UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

ý Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2012

o Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from ___________ to __________

Commission File No. 0-18958

Groen Brothers Aviation, Inc.

(Exact Name of Registrant as Specified in Its Charter)

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

2640 West California Avenue
Salt Lake City, Utah 84104-4593
(Address of principal executive offices, including zip code)

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

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 ý 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 ý No ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o	Accelerated filer o
Non-accelerated filer o	Smaller reporting company ý

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes o No ý

As of May 15, 2012, there were 171,416,289 shares of the Registrant’s common stock, no par value per share, outstanding.

GROEN BROTHERS AVIATION, INC.

FORM 10-Q

FOR THE QUARTER ENDED MARCH 31, 2012

PART I - Financial Information

Item 1.	Financial Statements (Unaudited)

	Condensed Consolidated Balance Sheets	3
	Condensed Consolidated Statements of Operations	4
	Condensed Consolidated Statements of Cash Flows	5
	Notes to Condensed Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition
	and Results of Operations	18

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	25

Item 4.	Controls and Procedures	26


	PART II - Other Information

Item 1.	Legal Proceedings	27

Item 1A.	Risk Factors	27

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	27

Item 3.	Defaults Upon Senior Securities	27

Item 4.	Mine Safety Disclosures	27

Item 5.	Other Information	27

Item 6.	Exhibits	28

	Signatures	30

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

GROEN BROTHERS AVIATION, INC.
Condensed Consolidated Balance Sheets
Assets	March 31, 2012			June 30, 2011
	(Unaudited)
Current assets:
Cash	$	1,000		$	204,000
Accounts receivable, net of allowance of $7,000		-			-
Related party accounts and notes receivable		2,000			1,000
Prepaid expenses		16,000			109,000
Total current assets		19,000			314,000

Property and equipment, net		33,000			43,000

Total assets	$	52,000		$	357,000

Liabilities and Stockholders’ Deficit

Current liabilities:
Accounts payable	$	1,802,000		$	2,265,000
Bank overdraft		19,000			-
Accrued expenses		26,653,000			22,276,000
Notes payable and current portion of capital lease obligations		1,349,000			1,406,000
Related party notes payable		95,257,000			84,687,000
Series B 15% cumulative redeemable non-voting preferred stock, no par value, 50,000,000 shares authorized, 49,949 and 46,660 shares issued and outstanding, respectively		49,949,000			46,660,000
Total current liabilities		175,029,000			157,294,000

Long-term liabilities:
Accrued expenses		6,626,000			6,339,000
Deferred revenue		25,000			25,000
Long-term debt and capital lease obligations		9,000			11,000
Related party long-term debt		109,000			112,000
Dealer deposits		2,105,000			2,105,000
Total liabilities		183,903,000			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		35,082,000			35,005,000
Accumulated deficit		(219,003,000	)		(200,604,000	)
Total stockholders’ deficit		(183,851,000	)		(165,529,000	)

Total liabilities and stockholders’ deficit	$	52,000		$	357,000

See accompanying notes to condensed consolidated financial statements

GROEN BROTHERS AVIATION, INC.

Condensed Consolidated Statements of Operations

(Unaudited)

	Three Months Ended March 31,						Nine Months Ended March 31,
	2012			2011			2012			2011

Revenues	$	2,000		$	3,000		$	6,000		$	4,000

Costs and expenses:
Cost of sales		1,000			4,000			4,000			9,000
Research and development		327,000			354,000			1,284,000			1,251,000
General and administrative expenses		329,000			443,000			1,359,000			1,731,000

Total costs and expenses		657,000			801,000			2,647,000			2,991,000

Loss from operations		(655,000	)		(798,000	)		(2,641,000	)		(2,987,000	)

Other income (expense):
Related party interest income		1,000			1,000			2,000			2,000
Gain on extinguishment of debt		461,000			9,000			569,000			77,000
Gain on sale of property and equipment		-			14,000			-			14,000
Interest expense		(3,802,000	)		(3,309,000	)		(11,040,000	)		(9,643,000	)
Series B preferred stock interest expense		(1,805,000	)		(1,625,000	)		(5,289,000	)		(4,702,000	)

Total other income (expense)		(5,145,000	)		(4,910,000	)		(15,758,000	)		(14,252,000	)

Loss before income taxes		(5,800,000	)		(5,708,000	)		(18,399,000	)		(17,239,000	)

Income tax benefit		-			-			-			-

Net loss	$	(5,800,000	)	$	(5,708,000	)	$	(18,399,000	)	$	(17,239,000	)

Net loss per common share – basic and diluted	$	(0.03	)	$	(0.03	)	$	(0.11	)	$	(0.10	)

Weighted average number of common shares outstanding – basic and diluted		166,066,000			166,066,000			166,066,000			166,066,000

See accompanying notes to condensed consolidated financial statements

GROEN BROTHERS AVIATION, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
	Nine Months Ended March 31,
	2012			2011
Cash flows from operating activities:
Net loss	$	(18,399,000	)	$	(17,239,000	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization expense		13,000			16,000
Stock options and warrants issued for interest expense		1,000			9,000
Stock options issued for services		-			5,000
Stock-based compensation		76,000			90,000
Interest expense accrued on Series B preferred stock		5,289,000			4,702,000
Interest expense added to debt principal		6,466,000			5,581,000
Gain on extinguishment of debt		(569,000	)		(77,000	)
Gain on sale of property and equipment		-			(14,000	)
(Increase) decrease in:
Accounts and notes receivable		(1,000	)		(3,000	)
Prepaid expenses		93,000			(67,000	)
Increase (decrease) in:
Accounts payable		(21,000	)		(62,000	)
Accrued expenses		4,741,000			4,247,000

Net cash used in operating activities		(2,311,000	)		(2,812,000	)

Cash flows from investing activities:
Proceeds from the sale of property and equipment		-			14,000
Purchase of property and equipment		(3,000	)		(13,000	)

Net cash provided by (used in) investing activities		(3,000	)		1,000

Cash flows from financing activities:
Proceeds from the issuance of debt		4,100,000			2,405,000
Repayment of debt and capital lease obligations		(8,000	)		(18,000	)
Redemption of Series B preferred stock		(2,000,000	)		-
Increase in bank overdraft		19,000			-

Net cash provided by financing activities		2,111,000			2,387,000

Net decrease in cash		(203,000	)		(424,000	)
Cash, beginning of period		204,000			428,000

Cash, end of period	$	1,000		$	4,000

See accompanying notes to condensed consolidated financial statements

GROEN BROTHERS AVIATION, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Note 1. Basis of Presentation

Organization and Consolidation

The unaudited condensed consolidated financial statements include the accounts of Groen Brothers Aviation, Inc. (the “Company”) and its wholly owned subsidiary, Groen Brothers Aviation USA, Inc. (“GBA USA”), and include all adjustments (consisting of normal recurring adjustments) which are, in the opinion of management, necessary to present fairly the financial position as of March 31, 2012 and the results of operations and cash flows for the three months and nine months ended March 31, 2012 and 2011. The results of operations for the three months and nine months ended March 31, 2012 are not necessarily indicative of the results to be expected for the full fiscal year ending June 30, 2012.

