ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Corporate Events
Sale of Common Stock of Majority Stockholders
On March 14, 2018, Lawrence and Loreen Calarco, officers and directors of the Company, the Lawrence & Loreen Calarco Family Trust and the Lawrence and Loreen Calarco Trust of June 3, 2014, majority stockholders controlled by Lawrence and Loreen Calarco, sold 51,711,571 common shares and 1,562,500 preferred shares to MAAB Global Limited (“MAAB”), a non-affiliate of the Company, paid from Bruce Bent, officer and director of MAAB’s personal funds resulting in a change of control of the Company. The stock was transferred to MAAB effective March 14, 2018. The 51,711,571 common shares and 1,562,500 preferred shares represented 62.35% and 100% of the then issued and outstanding common and preferred stock of the Company, respectively.
Resignation of Directors and Election of Directors
On March 14, 2018, Lawrence Calarco, Loreen Calarco and Charles Dargan II resigned as officers and directors of the Company. Additionally, on March 14, 2018, Jeffrey Michel and Randy Sofferman resigned as directors of the Company.
On March 14, 2018, Bruce Bent, age 62, was appointed as Chief Executive Officer and Director of the Company. He will stand for re-election at the next annual meeting of the shareholders. There are no material arrangements to which Mr. Bent is a party, and there is no family relationship between him and any other party connected to the Company.
Sale of Custom Pool and Spa Mechanics, Inc. and Custom Pool Plastering, Inc.
On April 30, 2018, pursuant to a Share Exchange Agreement dated April 16, 2018, the Company exchanged all of the issued and outstanding common shares of Custom Pool & Spa Mechanics, Inc. and Custom Pool Plastering, its wholly owned subsidiaries, for 13,668,900 common shares of the Company held by the Lawrence & Loreen Calarco Family Trust, an entity controlled by Lawrence & Loreen Calarco, former officers and directors of the Company. The Board of Directors subsequently authorized the cancellation of those common shares. After said cancellation, the total issued and outstanding common shares was 69,270,060. The Share Exchange Agreement was approved by the Board of Directors and written consent of shareholders holding 62.35% of the voting securities of the Company as of April 16, 2018.
Authorization of the Series B Convertible Preferred Stock
On May 4, 2018, the Board of the Company authorized 10,000 shares of the Series B Convertible Preferred Stock, par value $0.001 per share. The Preferred is entitled to a dividend, when declared by the Board of Directors, votes with all other classes of stock as a single class of stock on all actions to be voted on by the stockholders of the Company, and each share of Preferred is convertible into 1,333 shares of common stock and a five-year warrant to purchase 1,333 shares of common stock at an exercise price of $0.75 per share.
Asset Purchase Agreement with Confida Aerospace Ltd.
On May 8, 2018, the Company entered into an Asset Purchase Agreement with Confida Aerospace Ltd. Pursuant to the Asset Purchase Agreement, the Company purchased in-process research and development (“IPRD”) consisting of inventory, hardware designs, software designs, and a trademark all pertaining to passenger drone design and use from Confida Aerospace Ltd. As consideration for the Asset Purchase Agreement, the Company issued Confida Aerospace Ltd., 10,000 of the registrant’s Series B preferred shares. Each preferred share is convertible into 1,333 common shares and 1,333 warrants. Each warrant is exercisable into one of the Company’s common shares at an exercise price of $.75. The warrants have an
exercise period of five years upon conversion. Additionally, the Company assumed $25,000 of debts incurred by Confida Aerospace Ltd. related to drone development.
Current Operations – Astro Aerospace, Ltd.
Astro Aerospace Ltd. (“Astro” or the “Company) has acquired the software, firmware and hardware for Version 1.0 of a manned drone which has executed multiple flights. It is Astro’s goal to transform how people and things get from place to place. This will be done by making safe, affordable user-friendly autonomous manned and unmanned Electrical Vertical Take-Off and Landing (eVTOL) aircraft available to the mass market anywhere. Astro is currently working on Version 2.0 of the drone product which will feature design changes which enhance the top speed and length of time the drone can stay in the air and also adding additional safety features. The target market will be government, private sector operators and individuals for a wide range of commercial, logistical and personal uses. Astro is currently in the flight testing mode of its Passenger Drone Version 1.0, as well as in the development stages of its version 2.0 Passenger Drone model.
