10-K 1 transpacific_10k-103112.htm TRANS-PACIFIC AEROSPACE COMPANY, INC. 10-K

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

S ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended October 31, 2012
 
or
 
£ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                     to                  

 

Commission file number: 333-148447

 

Trans-Pacific Aerospace Company, Inc.

(Exact Name of registrant as specified in its charter)

 

Nevada       36-4613360

(State or Other Jurisdiction of

Incorporation)

      

(I.R.S. Employer Identification

Number)

 

2975 Huntington Drive, Suite 107

San Marino, California 91108

(Address of principal executive offices)

 

(626) 796-9804
(Registrant’s telephone number, including area code)

 

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

None

 

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

None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes  ¨  No  x

 

 Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. 

Yes  ¨ No  x

 

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 past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. 

Yes  x     No ¨

 

Indicate 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 S    No  ¨

 

Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  £

 

 
 

 

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

 

Large accelerated filer ¨ Accelerated filer ¨
   
Non-accelerated filer ¨ Smaller reporting company x
(Do not check if a smaller reporting company)  

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)

Yes  ¨  No  x

 

State the aggregate market value of voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter:  $2,038,922

 

State the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date: 78,640,659 shares as of February 1, 2013.

 

 
 

 

  

TABLE OF CONTENTS

 

    Page
PART I  
     
Item 1. Business 1
Item 1A. Risk Factors 6
Item 1B. Unresolved Staff Comments 12
Item 2. Properties 12
Item 3. Legal Proceedings 12
Item 4. Mine Safety Disclosures 13
     
PART II  
     
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer  Purchases of Equity Securities 14
Item 6. Selected Financial Data 14
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 14
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 15
Item 8. Financial Statements and Supplementary Data 16
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 17
Item 9A. Controls and Procedures 17
Item 9B. Other Information 17
     
PART III  
     
Item 10. Directors, Executive Officers and Corporate Governance 18
Item 11. Executive Compensation 20
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 24
Item 13. Certain Relationships and Related Transactions and Director Independence 26
Item 14. Principal Accountant Fees and Services 28
     
PART IV  
     
Item 15. Exhibits and Financial Statement Schedules 29
     
Signatures   32

 

 
 

 

CAUTIONARY NOTICE

 

This annual report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.  Those forward-looking statements include our expectations, beliefs, intentions and strategies regarding the future.  Such forward-looking statements relate to, among other things, Godfrey (China) Limited’s successful qualification of its production facilities; Godfrey’s commencement of manufacturing operations; our distribution of Godfrey’s products; our working capital requirements and results of operations; the further approvals of regulatory authorities; production and/or quality control problems; the denial, suspension or revocation of privileged operating licenses by regulatory authorities; overall industry environment; competitive pressures and general economic conditions.  These and other factors that may affect our financial results are discussed more fully in “Risk Factors” and  “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in this report.  We caution readers not to place undue reliance on any forward-looking statements.  We do not undertake, and specifically disclaim any obligation, to update or revise such statements to reflect new circumstances or unanticipated events as they occur, and we urge readers to review and consider disclosures we make in this and other reports that discuss factors germane to our business.  See in particular our reports on Forms 10-K, 10-Q, and 8-K subsequently filed from time to time with the Securities and Exchange Commission.

 

PART I

 

Item 1.  Business

 

General

 

We are engaged in the business of designing, manufacturing and selling aerospace quality component parts for commercial and military aircraft, space vehicles, power plants and surface and undersea vessels.   Our initial products will be self-lubricating spherical bearings for commercial aircraft.  These bearings are integral to the operation of commercial aircraft and help with several flight-critical tasks, including aircraft flight controls and landing gear.  As of the date of this report, we have not commenced commercial manufacture or sale of our products.

 

We commenced our aircraft component business in February 1, 2010. To date, our operations have focused on assisting Godfrey (China) Limited, a Hong Kong corporation, in the development of its production facility in Guangzhou, China and the design and engineering of Godfrey’s initial product line of spherical bearings.  We own 25% of the capital stock of Godfrey.  Although we have no written agreements with Godfrey concerning our distribution of its products, we expect to market and distribute the products manufactured by Godfrey. Navel Air Systems Command (“NAVAIR”) of the United States Navy has completed the qualification testing of Godfrey’s initial line of bearings. Godfrey expects to receive final approval from NAVAIR in the second quarter of 2013 and commence manufacturing operations in the third quarter of 2013.  We expect to commence marketing and distribution of sale of Godfrey’s initial product line of spherical bearings in the fourth quarter of 2013.

 

Our strategy is to leverage our product design and engineering expertise to form business relationships with local partners in markets outside the United States who will provide manufacturing, sales and distribution capabilities, similar to our relationship with Godfrey.  Our initial target markets for establishing foreign partnerships are China, India and the Middle East.  We intend to partner in these foreign markets with local businesses that can establish in-country production facilities using our product design and engineering expertise, and thereby take advantage of economies available only to local producers.  We intend to serve as the primary distributor of products manufactured by our foreign partners.  In addition to our partners’ foreign based operations, we plan to establish our own manufacturing facility in the United States to provide component parts to U.S. military weapon systems and commercial aerospace end users.

 

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We believe our strategy will permit us to compete more effectively with our larger competitors, who generally have greater financial resources, by:

 

  · Reducing our capital requirements by focusing on the design and engineering portions of the value chain;

  

  · Utilizing our partners' established raw material access, manufacturing facilities and sales and distribution networks;

 

  · Entering emerging international markets that have little in-country component parts manufacturing capacity and little established competition;

 

  · Taking advantage of local sales "offset" regulations that require aircraft original equipment manufacturers (OEMs) such as Airbus and Boeing to procure and utilize local made components for incorporation into products sold; and

 

  · Partnering with existing aerospace companies and investors within our initial target markets to provide us with working capital, political and economic resources and regional business and cultural expertise.

 

We currently have no joint venture or other business relationship in place for the manufacture or sale of our products other than our arrangements with Godfrey.

 

Godfrey (China) Limited

 

Our initial operations have focused on the Chinese bearings market and will be conducted in partnership with Godfrey (China) Limited, a Hong Kong corporation located in Guangzhou, China.   On March 30, 2010, we acquired 25% of the outstanding share capital of Godfrey in exchange for our contribution to Godfrey of technology used for the design and production of SAE-AS81820, 81934 and 81935 self-lubricated spherical bearings, bushings and rod-end bearings.  These bearings and component parts are designed to meet the specifications and standards of the U.S. Navy and are widely used in the manufacture of commercial aircraft, among other products.

 

In September 2010, Godfrey opened a production facility in Guangzhou, China. As of the date of this report, the facility is undergoing the qualification process for approval by the United States Navy.  If approved, the Guangzhou facility will be placed on the Society of Automotive Engineers (SAE) Qualified Producers List, allowing all Chinese and international airframe manufacturers, sub-tier suppliers, MRO facilities, airlines and distributors to purchase parts produced there.  The Guangzhou facility, located in close proximity to Hong Kong, would be the first facility in China qualified for the production of SAE-AS81820, 81934 and 81935 spherical bearings, bushings and rod end bearings.   We currently expect that the Guangzhou facility will complete the qualification process in the second quarter of 2013.  The current schedule would enable the Guangzhou facility to commence commercial deliveries in the fourth quarter of 2013.

 

In addition to our 25% ownership of the outstanding capital shares of Godfrey, two members of our board of directors also beneficially own the capital shares of Godfrey.  Mr. Peter Liu owns 20% of the capital shares of Godfrey and Mr. Alex Kam is an officer and director of a company that owns 5% of the capital shares of Godfrey.  Our chief executive officer, William McKay serves as the chief executive officer of Godfrey.  Godfrey is presently managed by a six person board of managers, which at this time includes three members of our board of directors, Messrs. McKay, Liu and Kam.

 

At the present time, we have no agreements with Godfrey or its shareholders concerning the governance of Godfrey or our participation in its operations.  We believe that Godfrey is dependent on our design and manufacturing expertise and we also believe, based on our communications with the U.S. Navy, that the qualification of Godfrey’s production facility and its sale of bearing products will be conditioned on our direct involvement in the manufacturing and distribution process.  While we are in discussions with Godfrey concerning our formal role in the manufacturing and distribution of its products, as of the date of this report there are no understandings or arrangements concerning our participation in the Godfrey operations.

 

Products

 

We are engaged in the business of designing, manufacturing and selling aerospace quality component parts for commercial and military aircraft, space vehicles, power plants and surface and undersea vessels.  Our product designs address over 3,000 component parts that are utilized in new and used commercial aircraft and military aircraft, space vehicles, power plants and surface and undersea vessels.  Our initial products will be self-lubricating spherical bearings for commercial aircraft.  These bearings are integral to the operation of commercial aircraft and help with several flight-critical tasks, including aircraft flight controls and landing gear.  

 

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Spherical bearings facilitate proper power transmission from one plane surface to another, provide for articulation of mating parts and reduce friction.  In general, a spherical bearing permits angular rotation about a central point in two orthogonal directions within a specified angular limit based on the bearing geometry. Typically, these bearings support a rotating shaft in the bore of the inner ring that must move not only rotationally, as most shafts, but also at angle.  Spherical bearings permit freedom of rotation on the two axes that are not parallel with the shaft axis (although some bearings do permit this also).  Comprised of one ball and one race, the ball is essentially a sphere with a hole bored through the center and the race is a ring that surrounds the ball. The ends of the sphere extend out past the surface of the race. These bearings are not used in rotational applications, but are used in misalignment applications or in hinging applications.

 

Spherical bearings act much like an elbow, wrist or knee joint acts in that they allow for slight rotation and severe misalignment.  In aircraft they are used on doors, hatches, landing gears, some flight control surfaces, slats, leading edges and trailing edges and on horizontal and vertical stabilizers. They are also used in engines as engine hangers and to open and close stator vanes.

 

Customers and Market

 

We plan to supply bearings for use in commercial, military and private aircraft, naval vessels, power plants, wind turbines and sophisticated commercial applications.  Our potential customers include large aerospace companies such as Airbus, Boeing, Embraer, COMAC, General Electric, Rolls Royce, Pratt & Whitney, Honeywell and various aftermarket channels.

 

Manufacturing and Operations

 

We have not commenced commercial manufacture of our products.  Our initial operations have focused on the Chinese bearings market and will be conducted in partnership with Godfrey (China) Limited, a Hong Kong corporation located in Guangzhou, China.  In September 2010, Godfrey opened a production facility in Guangzhou, China.  As of the date of this report, the facility is undergoing the qualification process for approval by the United States Navy.  If approved, the Guangzhou facility will be placed on SAE Qualified Producers List, allowing all Chinese and international airframe manufacturers, sub-tier suppliers, MRO facilities, airlines and distributors to purchase parts produced there.   We currently expect that the Guangzhou facility will complete the qualification process in the second quarter of 2013.  The current schedule would enable the Guangzhou facility to commence commercial deliveries in the fourth quarter of 2013.

 

Our strategy is to leverage our product design and engineering expertise to form business relationships with local partners in markets outside the United States who will provide manufacturing, sales and distribution capabilities, similar to our relationship with Godfrey.  Our initial target markets are China, India and the Middle East.  We intend to partner in these foreign markets with local businesses that have manufacturing or distribution resources and then establish in-country production facilities using our product design and engineering expertise, and thereby take advantage of economies available only to local producers.  We intend to serve as the primary distributor of products manufactured by our foreign partners.

 

In addition to our partners’ foreign based operations, we plan to establish our own manufacturing facility in the United States to provide component parts to U.S. military weapon systems and commercial aerospace end users.  We currently have no business relationships in place for the manufacture or sale of our products, other than our arrangements with Godfrey through its facility in Guangzhou, China which we are assisting in the qualification to SAE-AS81820, 81934 and 81925.

 

The production of our spherical bearings will occur in six general steps: (1) machining of ball and race; (2) preparation of self-lubricating liners; (3) assembly of race and liner; (4) swaging of ball in race; (5) final curing; and (6) final machining. These general steps take approximately 14 days to complete and employ a variety of tools, equipment and processes, some of which can be outsourced or performed at different facilities.  For the foreseeable future, we expect that our production facilities and those of our partners, such as Godfrey, will outsource the machining of the ball and race and the preparation of the liners.  All other steps will be conducted at our production facilities or the facilities of our foreign partners.  Godfrey’s production facility in Guangzhou, China is presently capable of conducting all production steps, other than the machining of the ball and race, the preparation of the liners and final grinding of the bearings, at a capacity that will handle demand for the foreseeable future.

 

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Sales, Marketing and Distribution

 

We have not commenced commercial sales of our products.  Our current strategy is to form business relationships with local partners in markets outside the United States who will provide sales, marketing, and manufacturing capabilities.  We will supply our product design and engineering expertise and also serve as the primary distributor of products manufactured by our joint venture partners.

 

Our initial sales, marketing and distribution efforts will focus on the self-lubricated spherical bearings, bushings and rod-ends to be manufactured by Godfrey at its production facility, in Guangzhou, China.  At the present time, we have no agreements with Godfrey or its shareholders concerning our participation in the distribution of Godfrey’s products.  However, we believe, based on our communications with the U.S. Navy, that the qualification of Godfrey’s production facility and its sale of bearing products will be conditioned on our direct involvement in the distribution process.  While we are in discussions with Godfrey concerning our formal role in the distribution of its products, as of the date of this report, there are no understandings or arrangements concerning our participation in the distribution of Godfrey’s products.

 

We expect to supplement the sales activities of our local-market partners with direct sales efforts by our executive management and internal sales staff.   We intend to implement a strategic brand management initiative that will seek to position the Trans-Pacific name as a global brand with local roots in various foreign countries.  In addition to standard primary touch points including OEMs, airlines and MROs, we will also reach out to leading bearing distributors, the sub-assembly industry and others.  We do not expect to market to the U.S. military until such time as we have established a U.S. based manufacturing facility.  Our marketing elements will include:

 

  · Participation in major air and aerospace trade shows (e.g., China International Aviation & Aerospace Exhibition; Farnborough/Paris; Dubai);

 

  · Participation in trade fairs (for airlines and MROs) sponsored by Boeing, Airbus and Embraer;

 

  · Trade publicity;

 

  · Key market tours to coincide with government-sponsored expositions;

 

  · Sponsorship of “best practice” seminars for airlines and MROs; and

 

  · Sales support materials for distributors (promotional collateral and product DVDs).

 

Competition

 

The markets within the aerospace industry that we plan to serve are relatively fragmented and we face several competitors for many of the products and services we provide. Due to the global nature of the commercial aircraft industry, competition in these categories comes from both U.S. and foreign companies. Competitors in our product offerings range in size from divisions of large public corporations that have significantly greater financial, technological and marketing resources than we do, to small privately-held entities, with only one or two components in their entire product portfolios.  The largest competitors in the sale of spherical bearings for the commercial aircraft industry are Minebea Co. Ltd., an international manufacturer of bearing products headquartered in Tokyo, Japan and traded on the Nikkei Stock Exchange, and RBC Bearings, Inc., an international manufacturer of bearing products headquartered in Oxford, Connecticut and traded on the NASDAQ Stock Market.

 

We expect to compete on the basis of engineering, manufacturing and marketing high quality products which meet or exceed the performance and maintenance requirements of our customers, consistent and timely delivery, and superior customer service and support. Additionally, we plan to take advantage of established long term relationships and sales "offset" regulations (in China and our other target markets) that require aircraft OEMs such as Airbus and Boeing to procure and utilize local made components for incorporation into products sold.

 

Regulations and Laws

 

The commercial aircraft component industry is highly regulated by the original equipment manufacturers (“OEM”), including Boeing and Airbus, and both the Federal Aviation Administration, or the FAA, in the United States and by the Joint Aviation Authorities in Europe and other agencies throughout the world. We, and the components we manufacture, are required to be certified or approved by one or more of these agencies and/or, in many cases, by individual OEMs in order to sell our parts for use in commercial aircraft.  Our foreign sales may be subject to similar approvals or U.S. export control restrictions, however, our management believes that there are no currently existing export restrictions for the products we wish to sell.

 

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In order to sell component parts to the OEMs of commercial aircraft in the United States, our products must be approved by an OEM or government agency, such as the U.S. Navy.  These production approval holders provide quality control and performance criteria and oversight and, in effect, generally limit the number of suppliers directly servicing the commercial aerospace new parts market. In order to directly sell component parts to the aftermarket, we must conform to a separate set of FAA regulations providing for an independent parts manufacturing authority, or PMA, process, which enables suppliers who conform to FAA PMA requirements to sell products to the aftermarket, irrespective of whether the supplier is an approved supplier to the OEM for original equipment or products.

 

Our Chinese partner, Godfrey, is currently undergoing the qualification process for approval by  the United States Navy, the qualifying agency for SAE-AS81820, 81934 and 81935 self-lubricating spherical bearings, bushings and rod-end bearings.  Upon acquiring such approval, Godfrey’s spherical bearings will be eligible for sale to OEMs in the U.S.  Since the PMA process is unavailable to manufacturers in China, products produced at Godfrey’s facilities in China will not be entitled to be sold in the U.S. aftermarket directly by Godfrey.  However, we intend to establish a facility in the United States through which we would be able to sell to the aftermarket the parts manufactured by Godfrey’s facilities in China.

 

In addition, sales of many of our products that will be used on aircraft owned by non-U.S. entities are subject to compliance with U.S. export control laws. Our management believes that none of the products we intend to design or manufacture currently are listed as restricted commodities on the U.S. Commerce Control List and that none of the products nor the technology to manufacture the products currently are subject to export license requirements from any agency of the United States federal government.

 

Our operations are also subject to a variety of worker and community safety laws. The Occupational Safety and Health Act mandates general requirements for safe workplaces for all employees. In addition, OSHA provides special procedures and measures for the handling of certain hazardous and toxic substances.

 

Intellectual Property

 

We have various trade secrets, proprietary information and other intellectual property rights, which we believe, in the aggregate but not individually, are important to our business.

 

Environmental Matters

 

We are subject to federal, state and local environmental laws and regulations, including those governing discharges of pollutants into the air and water, the storage, handling and disposal of wastes and the health and safety of employees. We also may be liable under the Comprehensive Environmental Response, Compensation, and Liability Act or similar state laws for the costs of investigation and clean-up of contamination at facilities currently or formerly owned or operated by us, or at other facilities at which we have disposed of hazardous substances. In connection with such contamination, we may also be liable for natural resource damages, government penalties and claims by third parties for personal injury and property damage. Agencies responsible for enforcing these laws have authority to impose significant civil or criminal penalties for noncompliance. We believe we are currently in material compliance with all applicable requirements of environmental laws. We do not anticipate material capital expenditures for environmental compliance in fiscal 2013.

 

Employees

 

As of the date of this report, we have one employee.  We expect to add additional employees in fiscal 2013 subject to Godfrey’s commencement of manufacturing operations.

 

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Company History

 

We were initially incorporated in the State of Nevada in June 2007, as Gas Salvage Corp., for the purpose of engaging in the exploration and development of oil and gas.  In July 2008, we changed our corporate name to Pinnacle Energy Corp. and from July 2007 through February 2010 we focused on the acquisition and development of oil and gas resources.

 

In the first quarter of 2010, our board of directors approved a change in our business model whereby we would divest our oil and gas properties and acquire the aircraft component part design, engineering and manufacturing business of Harbin Aerospace Company, LLC.  The transaction closed on February 1, 2010 and was structured as our acquisition of the assets of Harbin in exchange for our:

 

  · Issuance of 8,000,000 million shares of our common stock.

 

  · Issuances of a Series A common stock purchase warrant to purchase 4,000,000 shares of our common stock at an exercise price of $0.50 per share. The Series A warrant becomes exercisable on the date that we recognize revenue equal to or exceeding $50,000,000 for any consecutive twelve-month period and expires on January 31, 2015.

 

  · Issuance of a Series B common stock purchase warrant to purchase 4,000,000 shares of our common stock at an exercise price of $1.00 per share. The Series B warrant becomes exercisable on the date that we recognize revenue equal to or exceeding $100 million for any consecutive twelve-month period and expires on January 31, 2018.

 

  · Assumption of $460,000 of liabilities of Harbin.