Reclassifications

Certain amounts in the condensed consolidated financial statements for the three months and nine months ended March 31, 2011 have been reclassified to conform to the presentation for the three months and nine months ended March 31, 2012.

Note 2. Going Concern Uncertainty and Proposed Restructuring Plan

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.

At March 31, 2012, we had total current liabilities of $175,029,000 and current assets of $19,000, resulting in a working capital deficiency of $175,010,000. At March 31, 2012, we had a total stockholders’ deficit of $183,851,000.

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 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 three year period to date.

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 has reached an agreement with those creditors for the Company to proceed toward the accomplishment of a proposed financial restructuring without having to seek protection through a bankruptcy filing. In the event that the Company were 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 proposed restructuring plan that has been negotiated with all the 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 proposed restructuring will result in the elimination of substantially all of the Company’s debt obligations, which as of the date of this filing exceed $180 million, through the exchange of all of such debt for stock in a new private entity to be formed by the Company, and at this time is expected to be named, “Groen Brothers Aviation Corporation” (GBAC). In return the Company will transfer substantially all its assets, notably all of its technologies, knowhow, and associated patents, into GBAC in exchange for this relief of debt and receipt of some continued ownership of GBAC.

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. Because of continued accrual of interest by all interest-bearing debt and of continued funding, the precise breakdown of the ownership of GBAC will not be established until the date of closing. However, based upon the accrued value of these obligations as of December 31, 2011, it is anticipated that the ”Secured Debt Obligation Holders” in the aggregate will own approximately 70% of GBAC, the “Other GBA Debt Obligation Holders” in the aggregate will hold approximately 17%, Management combined will hold 9%, and the Company will hold 4% of GBAC. It is anticipated that GBAC will also form subsidiaries where Company developed technologies will be utilized and significant additional funding will be raised in those subsidiaries to complete the commercialization of the Company’s Civil and Military technologies, both manned and unmanned.

The activities that heretofore have been undertaken by the Company and its operating subsidiary Groen Brothers Aviation USA, Inc., will in the plan be carried forward by the operations and development of GBAC. So that the “good-will-value” of the Groen name within the aerospace industry may be retained, it is expected that the Groen Brothers Aviation name will be kept by it doing business as “Groen Brothers Aviation Corporation,” or similar name. The Company will continue to be a “holding company,” but whereas it now owns 100% of its technologies and is in debt by more than $180,000,000, its total assets will become a minority interest in GBAC and will be, essentially, debt free.

In summary, Management believes that this proposed restructuring plan 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 the Company has developed over the years, the debt burden has been a major impediment to the Company being able to exploit the value of these technologies, both civil and military.

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

As noted in Note 14, “Subsequent Events”, on May 16, 2012 the Company filed a Definitive Information Statement on Schedule 14C with the Securities and Exchange Commission (“SEC”) reporting its proposed restructuring plan. The Company is in the process of circulating this Statement with all the Company’s known common and preferred shareholders in order to receive the consent by a majority of those common and preferred shareholders in conformance with Utah law. The Company has already received written commitments from a majority of each shareholder group that they will vote in favor of the plan.

The Company’s continuation as a going concern is dependent on the approval and successful completion of the proposed restructuring plan. 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.

Note 3: Loss per Common Share

The computation of basic net loss per common share is computed using the weighted average number of common shares outstanding during each period. The computation of diluted net loss per common share is based on the weighted average number of shares outstanding during the period plus common stock equivalents which would arise from the exercise of stock options and warrants outstanding using the treasury stock method and the average market price per share during the period, as well as common shares issuable upon the conversion of debt to common stock. Common stock equivalents were not included in the diluted loss per share calculation because the effect would have been anti-dilutive.

The calculation of the weighted average number of common shares outstanding excludes common shares that have been issued as collateral for certain notes payable to related parties. These collateral shares are restricted and bear a legend prohibiting the holder from selling or transferring the shares at any time. The Company has assigned no value to these shares, and the terms of the notes payable require the holder of the collateral shares to return the shares to the Company when the applicable note and accrued interest are paid in full. At March 31, 2012, the Company had issued 5,350,000 shares of common stock as collateral. Under the terms of the proposed restructuring plan, it is anticipated that some or all of these collateral shares will be returned to the Company.

Note 4: Stock Based Compensation

The Company accounts for stock-based compensation in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 718, Compensation – Stock Compensation. Under the fair value recognition provisions of this statement, stock-based compensation cost is measured at the grant date based on the value of the award granted using the Black-Scholes option pricing model, and recognized over the period in which the award vests. The stock-based compensation expense for the three months and nine months ended March 31, 2012 and 2011 has been allocated to the various categories of operating costs and expenses in a manner similar to the allocation of payroll expense as follows:

	Three Months Ended March 31,				Nine Months Ended March 31,
	2012		2011		2012		2011

Research and development	$	12,000	$	16,000	$	40,000	$	48,000
General and administrative		10,000		14,000		36,000		42,000

Total stock-based compensation expense	$	22,000	$	30,000	$	76,000	$	90,000

There was no stock compensation expense capitalized during the nine months ended March 31, 2012 and 2011.

During the nine months ended March 31, 2012, no new stock options or warrants were issued. The following table summarizes the stock option and warrant activity during the nine months ended March 31, 2012:

	Options and Warrants			Weighted Average Exercise Price		Weighted Average Remaining Contract Term		Aggregate Intrinsic Value

Outstanding at June 30, 2011		21,841,000		$	0.19
Granted		-			-
Exercised		-			-
Cancelled		-			-
Expired		(7,520,000	)		0.21

Outstanding at March 31, 2012		14,321,000		$	0.18		1.92	$	0

Options and warrants vested and exercisable at March 31, 2012		14,131,201		$	0.18		1.92	$	0

The aggregate intrinsic value in the preceding table represents the total pretax intrinsic value, based on the Company’s closing stock price of $0.018 as of March 31, 2012, which would have been received by the holders of in-the-money options had the option holders exercised their options as of that date.

