FROM MAAB

MAAB, the parent of Astro has issued a Promissory Note, as amended, for monetary advances to the Company of up to $1,250,000, maturing on February 28, 2022. The Promissory Note has an interest charge of 10%, compounded monthly. Interest accrues on the principal amount or portion thereof which remains unpaid from time to time as well as any interest outstanding, from the date the principal amount is advanced until and including the date upon which the principal amount and all interest due under this promissory note shall be fully paid.

The Company has accrued interest expense of $246,897 at March 31, 2021 and $207,915 at December 31, 2020. The accrued interest expense is included in accounts payable and accrued liabilities in the accompanying condensed consolidated balance sheets.

20

Astro Aerospace Ltd. and Subsidiary

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

NOTE 9 – CONVERTIBLE PREFERRED STOCK

In December 2015, the Company authorized 50,000,000 shares of Series A Preferred Stock, with a $0.0001 par value and no liquidation value. The Series A Preferred has an 8% dividend paid quarterly and is convertible into one share of common stock. The Series A Preferred is senior to the common stock as to dividends, and any liquidation, dissolution or winding up of the Company. The Series A Preferred also has certain voting and registration rights.

In January 2016, the Company issued 1,562,500 shares of the Series A Preferred Stock. On March 14, 2018, all those shares were sold to MAAB, a non-affiliate of CPSM, Inc. Cumulative undeclared Series A Preferred dividends were $30,000 at March 31, 2021 and $27,500 at December 31, 2020.

On May 4, 2018, the Board of Directors of Astro Aerospace Ltd. authorized 10,000 shares of the Series B Convertible Preferred Stock, par value $0.001 per share. The Preferred shares are entitled to a dividend, when declared by the Board of Directors, votes with all other classes of stock as a single class of stock on all actions to be voted on by the stockholders of the Company, and each share of Preferred Stock is convertible into 89 shares of common stock and a five year warrant to purchase 89 shares of common stock at an exercise price of $11.25 per share. On May 8, 2018, the Company issued all of the 10,000 authorized Series B Preferred shares in the acquisition of certain assets from Confida Aerospace Ltd.

In January 2021, Confida assigned 9,500 shares of the Preferred Stock to two investors and on January 26, 2021, the two investors converted 9,500 shares of the Series B Preferred into 844,233 shares of the Company’s common stock. There are 500 shares of the Series B Convertible Preferred Stock outstanding at March 31, 2021.

Upon any liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, the holders of the shares of the Series B Preferred Stock shall share pro rata with the holders of the common stock, on an as if converted basis.

NOTE 10 – WARRANTS

As part of the 8% Senior Secured Convertible Promissory Note issuance, the Company issued warrants to acquire up to an aggregate 22,935 shares of the Company’s common stock at an exercise price of $7.65 per share. These warrants were fair valued using the Black Scholes Model with the following inputs: stock price on November 21, 2018, date of issuance, $8.55, strike price $7.65, time to expiration, five years, five year Treasury constant maturity rate, 2.33%, volatility 253% and no dividend yield. The result was a fair value of $8.51 per warrant or $195,271 in aggregate. This fair value was reduced with the relative fair value method when including the BCF of the convertible note (See Note 6, “8% Senior Secured Convertible Promissory Notes”) to $171,121. The warrant relative fair value was added to additional paid in capital – common stock.

In the second tranche, the Company issued warrants to acquire up to an aggregate 28,110 shares of the Company’s common stock at an exercise price of $6.00 per share. These warrants were fair valued using the Black Scholes Model with the following inputs: stock price on February 12, 2019, date of issuance, $4.95, strike price $6.00, time to expiration, five years, five year Treasury constant maturity rate, 2.34%, volatility 173% and no dividend yield. The result was a fair value of $5.25 per warrant or $147,580 in aggregate. This fair value was reduced with the relative fair value method when including the BCF of the convertible note (See Note 6, “8% Senior Secured Convertible Promissory Note”) to $121,320. The warrant relative fair value was added to additional paid in capital – common stock.

