FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1998
Commission file number 018958
GROEN BROTHERS AVIATION, INC.
(Exact name of registrant as specified in its charter)
Utah 87-0376766
State of other jurisdiction of I.R.S. Employer
Incorporation or organization Identification No.
2640 W. California Ave., Suite A
Salt Lake City, Utah 84104
Address of principal executive offices Zip Code
Registrant's telephone number, including area code (801) 973-0177
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Outstanding at
Class December 31, 1998
- ------------------------- -------------------
Common Stock, $.005 par value 51,879,651
Page 1 of 12 consecutively numbered pages.
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TABLE OF CONTENTS
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheet,
December 31, 1998 (unaudited) and June 30, 1998 . . . . . . 3
Condensed Consolidated statement of operations for the six
months ended December 31, 1998 and 1997 (unaudited) . . . . 4
Condensed Consolidated statement of cash flows for the six
months ended December 31, 1998 and 1997 (unaudited) . . . . 5
Notes to condensed consolidated financial statements . . . . 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. . . . . . . . . . . . . . . . . . 8
2
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<CAPTION>
GROEN BROTHERS AVIATION, INC., AND SUBSIDIARY
(A Development Stage Company)
Condensed Consolidated Balance Sheet
December 31, 1998 and June 30, 1998
- ----------------------------------------------------------------------------------------------------------
December 31, June 30,
1998 1998
-----------------------------------
(Unaudited)
Assets
Current assets:
<S> <C> <C>
Cash $ 284,211 $ 240,150
Note receivables 24,495 812
Prepaid expense 159,947 109,947
-----------------------------------
Current assets 468,653 350,909
Investment art held for sale 794,150 -
Machinery and equipment less accumulated
depreciation of $436,263 and $364,615 893,995 459,469
-----------------------------------
$ 2,156,798 $ 810,378
-----------------------------------
- ----------------------------------------------------------------------------------------------------------
Liabilities and Stockholders'
Current liabilities:
Accounts payable $ 49,171 $ 140,516
Accrued liabilities 1,097,255 1,030,527
Note payable 100,000 150,000
Current portion of related party note payable 198,382 198,137
Current portion of long-term debt 321,454 411,351
-----------------------------------
Total current liabilities 1,766,262 1,930,531
-----------------------------------
Long-term debt 45,851 45,851
Long-term portion of related party note payable 9,463 9,463
-----------------------------------
Total liabilities 1,821,576 1,985,845
-----------------------------------
Stockholders' equity (deficit):
Common stock, par value $.005 per share;
authorized 100,000,000 shares, issued and
outstanding 51,879,651 shares and 43,561,249
shares, respectively 259,399 217,807
Additional paid-in capital 11,409,337 7,657,141
Retained deficit (11,333,514) (9,050,415)
-----------------------------------
Total stockholders' equity (deficit) 335,222 (1,175,467)
-----------------------------------
Total liabilities and stockholders' equity $ 2,156,798 $ 810,378
-----------------------------------
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3
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<CAPTION>
GROEN BROTHERS AVIATION, INC., AND SUBSIDIARY
(A Development Stage Company)
Condensed Consolidated Statement of Operations (Unaudited)
- ----------------------------------------------------------------------------------------------------------
Cumulative
Amounts
Since
Three Months Ended Six Months Ended Develop-
December 31, December 31, ment
------------------------------------------------------------
1998 1997 1998 1997 Stage
---------------------------------------------------------------------------
Revenue -
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Interest and other $ 2,861 $ 5,401 $ 3,436 $ 5,462 $ 38,937
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Total revenue 2,861 5,401 3,436 5,462 38,937
---------------------------------------------------------------------------
Expenses:
Research and
development expense 763,395 409,310 1,437,628 574,251 4,649,453
General and
administrative expenses 369,520 319,402 816,627 702,208 4,375,653
Interest expense 23,324 6,236 32,280 10,961 479,790
---------------------------------------------------------------------------
Total expenses 1,156,239 734,948 2,286,535 1,287,420 9,504,896
---------------------------------------------------------------------------
Net loss $ (1,153,378)$ (729,547)$ (2,283,099)$ (1,281,958)$ (9,465,959)
---------------------------------------------------------------------------
Loss per share,