As of March 31, 2012, the total future compensation cost related to non-vested stock-options not yet recognized in the condensed consolidated statements of operations was approximately $5,750, and the weighted average period over which these awards are expected to be recognized was 0.03 years.

Note 5: Accrued Expenses

Accrued expenses consisted of the following at March 31, 2012:

Compensation and related taxes	$	503,000
Related party interest		24,865,000
Interest		937,000
Customer deposits		214,000
Consulting fees		33,000
Finders’ compensation		10,000
Royalties to related parties		32,000
Other		59,000

Total	$	26,653,000

Accrued related party interest payable is comprised of interest expense payable on notes payable to related parties, consisting primarily of stockholders of the Company.

Royalty payments totaling 1% of the gross sales price of gyroplanes are to be paid to the Company’s founders, David Groen and the estate of the late Jay Groen. Through March 31, 2012, royalties payable totaled $16,000 to each of these individuals, which amounts are accrued as a component of cost of sales in the condensed consolidated statements of operations.

Long-term accrued expenses consisted of the following at March 31, 2012:


Deferred compensation	$	6,128,000
Accrued payroll taxes on deferred compensation		199,000
Accrued interest on deferred compensation		299,000

Total	$	6,626,000

The deferred compensation is payable to certain current and former officers, directors, and senior management of the Company, with amounts originating from fiscal year 1998 through the current fiscal year. In addition to cash compensation, the Company has a deferred compensation arrangement for executive officers and certain of its senior management that accrues additional salary. The terms of the Company’s Series B 15% Preferred Stock preclude the Company from making any deferred compensation payments until all outstanding amounts due relating to the Series B 15% Preferred Stock have been paid in full. Absent payment restrictions related to outstanding Series B 15% Preferred Stock or other restrictions, the deferred compensation is payable in part or in whole only by resolution of the Company’s Board of Directors. Through March 31, 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 the Company’s outstanding financing agreements and would be prudent in light of the Company’s financial condition and availability of cash. In fiscal year 2001, the Company began accruing interest expense on the deferred compensation at the rate of 8% per annum. The accrual of interest was permanently discontinued on July 1, 2004. The deferred compensation and related accrued payroll taxes and interest payable are classified as long-term liabilities at March 31, 2012 as the Company does not anticipate payment of any of these amounts in the next twelve months.

Note 6: Debt

Notes payable and current portion of capital lease obligations include notes payable totaling $1,337,000 that were in default at March 31, 2012. In addition, the Company is delinquent in making payments of accrued interest payable of $912,000 on this debt at March 31, 2012. The Company maintains contact with most of these lenders and has, in most instances, been granted grace periods and extensions without receipt of formal notices of default or threat of legal action.

Substantially all related party notes payable of $95,257,000 at March 31, 2012 are payable to stockholders of the Company who are considered related parties, including the holders of the Company’s Series B Preferred Stock (the “Series B Holders”). The related party notes payable at March 31, 2012 are comprised of the following:

Series B Holders:
Dividend Notes	$	61,686,000
Note Purchase Notes		16,207,000
2006/2007 Notes		4,400,000
		82,293,000
Other Related Parties		12,964,000

Total Related Party Notes Payable	$	95,257,000

Dividend Notes totaling $61,686,000 ($36,962,000 original principal plus $24,724,000 in accrued interest expense added to note principal) resulted from the redemption of 36,962 shares of Series B Preferred Stock in October 2008. The Dividend Notes provide for the payment of interest at the rate of 15% per annum, compounded quarterly, and a rate of interest of 18% per annum during any period in which an event of default has occurred and is continuing. The maturity date for the Dividend Notes has also been extended from time to time and currently is June 30, 2012.

Pursuant to the Note Purchase Agreement discussed in Note 7, the Company borrowed a total of $16,207,000 from the Series B Holders during the period October 1, 2008 to March 31, 2012, of which $5.5 million was used to redeem 5,500 shares of the Series B Preferred Stock with a book value of $5,500,000. The Note Purchase Notes provide for the payment of simple interest at the rate of 15% per annum. The maturity date for the Note Purchase Notes has been extended from time to time and currently is June 30, 2012.

During 2006 and 2007, the Company also borrowed a total of $4,400,000 through the issuance of other promissory notes payable to the Series B Holders that provide for the payment of simple interest at the rate of 36% per annum. The maturity date for the 2006/2007 Notes has been extended from time to time and currently is June 30, 2012.

At March 31, 2012, the Company is delinquent in making payments on other related party notes payable totaling $2,615,000 and accrued interest payable on related party notes payable totaling $2,601,000.

Upon default, certain shareholder related party note holders, at their option, may elect to add any unpaid accrued interest to principal and such sum will bear interest therefrom until paid at the rate stated in the note agreement. An exposure to an amount in excess of the accrued interest payable recorded on these notes exists; however, the Company is currently unable to estimate such amount.

Note 7: 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 the ArrowHawk, as a replacement of the Hawk 4, and to convert the Hawk 4 dealer deposits to ArrowHawk dealer deposits. If and when 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.

Note 8: Preferred Stock

The Company has authorized 200,000,000 shares of preferred stock having no par value. There are two series of preferred stock with 50,000,000 shares authorized within each series. The rights, terms and preferences of preferred stock are set by the Board of Directors. As of March 31, 2012, the Board of Directors has set rights, terms and preferences of Series A and Series B Preferred Stock for issue.

Series A Convertible Preferred Stock

As of March 31, 2012, 1,400,000 shares of Series A Convertible Preferred Stock were issued and outstanding, and held by the following: David Groen, President, Chief Executive Officer and Chairman of the Board of Directors, 1,025,000 shares; Robin Wilson, Executive Vice President, Chief Operating Officer and member of the Board of Directors 125,000 shares; the widow of the late Jay Groen 125,000 shares; and Dennis Gauger, former member of the Board of Directors, 125,000 shares.

