PINX:GNBA Groen Brothers Aviation, Inc. Annual Report 10-K Filing - 10/8/2012

Effective Date 10/8/2012

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-K
(Mark One)
 
[ X ]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
   
SECURITIES EXCHANGE ACT OF 1934
     
For the fiscal year ended June 30, 2012

 
[    ]
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
(State or other jurisdiction of incorporation or organization)
87-0489865
(I.R.S. Employer Identification No.)
 

2640 W. California Avenue
Salt Lake City, Utah  84104-4593
(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code:  (801) 973-0177

Securities registered pursuant to Section 12(b) of the Act:  None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, No Par Value

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. £ Yes  No R

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. £ Yes  No R

Indicate by checkmark 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 Issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  R Yes  No £

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).  Yes R    No ¨
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. R

 
 

 

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
Accelerated filer o
 
Non-accelerated filer o
(Do not check if a smaller reporting company)
Smaller reporting company þ

Indicated by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act  £ Yes  No R

The aggregate market value of the voting and common equity held by non-affiliates computed by reference to the average bid and asked price of such common equity, as of the last business day of the registrant's second fiscal quarter ended December 31, 2011 was $3,049,000.

The number of shares outstanding of the registrant’s no par value Common Stock as of October 12, 2012 was 171,416,289.

Documents Incorporated by Reference
None

 
 

 

Groen Brothers Aviation, Inc.
Annual Report on Form 10-K
Year Ended June 30, 2012
Table of Contents



Part I
  Page No.
 
Item 1.
Business
1
 
Item 1A.
Risk Factors
17
 
Item 1B.
Unresolved Staff Comments
22
 
Item 2.
Properties
22
 
Item 3.
Legal Proceedings
22
 
Item 4.
(Removed and Reserved)
 
       
Part II
   
 
Item 5.
Market for Registrant’s Common Equity, Related Stockholder
 
   
Matters and Issuer Purchases of Equity Securities
23
 
Item 6.
Selected Financial Data
25
 
Item 7.
Management’s Discussion and Analysis of Financial
 
   
   Condition and Results of Operations
25
 
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
34
 
Item 8.
Financial Statements and Supplementary Data
34
 
Item 9.
Changes in and Disagreements with Accountants on
 
   
   Accounting and Financial Disclosure
34
 
Item 9A
Controls and Procedures
34
 
Item 9B
Other Information
35
       
Part III
   
 
Item 10.
Directors, Executive Officers and Corporate Governance
35
 
Item 11.
Executive Compensation
39
 
Item 12.
Security Ownership of Certain Beneficial Owners and
 
   
   Management and Related Stockholder Matters
42
 
Item 13.
Certain Relationships and Related Transactions, and Director
 
   
   Independence
43
 
Item 14.
Principal Accounting Fees and Services
44
       
Part IV
   
 
Item 15.
Exhibits, Financial Statement Schedules
45
       
Signatures
 
  50
 
 
 

 

PART I

Item 1.                    Business
 
Going Concern Qualification and Pending Restructure

Groen Brothers Aviation, Inc. (the “Company”) or (“GBA”) is restructuring its business plan and business operations (the “Restructure”) pursuant to an Exchange Agreement (the “Exchange Agreement”) dated as of September 7, 2012, which if concluded successfully, will result in the sale and transfer to a separate entity of our operations and extinguishment of substantially all of our liabilities.  As of the date of filing of this Annual Report, we had not closed the Exchange Agreement.

The Report of Independent Registered Public Accounting Firm on our 2012 audited consolidated financial statements addresses an uncertainty about our ability to continue as a going concern, indicating that our operating losses and lack of working capital raise substantial doubt about our ability to continue as a going concern.  At June 30, 2012, we had total current liabilities of $182,435,000 and current assets of $17,000, resulting in a working capital deficiency of $182,418,000.  At June 30, 2012, we had a total stockholders’ deficit of $191,246,000.  In light of our financial position and the pending sale and transfer of our operations, the Company’s viability as a going concern is uncertain.

Origins of the Company

The Company was originally incorporated in the State of Utah on July 28, 1980 as New Wave Energy.  On October 23, 1990, the name of New Wave Energy was changed to Groen Brothers Aviation, Inc., and under this name, the Company became a fully reporting public corporation (stock symbol “GNBA”) to facilitate the raising of capital.  Hereafter, the "Company" refers to the registrant, Groen Brothers Aviation, Inc. (“GBA”) and its wholly-owned subsidiaries, Groen Brothers Aviation USA, Inc. (“GBA USA”), Groen Brothers Aviation International, LLC (“GBA LLC”), Groen Brothers Aviation Global, Inc. (“GBA Global”) and, from December 2002 through November 2004, American Autogyro, Inc. (“AAI”).  Effective November 1, 2004, we merged AAI into GBA USA.  GBA LLC was formed as a special purpose subsidiary in July 2010 to participate in a possible future Chinese joint venture.  GBA Global was formed in June 2012 to facilitate the Exchange Agreement.  Unless otherwise stated, the operating activities described herein are those of GBA USA, which currently is the sole operating entity of the Company.

Twenty-six years ago David and Jay Groen had an insight that led to the founding of the Company.  David’s service as a combat helicopter pilot and aircraft commander in Viet Nam, and later as a commercial helicopter pilot in the U.S. and Asia, and Jay’s “black” flights as a US Air Force Chinese linguist during the Viet Nam war and later as a CIA analyst, provided them extensive experience in fixed-wing airplanes, helicopters, and other rotorwing aircraft. Importantly, they recognized both the capabilities and limitations of each type of aircraft, particularly the mechanical complexity and safety issues of the helicopter that translated into heavy cost.  This insight lead them to devote their lives to developing a modern rotorwing type of aircraft that was originally invented in the 1920’s as an airplane that cannot stall.  The aircraft was the gyroplane (formerly called “autogiro”).  The autogiro was the predecessor to the helicopter, which followed twenty years later.  This aircraft, later formally named the gyroplane, blended the versatility of the helicopter with the safety, stability, and low cost of a fixed-wing airplane.

 
1

 

Although it has a rotorwing much like a helicopter, the gyroplane is more closely related to an airplane.  A gyroplane has none of the components of a helicopter except a rotor – no transmissions or gearboxes and no tail rotor.  On the other hand, a modern gyroplane has nearly everything an airplane has, plus a rotor.  Essentially, GBA’s gyroplane design is “an airplane that doesn’t need a runway.” Unlike a helicopter that obtains both its lift and thrust from its engine-driven rotor – functioning as both its wing and its propeller, the gyroplane only obtains lift from its rotor and its forward thrust from an engine driven propeller, much like an airplane.  The rotor on a gyroplane, however, is not powered in flight. The rotor turns and provides lift by the air moving through the rotor by the forward movement of the aircraft.  Although unable to hover, a gyroplane can fly very slowly and with prerotation of its rotor is capable of making a vertical take-off and landing (VTOL), thereby eliminating the need for a runway.

By the 1930’s, the gyroplane had established itself as an effective commercial and military vehicle.  It was used by private aviation, and also by the U.S. Post Office to deliver mail from its roof tops.  It was also used by the military of several countries for transportation and surveillance. But by the 1940’s the gyroplane had largely disappeared, displaced by the technology of the helicopter whose ability to hover proved valuable to the military.  Until recently, only small numbers of recreational pilots flying home-built kits remain as devotees of the gyroplane.

Seeing recreational gyroplanes in the light of his own helicopter experience, David Groen quickly perceived that the kit gyroplane, typically a single or two-seat open cockpit sport aircraft of that period that still needed a runway, incorporated little of what had been learned about rotary-wing flight from the evolution of the helicopter.  He envisioned a market opportunity for a company that could develop an easy-to-fly and cost efficient VTOL gyroplane that could compete effectively in the general aviation market.

More significantly, he understood that a gyroplane designed and built with state-of-the-art aerospace engineering and aerodynamics, advanced materials, and proprietary technology could offer safety, performance, and cost advantages for many roles of both helicopters and airplanes.  Those advantages over the limitations of scale and speed inherent in a helicopter, and the runway requirements of an airplane, could lead sustained autorotative flight technology to large, fast, and economical gyroplanes that could open up a new market for runway-independent aircraft.

Initial GBA Research & Development into Gyroplane Technology

Starting with the usual constraints upon an individual entrepreneur, David looked to make his initial entry of his vision with an advanced designed recreational gyroplane that would be easy-to-fly and cost-efficient for the most immediate market.  In the early nineties that vision began to take shape in a proverbial “garage” in Salt Lake City, Utah.  Using only personal funds, he and his brother Jay designed and built their first gyroplane, which was a proof-of concept single-seat open cockpit aircraft called the “Hawk Point 5” that he personally flew in 1987 on its first and subsequent flights.  This aircraft incorporated the first variable collective pitch controlled rotor system for a gyroplane, a feature that would enable a smooth jump takeoff and higher speed.  The encouraging test flights of this aircraft led to David and Jay forming Sego Tool, Inc. (later renamed “Groen Brothers Aviation USA, Inc.”) in March of 1988 as a private company, gaining the support of new investors.  With this support the brothers recruited a small employee group and proceeded with the development of its next prototype test vehicle, the larger and much faster fully enclosed cockpit single-seat Hawk 1 Gyroplane.

 
2

 

In October 1990, in recognition that access to public capital markets could help fill the need for further funding, David and Jay reformed their company by the reverse merger into an existing public corporation.  The surviving company changed its name to Groen Brothers Aviation, Inc., with Jay as Chairman and David as President. Consequently, their vision and project became a fully reporting public corporation with the stock symbol “GNBA.”

With new access to the public market, further fundraising enabled support for the development of the Hawk 1 Gyroplane, which made its first flight in September 1992.  This and subsequent test flights verified the stability of the aircraft, confirmed its low drag design, and provided data for optimization of yaw, pitch, and roll performance, flight controls, engine cooling airflow, and the requirements for prerotation of the rotor for jump take-off using their now patented “collective pitch controlled rotor system for a semi-rigid rotor” on sustained autorotative flight vehicles.

In the following year, this experience led to new innovations in design, including development of a unique rotor-blade airfoil specific to optimization of sustained autorotative flight. The company also developed new manufacturing techniques.  The next generation aircraft was the two-seat Hawk H2X Gyroplane.  The prototype was first flown in February 1997 and expanded the gyroplane flight envelope well beyond that of the Hawk 1 and notably increased speed beyond that of typical helicopters of that era.  Furthermore, with this aircraft, GBA was able to demonstrate a smooth vertical jump takeoff at 8,000 ft density altitude at max gross weight, a world record-breaking achievement for gyroplanes.  The H2X was a breakthrough that showed that the modern gyroplane, with its scalable technology, could compete in a broad range of world markets.

The FAA Certified Aircraft Market

As noted earlier, David and Jay had envisioned that the opportunities for gyroplanes, and for GBA, extended well beyond the original general aviation market objective.  They believed it now had broad potential for commercial, law enforcement, and military applications.  As a result, in 1995 they retained a reputable market research organization to assess the potential market.  The research concluded that a larger Hawk model with 4-5 seats and Federal Aviation Administration (“FAA”) certification could compete profitably against the then comparable Bell and Aerospatiale products.  As a result, in 1995 the Company had initiated a design concept for what it then called the Hawk 4 Gyroplane.

With the successful performance of the Hawk H2X prototype confirming the potential of GBA’s concept and the accuracy of its forecasts for the performance of the technology, the decision needed to be made between the two-seat and four/five-seat versions.  Although market interest for an aircraft of the size of the H2X existed, a greater interest had emerged for a larger aircraft and discussions were initiated with the FAA.  Recognizing also that the technology incorporated in the H2X would be both technically advantageous and cost effective for a larger aircraft, the H2X would be unable to be fully utilized for the general aviation market at a profitable sales point.  As a result, Jay and David made the decision to proceed with a major program to produce an FAA Type Certified four place aircraft to be called the GBA Hawk 4 Gyroplane.

To set this program in motion, the Company leased a new building suitable for the design and construction of the test aircraft; established a flight test center in a favorable location in Arizona; designed a 200,000 sq. ft. manufacturing facility capable of producing 720 gyroplanes a year; and built a significant management, engineering, and manufacturing workforce that at peak was close to 135 people.  At the same time, David was overseeing the final design of the aircraft, pushing forward the FAA certification process, and initiating a substantial dealer program as the keystone of the marketing effort, while at the same time ensuring the necessary ongoing funding through a combination of equity and debt.

 
3

 

The first pre-production piston-engine version of the four-seat Hawk 4 Gyroplane flew in September 1999, followed by a turbine-engine version in July 20001, however, powered by a Rolls-Royce Model 250 gas-turbine turboprop engine with 420 shaft horsepower.  The Hawk 4 was the world’s first turbine engine gyroplane.  Based on the superior operating performance the latter aircraft demonstrated by its flight tests, the Board proceeded with an FAA certification program based on the turbine engine for a variety of commercial uses and was to become GBA’s first “major production” aircraft.  The Hawk 4 Gyroplane incorporated rotor blades optimized for autorotative flight and GBA’s patented rotor system with a variable collective pitch control.  This enabled the pilot to optimize the rotor blade pitch to the existing conditions for higher in-flight performance and to attain a smoothly controlled vertical take-off and landing.  The turbine engine allowed the Hawk 4 to compete with turbine-powered helicopters.

With these capabilities, it was anticipated that the improved safety, performance, reliability, maneuverability, and operating cost of the Hawk series gyroplanes would permit them to compete with helicopters for most of their missions. Potential customers included:

 
·
Law enforcement (police, sheriff, border patrol, customs, drug interdiction);
     
 
·
Public service agencies (fire patrol, wildlife, land management);
     
 
·
Military (courier, armed surveillance, VIP transport, forward artillery control, ground attack, unmanned aerial vehicle);
     
 
·
Commercial (oil, gas, and power line patrol and inspection, land survey, aerial photography, crop spraying, herd management, air taxi service, corporate transport) and
     
 
·
Private (commuting, sport flying, training).

Accident and incident free for the life of the Hawk 4 program, in the following two years, the Hawk 4 Gyroplane flew close to three hundred hours in several hundred sorties during its pre-certification flight-test program.  It also flew many flights demonstrating its utility and versatility at air shows and elsewhere throughout the country.  As an example, in one unusual display, the Hawk 4 Gyroplane showed its ability to spray fertilizer or insecticides more accurately and economically than either a fixed wing airplane or a helicopter due to it neither needing the runway of an airplane nor generating the dispersing downwash of a helicopter.  Orders for 140 Hawk 4 Gyroplanes had been received through a network of over 20 dealers, and in November 2000 the Hawk 4 was featured as the cover story in Aviation Week & Space Technology, in a very favorable story of the aircraft and of GBA.

Substantial progress had also been made by the summer of 2001 in the lengthy and expensive certification process.  This required partial fuselages manufactured as test vehicles to meet FAA crashworthiness requirements and seating to meet a new FAA standard requiring the ability to withstand a 30g vertical impact, which was far beyond that of any then current helicopter. At that time the Hawk 4 Gyroplane was scheduled to be the first rotary-wing aircraft to be certificated under the new standard.


 
1  The piston-powered Hawk 4, although with space for a pilot and four passengers, was limited by maximum payload to four occupants.  The more powerful turbine version can carry a pilot and four passengers. all certificated helicopters operated according to an earlier standard.  
 
 
4

 

As the “dot com” bubble began to burst in spring 2000, U.S. equity markets experienced substantial decline and consolidation.  Nonetheless, in May of 2001, David had arranged a multi-million dollar, three year equity financing commitment from an institutional investor.  This transaction was expected to cover a major part of the anticipated additional funding needs to bring the aircraft to market in 2004.  Thus, by summer of 2001, with test flying proceeding according to plan; the FAA certification program moving forward; aircraft orders in hand; plans in place for production; and funds seemingly assured, David could be confident that GBA would be close to being the first successful post WWII producer of a new aircraft type since Sikorsky’s helicopter.  In the background, however, there were disconcerting developments.

The collapse of the “Tech Sector” stock market in late 2000, although primarily affecting information technology stocks, began to impact other advanced technology industries, particularly for those companies like GBA where there was still a significant time to market.  In that financial climate, the September 11, 2001 terrorist attacks had a heightened impact on many research and development companies, driving stock prices down generally, but particularly on developing companies needing further infusion of significant amounts of cash in order to execute its business plan.  In these circumstances, the bright future of a few months earlier became cataclysmic.  All that had been accomplished over the previous years had to be put aside as the drastic drop in stock prices nullified the assumptions of the equity funding entered into four months earlier, rendering it and many other funding sources unavailable.

David and Jay quickly recognized that immediate and drastic action had to be taken in order for the Company to survive and to preserve its valuable technology.  Exactly thirty days after 9/11, they had orchestrated a very painful but necessary plan for survival that included a suspension of the Hawk 4 FAA certification program, the layoff of a large majority of the personnel involved in the commercial Hawk 4 program, the negotiation of deferred payment terms with all significant creditors, and a new concentrated focus on sales to government markets.  The Company laid off 100 of its 135 employees.

Notably, the brothers saw the opportunity to address the need for new missions necessitated by the terrorist attacks.  The capabilities of the Hawk 4 Gyroplane could be applied to Homeland Security activities such as border patrol, protection of pipelines, nuclear plants, and key transportation infrastructure.  Added to those needs, they saw the dangers to the country in GBA’s own backyard with the 2002 Winter Olympics taking place less than six months after 9/11, which loomed as an attractive and vulnerable target for another hurtful terrorist attack.  In quick order, the Company was able to organize the complex task that enabled the Hawk 4 Gyroplane to be approved as an official participant in the security arrangements for the 2002 Winter Olympic Games and then to perform superbly in that role.  The aircraft and its crew, flying some sixty-seven observation patrol flights, was the only rotorwing aircraft to be mission ready 24/7, being available to meet the demands of every call to duty from the Utah Olympic Public Safety Command (UOPSC).  This demonstrated clearly the merits that David had been claiming for the gyroplane since he and Jay founded the Company many years earlier.
 