basic and fully diluted $ (.02)$ (.02)$ (.05)$ (.03)$ (.25)
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Weighted average shares
outstanding 49,411,281 42,449,000 47,334,647 42,263,000 37,245,061
---------------------------------------------------------------------------
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GROEN BROTHERS AVIATION, INC., AND SUBSIDIARY
(A Development Stage Company)
Condensed Consolidated Statement of Cash Flows (Unaudited)
- ----------------------------------------------------------------------------------------------------------
Cumulative
Amounts
Six Months Ended Since
December 31, Development
-----------------------------------
1998 1997 Stage
----------------------------------------------------
Cash flows from operating activities:
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Net loss $ (2,283,099)$ (1,281,957)$ (9,465,959)
Adjustments to reconcile net (loss) to
net cash used in operating activities:
Depreciation and amortization 71,647 91,147 378,905
Stock issued for services 427,733 91,828 1,130,609
Stock options issued below market - 3,875 10,000
Loss on disposal of assets - - 25,713
(Increase) decrease in:
Accounts receivable - - (812)
Prepaid expense - (109,948)
Increase (decrease) in:
Accounts payable (91,345) 19,870 (8,354)
Accrued liabilities 66,728 30,816 909,572
----------------------------------------------------
Net cash used in
operating activities (1,808,336) (1,044,421) (7,130,274)
----------------------------------------------------
Cash flows from investing activities:
Purchase of property and equipment (506,173) (172,638) (741,089)
Sale of property and equipment - 2,200,030
Increase in note receivable (23,683) (29,933)
Collections on notes receivable and
advances - 1,100,000 6,250
Proceeds from art sale 1,850 - 1,850
----------------------------------------------------
Net cash provided by (used in)
investing activities (528,006) 927,362 1,437,108
----------------------------------------------------
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<CAPTION>
GROEN BROTHERS AVIATION, INC., AND SUBSIDIARY
(A Development Stage Company)
Condensed Consolidated Statement of Cash Flows (Unaudited)
Continued
- ----------------------------------------------------------------------------------------------------------
Cumulative
Amounts
Six Months Ended Since
December 31, Development
-----------------------------------
1998 1997 Stage
----------------------------------------------------
Cash flows from financing activities:
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Change in line of credit (50,000) 25,000 (50,000)
Proceeds from long-term debt - - 282,000
Proceeds from related party debt - - 488,894
Reduction of capitalized lease obligation (89,652) (99,578) (361,291)
Reduction of long-term debt - - (70,728)
Reduction of related party debt - (3,228) (116,690)
Proceeds from issuance of common stock 2,520,055 379,563 5,799,229
----------------------------------------------------
Net cash provided by
financing activities 2,380,403 301,757 5,971,414
----------------------------------------------------
Net increase in cash 44,061 184,698 278,248
Cash, beginning of period 240,150 211,818 5,963
----------------------------------------------------
Cash, end of period $ 284,211 $ 396,516 $ 284,211
----------------------------------------------------
Supplemental schedule of cash flow information:
Cash paid during the period for:
Interest $ 8,956 $ 10,960 $ 111,081
----------------------------------------------------
Taxes $ 200 $ 100 $ 700
----------------------------------------------------
Schedule of non-cash activities:
During the six months ended December 31, 1998:
o The Company issued 2,025,833 shares of its restricted common
stock to purchase investment art valued at $846,000.
o The Company prepaid $50,000 in advertising expenses in exchange for art work.
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GROEN BROTHERS AVIATION, INC., AND SUBSIDIARY
(A Development Stage Company)
Notes to Condensed Consolidated Financial Statements
- --------------------------------------------------------------------------------
(1) The unaudited condensed consolidated financial statements include the
accounts of Groen Brothers Aviation, Inc. and subsidiary and include
all adjustments (consisting of normal recurring items) which are, in
the opinion of management, necessary to present fairly the financial
position as of December 31, 1998 and the results of operations for the
six months and three months ended December 31, 1998 and 1997 and cash
flows for the six months ended December 31, 1998 and 1997. The results
of operations and cash flows for the six months and three months ended
December 31, 1998 and 1997 are not necessarily indicative of the
results to be expected for the entire year.