The rights, terms and preferences of the Series A Convertible Preferred Stock, as amended, are summarized as follows:

Each share may cast one hundred (100) votes on all matters submitted to the stockholders for a vote, voting together with the holders of the common stock of the Company as a single class, effectively giving current voting control to the Company's founders.

The voting rights expire January 31, 2013.

Upon, and only upon, the Company reaching significant revenue milestones, the shares are convertible into common stock of the Company through payment of a cash conversion price of $0.50 per share of common stock, convertible on a one-for-one hundred (1:100) basis (100 shares of common stock for each share of Series A Convertible Preferred Stock). Conversion is allowed at the rate of 25% of the preferred shares for each $30 million in defined cumulative gross sales, for a total of $120 million in sales. This convertibility is also only available if these significant revenue milestones are met within seven years from the date of issue of the Series A Convertible Preferred Stock.

The shares, including all voting and conversion rights, to the extent not converted into common shares, will expire on the later of (i) seven years from the date they are issued and (ii) January 31, 2013, and will be cancelled by the Company.

Upon the death or permanent incapacity of a holder of Series A Convertible Preferred Stock, all shares held by such holder will be divided equally between the then existing members of the Company’s Board of Directors and the holder’s survivor(s) (if more than one person, treated collectively as one person). Upon a temporary mental incapacity of a holder of Series A Convertible Preferred Stock, all shares will be voted by the remaining holders of the Series A Convertible Preferred Stock until the end of the temporary incapacity.

The shares are non-transferable, non-assignable, and have no dividend or liquidation rights.

On January 24, 2012, the Company filed the Sixteenth Amendment to the Fifth Amended and Restated Articles of Incorporation, which extended the expiration date of the Series A Preferred Stock from January 31, 2012 to January 31, 2013. The amendment was dated effective as of January 30, 2012.

Series B Preferred Stock

At March 31, 2012, there were 49,949 shares of Series B 15% Cumulative Redeemable Non-Voting Preferred Stock (the “Series B Preferred Stock”) outstanding. The rights, terms, and preferences of the outstanding preferred shares, as amended, are as follows:

The shares have no voting rights.

Each share’s original Stated Value, upon which unpaid dividends may accumulate, is $1,000.

· The shares have right to dividends at a 15% annual dividend rate, payable in cash or in kind at the end of each fiscal quarter. Accumulated but unpaid dividends shall be cumulative and shall be added to the Stated Value for purposes of subsequent quarterly dividend calculations.

The shares shall have superior liquidation priority to any other series of the Company’s capital stock, equal to the Stated Value plus all accrued but unpaid dividends thereon.

The redemption price of the shares must be paid by the Company in cash.

The Company may incur indebtedness of up to $68,250,000 without consent of the holders of the shares.

The Company is required to give notice to holders of the shares prior to making any capital expenditures in excess of $300,000.

The maturity date of the shares is defined as the first to occur of (a) June 30, 2012 or such later date as agreed to in writing by at least 80% of the Series B Holders, (b) the occurrence of a defined “liquidation event”, or (c) the date that is six months following the receipt by the Company or its affiliates of proceeds from one or more financing transactions in excess of $50 million.

If the Company should default in its obligation under the Series B Preferred Stock, the Series B Holders may require the Company to redeem the Series B Preferred Stock by providing written notice three days prior to the requested redemption date.

At any time after March 1, 2008, the holders of not less than 80% of the outstanding shares of Series B Preferred Stock may elect from time to time to have the outstanding shares of Series B Preferred Stock redeemed in whole or in part.

The Company is required to make pro rata redemptions of the shares in the event the Company receives proceeds from certain financing transactions that exceed $20 million in the aggregate.

On October 9, 2008, as part of a Note Purchase Agreement between the Company and the Series B Holders, the Company redeemed 36,962 shares of the Series B Preferred Stock with a book value of $36,962,000, representing the cumulative total of dividends paid in kind through October 9, 2008. Short-term, interest bearing promissory notes totaling $36,962,000 were issued to the Series B Holders in the redemption.

The Note Purchase Agreement also provides for the periodic sale by the Company to the lenders of short-term promissory notes to provide the Company with operating capital, as specified in the draw requests for such notes. The draw requests must be approved by the lenders. Through March 31, 2012, the lenders had purchased notes under the Note Purchase Agreement in the aggregate principal amount of $16,207,000 and the proceeds had been used by the Company to cover its minimum cash needs. The lenders and the Company have amended the October 9, 2008 Note Purchase Agreement from time to time to increase the aggregate amount of promissory notes that can be purchased to $17,000,000, to provide funding to meet the Company’s monthly minimum financial needs. The lenders are not obligated to purchase notes pursuant to the Note Purchase Agreement and there can be no assurance that the lenders will continue to purchase notes or otherwise provide funding to the Company.

The redemption date of the Series B Preferred Stock has been extended from time to time and currently is June 30, 2012, or such later date as agreed to in writing by the holders of at least 80% of the outstanding shares of Series B Preferred Stock.

On February 9, 2012, the Company filed the Seventeenth Amendment to the Fifth Amended and Restated Articles of Incorporation, which extended the redemption date of the Series B Preferred Stock from January 31, 2012 to March 31, 2012, or such later date as agreed to in writing by the holders of at least 80% of the outstanding shares of Series B Preferred Stock. The amendment was dated effective as of January 30, 2012.

On April 18, 2012, the Company filed the Eighteenth Amendment to the Fifth Amended and Restated Articles of Incorporation, which extended the mandatory redemption date of the Series B Preferred Stock from March 31, 2012 to June 30, 2012, or such later date as agreed to in writing by the holders of at least 80% of the outstanding shares of Series B Preferred. In addition, the amount of debt that the Company may incur without the consent of the Series B Holders was increased from $67,250,000 to $68,250,000. The amendment was dated effective as of March 30, 2012.

In connection with the execution of the Note Purchase Agreement and the issuance of the Series B Preferred Stock, substantially all assets of the Company, including its intellectual property, have been pledged as collateral for the Company’s debt.

The Company has determined that the extension of the redemption date of the original issuance of the Company’s Series B Preferred Stock in October 2003 met the criteria of a troubled debt restructuring outlined in ASC Topic 470-60, Troubled Debt Restructurings by Debtors. No gain or loss was recorded on the October 2003 extension and subsequent extension of the due date in October 2005. The value of the warrants issued to the Series B Holders in connection with the extensions of the due dates, estimated by the Black-Scholes option pricing model, was charged to interest expense. The Series B Preferred Stock will be classified through its redemption as a troubled debt restructuring.