 

 

William McKay, who was appointed as our chief executive officer and director upon the consummation of the asset acquisition, was the chief executive officer of Harbin and his wife, Nikki Lynn McKay, is the sole member of Harbin.  As part of the acquisition, we assumed $200,000 of obligations under a note payable, plus $11,737 of accrued interest, held by the mother-in-law of Mr. McKay.  The note bears interest at 7% per annum and all principal and interest was due and payable on March 31, 2011.  On June 4, 2010, we entered into an amended and restated convertible promissory note with holder, pursuant to which all principal and interest under the note  was convertible at $0.058 per share and the term of the note was extended to June 3, 2011.  In June 2010, we issued 2,200,000 shares of our common stock to the holder upon conversion of $127,600 of principal under the note. On November 22, 2010 the note was further amended, reducing the fixed conversion price to $.029 per share. During the year ended October 31, 2011, we issued 3,063,958 shares of common stock to the note holder valued at $.029 per the agreement as a full payment of the note payable pursuant to conversion requests.

 

Following completion of the Harbin acquisition, on February 10, 2010, we completed the sale of all of our oil and gas business interest in exchange for cancellation of all obligations under an outstanding promissory note having a principal amount of $1,000,000.  On March 20, 2010, we changed our corporate name to Trans-Pacific Aerospace Company, Inc.

 

Available Information

 

Our website is located at www.transpacificaerospace.com.  The information on or accessible through our website is not part of this annual report on Form 10-K.  A copy of this annual report on Form 10-K is located at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. Information on the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330.  The SEC also maintains an internet site that contains reports and other information regarding our filings at www.sec.gov.

 

Item 1A.  Risk Factors

 

In this report we make, and from time-to-time we otherwise make, written and oral statements regarding our business and prospects, such as projections of future performance, statements of management’s plans and objectives, forecasts of market trends, and other matters that are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.  Statements containing the words or phrases “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimates,” “projects,” “believes,” “expects,” “anticipates,” “intends,” “target,” “goal,” “plans,” “objective,” “should” or similar expressions identify forward-looking statements, which may appear in documents, reports, filings with the Securities and Exchange Commission, news releases, written or oral presentations made by officers or other representatives made by us to analysts, stockholders, investors, news organizations and others, and discussions with management and other of our representatives.  For such statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

 

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Our future results, including results related to forward-looking statements, involve a number of risks and uncertainties.  No assurance can be given that the results reflected in any forward-looking statements will be achieved.  Any forward-looking statement speaks only as of the date on which such statement is made.  Our forward-looking statements are based upon assumptions that are sometimes based upon estimates, data, communications and other information from suppliers, government agencies and other sources that may be subject to revision.  Except as required by law, we do not undertake any obligation to update or keep current either (i) any forward-looking statement to reflect events or circumstances arising after the date of such statement, or (ii) the important factors that could cause our future results to differ materially from historical results or trends, results anticipated or planned by us, or which are reflected from time to time in any forward-looking statement.

 

In addition to other matters identified or described by us from time to time in filings with the SEC, there are several important factors that could cause our future results to differ materially from historical results or trends, results anticipated or planned by us, or results that are reflected from time to time in any forward-looking statement. Some of these important factors, but not necessarily all important factors, include those set out below.

 

Risks Relating to Our Company and Business

 

We do not have a significant operating history and, as a result, there is a limited amount of information about us on which to make an investment decision.   We were incorporated in June 2007 to engage in the business of oil and gas exploration.  We terminated that business line in February 2010 and since then have been engaged in the business of designing, manufacturing and selling aerospace quality component parts for commercial and military aircraft, space vehicles, power plants and surface and undersea vessels.  To date, our operations have focused on assisting Godfrey (China) Limited, a Hong Kong corporation, in the development of its production facility in Guangzhou, China and the design and engineering of Godfrey’s initial product line of spherical bearings. While our chief executive officer, William McKay, has significant experience in the bearing manufacturing industry, our company has no prior operating experience in the manufacture or distribution of bearings.  Accordingly, there is little operating history upon which to judge our current operations or future success.  The likelihood of our success must be considered in light of the problems, expenses, complications and delays frequently encountered in connection with the development of a new business.

 

We are a development-stage business that has not commenced revenue producing operations and expects to incur operating losses until such time, if ever, as we are able to develop significant revenue.   To date, we have not commenced commercial manufacture or sales of our aircraft component products. Accordingly, we have not generated any revenues from these operations nor have we realized a profit from our operations, and there is little likelihood that we will generate significant revenues or realize any profits in the short term.  As we try to build our aircraft component business, we expect a significant increase in our operating costs. Consequently, we expect to continue to incur operating losses and negative cash flow until we generate significant revenue from the sale of our products.

 

The report of our independent registered public accounting firm for the fiscal year ended October 31, 2012 states that due to our losses from operations and lack of working capital there is substantial doubt about our ability to continue as a going concern.

 

Our business is capital intensive and we will need additional capital to execute our business plan and fund operations, and we may not be able to obtain such capital on acceptable terms or at all.   As of October 31, 2012, we had total assets of $24,463 and a working capital deficit of $359,975.  Since October 31, 2012, our working capital has decreased as a result of continuing losses from operations.  We estimate that we require approximately $2 million of additional working capital over the next 12 months in order to fund our marketing and distribution of the initial line of aircraft component products to be manufactured by Godfrey and to fund our expected operating losses as we endeavor to build revenue and achieve a profitable level of operations.  However, there are no commitments or understandings at this time with any third parties for their provision of capital to us.

 

 

-7-
 

 

The report of our independent registered public accounting firm for the fiscal year ended October 31, 2012 states that due to our losses from operations and lack of working capital there is substantial doubt about our ability to continue as a going concern.

 

We will endeavor to raise the additional required funds through various financing sources, including the sale of our equity and debt securities and, subject to our commencement of significant revenue producing operations, the procurement of commercial debt financing.  However, there can be no guarantees that such funds will be available on commercially reasonable terms, if at all.  If such financing is not available on satisfactory terms, we may be unable to expand or continue our business as desired and operating results may be adversely affected.  In addition, any financing arrangement may have potentially adverse effects on us or our stockholders.  Debt financing (if available and undertaken) will increase expenses, must be repaid regardless of operating results and may involve restrictions limiting our operating flexibility.  If we issue equity securities to raise additional funds, the percentage ownership of our existing stockholders will be reduced and the new equity securities may have rights, preferences or privileges senior to those of the holders of our common stock.

 

Our ability to obtain additional capital on acceptable terms or at all is subject to a variety of uncertainties, including:

 

·   our ability to generate revenue and net income;

 

·   investors' perceptions of, and demand for, aircraft component products;

 

·   conditions of the U.S. and other capital markets in which we may seek to raise funds;

 

·   our future results of operations, financial condition and cash flows;

 

·   governmental regulation; and

 

·   economic, political and other conditions in the United States and other countries.

 

Our products are subject to certain approvals and qualification, and the failure to obtain such approvals and qualification would materially reduce our revenues and profitability.   Obtaining product approvals from regulatory agencies and customers is essential to servicing the aerospace market. We will require a substantial number of product approvals to enable us to provide products we intend to manufacture and sell.  Qualification standards are rigorous and parts manufactured at such facilities must meet various qualification testing criteria.  If we (or our joint venture partners) are unable to obtain necessary product approvals or qualification it could result in lost sales and materially reduce our revenues and profitability.

 

Godfrey may not be able complete the product qualification process and commencement of manufacturing operations by our estimated dates, or at all.   In September 2010, Godfrey (China) Limited opened a production facility in Guangzhou, China.  As of the date of this report, the facility is undergoing the qualification process for approval by the United States Navy.  We currently expect that the Guangzhou facility will complete the qualification process in the second quarter of 2013, in which case we expect it will commence commercial manufacturing operations in the third quarter of 2013.  However, no assurance can be given that Godfrey will be able complete the product qualification process and commence manufacturing operations by the estimated dates.

 

We do not have any written agreements concerning our involvement with Godfrey and, as a result, cannot provide any assurance of the nature of our benefit, if any, from the commercial activities of Godfrey apart from our 25% ownership interest.   To date, our operations have focused on assisting Godfrey (China) Limited, in the development of its production facility in Guangzhou, China and the design and engineering of Godfrey’s initial product line of spherical bearings.  We own 25% of the capital stock of Godfrey.  As of the date of this report, we have no agreements with Godfrey or its shareholders concerning the governance of Godfrey or our participation in its operations.  We believe that Godfrey is dependent on our design and manufacturing expertise and we also believe, based on our communications with the U.S. Navy, that the qualification of Godfrey’s production facility and its sale of bearing products will be conditioned on our direct involvement in the manufacturing and distribution process.  While we are in discussions with Godfrey concerning our formal role in the manufacturing and distribution of its products, as of the date of this report, there are no understandings or arrangements concerning the nature of our participation in the Godfrey operations or the economic terms of any such participation.  As result, there can be no assurance that our participation in the operations of Godfrey will be meaningful or that we will derive significant revenues or profits apart from any distributions based on our 25% ownership interest.

 

-8-
 

 

Our business strategy is dependent on our ability to establish local market joint ventures outside the United States.  A critical element of our business strategy is to establish joint venture or other business relationships with local partners in markets outside the United States who will provide manufacturing and sales capabilities. We established our initial business relationship with our Chinese partner, Godfrey, however, there is no assurance that we will be successful in establishing additional joint venture or other business relationships with local partners on terms acceptable to us.   In addition, our reliance on local market partners and joint venture structures will expose us to several risks, including:

 

·       limited or reduced operational control over foreign market operations;

 

·       limited or reduced ability to control capital requirements of or cash flows from foreign operations;

 

·       risks associated with doing business in certain foreign markets where the legal system is less developed or subject to corrupt influences, resulting in uncertainties affecting our ability to protect our interest or pursue dispute resolution;

 

·       logistical and communications challenges posed by under-developed infrastructures;

 

·       changes in local government policies, such as changes in laws and regulations (or the interpretation thereof), restrictions on imports and exports, sources of supply, duties or tariffs, the introduction of measures to control inflation and changes in the rate or method of taxation; and

 

·       where our international operations utilize a local currency as its functional currency, changes in currency exchange rates between the U.S. dollar and functional other currencies will likely have an impact on our earnings.

 

Because we have few proprietary rights, others can provide products substantially equivalent to ours.  We hold no patents.  Although we have developed designs and processes for our line of spherical bearing products, we believe that most of the technology used by us in the design of our products is generally known and available to others.  Consequently, others can develop spherical bearing products similar to ours.  We rely on a combination of confidentiality agreements and trade secret law to protect our confidential information.  In addition, we restrict access to confidential information on a ‘‘need to know’’ basis.  However, there can be no assurance that we will be able to maintain the confidentiality of our proprietary information.   If our proprietary rights are violated, or if a third party claims that we violate their proprietary rights, we may be required to engage in litigation.  Proprietary rights litigation tends to be costly and time consuming.  Bringing or defending claims related to our proprietary rights may require us to redirect our human and monetary resources to address those claims.

 

The bearing industry is highly competitive, and competition could reduce our profitability or limit our ability to grow.   The global bearing industry is highly competitive, and we compete with several U.S. and non-U.S. companies.  We compete primarily based on product qualifications, product line breadth, service and price.  Virtually all of our competitors are presently better able to manage costs than us and many have greater financial resources than we have.  Due to the competitiveness in the bearing industry we may not be able to increase prices for our products to cover increases in our costs, and we may face pressure to reduce prices, which could materially reduce our revenues, gross margin and profitability. Competitive factors, including changes in market penetration, increased price competition and the introduction of new products and technology by existing and new competitors could materiality affect our ability to build revenue and achieve profitability.

 

Weakness in the commercial aerospace industry, as well as the cyclical nature of our customers' businesses generally, could materially reduce our revenues and profitability. The commercial aerospace industry is cyclical and tends to decline in response to overall declines in industrial production.  Margins are highly sensitive to demand cycles, and our potential customers historically have tended to delay large capital projects during economic downturns.  As a result, our business also will be cyclical, and the demand for our products by these customers depends, in part, on overall levels of industrial production, general economic conditions and business confidence levels.  Downward economic cycles have affected our customers and historically reduced sales of our aircraft component products.  Any future material weakness in demand in the commercial aerospace industry could materially reduce our revenues and profitability.

 

-9-
 

 

 

Fluctuating supply and costs of raw materials and energy resources could materially reduce our revenues, cash flow from operations and profitability.   Our business will be dependent on the availability and costs of energy resources and raw materials, particularly steel, generally in the form of specialty stainless and chrome steel, which are specialized steel products used almost exclusively in the aerospace industry. The availability and prices of raw materials and energy sources may be subject to curtailment or change due to, among other things, new laws or regulations, suppliers' allocations to other purchasers, interruptions in production by suppliers, changes in exchange rates and worldwide price levels. Accordingly, our business is subject to the risk of price fluctuations and periodic delays in the delivery of certain raw materials. Disruptions in the supply of raw materials and energy resources could temporarily impair our ability to manufacture our products for our customers or require us to pay higher prices in order to obtain these raw materials or energy resources from other sources, which could thereby affect our net sales and profitability.

 

Unexpected equipment failures, catastrophic events or capacity constraints may increase our costs and reduce our sales due to production curtailments or shutdowns.   Our manufacturing processes will be dependent upon critical pieces of equipment, such as presses, turning and grinding equipment, as well as electrical equipment, such as transformers, and this equipment may, on occasion, be out of service as a result of unanticipated failures.  In addition to equipment failures, our facilities also will be subject to the risk of catastrophic loss due to unanticipated events such as fires, explosions, earthquakes or violent weather conditions.  In the future, we may experience material plant shutdowns or periods of reduced production as a result of these types of equipment failures or catastrophes.  Interruptions in production capabilities will inevitably increase our production costs and reduce sales and earnings for the affected period.

 

We may incur material losses for product liability and recall related claims.  Our aircraft component part business is subject to a risk of product and recall related liability in the event that the failure, use or misuse of any of our products results in personal injury, death, or property damage or our products do not conform to our customers' specifications.  If one of our products is found to be defective, or otherwise results in a product recall, significant claims may be brought against us.  To date, we have not commenced commercial sales of our products and we do not currently maintain product liability insurance coverage for product liability.  Any product liability or recall related claims may result in material losses related to these claims and a corresponding reduction in our cash flow and net income.

 

Environmental regulations may impose substantial costs and limitations on our operations.  We are subject to various federal, state and local environmental laws and regulations, including those governing discharges of pollutants into the air and water, the storage, handling and disposal of wastes and the health and safety of employees. These laws and regulations could subject us to material costs and liabilities, including compliance costs, civil and criminal fines imposed for failure to comply with these laws and regulatory and litigation costs.

 

Risks Relating to Our Common Stock

 

Provisions of our articles of incorporation, our bylaws and Nevada law could delay or prevent a change in control of us, which could adversely affect the price of our common stock.   Our articles of incorporation, our bylaws and Nevada law could delay, defer or prevent a change in control of us, despite the possible benefit to our stockholders, or otherwise adversely affect the price of our common stock and the rights of our stockholders.  For example, our articles of incorporation permit our board of directors to issue one or more series of preferred stock with rights and preferences designated by our board of directors.  We are also subject provisions of the Nevada control share laws that may limit voting rights in shares representing a controlling interest in us.  These provisions could also discourage proxy contests and make it more difficult for you and other stockholders to elect directors other than the candidates nominated by our board.

 

-10-
 

 

Trading in our common shares on the OTC Bulletin Board is limited and sporadic making it difficult for our stockholders to sell their shares or liquidate their investments.   Our common shares are currently listed for public trading on the OTC Bulletin Board. We consider our common stock to be “thinly traded” and any last reported sale prices may not be a true market-based valuation of the common stock.  There can be no assurance that an active market for our common stock will develop.  In addition, the stock market in general, and early stage public companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of such companies.   If we are unable to develop a trading market for our common shares, you may not be able to sell your common shares at prices that you consider to be fair or at times that are convenient for you, or at all.

 

The limited and sporadic trading in our common shares also could affect our ability to raise further working capital and adversely impact our operations.   Because we currently expect to finance our operations primarily through the sale of our equity securities, the limited and sporadic trading in our common stock could be especially detrimental to our liquidity and our continued operations.  Investors in public companies tend to place a value on the investment security’s liquidity and, likewise, tend to be less interested in investing in securities for which there is not an established trading market.  In addition, because public companies tend to raise equity capital based on (and usually at a discount to) current trading prices, a thinly traded security may result in a trading price at the time of an equity raise that is less than a fair value for our shares, thus resulting in greater equity dilution to our shareholders.  Any reduction in our ability to raise equity capital in the future would force us to reallocate funds, if any are available, from other planned uses and would have a significant negative effect on our business plans and operations, including our ability to continue our current operations.

 

Our common stock may be deemed a "penny stock", which would make it more difficult for our investors to sell their shares.   Our common stock may be subject to the "penny stock" rules adopted under Section 15(g) of the Exchange Act. The penny stock rules apply to non-Nasdaq listed companies whose common stock trades at less than $5.00 per share or that have tangible net worth of less than $5,000,000 ($2,000,000 if the company has been operating for three or more years).  These rules require, among other things, that brokers who trade penny stock to persons other than "established customers" complete certain documentation, make suitability inquiries of investors and provide investors with certain information concerning trading in the security, including a risk disclosure document and quote information under certain circumstances.  Many brokers have decided not to trade penny stocks because of the requirements of the penny stock rules and, as a result, the number of broker-dealers willing to act as market makers in such securities is limited. If we remain subject to the penny stock rules for any significant period, it could have an adverse effect on the market, if any, for our securities.  As long as our securities are subject to the penny stock rules, investors will find it more difficult to dispose of our securities.

 

We are not a Section 12 registrant, which means that we are not subject to the SEC’s proxy rules and our shareholders are not subject to the SEC’s beneficial ownership reporting rules.   As of the date of this report, we are required to file certain periodic reports with the SEC, including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, pursuant to Section 15(d) of the Securities Exchange Act of 1934.  Most SEC reporting companies, including all U.S. domiciled SEC reporting companies whose shares are listed on the NYSE or NASDAQ, file reports with the SEC pursuant to Section 12 of the Exchange Act.  These so-called “Section 12 registrants” are required to file with the SEC, in addition to the aforementioned reports we are required to file, proxy or information statements in connection with any action taken by shareholders of the reporting company, and their shareholders are required to file with the SEC beneficial ownership reports on Schedules 13D and 13G pursuant to Section 13 of the Exchange Act and Forms, 3, 4 and 5 pursuant to Section 16 of the Exchange Act.  We will become a Section 12 registrant at such time as we attain $10 million in assets and 500 record holders of our common stock or we otherwise volunteer to become a Section 12 registrant.  However, until such time as we become a Section 12 registrant, you will not have the benefit of the disclosure provided by SEC mandated proxy statement or information statements in connection with any voting or consents by our shareholders nor will you have the benefit of the disclosure provided by way of beneficial ownership reports by our shareholders.

 

The Financial Industry Regulatory Authority, or FINRA, has adopted sales practice requirements which may also limit a stockholder's ability to buy and sell our stock.   In addition to the "penny stock" rules described above, FINRA has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer's financial status, tax status, investment objectives and other information.  Under interpretations of these rules, FINRA believes that there is a high probability that speculative low priced securities will not be suitable for at least some customers.  FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit your ability to buy and sell our stock and have an adverse effect on the market for our shares.

 

-11-
 

 

Investors should not anticipate receiving cash dividends on our common stock.   We have never declared or paid any cash dividends or distributions on our common stock and intend to retain our future earnings, if any, to support operations and to finance expansion.  Therefore, we do not anticipate paying any cash dividends on our common stock in the foreseeable future.

 

Sales of a substantial number of shares of our common stock may adversely affect the market price of our common stock or our ability to raise additional capital.   Sales of a substantial number of shares of our common stock in the public market, or the perception that large sales could occur, could cause the market price of our common stock to decline or limit our future ability to raise capital through an offering of equity securities. The sale of substantial amounts of our common stock in the public market could create a circumstance commonly referred to as an "overhang" and in anticipation of which the market price of our common stock could fall. The existence of an overhang, whether or not sales have occurred or are occurring, also could make more difficult our ability to raise additional financing through the sale of equity or equity-related securities in the future at a time and price that we deem reasonable or appropriate. Our articles of incorporation permits the issuance of up to 150,000,000 shares of common stock and 5,000,000 shares of preferred stock. As of February 1, 2013, we had an aggregate of 71,359,341 shares of our common stock and 5,000,000 shares of our preferred stock authorized but unissued. Thus, we have the ability to issue substantial amounts of stock in the future. No prediction can be made as to the effect, if any, that market sales of our common stock will have on the market price for our common stock. Sales of a substantial number could adversely affect the market price of our shares.

 

Item 1B.  Unresolved Staff Comments

 

Not applicable.