Encouraged by the performance of the Hawk 4 in the Winter Olympics and by its selection to be displayed in July 2002 outside the Senate Office Building in Washington D.C., as part of the Small Business Homeland Security Exposition organized by the Senate Small Business Committee, the Company continued to press its case for use in government.  Following its static display for the Senate Homeland Security Expo, where the Senate Committee Chairman declared the Hawk 4 Gyroplane his favorite product of the show and described its unique capabilities on “Wolf Blitzer Live,” in his summation at the closing ceremony.  The Company then took the aircraft to Leesburg Airport in Virginia and gave demonstration flights to a wide range of U.S. government agencies.

 
5

 

Regrettably, while these efforts aroused interest, including 57 letters from nation-wide Law Enforcement Agencies requesting funding for Hawk 4 Gyroplanes from the Department of Homeland Security, none resulted in timely orders.  This necessitated suspension of flight testing of the Hawk 4 in the summer of 2002 due to lack of financial resources.  Further development toward commercial certification of the Hawk 4 was deferred pending obtaining the funding necessary to complete it.  While considerable efforts were made in subsequent years, including the signing of a Memorandum of Understanding for manufacture in Europe, none were successful.  GBA continues to utilize its Hawk 4 Gyroplane, not with sales expectations, but as a vehicle for flight testing components to be used on more advanced gyroplanes incorporating technology that have been subsequently developed by the Company.

A Brief Return to the Company’s Roots – the Development of the SparrowHawk

While recognizing in 2002 the infeasibility of continuing at that time with FAA certification of the Hawk 4 Gyroplane, the Company also noted that the general aviation kit-plane market still lacked the safe, economical, easy-to-fly gyroplane that David and Jay originally intended to produce.  Since this market does not require the costly certification process required for a production aircraft like the Hawk 4, entry could be achieved at a much lower cost.

Furthermore, David and his management team believed that the kit-plane market could expand significantly as a result of GBA’s entrance with a gyroplane properly designed for that market.  Although hundreds of kit-built small gyroplanes have been produced by a variety of manufacturers over many years, for the most part, it was evident that many of these gyroplanes did not incorporate a full understanding of gyroplane flight dynamics.  Moreover this contributed to the fact that fatality statistics of kit gyroplanes did not reflect the inherent safety of the gyroplane.

This poor safety record of homebuilt gyroplanes was particularly troublesome because David and Jay remained convinced that the technology that the Company had developed could be utilized in certificated gyroplanes and intended to return to that market whenever an opportunity arose.  Thus, GBA had an important vested interest in the reputation of gyroplane safety in general.  It made sense to bring a gyroplane to this market that incorporated the Company’s understanding of autorotative flight especially to protect the reputation of the gyroplane and also to generate some revenue from an underserved market.  For this reason, GBA established a subsidiary company, American Autogyro, Inc., to enter this market, first with a modification kit that could be fitted as a safety advance for the most popular gyroplane of that era, and later with a two-seat kit gyroplane of the Company’s design named the GBA SparrowHawk that entered service in 2004.

By 2008, the SparrowHawk had become the bestselling gyroplane in its category and achieved the objective of creating an understanding within the gyroplane kit industry of the critical thrust dynamics that had previously led to accidents.  Nevertheless, the kit program continued to be a financial drain on the Company with a negative gross profit on sales of SparrowHawk kits.  The number of SparrowHawk kits sold had fallen below expectations, due in part to lack of funding to finalize product development and to pay for increased sales and marketing efforts.  In part, this funding constraint resulted from the Company being chosen by the Defense Advance Research Projects Agency (DARPA) to lead its Heliplane project, the most important program of GBA’s existence.  The Heliplane was to be a VTOL rotorwing aircraft capable of speeds and ranges more than double current helicopter performance.  Substantially all of the Company’s resources became dedicated to the Heliplane program and thus the SparrowHawk program by necessity suffered from lack of resources.

 
6

 

Although some 100 SparrowHawk kits were sold and the SparrowHawk program was maintained in parallel with the DARPA project for some time, prospects of reaching a satisfactory profit level in a deteriorating economic climate were not promising.  In addition, the kit aircraft business was not compatible with the DARPA project or with the design, manufacture, and marketing of more sophisticated aircraft required by military and commercial customers that David envisioned for the Company’s future.  Therefore, in May 2008, the Board, with David as Chairman following the untimely death of Jay in October of 2006, 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, thus allowing the Company to concentrate its limited financial resources on research and development of more advanced fully assembled aircraft, particularly those based on the technology that had emerged directly or indirectly from the Heliplane project.

A Major Advance in Gyroplane and Gyrodyne Technology – the Heliplane Project

Earlier David and Jay had recognized that the gyroplane technology emerging from GBA’s developmental efforts had significant potential for military and other government projects.  With this in mind, Jay had moved the Chairman’s office to Washington and he began the process of making relevant contacts in military and political circles.  Importantly, he arranged presentations of GBA’s views on the potential of its technology to DARPA, to other military agencies including the Aviation Applied Technology Directorate (AATD), which is the largest purchaser of military rotorcraft, and to major aerospace companies as well.  DARPA is the central research and development organization for the U.S. Department of Defense (DoD).  It manages and directs select basic and applied research for the DoD, emphasizing technology development projects where payoff is high and where success may provide dramatic advances in the capabilities of this country’s combat forces.

Jay and David’s efforts led first to GBA joining a team headed by Georgia Tech Research Corporation that offered a detailed response to a proposal from AATD for the concept design of a large (20 ton payload) vertical lift freighter aircraft in what was named the Joint Heavy Lift (JHL) Program.  This aircraft with a required speed up to 250 knots (287 mph) would be based on GBA’s gyroplane technology, extended by research work previously undertaken by GBA for a potential Navy project into the use of tip jets to power the rotor of a gyroplane for VTOL and hovering.  A gyroplane in this configuration is known as a gyrodyne.

Although GBA was not chosen as one of the five companies to receive a $3.5 million research contract, GBA was instead chosen by DARPA to lead the $50 million program called ‘Heliplane.’  This called for the design of a proof-of-concept high-speed, long range, VTOL gyrodyne rotorcraft, intended as a demonstrator aircraft for potential use in combat search and rescue roles.  It called for the design of a gyrodyne to fly at a forward speed of 400 mph, a speed twice as fast as is typical for helicopters, with a 1,150 mile range.  Essentially, this aircraft would offer the VTOL capability of a helicopter with the fast forward flight capability of an airplane. In conjunction with Georgia Tech, Williams International, and other major participants as subcontractors, a proposal using GBA’s gyroplane and gyrodyne technology was submitted and in May of 2005 and on October 31, 2005, DARPA announced that it had selected the GBA-led team to undertake the Heliplane program.

 
7

 

Phase I of the four phase program was completed in February 2008.  At the preliminary design review (PDR) meeting lasting four days in November of 2007, DARPA and its independent consultants reviewed the results presented by the Heliplane team.  The following month DARPA issued its concurrence that the Heliplane Team had met all the major specifications of the project, notably the speed, range, payload, and hover performance objectives.

However, with the US involved in two wars and with the collapse of the economy beginning in the spring of 2008, DARPA did not fund the further phases of the Heliplane program.  Thus, the Heliplane program was put on hold, where it remains today.

For GBA, this situation was very troublesome.  With the delay in the start of Phase II, the Company faced a dramatic reduction in its operational cash flow.  To make matters much worse, in 2008 the U.S. experienced a major economic collapse that took the banks and securities business to the brink of failure.  With the conditions in the capital markets at that time making obtaining new investment inaccessible for companies like GBA, the Company had no alternative but to retrench.

The staff that David and his management team had reassembled back up to nearly 100 employees, which had been described by Rotor & Wing International, as “… a powerhouse of rotorcraft research,” could no longer be kept together.  Stepping up to the reality of the situation, at the end of May 2008, David reduced the workforce by the laying off of all but six employees.

On the verge of collapse, in September of 2008, four months after the layoff, GBA was able to arrange new funding from its largest and long-standing investor.  This funding was in the form of debt financing that was secured by substantially all of the Company’s assets, including all of its intellectual property, technologies, and knowhow.

This permitted GBA to continue its work, with limited resources, to look for opportunities for new GBA gyroplanes that could take advantage of technical developments since the Hawk 4 was designed.  Those advances in technology enabled gyroplane designs that would maintain the inherent advantages demonstrated by the Hawk 4 Gyroplane and developed during the GBA DARPA Heliplane program, namely simplicity, safety, high performance, low operating cost, and high utilization compared to other types of rotorcraft, while offering an increase in speed, range, payload, and vertical take-off capability.  Assessment of the potential markets both in the United States and overseas indicated that the market for an easy-to-fly low cost two-person surveillance aircraft had excellent potential for both government and commercial uses.  Meanwhile, the market for air tour, air taxi, and corporate runway-independent aircraft had also grown, although the “sweet spot” had extended from the 4-5 seat optimum at the time of the design of the Hawk 4 to 6-7 seat aircraft.

The Seven Seat GBA ArrowHawk Gyroplane

Assessment of the evolving rotorcraft market and of competitors’ products in the context of the potential new performance capabilities, lead to the recognition that a new seven seat gyroplane (pilot and six passengers) would extend and enlarge the commercial market previously envisaged for the Hawk 4 Gyroplane.  Well suited to the future market place, such an aircraft had the potential to offer economic and performance advantages over competitive aircraft types for applications ranging from tour operations to power/pipeline patrol.  David therefore initiated the design of such a successor to the Hawk 4 called the GBA ArrowHawk to compete in this market.  The Company has since entered into discussions with potential joint venture partners in Asia related to its production.  Notably, the Company arranged for the construction of a full scale model of the ArrowHawk for exhibit at China’s largest Air Show, the China International Aviation & Aerospace Exhibition in Zhuhai in November 2010.  With prime positioning at the exhibition among the world’s leading aircraft manufacturers, the ArrowHawk model attracted substantial attention.

 
8

 

Business interest in the ArrowHawk and its potential application in China was greatly enhanced because in October 2010, shortly before the Exhibition, the Chinese State Council, Central Military Commission approved the “low-altitude airspace management reform guidance.”  This indicated the strong likelihood of an impending relaxation of regulations limiting the use of private and other commercial aircraft in China, stimulating new excitement over the potential use of small aircraft such as the ArrowHawk that had not been previously permitted.  This lead to an invitation for David to be a speaker at the “China International General Aviation Summit” held in Shanghai in April 2011.  This Conference, held in association with the Civil Aviation Administration of China (“CAAC”), dealt directly with “Opportunities and Challenges under China’s Low-Altitude Airspace.” David’s address, “The GBA Gyroplane: An Airplane That Doesn’t Need A Runway,” was well received in a nation of nearly a billion and a half people with very few runways.  Since then several Chinese parties have approached the Company to explore an interest in cooperation in the development of the ArrowHawk and other gyroplane and gyrodyne products for commercial use.

GBA ShadowHawk Gyroplane

In parallel with the ArrowHawk, the Company undertook the initial design of a smaller two-seat gyroplane, named the GBA ShadowHawk, using comparable technology to that of the ArrowHawk and intended for aerial observation for both commercial and public agency usage.  Unlike the two-seat SparrowHawk, designed with side-by-side seating for sport aviation, the ShadowHawk has tandem seating with optimized viewing for pilot and observer and again unlike the kit-built SparrowHawk, the ShadowHawk is designed as a fully-assembled aircraft with the intent of obtaining full FAA or equivalent certification.

Like the ArrowHawk, the ShadowHawk has aroused interest in China, particularly for power-line and pipeline patrol in areas difficult to access safely by ground or other air vehicles, including high-altitude sites.  In view of these market demands, the ShadowHawk is intended to be offered with a range of engines, including a turbo-charged version for mountainous terrain and a turbo-prop version for high performance.

Earlier discussions with the Office of Domestic Preparedness (“ODP”) on gyroplane usage emphasized the merits of the SparrowHawk as a readily available, ultra-low cost air surveillance vehicle.  Similarly, discussions held with the Department of Defense for the use of gyroplanes for mine and bomb detection to counter those threats in Iraq and Afghanistan emphasized its low cost and early availability in relation to other solutions.  In both cases, it became clear that while these government agencies had an interest in the potential performance and reliability of a gyroplane, there was a strong preference for aircraft with FAA or equivalent certification.  The ShadowHawk specifications incorporate lessons learned from those discussions, making those agencies also potential customers for the ShadowHawk.

Military Opportunities

Although the climate for defense expenditures in the United States is not encouraging for an early reopening of the Heliplane project, the capabilities and costs of gyroplanes and gyrodynes for military use, both manned and unmanned, offer significant advantages over other types of aircraft.  We continue to seek opportunities with the DoD and elsewhere where permitted under U.S. International Traffic in Arms regulations (ITAR), where our Heliplane technology and other expertise can offer special advantages for U.S. military needs, both manned and unmanned.

 
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Ongoing Financial Support

After the Heliplane Program was discontinued, the Company was left with no reliable source of revenue that could support even the modest ArrowHawk, ShadowHawk, and military initiatives described above.  Furthermore, the Company’s assets are essentially all in its technology and cannot be reflected on its consolidated balance sheet as an offset to the extensive debt incurred.  In that context, it was not feasible to raise funds through stock sales or from conventional debt sources.  Continuation of the Company’s operations was only possible through the support of its major creditor.  In recognition that other acceptable sources of funding on this scale were not available, David and the Board agreed to secure these new loans by pledging the Company’s assets: its patents, intellectual property, and limited hard assets.  Such essential funding has extended to over a four year period to date.

The Plan to Restructure, Survive, and Participate in Future Development

GBA started the past fiscal year with operational expenses of approximately $300,000 per month, with no income from operations.  Despite the continued support from key creditors, GBA has been unable to attract any equity capital since 2008.  As the national and worldwide financial equity markets continue to constrict, with only slight improvement in recent months, GBA has been forced to face the dire prospects of filing for Chapter 11 reorganization, or even Chapter 7 liquidation.

Following months of in depth negotiations with all its creditors, most of whom are significant equity holders as well, GBA has reached an agreement for accomplishing a financial restructure (previously defined as the “Restructure”) without having to seek protection through a bankruptcy filing.  Had GBA been forced into a Chapter 11, only the secured creditors would have had any equity or other interest in the Company because the bankruptcy process would have eliminated all shareholders and all non-secured creditors.  Management believes also that Groen Brothers Aviation’s name and reputation world-wide would have been harmed as well.  The Restructure that has been negotiated with the only secured creditors keeps intact all shareholders and treats all creditors converting their debt to equity pari passu to the percent of debt they hold, whether or not secured.

The Restructure will result in the elimination of substantially all of the company’s debt obligations, which exceeded $191 million at June 30, 2012, through the exchange of all but approximately $11 million of such debt for stock in GBA Global, a new private entity formed by GBA.  In return GBA will transfer substantially all its assets, notably all of its technologies, knowhow, and associated patents, into GBA Global in exchange for this relief of debt and receipt of some continued ownership of GBA.

The transfer of these assets requires approval through a vote of the Company’s shareholders holding a majority of the voting shares. The Company had received from holders of a significant majority of voting shares, a contractual commitment to vote in favor of this plan and now as of the date of this filing, has indeed received consent from these holders of a majority of the Company's voting shares. Because of continued accrual of interest by all interest-bearing debt and of continued funding, the precise breakdown of the ownership of GBA Global will not be established until the date of closing. However, based upon the accrued value of these obligations as of September 14, 2012, it is anticipated that debt holders and the holders of the Company’s Series B Preferred Stock own approximately 87% of GBA Global, Management combined will hold 9%, and GBA will hold 4% of GBA Global. It is anticipated that GBA Global will also form subsidiaries where GBA developed technologies will be utilized and significant additional funding will be raised in those subsidiaries to complete the commercialization of GBA Global's Civil and Military technologies, both manned and unmanned.

 
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The activities that heretofore have been undertaken by GBA and its operating subsidiary, GBA USA, will be carried forward by the operations and development of GBA Global. So that we may be able to retain the “good-will-value” of the Groen name within the aerospace industry, the Groen Brothers Aviation name will be kept by it doing business as “Groen Brothers Aviation Global, Inc.”  GBA will continue to be a “holding company,” but its total assets will become a minority interest in GBA Global.  Certain debt approximating $11 million will be retained by GBA.

In summary, Management believes that the Restructure represents the best possible opportunity for the Company’s creditors and shareholders to emerge from what has become an unsupportable debt burden. Though debt financing was very instrumental in helping to create the advanced technologies that we have developed over the years, the debt burden has been a major impediment to GBA being able to exploit the value of these technologies, both civil and military.

Following the Restructure, the new company’s standing in the industry is expected to be immensely stronger than that which GBA could achieve. This should create opportunities for GBA Global to exploit GBA’s gyroplane technology which otherwise likely would have been closed to GBA. The Restructure allows GBA to move into the future, too, although on a smaller scale. Consequently, in the opinion of management, the Restructure represents the best plan available to the Company that has the opportunity to preserve shareholder and creditor value.

The foregoing matters have been consented to by a majority of the Company’s common and preferred shareholders in conformance with Utah law.

Gyroplane and Gyrodyne Technology

Autorotative flight was developed in 1919 by Spanish aviator, Juan de la Cierva, with the objective of eliminating the risk of stalling inherent in all fixed wing aircraft when forward speed drops below a critical speed.  De la Cierva named and trademarked his invention as the “autogiro,” which means “self turning” or “autorotation.”  The rotary wing of a gyroplane2, however, powered in flight only by the onrushing air, much like a windmill, will not stall.  A reduction in forward speed will not result in a sudden loss of lift.  As speed decreases, a gyroplane will begin to descend, right side up and controllable, as its rotating wing continues to provide lift with the upward flow of air driving the rotor.  This provides the gyroplane with an important inherent safety advantage over a conventional airplane for activities requiring low altitude and low speed operations.  In a low level surveillance role, such as law enforcement, border patrol, traffic control, etc., proper procedure for all rotorcraft is to circle in a slow orbit, something we believe that Company-designed gyroplanes can do efficiently and safely.