21

Astro Aerospace Ltd. and Subsidiary

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

NOTE 10 – WARRANTS, CONTINUED

As part of the 8% Senior Secured Convertible Promissory Note, issued March 5, 2021, the Company issued warrantw to acquire up to an aggregate of 120,000 shares of the Company’s common stock at an exercise price of $5.00 per share. The warrants are exercisable by the Investor beginning on the Effective Date through the fifth year anniversary thereof. These warrants’ fair value of $524,904 was calculated using the Black Scholes Model. This fair value was reduced with the relative fair value method when including the BCF of the convertible note (See Note 6, “8% Senior Secured Convertible Promissory Notes”) to $369,671. The warrants’ relative fair value was added to additional paid in capital – common stock. The inputs for the model were: stock price, $4.66, exercise price, $5.00, time to expiration, 5 years, stock volatility, 169%, 5 Year Constant Maturity Treasury Rate, 0.382% and no dividends.

A summary of the warrant activity follows:

	Warrants outstanding		Exercise price per share			Price Per Share on Date of Issuance
Balance, December 31, 2019		939,712	6.00 – 11.25		4.95 – 15.00
Granted		-	-		-
Expired		-	-		-
Balance, March 31, 2020		939,712	6.00 – 11.25		4.95 – 15.00
Balance, December 31, 2020		939,712	6.00 – 11.25		4.95 – 15.00
Granted		120,000	5.00		4.66
Expired		-	-		-
Balance, March 31, 2021		1,059,712	5.00 – 11.25		4.66 – 15.00

NOTE 11 - EQUITY PURCHASE AGREEMENT AND REGISTRATION RIGHTS AGREEMENT

On August 26, 2019, the Company entered into an Equity Purchase Agreement and Registration Rights Agreement with the same Investor who provided the funding with the 8% Senior Secured Convertible Promissory Note. Under the terms of the Equity Purchase Agreement, the Investor agreed to purchase from the Company up to $5,000,000 of the Company’s common stock upon effectiveness of a registration statement on Form S-1 filed with the U.S. Securities and Exchange Commission and subject to certain limitations and conditions set forth in the Equity Purchase Agreement.

Following effectiveness of the Registration Statement, and subject to certain limitations and conditions set forth in the Equity Purchase Agreement, the Company shall have the discretion to deliver put notices to the Investor and the Investor will be obligated to purchase shares of the Company’s common stock, par value $0.001 per share based on the investment amount specified in each put notice. The maximum amount that the Company shall be entitled to put to the Investor in each put notice shall not exceed the lesser of $500,000 or one hundred fifty percent (150%) of the average daily trading volume of the Company’s Common Stock during the ten (10) trading days preceding the put. Pursuant to the Equity Purchase Agreement, the Investor and its affiliates will not be permitted to purchase and the Company may not put shares of the Company’s Common Stock to the Investor that would result in the Investor’s beneficial ownership of the Company’s outstanding Common Stock exceeding 9.99%. The price of each put share shall be equal to eighty five percent (85%) of the Market Price (as defined in the Equity Purchase Agreement). Puts may be delivered by the Company to the Investor until the earlier of (i) the date on which the Investor has purchased

22

Astro Aerospace Ltd. and Subsidiary

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

NOTE 11 - EQUITY PURCHASE AGREEMENT AND REGISTRATION RIGHTS AGREEMENT, CONTINUED

an aggregate of $5,000,000 worth of Common Stock under the terms of the Equity Purchase Agreement, (ii) August 26, 2022, or (iii) written notice of termination delivered by the Company to the Investor, subject to certain equity conditions set forth in the Equity Purchase Agreement.

On August 26, 2019, in connection with its entry into the Equity Purchase Agreement and the Registration Rights Agreement, the Company committed to 40,000 Commitment Shares (as defined in the Equity Purchase Agreement) to the Investor.  These shares are initially being issued pursuant to the Section 4(a)(2) exemption and were registered pursuant to the Registration Rights Agreement. Subsequent to the Agreement and prior to the issuance of the Commitment Shares, the Company renegotiated the payment to 20,000 shares of common stock. The fair value of the Commitment Shares as of August 26, 2019 was $48,300.

During the three months ended March 31, 2020, the Company put a total of 36,667 shares of common stock at prices ranging from $0.984 and $1.539 for total proceeds of $41,881, net of issuance costs.  During the three months ended March 31, 2021, the Company put 120,000 shares at prices ranging from $2.44 to $2.85 per share for total proceeds of $314,416, net of insurance costs.