 

Item 2.  Properties

 

Our executive offices are located in San Marino, California. We lease approximately 480 square feet at the rate of $792 per month pursuant to a month to month agreement.  At such time as our increased operations warrant, we intend to acquire larger leased properties in the general Los Angeles, California area.

 

Item 3.  Legal Proceedings

 

On July 1, 2011, a Complaint was filed in the Superior Court of the State of California, in Orange County, California, by Trans-Pacific Aerospace Company, Inc. and one of our shareholders, Harbin Aerospace Company, LLC, against Monarch Bay Associates, LLC, a FINRA member firm, and certain of its officers, employees and affiliates, including David Walters, Keith Moore, Mathew Szot and Cardiff Partners, LLC (“Defendants”). The Complaint alleges that Monarch Bay Associates entered into investment banking agreements initially with Harbin Aerospace and then subsequently with Trans-Pacific Aerospace based upon certain misrepresentations and omissions of material fact by Monarch Bay and its principals, David Walters and Keith Moore. The Complaint further alleges that Monarch Bay, Walters, Moore and Szot breached their fiduciary duties owed to Trans-Pacific Aerospace and Harbin Aerospace and otherwise engaged in acts of securities and common law fraud, professional negligence and unlawful practices under the California Business and Professions Code. The Complaint seeks, among other things, (i) general and special damages in an amount to be proven at trial; (ii) the rescission of certain material agreements entered into between Trans-Pacific Aerospace or Harbin Aerospace, on the one hand, and the Defendants, on the other, and (iii) the Defendants return of all cash and stock-based compensation received from either Trans-Pacific Aerospace or Harbin Aerospace in breach of the defendants’ fiduciary duties or applicable law. David Walters and Keith Moore are former members of the board of directors of Trans-Pacific Aerospace and Walters and Mathew Szot are former executive officers of Trans-Pacific Aerospace. The Defendants as a group are believed to own in excess of 9% of the issued and outstanding common shares of Trans-Pacific Aerospace.

 

On September 12, 2011, the Defendants filed a Cross-Complaint against Trans-Pacific Aerospace or Harbin Aerospace alleging the claims of Trans-Pacific Aerospace and Harbin Aerospace were released pursuant to a Settlement Agreement and Release dated October 19, 2010 between Trans-Pacific Aerospace and the Defendants. In their Cross-Complaint, the Defendants allege that although Harbin Aerospace was not a party to the Settlement Agreement and Release, Harbin Aerospace had effectively transferred to Trans-Pacific Aerospace any claims Harbin Aerospace had against the Defendants as part of Harbin Aerospace’s sale of assets to Trans-Pacific Aerospace in February 2010, and that such claims were then effectively released by Trans-Pacific Aerospace by way of the Settlement Agreement and Release dated October 19, 2010.

 

On December 5, 2011, the Defendants filed a First Amended Cross-Complaint against the Company and Harbin Aerospace for declaratory relief, breach of contract, specific performance, and indemnity, alleging that the claims of the Company and Harbin were released pursuant to the aforementioned settlement agreement. The Company and Harbin have filed an Answer to the First Amended Cross-Complaint denying the allegations and setting forth affirmative defenses. The Company and Harbin believe that the allegations contained within this First Amended Cross-Complaint are meritless.

 

-12-
 

 

On January 30, 2013, the Company, Harbin, the Defendants, and other parties entered into a settlement agreement (the “Settlement Agreement”) resolving the action.  Under the terms of the Settlement Agreement, Defendant Cardiff Partners, LLC (“Cardiff”) agreed to return 3,728,503 shares of the Company’s common stock to the Company for cancellation.  The Company agreed that Cardiff could retain 2,000,000 shares of the Company’s common stock, and that the retained shares would be subject to a lock-up/leak-out arrangement.  In addition, the parties agreed to amend certain Series A and Series B common stock purchase warrants held by Cardiff to extend the expiration date of said warrants to March 20, 2021 and to allow for the vesting of such warrants upon a “change in control” of the Company.  In addition, the Company agreed to indemnify the Defendants for certain matters arising out of the Settlement Agreement and for certain matter arising out the Defendants’ status or conduct as a director, officer, employee or agent of the Company.  The parties agreed to dismiss the action with prejudice and the Company, Harbin, and the other parties, on the one hand, and the Defendants, on the other hand, have agreed to a full and complete settlement and general release of all claims asserted by the parties regarding the subject matter of the action.  The court shall retain jurisdiction to enforce the terms of the Settlement Agreement.

 

Item 4. 

Mine Safety Disclosures.

 

N/A.

 

-13-
 

 

 

PART II

 

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

 

Market Information

 

Our common stock is quoted on the OTC Bulletin Board under the symbol "TPAC". The following table indicates the quarterly high and low last sale prices for shares of our common stock on the OTC Bulletin Board for the fiscal years ending October 31, 2012 and October 31, 2011.   

 

 

2012  Low  High
Fourth Quarter  $0.06   $0.14 
Third Quarter  $0.06   $0.12 
Second Quarter  $0.05   $0.09 
First Quarter  $0.06   $0.11 

 

2011  Low  High
Fourth Quarter  $0.09   $0.13 
Third Quarter  $0.10   $0.14 
Second Quarter  $0.12   $0.18 
First Quarter  $0.09   $0.26 

 

 

Holders of Record

 

As of February 1, 2013, we had outstanding 78,640,659 shares of common stock, held by 36 shareholders of record.

 

Dividend Policy

 

We have never declared or paid cash dividends on our common stock. We presently intend to retain earnings to finance the operation and expansion of our business and do not anticipate declaring cash dividends in the foreseeable future.

 

Item 6. Selected Financial Data

 

Not applicable.

 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

We intend for this discussion to provide the reader with information that will assist in understanding our financial statements, the changes in certain key items in those financial statements from year to year, and the primary factors that accounted for those changes, as well as how certain accounting principles affect our financial statements.  This discussion should be read in conjunction with our consolidated financial statements and accompanying notes as of and for the fiscal years ended October 31, 2012 and October 31, 2011 included elsewhere in this report.

 

Overview

 

We are engaged in the business of designing, manufacturing and selling aerospace quality component parts for commercial and military aircraft, space vehicles, power plants and surface and undersea vessels.   Our initial products will be self-lubricating spherical bearings for commercial aircraft.  These bearings are integral to the operation of commercial aircraft and help with several flight-critical tasks, including aircraft flight controls and landing gear.  As of the date of this report, we have not commenced commercial manufacture or sale of our products.

 

-14-
 

 

We commenced our aircraft component business in February 1, 2010. To date, our operations have focused on assisting Godfrey (China) Limited, a Hong Kong corporation, in the development of its production facility in Guangzhou, China and the design and engineering of Godfrey’s initial product line of spherical bearings.  We own 25% of the capital stock of Godfrey.  Although we have no written agreements with Godfrey concerning our distribution of its products, we expect to market and distribute the products manufactured by Godfrey. NAVAIR has completed the qualification testing of Godfrey’s initial line of bearings. Godfrey expects to receive final approval from NAVAIR in the second quarter of 2013 and commence manufacturing operations in the third quarter of 2013. We expect to commence marketing and distribution of sale of Godfrey’s initial product line of spherical bearings in the fourth quarter of 2013.

 

Results of Operations - Years Ended October 31, 2012 and 2011

 

We have not commenced revenue producing operations and do not expect to until the fourth quarter of 2013, at the earliest, at which time we expect to commence the distribution of Godfrey’s line of spherical bearings.  During the 2012 fiscal year, we incurred $1,478,822 of expenses compared to $2,923,603 during fiscal 2011.  Our operating expenses consist primarily of general and administrative expenses and the decrease in operating expenses from fiscal 2011 to fiscal 2012 was attributable primarily to decrease in stock based compensation, professional fees, and consulting fees.  We expect our operating expenses will significantly increase at such time as we commence the distribution of Godfrey’s spherical bearings.

 

During the 2012 fiscal year, we incurred a net loss from continuing operations of $1,532,755 compared to a net loss from continuing operations of $3,040,825 during fiscal 2011.  The decrease in our net loss in 2012 was attributable primarily to decrease in stock based compensation, professional fees, consulting fees, and interest expenses.

 

Financial Condition

 

Liquidity and Capital Resources

 

As of October 31, 2012, we had total assets of $24,463 and a working capital deficit of $359,975.  Since October 31, 2012, our working capital has decreased as a result of continuing losses from operations.  We estimate that we require approximately $2 million of additional working capital over the next 12 months in order to fund our expected marketing and distribution of the initial line of aircraft component products to be manufactured by Godfrey and to fund our expected operating losses as we endeavor to build revenue and achieve a profitable level of operations.  However, there are no commitments or understandings at this time with any third parties for their provision of capital to us.

 

We will endeavor to raise the additional required funds through various financing sources, including the sale of our equity and debt securities and, subject to our commence of significant revenue producing operations, the procurement of commercial debt financing.  However, there can be no guarantees that such funds will be available on commercially reasonable terms, if at all.  If such financing is not available on satisfactory terms, we may be unable to expand or continue our business as desired and operating results may be adversely affected.  In addition, any financing arrangement may have potentially adverse effects on us or our stockholders.  Debt financing (if available and undertaken) will increase expenses, must be repaid regardless of operating results and may involve restrictions limiting our operating flexibility.  If we issue equity securities to raise additional funds, the percentage ownership of our existing stockholders will be reduced and the new equity securities may have rights, preferences or privileges senior to those of the holders of our common stock.

 

The report of our independent registered public accounting firm for the fiscal year ended October 31, 2012 states that due to our losses from operations and lack of working capital there is substantial doubt about our ability to continue as a going concern.

 

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet financing arrangements.

 

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

 

Not applicable.

 

-15-
 

 

Item 8. Financial Statements and Supplementary Data

 

Index To Financial Statements

 

    Page
     
Report of Independent Registered Public Accounting Firm   F-1
     
Balance Sheets at October 31, 2012 and 2011   F-2
     
Statements of Operations for the Years Ended October 31, 2012 and 2011 and the period from inception (June 5, 2007) to October 31, 2012   F-3
     
Statement of Changes In Stockholders’ Equity (Deficit) for the period from inception (June 5, 2007) to October 31, 2012   F-4
     
Statements of Cash Flows for the Years Ended October 31, 2012 and 2011 and the period from inception (June 5, 2007) to October 31, 2012   F-7
     
Notes to Financial Statements   F-8

 

-16-
 

 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors

Trans-Pacific Aerospace Company, Inc.

(A Development Stage Company)

 

We have audited the accompanying balance sheets of Trans-Pacific Aerospace Company, Inc. (A Development Stage Company) as of October 31, 2012 and 2011 and the related statements of operations, changes in stockholders' equity (deficit) and cash flows for the years then ended. The financial statements for the period from Inception (June 5, 2007) to October 31, 2009 were audited by other auditors whose report expressed an unqualified opinion on those statements. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Trans-Pacific Aerospace Company, Inc. as of October 31, 2012 and 2011, and the results of its operations and cash flows for the periods described above in conformity with accounting principles generally accepted in the United States of America.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company suffered a net loss from operations and has a net capital deficiency, which raises substantial doubt about its ability to continue as a going concern. Management’s plans regarding those matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

/s/ M&K CPAS, PLLC

 

www.mkacpas.com

 

Houston, Texas

February 14, 2013

 

 

F-1
 

TRANS-PACIFIC AEROSPACE COMPANY, INC.

(A Development Stage Company)

Balance Sheets

 

   October 31,   October 31, 
   2012   2011 
ASSETS 
Current assets          
Cash and cash equivalents  $18,219   $36,876 
Prepaid expenses   792    1,584 
Total current assets   19,011    38,460 
           
Non-Current assets          
Office equipment, net of accumulated depreciation of $1,414 and  $593, respectively   3,868    3,017 
Security deposit   1,584    1,584 
Total non-current assets   5,452    4,601 
           
Total assets  $24,463   $43,061 
           
LIABILITIES AND STOCKHOLDERS' (DEFICIT)          
Current liabilities          
Accounts payable and accrued expenses  $91,661   $68,319 
Income taxes payable   1,629    1,629 
Accrued salary and payroll taxes   20,433    151,247 
Due to Godfrey (China) Ltd - related party   –    30,000 
Accrued interest payable   5,263    5,263 
Convertible note payable, currently in Default   260,000    260,000 
Total current liabilities   378,986    516,458 
           
Total liabilities   378,986    516,458 
           
Stockholders' (deficit)          
Preferred stock, par value $0.001, 5,000,000 shares authorized. No shares issued and outstanding at October 31, 2012 and Ocotber 31, 2011   –    – 
Common stock, par value $0.001, 150,000,000 shares authorized.73,367,389 shares issued and outstanding at October 31, 2012 and 54,169,244 shares issued and outstanding at October 31, 2011   73,367    54,169 
Additional paid-in capital   9,920,360    8,204,875 
Common stock to be issued   119,410    198,000 
Deficit accumulated during the development stage   (10,467,660)   (8,930,441)
           
Total stockholders' (deficit)   (354,523)   (473,397)
           
Total liabilities and stockholders' (deficit)  $24,463   $43,061 

 

See accompanying notes to financial statements

 

F-2
 

TRANS-PACIFIC AEROSPACE COMPANY, INC.

(A Development Stage Company)

Statements of Operations

 

   For the
Year Ended
October 31,		   Cumulative
from Inception
(June 5, 2007)		 
   2012   2011   to October 31, 2012 
             
Operating expenses               
Professional fees  $140,092   $510,163   $752,858 
Consulting   26,250    36,500    290,250 
Other general and administrative   1,312,480    2,376,940    6,262,723 
                
Total operating expenses   1,478,822    2,923,603    7,305,831 
                
Operating loss from continuing operations   (1,478,822)   (2,923,603)   (7,305,831)
                
Impairment of goodwill   –    –    (2,469,404)
Loss on induced debt conversion   –    (55,000)   (55,000)
Bad debt expense   (35,733)   –    (35,733)
Interest expense, net   (18,200)   (62,222)   (380,708)
                
Net loss from continuing operations  $(1,532,755)  $(3,040,825)  $(10,246,676)
                
Discontinued operations               
Net gain (loss) from discontinued operations   –    –    (213,194)
                
Loss before income taxes   (1,532,755)   (3,040,825)   (10,459,870)
                
Income taxes   (4,464)   (3,326)   (7,790)
                
Net Loss   (1,537,219)   (3,044,151)   (10,467,660)
                
Basic and dilutive net loss from operations per share  $(0.02)  $(0.07)     
                
Weighted average number of common shares outstanding, basic and diluted   67,440,727    43,353,134      

 

 

See accompanying notes to financial statements

 

F-3
 

TRANS-PACIFIC AEROSPACE COMPANY, INC.

(A Development Stage Company)

Statement of Stockholders' Equity (Deficit)

 

   Common Stock   Additional Paid-In   Common Stock   Deficit Accumulated
during the Development		     
   Shares   Amount   Capital   To Be Issued   Stage   Total 
                         
Inception, June 5, 2007   –   $–   $–   $–   $–   $– 
                               
Common stock issued for cash   13,140,000    13,140    253,161    –    –    266,301 
                               
Common stock issued for oil and gas working interest   2,700,000    2,700    87,300    –    –    90,000 
                               
Net loss from continuing operations for the year ended October 31, 2007   –    –    –    –    (13,363)   (13,363)
                               
Balances, October 31, 2007   15,840,000   $15,840   $340,461   $–   $(13,363)  $342,938 
                               
Net loss from continuing operations for the year ended October  31, 2008   –    –    –    –    (47,897)   (47,897)
                               
Balances, October 31, 2008   15,840,000   $15,840   $340,461   $–   $(61,260)  $295,041 
                               
Common stock retired   (5,250,000)   (5,250)   5,250    –    –    – 
                               
Common stock issued for services   550,000    550    378,950    –    –    379,500 
                               
Common stock issued for cash   52,083    52    24,930    –    –    24,982 
                               
Net loss from continuing operations for the year ended October 31, 2009   –    –    –    –    (606,809)   (606,809)
                               
Net loss from discontinued operations for the year ended October 31, 2009   –    –    –    –    (283,137)   (283,137)
                               
Balances, October 31, 2009   11,192,083   $11,192   $749,591   $–   $(951,206)  $(190,423)
                               

F-4
 

TRANS-PACIFIC AEROSPACE COMPANY, INC.

(A Development Stage Company)

Statement of Stockholders' Equity (Deficit)

(continued)

 

   Common Stock   Additional Paid-In   Common Stock   Deficit Accumulated
during the Development		     
   Shares   Amount   Capital   To Be Issued   Stage   Total 
Common stock issued for cash   3,091,700    3,092    226,890    –    –    229,982 
                               
Common stock issued for Board of Directors services   600,000    600    126,900    –    –    127,500 
                               
Common stock issued for payment on outstanding wages   2,141,514    2,142    527,546    –    –    529,688 
                               
Common stock issued for payment on outstanding liabilities   558,340    558    113,389    –    –    113,947 
                               
Common stock issued for services   3,250,000    3,250    803,871    –    –    807,121 
                               
Common stock issued for acquisition of aerospace assets   8,000,000    8,000    1,984,000    –    –    1,992,000 
                               
Beneficial conversion feature of convertible note payable   –    –    216,455    –    –    216,455 
                               
Common stock issued for acquisition of tooling asset   328,000    328    104,632    –    –    104,960 
                               
Common stock issued for conversion of notes payable   2,200,000    2,200    125,400    –    –    127,600 
                               
Common stock issued in connection with settlement agreement   1,838,649    1,839    292,346    –    –    294,185 
                               
Contributed capital, from Godfrey   –    –    50,380              50,380 
                               
Amortization of stock options   –    –    18,051    –    –    18,051 
                               
Common stock to be issued for services   –    –    –    165,000    –    165,000 
                               
Net loss from continuing operations for the  year ended October 31, 2010   –    –    –    –    (4,935,084)   (4,935,084)
                               
Balances, October 31, 2010   33,200,286   $33,200   $5,339,451   $165,000   $(5,886,290)  $(348,639)

  

F-5
 

TRANS-PACIFIC AEROSPACE COMPANY, INC.

(A Development Stage Company)

Statement of Stockholders' Equity (Deficit)

(continued)

 

   Common Stock   Additional Paid-In   Common Stock   Deficit Accumulated
during the Development		     
   Shares   Amount   Capital   To Be Issued   Stage   Total 
                               
Common stock issued for cash   10,869,000    10,869    560,177    –    –    571,046 
                               
Common stock issued in lieu of finders fees   848,000    848    (848)               
                               
Common stock issued for Board of Directors services   3,000,000    3,000    507,000    –    –    510,000 
                               
Common stock issued for services & compensation   3,338,000    3,338    287,662    –    –    291,000 
                               
Common stock issued for conversion of notes payable   3,063,958    3,064    85,791    –    –    88,855 
                               
Additional paid in capital from induced debt conversion   –    –    55,000    –    –    55,000 
                               
Amortization of stock options   –    –    1,333,467    –    –    1,333,467 
                               
Common stock to be issued for services   –    –    –    33,000    –    33,000 
                               
Common stock retired/cancelled   (150,000)   (150)   150    –    –    – 
                               
Contribution of officer salaries             37,025              37,025 
                               
Net loss from continuing operations for the year ended October 31, 2011   –    –    –    –    (3,044,151)   (3,044,151)
                               
Balances, October 31, 2011   54,169,244   $54,169   $8,204,875   $198,000   $(8,930,441)  $(473,397)
                               
Common stock issued for cash   13,098,145    13,098    483,802    56,421    –    553,321 
                               
Common stock issued in lieu of finders fees   1,025,000    1,025    (1,025)   –    –    – 
                               
Common stock issued for Board of Directors services   3,500,000    3,500    346,500    –    –    350,000 
                               
Common stock issued for services & compensation   1,575,000    1,575    175,540    (135,011)   –    42,104 
                               
Amortization of stock options   –    –    362,468    –    –    362,468 
                               
Imputed interest   –    –    18,200    –    –    18,200 
                               
Contribution of officer salaries   –    –    330,000    –    –    330,000 
                               
Net loss from continuing operations for the year ended October 31, 2012   –    –    –    –    (1,537,219)   (1,537,219)
                               
Balances, October 31, 2012   73,367,389   $73,367   $9,920,360   $119,410   $(10,467,660)  $(354,523)

 

See accompanying notes to financial statements

 

F-6
 

TRANS-PACIFIC AEROSPACE COMPANY, INC.