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).

Note 9: Common Stock

During the nine months ended March 31, 2012, the Company did not issue any shares of its common stock or any options and warrants to purchase shares of common stock. During the nine months ended March 31, 2012, the recorded amount of common stock has been increased by $1,000 for the periodic adjustment to the value of 3,200,000 variable stock options issued during the year ended June 30, 2006 computed using the Black-Scholes option pricing model. In addition, common stock was increased by $76,000 for total stock-based compensation (see Note 4).

During the nine months ended March 31, 2011, the Company did not issue any shares of its common stock or any options and warrants to purchase shares of common stock. During the nine months ended March 31, 2011, the recorded amount of common stock was increased by $9,000 for the periodic adjustment to the estimated value of 3,200,000 variable stock options issued during the year ended June 30, 2006 computed using the Black-Scholes option pricing model. The Company also increased the recorded amount of common stock by $5,000 for a charge to general and administrative expense for the vesting of the grant date fair value of 500,000 options issued to a non-employee consultant and by $90,000 for total stock-based compensation (Note 4). In addition, common stock was decreased by $2,000 to adjust finders’ compensation on the sale of common stock.

The Company has issued shares of its common stock as collateral for certain notes payable to related parties. These collateral shares are restricted and bear a legend prohibiting the holder from selling or transferring the shares at any time. The legend will only be removed if the Company is in default on the applicable loan, at which time, a new certificate will be issued and a value recorded for the shares to account for the loan and accrued interest settled. In addition, the terms of the notes payable require the holder of the collateral shares to return the shares to the Company when the applicable loan and accrued interest are paid in full. The Company has assigned no value to the collateral shares and does not include these shares in the calculation of loss per share. At March 31, 2012, the Company had issued 5,350,000 shares of common stock as collateral.

Certain shareholder related party note holders may choose to convert outstanding principal and interest balances to common stock of the Company. The conversion prices per share range from $0.10 per share to $1.25 per share. At March 31, 2012, $23,412,000 of principal and interest is convertible into 91,226,530 shares of the Company’s common stock. The cash price per common share and the conversion prices per share approximated the quoted market price per share of the Company’s common stock on or near the date the note agreements were negotiated. The conversion prices per share have all been set at the market price of the common stock, or above the market price whenever possible, with market price typically established at the price per share that the Company was selling restricted common shares for cash at the time. Because the conversion price per share was generally “under water” in substantially all of these transactions, the Company concluded that the conversion terms did not represent a beneficial conversion feature. Therefore, no beneficial conversion features have been accounted for in the Company’s consolidated financial statements for these transactions.

Note 10: Joint Venture

As previously reported, in December 2010, Groen Brothers Aviation International, LLC (“Groen LLC”), a wholly owned subsidiary of the Company, and Guangzhou Suntrans Aviation Science and Technology Co., Ltd., a company incorporated under the laws of the People’s Republic of China (“Suntrans”), entered into a Cooperative Joint Venture Contract (the “Agreement”) dated as of November 14, 2010 that provided for the establishment of Foshan Suntrans-Groen Aviation Co., Ltd. (the “Joint Venture”) to produce fully-assembled Light Gyroplanes based upon the Company’s SparrowHawk design. The Agreement generally provides that it will only come into force upon approval by the Chinese Examination and Approval Authority (“CEAA”) in accordance with applicable law and that if such approval is not granted, the Joint Venture Agreement shall be null and void. Further, if approval has not been obtained and a business license for the Joint Venture has not been issued within 180 days of the date of signature of the Agreement, the parties shall jointly consult to determine whether to continue with the formation of the Joint Venture and, if after a period of 30 days the parties cannot agree upon a common action to be taken, either party shall have the option to deem the Agreement void and of no effect by giving written notice to the other party. If the Joint Venture should become effective, the Company, through Groen LLC, expects to receive 25% of the equity in the JV in return for its contribution to the JV of its SparrowHawk III assets, rights to SparrowHawk designs and defined SparrowHawk derivatives, and a rotor blade design from the Hawk 4 Gyroplane.

As of the date hereof, the business license for the Joint Venture has not been issued and both the 180 day period and the 30 day period have run. As a result, both parties are free to initiate steps that could lead to the abrogation of the agreement. Subsequent to the period covered by this report, the Company notified Suntrans that it was exercising its option to terminate the Agreement (see Note 14).

Note 11: Supplemental Statement of Cash Flows Information

During the nine months ended March 31, 2012, the Company had the following non-cash investing and financing activities:

Decreased notes payable and current portion of capital lease obligations and increased accrued expenses by $50,000.

During the nine months ended March 31, 2011, the Company had the following non-cash investing and financing activities:

Decreased notes payable and current portion of capital lease obligations and increased accrued expenses by $33,000.

Decreased common stock and increased accrued expenses by $2,000.

Cash paid for interest expense was $43,000 and $81,000 for the nine months ended March 31, 2012 and 2011, respectively.

No payments of income taxes were made during the nine months ended March 31, 2012 and 2011.

Note 12: Recently Issued Accounting Pronouncements

There were no new accounting pronouncements issued during the nine months ended March 31, 2012 and through the date of this filing that the Company believes are applicable or would have a material impact on the consolidated financial statements of the Company.

Note 13: Comprehensive Loss

Comprehensive loss is the same as net loss.

Note 14: Subsequent Events

Eighteenth Amendment to the Fifth Restated Articles of Incorporation

Proposed Restructuring

On May 16, 2012, the Company filed a Definitive Information Statement on Schedule 14C with the Securities and Exchange Commission reporting a proposed restructuring plan. Following months of in depth negotiations with all its creditors, most of whom are significant equity holders as well, the Company has reached an agreement for accomplishing a financial restructuring without having to seek protection through a bankruptcy filing. Details of the proposed restructuring plan are discussed further in Note 2 to the Condensed Consolidated Financial Statements and under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” elsewhere in this quarterly report.

Debt Financing

Subsequent to March 31, 2012, the Company received net proceeds from debt financing pursuant to the Note Purchase Agreement of $150,000.

Termination of Joint Venture Agreement

In the absence of any receipt of approval for a business license, on May 7, 2012, the Company formally advised Suntrans that it was exercising its option to terminate the Joint Venture Agreement that is further discussed in Note 10.