 

The Registration Rights Agreement provides that the Company shall (i) file with the Commission the Registration Statement by November 25, 2019; and (ii) use its best efforts to have the Registration Statement declared effective by the Commission at the earliest possible date (in any event, within 120 days after the execution date of the definitive agreements). The Company filed a Registration Statement on Form S-1 with the Commission on November 25, 2019 and the S-1 was declared effective on December 27, 2019.

NOTE 12 – 2014 STOCK AWARDS PLAN

 

In November 2014, the board of directors of the Company approved the adoptions of a Stock Awards Plan. A total of 7,000,000 shares was authorized to be issued under the plan. For incentive stock options, at the grant date the stock options exercise price is required to be at least 110% of the fair value of the Company’s common stock. The Plan permits the grants of common stock or options to purchase common stock. As plan administrator, the Board of Directors has sole discretion to set the price of the options. Further, the Board of Directors may amend or terminate the plan.

On March 14, 2018, the Company cancelled all 216,667 outstanding stock options under the 2014 Stock Awards Plan, with 100,000 of the stock options exchanged for two 10% Convertible Promissory Notes with a six month maturity, which were subsequently converted into common stock in September 2018. Consequently, there are 7,000,000 shares available for issuance at March 31, 2021 and December 31, 2020. There are no outstanding stock options at March 31, 2021 and December 31, 2020.

NOTE 13 – COVID-19 PANDEMIC

The COVID-19 pandemic is currently impacting countries, communities, supply chains and markets as well as the global financial markets. Governments have imposed laws requiring social distancing, travel bans and quarantine, and these laws may limit access to the Company’s facilities, customers, management, support staff and professional advisors. These factors, in turn, may not only impact the Company’s operations, financial condition and demand for the Company’s goods and services, but the Company’s overall ability to react timely to mitigate the impact of this event. Also, it has affected the Company’s efforts to comply with filing obligations with the SEC. Depending on the

23

Astro Aerospace Ltd. and Subsidiary

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

NOTE 13 – COVID-19 PANDEMIC, CONTINUED

severity and longevity of the COVID-19 pandemic, the Company’s business and stockholders may experience a significant negative impact. Currently, the COVID-19 pandemic has limited the Company’s ability to move forward with its operations and has negatively affected its ability to timely comply with our ongoing filing obligations with the SEC.

NOTE 14 – LETTER OF INTENT, BUSINESS ADVISORY AGREEMENTS

Binding Letter of Intent

On February 17, 2021, the Company entered into a binding letter of intent to acquire all of the issued and outstanding securities of Horizon Aircraft Inc. (“Horizon”). Pursuant to the binding letter of intent, the Company shall acquire all of the issued and outstanding common shares of Horizon in exchange for 5,000,000 common shares of the Company.

If, following the Closing, Horizon develops a 1:2 scale test prototype of an eVTOL aircraft that can fly in accordance with mutually agreed upon parameters (a “Working Prototype”), then (X) if the Working Prototype is developed within 12 months following Closing, the Company shall issue the current shareholders of Horizon an additional 2,000,000 common shares of the Company or (Y) if the Working Prototype is developed within 18 months following Closing, the Company shall issue the current shareholders of Horizon an additional 1,500,000 common shares of the Company.

The Company will provide Horizon with a minimum of USD $1,500,000 to be used as a first year operating budget and will advance (A) an amount mutually agreed upon by the Company and Horizon to fund Horizon’s 60 day budget, within one week of the execution of the binding letter of intent; (B) USD $750,000 subtracted by the initial advance outlined in (A) at Closing, and (C) USD $750,000 on the three month anniversary of Closing.

Horizon shareholders will enter into customary lock-up agreements whereby they agree not to sell of dispose of the Company’s common shares received in the exchange for varying periods of time.  The Company agrees to include the Company’s common shares held by E. Brandon Robinson and Seaview Capital in any registration filed by the Company under applicable Canadian securities laws or U.S. securities laws.

Effective on Closing, the Company shall have entered in employment agreements with certain key employees of Horizon.  Additionally, the Company shall appoint one nominee of Horizon to the Company’s board of directors.

Business Advisory Agreement

On February 10, 2021, the Company entered into Business Advisory Agreements with SBC and KTAP LLC (“KTAP”) to provide such advice and services to the Company as may be reasonably requested by the Company concerning equity and/or debt financings, strategic planning, merger and acquisition possibilities and business development activities.  The term of the agreements is for twelve months and shall automatically renew for additional one year periods unless terminated in writing not less than thirty days prior to the expiration date.