(A Development Stage Company)

Statements of Cash Flows

 

   Year Ended October 31,   Cumulative from Inception (June 5, 2007) 
   2012   2011   to October 31, 2012 
Cash flows from operating activities:               
Net loss from continuing operations  $(1,537,219)  $(3,044,151)   (10,254,465)
Gain (loss) from discontinued operations   –    –    (213,194)
Adjustments to reconcile net loss to net cash used in operating activities:               
Stock based compensation   754,572    2,167,467    5,120,778 
Amortization of debt discount   –    59,284    236,787 
Imputed interest expense   18,200    –    18,200 
Loss on induced debt conversion   –    55,000    55,000 
Gain on disposal of discontinued assets   –    –    (115,528)
Loss from impairment of goodwill   –    –    2,469,404 
Depreciation expense   821    593    18,914 
Loss from settlement with common stock   –    –    22,460 
Impairment of fixed assets   –    –    82,500 
Impairment of oil & gas interests   –    –    190,000 
Contribution of officer salaries   330,000    37,025    367,025 
Change in operating assets and liabilities:               
Prepaid expenses   792    (1,584)   (792)
Security deposit   –    (1,584)   (1,584)
Due to Godfrey (China) Ltd   (30,000)   –    50,380 
Accounts payable and accrued expenses   23,342    61,528    232,040 
Income taxes payable   –    1,629    1,629 
Accounts payable - related party   –    (4,379)   (4,379)
Accrued salary and payroll taxes   (130,814)   74,729    125,434 
Accrued interest payable   –    5,263    125,508 
Net cash used in operating activities   (570,306)   (589,180)   (1,473,883)
                
Cash flows from investing activities               
Sale of equipment   –    –    82,500 
Notes receivable   –    –    (26,000)
Purchase of equipment   (1,672)   (3,610)   (105,282)
Oil & gas working interest   –    –    (100,000)
Net cash used in investing activities   (1,672)   (3,610)   (148,782)
                
Cash flows from financing activities:               
Common stock issued for cash and for contributed capital   553,321    571,046    1,640,884 
                
Net cash provided by financing activities   553,321    571,046    1,640,884 
                
Net increase / decrease in cash   (18,657)   (21,744)   18,219 
Cash, beginning of the period   36,876    58,620    – 
                
Cash, end of the period  $18,219   $36,876   $18,219 
                
Supplemental cash flow disclosure:               
Interest paid  $–   $–   $– 
Income taxes paid  $4,464   $1,697   $6,161 
                
Supplemental disclosure of non-cash transactions:               
Common stock issued for payment on outstanding liabilities  $–   $–   $136,000 
Common stock issued for payment on outstanding wages  $–   $–   $105,000 
Common stock issued for conversion of notes payable  $–   $88,855   $216,455 
Common stock issued for finders fees  $1,025   $848   $1,873 
Retirement of common shares  $–   $150   $5,400 
Acquisition of oil and gas properties in exchange for note payable  $–   $–   $1,000,000 
Acquisition of tooling assets  $–   $–   $82,500 
Acquisition of intellectual property  $–   $–   $2,469,404 
Beneficial conversion feature of convertible note payable  $–   $–   $216,455 

 

See accompanying notes to financial statements 

F-7
 

Trans-Pacific Aerospace Company, Inc.

(A Development Stage Company)

Notes to Financial Statements

October 31, 2012

 

 

NOTE 1 – BACKGROUND AND ORGANIZATION

 

Organization

 

The Company was incorporated in the State of Nevada on June 5, 2007, as Gas Salvage Corp. for the purpose of engaging in the exploration and development of oil and gas. In July 2008, the Company changed its name to Pinnacle Energy Corp. On February 1, 2010, the Company completed the acquisition of the aircraft component part design, engineering and manufacturing assets of Harbin Aerospace Company, LLC (“HAC”). The transaction was structured as a business combination. Following completion of the HAC acquisition, the Company’s Board of Directors decided to dispose of the oil and gas business interests and focus on the aircraft component market. On February 10, 2010, the Company completed the sale of all of its oil and gas business interests in exchange for cancellation of all obligations under an outstanding promissory note having a principal amount of $1,000,000. Pursuant to FASB standards, the Company has retro-actively presented its oil and gas business as discontinued operations.

 

In March 2010, the Company changed its name to Trans-Pacific Aerospace Company, Inc.

 

On July 27, 2008, the Company completed a three-for-one stock split of the Company’s common stock. The share and per-share information disclosed within this Form 10-K reflect the completion of this stock split.

 

Business Overview

 

The Company was in the business of acquiring and developing oil and gas properties until February 2010.

 

The Company’s aircraft component business was commenced on February 1, 2010. To date, its operations have focused on product design and engineering.  The Company has not commenced commercial manufacture or sales of its products.

 

The Company designs, manufactures and sells aerospace quality component parts for commercial and military aircraft, space vehicles, power plants and surface and undersea vessels.  These parts have applications in both newly constructed platforms and as spares for existing platforms. The Company’s initial products are self-lubricating spherical bearings that help with several flight-critical tasks, including aircraft flight controls and landing gear.   

 

Going Concern

 

The Company's financial statements are prepared using the accrual method of accounting in accordance with accounting principles generally accepted in the United States of America, and have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. The Company incurred a net loss from operations of $1,537,219 during the year ended October 31, 2012, and an accumulated deficit of $10,467,660 since inception. The Company has not yet established an ongoing source of revenues sufficient to cover its operating costs and to allow it to continue as a going concern. The ability of the Company to continue as a going concern is dependent on the Company obtaining adequate capital to fund operating losses until it becomes profitable. If the Company is unable to obtain adequate capital, it could be forced to cease development of operations.

 

In order to continue as a going concern, develop a reliable source of revenues, and achieve a profitable level of operations, the Company will need, among other things, additional capital resources. Management’s plans to continue as a going concern include raising additional capital through sales of common stock and or a debt financing. However, management cannot provide any assurances that the Company will be successful in accomplishing any of its plans.

 

The ability of the Company to continue as a going concern is dependent upon its ability to successfully accomplish the plans described in the preceding paragraph and eventually secure other sources of financing and attain profitable operations. The Company anticipates that losses will continue until such time, if ever, that the Company is able to generate sufficient revenues to support its operations. The accompanying financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

 

F-8
 

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

The Company maintains its accounting records on an accrual basis in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”).

 

On March 30, 2010, the Company acquired 25% of the outstanding share capital of Godfrey (China) Limited, a Hong Kong corporation (“Godfrey”), in exchange for the Company’s technology used for the design and production of SAE-AS81820, 81934 and 81935 self-lubricated spherical bearings, bushings and rod-end bearings. The Company legally owns 25% of Godfrey. The investment in Godfrey has been accounted for under the Equity Method whereby the investment in Godfrey is treated as an asset. The asset has been determined to be fully impaired with no value being shown on the balance sheet. Income and losses proportional to the Company’s investment in Godfrey respectively increase or decrease the carrying value of the investment. Losses are only recognized to the extent of the Company’s investment in Godfrey. When and if the carrying value becomes zero, losses become suspended and are recognized only when Godfrey realizes income. At October 31, 2012 there were suspended losses of $583,648. See Note 4 for further discussion.

 

Use of Estimates

 

The preparation of the financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Actual results could differ from those estimates.

 

Cash and Equivalents

 

Cash and equivalents include investments with initial maturities of three months or less. The Company maintains its cash balances at credit-worthy financial institutions that are insured by the Federal Deposit Insurance Corporation ("FDIC") up to $250,000. There were no cash equivalents at October 31, 2012 or October 31, 2011.

 

Concentration of Credit Risk

 

Financial instruments and related items, which potentially subject the Company to concentrations of credit risk, are cash and cash equivalents. The Company places its cash and temporary cash investments with credit quality institutions. At times, such investments may be in excess of FDIC insurance limits.

 

Impairment of Long-Lived Assets

 

The Company has adopted Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 360-10, Property, Plant and Equipment FASB ASC 360-10 requires that long-lived assets and certain identifiable intangibles held and used by the Company be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company evaluates its long-lived assets for impairment annually or more often if events and circumstances warrant. Events relating to recoverability may include significant unfavorable changes in business conditions, recurring losses or a forecasted inability to achieve break-even operating results over an extended period. The Company evaluates the recoverability of long-lived assets based upon forecasted undiscounted cash flows. Should impairment in value be indicated, the carrying value of intangible assets will be adjusted, based on estimates of future discounted cash flows resulting from the use and ultimate disposition of the asset. ASC 360-10 also requires assets to be disposed of be reported at the lower of the carrying amount or the fair value less costs to sell.

 

F-9
 

 

Indefinite-lived Intangible Assets

 

The Company has an indefinite-lived intangible asset (goodwill) relating to purchased blueprints, formulas, designs and processes for manufacturing and production of self-lubricated spherical bearings, bushings and rod-end bearings. The indefinite-lived intangible asset is not amortized; rather, it is tested for impairment at least annually by comparing the carrying amount of the asset with the fair value. An impairment loss is recognized if the carrying amount is greater than fair value. Testing done for the year ended October 31, 2010 determined that the above mentioned intangible asset with a cost of $2,469,404 was fully impaired.

 

Fair Value of Financial Instruments

 

The Company adopted FASB ASC 820 on October 1, 2008. Under this FASB, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). The standard outlines a valuation framework and creates a fair value hierarchy in order to increase the consistency and comparability of fair value measurements and the related disclosures. Under GAAP, certain assets and liabilities must be measured at fair value, and FASB ASC 820-10-50 details the disclosures that are required for items measured at fair value.

 

The Company has various financial instruments that must be measured under the new fair value standard including: cash and debt. The Company currently does not have non-financial assets or non-financial liabilities that are required to be measured at fair value on a recurring basis. The Company’s financial assets and liabilities are measured using inputs from the three levels of the fair value hierarchy. The three levels are as follows:

 

Level 1 - Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date. The fair value of the Company’s cash is based on quoted prices and therefore classified as Level 1.

 

Level 2 - Inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).

 

Level 3 - Unobservable inputs that reflect our assumptions about the assumptions that market participants would use in pricing the asset or liability.

 

Cash, accounts payable, and accrued expenses reported on the balance sheet are estimated by management to approximate fair market value due to their short term nature.

 

The following tables provide a summary of the fair values of assets and liabilities:

 

   Carrying   Fair Value Measurements at 
   Value   October 31, 2012 
   October 31,             
   2012   Level 1   Level 2   Level 3 
Liabilities:                    
Convertible notes payable  $260,000   $–   $–   $260,000 

 

F-10
 

 

 

   Carrying   Fair Value Measurements at 
   Value   October 31, 2011 
   October 31,             
   2011   Level 1   Level 2   Level 3 
Liabilities:                    
Convertible notes payable  $260,000   $–   $–   $260,000 

 

Goodwill and the investment in Godfrey have been recorded as fully impaired, see Notes 3 and 4.

 

The Company believes that the market rate of interest as of October 31, 2012 and October 31, 2011 was not materially different to the rate of interest at which the convertible notes payable were issued. Accordingly, the Company believes that the fair value of the convertible notes payable approximated their carrying value at October 31, 2012 and 2011.

 

Income Taxes

 

The Company accounts for income taxes under standards issued by the FASB. Under those standards, deferred tax assets and liabilities are recognized for future tax benefits or consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. 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. A valuation allowance is provided for significant deferred tax assets when it is more likely than not that such assets will not be realized through future operations.

 

No provision for federal income taxes has been recorded due to the net operating loss carry forwards totaling approximately $2,471,678 as of October 31, 2012 that will be offset against future taxable income.  The available net operating loss carry forwards of approximately $2,471,678 will expire in various years through 2032.  No tax benefit has been reported in the financial statements because the Company believes there is a 50% or greater chance the carry forwards will expire unused.

 

Deferred tax asset and the valuation account are as follows:

 

   October 31, 
   2012   2011 
Deferred tax asset:          
NOL Carry forward  $840,370   $700,137 
Valuation allowances   (840,370)   (700,137)
Total  $–   $– 

 

The components of income tax expense are as follows:

 

Current Federal Tax  $–   $– 
Current State Tax   –    – 
Change in NOL benefit   140,233    284,353 
Change in valuation allowance  $(140,233)   (284,353)
   $–   $– 

 

F-11
 

 

Equipment

 

Equipment is recorded at cost and depreciated using straight line methods over the estimated useful lives of the related assets. The Company reviews the carrying value of long-term assets to be held and used when events and circumstances warrant such a review. If the carrying value of a long-lived asset is considered impaired, a loss is recognized based on the amount by which the carrying value exceeds the fair market value. Fair market value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved. The cost of normal maintenance and repairs is charged to operations as incurred. Major overhaul that extends the useful life of existing assets is capitalized. When equipment is retired or disposed, the costs and related accumulated depreciation are eliminated and the resulting profit or loss is recognized in income. As of October 31, 2012, the useful lives of the office equipment ranged from five years to seven years.

 

Issuance of Shares for Non-Cash Consideration

 

The Company accounts for the issuance of equity instruments to acquire goods and/or services based on the fair value of the goods and services or the fair value of the equity instrument at the time of issuance, whichever is more readily determinable. The Company's accounting policy for equity instruments issued to consultants and vendors in exchange for goods and services follows the provisions of standards issued by the FASB. The measurement date for the fair value of the equity instruments issued is determined at the earlier of (i) the date at which a commitment for performance by the consultant or vendor is reached or (ii) the date at which the consultant or vendor's performance is complete. In the case of equity instruments issued to consultants, the fair value of the equity instrument is recognized over the term of the consulting agreement.

 

Stock-Based Compensation

 

In December of 2004, the FASB issued a standard which applies to transactions in which an entity exchanges its equity instruments for goods or services and also applies to liabilities an entity may incur for goods or services that are based on the fair value of those equity instruments. For any unvested portion of previously issued and outstanding awards, compensation expense is required to be recorded based on the previously disclosed methodology and amounts. Prior periods presented are not required to be restated. We adopted the standard as of inception and applied the standard using the modified prospective method. During the year ended October 31, 2011, the Company issued stock options to its Board of Directors and officer as compensation for their services. The options have been accounted for at a fair value as required by the FASB ASC 718.

 

Beneficial Conversion Features

 

From time to time, the Company may issue convertible notes that may contain an imbedded beneficial conversion feature. A beneficial conversion feature exists on the date a convertible note is issued when the fair value of the underlying common stock to which the note is convertible into is in excess of the remaining unallocated proceeds of the note after first considering the allocation of a portion of the note proceeds to the fair value of the warrants, if related warrants have been granted. The intrinsic value of the beneficial conversion feature is recorded as a debt discount with a corresponding amount to additional paid in capital. The debt discount is amortized to interest expense over the life of the note using the effective interest method.

 

Development-Stage Company

 

The Company is considered a development-stage company, with limited operating revenues during the periods presented, as defined by the FASB. The FASB requires companies to report their operations, shareholders deficit and cash flows since inception through the date that revenues are generated from management’s intended operations, among other things. Management has defined inception as June 5, 2007. Since inception, the Company has incurred losses of $10,425,677. The Company’s working capital has been primarily generated through the sales of common stock. Management has provided financial data since June 5, 2007, “Inception”, in the financial statements.

 

Net Loss Per Share

 

The Company adopted the standard issued by the FASB, which requires presentation of basic earnings or loss per share and diluted earnings or loss per share. Basic income (loss) per share (“Basic EPS”) is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share (“Diluted EPS”) are similarly calculated using the treasury stock method except that the denominator is increased to reflect the potential dilution that would occur if dilutive securities at the end of the applicable period were exercised. There were 2,000,000 Series A Warrants, 2,000,000 Series B Warrants and options for 18,000,000 shares outstanding as of October 31, 2012 that are not included in the calculation of Diluted EPS as their impact would be anti-dilutive.

 

F-12
 

 

   For the
Year Ended
October 31,		 
   2012   2011 
         
Net loss from continuing operations  $(1,537,219)  $(3,044,151)
           
Discontinued operations          
Net gain (loss) from discontinued operations   –    – 
           
Net loss from operations  $(1,537,219)  $(3,044,151)
           
Basic and diluted net loss from continuing operations per share  $(0.02)  $(0.07)
           
Basic and diluted net loss from discontinued operations per share  $–   $– 
           
Basic and diluted net loss attributable to Trans-Pacific Aerospace Company, Inc. per share  $(0.02)  $(0.07)
           
Weighted average number of common shares outstanding, basic and diluted   67,440,727    43,353,134 

 

The weighted average numbers of shares included in the calculation above are post-split.

 

Recent Accounting Pronouncements

 

In October 2012, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2012-04, “Technical Corrections and Improvements” in Accounting Standards Update No. 2012-04. The amendments in this update cover a wide range of Topics in the Accounting Standards Codification. These amendments include technical corrections and improvements to the Accounting Standards Codification and conforming amendments related to fair value measurements. The amendments in this update will be effective for fiscal periods beginning after December 15, 2012. The adoption of ASU 2012-04 is not expected to have a material impact on our financial position or results of operations.

 

In August 2012, the FASB issued ASU 2012-03, “Technical Amendments and Corrections to SEC Sections: Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin (“SAB”) No. 114, Technical Amendments Pursuant to SEC Release No. 33-9250, and Corrections Related to FASB Accounting Standards Update 2010-22 (SEC Update)” in Accounting Standards Update No. 2012-03. This update amends various SEC paragraphs pursuant to the issuance of SAB No. 114. The adoption of ASU 2012-03 is not expected to have a material impact on our financial position or results of operations.

 

In July 2012, the FASB issued ASU 2012-02, “Intangibles – Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment” in ASU No. 2012-02. This update amends ASU 2011-08, Intangibles – Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment and permits an entity first to assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform the quantitative impairment test in accordance with Subtopic 350-30, Intangibles - Goodwill and Other - General Intangibles Other than Goodwill. The amendments are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted, including for annual and interim impairment tests performed as of a date before July 27, 2012, if a public entity’s financial statements for the most recent annual or interim period have not yet been issued or, for nonpublic entities, have not yet been made available for issuance. The adoption of ASU 2012-02 is not expected to have a material impact on our financial position or results of operations.

 

F-13
 

 

In December 2011, the FASB issued ASU 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassification of Items Out of Accumulated Other Comprehensive Income in ASU No. 2011-05, in order to defer only those changes in ASU 2011-05 that relate to the presentation of reclassification adjustments. The amendments are being made to allow the FASB time to redeliberate whether to present on the face of the financial statements the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income for all periods presented. All other requirements in ASU 2011-05 not affected by this ASU are effective for fiscal years beginning after December 15, 2011. The Company does not expect the adoption of the standard update to impact its financial position or results of operations, as it only requires a change in the format of presentation.

 

In June 2011, the FASB issued ASU 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income, which amends current comprehensive income guidance. This accounting update eliminates the option to present the components of other comprehensive income (loss) as part of the statement of shareholders’ equity. Instead, the Company must report comprehensive income (loss) in either a single continuous statement of comprehensive income (loss) which contains two sections, net income (loss) and other comprehensive income (loss), or in two separate but consecutive statements. This guidance will be effective for the Company beginning in fiscal 2013. The Company does not expect the adoption of the standard update to impact its financial position or results of operations, as it only requires a change in the format of presentation.

 

In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. The new guidance results in a consistent definition of fair value and common requirements for measurement of and disclosure about fair value between U.S. GAAP and International Financial Reporting Standards. While many of the amendments to U.S. GAAP are not expected to have a significant effect on practice, the new guidance changes some fair value measurement principles and disclosure requirements. This new guidance is effective for fiscal years and interim periods beginning after December 15, 2011. The Company does not expect the adoption of the standard update to have a significant impact on its financial position or results of operations.

 

NOTE 3 – ACQUISITION OF INTANGIBLE ASSETS

 

On February 1, 2010, the Company completed its acquisition of the aircraft component part design, engineering and manufacturing assets of Harbin Aerospace Company, LLC (“HAC”). The transaction was structured as a business combination in exchange for:

 

  • 8,000,000 shares of the Company’s common stock.
  • A Series A common stock purchase warrant to purchase 4,000,000 shares of the Company’s common stock at an exercise price of $0.50 per share. The Series A warrant becomes exercisable on the date that the Company recognizes revenue equal to or exceeding $50,000,000 for any consecutive twelve-month period and expires on January 31, 2015.
  • A Series B common stock purchase warrant to purchase 4,000,000 shares of the Company’s common stock at an exercise price of $1.00 per share. The Series B warrant becomes exercisable on the date that the Company recognizes revenue equal to or exceeding $100,000,000 for any consecutive twelve-month period and expires on January 31, 2018.
  • The assumption by the Company of $260,000 of obligations under a convertible note. The convertible note assumed by the Company does not bear interest and becomes payable on March 12, 2011. The note is convertible into shares of the Company’s common stock at an initial conversion price of $0.25 per share. The conversion price is subject to adjustment for stock splits and combinations; certain dividends and distributions; reclassification, exchange or substitution; reorganization, merger, consolidation or sales of assets. As the convertible note does not bear interest, the Company recorded the present value of the convertible note obligation at $239,667 and accordingly recorded a convertible note payable for $260,000 and a corresponding debt discount of $20,333. Under the effective interest method, the Company accretes the note obligation to the face amount of the convertible note over the remaining term of the note. Debt discount expense totaled $9,394 for the year ended October 31, 2010. See Note 7 for further discussion.
  • The assumption by the Company of $200,000 of obligations under a note payable plus $11,737 of accrued interest. The holder of the note payable is the mother-in-law of William McKay, the Chairman of the Company’s Board of Directors and Chief Executive Officer. See Note 6 and 8 for further discussion.
  • Cancellation of $26,000 of HAC's secured promissory notes due to the Company.    