The Company is working with Paterson Composites Inc., our design and manufacturing partner, who is leading the design and development team with responsibility for developing the team as well as building the new prototypes for the two new drone models. The Company applied for approval to test the Passenger Drone 1.0 version in Canada in order to display new software, avionics and stability. The Company received an SFOC (Special Flight Operations Certificate) from Transport Canada in September 2018, allowing Astro to take to the sky, and put the Passenger Drone 1.0 “Elroy” through critical elements of integrated flight testing. The testing culminated on Wednesday September 19, 2018 with a 4 minute and 30 second flight, reaching heights of over 60 feet and speeds of over 50 km/h. The avionics and flight control systems were put to task with a multitude of maneuvers and the vehicle remained exceptionally stable, even under the effects of a couple of unexpected wind gusts.
Astro's newest prototype focuses on a multitude of applications including passenger transport, cargo delivery, ambulance and med-evac services, rescue and disaster assistance, military, and B2B. It's newly designed modular structure allows the Astro Top Frame to fly independently, as well as in combination with the individually designed "Astro Pods" for the specific need in that specific industry. A fly-in and pick-up system will allow the vehicle to connect, fly, disconnect and repeat, effectively and efficiently, changing from one application to the next. We refer to it as the Swiss Army Knife of the VTOL world.
Along with recent Avionics and Control system upgrades this modularity opens the door to the ever growing opportunities that (eVTOLS) electric take-off and landing short haul vehicles bring.
Astro anticipates the new prototype to be completed and flying by the end of the third quarter, 2019. We are currently building the new prototype with the anticipation of filing an SFOC for initial testing during September 2019.
Overview – Discontinued Operation, Custom Pool
The Company’s discontinued operation, Custom Pool, historically was a full-service pool maintenance, resurfacing and repair company whose main service area is the Martin, Palm Beach, St. Lucie, Indian River and Brevard counties of Florida. The Company earned revenue by charging service fees in the pool service business and by payments under contracts in the pool resurfacing business. The Company managed its operating margins of the businesses by controlling personnel costs, chemical and material purchases and other service costs such as motor vehicle and insurance costs. Personnel were critical to the business since customers choose those companies who have the most experience and perform the service in a timely and professional manner.
Custom Pool competed in its markets on the basis of price and the quality of the service. There are many pool service companies in the market and throughout Florida. However, this also presented an opportunity for the Company since many of its competitors are smaller and lack the infrastructure and depth of the Company. This allowed the Company to compete through offering a larger range of services with a lower
cost structure and to pursue growth opportunities either through internal growth or through opportunistic acquisitions.
Plan of Operations
Management will expand the business through further investment of capital provided by the controlling shareholder and through additional capital raises from third party investors. The Company raised an additional $1.2 million of cash in November 2018 through the issuance of a Senior Secured Convertible Promissory Note in the principal amount of $1,383,636. The first tranche of $600,000 was received in November 2018 and the second tranche of $600,000 was received in February 2019. The Company will continue to keep expenses as low as possible with closely monitoring working capital, development cost and schedule, while the Company continues the development of Passenger Drone Version 1.0 and 2.0.
Results of Operations
The Three Months Ended March 31, 2019 compared to the Three Months Ended March 31, 2018
For the three months ended March 31, 2019, the Company did not have any revenue. It is developing an eVTOL aircraft and expects that it will be marketing the aircraft sometime in 2020. Astro did incur $261,129 in operating expenses, which the majority of the expenses was from $110,943 in sales and marketing and $111,419 in research and development . There was also $38,767 in general and administrative expenses. Other expenses were $435,494 and consisted mainly of banking and filing fees and interest expense. The Company expects to incur operating losses until the eVTOL aircraft is marketable and has passed government and safety regulations. Astro’s continuing operations were not in operation in the three months ended March 31, 2018, as they commenced May 8, 2018.
Discontinued Operations
The discontinued operations of Custom Pool are not comparable in the three months ended March 31, 2019 and 2018 since Custom Pool was sold on April 30, 2018 and therefore only had operations in the 2018 period.