The Company shall pay SBC a one-time fee of 1,500 Series B preferred shares of the Company for the introduction and subsequent closing of the acquisition of Horizon. The fee will be payable once the acquisition has closed and $5,000,000 has been raised. The Company shall pay SBC a fee equal to five percent of equity the Company issued in an equity financing on which SBC worked. At SBC’s discretion, the fee shall be paid in cash or in the same form of the Company’s equity issued in the equity financing.

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Astro Aerospace Ltd. and Subsidiary

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

NOTE 14 – LETTER OF INTENT, BUSINESS ADVISORY AGREEMENTS, CONTINUED

If the Company completes a business combination, other than Horizon, with a public or private company on which SBC worked, the Company shall pay SBC Investments a fee equal to 2.5% of the Company’s issued and outstanding common stock, on an as-converted, fully diluted basis. The fee shall be deemed and earned and payable upon the closing of the business combination.

The Company shall pay KTAP LLC a one-time fee of 200,000 common shares of the Company due upon the milestones outlined in the agreement between the Company and KTAP. The Company shall pay KTAP a fee equal to one percent of equity the Company issues in an equity financing on which KTAP worked. At KTAP’s discretion, the fee shall be paid in cash or in the same form of the Company’s equity issued in the equity financing.

If the Company completes a business combination with a public or private company on which KTAP worked, the Company shall pay KTAP a fee equal to 0.5% of the Company’s issued and outstanding common stock, on an as-converted, fully diluted basis. The fee shall be deemed and earned and payable upon the closing of the business combination.  

Both advisors agreed not to introduce the Company to any potential financing source who is a U.S. Person and will not engage in any “directed selling efforts” in the United States.

The Company granted both advisors piggyback registration rights.

Placement Agent Agreement

On February 8, 2021, the Company entered into a Placement Agent Agreement with Kingswood Capital Markets (“Kingswood”), a division of Benchmark Investments, Inc. whereby Kingswood shall serve as the exclusive placement agent of the Company, on a “reasonable best efforts” basis. The terms of the placement and the securities shall be mutually agreed upon by the Company and the purchasers.

The Company shall pay Kingswood a cash fee equal to an aggregate of eight percent of the aggregate gross proceeds raised in the placement. The cash fee shall be paid at the Closing of the placement. As additional compensation, at Closing, the Company shall issue to Kingswood or its designees warrants to purchase shares of the Company’s common stock equal to five percent of the agreement number of the common stock sold in the placement. The exercise period of the warrants shall be four and a half years commencing six months from the effective date of the placement and the exercise price of the warrants shall be equal of 110% of the price per common share of the securities sold in the placement.  The warrants shall have registration rights and customary anti-dilution provisions and protection.

Kingswood shall have tail financing rights for six months following the termination of the Placement Agent Agreement. Additionally, Kingswood shall have right of first refusal to act as sole investment banker, sole book-runner and/or sole placement agent for a period of six months after the offering is completed.

NOTE 15 – COMMITMENTS AND CONTINGENCIES

The Company does not have any significant or long term commitments. The Company is not currently subject to any litigation.

25

Astro Aerospace Ltd. and Subsidiary

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

NOTE 16 - SUBSEQUENT EVENTS

The Company has evaluated subsequent events from the condensed consolidated balance sheet date through May 24, 2021, (the condensed consolidated financial statement issuance date), determining no additional events required disclosure.

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2

2

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Recent Events

COVID-19 Pandemic

The COVID-19 pandemic is currently impacting countries, communities, supply chains and markets as well as the global financial markets. Governments have imposed laws requiring social distancing, travel bans and quarantine, and these laws may limit access to the Company’s facilities, customers, management, support staff and professional advisors. These factors, in turn, may not only impact the Company’s operations, financial condition and demand for the Company’s goods and services, but the Company’s overall ability to react timely to mitigate the impact of this event. Also, it has affected the Company’s efforts to comply with filing obligations with the Securities and Exchange Commission. Depending on the severity and longevity of the COVID-19 pandemic, the Company’s business and stockholders may experience a significant negative impact. Currently, the COVID-19 pandemic has limited the Company’s ability to move forward with our operations and has negatively affected our ability to timely comply with our ongoing filing obligations with the Securities and Exchange Commission.