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

Forward Looking Statements

This management’s discussion and analysis of financial condition and results of operations and other portions of this Quarterly Report on Form 10-Q contain forward-looking information that involves risks and uncertainties. Our actual results could differ materially from those anticipated by this forward-looking information. Factors that could cause or contribute to such differences include, but are not limited to, those discussed or referred to in the Annual Report on Form 10-K for the year ended June 30, 2011, filed on October 13, 2011, under the heading “Forward Looking Statements” and elsewhere. Investors should review this quarterly report on Form 10-Q in combination with our Annual Report on Form 10-K in order to have a more complete understanding of the principal risks associated with an investment in our common stock. This management’s discussion and analysis of financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes included elsewhere in this document.

Background

The Company is engaged in the business of designing and developing new technology for gyroplane and gyrodyne rotor-wing aircraft for military and commercial uses. Following the delays in our Heliplane program for DARPA, lower than anticipated results from sales of SparrowHawk kits, and negative conditions in capital markets, we undertook cost-cutting measures that allowed us to continue to develop our technology on a reduced scale. We ceased production of the SparrowHawk and effected a substantial reduction in force and have reduced other operating expenditures as well. We currently have no significant operating revenues.

We have completed work on those milestones of Phase I of the DARPA contract where we served as prime contractor and on Phase IB of the DARPA contract where we subsequently served as a subcontractor for rotor systems work to Georgia Institute of Technology (GT), with final payment received by us in September 2009. As of the date of this report, DARPA has not yet announced funding for Phase II and the future involvement of the Company in the DARPA contract is not anticipated.

Significant Series B Preferred Stock and Debt Obligations

From 2006 through the present, we have obtained debt and equity financing primarily from certain lenders who are also stockholders of the Company. As of March 31, 2012, our obligations to such lenders included: 36% promissory notes issued during 2006 and 2007 in the aggregate principal amount of $4,400,000 (the “2006/2007 Notes”); a $49,949,000 Series B 15% Cumulative Preferred Stock Obligation; 15% secured promissory notes in the aggregate principal amount of $61,686,000 that were issued in satisfaction of accrued dividends of $36,962,000 on the Series B Preferred Stock through October 9, 2008 plus $24,724,000 in interest accrued and added to debt principal through March 31, 2012 (the “Dividend Notes”); and secured 15% promissory notes in the aggregate principal amount of $16,207,000 issued pursuant to the Note Purchase Agreement dated October 9, 2008 (the “Note Purchase Notes”). As discussed in more detail below, the redemption date of the Series B Preferred Stock and the maturity dates of the 2006/2007 Notes, the Dividend Notes and the Note Purchase Notes have been extended to June 30, 2012. We currently have no operating revenues to pay the interest accruing on the debt described above and we are currently unable to pay these obligations. Substantially all our assets have been pledged to secure our debts.

Going Concern Uncertainty and Proposed Restructuring Plan

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 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 three year period to date.

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 have reached an agreement with those creditors for the Company to proceed toward the accomplishment of a proposed financial restructuring without having to seek protection through a bankruptcy filing. In the event that the Company were 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 proposed restructuring plan that has been negotiated with all the 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 proposed restructuring will result in the elimination of substantially all of our debt obligations, which as of the date of this filing exceed $180 million, through the exchange of all of such debt for stock in a new private entity to be formed by the Company, and at this time is expected to be named, “Groen Brothers Aviation Corporation” (GBAC). In return we will transfer substantially all our assets, notably all of our technologies, knowhow, and associated patents, into GBAC in exchange for this relief of debt and receipt of some continued ownership of GBAC.

The transfer of these assets requires approval through a vote of the Company’s shareholders holding a majority of the voting shares. We have received from holders of a significant majority of voting shares, a contractual commitment to vote in favor of this plan. Because of continued accrual of interest by all interest-bearing debt and of continued funding, the precise breakdown of the ownership of GBAC will not be established until the date of closing. However, based upon the accrued value of these obligations as of December 31, 2011, it is anticipated that the ”Secured Debt Obligation Holders” in the aggregate will own approximately 70% of GBAC, the “Other GBA Debt Obligation Holders” in the aggregate will hold approximately 17%, Management combined will hold 9%, and the Company will hold 4% of GBAC. It is anticipated that GBAC will also form subsidiaries where Company developed technologies will be utilized and significant additional funding will be raised in those subsidiaries to complete the commercialization of the Company’s Civil and Military technologies, both manned and unmanned.

On May 16, 2012, the Company filed a Definitive Information Statement on Schedule 14C with the SEC) reporting its proposed restructuring plan. The Company is in the process of circulating this Statement with all the Company’s known common and preferred shareholders in order to receive the consent by a majority of those common and preferred shareholders in conformance with Utah law. The Company has already received written commitments from a majority of each shareholder group that they will vote in favor of the plan.

The Company’s continuation as a going concern is dependent on the approval and successful completion of the proposed restructuring plan. However, there can be no guarantee or assurance that we 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

As discussed above, we have significantly scaled back the level of our operations, including ceasing production of the SparrowHawk, eliminating substantially all flight training and concluding our involvement in the DARPA contract. We currently have no significant operating revenues. As a result, total miscellaneous operating revenues were $2,000 and $3,000 in the three months ended March 31, 2012 and 2011, and $6,000 and $4,000 in the nine months ended March 31, 2012 and 2011, respectively.

Costs and Expenses

Total cost of sales related to the miscellaneous operating revenues was $1,000 and $4,000 in the three months ended March 31, 2012 and 2011, and $4,000 and $9,000 in the nine months ended March 31, 2012 and 2011, respectively.

Research and development activities include the development of opportunities for potential joint venture activities, subcontract opportunities with industry partners, variations to the SparrowHawk, fully assembled SparrowHawk gyroplane derivatives, potential applications of our technology to heavy lift vertical take-off military aircraft, runway independent short-haul airliners and other aircraft, including government contract opportunities. Our efforts in these areas have remained somewhat consistent with the efforts in the same periods of the preceding fiscal year. As a result, research and development expenses for the three months ended March 31, 2012 decreased to $327,000 from $354,000 for the three months ended March 31, 2011. Research and development expenses for the nine months ended March 31, 2012 increased to $1,284,000 from $1,251,000 for the nine months ended March 31, 2011.