Custom Pool had a pre-tax income of $216,187 on revenue of $1,361,373 during the three months ended March 31, 2018. The pre-tax income is a result of a small increase in the customers served. Resurfacing customers delayed decisions to refurbish their pools in the fourth quarter due to economic uncertainty. In the first quarter of 2018, the resurfacing business rebounded. Pool service contract pricing and pool resurfacing contract pricing have remained at the same level from period to period. The operating margins improved for which some of the improvement was offset in general and administrative expenses due to higher compensation and more employees hired in the office. Additionally, this created a higher allocation of employee expenses, such as health and workers compensation insurance. The net income improvement with a decrease in income tax expense is mainly due to the lowering of the corporate tax rates by the Tax Cuts and Jobs Act of 2017.
The Company had a net loss of $696,623 comprised of the eVTOL aircraft operations. There was also an undeclared preferred dividend of $2,500 which made the net loss available to common stockholders of $699,123.
Astro also had a foreign currency translation gain of $665 from the difference in the Canadian dollar and U.S. dollar exchange rates, which produced a comprehensive loss of $695,958.
Capital Resources and Liquidity
The Company currently is not profitable and must finance its business through raising additional capital. The Company is financed through its parent, MAAB, which has loaned the Company $248,688 and there is $501,312 available under the terms of the note at March 31, 2019. The Company also raised an additional $1.2 million of cash in November 2018 through the issuance of a Senior Secured Convertible Promissory
Note in the principal amount of $1,383,636. The first tranche of $600,000 was received in November 2018 and the second tranche of $600,000 was received in February 2019. Further capital support will come from the parent, and additional capital from third party sources. There is no assurance that the third party capital will be available. In the event that additional capital from the private or public markets is not available, the Company will need to reduce its spending on development and operations to the level of the capital that is available from the parent.
The Company has prepared its condensed consolidated financial statements for the three months ended March 31, 2019 on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of our business. As reflected in the condensed consolidated financial statements, for the three months ended March 31, 2019 the Company had a net loss of $696,623, and used $287,933 in cash in operations, and at March 31, 2019, had negative working capital of $512,591, current assets of $80,398, and an accumulated deficit of $8,708,425. The foregoing factors raise substantial doubt about the Company’s ability to continue as a going concern. Ultimately, the ability to continue as a going concern is dependent upon the Company’s ability to attract significant new sources of capital, attain a reasonable threshold of operating efficiencies and achieve profitable operations by licensing or otherwise commercializing products incorporating the Company’s technologies. The condensed consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
While the Company has Net Operating Loss (“NOL”) for tax purposes due to the net loss from the year ended December 31, 2018 and the continuing net loss in the three months ended March 31, 2019, the Company has taken a 100% income tax valuation allowance against it resulting in no deferred tax asset. At this time it is not known if the Company will become profitable with the ability to use the NOL.
The Company expects to spend $1,500,000 in the next six months and then another $1,500,000 in the subsequent six months on the development of the eVTOL aircraft.
In December 2015, the Company authorized 50,000,000 shares of Series A Preferred Stock, with a $0.0001 par value. The Series A Preferred has an 8% dividend paid quarterly, and is convertible into one share of common stock. The Series A Preferred is senior to the common stock as to dividends, and any liquidation, dissolution or winding up of the Company. The Series A Preferred also has certain voting and registration rights.
On March 14, 2018, Lawrence and Loreen Calarco, officers and directors of the Company, the Lawrence & Loreen Calarco Family Trust and the Lawrence and Loreen Calarco Trust of June 3, 2014, sold all 1,562,500 preferred shares to MAAB, a non-affiliate of the Company.
On March 14, 2018, 1,500,000 stock options were cancelled and two 10% Convertible Promissory Notes (“Notes”) with a six month maturity were issued to the former option holders. The principal amount was $25,000 each and there was no prepayment penalty. The Notes were convertible into the Company’s common stock based upon the average of the previous ten trading days’ closing price of the stock, at the maturity date of the Notes. Upon conversion of the notes, Bruce Bent or MAAB had the option to purchase the common stock issued at a 5% discount to the average closing price of the stock over the previous 10 trading days. The option to purchase expired ten days after the issuance of the common stock.