Partial Sales, Conversions and Final Disposition of the 8% Senior Secured Convertible Promissory Note

Refer to Note 6, “8% Senior Secured Convertible Promissory Notes”, in the condensed consolidated financial statements for the final disposition of the Notes.

Reverse Common Stock Split

On October 8, 2020, the Company’s majority stockholder approved a 1-for-15 reverse common stock split (“the Reverse Stock Split”). On February 5, 2021, the Company effected the Reverse Stock Split, reducing the number of common shares outstanding. As a result of the Reverse Stock Split, every 15 shares of issued and outstanding common stock were combined into one issued and outstanding share of common stock, without any change in the par value per share and common shares authorized. All current and prior year share amounts and per share calculations have been retrospectively adjusted to reflect the impact of this reverse stock split and to provide data on a comparable basis. Such restatements include calculations regarding the Company’s weighted average shares and loss per share.

Operations – Astro Aerospace, Ltd.

In 2018, the Company acquired the software, firmware and hardware for Version 1.0 of a manned drone from Confida Aerospace, Ltd. The drone which is in the early stage of development, has executed multiple flights. It is Astro’s goal to transform how people and things get from place to place. This will be done by making safe, affordable user-friendly autonomous manned and unmanned Electric Vertical Take-Off and Landing (eVTOL) aircraft available to the mass market anywhere. Astro is currently working on Version 2.0 of the aircraft product which will feature design changes that enhance performance characteristics and safety features. The target market will be government, private sector operators and individuals for a wide range of commercial, logistical and personal uses.  Astro is currently in the flight testing mode of its Passenger Drone Version 1.0, as well as in the development stages of its version 2.0 Passenger Drone model.

The Company is working with Infly Technology Ltd., our design and manufacturing partner, who is leading the design and development team with responsibility for developing the team as well as building the new prototypes for the two new aircraft models. The Company applied for approval to test the Passenger Drone 1.0 version in Canada in order to display new software, avionics and stability. The Company received an SFOC (Special Flight Operations Certificate) from Transport Canada in September 2018, allowing Astro to take to the sky, and put the Passenger Drone 1.0 “Elroy” through critical elements of integrated flight testing.  The testing culminated on Wednesday, September 19, 2018 with a 4 minute and 30 second flight, reaching heights of over 60 feet and speeds of over 50 km/h. The avionics and flight control systems were put to task with a multitude of maneuvers and the vehicle remained exceptionally stable, even under the effects of a couple of unexpected wind gusts.

27

Astro's newest prototype focuses on a multitude of applications including passenger transport, cargo delivery, ambulance and med-evac services, rescue and disaster assistance, military, and B2B. Its newly designed modular structure allows the Astro Top Frame (ALTA) to fly independently, as well as in combination with the individually designed "Astro Pods" for the specific need in that specific industry. A fly-in and pick-up system will allow the vehicle to connect, fly, disconnect and repeat, effectively and efficiently, changing from one application to the next. Astro refers to it as the Swiss Army Knife of the eVTOL world. Along with recent Avionics and Control system upgrades this modularity opens the door to the ever growing opportunities that (eVTOL) electric take-off and landing short haul vehicles bring.  

Astro anticipates the new prototype for the frame to be completed and flying by the end of the second quarter, 2021. The Pods will be completed by the end of 2022. We have completed the engineering and firmware for the prototype and are now in building the body for the new prototype. Simulations have gone well. The drone is in an early development stage. The Company expects that it will be marketing the aircraft sometime in in the second quarter of 2022. To date, no commercial applications have been found which would accept the product.

Plan of Operations

Management will expand the business through further investment of capital provided by the controlling shareholder and through additional capital raises from third party investors. The Company raised an additional $1.2 million of cash in November 2018 through the issuance of a Senior Secured Convertible Promissory Note in the principal amount of $1,383,636. In December 2019, the Company raised an additional $125,000, in the first tranche, through the issuance of a new 8% Senior Secured Convertible Promissory Note in the principal amount of $575,682.