(2) Loss per share is based on the weighted average number of shares
outstanding at December 31, 1998 and 1997, respectively.
- --------------------------------------------------------------------------------
7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
The following is management's discussion and analysis of certain
significant factors which have affected the Company's financial position and
operating results during the period reported in the accompanying condensed
consolidated financial statements. The "Company" refers to the Registrant, and
its wholly-owned subsidiary, Sego Tool, Inc. (Sego). Unless otherwise stated,
the financial activities described herein are those of Sego, which was the sole
operating entity during the reporting period.
During the current fiscal year, the Company began the production of the
four- seat Hawk 4 gyroplane. The Company upgraded the formerly planned Hawk III
(three seat) to the Hawk 4, based upon engineering decisions. The first four
units produced will be used as demonstrators and for FAA certification testing.
The Company has been in the process of FAA Type Certification of the Hawk 4 for
the past year, a process which the Company plans to complete in another eighteen
months. The six-seat Hawk 6, presently on the drawing boards, will be a stretch
version of the Hawk 4 that employs a turboprop powerplant. The Hawk 6, for
certification purposes, will be registered with the FAA as a variant of the Hawk
4, thus shortening the time necessary for the Hawk 6 certification process.
According to the production plan, extensive use is being made of
aviation suppliers to provide parts produced to the Company's unique
specifications. Assembly of the Hawk 4 in the Company's facility is being done
on production tooling that is being verified for conformity by the FAA. It is
estimated that the Company's present facility will be capable of producing one
gyroplane per working day by the time it receives its Production Certificate
from the FAA.
Prior to achieving FAA Type Certification, the Company hopes to sell
some of its Hawk 4s to buyers which do not require FAA Certification, such as
civil government, military, and developing countries. In recent months, the
Company has received widespread interest from state and local airborne law
enforcement organizations. In addition, the Company is presently establishing
government and commercial relationships in Abu Dhabi, China, Jordan, Portugal,
Saudi Arabia and Taiwan.
Eventually, the bulk of export sales are expected to be in the form of
subassemblies, which will receive final assembly in the country or market of
export. The Company plans to set up "turnkey" assembly operations in those
countries which order a minimum number of gyroplanes, yet to be determined. The
Company has signed a contract with a private company in China, the Shanghai
Energy and Chemical Corporation, for the sale of 200 Hawk 4 and 6 gyroplanes.
These deliveries are contingent upon the Hawk certification by Chinese civil
aviation authorities (CAAC). The Company will be working concurrently with both
the FAA
8
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and the CAAC to achieve type-certification in both the US and China.
Results of Operations
Revenues remained insignificant during the three month period ended
December 31, 1998 compared to the same period in 1997. During the three months
ended December 31, 1998, general and administrative expenses increased to
$369,520 from $319,402 for the similar period ended 1997. The increase was small
compared to a much larger increase in R&D expenses which increased to $763,395
from $409,310 for the three months under comparison. The Company continued to
hire additional engineers, draftsmen, and outside consultants to accelerate the
Hawk 4 program. The resulting losses increased to ($1,153,378) from ($729,547)
for the quarters under comparison.
Revenues remained insignificant during the six month period ended
December 31, 1998 compared to the same period in 1997. During the six months
ended December 31, 1998, general and administrative expenses amounted to
$816,627 an increase from $702,208, while R&D costs increased to $1,437,628 from
$574,251 for the similar period ended 1997. The increase mostly reflects
increased personnel costs and engineering costs associated with the accelerated
Hawk 4 program. The resulting losses increased to ($2,283,099) from ($1,281,958)
for the six month periods under comparison.
Liquidity and Capital Resources
The Company's management expect that the long-term needs for capital
will be met with equity/debt financing based upon sale of equity, debt
instruments, and grant money, gradually to be replaced by retained earnings.
Short term financing will continue to come from the sale of restricted stock to
accredited investors.