On September 18, 2018, at the maturity of the Notes, the entire outstanding balance was converted into 38,886 shares of common stock of the Company, which included $2,534 of accrued interest. The Company issued the shares of common stock on October 22, 2018
On May 4, 2018, the Board of Directors of the Company authorized 10,000 shares of the Series B Convertible Preferred Stock, par value $0.001 per share. The Preferred is entitled to a dividend, when declared by the Board of Directors, votes with all other classes of stock as a single class of stock on all actions to be voted on by the stockholders of the Company, and each share of Preferred is convertible into 1,333 shares of common stock and a five year warrant to purchase 1,333 shares of common stock at an
exercise price of $0.75 per share. On May 8, 2018, the Company issued all of the 10,000 authorized Series B Preferred shares in the acquisition of certain assets from Confida Aerospace Ltd.
On March 14, 2018, MAAB Global Limited, the parent of Astro, issued a Promissory Note for monetary advances to the Company of up to $750,000. The Promissory Note matures on February 28, 2021. The Promissory Note has an interest rate of 10%, compounded monthly.
Interest accrues on the principal amount or portion thereof which remains unpaid from time to time as well as any interest outstanding, from the date the principal amount is advanced until and including the date upon which the principal amount and all interest due under this promissory note shall be fully paid. The principal amount advanced under the Promissory Note is $248,688 through March 31, 2019. The Company has accrued interest expense of $55,996 at March 31, 2019.
On November 21, 2018, the Company issued an 8% Senior Secured Convertible Promissory Note in the aggregate principal amount of $1,383,636 in exchange for a total investment of $1,200,000, less commissions and expenses, payable in two tranches. The first tranche was payable upon the closing of the agreement, and the second tranche was payable within ten (10) business days of the Investor receiving written notice confirming the effectiveness of the initial registration statement. The first tranche principal of $701,818 was issued, with an Original Issue Discount (“OID”) of $81,818, a $20,000 financing fee for the lender’s transactional expenses that was expensed and the Company received proceeds of $600,000. The second tranche was issued on February 12, 2019 in the principal amount of $681,818, with an OID of $81,818 and the Company received proceeds of $600,000. Each tranche matures 6 months after the issue date, the first tranche maturing on May 21, 2019 and the second tranche maturing on August 12, 2019.
The note is convertible into common shares of the Company at a price equal to 75% of the lowest market value in the thirty trading days prior to the conversion date. The Company is subject to certain penalties if the shares are not issued within two business days of receiving the conversion notice. Pursuant to a Security Agreement between the Company and the Investor (the “Security Agreement”), the Company has granted to the Investor a security interest in its assets to secure repayment of the Notes. The Company must reserve an amount of shares equal to 500% of the total amount of shares issuable upon full conversion of the promissory note. The Company meets this requirement since it has 250,000,000 common shares authorized and as of March 31, 2019, 159,164,018 common shares are available to be issued.
As additional consideration for the investment, the Company issued 156,250 shares of its common stock to the Investor, valued at $89,531 at the date of issuance, plus warrants to acquire up to an aggregate 344,029 shares of the Company’s common stock at an exercise price of $0.51 per share. Upon the closing of the second tranche in February 2019, the Company issued additional warrants to acquire up to an aggregate 421,656 shares of the Company’s common stock at an exercise price of $0.40 per share. Each Warrant is exercisable by the Investor beginning on the Effective Date through the fifth year anniversary thereof.
The Note has a beneficial conversion feature for both tranches, which were valued, along with the warrants, on a relative fair value method. In the first tranche, the warrant fair value (See Note 13, “Warrants”) was $171,121 and the beneficial conversion feature fair value was $523,326 for a total debt discount of $694,447. However, adding the OID and the inducement shares to the debt discount, made final total debt discount $865,796, larger than the principal amount of the Note. Consequently, $163,978 of the debt discount was expensed. Additionally, $108,886 of the debt discount was amortized to interest expense for the year ended December 31, 2018, with an additional $244,993 amortized to interest in the three months ended March 31, 2019, bringing the debt discount to $347,939 at March 31, 2019.
In the second tranche, the warrant fair value (See Note 13, “Warrants”) was $121,320 and the beneficial conversion feature fair value was $403,689 for a debt discount of $525,009. Including the $81,818 of OID, the total debt discount is $606,827. In the three months ended March 31, 2019, $158,449 of the debt discount was amortized into interest expense.