General and administrative expenses for the three months ended March 31, 2012 decreased to $329,000 from $443,000 for the three months ended March 31, 2011. General and administrative expenses for the nine months ended March 31, 2012 decreased to $1,359,000 from $1,731,000 for the nine months ended March 31, 2011. We have continued to maintain our operating expenses on a reduced level given the lack of operating capital available to us.

Other Income and Expenses

As a result of the reduction in our related party notes receivable, related party interest income is currently insignificant to our consolidated financial statements. Related party interest income was $1,000 for each of the three-month periods ended March 31, 2012 and 2011, and $2,000 for each of the nine-month periods ended March 31, 2012 and 2011.

We realized a gain on extinguishment of debt of $461,000 and $9,000 in the three months ended March 31, 2012 and 2011, and $569,000 and $77,000 in the nine months ended March 31, 2012 and 2011, respectively.

We realized a gain on sale of property and equipment of $14,000 in the three months and nine months ended March 31, 2011.

Interest expense for the three months ended March 31, 2012 increased to $3,802,000 from $3,309,000 for the three months ended March 31, 2011. Interest expense for the nine months ended March 31, 2012 increased to $11,040,000 from $9,643,000 for the nine months ended March 31, 2011. We continue 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 three months ended March 31, 2012 increased to $1,805,000 from $1,625,000 for the three months ended March 31, 2011. Series B Preferred Stock interest expense for the nine months ended March 31, 2012 increased to $5,289,000 from $4,702,000 for the nine months ended March 31, 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 three months ended March 31, 2012 was $5,800,000 compared to $5,708,000 for the three months ended March 31, 2011. The net loss for the nine months ended March 31, 2012 was $18,399,000 compared to $17,239,000 for the nine months ended March 31, 2011. The increase in the net loss in the first three months and six months of the current fiscal year resulted primarily from the increase in interest expense, as further discussed above.

Liquidity and Capital Resources

Series B Preferred Stock Obligation

At March 31, 2012, we had total current liabilities of $175,029,000 and current assets of $19,000, resulting in a working capital deficiency of $175,010,000. Included in current liabilities and the working capital deficiency at March 31, 2012 is a $49,949,000 Series B Preferred Stock obligation. 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 currently is 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 currently is 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 $61,686,000 at March 31, 2012. The maturity date of the Dividend Notes has also been extended from time to time and currently is 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 must be approved by the lenders. Through March 31, 2012, the lenders had purchased notes under the Note Purchase Agreement in the aggregate principal amount of $16,207,000 and the proceeds had been used by us to cover our minimum operating cash needs. In addition, $5,500,000 of the proceeds was used to redeem 5,500 shares of the Series B Preferred Stock with a book value of $5,500,000. The Note Purchase Notes provide for the payment of simple interest at the rate of 15% per annum. The maturity date of the Note Purchase Notes has been extended from time to time and currently is June 30, 2012.

The lenders and the Company have amended the October 9, 2008 Note Purchase Agreement from time to time to increase the aggregate amount of promissory notes than can be purchased to $17,000,000 to provide funding to meet our monthly minimum financial needs. The lenders are not obligated to purchase notes pursuant to the Note Purchase Agreement and there can be no assurance that the lenders will continue to purchase notes or otherwise provide funding to us.

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.

Our ability to repay these obligations is dependent on the approval and successful completion of our proposed restructuring plan. However, there can be no guarantee or assurance that we will be successful in these efforts.

Other Debt Obligations

Current liabilities at March 31, 2012 included $95,257,000 notes payable to related parties, comprised of the following:

Series B Holders:
Dividend Notes	$	61,686,000
Note Purchase Notes		16,207,000
2006/2007 Notes		4,400,000
		82,293,000
Other Related Parties		12,964,000

Total Related Party Notes Payable	$	95,257,000

Of the other related parties notes, $2,615,000 is in default. In addition, we are delinquent in making payments of accrued interest payable of $2,601,000 on this related party debt at March 31, 2012. Most of these related party notes payable are held by long-time shareholders and lenders of the Company and are payable on demand or are short-term in nature.

Also included in current liabilities at March 31, 2012 are notes payable and capital lease obligations to unrelated parties of $1,349,000, a significant portion of which is in default. In addition, we are delinquent in making payments of accrued interest payable of $912,000 on this debt at March 31, 2012. We continue to make some payments on this indebtedness and continue discussions with many of these vendors and lenders, and have, in most instances, been granted grace periods and extensions without receipt of formal notices of default or threat of legal action.

Operating, Investing and Financing Activities

Net cash used in operating activities was $2,311,000 for the nine months ended March 31, 2012, compared to net cash used in operating activities of $2,812,000 for the nine months ended March 31, 2011. The decrease in the net cash used in operating activities in the first nine months of the current fiscal year is due primarily to the increase in non-cash interest expense and accrued expenses, partially offset by an increase in our net loss for this period.

Net cash used in investing activities for the nine months ended March 31, 2012 was $3,000, consisting of the purchase of property and equipment. Net cash provided by investing activities for the nine months ended March 31, 2011 was $1,000 comprised of proceeds from the sale of property and equipment of $14,000, partially offset by the purchase of property and equipment of $13,000.

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 we will require additional funding from these sources to sustain our future operations if our proposed restructuring plan is not approved and successfully implemented.

Net cash provided by financing activities was $2,111,000 for the nine months ended March 31, 2012, comprised of proceeds from the issuance of debt of $4,100,000 and an increase in bank overdraft of $19,000, partially offset by repayment of debt and capital lease obligations of $8,000 and redemption of Series B Preferred Stock of $2,000,000. Net cash provided by financing activities was $2,387,000 for the nine months ended March 31, 2011, comprised of proceeds from the issuance of debt of $2,405,000, partially offset by repayment of debt and capital lease obligations of $18,000.

We currently do not have sufficient cash to sustain our operations for the next twelve months. Unless our proposed restructuring plan is approved by our shareholders and successfully implemented, we will continue to be dependent on the lenders under the Note Purchase Agreement to continue to fund operating losses. As discussed above, the Note Purchase Agreement provides for the periodic sale by the Company to the lenders of short-term promissory notes to provide us with operating capital, as specified in the draw requests for such notes. The draw requests must be approved by the lenders. There is no assurance that this funding under the Note Purchase Agreement will continue beyond the current short-term agreement. Further, there is no assurance that we will be successful in either raising sufficient capital from other sources or improving operations.

Management does not anticipate that revenues or expenses will be materially affected by inflation during the next twelve months of operations.

Our operations are not subject to material seasonal fluctuations.