For such low, slow flying missions, a gyroplane has a similar safety advantage over a helicopter.  The helicopter obtains its lift from its engine-powered rotor blades pulling the air downwards, creating an upward force on the rotor, enabling the helicopter to hover.  This, however, also makes the aircraft unstable and difficult to fly since a loss of power to a helicopter rotor will cause an immediate loss of lift.  Only with sufficient forward speed or altitude will a skilled and practiced pilot have sufficient time to put a helicopter into autorotation and thus make a controlled landing while operating as a gyroplane, although without the benefit of rotor blades optimized for autorotative flight.  A helicopter is also more mechanically complex than a gyroplane, requiring additional safety-critical systems, notably a transmission between engine and main rotor, and a tail rotor with its gearbox, needed to offset the torque in the system created by the powering of the rotor in flight.  For these reasons, a gyroplane, not requiring a tail rotor or complex transmission because its rotor is not driven by its engine, is inherently safer, simpler, quieter, and easier to operate while much less expensive to maintain than a helicopter.


 
2  Gyroplane is an official term now designated by the FAA to describe an aircraft that gets its lift from rotor blades and its thrust from an engine-driven propeller either in front, the tractor configuration, or at the rear, the pusher configuration.
 
 
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The one material advantage of a helicopter over a gyroplane is its ability to hover, which is necessary in some situations such as sea rescue, sling-load work, or landing in uneven terrain.  For air surveillance and point-to-point flying, the inability to hover is not a disadvantage.  Helicopters at low altitude, out of ground effect, will whenever possible avoid hovering because of the danger inherent in doing so.  When power fails in a helicopter, the pilot must convert from powered flight to autorotative flight to keep the rotor blades turning.  This is an unforgiving process, requiring a skilled, practiced, accurate, and rapid reaction by the pilot and it requires a minimum altitude and/or airspeed to be performed safely.  If a power failure occurs when a helicopter is operating with insufficient altitude or speed, specifically if operating within the “height-velocity” curve shown on graphs in the helicopter’s flight manual (informally known as the “dead man’s curve”), the pilot will not be able to avoid a crash landing.

In summary, gyroplanes in flight, being in constant autorotation, are much safer in low and slow flight than either airplanes or helicopters.  Airplanes flying low and slow risk a stall/spin crash, which cannot happen in a gyroplane, while helicopters losing power in the same conditions can face an unrecoverable condition as they lose lift.  If power fails in a gyroplane, however, the autorotation continues and the aircraft can be guided softly to the ground from virtually any altitude.

The gyrodyne is a derivative of the gyroplane that, as the name implies, has a powered rotor that enables the gyrodyne to hover and to take-off and land vertically.  Gyrodynes differ from helicopters in that their rotors are powered, not by the main engine, but by tip-jets which are normally used only for takeoff, landing, and hovering.  In forward flight the tip-jets are turned off and the aircraft operates as a gyroplane with the attendant advantages of safety, reliability, and economy.  Since the rotor is not driven mechanically by torque from the main engine located in the aircraft fuselage, a gyrodyne, like a gyroplane, does not require a tail rotor with its complexity and maintenance requirements.

Interrupted History of the Gyroplane

In the 1920s and 1930s, following Spaniard Juan de la Cierva’s successful flights of  his invention, the autogiro (gyroplane),  Harold Pitcairn and his colleague Walter Kellett, under license from Cierva, designed and built a series of gyroplanes in America which eventually made vertical takeoffs and landings.  Their efforts resulted in the autogiro concept proving commercially successful in many applications during the 1930s and early 1940s.  An outstanding example was its use by the U.S. Postal Service for nearly ten years to deliver mail from the roofs of post offices.  Hundreds of flights carrying mail were performed by Kellett and Pitcairn gyroplanes flying in Camden, Philadelphia, Chicago, New Orleans, Washington, D.C., and other cities.
 
Funding for development of aircraft for the private market had collapsed in the years of the Great Depression and in the build up toward World War II, the main source of investment in aviation came from the U.S. military.  At the time, Igor Sikorsky, who was an important designer of transport airplanes for the government, recognized the potential of a helicopter to the military.  After licensing rotor technology from Pitcairn, he convinced the U.S. military to invest in the helicopter as the next logical step in the evolution of rotorcraft, promising more versatility for military purposes than the gyroplane.  This commitment to the helicopter effectively ended government funding for technical development of the gyroplane.

 
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After World War II, there was a brief and modest resurgence as investors enabled three private companies to develop two-seat commercial gyroplanes that were certified by the FAA:  the Umbaugh (later the Air & Space 18A), the Avian (a Canadian design of that same period that reached FAA certification, but was never produced), and the McCulloch J-2.  In each case, as an expedient to FAA certification, the designers adapted helicopter rotors and blades and thus did not fully use the gyroplane technology created by their 1930s predecessors.  As a result, none of these civilian gyroplanes performed well and their companies failed.

More significantly, during the 1950s, Igor Bensen, who had been a principal in General Electric’s rotary wing program after World War II, developed a home-built open-frame gyroplane kit for amateurs, which he called the “gyrocopter.”  Stemming from this initiative, home-built kits, mostly seating one person, became popular with enthusiasts and more than a dozen small manufacturers have produced and sold hundreds of kits.

The technical development of the helicopter necessary to achieve the potential of hovering flight was, however, much more difficult and took far longer than the military expected.  Real utility was not fully attained until the middle of the Vietnam War and then only after billions of dollars had been spent developing turbine-powered helicopters with sufficient payload to move large numbers of troops and equipment into and out of the jungle.

Distribution and Marketing

It had been our plan to market the Hawk 4 through a dealer network, both in the United States and the rest of the world.  A GBA Authorized Dealer network with 14 United States dealers, 3 International dealers and over 60 national sales representatives was established and these dealers placed firm orders with deposits for 145 Hawk 4 gyroplanes.  As of June 30, 2012, dealer deposits totaled $2,105,000, which amount has been reported as a long-term liability in the accompanying consolidated financial statements.  The deposit provides a delivery sequence number and represents a percentage of the total estimated purchase price.  We have 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 dealer deposit obligation will be retained by the Company and not transferred as part of the Restructure.

Government Regulation

The nature of aviation products has resulted in their manufacture being regulated by governments for public safety, national defense, and economic and/or political purposes.  Such regulations vary widely by country, by product type and by usage.  Our products and intended products are principally impacted by United States laws and regulations, but also by requirements in our potential export markets.  As our products can be used for private, commercial, public agency or military purposes, their sale and operation are governed by regulations appropriate to each category. Developmental flight testing of our aircraft is carried out under exemption rules covering experimental aircraft.  The following section reviews the principal regulations applicable to each category of our activities in the United States.

 
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GBA Hawk Series Gyroplanes

Commercial or Private Use:  FAA certification is the process by which the United States government ensures that aircraft sold into the U.S. civil market meet appropriate standards for all civil users.  FAA certification is not required by military aircraft and by many aircraft in “Public Use,” roles operated by Federal, State or local agencies.  Civil aircraft operated outside the United States are regulated by the authorities of those countries and may be required to obtain additional certification.  The analysis and testing leading to a U.S. certificate is, however, currently acceptable in most foreign countries as the basis for granting certification in those countries.

FAA certification has two related components.  The first, Aircraft Type Certification assesses the integrity of the design and associated engineering through analysis and testing of components and complete aircraft to insure that the aircraft can achieve its performance standards safely.  The second, Aircraft Production Certification, assesses the manufacturing organization to insure that its processes and procedures will result in the production of aircraft that fully conform to the standards of the aircraft type certificate.

The regulations pertaining to aircraft certification are contained in Title 14 of the United States Code, the “Federal Aviation Regulations” (FAR).  Aircraft in the category of the Company’s Hawk 4 aircraft, to be operated commercially or privately, must receive an Aircraft Type Certificate under Part 27 (normal category rotorcraft weighing less than 6,000 lbs) of the FAR, while the Production Certificate must be obtained under Part 21 of the FAR.

Public Use: The Company’s past efforts to sell its Hawk 4 to government agencies in the United States, like any future efforts to make such sales for the ArrowHawk, were based on the specific exemption for operation of aircraft used by government agencies as authorized by Federal Public Law 103-411, which defines what is a “public aircraft operation.”  This law permits training and flights in “public aircraft” for performance of the following governmental functions:

Flights in response to fire fighting;
Flights in response to search and rescue;
Flights in response to law enforcement activities; and
Flights in support of aeronautical research or biological or geological resource management.

In this context, ''public aircraft'' means an aircraft:

(i) used only for the United States Government;
(ii) owned by the United States Government and operated by any person for purposes related to crew training, equipment development, or demonstration; or
(iii) owned and operated (except for commercial purposes), or exclusively leased for at least 90 continuous days, by a government (except the United States Government), including a State, the District of Columbia, or a territory or possession of the United States, or political subdivision of that government;
 
It does not include a government-owned aircraft:

(i) transporting property for commercial purposes; or

 
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(ii) transporting passengers other than –

 
(I)
transporting (for other than commercial purposes) crewmembers or other persons aboard the aircraft whose presence is required to perform, or is associated with the performance of, a governmental function such as firefighting, search and rescue, law enforcement, aeronautical research, or biological or geological resource management; or
 
(II)
transporting (for other than commercial purposes) persons aboard the aircraft if the aircraft is operated by the Armed Forces or an intelligence agency of the United States.

An aircraft that meets the above definition of “public aircraft” shall, notwithstanding any limitation relating to use of the aircraft for commercial purposes, be considered to be a public aircraft for the purposes of this part without regard to whether the aircraft is operated by a unit of government on behalf of another unit of government, pursuant to a cost reimbursement agreement between such units of government, if the unit of government on whose behalf the operation is conducted certifies to the Administrator of the Federal Aviation Administration that the operation was necessary to respond to a significant and imminent threat to life or property (including natural resources) and that no service by a private operator was reasonably available to meet the threat.

Military Use: Aircraft sold to the US military are not required to meet FAA regulations, but must conform to military specifications that serve a similar purpose.  The Company did not attempt to sell its Hawk 4 to the United States Armed Forces and is thus not familiar with the detailed requirements that would have to be met.  It believes, however, that should a military application for the ArrowHawk be needed by the US Armed Forces, a version of the ArrowHawk could be designed to meet military specifications.

GBA SparrowHawk Gyroplanes

Homebuilt Kit Aircraft:  While it might be possible to design and manufacture a gyroplane in the size and performance class of the SparrowHawk to meet the FAA FAR Parts 21 and 27 regulations that the Hawk 4 is designed to meet, we did not choose to do this.  Our entry to the SparrowHawk market was through the alternative path of producing homebuilt aircraft kits for which there was an established market.  Homebuilt aircraft kits are permitted by the FAA under its FAR Part 21 regulations governing the certification and operation of amateur-built aircraft.  Such kits, however, require that the majority portion of the kit be built by an amateur (the “51% rule”), limiting the manufacturer’s portion to 49%.

Competition

To our knowledge, no other gyroplane is being prepared for commercial FAA certification, nor are any certified commercial gyroplanes currently being manufactured.  The sole company known to be developing modern gyroplane technology is CarterCopter, LLC (“Carter”).  Carter, like the Company, has identified the potential for a safe and efficient gyroplane that can operate without the need for a runway.  Carter has, however, approached the market from a very different perspective than the Company.  Carter has stated that its business strategy is to be a technology development company, not a manufacturer, and therefore, for these reasons we do not believe the CarterCopter represents any direct competition to the derivatives of the Hawk 4, such as the ArrowHawk, or of the SparrowHawk, such as the ShadowHawk.  However, Carter has licensed its technology in some form to AAI, a Textron subsidiary and we understand that this might relate to AAI’s in unmanned aircraft.  If the Company’s activities are successful in expanding to unmanned aircraft, AAI could become a competitor.  However, we do not know how to rate the potential competition that may arise in that circumstance.

 
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Competition for the Hawk 4 variants, such as the ArrowHawk, lies largely in the helicopter segment, although the aircraft is competitive with airplanes for certain missions and is expected to obtain part of its market from fixed–wing markets.  Its principal competitors are therefore comparably-sized turbine-powered helicopters, with similar speed, payload and range capabilities, notably those produced by Eurocopter and Bell.  We believe that the much lower maintenance cost, greater daily utilization capability and inherent safety could enable the ArrowHawk or other Hawk 4 derivatives to compete effectively against these aircraft as well as the lower cost, but lower-performing piston-powered Robinson R44 and its emerging turbine-powered R66.

With our exit from the kit-built market, we no longer regard kit manufacturers as competitors.  GBA, Sportcopter and four European gyroplane manufacturers applied to the FAA for exemptions that would permit LSA operations of their aircraft, but all these applications were denied.  Should the FAA grant LSA approval for gyroplanes in the future, these manufacturers could provide future competition for our SportHawk if we were to offer it in the LSA market.

As our gyrodyne technology is principally directed towards missions that require either VTOL or near VTOL capability, our most significant competition comes from helicopters or hybrid aircraft that combine both helicopter and airplane characteristics.  For high speed and heavy lift applications, both civil and military, these include tiltrotors in both two and four rotor configurations, proposed by Bell and Boeing, compound tandem helicopters with augmented lift from small wings and augmented thrust from external jet engines, proposed by Boeing and coaxial twin rotor helicopters proposed by Sikorsky.  The Company believes that inherent advantages in its technology could allow it to compete effectively with these approaches.

Patents

We presently own several patents that relate to collective pitch and flight controls.  We believe the important element of these patents is collective pitch control on a semi-rigid, teetering rotor head for gyroplanes.  We believe this application is differentiated from similar sounding claims for helicopters, as this concept has never before been applied to gyroplanes.  The patent claims are written very broadly, which we believe makes it difficult to design around them.  Our patent opportunity existed because of a fifty-year hiatus in development in gyroplane technology.  The earliest of these patents expire over the next few years.  Consistent with our expectation of a change in the Patent Laws, the Company has been significantly increasing its patent protection, filing, since its last Annual Report, some 36 patent applications with the US Patent Office (“USPTO”) related to technology it developed over the last several years.  Further applications are in process of preparation and the Company intends to continue making filings to protect its technology as it continues to develop.  There can be no guarantees that any of these actual or potential applications will result in patents being issued and there can be no guarantee that cash value can be gained from any patent that may be issued by the USPTO.
 
Substantially all patents and intellectual property will be transferred to GBA Global pursuant to the Exchange Agreement.

 
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Royalty Commitments

Royalty payments of 1% of the gross sales price of gyroplanes are to be paid in total to the Company’s founders, David Groen and the estate of the late Jay Groen.  Through June 30, 2012, royalties payable totaled $16,000 to each of these parties.  These obligations will be retained by the Company pursuant to the Exchange Agreement. However, as part of the Exchange Agreement, this royalty agreement is being exchanged for equity in GBA Global.

We have royalty agreements with two holders of notes payable totaling $300,000 which entitle the note holders to receive royalties on the sales by the Company of certain gyroplanes other than the SparrowHawk gyroplane.  The royalties are calculated on each aircraft sold, and are limited to a combined maximum total of $1.3 million.  However, as part of the Exchange Agreement, these royalty agreements are being exchanged for equity in GBA Global.
 
We have a royalty agreement with an investor entitling the investor to receive royalties equal to $2,500 for each Hawk 4 Gyroplane sold, limited to a maximum total of $125,000.  However, as part of the Exchange Agreement, this royalty agreement is being exchanged for equity in GBA Global.
 
Research and Development Expenditures

Total research and development expenditures incurred by us for the years ended June 30, 2012 and 2011 were $1,541,000 and $1,622,000, respectively.

Employees

We currently have 13 full time employees, and utilize additional part-time employees and outside consultants on an as needed basis.  Our employees are not represented by any labor union, and we believe our relations with our employees are good.


Item 1A.                 Risk Factors

Our future operating results are highly uncertain.  Before deciding to invest in Groen Brothers Aviation, Inc. or to maintain or increase your investment, you should carefully consider the risks described below, in addition to the other information contained in this annual report on Form 10-K.  If any of these risks actually occur, our business, financial condition or results of operations could be seriously harmed.  In that event, the market price for our common stock could decline and you may lose all or part of your investment.  Although the Company has attempted to list the factors of which it is currently aware that may have an impact on its operations, there may be other factors of which the Company is currently unaware or to which it does not assign sufficient significance, and the following list should not be considered comprehensive.

The Report of Independent Registered Public Accounting Firm on our consolidated financial statements addresses an uncertainty about our ability to continue as a going concern.

The Report of Independent Registered Public Accounting Firm on our audited consolidated financial statements addresses an uncertainty about our ability to continue as a going concern, indicating that our operating losses and lack of working capital raise substantial doubt about our ability to continue as a going concern.  At June 30, 2012, we had total current liabilities of $182,435,000 and current assets of $17,000, resulting in a working capital deficiency of $182,418,000.  At June 30, 2012, we had a total stockholders’ deficit of $191,246,000.  There can be no assurance that the proposed Restructure and other efforts of management to extinguish debt, adequately capitalize the Company, or attain a successful level of operations and cash flows will be successful.  In light of our current financial position and the uncertainty of raising sufficient capital to achieve our goals, the Company’s viability as a going concern is uncertain.

 
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We have a history of operating losses and there can be no assurance that we will be able to operate at a profit in the future.
 
We have incurred operating losses from our inception, and had an accumulated deficit of $226,413,000 at June 30, 2012.  We incurred a net loss of $25,809,000 for the year ended June 30, 2012 and a net loss of $23,308,000 for the year ended June 30, 2011.  We have ceased production of the SparrowHawk and our involvement in the DARPA.  In addition, we plan to transfer substantially all of our operating assets and intellectual property in the proposed Restructure.  There can be no assurance that we will be able to operate at a profit in the future.  If we cannot generate sufficient revenues to operate profitably and to meet our debt obligations that we will retain after the Restructure, we may suspend or cease operations.