 

F-14
 

 

The Company acquired intangible intellectual property including blueprints, formulas, designs and processes for manufacturing and production of self-lubricated spherical bearings, bushings and rod-end bearings. The transaction was deemed to be a business combination pursuant to the FASB standards.

 

The following table summarizes the entry recording the intangible assets acquired:

 

Intangible assets - goodwill  $2,469,404 
Debt discount on convertible note   20,333 
Common stock   (8,000)
Additional paid in capital   (1,984,000)
Convertible note payable   (260,000)
Note payable – related party   (200,000)
Accrued interest on note payable   (11,737)
Cancellation of HAC note receivable   (26,000)
   $– 

 

These intangible assets (goodwill) are deemed to be indefinite-lived and accordingly are not amortized. The Company does perform an annual review for impairment. At October 31, 2010 a valuation of the purchase price was performed by an independent valuation expert who determined that the intangible assets were fully impaired. Accordingly, an allowance for impairment for the full cost of the property was established at October 31, 2010.

 

NOTE 4 – ACQUISITION OF INTEREST IN GODFREY (CHINA) LIMITED

 

On March 30, 2010, the Company acquired 25% of the outstanding share capital of Godfrey (China) Limited, a Hong Kong corporation (“Godfrey”), in exchange for the Company’s technology used for the design and production of SAE-AS81820, 81934 and 81935 self-lubricated spherical bearings, bushings and rod-end bearings. The Company legally owns 25% of Godfrey. The formation and acquisition of the interest in Godfrey is intended to assist the Company in its focus on the Chinese bearings market. In September 2010, Godfrey opened a production facility in Guangzhou, China. The Company received its 25% interest in Godfrey for a 50% interest in the intellectual property assets acquired on February 1, 2010 (as discussed in Note 3). Since the investment in Godfrey is an active investment, it has been accounted for under the “equity method”. Since the independent valuation determined that the purchase price allocation attributed no value to the intangible assets, there was no dollar investment in Godfrey by the Company and therefore no charge to the investment being impaired. At October 31, 2012 there were suspended losses of $583,648.

 

As there were no operations for Godfrey and the fact that Godfrey is being accounted for as an equity investment, no proforma presentation is necessary because there was no impact on the previously issued financial statements.

 

During the year ended October 31, 2012, the Company transferred a total of $65,733 to Godfrey for its cash flow needs. The Company determined that the amount owed by Godfrey was uncollectible so recorded bad expense of $35,733. As at October 31, 2012, the amount due from Godfrey was $0. As of October 31, 2011, the amount due to Godfrey was $30,000.

 

NOTE 5 – PROPERTY AND EQUIPMENT

 

On April 12, 2010, the Company purchased $82,500 of tooling for its proprietary bearings.  The Company and the vendor agreed that 328,000 shares of common stock would be issued as payment in full for the tooling assets.  As the value of the common stock obligation totaled $104,960 at April 12, 2010 (the closing stock price was $0.32 per share on April 12, 2010), the Company recorded in equity $104,960 and recorded a corresponding loss on settlement with stock for $22,460 for the difference between the value of the common stock to be issued and the value of the tooling asset acquired.  On June 9, 2010, the Company issued 328,000 shares of common stock to pay the obligation in full.  In May 2010 the Company sold the tooling to Godfrey for $132,880. The portion of the sales price in excess of the tooling’s original cost was deemed to be contributed capital due to the related party nature of the transaction.

 

As of October 31, 2012, the Company had office equipment of $3,868, net of accumulated depreciation of $1,414. For the year ended October 31, 2012 and 2011, the Company recorded depreciation expense of $821 and $593, respectively.

 

F-15
 

 

NOTE 6 - RELATED PARTY TRANSACTIONS

 

On June 29, 2009, the Company entered into a Support Services Agreement with Cardiff Partners, LLC (formerly Strands Management Company, LLC) (the “Cardiff Agreement”).  Matt Szot, our former Chief Financial Officer and former Secretary, is the Chief Financial Officer of Cardiff. Keith Moore and David Walters, former members of our board of directors, each own a 50% interest and is a managing member of Cardiff.   Pursuant to the Cardiff Agreement, in consideration for providing certain services to the Company, Cardiff is entitled to a monthly fee in the amount of $10,000.   The Company also issued 50,000 shares of the Company’s common stock to Mr. Szot pursuant to the Cardiff Agreement.  The initial term of the Cardiff Agreement expired June 28, 2010. The Company incurred $120,500 in consulting fees under the terms of the agreement for the year ended October 31, 2010, which is included in consulting expenses.  On January 28, 2010, the Company issued 448,340 shares of common stock as payment in full of $50,000 of outstanding balances due to Cardiff.  As of October 31, 2010, $49,500 was outstanding under the agreement and is included in common stock to be issued.

 

On January 12, 2010, the Company amended the Cardiff Agreement.  Under the amended Cardiff Agreement, Cardiff has the option to accept payment of outstanding cash compensation owed to it under its agreements with the Company in the form of shares of our common stock.  The number of shares to be issued will be calculated by dividing the outstanding balance to be paid by 50% of the average of the closing prices for the Company’s common stock during the 20 trading day period ending one trading day prior to the date that notice accepting shares in payment is sent to us.  In addition, under the amended Cardiff Agreement, Cardiff has provided and will provide the Company with transaction execution support services in connection with the HAC transaction, including due diligence, business review of relevant transaction documentation and audit support.   As compensation for the additional services, in February 2010 the Company issued to Cardiff 2,500,000 shares of the Company’s common stock, a Series A common stock purchase warrant to purchase 2,000,000 shares of the Company’s common stock and a Series B common stock purchase warrant to purchase 2,000,000 shares of the Company’s common stock.  The Series A warrant has an exercise price of $0.50 and becomes exercisable on the date that the Company recognizes revenue equal to or exceeding $50,000,000 for any consecutive twelve-month period and expires on January 31, 2015.  The Series B warrant has an exercise price of $1.00 and becomes exercisable on the date that the Company recognizes revenue equal to or exceeding $100,000,000 for any consecutive twelve-month period and expires on January 31, 2018.The warrants have not been included in paid in capital because it is unlikely that in the near term the Company can attain revenue numbers high enough for the warrants to become exercisable.

 

On February 15, 2010, we entered into a placement agency and advisory services agreement with Monarch Bay Associates, LLC, a FINRA member investment banking firm.  Mr. Walters is a manager and 50%-owner of Monarch Bay.  Under the agreement, Monarch Bay was to act as our placement agent on an exclusive basis with respect to private placements of our capital stock and as our exclusive advisor with respect to acquisitions, mergers, joint ventures and similar transactions.   Pursuant to the agreement, Monarch Bay would receive fees equal to (a) 8% of the gross proceeds raised by us in any private placement, plus warrants to purchase 8% of the number of shares of common stock issued or issuable by us in connection with any private placement and (b) up to 5% of the total consideration paid or received by us or our stockholders in any acquisition, merger, joint venture or similar transaction.

 

On October 19, 2010, we entered into a settlement and release agreement with Cardiff Partners, LLC, Monarch Bay Associates, LLC, David Walters, Keith Moore and Matt Szot, collectively referred to as the “Cardiff parties.”  Under the settlement and release agreement, we terminated the aforementioned agreements with Cardiff and Monarch Bay and all other agreements and arrangements between us, on the one hand, and any of the Cardiff parties in exchange for our issuance of 1,838,649 shares of our common stock to Cardiff Partners, LLC.   We also agreed with the Cardiff parties to mutually release each other of all claims, known or unknown.

 

F-16
 

 

On July 1, 2011, a Complaint was filed in the Superior Court of the State of California, in Orange County, California, by Trans-Pacific Aerospace Company, Inc. and one of our shareholders, Harbin Aerospace Company, LLC, against Monarch Bay Associates, LLC, a FINRA member firm, and certain of its officers, employees and affiliates, including David Walters, Keith Moore, Mathew Szot and Cardiff Partners, LLC (“Defendants”). The Complaint alleges that Monarch Bay Associates entered into investment banking agreements initially with Harbin Aerospace and then subsequently with Trans-Pacific Aerospace based upon certain misrepresentations and omissions of material fact by Monarch Bay and its principals, David Walters and Keith Moore. The Complaint further alleges that Monarch Bay, Walters, Moore and Szot breached their fiduciary duties owed to Trans-Pacific Aerospace and Harbin Aerospace and otherwise engaged in acts of securities and common law fraud, professional negligence and unlawful practices under the California Business and Professions Code. The Complaint seeks, among other things, (i) general and special damages in an amount to be proven at trial; (ii) the rescission of certain material agreements entered into between Trans-Pacific Aerospace or Harbin Aerospace, on the one hand, and the Defendants, on the other, and (iii) the Defendants return of all cash and stock-based compensation received from either Trans-Pacific Aerospace or Harbin Aerospace in breach of the defendants’ fiduciary duties or applicable law. David Walters and Keith Moore are former members of the board of directors of Trans-Pacific Aerospace and Walters and Mathew Szot are former executive officers of Trans-Pacific Aerospace. The Defendants as a group are believed to own in excess of 9% of the issued and outstanding common shares of Trans-Pacific Aerospace.

 

On September 12, 2011, the Defendants filed a Cross-Complaint against Trans-Pacific Aerospace or Harbin Aerospace alleging the claims of Trans-Pacific Aerospace and Harbin Aerospace were released pursuant to a Settlement Agreement and Release dated October 19, 2010 between Trans-Pacific Aerospace and the Defendants. In their Cross-Complaint, the Defendants allege that although Harbin Aerospace was not a party to the Settlement Agreement and Release, Harbin Aerospace had effectively transferred to Trans-Pacific Aerospace any claims Harbin Aerospace had against the Defendants as part of Harbin Aerospace’s sale of assets to Trans-Pacific Aerospace in February 2010, and that such claims were then effectively released by Trans-Pacific Aerospace by way of the Settlement Agreement and Release dated October 19, 2010.

 

On December 5, 2011, the Defendants filed a First Amended Cross-Complaint against the Company and Harbin Aerospace for declaratory relief, breach of contract, specific performance, and indemnity, alleging that the claims of the Company and Harbin were released pursuant to the aforementioned settlement agreement. The Company and Harbin have filed an Answer to the First Amended Cross-Complaint denying the allegations and setting forth affirmative defenses. The Company and Harbin believe that the allegations contained within this First Amended Cross-Complaint are meritless.

 

On January 30, 2013, the Company, Harbin, the Defendants, and other parties entered into a settlement agreement (the “Settlement Agreement”) resolving the action.  Under the terms of the Settlement Agreement, Defendant Cardiff Partners, LLC (“Cardiff”) agreed to return 3,728,503 shares of the Company’s common stock to the Company for cancellation.  The Company agreed that Cardiff could retain 2,000,000 shares of the Company’s common stock, and that the retained shares would be subject to a lock-up/leak-out arrangement.  In addition, the parties agreed to amend certain Series A and Series B common stock purchase warrants held by Cardiff to extend the expiration date of said warrants to March 20, 2021 (as described in Note 8) and to allow for the vesting of such warrants upon a “change in control” of the Company.  In addition, the Company agreed to indemnify the Defendants for certain matters arising out of the Settlement Agreement and for certain matter arising out the Defendants’ status or conduct as a director, officer, employee or agent of the Company.  The parties agreed to dismiss the action with prejudice and the Company, Harbin, and the other parties, on the one hand, and the Defendants, on the other hand, have agreed to a full and complete settlement and general release of all claims asserted by the parties regarding the subject matter of the action.  The court shall retain jurisdiction to enforce the terms of the Settlement Agreement.

 

On June 29, 2009, the Company entered into an Employment Agreement with David Walters, its former Chief Executive Officer and former member of its Board of Directors.  Under the agreement, which had a term of one year, Mr. Walters received a base salary of $180,000, plus 500,000 shares of the Company’s common stock.  On January 12, 2010, the Company amended the Employment Agreement with Mr. Walters.  Under the amended agreement, Mr. Walters had the option to accept payment of outstanding cash compensation owed to him under the agreement in the form of shares of the Company’s common stock.  The number of shares to be issued is calculated by dividing the outstanding balance to be paid by 50% of the average of the closing prices for our common stock during the 20 trading day period ending one trading day prior to the date that notice accepting shares in payment is sent to the Company. On January 28, 2010, the Company issued 941,514 shares of common stock as payment in full of outstanding balances due to Mr. Walters totaling $105,000.  As of October 31, 2010, no amounts were outstanding under the agreement.  On October 19, 2010 the Agreement was terminated by mutual agreement of the parties.

 

F-17
 

 

As part of the acquisition of Harbin Aerospace Company (HAC), the Company assumed $200,000 of obligations under a note payable plus $11,737 of accrued interest. The holder of the note payable (Theodora Kobal) is the mother-in-law of William McKay, the Chairman of the Company’s Board of Directors and Chief Executive Officer. On June 4, 2010, the Company entered into an amended and restated convertible promissory note with Theodora Kobal which amended and restated in its entirety the Promissory Note in the original principal amount of $200,000 issued by HAC to Theodora Kobal on March 16, 2009, and assumed by the Company on February 1, 2010 in connection with its acquisition of the assets of HAC. The amended and restated note has a principal amount of $216,455 which included all outstanding interest due on the note. The amended and restated note includes a fixed conversion price of $0.058 per share, 7% interest rate per annum and was due and payable on June 3, 2011. In June 2010, the Company issued 2,200,000 shares of common stock to the note holder valued at $.058 per the agreement reducing its principal obligation by $127,600 pursuant to conversion requests. The Company has evaluated the conversion feature of the notes and determined that there was a $216,455 beneficial conversion feature on them as the fixed conversion price of $0.058 was less than the fair value of the common stock at the time of issuance. The beneficial conversion feature was recorded as a debt discount on the accompanying balance sheet. The amortization of the debt discount totaled $59,284 and $177,503 for the years ended October 31, 2011 and 2010. On November 22, 2010 the note was further amended, reducing the fixed conversion price to $0.029 per share. During the year ended October 31, 2011, the Company issued 3,063,958 shares of common stock to the note holder valued at $0.029 per the agreement as a full payment of the note payable pursuant to conversion requests. No gain or loss has been recorded because it was converted within the terms of the agreement. Due to the reduction in conversion price at a rate below fair market value, this has been determined to be an induced conversion of debt under ASC 470-20, resulting in $55,000 of expense and corresponding paid in capital for the year ended October 31, 2011.

 

On March 21, 2011, as a consideration to Harbin Aerospace assigning its claim against Monarch, the Company granted an option to purchase 8,000,000 shares of its common stock to William McKay at an exercise price of $0.15 per share in exchange for the outstanding Series A and Series B warrants to purchase a total of 8,000,000 shares of its common stock. The option is fully vested and exercisable and expires on March 20, 2021. The total estimated value using the Black-Scholes Model, based on a volatility rate of 127%, and a call option value of $0.1272, was $1,017,634. For the year ended October 31, 2011, the Company recorded $1,017,634 as stock based compensation expense.

 

On August 25, 2011, in connection with his agreement to serve as the Company’s sole officer, the Company granted an option to purchase 2,000,000 shares of its common stock to William McKay at an exercise price of $0.15 per share. The option vests in three equal amounts on each of the next three anniversary dates of this agreement, beginning August 25, 2012 and is exercisable until August 24, 2021. The total estimated value using the Black-Scholes Model, based on a volatility rate of 127%, and a call option value of $0.0859, was $171,888. For the year ended October 31, 2012 and 2011, $57,296 and $10,663 were amortized as stock based compensation expense, respectively.

 

During the year ended October 31, 2011, Mr. McKay waived $37,025 of the salaries owed to him. During the year ended October 31, 2012, Mr. McKay waived $330,000 of the salaries owed to him which was treated as a capital contribution increasing additional paid in capital by $330,000.

 

NOTE 7 – NOTES PAYABLE

 

As part of the acquisition of HAC, the Company assumed $260,000 of obligations under a convertible note. The convertible note assumed by the Company does not bear interest and became payable on March 12, 2011. The note is convertible into shares of the Company’s common stock at an initial conversion price of $0.25 per share. The conversion price is subject to adjustment for stock splits and combinations; certain dividends and distributions; reclassification, exchange or substitution; reorganization, merger, consolidation or sales of assets. As the convertible note does not bear interest, the Company recorded the present value of the convertible note obligation at $239,667 and accordingly recorded a convertible note payable for $260,000 and a corresponding debt discount of $20,333. Under the effective interest method, the Company accretes the note obligation to the face amount of the convertible note over the remaining term of the note. The discount was fully amortized at March 12, 2011. Debt discount expense totaled $7,452 and $12,880 for the years ended October 31, 2011 and 2010 respectively. The Company performed an evaluation and determined that the anti-dilution clause did not require derivative treatment. On September 16, 2011, the Company entered into an agreement with the note holder to extend the maturity date of the note. Pursuant to the agreement, the entire outstanding amount becomes fully due and payable on December 31, 2011. The note is now currently in default.

 

F-18
 

 

As part of the acquisition of HAC, the Company assumed $200,000 of obligations under a note payable plus $11,737 of accrued interest. The holder of the note payable (Theodora Kobal) is the mother-in-law of William McKay, the Chairman of the Company’s Board of Directors and Chief Executive Officer. The note bears interest at 7% per annum and principal and interest was due and payable on March 31, 2011. On June 4, 2010, the Company entered into an amended and restated convertible promissory note with Theodora Kobal which amended and restated in its entirety the Promissory Note in the original principal amount of $200,000 issued by HAC to Theodora Kobal on March 16, 2009, and assumed by the Company on February 1, 2010 in connection with its acquisition of the assets of HAC. The amended and restated note had a principal amount of $216,455 which included all outstanding interest due on the note. The amended and restated note included a fixed conversion price of $0.058 per share, 7% interest rate per annum and was due and payable on June 3, 2011. The Company has evaluated the conversion feature of the notes and determined that there was a $216,455 beneficial conversion feature on certain notes as the fixed conversion price of $0.058 was less than the fair value of the common stock at the time of issuance. The beneficial conversion feature was recorded as a debt discount on the accompanying balance sheet. The amortization of the debt discount totaled $59,284 and $177,503 for the years ended October 31, 2011 and 2010. In June 2010, the Company issued 2,200,000 shares of common stock at $.058 per share to the note holder reducing its principal obligation by $127,600 pursuant to conversion requests. On November 22, 2010 the note was further amended which resulted in the reduction of the conversion price from $0.058 to $0.029 per share and a corresponding loss of $55,000 on induced debt conversion was recorded. During the year ended October 31, 2011, the Company issued 3,063,958 shares of common stock to the note holder valued at $.029 per the agreement as a full payment of the note payable pursuant to conversion requests. No gain or loss was recorded because it was converted within the terms of the agreement.

 

NOTE 8 - COMMITMENTS AND CONTINGENCIES

 

Consulting Agreements

 

The Company has entered into consulting agreements for services to be provided to the Company in the ordinary course of business. These agreements call for expense reimbursement and various payments upon performance of services.

 

Employment Agreements

 

On February 1, 2010, the Company entered into an Employment Agreement with William McKay. Under the agreement, Mr. McKay will receive a base salary of $180,000, plus an initial bonus of 1,200,000 shares of the Company’s common stock (to be issued in 300,000 share blocks on a quarterly basis). The shares were valued based on the closing stock price on the date of the agreement. The initial term of the Employment Agreement expired on January 31, 2011 and automatically renewed for an additional one-year term. During the year ended October 31, 2011, Mr. McKay waived $37,025 of the salaries owed to him. During the year ended October 31, 2012, Mr. McKay waived $330,000 of the salaries owed to him which was treated as a capital contribution increasing additional paid in capital by $330,000. As of October 31, 2012 and 2011, the total accrued salaries owed to Mr. McKay were $0 and $150,000, respectively.