Off Balance Sheet Commitments

We 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.

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).

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not applicable. The Company is a smaller reporting company.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, under the supervision and with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of March 31, 2012, the end of the period covered by this report. Based on that evaluation, our chief executive officer and chief financial officer concluded that the disclosure controls and procedures employed at the Company as of March 31, 2012 were effective such 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 and is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding disclosure.

However, it should be noted that a controls system cannot provide absolute assurance that the objectives of the controls systems are met and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

Change in Internal Control Over Financial Reporting

There was no change in our internal control over financial reporting during the third quarter of our fiscal year 2012, that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

We are not involved in any material pending legal proceedings other than ordinary routine litigation incidental to our business and, to the best of our knowledge, no material legal proceedings against the Company have been threatened. We are subject to the potential of various claims and legal actions arising in the ordinary course of business, including certain matters relating to past due amounts to creditors. The past due amounts are recorded as liabilities in our consolidated financial statements, and management believes that the amount, if any, that may result from other claims will not have a material adverse effect on our consolidated financial statements.

Item 1A. Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Item 1A – “Risk Factors” in our Annual Report on Form 10-K for the year ended June 30, 2011, which could materially affect our business, financial condition or future results of operations.

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

There were no sales of unregistered equity securities during the three months ended March 31, 2012.

Item 3. Defaults Upon Senior Securities

As more fully discussed under “Liquidity and Capital Resources” above, as of March 31, 2012, we are delinquent in making payments on notes payable and capital lease obligations totaling $1,337,000 and related accrued interest payable of $912,000, and notes payable to related parties of $2,615,000 and related accrued interest payable of $2,601,000.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

Not applicable.

Item 6. Exhibits

The following exhibits are filed as part of this report:

Exhibit No.	Description of Exhibit
3.1	Sixteenth Amendment to Fifth Amended and Restated Articles of Incorporation of Groen Brothers Aviation, Inc. filed January 24, 2012 (1)
3.2	Seventeenth Amendment to Fifth Amended and Restated Articles of Incorporation of Groen Brothers Aviation, Inc. filed February 9, 2012 (2)
3.3	Eighteenth Amendment to Fifth Amended and Restated Articles of Incorporation of Groen Brothers Aviation, Inc. filed April 18, 2012 (3)
10.1	Seventh Amendment to Promissory Notes dated as of February 10, 2012 among Groen Brothers Aviation, Inc. and Lender F named therein*
10.2	Twelfth Amendment to Promissory Notes dated as of February 10, 2012 among Groen Brothers Aviation, Inc. and Lender C named therein*
10.3	Twelfth Amendment to Promissory Notes dated as of February 10, 2012 among Groen Brothers Aviation, Inc. and Lender D named therein*
10.4	Twelfth Amendment to Promissory Notes dated as of February 10, 2012 among Groen Brothers Aviation, Inc. and Lender C named therein*
10.5	Twelfth Amendment to Promissory Notes dated as of February 10, 2012 among Groen Brothers Aviation, Inc. and Lender D named therein*
10.6	Fourteenth Amendment to Promissory Notes dated as of February 10, 2012 among Groen Brothers Aviation, Inc. and Lender B named therein*
10.7	Fourteenth Amendment to Promissory Notes dated as of February 10, 2012 among Groen Brothers Aviation, Inc. and Lender A named therein*
10.8	Fourteenth Amendment to Promissory Notes dated as of February 10, 2012 among Groen Brothers Aviation, Inc. and Lender H named therein*
10.9	Fifteenth Amendment to Promissory Notes dated as of February 10, 2012 among Groen Brothers Aviation, Inc. and Lender B therein*
10.10	Fifteenth Amendment to Promissory Notes dated as of February 10, 2012 among Groen Brothers Aviation, Inc. and Lender H named therein*
10.11	Eighth Amendment to Promissory Notes dated as of April 20, 2012 among Groen Brothers Aviation, Inc. and Lender F named therein*
10.12	Thirteenth Amendment to Promissory Notes dated as of April 20, 2012 among Groen Brothers Aviation, Inc. and Lender C named therein*
10.13	Thirteenth Amendment to Promissory Notes dated as of April 20, 2012 among Groen Brothers Aviation, Inc. and Lender D named therein*
10.14	Thirteenth Amendment to Promissory Notes dated as of April 20, 2012 among Groen Brothers Aviation, Inc. and Lender C named therein*
10.15	Thirteenth Amendment to Promissory Notes dated as of April 20, 2012 among Groen Brothers Aviation, Inc. and Lender D named therein*
10.16	Fifteenth Amendment to Promissory Notes dated as of April 20, 2012 among Groen Brothers Aviation, Inc. and Lender B named therein*

10.17	Fifteenth Amendment to Promissory Notes dated as of April 20, 2012 among Groen Brothers Aviation, Inc. and Lender A named therein*
10.18	Fifteenth Amendment to Promissory Notes dated as of April 20, 2012 among Groen Brothers Aviation, Inc. and Lender H named therein*
10.19	Sixteenth Amendment to Promissory Notes dated as of April 20, 2012 among Groen Brothers Aviation, Inc. and Lender B therein*
10.20	Sixteenth Amendment to Promissory Notes dated as of April 20, 2012 among Groen Brothers Aviation, Inc. and Lender H named therein*
31.1	Section 302 Certification of Chief Executive and Chief Financial Officer*
32.1	Section 1350 Certification of Chief Executive Officer and Chief Financial Officer*
101.ins	XBRL.Instance
101.xsd	XBRL.Schema
101.cal	XBRL.Calculation
101.def	XBRL.Definition
101.lab	XBRL.Label
101.pre	XBRL.Presentation

* Exhibits filed with this report.

(1) Exhibit filed with the Company’s Current Report on Form 8-K filed January 25, 2012 and incorporated herein by reference.

(2) Exhibit filed with the Company’s Quarterly Report on Form 10-Q filed February 15, 2012 and incorporated herein by reference.

(3) Exhibit filed with the Company’s Current Report on Form 8-K filed April 19, 2012 and incorporated herein by reference.

SIGNATURES

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

	GROEN BROTHERS AVIATION, INC.


	/s/ David Groen
	David Groen, President, Chief Executive Officer
	and Chief Financial Officer
	(Principal Executive and Principal Financial Officer)

	Date: May 21, 2012

GROEN BROTHERS AVIATION INC /UT/ 10-Q