We will require additional funds to continue our business plan.

We do not currently have adequate funds to meet our obligations for the next twelve months and we are dependent on the successful completion of our proposed Restructure and receipt of additional debt or equity capital to fund our operations until such time as our revenues exceed our expenses and we begin to operate at a profit, if ever.  There can be no assurance that we will complete the Restructure.  We anticipate that we will have difficulty in obtaining other financing given the current economic climate and the proposed transfer of substantially all of our assets in the Restructure.

We have a significant amount of debt that is past due.

A significant portion of our debt at June 30, 2012 is scheduled to be transferred to GBA Global in the proposed Restructure.  However, we are scheduled to retain approximately $927,000 of debt that is in default.  Accrued interest on this debt was $309,000 at June 30, 2012.  There is no assurance that these lenders will not demand payment in full of this short-term indebtedness in the near future or that we will be successful in raising sufficient capital from other sources to extinguish this debt.

Substantially all of our assets, including our intellectual property, is scheduled to be transferred in the proposed Restructure.

Substantially all of our assets, including our intellectual property, is scheduled to be transferred in the proposed Restructure.

Our business is subject to significant government regulation that will increase our operating costs.

The nature of aviation products has resulted in their manufacture being regulated by governments for public safety, national defense, and economic and/or political purposes.  Such regulations vary widely by country, by product type and by usage.  Our products and intended products are principally impacted by United States laws and regulations, but also by requirements in our export markets.  As our products can be used for private, commercial, public agency or military purposes, their sale and operation are governed by regulations appropriate to each category.  Developmental flight testing of our aircraft is carried out under exemption rules covering experimental aircraft.  The failure to comply with government regulation could adversely affect our operations.

 
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Difficulties or delays in the development, production, testing and marketing of products could have a materially adverse effect on our business.

Difficulties or delays in the development, production, testing and marketing of products, could have a materially adverse effect.  Our business is subject, in part, to regulatory procedures and administration enacted by and/or administered by the FAA.  Accordingly, our business may be adversely affected in the event we are unable to comply with such regulations relative to our current products and/or if any new products and/or services to be offered by us can or may not be formally approved by such agency.

Our potential international sales may be subject to local government laws, regulations and procurement policies and practices which may differ from U.S. Government regulations.

Our potential international sales may be subject to local government laws, regulations and procurement policies and practices which may differ from U.S. Government regulation, including regulations related to products being installed on aircraft, exchange controls, as well to varying currency, geo-political and economic risks.  We also are exposed to risks associated with any relationships with foreign representatives, consultants, partners and suppliers for international sales and operations.

As a contractor to the U.S. government, we are subject to extensive government regulation, and our failure to comply with applicable regulations could subject us to penalties that may restrict our ability to conduct our business.

As a contractor to the U.S. government, we are subject to and must comply with various government regulations that impact our revenue, operating costs, profit margins and the internal organization and operation of our business.  Also, we need special security clearances and regulatory approvals to work on certain projects with the U.S. government.  Classified programs generally will require that we comply with various executive orders, federal laws and regulations and customer security requirements that may include restrictions on how we develop, store, protect and share information, and may require our employees to obtain government security clearances. Our failure to comply with applicable regulations, rules and approvals or misconduct by any of our employees could result in the imposition of fines and penalties, the loss of security clearances, the loss of government contracts or our suspension or debarment from contracting with the U.S. government generally, any of which would harm our business, financial condition and results of operations.

We depend on our officers and the loss of their services would have an adverse effect on our business.

We are dependent on our officers, particularly David Groen, our president and chief executive officer, to operate our business and the loss of such persons would have an adverse impact on our operations. We do not have employment agreements with our officers and we do not carry key man life insurance on their lives.

 
19

 

We will be required to establish and maintain acceptable internal controls related to financial reporting which will be difficult, time consuming and expensive

As a public reporting company, our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act).  Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States.  Since we do not currently have full time employees with the requisite accounting expertise or experience or an internal audit or accounting group, we need to rely on consultants and other outside experts to assist us in establishing and maintaining internal control over financial reporting which is expensive.  Since we are currently operating at a loss, there is no assurance that we will continue to be able to pay the costs of maintaining such controls or that we will be able to establish controls that are free from material weaknesses.

We have only two directors and they are not independent directors, which means our board of directors may be influenced by the concerns, issues or objectives of management to a greater extent than would occur with a number of independent directors.

We have only two directors and they are not independent directors.  As a result, our board of directors may be influenced by the concerns, issues or objectives of management to a greater extent than would occur with independent board members. In addition, we do not have the benefit of having persons independent of management review, comment and direct our corporate strategies and objectives and oversee our reporting processes, our disclosure controls and procedures and our internal control over financial reporting.

We do not anticipate paying dividends on our common stock in the foreseeable future.

We have never paid dividends on our common stock.  The payment of dividends, if any, on the common stock in the future is at the discretion of the board of directors and will depend upon our earnings, if any, capital requirements, financial condition, existing financing agreements, and other relevant factors. The board of directors does not intend to declare any dividends on our common stock in the foreseeable future.

We have the ability to issue additional shares of common stock and to issue shares of preferred stock without stockholder approval.

The Company is authorized to issue up to 500,000,000 shares of common stock. To the extent of such authorization, the directors of the Company have the ability, without seeking stockholder approval, to issue additional shares of common stock in the future for such consideration as they believe to be sufficient.  The issuance of additional common stock in the future will reduce the proportionate ownership and voting power of our current stockholders.  The Company is also authorized to issue up to 50,000,000 shares of preferred stock, the rights and preferences of which may be designated in series by the board of directors.  To the extent of any authorizations, such designations may be made without stockholder approval.  The designation and issuance of a series of preferred stock in the future could create additional securities which may have voting, dividend, liquidation preferences or other rights that are superior to those of the common stock, which could effectively deter any takeover attempt of the Company.

 
20

 

The holders of our Series A Convertible Preferred Stock have a significant number of votes on all matters submitted to our stockholders for a vote.

David Groen, President and Chief Executive Officer, owns 1,025,000 shares of the Company’s Series A Convertible Preferred Stock, and Robin Wilson, Executive Vice President and Chief Operating Officer, Dennis Gauger, former officer and director, and Margaret Groen, the surviving spouse of the late Jay Groen, each owns 125,000 shares of the Company’s Series A Convertible Preferred Stock, combined representing 100% of the outstanding shares of that series of preferred stock.  Each share of the Series A Convertible Preferred Stock entitles the holder to cast one hundred (100) votes, or a total of 140,000,000 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.  As such, the holders of the Company’s Series A Convertible Preferred Stock currently hold approximately 59% of the Company’s total voting power and are able to control the outcome of any matter submitted to the Company’s stockholders for their consideration.  The voting rights of our Series A Convertible Preferred Stock expire October 31, 2011.

The market price of our common stock is volatile.

The market price of our common stock has fluctuated widely, and in the future may be subject to similar fluctuations in response to ongoing variations in the future prospects of the Company and other events or factors, some of which are beyond our control.

Our common stock historically has been thinly traded.

Our common stock historically has been thinly traded.  Therefore, our shareholders may not be able to sell their shares freely.  The volume of trading in our common stock historically has been low and a limited market presently exists for our common shares.  We cannot be assured that our trading volume will increase, or that our historically light trading volume or any trading volume whatsoever will be sustained in the future.  Therefore, we cannot be assured that our shareholders will be able to sell their shares of our common stock at the time or at the price that they desire, or at all.

Our stock is a penny stock and is subject to special regulations which may make it more difficult for investors to liquidate their investment.
 
Because our common stock is deemed a low-priced “Penny” stock, an investment in our common stock should be considered high risk and subject to marketability restrictions.  Since our common stock is a penny stock, as defined in Rule 3a51-1 under the Securities Exchange Act, it will be more difficult for investors to liquidate their investment in our common stock. Until the trading price of the common stock rises above $5.00 per share, if ever, trading in the common stock is subject to the penny stock rules of the Securities Exchange Act specified in rules 15g-1 through 15g-10. Those rules require broker-dealers, before effecting transactions in any penny stock, to: (i) deliver to the customer, and obtain a written receipt for a disclosure document; (ii) disclose certain price information about the stock; (iii) disclose the amount of compensation received by the broker-dealer or any associated person of the broker-dealer; (iv) send monthly statements to customers with market and price information about the penny stock; and (v) in some circumstances, approve the purchaser's account under certain standards and deliver written statements to the customer with information specified in the rules.  As a result, the penny stock rules may restrict the ability or willingness of broker-dealers to sell the common stock and may affect the ability of holders to sell their common stock in the secondary market and the price at which such holders can sell any such securities. These additional procedures could also limit our ability to raise additional capital in the future.

 
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We currently have a significant number of options, warrants and convertible debt outstanding, the exercise of which may adversely affect our stock price and dilute our stockholders’ ownership percentage.

Options and warrants to purchase 12,321,201 shares of our common stock at exercise prices ranging from $0.08 to $0.25 were outstanding at June 30, 2012.  In addition, certain notes payable, long-term debt and related accrued interest payable were convertible into a total of 92,217,414 shares of our common stock at June 30, 2012, with conversion prices ranging from $0.10 to $1.25.  The exercise of these options and warrants or the conversion of the convertible debt would result in a significant increase in the number of our common shares outstanding, which may adversely affect our stock price and dilute our stockholders’ ownership percentage.


Item 1B.                 Unresolved Staff Comments

Not applicable.


Item 2.                    Properties

We lease our development/manufacturing facility located at 2640 W. California Avenue, Salt Lake City, Utah on a month-to-month basis from an unrelated party for approximately $12,000 per month.  This property consists of approximately 10,000 square feet, houses our headquarters and our administrative offices, and within this facility we conduct research and development and any government contract activities.

We rent on a month-to-month basis a small hangar for storage purposes at Buckeye Airport, Arizona at a monthly rental of approximately $850 per month and we rent on a month-to-month basis a small hangar for our Hawk 4 Gyroplane at the Brigham City, Utah airport at a monthly rental of approximately $250 per month.

We consider the condition of our leased facility to be good and adequate for the current level of our operations.


Item 3.                    Legal Proceedings

We are not involved in any material legal proceedings 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 4.                    (Removed and Reserved)

 
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PART II


Item 5:                    Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

(a) Market Information.

Since October 7, 2008, our common stock has been quoted on the National Quotation Bureau’s Pink Sheets under the symbol “GNBA.PK”   As of October 3, 2012, the high bid and low asked quotation for our common stock on the Pink Sheets was $ 0.14 bid and $ 0.17 asked, respectively.

The following table sets forth the high and low bid quotations for our common stock for each quarter during the two fiscal years ended June 30, 2012 and 2011.  The quotations presented reflect inter-dealer prices, without retail markup, markdown, or commissions, and may not necessarily represent actual transactions in the common stock.

       Closing Prices  
               
Fiscal Year Ended June 30:
 
High
   
Low
 
             
2012
First Quarter
  $ 0.02     $ 0.01  
 
Second Quarter
  $ 0.03     $ 0.01  
 
Third Quarter
  $ 0.03     $ 0.01  
 
Fourth Quarter
  $ 0.04     $ 0.01  
                   
2011
First Quarter
  $ 0.02     $ 0.01  
 
Second Quarter
  $ 0.04     $ 0.01  
 
Third Quarter
  $ 0.05     $ 0.02  
 
Fourth Quarter
  $ 0.03     $ 0.01  

As reflected by the high and low prices on the foregoing table, the trading price of the common stock of the Company can be volatile with dramatic changes over short periods.  The trading price may reflect imbalances in the supply and demand for our shares, market reaction to perceived changes in the industry in which we sell products and services, general economic conditions, and other factors.  Investors are cautioned that the trading price of the common stock can change dramatically based on changing market perceptions that may be unrelated to us and our activities.

(b) Number of equity security holders.

The number of record holders of our common stock as of October 3, 2012 was approximately 1,600.  This number counts each broker dealer and clearing corporation who holds shares for its customers as a single holder.

 
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(c) Dividends.

We did not declare or pay any cash dividends on our common stock during the past two fiscal years and we do not intend to declare any dividends in the foreseeable future.

(d) Securities authorized for issuance under equity compensation plans.

The Company’s Amended and Restated 2000 Stock Option Plan (the “Plan”) has been approved by our shareholders.  Under the Plan, a maximum of 60,000,000 common shares are available for granting options to purchase common stock.  We may issue both non-qualified stock options and qualified incentive stock options.  We have also issued stock options and warrants outside the Plan which have been approved by our Board of Directors and which have been issued under no specific plan approved by our shareholders.  The following table presents information concerning outstanding stock options and warrants issued by us as of June 30, 2012.


 
 
 
 
 
 
 
 
Plan Category
 
 
 
 
 
 
Number of Securities
to be Issued Upon Exercise
of Outstanding Options
and Warrants
 
   
 
 
 
 
Weighted-Average
Exercise Price of
Outstanding Options
and Warrants
 
   
 
 
Number of Securities
Remaining Available for
Future Issuance Under
Equity Compensation Plans
(Excluding Securities Reflected
in Column (a))
 
   
(a)
   
(b)
   
(c)
 
Equity compensation plans approved by security holders
      9,121,201     $ 0.10         50,878,799  
Equity compensation plans not approved by security holders
      3,200,000     $ 0.20         n/a  
Total
    12,321,201               50,878,799  
 
See also the Notes to Consolidated Financial Statements for further information regarding the Plan and stock options and warrants issued by the Company.

(e) Recent sales of unregistered securities.

During the three months ended June 30, 2012, we did not issue any shares of our common stock or options and warrants to purchase shares of our common stock.

(f) Purchases of equity securities by the registrant and affiliated purchasers.

We have not adopted a stock repurchase plan and we did not purchase any shares of our equity securities during the last three months of the year ended June 30, 2012.
 
 
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Item 6.                    Selected Financial Data

Because the Company is a Smaller Reporting Company, this Item is not applicable to the Company.
 
Item 7.                    Management’s Discussion and Analysis of Financial Condition and Results of Operations

Background

We are engaged in the business of designing and developing new technology for gyroplane and gyrodyne rotor-wing aircraft for military and commercial uses.  We currently have no significant operating revenues.  We are restructuring our business plan and business operations (the “Restructure”) pursuant to an Exchange Agreement (the “Exchange Agreement”) dated as of September 7, 2012, which if concluded successfully, will result in the sale and transfer to a separate entity of substantially all of our assets and operations and extinguishment of substantially all of our liabilities.

Significant Series B Preferred Stock and Debt Obligations

From 2006 through the present, we have obtained debt and equity financing primarily from our principal creditor who is also a stockholder of the Company.  As of June 30, 2012, these obligations included: 36% promissory notes issued during 2006 and 2007 in the aggregate principal amount of $4,400,000 (the “2006/2007 Notes”); a $51,822,000 Series B 15% Cumulative Preferred Stock Obligation; 15% secured promissory notes in the aggregate principal amount of $64,464,000 that were issued in satisfaction of accrued dividends of $36,962,000 on the Series B Preferred Stock through October 9, 2008 plus $27,502,000 in interest accrued and added to debt principal through June 30, 2012 (the “Dividend Notes”); and secured 15% promissory notes in the aggregate principal amount of $16,842,000 issued pursuant to the Note Purchase Agreement dated October 9, 2008 (the “Note Purchase Notes”).  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 were extended to June 30, 2012.  Substantially all our assets have been pledged to secure our debts.  As further discussed below, following months of in depth negotiations with our principal creditor and essentially all other creditors, we reached completed an Exchange Agreement to proceed toward the accomplishment of a financial restructuring without having to seek protection through a bankruptcy filing.

Going Concern Uncertainty

The accompanying condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern.  Because of the lack of significant operating revenues, recurring operating losses, negative cash flows from operations, the excess of current liabilities over current assets, significant past due obligations, and the stockholders’ deficit, there is substantial doubt about the Company’s ability to continue as a going concern.  We are restructuring our business plan and business operations pursuant to an Exchange Agreement dated as of September 7, 2012, which if concluded successfully, will result in the sale and transfer to a separate entity of substantially all of our assets and operations and extinguishment of substantially all of our liabilities.

 
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At June 30, 2012, the Company had total current liabilities of $182,435,000 and current assets of $17,000, resulting in a working capital deficiency of $182,418,000.  At June 30, 2012, the Company had a total stockholders’ deficit of $191,246,000.

We have no reliable source of revenue that could support even the modest initiatives to further develop our gyroplane technology.  Furthermore, our assets are essentially all in our technology and cannot be reflected on our consolidated balance sheet as an offset to the extensive debt incurred.  In that context, it is not feasible to raise funds through stock sales or from conventional debt sources.  Continuation of our operations has only been possible through the support of our major creditor.  These loans have been secured by the pledge of substantially all of our assets: our patents, intellectual property, and limited hard assets.  This essential funding has extended to over a four year period.

We started the past fiscal year with operational expenses of approximately $300,000 per month, with no income from operations.  Despite the continued support from key creditors, we have been unable to attract any equity capital since 2008.  As the national and worldwide financial equity markets continue to constrict, with only slight improvement in recent months, we have been forced to face the prospects of filing for Chapter 11 reorganization, or even Chapter 7 liquidation.

Following months of in depth negotiations with essentially all our creditors, most of whom are significant equity holders as well, we reached an agreement with those creditors for the Company to proceed toward the accomplishment of a financial restructuring without having to seek protection through a bankruptcy filing.  In the event that the Company was to be forced into Chapter 11 reorganization, only the secured creditors would have had any equity or other interest in the Company because the bankruptcy process would have eliminated all shareholders and all non-secured creditors.  Management also believes that Groen Brothers Aviation’s name and reputation world-wide would be harmed as well.  The Restructure that has been negotiated with all the secured creditors pursuant to the Exchange Agreement keeps intact all shareholders and treats all creditors converting their debt to equity pari passu to the percent of debt they hold, whether or not secured.