 

Legal Proceedings

 

On July 1, 2011, a Complaint was filed in the Superior Court of the State of California, in Orange County, California, by Trans-Pacific Aerospace Company, Inc. and one of our shareholders, Harbin Aerospace Company, LLC, against Monarch Bay Associates, LLC, a FINRA member firm, and certain of its officers, employees and affiliates, including David Walters, Keith Moore, Mathew Szot and Cardiff Partners, LLC (“Defendants”). The Complaint alleges that Monarch Bay Associates entered into investment banking agreements initially with Harbin Aerospace and then subsequently with Trans-Pacific Aerospace based upon certain misrepresentations and omissions of material fact by Monarch Bay and its principals, David Walters and Keith Moore. The Complaint further alleges that Monarch Bay, Walters, Moore and Szot breached their fiduciary duties owed to Trans-Pacific Aerospace and Harbin Aerospace and otherwise engaged in acts of securities and common law fraud, professional negligence and unlawful practices under the California Business and Professions Code. The Complaint seeks, among other things, (i) general and special damages in an amount to be proven at trial; (ii) the rescission of certain material agreements entered into between Trans-Pacific Aerospace or Harbin Aerospace, on the one hand, and the Defendants, on the other, and (iii) the Defendants return of all cash and stock-based compensation received from either Trans-Pacific Aerospace or Harbin Aerospace in breach of the defendants’ fiduciary duties or applicable law. David Walters and Keith Moore are former members of the board of directors of Trans-Pacific Aerospace and Walters and Mathew Szot are former executive officers of Trans-Pacific Aerospace. The Defendants as a group are believed to own in excess of 9% of the issued and outstanding common shares of Trans-Pacific Aerospace.

 

F-19
 

 

On September 12, 2011, the Defendants filed a Cross-Complaint against Trans-Pacific Aerospace or Harbin Aerospace alleging the claims of Trans-Pacific Aerospace and Harbin Aerospace were released pursuant to a Settlement Agreement and Release dated October 19, 2010 between Trans-Pacific Aerospace and the Defendants. In their Cross-Complaint, the Defendants allege that although Harbin Aerospace was not a party to the Settlement Agreement and Release, Harbin Aerospace had effectively transferred to Trans-Pacific Aerospace any claims Harbin Aerospace had against the Defendants as part of Harbin Aerospace’s sale of assets to Trans-Pacific Aerospace in February 2010, and that such claims were then effectively released by Trans-Pacific Aerospace by way of the Settlement Agreement and Release dated October 19, 2010.

 

On December 5, 2011, the Defendants filed a First Amended Cross-Complaint against the Company and Harbin Aerospace for declaratory relief, breach of contract, specific performance, and indemnity, alleging that the claims of the Company and Harbin were released pursuant to the aforementioned settlement agreement. The Company and Harbin have filed an Answer to the First Amended Cross-Complaint denying the allegations and setting forth affirmative defenses. The Company and Harbin believe that the allegations contained within this First Amended Cross-Complaint are meritless.

 

On January 30, 2013, the Company, Harbin, the Defendants, and other parties entered into a settlement agreement (the “Settlement Agreement”) resolving the action.  Under the terms of the Settlement Agreement, Defendant Cardiff Partners, LLC (“Cardiff”) agreed to return 3,728,503 shares of the Company’s common stock to the Company for cancellation.  The Company agreed that Cardiff could retain 2,000,000 shares of the Company’s common stock, and that the retained shares would be subject to a lock-up/leak-out arrangement.  In addition, the parties agreed to amend certain Series A and Series B common stock purchase warrants held by Cardiff to extend the expiration date of said warrants to March 20, 2021 and to allow for the vesting of such warrants upon a “change in control” of the Company.  In addition, the Company agreed to indemnify the Defendants for certain matters arising out of the Settlement Agreement and for certain matter arising out the Defendants’ status or conduct as a director, officer, employee or agent of the Company.  The parties agreed to dismiss the action with prejudice and the Company, Harbin, and the other parties, on the one hand, and the Defendants, on the other hand, have agreed to a full and complete settlement and general release of all claims asserted by the parties regarding the subject matter of the action.  The court shall retain jurisdiction to enforce the terms of the Settlement Agreement.

 

Lease Agreement

 

In October 2010, the Company entered into a lease of its administrative offices. The lease expires November 30, 2012 and currently calls for monthly rental payments of $792 pursuant to a month to month agreement.

 

NOTE 9 – CAPITAL STOCK TRANSACTIONS

 

Preferred Stock

 

The Company is authorized to issue up to 5,000,000 shares of its $0.001 preferred stock. At October 31, 2012 and 2011, there were no shares issued and outstanding, respectively.

 

Common Stock

 

The Company is authorized to issue up to 150,000,000 shares of its $0.001 common stock. At October 31, 2012 and 2011, there were 73,367,389 and 54,169,244 shares issued and outstanding, respectively.

 

On December 22, 2009, the Company entered into a stock purchase agreement with an accredited investor for the sale of 400,000 shares of its common stock at a purchase price of $0.25 per share or $100,000.  The sale of 72,000 shares of common stock pursuant to this agreement closed on December 24, 2009.  The sale of 20,000 shares of common stock pursuant to this agreement closed on January 20, 2010.  The sale of 80,000 shares of common stock pursuant to this agreement closed on February 16, 2010.   The sale of 60,000 shares of common stock pursuant to this agreement closed on March 24, 2010.   The sale of 168,000 shares of common stock pursuant to this agreement closed on April 5, 2010.

 

On January 15, 2010, the Company entered into a stock purchase agreement with an accredited investor for the sale of 120,000 shares of its common stock at a purchase price of $0.25 per share or $30,000.  The sale closed on January 15, 2010.

 

F-20
 

 

On January 28, 2010, the Company issued 448,340 shares of common stock as payment in full of $50,000 of outstanding balances due to Cardiff.   The Company recorded a stock based compensation charge of $58,947 for the difference between the fair value of the common stock issued on this date and the $50,000 obligation it settled.

 

On January 28, 2010, the Company issued 941,514 shares of common stock as payment in full of outstanding balances due to Mr. Walters totaling $105,000.  The Company recorded a stock based compensation charge of $123,788 for the difference between the fair value of the common stock issued on this date and the $105,000 obligation it settled.

 

On February 1, 2010, the Company issued 8,000,000 shares of the Company’s common stock valued at $1,992,000 as part of the acquisition of HAC.  The shares were valued based on the closing stock price on the date of grant.  Pursuant to this agreement, the Company also issued Series A and Series B common stock purchase warrant to purchase 8,000,000 shares of the Company’s common stock, exercisable contingent on the Company’s recognized revenue amounts.

 

As compensation for the additional services, in February 2010 the Company issued to Cardiff 2,500,000 shares of the Company’s common stock valued at $622,500, a Series A common stock purchase warrant to purchase 2,000,000 shares of the Company’s common stock and a Series B common stock purchase warrant to purchase 2,000,000 shares of the Company’s common stock, exercisable contingent on the Company’s recognized revenue amounts. The shares were valued based on the closing stock price on the date of grant. 

 

During the year ended October 31, 2010, the Company issued 900,000 shares of the Company’s common stock to Mr. McKay valued at $191,400 pursuant to his employment agreement.  The shares were valued based on the closing stock price on the date of the agreement.

 

In June 2010, the Company issued 2,200,000 shares of common stock valued at $127,600 to the note holder reducing its principal obligation by $127,600 pursuant to conversion requests. The shares were valued at $0.58 per share per the agreement.

 

On June 5, 2010, the Company hired Equiti-Trend as the Company’s public and investor relations, to perform public and investor relations under the terms set forth in the engagement letter which provided for cancellation by either party on 30 days notice.  Pursuant to the engagement letter, the Company agreed to issue Equiti-Trend up to 1,800,000 shares of the Company’s restricted common stock as sole compensation for its services for a six-month service period.   The Company issued 300,000 restricted common shares valued at $45,000 upon execution of the agreement. The shares were valued based on the closing stock price on the date of the agreement.

 

On June 9, 2010, the Company issued 328,000 shares of common stock which was valued at $104,960 based on the closing price on the date of acquisition for the tooling assets it acquired in April 2010 at a cost of $82,500.  A loss of $22,460 was realized on the difference between the cost of the tooling and the value of the shares issued.

 

On August 20, 2010, the Company issued 300,000 shares of common stock to Keith Moore valued at $87,000 pursuant to his employment agreement. The shares were valued based on the closing stock price on the date of the agreement.

 

On August 20, 2010, the Company issued 300,000 common shares to the Company’s Board of Directors valued at $71,250 for services.  The shares were valued based on the closing stock price on the date of the restricted stock grant.

 

On October 19, 2010 the Company issued 150,000 shares of common stock valued at $18,000 to Matt Szot pursuant to the Cardiff Settlement Agreement (see footnote 6). The shares were valued based on the closing stock price on the date of the agreement.

 

On October 19, 2010 the Company issued 1,838,649 shares of common stock to Cardiff Partners as part of a settlement agreement with Cardiff (see footnote 6). The shares valued at $294,184 were based on the closing stock price on the date of the agreement.

 

On October 27, 2010, the Company entered into a stock purchase agreement with an accredited investor for the sale of 1,000,000 shares of its common stock at a purchase price of $0.05 per share.  The sale closed and cash of $50,000 was received on October 28, 2010.

 

F-21
 

 

On October 27, 2010 the Company issued 100,000 shares of common stock in lieu of commissions which were valued at $12,000 based on the closing stock price on the date of grant.

 

On October 28, 2010 the Company issued 100,000 shares of common stock in lieu of commissions which were valued at $9,000 based on the closing stock price on the date of grant.

 

On October 28, 2010, the Company entered into a stock purchase agreement with an accredited investor for the sale of 1,000,000 shares of its common stock at a purchase price of $0.05 per share or $50,000.  The sale closed and cash of $50,000 was received on October 28, 2010.

 

On October 29, 2010 the Company issued 410,000 common shares to the Company’s Board of Directors for services.  The shares were valued at $69,300 based on the closing stock price on the date of the restricted stock grant.

 

On October 29, 2010 the Company issued 110,000 common shares valued at $5,000 for services to a vendor. The shares were valued based on the closing stock price on the date the vendor accepted share based payment.

 

As of October 31, 2010, the Company recorded a common stock payable of $165,000 for 1,200,000 common shares issuable to Equiti-Trend for services. The shares were valued based on the closing stock price on the date of the restricted stock grant. The agreement with Equiti-Trend has been cancelled by the Company. As of October 31, 2011 the Company recorded the final 300,000 shares under the contract valued at $33,000. The shares were valued based on the closing price at November 30, 2010, when the final payment was due. On November 15, 2011, the Company issued 1,000,000 shares of its common stock to Theodora Kobal, a related party, as reimbursement for transfer of her free trading stocks to Equiti-Trend on behalf of the Company to settle part of the common stock owed to Equiti-Trend.

 

During the year ended October 31, 2011, the Company issued 3,000,000 common shares to the Company’s Board of Directors for services. The shares were valued at $510,000 based on the closing stock price on the date of the restricted stock grant.

 

On November 10, 2010, the Company issued 200,000 shares of common stock in lieu of payment for services. The shares were valued at $34,000 based on the closing price on the date a service agreement was entered into.

 

On March 14, 2011, the Company issued 300,000 shares of the Company’s common stock to Mr. McKay valued at $57,000 pursuant to his employment agreement. The shares were valued based on the closing stock price on the date of the restricted stock grant.

 

On March 14, 2011, the Company issued 4,460,000 shares of common stock at a purchase price of $0.05 per share or $223,000 under various stock purchase agreements with accredited investors entered into as of January 31, 2011.

 

On March 18, 2011, the Company entered into various stock purchase agreements with accredited investors for the sale of 920,000 shares of its common stock at a purchase price of $0.05 per share. The sale closed and cash of $46,000 was received on March 18, 2011.

 

On March 18, 2011, the Company issued 102,000 shares of common stock in lieu of finders fees valued at $0.14 per share, which represents stock offering costs. Finders’ fees are treated as a reduction in paid in capital per current accounting guidance.

 

On April 15, 2011, the Company entered into various stock purchase agreements with accredited investors for the sale of 1,300,000 shares of its common stock at a purchase price of $0.05 per share. The sale closed and cash of $65,000 was received during the quarter ended April 15, 2011.

 

On April 15, 2011, the Company issued 200,000 shares of common stock at a purchase price of $0.05 per share or $10,000 under a stock purchase agreement with an accredited investor entered into as of January 31, 2011.

 

F-22
 

 

On April 15, 2011, the Company issued 506,000 and 80,000 shares of common stock in lieu of finders’ fees valued at $0.19 and $0.13 per share respectively, which represents stock offering costs. Finders’ fees are treated as a reduction in paid in capital per current accounting guidance.

 

On April 28, 2011, the Company entered into various stock purchase agreements with accredited investors for the sale of 80,000 shares of its common stock at a purchase price of $0.05 per share. The sale closed and cash of $4,000 was received on April 28, 2011.

 

On June 20, 2011, the Company entered into various stock purchase agreements with accredited investors for the sale of 1,500,000 shares of its common stock at a purchase price of $0.05 per share. The sale closed and cash of $75,000 was received during the quarter ended July 31, 2011.

 

On June 20, 2011, the Company issued 150,000 shares of common stock in lieu of finders’ fees valued at $0.11 per share or $16,500 which represents stock offering costs. Finders’ fees are treated as a reduction in paid in capital per current accounting guidance.

 

On October 19, 2011, the Company issued 10,000 shares of common stock in lieu of finders fees valued at $0.14 per share, which represents stock offering costs. Finders’ fees are treated as a reduction in paid in capital per current accounting guidance.

 

On October 19, 2011, the Company issued 2,000,000 shares of common stock to Bula Holdings, Inc. for services rendered for future market awareness at $0.10 per share. The shares were valued based on the closing stock price on the date of the agreement.

 

During the three months ended October 31, 2011, the Company entered into various stock purchase agreements with accredited investors for the sale of 3,247,000 shares of its common stock at a purchase price of $0.045 and $0.05 per share. The sale closed and cash of $148,045 was received during the three months ended October 31, 2011.

 

During the year ended October 31, 2011, the Company issued 3,063,958 shares of common stock to a note holder valued at $0.029 per share or $88,855 as full payment to an amended note dated November 22, 2010. See footnotes 6 and 7 for further discussion.

 

During the year ended October 31, 2011, 150,000 shares issued to former officers and directors were cancelled due to their removal prior to completion of the required service period.

 

On November 15, 2011, the Company issued total of 3,500,000 shares of common stock to its Board of Directors for services. The shares were valued at $350,000 based on the closing stock price on the date of the restricted stock grant.

 

On December 21, 2011, the Company issued 1,000,000 shares of common stock in lieu of finders’ fees valued at $0.07 per share, which represents stock offering costs. Finders’ fees are treated as a reduction in paid in capital per current accounting guidance.

 

On February 10, 2012, the Company issued 375,000 shares of common stock to its advisory board member for services. The shares were valued at $26,250 based on the closing stock price on the date of the restricted stock grant.

 

On August 17, 2012, the Company issued 25,000 shares of common stock in lieu of finders’ fees valued at $0.14 per share, which represents stock offering costs. Finders’ fees are treated as a reduction in paid in capital per current accounting guidance.

 

On August 17, 2012, the Company issued 200,000 shares of its common stock to a consultant in exchange for accounting services valued at $13,500. The shares granted were valued based upon the closing stock price on the filing dates of February 13, 2012, March 20, 2012, and June 19, 2012, which were the performance dates of the stock award.

 

During the year ended October 31, 2012, the Company entered into various purchase agreements with accredited investors for the sale of 14,652,443 shares of its common stock at a price of $0.05 and $0.0363 per share. Cash of $553,321 was received and 13,098,145 shares were issued during the year ended October 31, 2012. $56,421 for 1,554,298 shares was recorded as common stock to be issued as of October 31, 2012.

 

F-23
 

 

Warrants and Options

 

A summary of option activity during the fiscal years ended October 31, 2012 and 2011 and changes during the years then ended are presented below:

 

   October 31, 2012   October 31, 2011 
       Weighted           Weighted     
       average           average     
   Number of   exercise   Life   Number of   exercise   Life 
   shares   price   (years)   shares   price   (years) 
                         
Outstanding at beginning of year   18,000,000   $0.15    9.24    4,000,000   $0.15    9.88 
Granted   –    –    –    14,000,000    0.15    10 
Exercised   –    –    –    –    –    – 
Forfeited   –    –    –    –    –    – 
Cancelled   –    –    –    –    –    – 
Expired   –    –    –    –    –    – 
                               
Outstanding at end of year   18,000,000   $0.15    8.24    18,000,000   $0.15    9.24 
                               
Options exercisable at end of year   14,000,000   $0.15    8.24    10,666,667   $0.15    9.24 

 

 

A summary of warrant activity during the fiscal years ended October 31, 2012 and 2011 and changes during the years then ended are presented below:

 

   October 31, 2012   October 31, 2011 
       Weighted   Weighted       Weighted   Weighted 
       average   average       average   average 
       exercise   remaining       exercise   remaining 
   Number   price   contractual   Number   price   contractual 
   Outstanding   per share   life (years)   Outstanding   per share   life (years) 
Outstanding at beginning of year   4,000,000   $0.75    4.75    12,000,000   $0.75    5.75 
Granted   –    –    –                
Exercised   –    –    –    –    –    – 
Forfeited   –    –    –    –    –    – 
Cancelled   –    –    –    8,000,000    0.75    – 
Expired   –    –    –    –    –    – 
                               
Outstanding at end of year   4,000,000   $0.75    8.39    4,000,000   $0.75    4.75 
                               
Warrants exercisable at end of year   –   $–    –    –   $–    – 

 

On February 1, 2010, pursuant to the agreement on acquisition of Harbin, the Company also issued (i) Series A common stock purchase warrant to purchase 4,000,000 shares of the Company’s common stock at an exercise price of $0.50 per share.   The Series A warrant becomes exercisable on the date that the Company recognizes revenue equal to or exceeding $50,000,000 for any consecutive twelve-month period and expires on January 31, 2015 and (ii) a Series B common stock purchase warrant to purchase 4,000,000 shares of the Company’s common stock at an exercise price of $1.00 per share.   The Series B warrant becomes exercisable on the date that the Company recognizes revenue equal to or exceeding $100,000,000 for any consecutive twelve-month period and expires on January 31, 2018.  The warrants have not been valued as it is unlikely that in the near term the Company can attain revenue numbers high enough for the warrants to become exercisable.

 

F-24
 

 

As compensation for the additional services, in addition to issuance of 2,500,000 shares of the Company’s common stock, the Company issued to Cardiff a Series A common stock purchase warrant to purchase 2,000,000 shares of the Company’s common stock and a Series B common stock purchase warrant to purchase 2,000,000 shares of the Company’s common stock.   The warrants have not been valued as it is unlikely that in the near term the Company can attain revenue numbers high enough for the warrants to become exercisable. On January 30, 2013, under the terms of the Settlement Agreement, the Company agreed to amend the Series A and Series B common stock purchase warrants to extend the expiration date of the warrants to March 20, 2021 and to allow for the vesting of such warrants upon a “change in control” of the Company.

 

In connection with their agreement to serve on the Board, on September 16, 2010 the Company granted 2,000,000 stock options each to two members of the Board of Directors to purchase shares at the closing price as of September 16, 2010 of $0.15 per share. The options vest in three equal amounts on each of the next three anniversary dates of this agreement, beginning September 16, 2011 and are exercisable until September 16, 2020. The total estimated value using the Black-Scholes Model, based on a volatility rate of 95% and a call option value of $0.1083, was $433,228.

 

On November 5, 2010 the Company granted 2,000,000 stock options each to two additional members of the Board of Directors to purchase shares at $0.15 per share. The options vest in three equal amounts on each of the next three anniversary dates of this agreement, beginning November 5, 2011 and are exercisable until November 5, 2020. The total estimated value using the Black-Scholes Model, based on a volatility rate of 133% and a call option value of $0.1206, was $482,278.

 

Using the Black-Scholes Pricing Model, for the years ended October 31, 2012 and 2011, $610,341 and $305,169, respectively, were amortized as stock based compensation in connection with the stock option grants above.