On August 26, 2019, the Company entered into an Equity Purchase Agreement and Registration Rights Agreement with the same investor who provided the Senior Secured Convertible Promissory Note. Under the terms of the Equity Purchase Agreement, the investor agreed to purchase from the Company up to $5,000,000 of the Company’s common stock upon effectiveness of a registration statement on Form S-1.

During the three months ended March 31, 2020, the Company put a total of 36,667 shares of common stock at prices ranging from $0.984 and $1.539 for total proceeds of $41,881, net of issuance costs.  During the three months ended March 31, 2021, the Company put 120,000 shares at prices ranging from $2.44 to $2.85 per share for total proceeds of $314,416, net of insurance costs.

 

In April 2020, the Company amended the MAAB Promissory Note to increase the maximum principal amount to $1,250,000 and to extend the maturity date to February 28, 2022. The principal amount advanced under the Promissory Note was $963,203 at March 31, 2021.

On March 5, the Company raised $1,250,000, less $25,000 for commissions and expenses, through the issuance of a new 8% Senior Secured Convertible Promissory Note.

The Company will continue to keep expenses as low as possible with closely monitoring working capital, development cost and schedule, while the Company continues the development of Passenger Drone Version 1.0 and 2.0.

Results of Operations

 

The Three Months Ended March 31, 2021 compared to The Three Months Ended March 31, 2020

For the three months ended March 31, 2021 and 2020, the Company did not have any revenue. It is developing an eVTOL aircraft and expects that it will be marketing the aircraft sometime in in the second quarter of 2022. To date, no commercial applications have been found which would accept the product.

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In the three months ended March 31, 2021 and 2020, Astro did incur $802,010 and $180,064 in operating expenses respectively, an increase of $621,946 or 345%. The increase was mostly due to new spending on the eVTOL aircraft and costs related to the potential acquisition of Horizon Aircraft, Inc. Also, in the three months ended March 31, 2020, the spending was significantly reduced due to the worldwide COVID-19 economic shutdowns.

Sales and marketing expenses increased from $82,425 in the three months ended March 31, 2020 to $564,040 in the three months ended March 31, 2021, an increase of $481,615 or 584%. The significant increase is due to increasing the investor relations support and the hiring of marketing consultants, as well as other capital markets support. R&D expenses increased $17,622 or 59% in the three months ended March 31, 2021 versus 2020 as the Company returned to R&D spending as the COVID-19 pandemic is ebbing. General and administrative expenses increased in the three months ended March 31, 2021 versus 2020 to $190,579 from $67,870, largely due to increases in consulting, accounting and legal fees.

Other expenses declined in the three months ended March 31, 2021 versus 2020 from $286,066 to $245,155, a decline of $40,911 or 14%. The largest portion of the decline is in interest expense, which declined $42,059 or 15%. This is due to the decline in the amortization of the 8% Senior Secured Convertible Promissory Notes, as well as a significant portion of the Notes were converted into the Company’s common stock. This was slightly offset by a small increase of $1,148 in the bank and filing fees.

The Company had a net loss of $1,047,165 versus $466,130 in the three months ended March 31, 2021 versus 2020, largely due to the increases in sales and marketing, R&D spending and in general and administrative expense, somewhat offset by a reduction in interest expense. There was also an undeclared preferred dividend of $2,500 in both the 2021 and 2020 periods which made the net loss available to common stockholders of $1,049,665 and $468,630, respectively.

Astro also had foreign currency translation loss of $32,895 in the three months ended March 31, 2021 and had a translation gain of $138,665 in the three months ended March 31, 2020. This is due to the difference in the Canadian dollar and U.S. dollar exchange rates for those periods. The COVID-19 pandemic greatly increased the fluctuation of the Canadian and U.S. dollar exchange rate. Astro’s comprehensive loss was $1,080,060 and $327,465 in the three months ended March 31, 2021 and 2020, respectively.

Capital Resources and Liquidity

The Company currently is not profitable and must finance its business through raising additional capital. The Company is financed through its parent, MAAB, which has loaned the Company $963,203 and there is $286,797 available under the terms of the note at March 31, 2021. The note was amended on April 22, 2020 to increase the maximum principal amount to $1,250,000 and to extend the maturity to February 28, 2022.

The Company also raised an additional $1.2 million of cash in November 2018 through the issuance of a Senior Secured Convertible Promissory Note in the principal amount of $1,383,636. On December 2, 2019, the Company issued a new 8% Senior Secured Convertible Promissory Note and received $125,000 in proceeds. As of March 12, 2021, both tranches of the Note have been completely converted into common stock.