The Restructure will result in the elimination of substantially all of GBA’s debt obligations, which exceeded $191 million at June 30, 2012, through the exchange of all but approximately $11 million of such debt for stock in GBA Global, a new private entity formed by GBA.  In return, GBA will transfer substantially all its assets, notably all of its technologies, knowhow, and associated patents, into GBA Global in exchange for this relief of debt and receipt of some continued ownership of GBA. Because of the planned Restructure, the Company does not consider any of the debt obligations schedlued to be transferred to be in default at June 30, 2012.

The transfer of these assets requires approval through a vote of the Company’s shareholders holding a majority of the voting shares.  The Company had received from holders of a significant majority of voting shares, a contractual commitment to vote in favor of this plan and now as of the date of this filing, has indeed received consent from these holders of a majority of the Company's voting shares.  Because of continued accrual of interest by all interest-bearing debt and of continued funding, the precise breakdown of the ownership of GBA Global will not be established until the date of closing.  However, based upon the accrued value of these obligations as of September 14, 2012, it is anticipated that debt holders and the holders of the Company’s Series B Preferred Stock will own approximately 87% of GBA Global, Management combined will hold 9%, and GBA will hold 4% of GBA Global.  It is anticipated that GBA Global will also form subsidiaries where GBA developed technologies will be utilized and significant additional funding will be raised in those subsidiaries to complete the commercialization of GBA Global's Civil and Military technologies, both manned and unmanned.  However, there can be no assurance such activities will be successful.

 
26

 

The activities that heretofore have been undertaken by GBA and its operating subsidiary, GBA USA, will be carried forward by the operations and development of GBA Global.  So that the “good-will-value” of the Groen name within the aerospace industry may be retained, the Groen Brothers Aviation name will be kept by it doing business as “Groen Brothers Aviation Global, Inc.”  GBA will continue to be a “holding company,” but its total assets will become a minority interest in GBA Global.  Certain debt approximating $11 million will be retained by GBA.

Following the Restructure, GBA Global’s standing in the industry is expected to be stronger than that which GBA could achieve. This should create opportunities for GBA Global to exploit GBA’s gyroplane technology which otherwise likely would have been closed to GBA. The Restructure allows GBA to move into the future, too, although on a smaller scale.  Consequently, in the opinion of management, the Restructure represents the best plan available to GBA that has the opportunity to preserve shareholder and creditor value.

The Company’s continuation as a going concern is dependent on the approval and successful completion of the proposed Restructure.  However, there can be no guarantee or assurance that the Company will be successful in these efforts.  The condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Results of Operations

Revenues

The Company’s consolidated revenues are comprised of the following:

   
Years Ended June 30,
 
   
2012
   
2011
 
             
SparrowHawk parts
  $ 6,000     $ 3,000  
Other operating
    6,000       1,000  
                 
Total
  $ 12,000     $ 4,000  

We have significantly scaled back the level of our operations, including ceasing production of the SparrowHawk, eliminating substantially all flight training and completing our involvement in the DARPA contract.  As a result, we currently have no significant operating revenues.  We had total revenues of $12,000 and $4,000 for the years ended June 30, 2012 and 2011, respectively.

Costs and Expenses

The Company’s consolidated cost of sales is comprised of the following:

   
Year Ended June 30,
 
   
2012
   
2011
 
             
Government contracts
  $ 2,000     $ 2,000  
SparrowHawk parts
    1,000       6,000  
Other
    4,000       2,000  
                 
Total
  $ 7,000     $ 10,000  
 
 
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As discussed above, we significantly scaled back the level of our operations, including ceasing production of the SparrowHawk, eliminating substantially all flight training and completing our involvement in the DARPA contract.  Consequently, we currently incur only nominal amounts of cost of sales.

Research and development expenses for the year ended June 30, 2012 decreased to $1,541,000 from $1,622,000 for the year ended June 30, 2011.  Research and development activities include advancing the design of the ArrowHawk and ShadowHawk gyroplanes in response to potential customer interest, the development of opportunities for potential joint venture activities and subcontract opportunities with industry partners, the assessment of variations to the SparrowHawk for the international market and of fully assembled SparrowHawk gyroplane derivatives for the US Light Sport Aircraft market, potential applications of our technology to vertical take-off military aircraft, runway independent short-haul airliners and other aircraft, including government contract opportunities.

General and administrative expenses for the year ended June 30, 2012 decreased to $2,013,000 from $2,399,000 for the year ended June 30, 2011.  The lack of funding and the decrease in activities in anticipation of completing the Exchange Agreement led to the decrease in expenses in the current fiscal year.

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 $3,000 and $2,000 for the years ended June 30, 2012 and 2011, respectively.

We realized a gain on sale of property and equipment of $62,000 in the year ended June 30, 2011.  We had no gain on sale of property and equipment in the current fiscal year.

We realized a gain on extinguishment of debt of $569,000 and $87,000 in the years ended June 30, 2012 and 2011, respectively, resulting from successful negotiations in settling certain outstanding vender debt.

Interest expense for the year ended June 30, 2012 increased to $15,670,000 from $13,043,000 for the year ended June 30, 2011.  We continued to fund our operations with an increase in related party debt, which has resulted in increased interest expense.

Series B Preferred Stock interest expense for the year ended June 30, 2012 increased to $7,162,000 from $6,389,000 for the year ended June 30, 2011.  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.  This results in increasing levels of Series B Preferred Stock interest expense.

Net Loss

The net loss for the year ended June 30, 2012 was $25,809,000 compared to $23,308,000 for the year ended June 30, 2011.  The increase in the net loss resulted primarily from the increase in interest expense, partially offset by a decrease in operating costs and expenses, as further discussed above.

 
28

 

Liquidity and Capital Resources

At June 30, 2012, we had total current liabilities of $182,435,000 and current assets of $17,000, resulting in a working capital deficiency of $182,418,000.  In addition, we had a total stockholders’ deficit of $191,246,000 at June 30, 2012.  We have no reliable source of revenue that could support even the modest initiatives to further develop our gyroplane technology.  Furthermore, our assets are essentially all in our technology and cannot be reflected on our consolidated balance sheet as an offset to the extensive debt incurred.  It has not been feasible to raise funds through stock sales or from conventional debt sources.  Continuation of our operations has only been possible through the support of our major creditor

We are restructuring our business plan and business operations pursuant to an Exchange Agreement dated as of September 7, 2012, which if concluded successfully, will result in the elimination of substantially all of our debt obligations, through the exchange of all but approximately $11 million of such debt for stock in GBA Global, a new private entity formed by us.  In return, we will transfer substantially all our assets, notably all of its technologies, knowhow, and associated patents, into GBA Global in exchange for this relief of debt and receipt by us of some continued ownership.

The transfer of these assets requires approval through a vote of the Company’s shareholders holding a majority of the voting shares.  The Company has received from holders of a significant majority of voting shares, a contractual commitment to vote in favor of this plan.  We believe shareholder approval will be obtained and the Restructure completed through the Exchange Agreement.  However, as of the date of filing of this Annual Report, we had not closed the Exchange Agreement and there can be no assurance that we will be successful in these efforts.

Obligations to Major Creditor

Included in current liabilities and the working capital deficiency at June 30, 2012 is a $51,822,000 Series B Preferred Stock obligation to our major creditor, or the Series B Holders.  With the approval of the Series B Holders, the maturity date of the Series B Preferred Stock has been extended from time to time and was last extended to June 30, 2012, or such later date as agreed to in writing by at least 80% of the Series B Holders.

During 2006 and 2007, we 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 was last extended to June 30, 2012.

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.  The Dividend Notes provide for the payment of interest at the rate of 15% per annum, compounded quarterly, and had a balance of $64,464,000 at June 30, 2012.  The maturity date of the Dividend Notes has also been extended from time to time and was last extended to June 30, 2012.

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 us with operating capital, as specified in the draw requests for such notes.  The draw requests required approval by the lenders.  Through June 30, 2012, the lenders had purchased notes under the Note Purchase Agreement in the aggregate principal amount of $16,842,000 and the proceeds had been used by us to cover our minimum operating cash needs.  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 was last extended to June 30, 2012.

 
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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.

Pursuant to the Exchange Agreement, the Series B Preferred Stock, the 2006/2007 Notes and the Dividend Notes are scheduled to be transferred to GBA Global.

Other Debt Obligations

Current liabilities at June 30, 2012 included $99,066,000 notes payable to related parties, comprised of the following:

Series B Holders:
     
   Dividend Notes
  $ 64,464,000  
   Note Purchase Notes
    16,842,000  
   2006/2007 Notes
    4,400,000  
      85,706,000  
Other Related Parties
    13,360,000  
         
Total Related Party Notes Payable
  $ 99,066,000  

Pursuant to the Exchange Agreement, all related party debt holders have agreed to exchange shares in GBA Global for the principal amount of their debt and related accrued interest.

Also included in current liabilities at June 30, 2012 are short-term notes payable and capital lease obligations to unrelated parties of $1,348,000, including notes payable totaling $972,000 that were in default at June 30, 2012.  In addition, the Company is delinquent in making payments of accrued interest payable of $953,000 on this debt at June 30, 2012.  Of the debt principal outstanding at June 30, 2012, $419,000 is scheduled to be transferred to GBA Global in the Restructure and $929,000 is scheduled to be retained by the Company.

Operating, Investing and Financing Activities

Net cash used in operating activities was $2,959,000 for the year ended June 30, 2012, compared to net cash used in operating activities of $3,755,000 for the year ended June 30, 2011.  The decrease in the net cash used in operating activities in the current fiscal year is due primarily to the increase in our non-cash expenses for the current year.

Net cash used in investing activities for the year ended June 30, 2012 was $3,000 consisting of the purchase of property and equipment.  Net cash provided by investing activities for the year ended June 30, 2011 was $45,000, comprised of proceeds from the sale of property and equipment of $62,000, partially offset by the purchase of property and equipment of $17,000.

 
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We have recently funded losses from operations and net cash used in investing activities primarily from the issuance of debt to related parties (current shareholders and lenders of the Company) and 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 $2,760,000 for the year ended June 30, 2012, comprised of proceeds from the issuance of debt of $4,735,000 and an increase in bank overdraft of $35,000, partially offset by repayment of debt and capital lease obligations of $10,000 and partial redemption of Series B Preferred Stock of $2,000,000.  Net cash provided by financing activities was $3,486,000 for the year ended June 30, 2011, comprised of proceeds from the issuance of debt of $3,555,000, partially offset by repayment of debt and capital lease obligations of $69,000.

We currently do not have sufficient cash to sustain our operations for the next twelve months.  We are dependent on the successful completion of the Exchange Agreement to accomplish our planned Restructure.  Even if the Restructure is completed successfully, we will retain approximately $11 million of debt, a significant portion of which is long term.  However, to conduct any operations in the Company and to retire any of the debt retained will require substantial amounts of capital, and it is uncertain what source funds may be available from, if they are available at all.

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 currently have no material non-cancelable operating lease commitments in excess of one year.

Critical Accounting Policies

Our critical accounting policies include the following:

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 government contracts where we serve as the lead contractor as each defined milestone is completed and the requisite meetings are held and technical data submitted and accepted by the contracting party.  At that time, we 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 our 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.

 
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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 our 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.

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 Financial Accounting Standards Board (FASB) Accounting Standards Codification (“ASC”) Topic 730, Research and Development.  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.

Stock-Based Compensation – We have adopted the fair value recognition provisions of ASC Topic 718, Compensation – Stock Compensation, which requires the Company 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.

Non-Employee Stock Options and Warrants – In accordance with ASC Topic 505-50, Equity-Based Payments to Non-Employees, 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 the Company’s 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 accordance with ASC Topic 480, Distinguishing Liabilities from Equity, we report our Series B Preferred Stock as a liability.  This pronouncement 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).

 
32

 

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

No additional new accounting pronouncements were issued during the year ended June 30, 2012 and through the date of the filing of this report that we believe are applicable to or would have a material impact on our consolidated financial statements.


Forward Looking Statements

This Form 10-K contains certain “forward-looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act with respect to our results of operations and businesses.  All statements, other than statements of historical facts, included in this Form 10-K, including those regarding market trends, our financial position, business strategy, projected costs, and plans and objectives of management for future operations, are forward-looking statements.  In general, such statements are identified by the use of forward-looking words or phrases including, but not limited to, “believes”, “intended”, “will”, “should”, “may”, “expect”, “anticipate”, “estimates”, “projects” or the negative thereof or variations thereon or similar terminology.

Forward-looking statements are based on our current expectations.  Although we believe that the expectations reflected in such forward-looking statements are reasonable, there can be no assurance that such expectations will prove to be correct.  Because forward-looking statements involve risk and uncertainty, our actual results could differ materially.  Important factors that could cause actual results to differ materially from our expectations include, but are not limited to, the risks described herein under the caption “Item 1A, Risk Factors.” These forward-looking statements represent our judgment as of the date of this Form 10-K.  All subsequent written and oral forward-looking statements attributable to us are expressly qualified in their entirety by the Cautionary Statements.  We disclaim, however, any intent or obligation to update our forward-looking statements.

 
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Item 7A.                 Quantitative and Qualitative Disclosures About Market Risk

Because the Company is a Smaller Reporting Company, this Item is not applicable to the Company.
 
Item 8.                    Financial Statements and Supplementary Data

The consolidated financial statements of the Company required by this Item are contained in a separate section of this report located immediately following the signature page.  See “Index to Consolidated Financial Statements” on Page F-1 for the consolidated financial statements of the Company included in this report.
 
Item 9.                    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.


Item 9A                  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 June 30, 2012.  Based on that evaluation, our chief executive officer and chief financial officer concluded that the disclosure controls and procedures employed at the Company are 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’s Report on Internal Control Over Financial Reporting

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.  Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an 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 effective as of June 30, 2012.

This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting.  Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.

 
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Change in Internal Control Over Financial Reporting

There was no change in our internal control over financial reporting during the fourth fiscal quarter ended June 30, 2012, that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 
Item 9B.                 Other Information

None
 
PART III

Item 10.
Directors, Executive Officers and Corporate Governance

The following table contains the names and ages of all our Directors and Executive Officers and offices held by each such person.

Name
 
Age
 
Positions
         
David L. Groen
   61  
Chairman of the Board of
         
Directors, President and Chief Executive
         
Officer, Chief Financial Officer
           
Robert (Robin) H. H. Wilson
  76   
Director, Executive Vice President,
         
and Chief Operating Officer

Term of Office

The appointment of David Groen as a member of the Board of Directors was ratified and approved by the stockholders at a meeting for that purpose on May 20, 2000.  Mr. Wilson was appointed a member of the Board of Directors on October 3, 2006.  The term of service of each director continues until the next annual meeting of the stockholders.  With the exception of compliance with the duties of a director as set forth in the Articles of Incorporation or By-laws of the Company or in the provisions of the Utah Revised Business Corporation Act, there are no arrangements or understandings pursuant to which any of the foregoing persons were selected to serve on the Board of Directors of the Company.  Each of the foregoing persons consented to serve as a director of the Registrant prior to their designation or subsequent election as such.

Background on Directors and Executive Officers

David L. Groen  As a founder of Groen Brothers Aviation, David Groen has performed in an executive management role for over twenty-five years, nearly a decade and a half of which as its President and Chief Executive Officer.  David and his late brother Jay grew the Company from just the two of them in 1986 to more than 130 people by 2001, all the while developing and re-discovering the science of autorotative flight.  They weathered the severe economic down turn cause by the “Tech Sector” crash, made even worse by the events of 9/11, necessitating a reduction in its work force of more than 100 people, then growing the Company back to nearly 100 full time and part time
employees.  This followed the receipt of the Company’s award, from DARPA, largely conceived by Mr. Groen, for its important Heliplane contract.   Following the completion of Phase I of the Heliplane contract and the onset of the current recession, Mr. Groen undertook another major reduction in force, while at the same time arranging funding that would permit the Company to continue research and development on a smaller scale, while seeking major funding for the full exploitation of its technology of autorotative flight.

 
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Immediately prior to forming Groen Brothers Aviation, David Groen was a founding partner and Chief Financial Officer for Seagull Recycling Company.  Previously, he has held numerous executive positions in the helicopter industry with Sales and Marketing, Safety Officer, Branch Manager, and Chief Pilot responsibilities.

Having extensive military and commercial experience in helicopters, Mr. Groen has logged over 7,000 hours in rotor-wing and fixed-wing aircraft.  Mr. Groen received his Certificate of Graduation in 1970 from the U.S. Army Warrant Officer Flight Training School, was awarded Army Aviator Wings and promoted to the rank of Warrant Officer.  As a combat helicopter pilot and Aircraft Commander in Vietnam, he flew hundreds of combat sorties.  He was qualified as a pilot in several American and French helicopters, and has attended Aerospatiale factory schools.

Over the years, Mr. Groen’s numerous commercial helicopter missions have involved such work as EMS (emergency medical service hospital air ambulance), power line construction and patrol, topographical survey, USGS map making, wildlife management, predator control, herd management, back country tour guides, heli-skiing, forest fire fighting, long line seismic oil exploration, and wildcat on shore and off shore oil drilling operations.

These years of commercial flying, added to his tenure serving in management positions within the rotor-wing industry, gave Mr. Groen a wealth of management and leadership experience in a variety of related fields, which we believe qualify him to serve as a director of the Company.  David Groen is co-author, along with his brother Jay, of a bestselling novel entitled Huey.

Robert (Robin) H.H. Wilson has had a long and prominent career in aviation.  A U.S. citizen, he is a native of Ireland, but began his career with Rolls-Royce Aero-Engines in England, where he worked for eight years, obtaining his Engineering degree from Cambridge University.  During this period he was a section leader on the development of the Tyne engine intended among other applications as the power plant for the Fairey Rotodyne, a large commercial gyrodyne.