 

On March 21, 2011, as a consideration to Harbin Aerospace assigning its claim against Monarch, the Company granted an option to purchase 8,000,000 shares of its common stock to William McKay at an exercise price of $0.15 per share in exchange for the outstanding Series A and Series B warrants to purchase a total of 8,000,000 shares of its common stock. The option is fully vested and exercisable and expires on March 20, 2021. The total estimated value using the Black-Scholes Model, based on a volatility rate of 127%, and a call option value of $0.1272, was $1,017,634. For the year ended October 31, 2011, the Company recorded $1,017,634 as stock based compensation expense.

 

On August 25, 2011, in connection with his agreement to serve as the Company’s sole officer, the Company granted an option to purchase 2,000,000 shares of its common stock to William McKay at an exercise price of $0.15 per share. The option vests in three equal amounts on each of the next three anniversary dates of this agreement, beginning August 25, 2012 and is exercisable until August 24, 2021. The total estimated value using the Black-Scholes Model, based on a volatility rate of 127% and a call option value of $0.0859, was $171,888. For the year ended October 31, 2012 and 2011, $57,296 and $10,663 were amortized as stock based compensation expense, respectively.

 

No additional options were granted, cancelled, exercised, or expired during the year ended October 31, 2012.

 

NOTE 10 – DISCONTINUED OPERATIONS

 

On February 10, 2010, the Company completed the sale of all of its oil and gas business interests in exchange for cancellation of all obligations under an outstanding promissory note having a principal amount of $1,000,000 and accrued interest of $115,527.  The Company recorded a gain on disposal of assets totaling $115,527 for the year ended October 31, 2010.  Pursuant to FASB standards, the Company has retro-actively presented its oil and gas business as discontinued operations.

 

The Company’s gain from discontinued operations for the year ended October 31, 2010 totaled $115,527.  The Company’s loss from discontinued operations since inception through October 31, 2010 totaled $213,194.   

 

F-25
 

 

NOTE 11 – SUBSEQUENT EVENTS

 

Events subsequent to October 31, 2012 have been evaluated through the date these financial statements were issued, to determine whether any events should be disclosed to keep the financial statements from being misleading.  The following event occurred since October 31, 2012:

 

·      On November 15, 2012, the Company issued 688,706 shares of its common stock to an accredited investor at $0.0363 per share for a total of $25,000 in cash.

 

·      On November 16, 2012, the Company issued 566,667 shares of its common stock to a consultant for services to be performed for fiscal year 2013. The shares were valued at $62,333 based on the closing price on the grant date of these restricted common stocks.

 

·      In January 2013, the Company issued 4,017,897 shares of its common stock to two accredited investors at $0.036 per share for a total of $145,396 in cash.

 

·As disclosed in Note 8 above, on January 30, 2013, the Company, Harbin, the Defendants, and other parties entered into a settlement agreement (the “Settlement Agreement”) resolving the action.  Under the terms of the Settlement Agreement, Defendant Cardiff Partners, LLC (“Cardiff”) agreed to return 3,728,503 shares of the Company’s common stock to the Company for cancellation.  The Company agreed that Cardiff could retain 2,000,000 shares of the Company’s common stock, and that the retained shares would be subject to a lock-up/leak-out arrangement.  In addition, the parties agreed to amend certain Series A and Series B common stock purchase warrants held by Cardiff to extend the expiration date of said warrants to March 20, 2021 and to allow for the vesting of such warrants upon a “change in control” of the Company.  In addition, the Company agreed to indemnify the Defendants for certain matters arising out of the Settlement Agreement and for certain matter arising out the Defendants’ status or conduct as a director, officer, employee or agent of the Company.  The parties agreed to dismiss the action with prejudice and the Company, Harbin, and the other parties, on the one hand, and the Defendants, on the other hand, have agreed to a full and complete settlement and general release of all claims asserted by the parties regarding the subject matter of the action.  The court shall retain jurisdiction to enforce the terms of the Settlement Agreement

 

F-26
 

 

Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosures

 

Not applicable.

 

Item 9A. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 15a-15 under the Securities Exchange Act of 1934.  Based upon that evaluation, our management, including our chief executive officer and chief financial officer, concluded that our disclosure controls and procedures were not effective as of October 31, 2012 for the reasons described below.

 

Management’s report on internal controls over financial reporting

 

Our management is responsible for establishing and maintaining adequate internal controls over financial reporting, as defined under Rule 15a-15(f) under the Securities Exchange Act of 1934.  Management has assessed the effectiveness of our internal controls over financial reporting as of October 31, 2012 based on the framework established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Our internal control system was designed to provide reasonable assurance to our management and board of directors regarding the preparation and fair presentation of published financial statements. An internal control material weakness is a significant deficiency, or aggregation of deficiencies, that does not reduce to a relatively low level the risk that material misstatements in financial statements will be prevented or detected on a timely basis by employees in the normal course of their work. Our management assessed the effectiveness of our internal control over financial reporting as of October 31, 2012, and this assessment identified the following material weaknesses in our internal control over financial reporting:

 

  1. Due to our small size, we do not maintain effective internal controls to assure segregation of duties as we have only one employee who is responsible for initiating and approving of transactions, thereby creating the segregation of duties weakness;

 

  2. Our board of directors does not have an audit committee or a financial expert to maintain effective oversight of our financial reporting process; and

 

  3. Lack of formal policies or procedures to provide assurance that relevant information is identified, captured, processed, and reported in an appropriate and timely fashion.

 

Based on that evaluation, management concluded that our internal control over financial reporting was not effective as of October 31, 2012.

 

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

 

Changes in internal control over financial reporting

 

There were no changes in our internal control over financial reporting that occurred during the fourth quarter of fiscal 2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

Item 9B. Other Information

 

Not applicable.

 

-17-
 

 

PART III

 

Item 10. Directors, Executive Officers and Corporate Governance

 

The names of our executive officers and directors and their ages, titles and biographies as of the date of this report are set forth below:

 

Name   Age   Position
William R. McKay   57   Chairman of the Board of Directors, President, Chief Executive Officer and Chief Financial Officer
Greg Archer   57   Director
Kevin Gould   57   Director
Ray Kwong   57   Director
Alex Kam   58   Director
Peter Liu   55   Director

 

Mr. McKay has served as our president, chief executive officer, chief financial officer and chairman of our board of directors since February 1, 2010.   Mr. McKay also serves as chief executive officer and a member of the board of managers of Godfrey (China) Limited.  From March 2009 through February 2010, Mr. McKay was the founder and chief executive officer of Harbin Aerospace Company, LLC, whose assets were acquired by us on February 1, 2010.  Prior to forming Harbin, Mr. McKay was an aerospace industry consultant involved in aerospace projects in China and other aspects of the industry from 2008 to 2009.   From 2006 to 2008, Mr. McKay served as chief operating officer for Acromil Corporation, an aerospace structural component manufacturing company.   Prior to Acromil, Mr. McKay served from 1986 to 2006 in a variety of senior management roles with Southwest Products Company, a specialized engineering consulting firm and designer and manufacturer of plain spherical bearings used primarily in aerospace, naval and sophisticated commercial applications, most recently serving as a chief executive officer from 1991 to 2006.  In May 2005, Southwest Products filed for protection under Chapter 11 of the U.S. Bankruptcy Code, which was converted to a Chapter 7 proceeding in July 2005.  Mr. McKay was a personal guarantor of commercial loans by Southwest Products and upon Southwest Products’ bankruptcy was forced to seek protection under Chapter 7 of the U.S. Bankruptcy Code in July 2005.  Mr. McKay received a bachelors of arts degree, a law degree and a masters of business administration from the University of Southern California.  He is a member of the California State Bar.

 

Mr. Archer has served as a member of our board of directors since April 21, 2010.  Mr. Archer has been engaged as a private investor since March 2010.  Prior to March 2010, Mr. Archer was employed by Northrop Grumman Corporation in a variety of management positions over a 24 year period of time, most recently serving as director of procurement and global supply chain for the aerospace systems sector of Northrup Grumman from December 2002 to March 2010.  Mr. Archer is a graduate of California State Polytechnic State University at Pomona.

 

Mr. Gould has served as a member of our board of directors since August 27, 2010.  Mr. Gould has been engaged as a private investor since July 2010.  Prior to July 2010, Mr. Gould served as chief executive officer of Piper Aircraft, Inc. from January 2009 to July 2010 and vice president of operations of Piper Aircraft from 2005 to January 2009.  Mr. Gould holds a masters of business administration from Harvard University, a masters of science in management from Stanford University's Sloan program, a law degree from University of Southern California and a bachelors of arts degree from Washington State University.  

 

Mr. Kwong has served as a member of our board of directors since November 12, 2010.  Since 2001, Mr. Kwong has served as president of SNC Consulting, a cross-border business development consulting firm.  Mr. Kwong received a masters of business administration from the University of Southern California.

 

Mr. Kam has served as a member of our board of directors since November 12, 2010.  Mr. Kam also serves as a member of the board of managers of Godfrey (China) Limited.  For over the past five years, Mr. Kam has served as president of China United Industrial Co., Ltd., a manufacturer of consumer electronics in China.  Mr. Kam received a masters of science and bachelors of science from UCLA.

 

-18-
 

 

Mr. Liu has served as a member of our board of directors since November 12, 2010.  Mr. Liu also serves as a member of the board of managers of Godfrey (China) Limited.  For over the past five years, Mr. Liu has served as chief executive officer of SoCal Metals, Inc., a Los Angeles, California based metal processing company with facilities in the United States and China.  Mr. Liu received a masters of science and a Ph.D. from Auburn University and a bachelor of science from Zhongshan University in China.

 

Our executive officers are appointed by, and serve at the discretion of, our board of directors.  There is no family relationship between any of our executive officers or directors.  Each of our directors has been elected to serve on our board of directors based on their experience in the aerospace industry or Chinese based cross-border transactions.

 

Committee Interlocks and Insider Participation

 

No member of our board of directors is employed by us except for Mr. McKay, who is presently employed as our president and chief executive officer.  None of our executive officers serve on the board of directors of another entity, whose executive officers serves on the compensation committee of our board of directors.  None of our officers or employees participated in deliberations of our board of directors concerning executive officer compensation.

 

Code of Ethics

 

We have adopted a code of ethics for our chief executive officer, principal financial officer and principal accounting officer or controller, and/or persons performing similar functions, which is available on our website, under the link entitled “Code of Ethics”.

 

Audit Committee Financial Expert

 

We currently do not have an audit committee of our board of directors. As a result, our board has not determined any of its members to be audit committee financial experts.

 

-19-
 

 

Item 11. Executive Compensation

 

Summary Compensation Table

 

The following table sets forth the compensation awarded to, earned by or paid to, our chief executive officers during the fiscal year ended October 31, 2012 and 2011. 

 

Name and Principal

Position (a)

Year (b)

      

Salary (c)

      

Bonus (d)

      

Stock Awards (e)

      

Option Awards (f)

      

All Other Compensation

(g)

      

Total (h)

  

William McKay,

CEO, CFO

     2012       180,000       -         107,296       -         -         287,296  
      2011       172,431       -         1,170,298       -         -       1,342,729  

 

The dollar amounts in columns (e) reflect the dollar amounts calculated in accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 718, Compensation- Stock Compensation (“FASB ASC Topic 718”), and, therefore, may not necessarily reflect actual benefits received by the individuals.  Assumptions used in the calculation of these amounts are included in footnotes 2 and 9 to our audited financial statements for the fiscal year ended October 31, 2012. Column (e) in the above table reflects the dollar amounts of :

 

  · For fiscal year 2011, 300,000 fully vested common shares issued as a bonus;  
     
  · For fiscal year 2011, 500,000 fully vested common shares issued as a bonus;  
     
  ·

For fiscal year 2012 and 2011, an option to purchase 2.0 million common shares vesting over the next three years starting August 25, 2011; 

   
  ·

For fiscal year 2011, a fully vested option to purchase 8.0 million common shares issued in exchange for the Series A and Series B warrants as disclosed in the Footnotes 6 and 9 to our audited financial statements for the fiscal year ended October 31, 2012; and

   
  · For fiscal year 2012, 500,000 fully vested common shares issued as board of director fee.

 

 

Narrative Disclosure to Summary Compensation Table

 

William McKay

 

On February 1, 2010, we entered into a written employment agreement with William McKay pursuant to which he serves as our chief executive officer and chairman of the board for a term of one year ending on January 31, 2011, provided that the agreement shall be subject to automatic renewals of additional one year terms unless either party notifies the other no later than July 31 of the then current term of its intent to terminate the agreement.  No such notice of termination has been provided by either party as of the date of this report, therefore Mr. McKay’s employment agreement is currently effective through January 31, 2014. Pursuant to McKay’s employment agreement, he is entitled to:

 

  · an annual salary of $180,000, subject to annual review by our board of directors;  

 

  · a one-time bonus of 1.2 million shares of our common stock issuable in quarterly installments of 300,000 shares over the first four quarters of the agreement;

 

  · a car allowance of $750 per month;

 

  · four weeks annual paid vacation;

 

  · an annual bonus at the discretion of our board of directors;

 

  · participation in such medical, retirement and other benefit plans as we offer to our other senior executives; and

 

  ·

in the event of his termination by us without cause or by Mr. McKay for good reason (as such terms are defined in the agreement) the payment of salary and continued plan benefits for the remainder of the one year term then in effect.

 

 

-20-
 

 

On August 25, 2011, upon Mr. McKay’s agreement to continue serving as our sole officer and chairman of the Board of Directors, the Board approved that in addition to the above terms, Mr. McKay is also entitled to the following:

 

  · 500,000 shares per year, same as other Board of Directors members;

 

  · Health insurance and car allowance of $1,700 per month; and

 

  ·

a one-time grant of a stock options to purchase 2,000,000 shares of our common stock at an exercise price of $0.15, vesting over a three-year period and expiring on August 24, 2021.

 

 

Outstanding Equity Awards at October 31, 2012

 

Option Awards           
Name (a)  

Number of

Securities

Underlying

Unexercised

Options (#)

Exercisable

(b)

  

Number of

Securities

Underlying

Unexercised

Options (#)

Unexercisable

(c)

  

Equity

Incentive

Plan

Awards:

Number of

Securities

Underlying

Unexercised

Unearned

Options (#)

(d)

  

Option

Exercise

Price

(e)

  

Option

Expiration

Date

(mm/dd/yyyy)

(f)

  

William McKay

   8,000,000   --   --   $0.15   03/21/2021  

William McKay

   666,667   --   1,333,333   $0.15   08/24/2021  

 

-21-
 

 

2012 Director Compensation Table

 

The following table sets forth information concerning all cash and non-cash based compensation we paid to our directors during the fiscal year ended October 31, 2012.  In reviewing the table, please note:

 

  · No information is provided for William McKay since all compensation paid to him for the 2012 fiscal year is included in the summary compensation table above

  

Name   Fees Earned or Paid in Cash     Stock Awards     Option Awards     Non-Equity Incentive Plan Compensation     Nonqualified Deferred Compensation Earnings     All Other Compensation     Total  
(a)   (b)     (c)     (d)     (e)     (f)     (g)     (h)  
Ray Kwong     1,250       50,000                                       51,250  
Greg Archer     1,250       50,000       72,205                               123,455  
Kevin Gould     1,250       50,000       72,205                               123,455  
Alex Kam     1,250       50,000       80,380                               131,630  
Peter Liu     1,250       50,000       80,380                               131,630  

 

The dollar amounts in column (b) are fees earned but not paid as of October 31, 2012.

 

The dollar amounts in columns (c) and (d) reflect the dollar amounts of the awards calculated in accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 718, Compensation- Stock Compensation (“FASB ASC Topic 718”), and, therefore, may not necessarily reflect actual benefits received by the individuals. Assumptions used in the calculation of these amounts are included in footnote 2 and 9 to our audited financial statements for the fiscal year ended October 31, 2012.

 

Narrative Disclosure to 2012 Director Compensation Table

 

We pay each of our non-executive members of the board an attendance fee in the amount of $2,500 per meeting attended in person and $1,250 per meeting attended telephonically.  These amounts are reflected in columns (b) and (h) in the above table.  Directors who are employees of our company receive no compensation for services provided in that capacity, but are reimbursed for out-of-pocket expenses in connection with attendance at meetings of our board.

 

In September 2010, we entered into consulting agreements with Messrs. Archer and Gould pursuant to which they have agreed to provide certain advisory services to our management from time to time, in return for which we granted to each of them non-qualified stock options to purchase 2 million shares of our common stock, over a 10 year period from the date of vesting, at an exercise price of $0.15 per share.  The options vest in three equal installments on the first three anniversaries of the option grant.  The dollar amounts of these option grants are reflected in columns (d) and (h) in the above table.  We also granted options to purchase 2 million shares of our common stock each to Messrs. Kam and Liu upon their appointment to our board of directors in November 2010 on similar terms.

 

-22-
 

 

SEC Position on Certain Indemnification Arrangements

 

Our articles of incorporation allow us to indemnify our directors and officers to the fullest extent permitted under Nevada law. Chapter 78 of the Nevada Revised Statutes provides for indemnification by a corporation of costs incurred by directors, employees, and agents in connection with an action, suit, or proceeding brought by reason of their position as a director, employee, or agent. The person being indemnified must have acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation.  We intend to enter into agreements with the current members of our board of directors and certain other employees in which we agree to hold harmless and indemnify such directors, officers and employees to the fullest extent authorized under Nevada law, and to pay any and all related expenses reasonably incurred by the indemnitee.

 

Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers or persons controlling us pursuant to the provisions contained in our amended and restated articles of incorporation, our amended and restated bylaws, Nevada law or otherwise, we have been informed that, in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable. If a claim for indemnification against such liabilities, other than the payment by us of expenses incurred or paid by one of our directors, officers or controlling persons in the successful defense of any action, suit, or proceeding, is asserted by such director, officer or controlling person, we will, unless in the opinion of our counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether such indemnification by us is against public policy as expressed in the Securities Act and will be governed by the final adjudication of this issue.

 

-23-
 

 

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

 

The table below sets forth the beneficial ownership of our common stock, as of February 1, 2013, by:

 

· All of our directors and executive officers, individually;

 

· All of our directors and executive officers, as a group; and

 

· All persons who beneficially owned more than 5% of our outstanding common stock.

 

The beneficial ownership of each person was calculated based on 78,640,659 shares of our common stock outstanding as of February 1, 2013, according to the record ownership listings as of that date and the verifications we solicited and received from each director and executive officer. The SEC has defined “beneficial ownership” to mean more than ownership in the usual sense. For example, a person has beneficial ownership of a share not only if he owns it in the usual sense, but also if he has the power (solely or shared) to vote, sell or otherwise dispose of the share. Beneficial ownership also includes the number of shares that a person has the right to acquire within 60 days of February 1, 2013, pursuant to the exercise of options or warrants or the conversion of notes, debentures or other indebtedness, but excludes stock appreciation rights. Two or more persons might count as beneficial owners of the same share. Unless otherwise noted, the address of the following persons listed below is c/o Trans-Pacific Aerospace Company, Inc., 2975 Huntington Drive, Suite 107, San Marino, California 91108.

 

Name of Director, Executive Officer or Nominee   Shares (1)         Percentage  
William R. McKay     15,800,000   (2 )(3)     18.03 %  
Ray Kwong     1,975,000           2.51 %  
Greg Archer     2,888,889   (3 )     3.60 %  
Kevin Gould     2,873,889   (3 )     3.58 %  
Alex Kam     2,655,556   (3 )     3.31 %  
Peter Liu     2,555,556   (3 )     3.19 %  
                       
All directors and executive officers as a group (6 persons)     28,748,890           34.22 %  
                       
Name and Address of 5% Holders   Shares (1)           Percentage  
Harbin Aerospace Company, LLC                      
2975 Huntington Drive, Suite 107                      
San Marino, CA 91108     6,800,000           8.65 %  
                       
     
     
(1)   Unless otherwise noted, the persons identified in this table have sole voting and sole investment power with regard to the shares beneficially owned by them.
     
(2)  

Includes 6,800,000 shares held directly by Harbin Aerospace Company, LLC, a Nevada limited liability company, controlled by Mr. McKay’s wife.

 

(3)   Includes shares of common stock underlying vested and exercisable options.
                           

 

-24-
 

 

Equity Compensation Plan Information

 

Our board of directors approved our 2010 Stock Incentive Plan in 2010.  The plan allows for incentive awards to eligible recipients consisting of:

 

  · Options to purchase shares of common stock, that qualify as incentive stock options within the meaning of the Internal Revenue Code;

 

  · Non-statutory stock options that do not qualify as incentive options;

 

  · Restricted stock awards; and

 

  · Performance stock awards, which may be subject to future achievement of performance criteria or free of any performance or vesting conditions.