On March 5, 2021, the Company issued an 8% Senior Secured Convertible Promissory Note (the “Note”) in the aggregate principal amount of $1,250,000, less commissions and expenses of $25,000. The Note matures in six months on September 5, 2021.

For more detail, see Note 6 to the condensed consolidated financial statements.

On August 26, 2019, the Company entered into an Equity Purchase Agreement and Registration Rights Agreement with the same investor who provided the Senior Secured Convertible Promissory Note. Under the terms of the Equity Purchase Agreement, the investor agreed to purchase from the Company up to $5,000,000 of the Company’s common stock upon effectiveness of a registration statement on Form S-1.

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During the three months ended March 31, 2020, the Company put a total of 36,667 shares of common stock at prices ranging from $0.984 and $1.539 for total proceeds of $41,881, net of issuance costs.  During the three months ended March 31, 2021, the Company put 120,000 shares at prices ranging from $2.44 to $2.85 per share for total proceeds of $314,416, net of insurance costs.

Further capital support will come from the parent, and additional capital from third party sources. There is no assurance that the third party capital will be available. In the event that additional capital from the private or public markets is not available, the Company will need to reduce its spending on development and operations to the level of the capital that is available from the parent.

The accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of our business. As reflected in the accompanying condensed consolidated financial statements, for the three months ended March 31, 2021 the Company had a net loss of $1,047,165 and used $972,968 cash in operations, and at March 31, 2021, had negative working capital of $955,840, current assets of $642,040, and an accumulated deficit of $12,549,886. The foregoing factors raise substantial doubt about the Company’s ability to continue as a going concern. Ultimately, the ability to continue as a going concern is dependent upon the Company’s ability to attract significant new sources of capital, attain a reasonable threshold of operating efficiencies and achieve profitable operations by licensing or otherwise commercializing products incorporating the Company’s technologies. The condensed consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern

While the Company has Net Operating Losses (“NOL”) for tax purposes due to the net losses through the three months ended March 31, 2021, the Company has taken a 100% income tax valuation allowance against it resulting in no deferred tax asset. At this time, it is not known if the Company will become profitable with the ability to use the NOL.

The Company expects to spend $760,000 in the next six months and then another $1,500,000 in the subsequent six months on the development and marketing of the eVTOL aircraft.

See Notes to the condensed consolidated financial statements for Series A Preferred stock, Series B Preferred stock, promissory note from MAAB, 8% Senior Secured Convertible Promissory Notes, Equity Purchase Agreement and Registration Rights Agreement and Forbearance Agreement.

The Three Months Ended March 31, 2021 compared to the Three Months Ended March 31, 2020

For the three months ended March 31, 2021, we had a net loss of $1,047,165. We had the following adjustments to reconcile net loss to cash flows from operating activities: an increase of $166,431 due to the amortization of the 8% Senior Secured Convertible Promissory Note discount and common stock issued for services of $43,696. We had the following changes in operating assets and liabilities: a decrease of $36,352 in other receivables, an increase of $275,000 in a promissory note receivable, an increase of $108,117 in deposits, an increase of $1,688 in other assets, and an increase of $212,522 in accounts payable and accrued liabilities.

As a result, we had net cash used in operating activities of $972,968 for the three months ended March 31, 2021, which is largely due to the continued development of the eVTOL aircraft.

For the three months ended March 31, 2020, the Company had a net loss of $466,130. The Company had the following adjustment to reconcile net loss to cash flows from operating activities: an increase of $247,802 due to the amortization of the 8% Senior Secured Convertible Promissory Notes’ discounts. The Company had the following changes in operating assets and liabilities: a decrease of $2,773 in other receivables, a decrease of $4,341 in deposits, an increase of $13,809 in the bank overdraft and an increase of $41,226 in accounts payable and accrued expenses.

As a result, the Company had net cash used in operating activities of $156,179 for the three months ended March 31, 2020 which is largely due to the continued development of the eVTOL aircraft.

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For the three months ended March 31, 2021, we repaid $246,147 on the Promissory Note from the Parent, received $1,225,000 from the issuance of a new 8% Senior Secured Convertible Promissory Note, and received $314,416 from the puts of common stock under the Equity Purchase Agreement.