Mr. Wilson left Rolls-Royce to attend graduate school, obtaining an MBA with High Distinction from Harvard University.  From Harvard he joined TWA as a Financial Analyst, where over the following seventeen years he held several Vice President positions across many functional areas, including Planning, Marketing, Maintenance and Engineering and finally Senior Vice President, Operations.  He left TWA to become President of the Long Island Rail Road, the nation’s oldest and largest passenger carrying railroad.  His 3½ years in this position were marked by significant improvement in the railroad with a commendation by the U.S. Senate and New York State legislature for outstanding performance.

Mr. Wilson returned to aviation as President of Western Airlines, where he participated in the buildup of its Salt Lake City hub as part of the team that managed the major turnaround of that carrier and merger with Delta.  Later, he was appointed President of Burlington Air Express, before returning to Ireland, as Chief Technical Officer of Guinness Peat Aviation, then the world’s largest aircraft leasing company.

 
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Following TWA’s Chapter 11 filing in 1992, Mr. Wilson was asked to return to TWA as Co-Chief Executive to take the company out of bankruptcy.  When this was accomplished, he remained as Vice Chairman until new management was recruited.  He then became a partner in the international aviation consultancy, SH&E, advising Governments, Banks, Airlines and other parties on aviation matters over a five-year period.

In August 2001 he joined Groen Brothers Aviation as Chief Financial Officer and Head of Business Development.  Late in 2003, he took on added responsibility for GBA and AAI Marketing and Sales, while relinquishing his CFO role.  Subsequently, he was appointed Executive Vice President and Chief Operating Officer and joined the Board following the death of Jay Groen.  Mr. Wilson is a Fellow of the Royal Aeronautical Society.  We believe Mr. Wilson’s extensive management experience and experience in the aviation industry qualify him to serve as a director of the Company.

Communications between Shareholders and the Board of Directors

Our Board of Directors has not adopted a formal procedure that shareholders must follow to send communications directly to it.  The Board of Directors does receive communication from shareholders, from time to time, and addresses those communications as appropriate.  Shareholders can send communication to the Board of Directors in one of the following ways:

 
In writing, to Groen Brothers Aviation, Inc., 2640 West California Avenue, Salt Lake City, Utah 84104, Attention of Board of Directors
     
 
By Email, at directors@groenbros.com.

We did not hold an annual meeting of shareholders during the fiscal year ended June 30, 2012.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our directors and executive officers, and persons who own more than 10% of a registered class of the Company’s equity securities, to file initial reports of ownership and reports of changes in ownership with the SEC.  Such persons are required by SEC regulations to furnish us with copies of all Section 16(a) forms they file.

Based solely on the review of the copies of such forms received by us or written representations from certain reporting persons, that no other reports were required, management of the Company believes that all filing requirements applicable to its officers, directors, and greater than 10% beneficial owners were complied with during the year ended June 30, 2012.

Committees of the Board of Directors

The two members of the Company’s Board of Directors, none of whom is deemed independent pursuant to Rule 4200(a) of the NASD’s Marketplace Rules, currently serve as the Audit Committee and Compensation Committee of the Board.  The Company does not have a standing nominating committee and the Company’s entire Board of Directors performs the functions that would customarily be performed by a nominating committee.  The Board of Directors does not believe a separate nominating committee is required at this time due to the limited size of the Company’s business operations and the limited resources of the Company which do not permit it to compensate its directors.  The Board of Directors has not established policies with regard to the consideration of director candidates recommended by security holders or the minimum qualifications of such candidates.

 
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Audit Committee

The Audit Committee of the Board of Directors makes recommendations regarding the retention of the independent registered public accounting firm, reviews the scope of the annual audit undertaken by our independent registered public accounting firm and the progress and results of their work, reviews the financial statements of the Company, and oversees the internal controls over financial reporting and corporate programs to ensure compliance with applicable laws. The Audit Committee reviews the services performed by the independent registered public accounting firm and determines whether they are compatible with maintaining the registered public accounting firm’s independence. The Audit Committee currently does not have a charter, and the two members of the Audit Committee are not independent directors.  Our Board of Directors has determined that Robin Wilson is an “audit committee financial expert,” as that term is defined by the rules and regulations of the Securities and Exchange Commission.

In fulfilling its oversight responsibilities, the Audit Committee has reviewed and discussed the audited financial statements and discussed with the independent auditors the matters required to be discussed by SAS 61.  Management is responsible for the financial statements and the reporting process, including the system of internal controls.  The independent auditors are responsible for expressing an opinion on the conformity of those audited financial statements with generally accepted accounting principles.

The Audit Committee discussed with the independent auditors the auditors' independence from the management of the Company and received written disclosures and the letter from the independent accountants required by Independence Standards Board Standard No. 1.
 
After review and discussions, the Audit Committee approved the audited financial statements included in the Company's Annual Report on Form 10-K for the year ended June 30, 2010.  The Audit Committee also selected HJ & Associates, LLC as the Company’s independent registered public accounting firm for the fiscal year ending June 30, 2012.

Compensation Committee

The Compensation Committee of the Board of Directors reviews and approves executive compensation policies and practices, reviews salaries and bonuses for our officers, administers our stock option plans and other benefit plans, and considers other matters as required.  The Company’s President and Chief Executive Officer and its Chief Operating Officer are the only members of the Compensation Committee and such persons participate in determining the amount and form of executive and director compensation.  To date, the Company has not engaged independent compensation consultants to determine or recommend the amount or form of executive or director compensation.

 
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The Board of Directors held four formal meetings during the 2012 fiscal year.  All of the directors attended the meetings.  In addition, the directors met on numerous occasions during fiscal 2012 for informal discussions and took action by unanimous written consents in lieu of meetings.

Code of Ethics

We have adopted Standards of Conduct and a Statement of Corporate Values that are applicable to all employees including our principal executive and financial officers and persons performing similar functions.  Our Standards of Conduct and Statement of Corporate Values are being filed as an exhibit to this report and are also available on our web site.


Item 11.                  Executive Compensation

The following table summarizes all compensation earned by or paid to our President, Chief Executive Officer and Chief Financial Officer and our Executive Vice President and Chief Operating Officer (the “Named Executive Officers”) for services rendered in all capacities for the years ended June 30, 2012 and 2011.

Summary Compensation Table
 
 
 
 
 
 
Name and
Principal Position
 
 
 
 
 
 
Year
 
 
 
 
Salary
 
 
 
 
 
Bonus
 
 
 
 
Stock
Awards
 
 
 
 
Option
Awards (1)
 
 
 
Non-Equity
Incentive Plan
Compensation
 
Change in
Pension Value
 and Non-
Qualified
Deferred
Compensation
Earnings (2)
 
 
 
All
Other
Compensation
 
 
 
 
 
Total
 
(a)
(b)
(c)
 
(d)
 
(e)
 
(f)
 
(g)
 
(h)
 
(i)
 
(j)
 
                                   
David Groen
2012
  $ 150,000     $ -     $ -     $ -     $ -     $ 160,000     $ -     $ 310,000  
President, Chief Executive Officer and Chief Financial Officer 2011   $ 150,000     $ -     $ -     $ -     $ -     $ 160,000     $ -     $ 310,000  
                                                                   
Robin Wilson 2012   $ 140,000     $ -     $ -     $ -     $ -     $ 145,000     $ -     $ 285,000  
Executive Vice President and Chief Operating Officer
2011
  $ 140,000     $ -     $ -     $ -     $ -     $ 145,000     $ -     $ 285,000  
____________

(1)
The amounts in column (f) reflect the aggregate grant date fair value with respect to stock options granted during the years ended June 30, 2011 and 2010 in accordance with FASB Accounting Standards Codification Topic 718.  There were no stock options awarded to the Named Executive Officers during the years ended June 30, 2012 and 2011.
(2)
The amounts in column (h) reflect the additions to deferred compensation payable during the years ended June 30, 2012 and 2011.  The deferred compensation is payable in part or in whole only by resolution of the Company’s Board of Directors and when not precluded by the Company’s financing agreements.

 
39

 


Employment Arrangements

Effective August 12, 2007 annual salaries for David Groen and Robin Wilson were established at $150,000 and $140,000, respectively, with no additional compensation for service on the Company’s Board of Directors.  We do not have written employment agreements with our executive officers.

At June 30, 2012, we owed unpaid salaries totaling $285,198 to David Groen for all or portions of fiscal years 2003 through 2010 and for fiscal year 2012.  At June 30, 2012, we owed unpaid salaries to Robin Wilson totaling $160,654 for portions of fiscal years 2003 through 2009 and for fiscal year 2012.

Deferred Compensation

In addition to cash compensation, we have a deferred compensation arrangement for executive officers and certain of our senior management that accrues additional salary, with amounts originating from fiscal year 1998 through the 2012 fiscal year.  The terms of our Series B Preferred Stock preclude us from making any deferred compensation payments until all outstanding amounts due relating to the Series B Preferred Stock have been paid in full.  Absent payment restrictions related to outstanding Series B 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 June 30, 2012, 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 our outstanding financing agreements and would be prudent in light of our financial condition and availability of cash.  The deferred compensation obligations are scheduled to be retained by the Company in the Restructure. Deferred compensation totaling $6,222,000, related accrued payroll taxes of $200,000 and related accrued interest payable of $299,000 are classified as long-term liabilities at June 30, 2012.  In fiscal year 2001, we 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.  At June 30, 2012, deferred compensation and related interest accrued to the Named Executive Officers were as follows:

   
Deferred Compensation
   
Accrued
Interest
   
Total
 
 
David Groen
  $ 2,359,354     $ 179,711     $ 2,539,065  
 
Robin Wilson
  $ 1,517,139     $ 41,158     $ 1,558,297  

The increase in the deferred compensation payable to David Groen was $160,000 for each of the years ended June 30, 2012 and 2011.  The increase in the deferred compensation payable to Robin Wilson was $145,000 for each of the years ended June 30, 2012 and 2011.

Stock Option Plan

The following table summarizes the outstanding stock options held by the Named Executive Officers at June 30, 2012.

 
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Outstanding Equity Awards at Fiscal Year-End

   
Option Awards
 
 
 
 
 
 
Name
 
Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable
   
Number of
 Securities
Underlying
 Unexercised
Options (#)
Unexercisable
   
Equity Incentive
Plan Awards:
Number of
Securities
Underlying
Unexercised
 Unearned Options
 (#)
   
 
 
Option
Exercise
Price ($)
 
 
 
 
 
Option
Expiration
Date
(a)
 
(b)
   
(c)
   
(d)
   
(e)
 
(f)
                           
David Groen (1)
    40,000       10,000       -       0.17  
9/16/2012
David Groen
    625,000       -       -       0.08  
3/5/2015
Robin Wilson (1)
    40,000       10,000       -       0.17  
9/16/2012
Robin Wilson
    583,333       -       -       0.08  
3/5/2015

 
(1)
The options vest 10,000 shares on September 16, 2012.
 
       Columns (g) through (j) have been omitted since we have not granted any stock awards.

Under our 2000 amended and restated stock option plan (Plan), there are 60 million shares that are authorized for stock options.  We may issue both non-qualifying stock options and qualifying incentive stock options.  All stock options have an exercise price that is not less than 100 percent of the fair market value on the date of the grant.  While expiration dates vary on particular grants, no stock options may be exercised more than ten years after the date of grant.  Qualifying incentive stock options are granted only to employees, while non-qualifying options may be granted to employees, directors, and non-employees.

On May 17, 2002 and June 10, 2005, we filed Form S-8 Registration Statements (“Registration”) for the Plan under the Securities Act of 1933.  Options granted under the Plan can be exercised for registered shares of common stock.

Our Board of Directors may also authorize the issuance of other stock options and warrants outside of the Plan.

No stock options were granted during the year ended June 30, 2012.

Compensation of Directors

We paid no cash fees, equity awards or other consideration to our directors for service as directors during the fiscal year ended June 30, 2012. We have made no agreements regarding future compensation of directors. All directors are entitled to reimbursement for reasonable expenses incurred in the performance of their duties as members of the Board of Directors.  All compensation paid to our directors in their capacities as officers and employees of the Company is included in the Summary Compensation Table in Item 11.

 
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Item 12.                  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

The following tabulation shows, as of October 3, 2012, the number of shares of common stock, no par value, and the number of shares of Series A preferred stock owned beneficially by: (a) all persons known to be the holders of more than five percent (5%) of voting securities, (b) Directors, (c) the Named Executive Officers and (d) all Officers and Directors as a group:

   
Amount and Nature of
Beneficial Ownership (1)
 
Name and Address of Beneficial Owner
 
Common Shares
   
Series A
Preferred Shares
   
Total Voting
Shares (6)
 
   
Shares
 
%
   
Shares
   
%
   
Shares
   
%
 
Principal Stockholders
                                   
Dennis Gauger
2640 W. California Ave.
Salt Lake City, Utah 84104
      50,000  (4)       0.0         125,000         8.9         12,550,000         4.0  
                                                 
Margaret Groen
2640 W. California Ave.
Salt Lake City, Utah 84104
      4,055,100  (5)       2.4         125,000         8.9         16,555,100         5.3  
                                                 
Officers and Directors
                                               
David Groen
2640 W. California Ave.
Salt Lake City, Utah 84104
      11,180,884  (2)       6.5         1,025,000         73.2         113,680,884         36.5  
                                                 
Robin Wilson
2640 W. California Ave.
Salt Lake City, Utah 84104
      983,333  (3)       0.6         125,000         8.9         13,483,333         4.3  
                                                 
All officers and directors as a group (2 persons)
    12,164,217       7.1       1,150,000       82.1       127,164,217       40.8  

 
(1)
Unless otherwise indicated, each person identified in the table has sole voting and investment power with respect to the common stock beneficially owned by such person.  The total number of outstanding shares included in the computation of percentages is 171,416,289.
 
(2)
Includes 8,452,884 shares owned by David Groen, 2,103,000 shares beneficially owned held by family trusts and 625,000 options exercisable by David Groen at October 3, 2012 or within 60 days of October 3, 2012.
 
(3)
Includes 300,000 shares owned by Robin Wilson, 100,000 shares beneficially owned held by family trusts and 583,333 options exercisable by Robin Wilson at October 3, 2012 or within 60 days of October 3, 2012.
 
(4)
Includes 50,000 shares owned by Dennis Gauger.
 
(5)
Includes 4,055,100 shares beneficially owned by Margaret Groen held by a trust and by the estate of Jay Groen.
 
(6)
Each share of Series A preferred stock entitles the holder to cast one hundred (100) votes on all matters submitted to the stockholders for a vote, voting together with the holders of the common stock as a single class.

David Groen, President and Chief Executive Officer, owns 1,025,000 shares of the Company’s Series A Convertible Preferred Stock, and Robin Wilson, Executive Vice President and Chief Operating Officer, Dennis Gauger, former officer and director, and Margaret Groen, the surviving spouse of the late Jay Groen, each owns 125,000 shares of the Company’s Series A Convertible Preferred Stock, combined representing 100% of the outstanding shares of that series of preferred stock.  Each share of the Series A Convertible Preferred Stock entitles the holder to cast one hundred (100) votes, or a total of 140,000,000 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.

 
42

 

Item 13.                  Certain Relationships and Related Transactions, and Director Independence

Related Party Transactions

At June 30, 2012, we had accrued interest payable to David Groen of $75,000.

At June 30, 2011, we had notes payable to Robin Wilson totaling $290,000, plus accrued interest totaling $188,000.  The notes bear interest at rates of 8% to 18% and are due on demand.

At June 30, 2012, our current liabilities included short-term notes payable to related parties (including the notes payable to executive officers discussed in the two preceding paragraphs), primarily stockholders of the Company, totaling $99,066,000, with accrued interest payable of $26,372,000.  Of these notes payable to related parties, notes with an aggregate principal balance of $85,706,000 are payable to the holders of the Company’s Series B Preferred Stock.  These notes are secured by substantially all of the assets of the Company, bear interest rates from 15% to 36% and are payable on October 31, 2011.  Other notes payable to related parties with an aggregate principal balance of $13,360,000 are generally unsecured, due on demand, and bear interest at annual rates ranging from 8% to 50%.  All notes payable to related parties are scheduled to be transferred to GBA Global in the proposed Restructure.

Royalty payments of 1% of the gross sales price of gyroplanes are to be paid to our founders, David Groen and the estate of the late Jay Groen.  Through June 30, 2012, royalties payable totaled $16,000 to each of these parties, which amounts are included in cost of sales in the accompanying consolidated statement of operations.

Included in long-term accrued expenses in the consolidated balance sheet at June 30, 2012 is deferred compensation payable to twelve management employees or former employees, including officers and directors of the Company, with amounts originating from fiscal year 1998 through fiscal year 2012.  In addition to cash compensation, we have a deferred compensation arrangement for executive officers and certain of our senior management that accrues additional salary.  The terms of our Series B Preferred Stock preclude the Company from making any deferred compensation payments until all outstanding amounts due relating to the Series B Preferred Stock have been paid in full.  Absent payment restrictions related to outstanding Series B Preferred Stock or other restrictions, the deferred compensation is payable in part or in whole only by resolution of our Board of Directors.  Deferred compensation totaling $6,222,000, related accrued payroll taxes of $200,000 and related accrued interest payable of $299,000 are classified as long-term liabilities at June 30, 2012.  Through June 30, 2012, 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 our outstanding financing agreements and would be prudent in light of our financial condition and availability of cash.  In fiscal year 2001, we 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.

 
43

 

Director Independence

We currently do not have any directors considered to be independent pursuant to Rule 4200 of the National Association of Securities Dealers' listing standards.


Item 14.                      Principal Accounting Fees and Services

The following schedule presents the professional fees incurred to HJ & Associates, LLC, our independent registered accountants, for the fiscal years ended June 30, 2012 and 2011.

   
2012
   
2011
 
             
Audit fees
  $ 48,000     $ 49,000  
Audit related fees
    -       -  
Tax fees
    2,000       6,000  
Other fees
    -       -  
                 
Total
  $ 50,000     $ 55,000  

Audit Fees consist of fees billed for professional services rendered by our principal accountant for the audit of our financial statements, review of financial statements included in our quarterly reports and other fees that are normally provided by the accountant in connection with statutory and regulatory filings or engagements. Audit Related Fees consist of fees billed for assurance and related services by our principal accountant that are reasonably related to the performance of the audit or review of our financial statements. Tax fees were for preparation of federal and state income tax returns and related tax consultation.

All professional fees paid to our independent registered accountants are pre-approved by the Board of Directors of the Company, acting in its capacity as the Audit Committee.
 
 
44

 

PART IV

Item 15.                  Exhibits, Financial Statement Schedules
 
Exhibit No.
Description of Exhibit                                                                                                                     
3.1
Eleventh Amendment to Fifth Amended and Restated Articles of Incorporation of Groen Brothers Aviation, Inc. filed August 10, 2011 (1)
3.2
Twelfth Amendment to Fifth Amended and Restated Articles of Incorporation of Groen Brothers Aviation, Inc. filed September 22, 2011 (2)
3.3
Thirteenth Amendment to Fifth Amended and Restated Articles of Incorporation of Groen Brothers Aviation, Inc. filed October 11, 2011 (3)
3.4
Fourteenth Amendment to Fifth Amended and Restated Articles of Incorporation of Groen Brothers Aviation, Inc. filed November 2, 2011 (4)
3.5
Fifteenth Amendment to Fifth Amended and Restated Articles of Incorporation of Groen Brothers Aviation, Inc. filed December 19, 2011 (5)
3.6
Sixteenth Amendment to Fifth Amended and Restated Articles of Incorporation of Groen Brothers Aviation, Inc. filed January 24, 2012 (6)
3.7
Seventeenth Amendment to Fifth Amended and Restated Articles of Incorporation of Groen Brothers Aviation, Inc. filed February 9, 2012 (7)
3.8
Eighteenth Amendment to Fifth Amended and Restated Articles of Incorporation of Groen Brothers Aviation, Inc. filed April 18, 2012 (8)
3.9
By-laws (9)
4.1
Amended and Restated 2000 Option Plan (10)
10.1
Note Purchase Agreement dated as of October 9, 2008 by and among Groen Brothers Aviation, Inc. and Lenders named therein (11)
10.2
Form of Secured Promissory Notes Issued under the Note Purchase Agreement dated as of October 9, 2008 and the schedule of Notes issued to date (12)
10.3
Amended and Restated Security Agreement dated as of January 20, 2009 among the Company and the Lenders under the Note Purchase Agreement (11)
10.4
Amended and Restated IP Security Agreement dated as of October 9, 2008 among the Company and the Lenders under the Note Purchase Agreement (11)
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 (11)
10.6
Fourth Amendment to Promissory Notes dated as of August 10, 2011 among Groen Brothers Aviation, Inc. and Lender F named therein (1)
10.7
Ninth Amendment to Promissory Notes dated as of August 10, 2011 among Groen Brothers Aviation, Inc. and Lender C named therein (1)

 
45

 
 
Exhibit No.
Description of Exhibit
10.8
Ninth Amendment to Promissory Notes dated as of August 10, 2011 among Groen Brothers Aviation, Inc. and Lender D named therein (1)
10.9
Ninth Amendment to Promissory Notes dated as of August 10, 2011 among Groen Brothers Aviation, Inc. and Lender C named therein (1)
10.10
Ninth Amendment to Promissory Notes dated as of August 10, 2011 among Groen Brothers Aviation, Inc. and Lender D named therein (1)
10.11
Eleventh Amendment to Promissory Notes dated as of August 10, 2011 among Groen Brothers Aviation, Inc. and Lender B named therein (1)
10.12
Eleventh Amendment to Promissory Notes dated as of August 10, 2011 among Groen Brothers Aviation, Inc. and Lender A named therein (1)
10.13
Eleventh Amendment to Promissory Notes dated as of August 10, 2011 among Groen Brothers Aviation, Inc. and Lender H named therein (1)
10.14
Twelfth Amendment to Promissory Notes dated as of August 10, 2011 among Groen Brothers Aviation, Inc. and Lender B therein (1)
10.15
Twelfth Amendment to Promissory Notes dated as of August 10, 2011 among Groen Brothers Aviation, Inc. and Lender H named therein (1)
10.16
Fifth Amendment to Promissory Notes dated as of September 21, 2011 among Groen Brothers Aviation, Inc. and Lender F named therein (1)
10.17
Tenth Amendment to Promissory Notes dated as of September 21, 2011 among Groen Brothers Aviation, Inc. and Lender C named therein (1)
10.18
Tenth Amendment to Promissory Notes dated as of September 21, 2011 among Groen Brothers Aviation, Inc. and Lender D named therein (1)
10.19
Tenth Amendment to Promissory Notes dated as of September 21, 2011 among Groen Brothers Aviation, Inc. and Lender C named therein (1)
10.20
Tenth Amendment to Promissory Notes dated as of September 21, 2011 among Groen Brothers Aviation, Inc. and Lender D named therein (1)
10.21
Twelfth Amendment to Promissory Notes dated as of September 21, 2011 among Groen Brothers Aviation, Inc. and Lender B named therein (1)
10.22
Twelfth Amendment to Promissory Notes dated as of September 21, 2011 among Groen Brothers Aviation, Inc. and Lender A named therein (1)
10.23
Twelfth Amendment to Promissory Notes dated as of September 21, 2011 among Groen Brothers Aviation, Inc. and Lender H named therein (1)
10.24
Thirteenth Amendment to Promissory Notes dated as of September 21, 2011 among Groen Brothers Aviation, Inc. and Lender B therein (1)
10.25
Thirteenth Amendment to Promissory Notes dated as of September 21, 2011 among Groen Brothers Aviation, Inc. and Lender H named therein (1)
10.26
Sixth Amendment to Promissory Notes dated as of December 19, 2011 among Groen Brothers Aviation, Inc. and Lender F named therein (7)

 
46

 

Exhibit No.
Description of Exhibit
10.27
Eleventh Amendment to Promissory Notes dated as of December 19, 2011 among Groen Brothers Aviation, Inc. and Lender C named therein (7)
10.28
Eleventh Amendment to Promissory Notes dated as of December 19, 2011 among Groen Brothers Aviation, Inc. and Lender D named therein (7)
10.29
Eleventh Amendment to Promissory Notes dated as of December 19, 2011 among Groen Brothers Aviation, Inc. and Lender C named therein (7)
10.30
Eleventh Amendment to Promissory Notes dated as of December 19, 2011 among Groen Brothers Aviation, Inc. and Lender D named therein (7)
10.31
Thirteenth Amendment to Promissory Notes dated as of December 19, 2011 among Groen Brothers Aviation, Inc. and Lender B named therein (7)
10.32
Thirteenth Amendment to Promissory Notes dated as of December 19, 2011 among Groen Brothers Aviation, Inc. and Lender A named therein (7)
10.33
Thirteenth Amendment to Promissory Notes dated as of December 19, 2011 among Groen Brothers Aviation, Inc. and Lender H named therein (7)
10.34
Fourteenth Amendment to Promissory Notes dated as of December 19, 2011 among Groen Brothers Aviation, Inc. and Lender B therein (7)
10.35
Fourteenth Amendment to Promissory Notes dated as of December 19, 2011 among Groen Brothers Aviation, Inc. and Lender H named therein (7)
10.36
Seventh Amendment to Promissory Notes dated as of February 10, 2012 among Groen Brothers Aviation, Inc. and Lender F named therein (13)
10.37
Twelfth Amendment to Promissory Notes dated as of February 10, 2012 among Groen Brothers Aviation, Inc. and Lender C named therein (13)
10.38
Twelfth Amendment to Promissory Notes dated as of February 10, 2012 among Groen Brothers Aviation, Inc. and Lender D named therein (13)
10.39
Twelfth Amendment to Promissory Notes dated as of February 10, 2012 among Groen Brothers Aviation, Inc. and Lender C named therein (13)
10.40
Twelfth Amendment to Promissory Notes dated as of February 10, 2012 among Groen Brothers Aviation, Inc. and Lender D named therein (13)
10.41
Fourteenth Amendment to Promissory Notes dated as of February 10, 2012 among Groen Brothers Aviation, Inc. and Lender B named therein (13)
10.42
Fourteenth Amendment to Promissory Notes dated as of February 10, 2012 among Groen Brothers Aviation, Inc. and Lender A named therein (13)
10.43
Fourteenth Amendment to Promissory Notes dated as of February 10, 2012 among Groen Brothers Aviation, Inc. and Lender H named therein (13)
10.44
Fifteenth Amendment to Promissory Notes dated as of February 10, 2012 among Groen Brothers Aviation, Inc. and Lender B therein (13)
10.45
Fifteenth Amendment to Promissory Notes dated as of February 10, 2012 among Groen Brothers Aviation, Inc. and Lender H named therein (13)

 
47

 

Exhibit No.
Description of Exhibit
10.46
Eighth Amendment to Promissory Notes dated as of April 20, 2012 among Groen Brothers Aviation, Inc. and Lender F named therein (13)
10.47
Thirteenth Amendment to Promissory Notes dated as of April 20, 2012 among Groen Brothers Aviation, Inc. and Lender C named therein (13)
10.48
Thirteenth Amendment to Promissory Notes dated as of April 20, 2012 among Groen Brothers Aviation, Inc. and Lender D named therein (13)
10.49
Thirteenth Amendment to Promissory Notes dated as of April 20, 2012 among Groen Brothers Aviation, Inc. and Lender C named therein (13)
10.50
Thirteenth Amendment to Promissory Notes dated as of April 20, 2012 among Groen Brothers Aviation, Inc. and Lender D named therein (13)
10.51
Fifteenth Amendment to Promissory Notes dated as of April 20, 2012 among Groen Brothers Aviation, Inc. and Lender B named therein (13)
10.52
Fifteenth Amendment to Promissory Notes dated as of April 20, 2012 among Groen Brothers Aviation, Inc. and Lender A named therein (13)
10.53
Fifteenth Amendment to Promissory Notes dated as of April 20, 2012 among Groen Brothers Aviation, Inc. and Lender H named therein (13)
10.54
Sixteenth Amendment to Promissory Notes dated as of April 20, 2012 among Groen Brothers Aviation, Inc. and Lender B therein (13)
10.55
Sixteenth Amendment to Promissory Notes dated as of April 20, 2012 among Groen Brothers Aviation, Inc. and Lender H named therein (13)
11
Statement regarding computation of per share earnings  -- included in the Notes to the Consolidated Financial Statements filed with this report
14.1
Groen Brothers Aviation Corporate Values (14)
14.2
Standards of Conduct (14)
21
Subsidiaries of the registrant - included in the Notes to the Consolidated Financial Statements filed with this report
23.1
Consent of Independent Registered Accounting Firm*
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*
101 INS
XBRL Instance Document**
101 SCH
XBRL Schema Document**
101 CAL
XBRL Calculation Linkbase Document**
101 LAB
XBRL Labels Linkbase Document**
101 PRE
XBRL Presentation Linkbase Document**
101 DEF
XBRL Definition Linkbase Document**
 
* Exhibits filed with this report.
**The XBRL related information in Exhibit 101 shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability of that section and shall not be incorporated by reference into any filing or other document pursuant to the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such filing or document.
(1) Exhibit filed with the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2011 and incorporated herein by reference.
(2) Exhibits filed with the Company’s Current Report on Form 8-K filed September 28, 2011 and incorporated herein by reference.
(3) Exhibits filed with the Company’s Current Report on Form 8-K filed October 11, 2011 and incorporated herein by reference.
(4) Exhibits filed with the Company’s Current Report on Form 8-K filed November 8, 2011 and incorporated herein by reference.
 
 
48

 
 
(5) Exhibits filed with the Company’s Current Report on Form 8-K filed December 20, 2011 and incorporated herein by reference.
(6) Exhibits filed with the Company’s Current Report on Form 8-K filed January 25, 2012 and incorporated herein by reference.
(7) Exhibits filed with the Company’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2011 and incorporated herein by reference.
(8) Exhibits filed with the Company’s Current Report on Form 8-K filed April 19, 2012 and incorporated herein by reference.
(9) Exhibits filed with the Company’s Annual Report on Form 10-KSB for the year ended June 30, 2005 and incorporated herein by reference.
(10) Exhibits filed with the Company’s registration statement on Form S-8 filed June 10, 2005 and incorporated herein by reference.
(11) Exhibits filed with the Company’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2008 and incorporated herein by reference.
(12) Exhibits filed with the Company’s Annual Report on Form 10-K for the year ended June 30, 2011 and incorporated herein by reference.
(13) Exhibits filed with the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2012 and incorporated herein by reference.
(14) Exhibits filed with the Company’s Annual Report on Form 10-KSB for the year ended June 30, 2004 and incorporated herein by reference.

 
49

 


SIGNATURES


Pursuant to the requirements of Section 13 or 15 (d) 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:  October 15, 2012
   

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signatures
Title
Date
/s/ David Groen
Director
October 15, 2012
David Groen
   
     
/s/ Robert Wilson
Director
October 15, 2012
Robert Wilson
   

 
50

 

GROEN BROTHERS AVIATION, INC.
Index to Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm
F-2
   
Consolidated Balance Sheets
F-3
   
Consolidated Statements of Operations
F-4
   
Consolidated Statements of Stockholders’ Deficit
F-5
   
Consolidated Statements of Cash Flows
F-6
   
Notes to Consolidated Financial Statements
F-7
 
 
F-1

 

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders
Groen Brothers Aviation, Inc.
Salt Lake City, Utah

We have audited the accompanying consolidated balance sheets of Groen Brothers Aviation, Inc. as of June 30, 2012 and 2011, and the related consolidated statements of operations, stockholders' deficit, and cash flows for the years then ended.  These financial statements are the responsibility of the Company's management.  Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting.  Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.  Accordingly, we express no such opinion.  An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Groen Brothers Aviation, Inc. as of June 30, 2012 and 2011, and the results of their operations and their cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern.  As discussed in Note 2 to the financial statements, the Company’s operating losses and lack of working capital raise substantial doubt about its ability to continue as a going concern.  Management's plans in regard to these matters are also described in Note 2.  The financial statements do not include any adjustments that might result from the outcome of this uncertainty.




HJ & Associates, LLC
Salt Lake City, Utah
October 15, 2012
 
 
F-2

 


GROEN BROTHERS AVIATION, INC.
Consolidated Balance Sheets

Assets
 
June 30,
 
   
2012
   
2011
 
Current assets:
           
   Cash
  $ 2,000     $ 204,000  
   Accounts and notes receivable, net of allowance of $7,000
    2,000       1,000  
   Prepaid expenses
    13,000       109,000  
      Total current assets
    17,000       314,000  
                 
Property and equipment, net
    31,000       43,000  
                 
      Total assets
  $ 48,000     $ 357,000  
                 
Liabilities and Stockholders’ Deficit
               
                 
Current liabilities:
               
   Accounts payable
  $ 1,893,000     $ 2,265,000  
   Bank overdraft
    35,000       -  
   Accrued expenses
    28,271,000       22,276,000  
   Notes payable and current portion of capital lease obligations
    1,348,000       1,406,000  
   Related party notes payable
    99,066,000       84,687,000  
   Series B 15% cumulative redeemable non-voting preferred stock, no par value, 50,000,000 shares authorized, 51,822 and 46,660 shares issued and outstanding, respectively
      51,822,000         46,660,000  
      Total current liabilities
    182,435,000       157,294,000  
                 
Long-term liabilities:
               
   Accrued expenses
    6,721,000       6,339,000  
   Deferred revenue
    25,000       25,000  
   Long-term debt and capital lease obligations
    8,000       11,000  
   Related party long-term debt
    -       112,000  
   Dealer deposits
    2,105,000       2,105,000  
      Total liabilities
    191,294,000       165,886,000  
                 
Stockholders’ deficit:
               
   Series A convertible preferred stock, no par value, 50,000,000 shares authorized, 1,400,000 shares issued and outstanding
    70,000       70,000  
   Common stock, no par value, 500,000,000 shares authorized, 171,416,289 shares issued and outstanding
    35,097,000       35,005,000  
   Accumulated deficit
    (226,413,000 )     (200,604,000 )
      Total stockholders’ deficit
    (191,246,000 )     (165,529,000 )
                 
   Total liabilities and stockholders’ deficit
  $ 48,000     $ 357,000  
   
See accompanying notes to consolidated financial statements
 
 
F-3

 
 
GROEN BROTHERS AVIATION, INC.
 
Consolidated Statements of Operations
 
   
   
Years Ended June 30,
 
   
2012
   
2011
 
 
Revenues
  $ 12,000     $ 4,000  
                 
Costs and expenses:
               
   Cost of sales
    7,000       10,000  
   Research and development expenses
    1,541,000       1,622,000  
   General and administrative expenses
    2,013,000       2,399,000  
                 
   Total costs and expenses
    3,561,000       4,031,000  
                 
   Loss from operations
    (3,549,000 )     (4,027,000 )
                 
Other income (expense):
               
   Related party interest income
    3,000       2,000  
   Gain on sale of property and equipment
    -       62,000  
   Gain on extinguishment of debt
    569,000       87,000  
   Interest expense
    (15,670,000 )     (13,043,000 )
   Series B preferred stock interest expense
    (7,162,000 )     (6,389,000 )
                 
   Total other income (expense)
    (22,260,000 )     (19,281,000 )
                 
Loss before income taxes
    (25,809,000 )     (23,308,000 )
                 
Income tax benefit
    -       -  
                 
Net loss
  $ (25,809,000 )   $ (23,308,000 )
                 
                 
Net loss per share – basic and diluted
  $ (0.16 )   $ (0.14 )
                 
Weighted average number of common shares
               
   outstanding – basic and diluted
    166,066,000       166,066,000  
           
 See accompanying notes to consolidated financial statements
 
 
F-4

 
 
GROEN BROTHERS AVIATION, INC.
Consolidated Statements of Stockholders' Deficit
Years Ended June 30, 2012 and 2011
 
 
   
Series A Convertible
                   
   
Preferred Stock
   
Common Stock
   
Accumulated
       
   
Shares
   
Amount
   
Shares
   
Amount
   
Deficit
   
Total
 
                                     
Balance forward, June 30, 2010
    1,400,000     $ 70,000       171,416,289     $ 34,877,000     $ (177,296,000 )   $ (142,349,000 )
 
Issuance of stock options for:
   Interest expense
    -       -       -       2,000       -       2,000  
   Services
    -       -       -       8,000       -       8,000  
Stock-based compensation
    -       -       -       118,000       -       118,000  
Net loss
    -       -       -       -       (23,308,000 )     (23,308,000 )
 
Balance, June 30, 2011
    1,400,000       70,000       171,416,289       35,005,000       (200,604,000 )     (165,529,000 )
 
Issuance of stock options for
   interest expense
    -       -       -       13,000       -       13,000  
Stock-based compensation
    -       -       -       80,000       -       80,000  
Finders’ compensation
    -       -       -       (1,000 )     -       (1,000 )
Net loss
    -       -       -       -       (25,809,000 )     (25,809,000 )
                                                 
Balance, June 30, 2012
    1,400,000     $ 70,000       171,416,289     $ 35,097,000     $ (226,413,000 )   $ (191,246,000 )
                                                 
See accompanying notes to consolidated financial statements

 
F-5

 

GROEN BROTHERS AVIATION, INC.
 
Consolidated Statements of Cash Flows
 
   
Years Ended June 30,
 
   
2012
   
2011
 
Cash flows from operating activities:
           
   Net loss
  $ (25,809,000 )   $ (23,308,000 )
   Adjustments to reconcile net loss to net cash used in operating activities:
               
      Depreciation and amortization expense
    15,000       22,000  
      Stock-based compensation
    80,000       118,000  
      Stock options and warrants issued for interest expense
    13,000       2,000  
      Stock options and warrants issued for services
    -       8,000  
      Interest expense accrued on Series B Preferred Stock
    7,162,000       6,389,000  
      Interest expense added to debt principal
    9,249,000       7,583,000  
      Gain on disposal of property and equipment
    -       (62,000 )
      Gain on extinguishment of debt
    (569,000 )     (77,000 )
      (Increase) decrease in:
               
         Accounts and notes receivable
    (1,000 )     -  
         Prepaid expenses
    96,000       (34,000 )
      Increase (decrease) in:
               
         Accounts payable
    70,000       (75,000 )
         Accrued expenses
    6,735,000       5,679,000  
 
   Net cash used in operating activities
    (2,959,000 )     (3,755,000 )
                 
Cash flows from investing activities:
               
   Proceeds from the disposal of property and equipment
    -       62,000  
   Purchase of property and equipment
    (3,000 )     (17,000 )
 
   Net cash provided by (used in) investing activities
    (3,000 )     45,000  
                 
Cash flows from financing activities:
               
   Proceeds from the issuance of debt and capital lease obligations
    4,735,000       3,555,000  
   Repayment of debt and capital lease obligations
    (10,000 )     (69,000 )
   Increase in bank overdraft
    35,000       -  
   Partial redemption of Series B Preferred Stock
    (2,000,000 )     -  
 
   Net cash provided by financing activities
    2,760,000       3,486,000  
                 
Net decrease in cash
    (202,000 )     (224,000 )
Cash, beginning of year
    204,000       428,000  
 
Cash, end of year
  $ 2,000     $ 204,000  
           
 See accompanying notes to consolidated financial statements

 
F-6

 

GROEN BROTHERS AVIATION, INC.
Notes to Consolidated Financial Statements
 
Note 1:  Organization and Summary of Significant Accounting Policies

Organization and Principles of Consolidation – The consolidated financial statements include the accounts of Groen Brothers Aviation, Inc. and its wholly-owned subsidiaries, Groen Brothers Aviation USA, Inc. (“GBA USA”), Groen Brothers Aviation International, LLC (“GBA LLC”), a wholly owned special purpose subsidiary formed to participate in a proposed joint venture, and Groen Brothers Aviation Global, Inc. (‘GBA Global”), formed in June 2012 to facilitate a restructure of operations, (collectively, the “Company”).  All significant inter-company balances and transactions have been eliminated.  The primary business purpose of the Company is to develop, manufacture and market the gyroplane, which activities are considered one business segment.

Concentration of Credit Risk – The Company maintains its cash in bank deposit accounts which, at times, may exceed federally insured limits.  The Company has not experienced any losses in such accounts.  The Company believes it is not exposed to any significant credit risk on cash and cash equivalents.

Cash and Cash Equivalents – For purposes of the consolidated statements of cash flows, the Company considers all cash and investments with original maturities to the Company of three months or less to be cash equivalents.  The Company had no cash equivalents at June 30, 2012 and 2011.

Accounts Receivable – Trade accounts receivable are carried at original invoice amount less an estimate made for doubtful accounts.  Management of the Company determines the allowance for doubtful accounts by identifying potential troubled accounts and by using historical experience and future expectations applied to an aging of accounts.  Trade accounts receivable are written off when deemed uncollectible.  Recoveries of trade accounts receivable previously written off are recorded as income when received.  Management determined that an allowance for doubtful accounts of $7,000 was required at June 30, 2012 and 2011.

Inventories – Raw materials and parts inventories are stated at the lower of cost or market, with cost determined using primarily the first-in-first-out (FIFO) method.  Work-in-process inventories are stated at the lower of cost or market, with cost determined on estimated average unit costs.  The cost of parts inventories manufactured by the Company and work-in-process inventories include an allocation of overhead costs comprised of labor, operating supplies, utilities, depreciation, rent and other facility costs.  The Company had no inventories at June 30, 2012 and 2011.

Contract-related expenses incurred on by the Company on its long-term government and commercial contracts and subcontracts, including its own labor, travel, supplies and other costs, and the costs of subcontractors and consultants, are generally deferred as work-in-process inventories and expensed to cost of sales as the contract revenue for each milestone of a particular contract is recognized.  When a loss on a contract is projected, however, all contract-related costs and expenses are expensed as incurred.  At June 30, 2012 and 2011, the Company had no work-in-process inventories related to long-term contracts or subcontracts.

 
F-7

 

GROEN BROTHERS AVIATION, INC.
Notes to Consolidated Financial Statements
(Continued)


Property and Equipment – Property and equipment are carried at cost, less accumulated depreciation and amortization.  Depreciation and amortization are computed using accelerated and straight-line methods based on the estimated useful lives of the assets or term of the lease.  Depreciation and amortization expense was $15,000 and $22,000 for the years ended June 30, 2012 and 2011, respectively.  When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed and any resulting gain or loss is recognized in operations for the period.  The cost of maintenance and repairs is charged to operations as incurred.  Significant renewals and betterments are capitalized.

Impairment of Long-Lived Assets – The Company periodically reviews its long-lived assets for impairment when events or changes in circumstances indicate that the carrying value of an asset may not be recoverable.  The Company evaluates, 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.

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’s intention is to obtain the funding to complete the certification of its newly designed ArrowHawk gyroplane, preliminarily named the Hawk 6.  The ArrowHawk enlarges and extends the market potential of the Hawk 4, and replaces it in the Company’s plans.  The Company intends to convert the Hawk 4 dealer deposits to ArrowHawk dealer deposits.  Once such funding is obtained, the Company estimates the certification process of the ArrowHawk will require at least 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.

Research and Development Costs – Research and development costs are expensed as incurred in accordance with ASC Topic 730, Research and Development.  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.  Research and development expenses were $1,541,000 and $1,622,000 for the years ended June 30, 2012 and 2011, respectively.

Revenue Recognition – The Company recognizes 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 the Company has no significant obligations remaining.  Portions of the purchase price of the Company’s products collected from customers in advance of product delivery are recorded as deferred revenue.

 
F-8

 

GROEN BROTHERS AVIATION, INC.
Notes to Consolidated Financial Statements
(Continued)


The Company recognizes revenue on government contracts where it serves as the lead contractor as each defined milestone is completed and the requisite meetings are held and technical data submitted and accepted by the contracting party.  At that time, the Company submits an invoice for payment for the respective milestone at the amount specified in the contract.  Contract-related expenses incurred by the Company 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.

The Company recognizes 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 the Company 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.

Accounting Estimates – The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.

Stock-Based Compensation – The Company has adopted the fair value recognition provisions of Financial Accounting Standards Board (FASB) Accounting Standards Codification (“ASC”) Topic 718, Compensation – Stock Compensation, which requires the Company 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 Company recorded stock-based compensation expense of $80,000 and $118,000 for the years ended June 30, 2012 and 2011, respectively.  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.

Non-Employee Stock Options and Warrants – In accordance with ASC Topic 505-50, Equity-Based Payments to Non-Employees, the Company estimates 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, the Company 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 the Company’s 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 accordance with ASC Topic 480, Distinguishing Liabilities from Equity, the Company reports its Series B Preferred Stock as a liability.  This pronouncement 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).

 
F-9

 

GROEN BROTHERS AVIATION, INC.
Notes to Consolidated Financial Statements
(Continued)


Income Taxes – The Company accounts 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.

Loss per Common and Common Equivalent Share – The computation of basic loss per common share is computed using the weighted average number of common shares outstanding during each year.

The computation of diluted loss per common share is based on the weighted average number of shares outstanding during the period plus common stock equivalents which would arise primarily from the exercise of stock options and warrants outstanding using the treasury stock method and the average market price per share during the year.  Options and warrants to purchase 12,321,201 shares of common stock at exercise prices ranging from $0.08 to $0.25 and 21,841,201 shares of common stock at exercise prices ranging from $0.08 to $1.00 were outstanding at June 30, 2012 and 2011, respectively.  Certain notes payable, long-term debt and related accrued interest payable were convertible into a total of 92,217,414 and 85,049,681 shares of common stock at June 30, 2012 and 2011, respectively, with conversion prices ranging from $0.10 to $1.25.  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 June 30, 2012 and 2011, the Company had issued 5,350,000 shares of common stock as collateral.  It is anticipated that the shares will be cancelled when the related debt is transferred upon completion of the Restructure.
 
Comprehensive Loss – Comprehensive loss is the same as net loss.

Reclassifications – Certain amounts in the consolidated financial statements for fiscal year 2011 have been reclassified to conform to the current year presentation.
 
Note 2:  Restructure 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 the lack of significant operating revenues, recurring operating losses, negative cash flows from operations, the excess of current liabilities over current assets, significant past due obligations, and the stockholders’ deficit, there is substantial doubt about the Company’s ability to continue as a going concern.  The Company is restructuring its business plan and business operations pursuant to an Exchange Agreement (the “Exchange Agreement”) dated as of September 7, 2012, which if concluded successfully, will result in the sale and transfer to a separate entity of substantially all of the Company’s assets and operations and extinguishment of substantially all of the Company’s liabilities.

 
F-10

 

GROEN BROTHERS AVIATION, INC.
Notes to Consolidated Financial Statements
(Continued)


At June 30, 2012, the Company had total current liabilities of $182,435,000 and current assets of $17,000, resulting in a working capital deficiency of $182,418,000.  At June 30, 2012, the Company had a total stockholders’ deficit of $191,246,000.

The Company has no reliable source of revenue that could support even the modest initiatives to further develop its gyroplane technology.  Furthermore, the Company’s assets are essentially all in its technology and cannot be reflected on its consolidated balance sheet as an offset to the extensive debt incurred.  In that context, it is not feasible to raise funds through stock sales or from conventional debt sources.  Continuation of the Company’s operations has only been possible through the support of its major creditor.  These loans have been secured by the pledge of substantially all of the Company’s assets: its patents, intellectual property, and limited hard assets.  This essential funding has extended to over a four year period.

The Company started the past fiscal year with operational expenses of approximately $300,000 per month, with no income from operations.  Despite the continued support from key creditors, the Company has been unable to attract any equity capital since 2008.  As the national and worldwide financial equity markets continue to constrict, with only slight improvement in recent months, the Company has been forced to face the prospects of filing for Chapter 11 reorganization, or even Chapter 7 liquidation.

Following months of in depth negotiations with essentially all its creditors, most of whom are significant equity holders as well, the Company reached an agreement with those creditors for the Company to proceed toward the accomplishment of a financial restructuring without having to seek protection through a bankruptcy filing.  In the event that the Company was to be forced into Chapter 11 reorganization, only the secured creditors would have had any equity or other interest in the Company because the bankruptcy process would have eliminated all shareholders and all non-secured creditors.  Management also believes that Groen Brothers Aviation’s name and reputation world-wide would be harmed as well.  The Restructure that has been negotiated with all the secured creditors pursuant to the Exchange Agreement keeps intact all shareholders and treats all creditors converting their debt to equity pari passu to the percent of debt they hold, whether or not secured.

The Restructure will result in the elimination of substantially all of GBA’s debt obligations, which exceeded $191 million at June 30, 2012, through the exchange of all but approximately $11 million of such debt for stock in GBA Global, a new private entity formed by GBA.  In return, GBA will transfer substantially all its assets, notably all of its technologies, knowhow, and associated patents, into GBA Global in exchange for this relief of debt and receipt of some continued ownership of GBA.

The transfer of these assets requires approval through a vote of the Company’s shareholders holding a majority of the voting shares. The Company had received from holders of a significant majority of voting shares, a contractual commitment to vote in favor of this plan and now as of the date of this filing, has indeed received consent from these holders of a majority of the Company's voting shares.  Because of continued accrual of interest by all interest-bearing debt and of continued funding, the precise breakdown of the ownership of GBA Global will not be established until the date of closing.  However, based upon the accrued value of these obligations as of September 14, 2012, it is anticipated that debt holders and the holders of the Company’s Series B Preferred Stock will own approximately 87% of GBA Global, Management combined will hold 9%, and GBA will hold 4% of GBA Global. It is anticipated that GBA Global will also form subsidiaries where GBA developed technologies will be utilized and significant additional funding will be raised in those subsidiaries to complete the commercialization of GBA Global’s Civil and Military technologies, both manned and unmanned.  However, there can be no assurance such activities will be successful.

 
F-11

 

GROEN BROTHERS AVIATION, INC.
Notes to Consolidated Financial Statements
(Continued)


The activities that heretofore have been undertaken by GBA and its operating subsidiary, GBA USA, will be carried forward by the operations and development of GBA Global.  So that the “good-will-value” of the Groen name within the aerospace industry may be retained, the Groen Brothers Aviation name will be kept by it doing business as “Groen Brothers Aviation Global, Inc.”  GBA will continue to be a “holding company,” but its total assets will become a minority interest in GBA Global.  Certain debt approximating $11 million will be retained by GBA.

Following the Restructure, GBA Global’s standing in the industry is expected to be stronger than that which GBA could achieve. This should create opportunities for GBA Global to exploit GBA’s gyroplane technology which otherwise likely would have been closed to GBA. The Restructure allows GBA to move into the future, too, although on a smaller scale.  Consequently, in the opinion of management, the Restructure represents the best plan available to GBA that has the opportunity to preserve shareholder and creditor value.

The Company’s continuation as a going concern is dependent on the approval and successful completion of the Restructure.  However, as of the date of filing this Annual Report the Company had not closed the Exchange Agreement and there can be no guarantee or assurance that the Company will be successful in these efforts.  The condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.


Note 3:  Detail of Certain Balance Sheet Accounts

Property and equipment consists of the following at June 30:

   
2012
   
2011
 
             
Equipment and tools
  $ 54,000     $ 54,000  
Computer equipment and software
    267,000       263,000  
Aircraft
    66,000       66,000  
Vehicles
    71,000       71,000  
Leasehold improvements
    -       -  
Furniture
    -       -  
                 
      458,000       454,000  
Accumulated depreciation and amortization
    (427,000 )     (411,000 )
                 
    $ 31,000     $ 43,000  
 
 
F-12

 

GROEN BROTHERS AVIATION, INC.
Notes to Consolidated Financial Statements
(Continued)



Substantially all of the property and equipment has been pledged as collateral for debt and is scheduled to be transferred to GBA Global in the Restructure.

Accounts payable consist of the following at June 30:

   
2012
   
2011
 
             
Trade accounts payable
  $ 1,655,000     $ 2,050,000  
Related party payables
    238,000       215,000  
                 
    $ 1,893,000     $ 2,265,000  

Dealer deposits consist of the following at June 30:

   
2012
   
2011
 
             
Related party dealer deposits
  $ 1,701,000     $ 1,701,000  
Dealer deposits
    404,000       404,000  
                 
    $ 2,105,000     $ 2,105,000  

Pursuant to the Exchange Agreement, the dealer deposits obligation will be retained by the Company.

Related parties consist of officers, directors, employees and shareholders.
 
Note 4:  Accrued Expenses:

Accrued expenses reported as current liabilities consist of the following at June 30:

   
2012
   
2011
 
             
Compensation and related taxes
  $ 576,000     $ 590,000  
Related party interest
    26,372,000       20,456,000  
Interest
    978,000       907,000  
SparrowHawk customer deposits
    214,000       214,000  
Consulting fees
    30,000       9,000  
Finders’ compensation
    10,000       9,000  
Royalties to related parties
    32,000       32,000  
Other
    59,000       59,000  
 
Total
  $ 28,271,000     $ 22,276,000  
 
 
F-13

 

GROEN BROTHERS AVIATION, INC.
Notes to Consolidated Financial Statements
(Continued)


Accrued related party interest payable is comprised of interest expense payable on notes payable to related parties, consisting primarily of stockholders of the Company.  Substantially all related party and other accrued interest payable is scheduled to be transferred to GBA Global in the Restructure.