 

The maximum number of shares reserved for issuance under the plan is 7,500,000.  The exercise price of options granted under the plan shall not be less than 100% of the fair market value of one share of common stock on the date of grant, unless the participant owns more than 10% of the total combined voting power of all classes of our stock or any parent or subsidiary corporation of ours, in which case the exercise price shall then be 110% of the fair market value.

 

In 2010, we granted outside of our 2010 Stock Incentive Plan non-qualified stock options to certain independent directors.  We granted to Greg Archer, Kevin Gould, Alex Kam and Peter Liu each options to purchase 2,000,000 shares of our common stock, exercisable over a 10-year period from the date of vesting, at an exercise price of $0.15 per share.  The options vest in three equal installments on the first three anniversaries of the date of grant.

 

On March 21, 2011, as a consideration to Harbin Aerospace assigning its claim against Monarch, the Company granted an option to purchase 8,000,000 shares of its common stock to William McKay at an exercise price of $0.15 per share in exchange for the outstanding Series A and Series B warrants to purchase a total of 8,000,000 shares of its common stock. The option is fully vested and exercisable and expires on March 20, 2021.

 

On August 25, 2011, in connection with his agreement to serve as the Company’s sole officer, the Company granted an option to purchase 2,000,000 shares of its common stock to William McKay at an exercise price of $0.15 per share. The option vests in three equal amounts on each of the next three anniversary dates of this agreement, beginning August 25, 2012 and are exercisable until August 24, 2021.

 

 The following table sets forth certain information as of October 31, 2012 about our 2010 Stock Incentive Plan and our non-plan options under which our equity securities are authorized for issuance.  The first column reflects outstanding stock options to purchase 18,000,000 shares of common stock pursuant to non-plan options issued to certain of our independent directors and officers as of October 31, 2012.  The third column reflects 7,500,000 shares available for issuance under our 2010 Stock Incentive Plan as of October 31, 2012.

 

Plan Category  

(a)

Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights

    

(b)

Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights

    

(c)

Number of Securities

Remaining Available for Future Issuance Under Equity Compensation Plans

(Excluding Securities

Reflected In Column (a))

  
Equity compensation plans approved by security holders     -       $ -         7,500,000  
Equity compensation plans not approved by security holders     18,000,000     $ 0.15       -    
Total     18,000,000     $ 0.15       7,500,000  

 

-25-
 

 

Item 13. Certain Relationships and Related Transactions and Director Independence

 

The Cardiff Agreements

 

On June 30, 2009, we entered into a support services agreement with Cardiff Partners, LLC.  At the time of that agreement, our chief executive officer, David Walters, was a director and 50%-owner of Cardiff and our chief financial officer, Matt Szot, was the chief financial officer of Cardiff.  Pursuant to the Cardiff agreement, Cardiff provided certain services to us in return for a monthly fee of $10,000.  We also issued 50,000 shares of our common stock to Mr. Szot pursuant to the Cardiff agreement.  The initial term of the Cardiff agreement expired on June 28, 2010. We incurred $40,000 in consulting fees and $34,500 in stock based compensation under the terms of the agreement for the fiscal years ended October 31, 2009.

 

On January 12, 2010, we amended the Cardiff agreement to allow Cardiff the option to accept payment of outstanding cash compensation owed to it under the agreements in the form of shares of our common stock.  The number of shares to be issued were to be calculated by dividing the outstanding balance to be paid by 50% of the average of the closing prices for our common stock during the 20 trading day period ending one trading day prior to the date that notice accepting shares in payment is sent to us.  On January 28, 2010, we issued 448,340 shares of our common stock as payment in full of $50,000 of outstanding balances due to Cardiff.

 

In addition, under the amended Cardiff agreement, Cardiff was to provide us with transaction execution support services in connection with our acquisition of Harbin Aerospace Company, LLC, including due diligence, business review of relevant transaction documentation and audit support.  As compensation for the additional services, we issued to Cardiff 2,500,000 shares of our common stock, a Series A common stock purchase warrant to purchase 2,000,000 shares of our common stock and a Series B common stock purchase warrant to purchase 2,000,000 shares of our common stock.

 

On February 15, 2010, we entered into a placement agency and advisory services agreement with Monarch Bay Associates, LLC, a FINRA member investment banking firm.  Mr. Walters is a manager and 50%-owner of Monarch Bay.  Under the agreement, Monarch Bay was to act as our placement agent on an exclusive basis with respect to private placements of our capital stock and as our exclusive advisor with respect to acquisitions, mergers, joint ventures and similar transactions.   Pursuant to the agreement, Monarch Bay would receive fees equal to (a) 8% of the gross proceeds raised by us in any private placement, plus warrants to purchase 8% of the number of shares of common stock issued or issuable by us in connection with any private placement and (b) up to 5% of the total consideration paid or received by us or our stockholders in any acquisition, merger, joint venture or similar transaction.

 

On October 19, 2010, we entered into a settlement and release agreement with Cardiff Partners, LLC, Monarch Bay Associates, LLC, David Walters, Keith Moore and Matt Szot, collectively referred to as the “Cardiff parties.”  Under the settlement and release agreement, we terminated the aforementioned agreements with Cardiff and Monarch Bay and all other agreements and arrangements between us, on the one hand, and any of the Cardiff parties in exchange for our issuance of  1,838,649 shares of our common stock to Cardiff Partners, LLC.   We also agreed with the Cardiff parties to mutually release each other of all claims, known or unknown.

 

On July 1, 2011, a Complaint was filed in the Superior Court of the State of California, in Orange County, California, by Trans-Pacific Aerospace Company, Inc. and one of our shareholders, Harbin Aerospace Company, LLC, against Monarch Bay Associates, LLC, a FINRA member firm, and certain of its officers, employees and affiliates, including David Walters, Keith Moore, Mathew Szot and Cardiff Partners, LLC (“Defendants”). The Complaint alleges that Monarch Bay Associates entered into investment banking agreements initially with Harbin Aerospace and then subsequently with Trans-Pacific Aerospace based upon certain misrepresentations and omissions of material fact by Monarch Bay and its principals, David Walters and Keith Moore. The Complaint further alleges that Monarch Bay, Walters, Moore and Szot breached their fiduciary duties owed to Trans-Pacific Aerospace and Harbin Aerospace and otherwise engaged in acts of securities and common law fraud, professional negligence and unlawful practices under the California Business and Professions Code. The Complaint seeks, among other things, (i) general and special damages in an amount to be proven at trial; (ii) the rescission of certain material agreements entered into between Trans-Pacific Aerospace or Harbin Aerospace, on the one hand, and the Defendants, on the other, and (iii) the Defendants return of all cash and stock-based compensation received from either Trans-Pacific Aerospace or Harbin Aerospace in breach of the defendants’ fiduciary duties or applicable law. David Walters and Keith Moore are former members of the board of directors of Trans-Pacific Aerospace and Walters and Mathew Szot are former executive officers of Trans-Pacific Aerospace. The Defendants as a group are believed to own in excess of 9% of the issued and outstanding common shares of Trans-Pacific Aerospace.

 

-26-
 

 

On September 12, 2011, the Defendants filed a Cross-Complaint against Trans-Pacific Aerospace or Harbin Aerospace alleging the claims of Trans-Pacific Aerospace and Harbin Aerospace were released pursuant to a Settlement Agreement and Release dated October 19, 2010 between Trans-Pacific Aerospace and the Defendants. In their Cross-Complaint, the Defendants allege that although Harbin Aerospace was not a party to the Settlement Agreement and Release, Harbin Aerospace had effectively transferred to Trans-Pacific Aerospace any claims Harbin Aerospace had against the Defendants as part of Harbin Aerospace’s sale of assets to Trans-Pacific Aerospace in February 2010, and that such claims were then effectively released by Trans-Pacific Aerospace by way of the Settlement Agreement and Release dated October 19, 2010.

 

On December 5, 2011, the Defendants filed a First Amended Cross-Complaint against the Company and Harbin Aerospace for declaratory relief, breach of contract, specific performance, and indemnity, alleging that the claims of the Company and Harbin were released pursuant to the aforementioned settlement agreement. The Company and Harbin have filed an Answer to the First Amended Cross-Complaint denying the allegations and setting forth affirmative defenses. The Company and Harbin believe that the allegations contained within this First Amended Cross-Complaint are meritless.

 

On January 30, 2013, the Company, Harbin, the Defendants, and other parties into a settlement agreement (the “Settlement Agreement”) resolving the action.  Under the terms of the Settlement Agreement, Defendant Cardiff Partners, LLC (“Cardiff”) agreed to return 3,728,503 shares of the Company’s common stock to the Company for cancellation.  The Company agreed that Cardiff could retain 2,000,000 shares of the Company’s common stock, and that the retained shares would be subject to a lock-up/leak-out arrangement.  In addition, the parties agreed to amend certain Series A and Series B common stock purchase warrants held by Cardiff to extend the expiration date of said warrants to March 20, 2021 and to allow for the vesting of such warrants upon a “change in control” of the Company.  In addition, the Company agreed to indemnify the Defendants for certain matters arising out of the Settlement Agreement and for certain matter arising out the Defendants’ status or conduct as a director, officer, employee or agent of the Company.  The parties agreed to dismiss the action with prejudice and the Company, Harbin, and the other parties, on the one hand, and the Defendants, on the other hand, have agreed to a full and complete settlement and general release of all claims asserted by the parties regarding the subject matter of the action.  The court shall retain jurisdiction to enforce the terms of the Settlement Agreement.

 

The Harbin Agreements

 

On February 1, 2010, we acquired from Harbin Aerospace Company, LLC certain assets relating to aircraft component part design, engineering and manufacturing.  The transaction was structured as a business combination in exchange for our:

 

  · Issuances of a Series A common stock purchase warrant to purchase 4,000,000 shares of our common stock at an exercise price of $0.50 per share. The Series A warrant becomes exercisable on the date that we recognize revenue equal to or exceeding $50,000,000 for any consecutive twelve-month period and expires on January 31, 2015.

 

  · Issuance of a Series B common stock purchase warrant to purchase 4,000,000 shares of our common stock at an exercise price of $1.00 per share. The Series B warrant becomes exercisable on the date that we recognize revenue equal to or exceeding $100 million for any consecutive twelve-month period and expires on January 31, 2018.

 

  · Assumption of $460,000 of liabilities of Harbin.

 

-27-
 

 

William McKay, who was appointed as our chief executive officer and director upon the consummation of the asset acquisition, was the chief executive officer of Harbin and his wife, Nikki Lynn McKay, is the sole member of Harbin.  As part of the acquisition, we assumed $200,000 of obligations under a note payable, plus $11,737 of accrued interest, held by the mother-in-law of Mr. McKay.  The note bears interest at 7% per annum and all principal and interest was due and payable on March 31, 2011.  On June 4, 2010, we entered into an amended and restated convertible promissory note with holder, pursuant to which all principal and interest under the note is convertible at $0.058 per share and the term of the note was extended to June 3, 2011.  In June 2010, we issued 2,200,000 shares of our common stock to the holder upon conversion of $127,600 of principal under the note. On November 22, 2010 the note was further amended, reducing the fixed conversion price to $.029 per share. During the year ended October 31, 2011, we issued 3,063,958 shares of common stock to the note holder valued at $.029 per the agreement as a full payment of the note payable pursuant to conversion requests.

  

On March 21, 2011, as a consideration to Harbin Aerospace assigning its claim against Monarch, the Company granted an option to purchase 8,000,000 shares of its common stock to William McKay at an exercise price of $0.15 per share in exchange for the outstanding Series A and Series B warrants to purchase a total of 8,000,000 shares of its common stock. The option is fully vested and exercisable and expires on March 20, 2021.

 

On August 25, 2011, in connection with his agreement to serve as the Company’s sole officer, the Company granted an option to purchase 2,000,000 shares of its common stock to William McKay at an exercise price of $0.15 per share. The option vests in three equal amounts on each of the next three anniversary dates of this agreement, beginning August 25, 2012 and are exercisable until August 24, 2021.

 

During the year ended October 31, 2011, Mr. McKay waived $37,025 of the salaries owed to him. During the year ended October 31, 2012, Mr. McKay waived $330,000 of the salaries owed to him which was treated as a capital contribution increasing additional paid in capital by $330,000.

 

  

Item 14. Principal Accounting Fees and Services

 

The following table sets forth the aggregate fees billed to us for services rendered to us for the fiscal years ended October 31, 2012 and 2011 by our independent registered public accounting firm for such years, as of the filing dates, for the audit of our consolidated financial statements for the fiscal years ended October 31, 2012 and 2011, and assistance with the reporting requirements thereof, the review of our condensed consolidated financial statements included in our quarterly reports on Form 10-Q, and accounting and auditing assistance relative to acquisition accounting and reporting.

 

The following table presents fees billed by M&K relate to the audits and reviews for the fiscal years ended October 31, 2012 and 2011.  

 

   2012  2011
Audit Fees  $19,500   $24,500 
Audit-Related Fees   –    – 
Tax Fees   –    – 
   $19,500   $24,500 

  

Audit Committee Pre-Approval Policies

 

We do not have an audit committee of our board of directors.  However, our board approves all audit fees, audit-related fees, tax fees and special engagement fees.  Our board approved 100% of such fees for the fiscal year ended October 31, 2012.

 

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PART IV

 

Item 15. Exhibits and Financial Statement Schedules

 

  (a) Financial statements

 

Reference is made to the Index and Financial Statements under Item 8 in Part II hereof where these documents are listed

 

  (b) Financial statement schedules

 

Financial statement schedules are either not required or the required information is included in the consolidated financial statements or notes thereto filed under Item 8 in Part II hereof.

 

  (c) Exhibits

 

The exhibits to this Annual Report on Form 10-K are set forth below. The exhibit index indicates each management contract or compensatory plan or arrangement required to be filed as an exhibit.

 

Exhibit Index

 

Number   Exhibit Description   Method of Filing
         
3.1   Articles of Incorporation dated June 5, 2007.   Incorporated by reference from the Registrant’s Registration Statement on Form SB-2 filed on January 2, 2008.
         
3.2   Certificate of Amendment to Articles of Incorporation dated October 3, 2007.   Incorporated by reference from the Registrant’s Registration Statement on Form SB-2 filed on January 2, 2008.
         
3.3   Certificate of Change to Articles of Incorporation dated July 25, 2008.   Incorporated by reference from the Registrant’s Annual Report on Form 10-K filed on January 29, 2009.
         
3.4   Certificate of Amendment to Articles of Incorporation dated July 31, 2008.   Incorporated by reference from the Registrant’s Annual Report on Form 10-K filed on January 29, 2009.
         
3.5   Certificate of Amendment to Articles of Incorporation dated February 17, 2010.   Incorporated by reference from the Registrant’s Annual Report on Form 10-K filed on February 15, 2011.
         
3.6   Bylaws of the Registrant, as amended June 3, 2010.   Incorporated by reference from the Registrant’s Quarterly Report on Form 10-Q filed on June 21, 2010.
         
10.1   Employment Agreement dated June 30, 2009 between Registrant and David Walters.   Incorporated by reference from the Registrant’s Current Report on Form 8-K filed on July 2, 2009.
         
10.2   Support Services Agreement dated June 30, 2009 between Registrant and Cardiff Partners, LLC.   Incorporated by reference from the Registrant’s Current Report on Form 8-K filed on July 2, 2009.
         
10.3   Amendment No. 1 to Employment Agreement dated January 17, 2010 between Registrant and David Walters   Incorporated by reference from the Registrant’s Current Report on Form 8-K filed on February 3, 2010.

 

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Number   Exhibit Description   Method of Filing
         
10.4   Amendment No. 1 dated January 17, 2010 to Support Services Agreement Registrant and between Cardiff Partners, LLC   Incorporated by reference from the Registrant’s Current Report on Form 8-K filed on February 3, 2010.
         
10.5   Agreement dated January 19, 2010 regarding formation of Godfrey (China) Limited*   Incorporated by reference from the Registrant’s Quarterly Report on Form 10-Q filed on October 20, 2010.
         
10.6   Asset Purchase Agreement dated January 27, 2010 between Registrant and Harbin Aerospace Company, LLC.   Incorporated by reference from the Registrant’s Current Report on Form 8-K filed on February 3, 2010.
         
10.7   Form of Series A Warrant issued by Registrant to Harbin Aerospace Company, LLC.   Incorporated by reference from the Registrant’s Current Report on Form 8-K filed on February 3, 2010.
         
10.8   Form of Series B Warrant issued by Registrant to Harbin Aerospace Company, LLC.   Incorporated by reference from the Registrant’s Current Report on Form 8-K filed on February 3, 2010.
         
10.9   Convertible Promissory Note dated February 1, 2010 issued by Registrant to Santa Anita Co., LLC.   Incorporated by reference from the Registrant’s Current Report on Form 8-K filed on February 3, 2010.
         
10.10   Employment Agreement dated February 1, 2010 between Registrant and William McKay*   Incorporated by reference from the Registrant’s Quarterly Report on Form 10-Q filed on March 12, 2010.
         
10.11   Placement Agency and Advisory Services Agreement with Monarch Bay Associates, LLC, dated February 15, 2010*   Incorporated by reference from the Registrant’s Quarterly Report on Form 10-Q filed on March 12, 2010.
         
10.12   Settlement and Release Agreement dated October 19, 2010 between Registrant and Cardiff Partners, LLC.*   Incorporated by reference from the Registrant’s Quarterly Report on Form 10-Q filed on October 20, 2010.
         
10.13   Asset Purchase Agreement dated February 10, 2010 between Registrant and Futures Investment Corp.  

Incorporated by reference from the Registrant’s Annual Report on Form 10-K filed on February 15, 2011.

         

10.14

 

  

 Settlement Agreement and general Release dated January 30, 2013 between, among others, Registrant and Cardiff Partners, LLC

  

 Filed electronically herewith

         
10.15   Amendment to Series A Common Stock Purchase Warrant dated January 31, 0213 held by Cardiff Partners, LLC   Filed electronically herewith
         
10.16   Amendment to Series B Common Stock Purchase Warrant dated January 31, 0213 held by Cardiff Partners, LLC   Filed electronically herewith
               

 

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Number   Exhibit Description   Method of Filing
         
21.1   List of subsidiaries of Registrant.   Incorporated by reference from the Registrant’s Annual Report on Form 10-K filed on February 15, 2011.
         
31.1   Certification under Section 302 of the Sarbanes-Oxley Act of 2002.   Filed electronically herewith.
         
31.2   Certification under Section 302 of the Sarbanes-Oxley Act of 2002.   Filed electronically herewith.
         
32.1   Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.   Filed electronically herewith.
         
101.INS**   XBRL Instance Document   Filed electronically herewith
         
101.SCH**   XBRL Taxonomy Extension Schema Document   Filed electronically herewith
         
101.CAL**   XBRL Taxonomy Extension Calculation Linkbase Document   Filed electronically herewith
         
101.LAB**   XBRL Taxonomy Extension Label Linkbase Document   Filed electronically herewith
         
101.PRE**   XBRL Taxonomy Extension Presentation Linkbase Document   Filed electronically herewith
         
101.DEF**   XBRL Taxonomy Extension Definition Linkbase Document   Filed electronically herewith
               

* Indicates management compensatory plan, contract or arrangement.

 

 ** Pursuant to applicable securities laws and regulations, we are deemed to have complied with the reporting obligation relating to the submission of interactive data files in such exhibits and are not subject to liability under any anti-fraud provisions of the federal securities laws as long as we have made a good faith attempt to comply with the submission requirements and promptly amend the interactive data files after becoming aware that the interactive data files fail to comply with the submission requirements. Users of this data are advised that, pursuant to Rule 406T, these interactive data files are deemed not filed and otherwise are not subject to liability.

 

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SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this annual report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.

 

    TRANS-PACIFIC AEROSPACE COMPANY, INC.
     
Date:  February 14, 2013   By: /s/William Reed McKay
      William Reed McKay
      Chief Executive Officer

 

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

 

Signature   Title   Date
         
/s/ William Reed McKay  

Chairman of the Board,

Chief Executive Officer and

Chief Financial Officer

   February 14, 2013
William Reed McKay   (Principal Executive and Financial Officer)    
         
/s/ Greg Archer   Director   February 14, 2013
Greg Archer        
         
/s/ Kevin Gould   Director   February 14, 2013
Kevin Gould        
         
/s/ Ray Kwong   Director   February 14, 2013
Ray Kwong        
         
 /s/ Alex Kam   Director   February 14, 2013
Alex Kam        
         
 /s/ Peter Liu   Director   February 14, 2013
Peter Liu        
         

 

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