As a result, we had net cash provided by financing activities of $1,293,269 for the three months ended March 31, 2021.

For the three months ended March 31, 2020, the Company repaid $15,933 on a Promissory Note from MAAB and received $32,288 from the puts of common stock under the Equity Purchase Agreement. As a result, the Company had net cash provided by financing activities of $16,355 for the three months ended March 31, 2020.

For the three months ended March 31, 2021 we had a loss on foreign currency translation of $32,895 and for the three months ended March 31, 2020, the Company had a gain from the effect of the foreign currency translation of $138,665.

Critical Accounting Policies and Estimates

Management's Discussion and Analysis of its Financial Condition and Results of Operations is based upon our condensed consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities.  On an on- going basis, we evaluate our estimates, including those related to the reported amounts of revenues and expenses and the valuation of our assets and contingencies. We believe our estimates and assumptions to be reasonable under the circumstances.  However, actual results could differ from those estimates under different assumptions or conditions. Our condensed consolidated financial statements are based on the assumption that we will continue as a going concern.  If we are unable to continue as a going concern, we would experience additional losses from the write-down of assets.

Recent Accounting Pronouncements

See Note 3 to the Condensed Consolidated Financial Statements, “Recent Accounting Pronouncements”, for the applicable accounting pronouncements affecting the Company.

Off - Balance Sheet Arrangements

We had no material off-balance sheet arrangements as of March 31, 2021.

Contractual Obligations

The Company has no material contractual obligations.

 

The long term debt repayments as of March 31, 2021 are as follows:

 

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ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

The Company does not have any significant market risk exposures.

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ITEM 4.   CONTROLS AND PROCEDURES

During period since the change in control of the Company on March 14, 2018, the Company has undergone operational and management changes, specifically with the sale of the discontinued operations and the acquisition of the new eVTOL aircraft in-process research and development and trademarks. In light of these changes management has assessed its internal controls and procedures.

Evaluation of Disclosure Controls and Procedures

We carried out an evaluation as required by paragraph (b) of Rule 13a-15 and 15d-15 of the Exchange Act, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer (who are the same person), of the effectiveness 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, 2021.

 

A material weakness can be defined as an insufficiency of internal controls that may result in a more than remote likelihood that a material misstatement will not be prevented, detected or corrected in a company’s condensed consolidated financial statements.

Based upon that evaluation, our Chief Executive Officer /Chief Financial Officer concluded that as of March 31, 2021, our disclosures and controls and procedures were not effective, based on the following deficiencies:

Weaknesses in Accounting and Finance Personnel: We have a small accounting staff and we do not have the robust employee resources and expertise needed to meet complex and intricate GAAP and SEC reporting requirements of a U.S. public company. Additionally, numerous adjustments and proposed adjustments have been noted by our auditors. This is deemed by management to be a material weakness in preparing financial statements.

We do not have written accounting policies and control procedures, and do not have sufficient staff to implement the related controls. Management had determined that this lack of written accounting policies and control procedures and the lack of the implantation of segregation of duties, represents a material weakness in our internal controls.

Internal control has as its core a basic tenant of segregation of duties. Due to our limited size and economic constraints, the Company is not able to segregate for control purposes various asset control and recording duties and functions to different employees. This lack of segregation of duties had been evaluated by management and has been deemed to be a material control deficiency.

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PART II – OTHER INFORMATION

Item 1. Legal Proceedings

None

Item 1A. Risk Factors  

Not applicable for smaller reporting companies

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None

Item 3. Defaults Upon Senior Securities

None

Item 4. Mine Safety Disclosures

Not Applicable

Item 5. Other Information

None

Item 6. Exhibits

Exhibit 31* - Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Exhibit 32* - Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS** XBRL Instance Document

101.SCH** XBRL Taxonomy Extension Schema Document

101.CAL** XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF**.XBRL Taxonomy Extension Definition Linkbase Document

101.LAB** XBRL Taxonomy Extension Label Linkbase Document

101.PRE** XBRL Taxonomy Extension Presentation Linkbase Document

*  Filed herewith

**XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.

Dated: May 24, 2021

ASTRO AEROSPACE LTD.

By: /s/Bruce Bent

Bruce Bent

Chief Executive Officer

Chief Financial Officer

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