The Company is presently applying for grants and loans from government
entities, domestic and foreign, and is negotiating with private investors for
equity financing to meet its business plan needs. Current working capital
requirements are being obtained through the sale of the Company's restricted
stock and from loans. During the six months ended December 31, 1998 the Company
had received $2,520,055 from the private sale of stock to accredited investors.
Year 2000
The Company's computer system and software are warranted by the vendor
to be Y2K compliant. There does not appear to be any material internal issues at
this time.
9
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The Company has communicated with its primary vendors and has
determined that all are either Y2K compliant, or are making significant progress
toward Y2K compliance. In those cases where a vendor does not claim that they
are Y2K compliant, the Company is seeking sufficient alternatives to obtain
necessary products and services.
The financial institutions with which the Company has its material
relationships have represented to the Company that they are Y2K compliant.
Forward Outlook and Risks
The Company, from time to time, may publish forward-looking statements
relating to such matters as anticipated financial performance, business
prospects, technological development, new products, research and development
activities and similar matters. The Private Securities Litigation Reform Act of
1995 provides a safe harbor for forward-looking statements. In order to comply
with the terms of the safe harbor, the Company notes that a variety of factors
could cause the Company's actual results and experience to differ materially
from the anticipated results or other expectations expressed in any of the
Company's forward-looking statements. The risks and uncertainties that may
affect the operations, performance, development and results of the Company's
business include, but are not limited to, the following: (a) the failure to
obtain additional borrowed and/or equity capital on favorable terms for
acquisitions and expansion; (b) adverse changes in federal and state laws, or
other matters affecting the Company's business; (c) the demand for the Company's
products and services; and (d) other risks detailed in the Company's Securities
and Exchange Commission filings.
This Form 10-QSB contains and incorporates by reference certain
"forward- looking statements" within the meaning of Section 27A of the
Securities Act and Section 21E of the Exchange Act with respect to results of
operations and businesses of the Company. All statements, other than statements
of historical facts, included in this Form 10-QSB, including those regarding
market trends, the Company's 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,
"intended, will, should, may, expect, anticipate, estimates, projects" or the
negative thereof or variations thereon or similar terminology.
Forward-looking statements are based on the Company's current
expectations. Although the Company believes 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, the Company's actual results could differ
materially.
10
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Important factors that could cause actual results to differ materially from the
Company's expectations are disclosed hereunder and elsewhere in this Form 10-
QSB. These forward-looking statements represent the Company's judgement as of
the date of this Form 10-QSB. All subsequent written and oral forward-looking
statements attributable to the Company are expressly qualified in their entirety
by the Cautionary Statements. The Company disclaims, however, any intent or
obligation to update its forward-looking statements.
Part II - Other Information
Item 1 Legal Proceedings. None.
Item 2 Changes in the securities of the Company. None.
Item 3 Defaults upon senior securities. None.
Item 4 Matters submitted to a vote of security holders. None
Item 5 Other information. None.
Item 6 Exhibits and Reports on Form 8K. None
11
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: February 19, 1999 GROEN BROTHERS AVIATION, INC.
S/David L. Groen
By: _________________________
David L. Groen, President
12
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<LEGEND>
THIS SCHEDULE CONTAIN SUMMARY FINANCIAL INFORMATION EXTRACTED FROM GROEN BROTHES
AVIATION, INC. DECEMBER 31, 1998 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> DEC-30-1998
<CASH> 284,211
<SECURITIES> 0
<RECEIVABLES> 24,495
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 468,653
<PP&E> 1,330,258
<DEPRECIATION> 436,263
<TOTAL-ASSETS> 2,156,798
<CURRENT-LIABILITIES> 1,766,262
<BONDS> 55,314
0
0
<COMMON> 259,399
<OTHER-SE> 75,823
<TOTAL-LIABILITY-AND-EQUITY> 2,156,798
<SALES> 0
<TOTAL-REVENUES> 3,436
<CGS> 0
<TOTAL-COSTS> 1,276,459
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,961
<INCOME-PRETAX> (1,281,958)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,281,958)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,281,958)
<EPS-PRIMARY> (.03)
<EPS-DILUTED> (.03)
</TABLE>