On February 22, 2019, Oasis converted $55,387 in principal amount of the Notes into 215,054 shares of the Company’s common stock. Likewise, on March 19, 2019, Oasis converted $38,633 in principal amount of
the Notes into 150,000 shares of the Company’s common stock. However, the conversion share calculation was incorrect for the March 19, 2019 conversion of the $38,633 in principal amount of the Note and was 26,712 shares less than what it should have been. These shares, as well as the conversion pricing formula methodology are being renegotiated by the Company and the Investor, with a resolution expected by the end of June 2019.
The first tranche of the 8% Senior Secured Convertible Promissory Note matured on May 21, 2019. The Company and the Investor have verbally agreed to extend the maturity to December 31, 2019 and the Company expects to have all terms and documentation completed by the end of June 2019.
For the Three Months Ended March 31, 2019 compared to the Three Months Ended March 31, 2018
For the three months ended March 31, 2019, the Company had a net loss of $696,623. The Company had the following adjustments to reconcile net loss to cash flows from operating activities: an increase of $403,442 due to the amortization of the Senior Secured Convertible Promissory Note discounts.
The Company had the following changes in operating assets and liabilities: an increase of $5,008 in other receivables, a decrease of $1,567 in prepaid expenses, a decrease of $2,951 in deposits, and an increase of $5,738 in accounts payable and accrued expenses..
As a result, the Company had net cash used in operating activities of $287,933 for the three months ended March 31, 2019 which is largely due to the continued development of the eVTOL aircraft.
For the three months ended March 31, 2018, the Company did not pursue any operations. From the discontinued operations of Custom Pool, the Company had a net income of $178,820 and an increase from the discontinued operations during the period of $190,494. As a result, we had net cash provided by operating activities of $369,314 for the three months ended March 31, 2018.
For the three months ended March 31, 2019 and 2018, the Company did not have any cash flow from investing activities.
For the three months ended March 31, 2019, the Company repaid $342,751 on a Promissory Note from MAAB and received $600,000 from the issuance of a second tranche of the Senior Secured Convertible Promissory Note. As a result, the Company had net cash provided by financing activities of $257,249 for the three months ended March 31, 2019.
For the three months ended March 31, 2018, the Company had cash used in financing activities of $27,435 from the discontinued operations of Custom Pool.
For the three months ended March 31, 2019, the Company had a gain on foreign currency translation of $665. There was no foreign currency translation in the three months ended March 31, 2018.
Section 16(a) Beneficial Ownership Reporting Compliance
Under Section 16(a) of the Securities Exchange Act of 1934, as amended, an officer, director, or greater-than-10% shareholder of the Company must file a Form 4 reporting the acquisition or disposition of Company’s equity securities with the Securities and Exchange Commission no later than the end of the second business day after the day the transaction occurred unless certain exceptions apply. Transactions not reported on Form 4 must be reported on Form 5 within 45 days after the end of the Company’s fiscal year. Such persons must also file initial reports of ownership on Form 3 upon becoming an officer, director, or greater-than-10% shareholder. Mr. Bruce Bent, the Company’s Chief Executive Officer, is currently delinquent in meeting these requirements and has notified the Company that he is taking steps to become compliant.
Critical Accounting Policies and Estimates
Management's Discussion and Analysis of its Financial Condition and Results of Operations is based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. On an on- going basis, we evaluate our estimates, including those related to the reported amounts of revenues and expenses and the valuation of our assets and contingencies. We believe our estimates and assumptions to be reasonable under the circumstances. However, actual results could differ from those estimates under different assumptions or conditions. Our financial statements are based on the assumption that we will continue as a going concern. If we are unable to continue as a going concern, we would experience additional losses from the write-down of assets.
Recent Accounting Pronouncements
See Note 6 to the Condensed Consolidated Financial Statements, “Recent Accounting Pronouncements”, for the applicable accounting pronouncements affecting the Company.
Off - Balance Sheet Arrangements
We had no material off-balance sheet arrangements as of March 31, 2019.
Contractual Obligations
The registrant has no material contractual obligations
The long term debt repayments are as follows: