UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[Mark One]
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended January 31, 2014
or
| ¨ | TRANSITION REPORT PURSUANT TO 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 of Incorporation) | (IRS Employer Ident. No.) |
|
2975 Huntington Drive, Suite 107 San Marino, CA |
91108 |
| (Address of Principal Executive Offices) | (Zip Code) |
Registrant's telephone number: (626) 796-9804
| Not applicable |
|
(Former name, former address or former fiscal year, if changed since last report) |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
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 (Section 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 reports). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| ¨ Large accelerated filer | ¨ Accelerated filer | ¨ Non-accelerated filer | x 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
As of March 6, 2014, the registrant had 119,965,659 shares of its $0.001 par value common stock issued and outstanding.
TRANS-PACIFIC AEROSPACE COMPANY, INC.
| Page | ||
| PART I – FINANCIAL INFORMATION | ||
| Item 1. | Financial Statements | F-1 |
| Consolidated Balance Sheets as of January 31, 2014 (Unaudited) and October 31, 2013 (Audited) | F-1 | |
| Consolidated Statements of Operations (Unaudited) for the Three Months Ended January 31, 2014 and 2013 and the period from inception (June 5, 2007) to January 31, 2014 | F-2 | |
| Consolidated Statement of Stockholders’ Equity (Deficit) for the period from inception (June 5, 2007) to January 31, 2014 (Unaudited) | F-3 | |
| Consolidated Statements of Cash Flows (Unaudited) for the Three Months Ended January 31, 2014 and 2013 and the period from inception (June 5, 2007) to January 31, 2014 | F-4 | |
| Notes to Unaudited Consolidated Financial Statements | F-5 | |
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 1 |
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 2 |
| Item 4. | Controls and Procedures | 3 |
| PART II – OTHER INFORMATION | ||
| Item 1. | Legal Proceedings | 4 |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 4 |
| Item 6. | Exhibits | 4 |
| Signatures | 5 | |
| i |
PART I – FINANCIAL INFORMATION
| Item 1. | Financial Statements |
TRANS-PACIFIC AEROSPACE COMPANY, INC.
(A Development Stage Company)
Consolidated Balance Sheets - Unaudited
| January 31, | October 31, | |||||||
| 2014 | 2013 | |||||||
| (Audited) | ||||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | 2,420 | $ | 27,456 | ||||
| Deferred financing costs | 2,100 | – | ||||||
| Prepaid expenses | 792 | 1,584 | ||||||
| Total current assets | 5,312 | 29,040 | ||||||
| Non-Current assets | ||||||||
| Office equipment, net of accumulated depreciation of $2,295 and $1,414, respectively | 5,811 | 6,112 | ||||||
| Security deposit | 1,584 | 1,584 | ||||||
| Total non-current assets | 7,395 | 7,696 | ||||||
| Total assets | $ | 12,707 | $ | 36,736 | ||||
| LIABILITIES AND STOCKHOLDERS' (DEFICIT) | ||||||||
| Current liabilities | ||||||||
| Accounts payable and accrued expenses | $ | 175,820 | $ | 185,819 | ||||
| Income taxes payable | 1,951 | 1,951 | ||||||
| Accrued salary and payroll taxes | 20,433 | 20,433 | ||||||
| Accrued interest payable | 6,808 | 5,740 | ||||||
| Other payable - related parties | 110,700 | 35,000 | ||||||
| Convertible note payable, net of discount | 28,310 | 7,773 | ||||||
| Convertible note payable, currently in default | 260,000 | 260,000 | ||||||
| Total current liabilities | 604,022 | 516,716 | ||||||
| Total liabilities | 604,022 | 516,716 | ||||||
| Stockholders' (deficit) | ||||||||
| Preferred stock, par value $0.001, 5,000,000 shares authorized. | ||||||||
| No shares issued and outstanding at January 31, 2014 and October 31, 2013 | – | – | ||||||
| Common stock, par value $0.001, 150,000,000 shares authorized. | ||||||||
| 109,290,659 shares issued and outstanding at January 31, 2014 and 100,790,659 shares issued and outstanding at October 31, 2013 | 109,290 | 100,790 | ||||||
| Additional paid-in capital | 12,887,933 | 12,157,394 | ||||||
| Common stock to be issued | 137,693 | 137,693 | ||||||
| Non-controlling interest | (179,553 | ) | (116,553 | ) | ||||
| Deficit accumulated during the development stage | (13,546,678 | ) | (12,759,304 | ) | ||||
| Total stockholders' (deficit) | (591,315 | ) | (479,980 | ) | ||||
| Total liabilities and stockholders' (deficit) | $ | 12,707 | $ | 36,736 | ||||
See accompanying notes to consolidated financial statements.
| F-2 |
TRANS-PACIFIC AEROSPACE COMPANY, INC.
(A Development Stage Company)
Consolidated Statements of Operations - Unaudited
For the Three Months ended January 31, | Cumulative from Inception (June 5, 2007) | |||||||||||
| 2014 | 2013 | to January 31, 2014 | ||||||||||
| Operating expenses | ||||||||||||
| Professional fees | $ | 6,766 | $ | 26,402 | $ | 853,940 | ||||||
| Consulting | – | – | 290,250 | |||||||||
| Other general and administrative | 817,052 | 326,525 | 8,767,424 | |||||||||
| Total operating expenses | 823,818 | 352,927 | 9,911,614 | |||||||||
| Operating loss from continuing operations | (823,818 | ) | (352,927 | ) | (9,911,614 | ) | ||||||
| Impairment of goodwill | – | – | (2,469,404 | ) | ||||||||
| Impairment of acquisition | – | – | (528,101 | ) | ||||||||
| Loss on induced debt conversion | – | – | (55,000 | ) | ||||||||
| Bad debt expense | – | – | (35,733 | ) | ||||||||
| Interest expense, net | (26,556 | ) | (4,550 | ) | (433,714 | ) | ||||||
| Net loss from continuing operations | $ | (850,374 | ) | $ | (357,477 | ) | $ | (13,433,566 | ) | |||
| Discontinued operations | ||||||||||||
| Net gain (loss) from discontinued operations | – | – | (213,194 | ) | ||||||||
| Loss before income taxes | (850,374 | ) | (357,477 | ) | (13,646,760 | ) | ||||||
| Income taxes | – | (8,697 | ) | |||||||||
| Net Loss | (850,374 | ) | (357,477 | ) | (13,655,457 | ) | ||||||
| Less: Loss attributable to non-controlling interest | (63,000 | ) | – | (108,779 | ) | |||||||
| Net Loss attributable to the Company | $ | (787,374 | ) | $ | (357,477 | ) | $ | (13,546,678 | ) | |||
| Basic and dilutive net loss from operations per share | $ | (0.01 | ) | $ | (0.00 | ) | ||||||
| Weighted average number of common shares outstanding, basic and diluted | 104,407,507 | 75,662,129 | ||||||||||
See accompanying notes to consolidated financial statements.
| F-3 |
TRANS-PACIFIC AEROSPACE COMPANY, INC.
(A Development Stage Company)
Consolidated Statement of Stockholders' Equity (Deficit)
| Common Stock | Additional Paid-In | Common Stock To Be | Deficit Accumulated Non Controlling | Deficit Accumulated during the Development | ||||||||||||||||||||||||
| Shares | Amount | Capital | Issued | Interest | 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 | ) | |||||||||||||
| 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 | ) | |||||||||||||
| 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 | ) | |||||||||||||
| Common stock issued for cash | 15,152,305 | 15,152 | 543,173 | 1,104 | – | – | 559,429 | |||||||||||||||||||||
| Common stock issued in lieu of finders fees | 800,000 | 800 | (800 | ) | – | – | – | – | ||||||||||||||||||||
| Common stock issued for common stock payable | 1,554,298 | 1,554 | 54,867 | (56,421 | ) | – | – | – | ||||||||||||||||||||
| Common stock issued for services & compensation | 5,916,667 | 5,917 | 658,092 | – | – | – | 664,009 | |||||||||||||||||||||
| Amortization of stock options | – | – | 291,118 | – | – | – | 291,118 | |||||||||||||||||||||
| Acquisition of ownership interest in Godfrey | 4,000,000 | 4,000 | 364,000 | 73,600 | (70,774 | ) | – | 370,826 | ||||||||||||||||||||
| Imputed interest | – | – | 18,200 | – | – | – | 18,200 | |||||||||||||||||||||
| Contribution of officer salaries | – | – | 47,200 | – | – | – | 47,200 | |||||||||||||||||||||
| Forgiveness of payables to officer | – | – | 223,684 | – | – | – | 223,684 | |||||||||||||||||||||
| Note discount | – | – | 37,500 | – | – | – | 37,500 | |||||||||||||||||||||
| Loss on Minority interest | – | – | – | – | (45,779 | ) | – | (45,779 | ) | |||||||||||||||||||
| Net loss from continuing operations for the period ended October 31, 2013 | – | – | – | – | – | (2,291,644 | ) | (2,291,644 | ) | |||||||||||||||||||
| Balances, October 31, 2013 | 100,790,659 | $ | 100,790 | $ | 12,157,394 | $ | 137,693 | $ | (116,553 | ) | $ | (12,759,304 | ) | $ | (479,980 | ) | ||||||||||||
| Common stock issued for cash | 2,500,000 | $ | 2,500 | $ | 97,500 | – | – | – | 100,000 | |||||||||||||||||||
| Common stock issued in lieu of finders fees | 250,000 | $ | 250 | $ | (250 | ) | – | – | – | – | ||||||||||||||||||
| Common stock issued for services & compensation | 5,750,000 | $ | 5,750 | $ | 339,500 | – | – | – | 345,250 | |||||||||||||||||||
| Amortization of stock options | – | – | $ | 231,739 | – | – | – | 231,739 | ||||||||||||||||||||
| Imputed interest | – | – | $ | 4,550 | – | – | – | 4,550 | ||||||||||||||||||||
| Note discount | – | – | $ | 57,500 | – | – | – | 57,500 | ||||||||||||||||||||
| Loss on Minority interest | – | – | – | – | $ | (63,000 | ) | – | (63,000 | ) | ||||||||||||||||||
| Net loss from continuing operations for the period ended October 31, 2013 | – | – | – | – | – | $ | (787,374 | ) | (787,374 | ) | ||||||||||||||||||
| Balances, January 31, 2014 - Unaudited | 109,290,659 | $ | 109,290 | $ | 12,887,933 | $ | 137,693 | $ | (179,553 | ) | $ | (13,546,678 | ) | $ | (591,315 | ) | ||||||||||||
See accompanying notes to consolidated financial statements.
| F-4 |
TRANS-PACIFIC AEROSPACE COMPANY, INC.
(A Development Stage Company)
Consolidated Statements of Cash Flows - Unaudited
For the Three Months ended January 31, | Cumulative from Inception (June 5, 2007) | |||||||||||
| 2014 | 2013 | to January 31, 2014 | ||||||||||
| Cash flows from operating activities: | ||||||||||||
| Net loss from continuing operations | $ | (787,374 | ) | $ | (357,477 | ) | $ | (13,546,678 | ) | |||
| Non-controlling interest in net loss | (63,000 | ) | – | (108,779 | ) | |||||||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||||||
| Stock based compensation | 576,989 | 154,877 | 6,652,894 | |||||||||
| Amortization of debt discount | 20,537 | – | 265,097 | |||||||||
| Imputed interest expense | 4,550 | 4,550 | 40,950 | |||||||||
| Loss on induced debt conversion | – | – | 55,000 | |||||||||
| Gain on disposal of discontinued assets | – | – | (115,528 | ) | ||||||||
| Loss from impairment of goodwill | – | – | 2,469,404 | |||||||||
| Depreciation expense | 301 | 181 | 20,095 | |||||||||
| Amortization of deferred financing costs | 400 | 400 | ||||||||||
| Loss from settlement with common stock | – | – | 22,460 | |||||||||
| Impairment of Godfrey ownership interest | – | – | 528,101 | |||||||||
| Impairment of fixed assets | – | – | 82,500 | |||||||||
| Impairment of oil & gas interests | – | – | 190,000 | |||||||||
| Contribution of officer salaries | – | – | 414,225 | |||||||||
| Forgiveness of payable to officer | – | – | 101,731 | |||||||||
| Change in operating assets and liabilities: | ||||||||||||
| Prepaid expenses | 792 | (2,376 | ) | (792 | ) | |||||||
| Security deposit | – | – | (1,584 | ) | ||||||||
| Due from Godfrey (China) Ltd | – | – | 50,380 | |||||||||
| Due to Officer | – | 20,000 | – | |||||||||
| Accounts payable and accrued expenses | (9,999 | ) | 4,000 | 316,200 | ||||||||
| Income taxes payable | – | – | 1,629 | |||||||||
| Accounts payable - related party | 75,700 | – | 71,321 | |||||||||
| Accrued salary and payroll taxes | – | 50,400 | 125,434 | |||||||||
| Accrued interest payable | 1,068 | – | 127,053 | |||||||||
| Net cash used in operating activities | (180,036 | ) | (125,845 | ) | (2,238,487 | ) | ||||||
| Cash flows from investing activities | ||||||||||||
| Sale of equipment | – | – | 82,500 | |||||||||
| Notes receivable | – | – | (26,000 | ) | ||||||||
| Purchase of equipment | – | – | (108,406 | ) | ||||||||
| Oil & gas working interest | – | – | (100,000 | ) | ||||||||
| Net cash used in investing activities | – | – | (151,906 | ) | ||||||||
| Cash flows from financing activities: | ||||||||||||
| Common stock issued for cash | 100,000 | 113,975 | 2,300,313 | |||||||||
| Convertible note issued for cash | 55,000 | – | 92,500 | |||||||||
| Net cash provided by financing activities | 155,000 | 113,975 | 2,392,813 | |||||||||
| Net increase / decrease in cash | (25,036 | ) | (11,870 | ) | 2,420 | |||||||
| Cash, beginning of the period | 27,456 | 18,219 | – | |||||||||
| Cash, end of the period | $ | 2,420 | $ | 6,349 | $ | 2,420 | ||||||
| Supplemental cash flow disclosure: | ||||||||||||
| Interest paid | $ | – | $ | – | $ | – | ||||||
| Income taxes paid | $ | – | $ | 4,464 | $ | 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 | $ | – | $ | – | $ | 216,455 | ||||||
| Deferred financing costs | $ | 2,500 | $ | – | $ | 2,500 | ||||||
| Common stock issued for finders fees | $ | 250 | $ | – | $ | 2,923 | ||||||
| Common stock issued for common stock payable | $ | – | $ | 56,421 | $ | 56,421 | ||||||
| Retirement of common shares | $ | – | $ | – | $ | 5,400 | ||||||
| Acquisition of oil and gas properties in exchange for note payable | $ | – | $ | – | $ | 1,000,000 | ||||||
| Acquisition of tooling assets | $ | – | $ | – | $ | 82,500 | ||||||
| Contribution of accrued salaries from acquisition to paid in capital | $ | – | $ | – | $ | 121,953 | ||||||
| Acquisition of intellectual property | $ | – | $ | – | $ | 2,469,404 | ||||||
| Beneficial conversion feature of convertible note payable | $ | 57,500 | $ | – | $ | 311,455 | ||||||
| Acquisition of ownership interest in Godfrey | $ | – | $ | – | $ | 528,101 | ||||||
See accompanying notes to consolidated financial statements.
| F-5 |
Trans-Pacific Aerospace Company, Inc.
(A Development Stage Company)
Notes to Unaudited Consolidated Financial Statements
January 31, 2014
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-Q reflect the completion of this stock split.
On April 5, 2013, the Company entered into separate Securities Purchase Agreements with Tina Kwan, Betty Li and Harbin Aerospace Company, LLC (“Harbin”), each of whom are holders of the capital stock of Godfrey (China) Limited (“Godfrey”), the Company’s 25%-owned Hong Kong subsidiary engaged in the development of the production facility in Guangzhou, China.
Pursuant to the Securities Purchase Agreements, Tina Kwan and Betty Li each agreed to transfer to the Company 125,000 shares of the capital stock of Godfrey and Harbin agreed to transfer to the Company 50,000 shares of the capital stock of Godfrey in consideration of the Company’s issuance of 2,000,000 shares of its common stock to each of Ms. Kwan and Ms. Li and 800,000 shares of its common stock to Harbin. In addition, the Company agreed that in the event all of the stock holders of Godfrey sell 100% of the issued and outstanding shares of Godfrey for cash, the Company will pay to Kwan, Li and Harbin the cash amount they would have received had they retained their Godfrey shares. The Godfrey shares transferred by Kwan, Li and Harbin represented all of the shares of capital stock of Godfrey held by them.
On June 21, 2013, upon the closing of the transactions under the Securities Purchase Agreements, the Company increased its ownership of Godfrey from 25% to 55%.
Pursuant to the Agreement, the Company had issued 4,000,000 shares of its common stock to Ms. Kwan and Ms. Li, which as of June 21, 2013, the acquisition date, the shares were valued at $368,000 based on the closing market price on that date. The 800,000 shares to Harbin were valued at $73,600 which was recorded as common stock to be issued at October 31, 2013 since the shares had not been issued at of the date of the report. On June 21, 2013, the transactions were approved by the Hong Kong Government. The acquisition increased current liabilities from related parties by $179,053 and incomes taxes owed to Hong Kong by $322; offset by an increase in impairment expense of $528,101, and a decrease in non-controlling interest of $70,774. The impairment was immediately recognized due to the fact that Godfrey has not produced any revenue in its operations and lacks sufficient capital to implement its business plan. As Godfrey’s statement of operations was not significant to the Company’s, no pro forma information will be presented below.
| F-6 |
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 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 consolidated 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 $787,374 during the three months ended January 31, 2014, and an accumulated deficit of $13,546,678 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.
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 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.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (U.S.) for interim financial information and with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X promulgated by the Securities and Exchange Commission (“SEC”) and reflect all adjustments, consisting of normal recurring adjustments and other adjustments, which management believes are necessary to fairly present the financial position, results of operations and cash flows of the Company, for the respective periods presented. The results of operations for an interim period are not necessarily indicative of the results that may be expected for any other interim period or the year as a whole. The accompanying unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto in the Company’s Annual Report on Form 10-K for the year ended October 31, 2013, filed with the SEC on February 13, 2014.
Consolidation
Accounting policies used by the Company and the Company’s subsidiaries conform to US GAAP. Significant policies are discussed below. The Company’s consolidated accounts include the Company’s accounts and the accounts of the Company’s subsidiaries of which we own a 50% interest or greater.
These consolidated financial statements include the accounts of the parent company Trans-Pacific Aerospace Company, Inc., and the majority owned subsidiary: Godfrey. All intercompany transactions have been eliminated.
| F-7 |
Non-controlling interests
The Company accounts for changes in our controlling interests of subsidiaries according to Accounting Codification Standards 810 – Consolidations (“ASC 810”). ASC 810 requires that the Company record such changes as equity transactions, recording no gain or loss on such a sale.
The Company’s non-controlling interest arises from the purchase of equity in Godfrey. It represents the portion of Godfrey that is not owned. ASC 810 requires that the Company account for the equity and income or loss on that operation separately from the Company’s other activities. In the equity section of the Consolidated Balance Sheet, the Company presents the portion of the negative equity attributable to non-controlling interests in Godfrey. In the Consolidated Statement of Operations, the Company presents the portion of current period net loss in Godfrey attributable to non-controlling interests.
Use of Estimates
The preparation of the consolidated 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 consolidated 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 January 31, 2014 or October 31, 2013.
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-8 |
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:
| Fair Value Measurements at | ||||||||||||||||
| January 31, 2014 | ||||||||||||||||
| Carrying | ||||||||||||||||
| Value | ||||||||||||||||
| January 31, | ||||||||||||||||
| 2014 | Level 1 | Level 2 | Level 3 | |||||||||||||
| Liabilities: | ||||||||||||||||
| Convertible notes payable | $ | 28,310 | $ | – | $ | – | $ | 28,310 | ||||||||
| Convertible notes payable – currently in default | $ | 260,000 | $ | – | $ | – | $ | 260,000 | ||||||||
| F-9 |
| Fair Value Measurements at | ||||||||||||||||
| October 31, 2013 | ||||||||||||||||
| Carrying | ||||||||||||||||
| Value | ||||||||||||||||
| October 31, | ||||||||||||||||
| 2013 | Level 1 | Level 2 | Level 3 | |||||||||||||
| Liabilities: | ||||||||||||||||
| Convertible notes payable | $ | 7,773 | $ | – | $ | – | $ | 7,773 | ||||||||
| Convertible notes payable – currently in default | $ | 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 January 31, 2014 and October 31, 2013 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 January 31, 2014 and October 31, 2013.
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 $3,485,751 as of January 31, 2014 that will be offset against future taxable income. The available net operating loss carry forwards of approximately $3,485,751 will expire in various years through 2033. No tax benefit has been reported in the consolidated financial statements because the Company believes there is a 50% or greater chance the carry forwards will expire unused.
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 January 31, 2014, 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.
| F-10 |
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 $13,546,678. 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 consolidated 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 54,000,000 shares outstanding as of January 31, 2014 that are not included in the calculation of Diluted EPS as their impact would be anti-dilutive.
For the Three Months Ended January 31, | ||||||||
| 2014 | 2013 | |||||||
| Net loss from operations | $ | (787,374 | ) | $ | (357,477 | ) | ||
| Basic and diluted net loss from operations per share | $ | (0.01 | ) | $ | (0.00 | ) | ||
| Weighted average number of common shares outstanding, basic and diluted | 104,407,507 | 75,662,129 | ||||||
The weighted average numbers of shares included in the calculation above are post-split.
| F-11 |
Recently Adopted and Recently Enacted Accounting Pronouncements
In July 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2013-11: Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. The new guidance requires that unrecognized tax benefits be presented on a net basis with the deferred tax assets for such carryforwards. This new guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2013. We do not expect the adoption of the new provisions to have a material impact on our financial condition or results of operations.
In February 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, to improve the transparency of reporting these reclassifications. Other comprehensive income includes gains and losses that are initially excluded from net income for an accounting period. Those gains and losses are later reclassified out of accumulated other comprehensive income into net income. The amendments in the ASU do not change the current requirements for reporting net income or other comprehensive income in financial statements. All of the information that this ASU requires already is required to be disclosed elsewhere in the financial statements under U.S. GAAP. The new amendments will require an organization to:
- Present (either on the face of the statement where net income is presented or in the notes) the effects on the line items of net income of significant amounts reclassified out of accumulated other comprehensive income - but only if the item reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period; and
- Cross-reference to other disclosures currently required under U.S. GAAP for other reclassification items (that are not required under U.S. GAAP) to be reclassified directly to net income in their entirety in the same reporting period. This would be the case when a portion of the amount reclassified out of accumulated other comprehensive income is initially transferred to a balance sheet account (e.g., inventory for pension-related amounts) instead of directly to income or expense.
The amendments apply to all public and private companies that report items of other comprehensive income. Public companies are required to comply with these amendments for all reporting periods (interim and annual). The amendments are effective for reporting periods beginning after December 15, 2012, for public companies. Early adoption is permitted. The adoption of ASU No. 2013-02 is not expected to have a material impact on our financial position or results of operations.
In January 2013, the FASB issued ASU No. 2013-01, Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities, which clarifies which instruments and transactions are subject to the offsetting disclosure requirements originally established by ASU 2011-11. The new ASU addresses preparer concerns that the scope of the disclosure requirements under ASU 2011-11 was overly broad and imposed unintended costs that were not commensurate with estimated benefits to financial statement users. In choosing to narrow the scope of the offsetting disclosures, the Board determined that it could make them more operable and cost effective for preparers while still giving financial statement users sufficient information to analyze the most significant presentation differences between financial statements prepared in accordance with U.S. GAAP and those prepared under IFRSs. Like ASU 2011-11, the amendments in this update will be effective for fiscal periods beginning on, or after January 1, 2013. The adoption of ASU 2013-01 is not expected to have a material impact on our financial position or results of operations.
| F-12 |
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 8 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. |
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.
| F-13 |
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.
On April 5, 2013, the Company entered into separate Securities Purchase Agreements with Tina Kwan, Betty Li and Harbin Aerospace Company, LLC (“Harbin”), each of whom are holders of the capital stock of Godfrey (China) Limited (“Godfrey”), the Company’s 25%-owned Hong Kong subsidiary engaged in the development of the production facility in Guangzhou, China.
Pursuant to the Securities Purchase Agreements, Tina Kwan and Betty Li each agreed to transfer to the Company 125,000 shares of the capital stock of Godfrey and Harbin agreed to transfer to the Company 50,000 shares of the capital stock of Godfrey in consideration of the Company’s issuance of 2,000,000 shares of its common stock to each of Ms. Kwan and Ms. Li and 800,000 shares of its common stock to Harbin. In addition, the Company agreed that in the event all of the stock holders of Godfrey sell 100% of the issued and outstanding shares of Godfrey for cash, the Company will pay to Kwan, Li and Harbin the cash amount they would have received had they retained their Godfrey shares. The Godfrey shares transferred by Kwan, Li and Harbin represented all of the shares of capital stock of Godfrey held by them.
On June 21, 2013, upon the closing of the transactions under the Securities Purchase Agreements, the Company increased its ownership of Godfrey from 25% to 55%.
Pursuant to the Agreement, the Company had issued 4,000,000 shares of its common stock to Ms. Kwan and Ms. Li, which as of June 21, 2013, the acquisition date, the shares were valued at $368,000 based on the closing market price on that date. The 800,000 shares to Harbin were valued at $73,600 which was recorded as common stock to be issued at July 31, 2013 since the shares had not been issued at of the date of the report. On June 21, 2013, the transactions were approved by the Hong Kong Government. The acquisition increased current liabilities from related parties by $156,953 and incomes taxes owed to Hong Kong by $322; offset by an increase in impairment expense of $528,101, and a decrease in non-controlling interest of $70,774. The impairment was immediately recognized due to the fact that Godfrey has not produced any revenue in its operations and lacks sufficient capital to implement its business plan. As Godfrey’s statement of operations was not significant to the Company’s, no pro forma information will be presented below.
The Company acquired liabilities including other payables to related parties and taxes payable to the Hong Kong government. The transaction was deemed to be a business combination pursuant to the FASB standards.
The following table summarizes the entry recording the liabilities acquired:
| Other payable – related party | $ | 156,953 | ||
| Taxes payable | 322 | |||
| Common stock | 4,000 | |||
| Additional paid in capital | 364,000 | |||
| Common stock to be issued | 73,600 | |||
| Non-controlling interest | (70,774 | ) | ||
| Impairment on acquisition | (528,101 | ) | ||
| Total | $ | – |
At June 21, 2013 a valuation of the purchase price was performed by an independent valuation expert who determined that the acquisition costs were fully impaired. Accordingly, the costs were written off for the full cost of the acquisition on June 21, 2013.
| F-14 |
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 January 31, 2014, the Company had office equipment of $5,811, net of accumulated depreciation of $2,595. For the three months ended January 31, 2014 and 2013, the Company recorded depreciation expense of $301 and $181, respectively.
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-15 |
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-16 |
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 years ended October 31, 2013 and 2012, $57,296 and $57,296 were amortized as stock based compensation expense, respectively.
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.
During the year ended October 31, 2013, Mr. McKay waived $47,200 of the salaries owed to him which was treated as a capital contribution increasing additional paid in capital by $47,200.
During the year ended October 31, 2013, Mr. McKay also forgave $223,684 of the outstanding amount owed to him which was treated as a capital contribution increasing additional paid in capital by $223,684.
On April 5, 2013, the Company entered into separate Securities Purchase Agreements with Tina Kwan, Betty Li and Harbin Aerospace Company, LLC (“Harbin”), each of whom are holders of the capital stock of Godfrey (China) Limited (“Godfrey”), and therefore related parties, the Company’s 55%-owned Hong Kong subsidiary engaged in the development of the production facility in Guangzhou, China.
| F-17 |
Pursuant to the Securities Purchase Agreements, Tina Kwan and Betty Li each agreed to transfer to the Company 125,000 shares of the capital stock of Godfrey and Harbin agreed to transfer to the Company 50,000 shares of the capital stock of Godfrey in consideration of the Company’s issuance of 2,000,000 shares of its common stock to each of Ms. Kwan and Ms. Li and 800,000 shares of its common stock to Harbin. In addition, the Company agreed that in the event all of the stock holders of Godfrey sell 100% of the issued and outstanding shares of Godfrey for cash, the Company will pay to Kwan, Li and Harbin the cash amount they would have received had they retained their Godfrey shares. The Godfrey shares transferred by Kwan, Li and Harbin represented all of the shares of capital stock of Godfrey held by them.
On June 21, 2013, upon the closing of the transactions under the Securities Purchase Agreements, the Company increased its ownership of Godfrey from 25% to 55%.
Pursuant to the Agreement, the Company had issued 4,000,000 shares of its common stock to Ms. Kwan and Ms. Li, which as of June 21, 2013, the acquisition date, the shares were valued at $368,000 based on the closing market price on that date. The 800,000 shares to Harbin were valued at $73,600 which was recorded as common stock to be issued at July 31, 2013 since the shares had not been issued at of the date of the report. On June 21, 2013, the transactions were approved by the Hong Kong Government. The acquisition increased current liabilities from related parties by $156,953 and incomes taxes owed to Hong Kong by $322; offset by an increase in impairment expense of $528,101, and a decrease in non-controlling interest of $70,774. The impairment was immediately recognized due to the fact that Godfrey has not produced any revenue in its operations and lacks sufficient capital to implement its business plan. As Godfrey’s statement of operations was not significant to the Company’s, no pro forma information will be presented.
As of January 31, 2014 and October 31, 2013, Mr. Liu had payables due to him from Godfrey of $45,000 and $35,000; respectively. As of January 31, 2014 and October 31, 2013, Mr. McKay had payables due to him from Godfrey of $65,700 and $0; respectively.
NOTE 7 – CONVERTIBLE 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 became fully due and payable on December 31, 2011. The note is now currently in default. For the years ended October 31, 2013 and 2012, the Company recorded imputed interest of $18,200 and $18,200, respectively.
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.
| F-18 |
On September 4, 2013, we entered into a Securities Purchase Agreement with Asher Enterprises, Inc., pursuant to which we sold to Asher an 8% Convertible Promissory Note in the original principal amount of $37,500 (the "First Asher Note"). The First Asher Note has a maturity date of June 6, 2014 and is convertible into our common stock at the greater of (i) the Variable Conversion Price and (ii) the Fixed Conversion Price. The "Variable Conversion Price" shall mean 58% multiplied by the Market Price (representing a discount rate of 42%). "Market Price" means the average of the lowest three (3) Trading Prices for the Common Stock during the ten (10) Trading Day period ending on the latest complete Trading Day prior to the Conversion Date. "Fixed Conversion Price" shall mean $0.00005. The shares of common stock issuable upon conversion of the First Asher Note will be restricted securities as defined in Rule 144 promulgated under the Securities Act of 1933. The issuance of the First Asher Note was exempt from the registration requirements of the Securities Act of 1933 pursuant to Rule 506 of Regulation D promulgated thereunder. The purchaser was an accredited and sophisticated investor, familiar with our operations, and there was no solicitation.
The Company evaluated the First Asher Note and determined that the shares issuable pursuant to the conversion option were determinate due to the Fixed Conversion Price and, as such, does not constitute a derivative liability as the Company has obtained authorization from a majority of shareholders such that should conversion occur at the Fixed Conversion Price the appropriate number of shares will be available or issuable for settlement to occur. The beneficial conversion feature discount resulting from the conversion prices below the market price on the agreement dates provided a value of $37,500, which was recorded as a discount on debt with a corresponding increase to additional paid in capital. During the quarter ended January 31, 2014, $12,545 was amortized from the debt discount. Accrued interest on the First Asher Note totaled $1,227 and $477 as of January 31, 2014 and October 31, 2013, respectively.
On December 18, 2013, we entered into a Securities Purchase Agreement with Asher Enterprises, Inc., pursuant to which we sold to Asher an 8% Convertible Promissory Note in the original principal amount of $32,500, (the "Second Asher Note"). The Second Asher Note has a maturity date of September 20, 2014, and is convertible into our common stock at the greater of (i) the Variable Conversion Price and (ii) the Fixed Conversion Price. The "Variable Conversion Price" shall mean 58% multiplied by the Market Price (representing a discount rate of 42%). "Market Price" means the average of the lowest three (3) Trading Prices for the Common Stock during the ten (10) Trading Day period ending on the latest complete Trading Day prior to the Conversion Date. "Fixed Conversion Price" shall mean $0.00005. The shares of common stock issuable upon conversion of the Second Asher Note will be restricted securities as defined in Rule 144 promulgated under the Securities Act of 1933. The issuance of the Second Asher Note was exempt from the registration requirements of the Securities Act of 1933 pursuant to Rule 506 of Regulation D promulgated thereunder. The purchaser was an accredited and sophisticated investor, familiar with our operations, and there was no solicitation.
The Company evaluated the Second Asher Note and determined that the shares issuable pursuant to the conversion option were determinate due to the Fixed Conversion Price and, as such, does not constitute a derivative liability as the Company has obtained authorization from a majority of shareholders such that should conversion occur at the Fixed Conversion Price the appropriate number of shares will be available or issuable for settlement to occur. The beneficial conversion feature discount resulting from the conversion prices below the market price on the agreement dates provided a value of $32,500, which was recorded as a discount on debt with a corresponding increase to additional paid in capital. The Second Asher Note included issuance costs of $2,500 which were capitalized and will be amortized over the term of the note; $400 was amortized during the quarter ended January 31, 2014. During the quarter ended January 31, 2014, $5,181 was amortized from the Second Asher Note. Accrued interest on the Second Asher Note was $319 and $0 as of January 31, 2014 and October 31, 2013, respectively.
On November 20, 2013, we entered into a Promissory Note Agreements with JMJ Financial, pursuant to which we sold to JMJ a Convertible Promissory Note in the total principal amount of $335,000 with a consideration of $300,000 (the “JMJ Note”). The difference of $35,000 is stated as original issue discount (the “OID”). JMJ paid $25,000 of consideration upon closing of this Note. These were the only funds received by the Company during the quarter ended January 31, 2014. JMJ may pay additional consideration to the Company in such amounts and at such dates as JMJ may choose in its sole discretion. The maturity date is two years from the effective date of each payment. JMJ Note is convertible into our common stock at the greater of (i) the Variable Conversion Price and (ii) the Fixed Conversion Price. The “Variable Conversion Price” shall mean 60% multiplied by the Market Price (representing a discount rate of 40%). “Market Price” means the average of the lowest Trading Price for the Common Stock during the 25 Trading Days prior to the Conversion Date. “Fixed Conversion Price” shall mean $0.00009. The shares of common stock issuable upon conversion of the JMJ Note will be restricted securities as defined in Rule 144 promulgated under the Securities Act of 1933. The issuance of the JMJ Note was exempt from the registration requirements of the Securities Act of 1933 pursuant to Rule 506 of Regulation D promulgated thereunder. The purchaser was an accredited and sophisticated investor, familiar with our operations, and there was no solicitation.
Upon closing of the JMJ Note, the Company received $25,000 in cash, which the total principal was $27,917, including $2,917 as OID. The OID was recorded as a debt discount with the corresponding increase to the note principal balance. The Company evaluated the JMJ Note and determined that the shares issuable pursuant to the conversion option were determinate due to the Fixed Conversion Price and, as such, does not constitute a derivative liability as the Company has obtained authorization from a majority of shareholders such that should conversion occur at the Fixed Conversion Price the appropriate number of shares will be available or issuable for settlement to occur. The beneficial conversion feature discount resulting from the conversion prices below the market price on the agreement dates provided a value of $25,000, which was recorded as a discount on debt with a corresponding increase to additional paid in capital. Using the effective interest method, $2,792 was amortized during the three months ended January 31, 2014. There was no accrued interest as of January 31, 2014 as the note includes the interest expense within the OID.
| F-19 |
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. The agreement ended January 31, 2013 and Mr. McKay agreed to continue serve as the Company’s CEO without base salary. 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. During the year ended October 31, 2013, Mr. McKay waived $47,200 of the salaries owed to him which was treated as a capital contribution increasing additional paid in capital by $47,200.
Since January 31, 2013, the Company stopped accruing salaries to Mr. McKay based on the agreement. As of January 31, 2014 and October 31, 2013, the total accrued salaries owed to Mr. McKay were $0. Mr. McKay also agreed to terminate the terms of the salary compensation agreement.
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.
| F-20 |
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 expired 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, 2013 and October 31, 2012, 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 January 31, 2014 and October 31, 2013, there were 109,290,659 and 100,790,659 shares issued and outstanding, respectively.
Fiscal year 2010:
During the year ended October 31, 2010, the Company entered into various stock purchase agreements with accredited investors for the sale of a total of 2,520,000 shares of its common stock, of which 400,000 shares were sold at a purchase price of $0.25 per share or $100,000 and 2,120,000 shares were sold at a purchase price of $0.05 per share of $106,000. During the same period, the Company issued 200,000 shares of common stock in lieu of commissions which were valued at $21,000 based on the closing stock price on the date of grant.
| F-21 |
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 nine-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.
| F-22 |
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.
Fiscal year 2011:
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.
During the year ended October 31, 2011, the Company entered into various stock purchase agreements with accredited investors for the sale of a total of 10,869,000 shares of its common stock at purchase prices of $0.05 and $0.045 per share, for total consideration of $571,045. During the same period, the Company issue 848,000 shares of common stock in lieu of finders fees which were recorded at par against additional paid in capital.
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 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 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.
Fiscal year 2012:
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.
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, 13,098,145 shares were issued, and a common stock payable was recorded in the amount of $56,421 during the year ended October 31, 2012. During the same period, the Company issue 1,025,000 shares of common stock in lieu of finders fees which were recorded at par against additional paid in capital.
| F-23 |
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 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.
Fiscal year 2013:
During the three months ended April 30, 2013, 1,554,298 shares were issued to relieve the common stock payable of $56,421.
On November 16, 2012, the Company issued 566,667 shares of common stock to a consultant for services to be performed during 2013. The shares were valued at $64,260 based on the closing stock price on November 16, 2012 which was the date of the agreement between the consultant and the Company as the shares were granted without performance contingencies.
During the year ended October 31, 2013, the Company issued total of 4,100,000 shares of common stock to its Board of Directors for services. The shares were valued at $179,700 based on the closing stock price on the date of the restricted stock grant.
On July 8, 2013, the Company issued total of 1,250,000 shares of common stock to a consultant for services rendered. The shares were valued at $113,750 based on the closing stock price on the date of the stock grant.
During the year ended October 31, 2013, the Company entered into various purchase agreements with accredited investors for the sale of 15,152,305 shares of its common stock at prices between $0.025 and $0.04 per share. For the 1,000,000 shares sold at $0.03, additional stock expense was recorded due to the difference of $6,300 (1,000,000 shares times $0.0063 per share) between $0.03 and $0.0363 sales prices; of which $0.0363 has been the regular sales price of stock for cash by the Company. The adjustments were recorded as an increase in additional paid in capital. Cash of $559,429 was received and 15,152,305 shares were issued during the year ended October 31, 2013. In connection with the these stock purchase agreements, the Company issued 800,000 shares of common stock in lieu of finders’ fees, which represents stock offering costs. In addition, cash of $3,250 was paid as finders’ fees to an unrelated consultant. Finders’ fees are treated as a reduction in paid in capital per current accounting guidance.
On April 5, 2013, the Company entered into separate Securities Purchase Agreements with Tina Kwan, Betty Li and Harbin Aerospace Company, LLC (“Harbin”), each of whom are holders of the capital stock of Godfrey (China) Limited (“Godfrey”), the Company’s 55%-owned Hong Kong subsidiary engaged in the development of the production facility in Guangzhou, China.
Pursuant to the Securities Purchase Agreements, the Company issued 4,000,000 shares of its common stock to Ms. Kwan and Ms. Li. The 800,000 shares to Harbin were valued at $73,600 which was recorded as common stock to be issued at October 31, 2013 since the shares had not been issued at of the date of the report.
During 2013, $270,884 of accrued expenses due to Bill McKay were forgiven and contributed to the Company.
Fiscal year 2014:
During the three months ended January 31, 2014, the Company issued a total of 2,000,000 shares of common stock to its Board of Directors for services. The shares were valued at $93,000 based on the closing stock price on the date of the restricted stock grant.
During the three months ended January 31, 2014, the Company also issued total of 3,750,000 shares of common stock to consultants for services rendered. The shares were valued at $252,250 based on the closing stock prices on the dates of the stock grants.
| F-24 |
During the three months ended January 31, 2014, the Company entered into various purchase agreements with accredited investors for the sale of 2,500,000 shares of its common stock at a price of $0.04 per share. Total cash proceeds from the sale of stock during the quarter ended January 31, 2014, was $100,000. In connection with the these stock purchase agreements, the Company issued 250,000 shares of common stock in lieu of finders’ fees, which represents stock offering costs. Finders’ fees are treated as a reduction in paid in capital per current accounting guidance.
Warrants and Options
A summary of option activity during the three months ended January 31, 2014 and the year ended October 31, 2013 are presented below:
| January 31, 2014 | October 31, 2013 | |||||||||||||||||||||||
| Weighted | Weighted | Weighted | Weighted | |||||||||||||||||||||
| average | average | average | average | |||||||||||||||||||||
| Number of | exercise | life | Number of | exercise | life | |||||||||||||||||||
| shares | price | (years) | shares | price | (years) | |||||||||||||||||||
| Outstanding at beginning of year | 52,666,667 | $ | 0.08 | 10.42 | 18,000,000 | $ | 0.15 | 8.24 | ||||||||||||||||
| Granted | – | – | – | 36,000,000 | 0.045 | 11.88 | ||||||||||||||||||
| Exercised | – | – | – | – | – | – | ||||||||||||||||||
| Forfeited | – | – | – | (1,333,333 | ) | 0.15 | 8.24 | |||||||||||||||||
| Cancelled | – | – | – | – | – | – | ||||||||||||||||||
| Expired | – | – | – | – | – | – | ||||||||||||||||||
| Outstanding at end of year | 52,666,667 | $ | 0.08 | 10.17 | 52,666,667 | $ | 0.08 | 10.42 | ||||||||||||||||
| Options exercisable at end of year | 19,166,667 | $ | 0.15 | 6.99 | 16,000,000 | $ | 0.15 | 7.24 | ||||||||||||||||
A summary of warrant activity during the three months ended January 31, 2014 and the year ended October 31, 2013 are presented below:
| January 31, 2014 | October 31, 2013 | |||||||||||||||||||||||
| 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 | 7.39 | 4,000,000 | $ | 0.75 | 8.39 | ||||||||||||||||
| Granted | – | – | – | |||||||||||||||||||||
| Exercised | – | – | – | – | – | – | ||||||||||||||||||
| Forfeited | – | – | – | – | – | – | ||||||||||||||||||
| Cancelled | – | – | – | – | – | – | ||||||||||||||||||
| Expired | – | – | – | – | – | – | ||||||||||||||||||
| Outstanding at end of year | 4,000,000 | $ | 0.75 | 7.14 | 4,000,000 | $ | 0.75 | 7.39 | ||||||||||||||||
| Warrants exercisable at end of year | – | $ | – | – | – | $ | – | – | ||||||||||||||||
| F-25 |
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.
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.
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. During the year ended October 31, 2013, these directors resigned and option to purchase a total of 1,333,333 shares was forfeited.
Using the Black-Scholes Pricing Model, for the years ended October 31, 2013, the above options were fully vested and $126,605 was amortized as stock based compensation.
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 three months ended January 31, 2014 and 2013, $14,324 and $14,324 was amortized as stock based compensation, respectively.
On September 16, 2013, the Company granted 9,000,000 stock options each to four members of the Board of Directors to purchase shares at $0.045 per share. The options vest in three equal amounts on each of the next three anniversary dates of this agreement, beginning September 16, 2014 and are exercisable until September 16, 2026. The total estimated value using the Black-Scholes Model, based on a volatility rate of 163% and a call option value of $0.0725, was $2,608,982. For the three months ended January 31, 2014 and 2013, $217,415 and $0 was amortized as stock based compensation, respectively.
No additional options or warrants were granted, cancelled, exercised, or expired during the three months ended January 31, 2014.
| F-26 |
NOTE 10 – SUBSEQUENT EVENTS
Events subsequent to January 31, 2014 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 January 31, 2014:
| · | Pursuant to the Securities Purchase Agreements entered into on April 5, 2013, the Company recorded 800,000 shares owed to Harbin Aerospace Company LLC. In February 2014, the Company issued 800,000 shares of its common stock as final payment to Harbin for acquisition of ownership in Godfrey. These shares were included in common stock payable at January 31, 2014. |
| · | In February 2014, the Company issued 9,875,000 shares of its common stock to third parties for services rendered. The shares were valued based on the closing stock prices on the dates of the restricted stock grants. |
| F-27 |
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operation |
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 financial statements and accompanying notes included elsewhere in this report.
Forward Looking Statements
This quarterly report on Form 10-Q 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 the “Risk Factors” section of in our annual report on Form 10-K for the year ended October 31, 2013 filed with the Securities and Exchange Commission on February 13, 2014. 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.
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.
We commenced our aircraft component business in February 1, 2010. To date, our operations have focused on the development of our production facility in Guangzhou, China and the design and engineering of our initial product line of spherical bearings. Our production facility in Guangzhou, China is held and operated by our 55%-owned subsidiary, Godfrey (China) Limited, a Hong Kong corporation. Naval Air Systems Command (“NAVAIR”) of the United States Navy has completed the qualification testing of Godfrey’s initial line of bearings. We received final approval from NAVAIR on March 5, 2013 and expect to commence the manufacture of our spherical bearings in the second quarter of 2014. We expect to commence marketing and distribution of sale of Godfrey’s initial product line of spherical bearings in the third quarter of 2014.
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.
Results of Operations
Three Months Ended January 31, 2014 and 2013
We have not commenced revenue producing operations and do not expect to until the third quarter of 2014, at the earliest, at which time we expect to commence the distribution of Godfrey’s line of spherical bearings. During the three months ended January 31, 2014, we incurred $823,818 of operating expenses compared to $352,927 during the three months ended January 31, 2013. Our operating expenses consist primarily of professional fees, consulting fees, and other general and administrative expenses. The increase in operating expenses for the three months ended January 31, 2014 compared to the same period in fiscal 2013 was primarily resulted from issuance of common stock to board of directors and consultants. We expect our operating expenses will significantly increase at such time as we commence the distribution of Godfrey’s spherical bearings.
| 1 |
During the three months ended January 31, 2014 and 2013, we incurred a net loss from operations of $787,374 and $357,477, respectively. The increase was primarily resulted from issuance of common stock to board of directors and consultants.
Financial Condition
Liquidity and Capital Resources
As of January 31, 2014, we had total assets of $12,707 and a working capital deficit of $598,710. Since January 31, 2014, 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 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.
The report of our independent registered public accounting firm for the fiscal year ended October 31, 2013 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 arrangements, as defined in Item 303 of Regulation S-K.
| Item 3. | Quantitative and Qualitative Disclosures about Market Risk. |
None.
| 2 |
| Item 4. | 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 13a-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The term “disclosure controls and procedures” refers to the controls and procedures of our company that are designed to ensure that information required to be disclosed by us in the reports that we file under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosures.
Based upon the above-described evaluation, our management, including our chief executive officer and chief financial officer, concluded that our disclosure controls and procedures were not effective as of January 31, 2014 due to certain material weakness in our internal control over financial reporting. 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 January 31, 2014, 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 January 31, 2014.
Changes in internal control over financial reporting
There were no changes in our internal control over financial reporting that occurred during the second quarter of fiscal 2013 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
| 3 |
PART II – OTHER INFORMATION
| Item 1. | Legal Proceedings |
As of the date of this report, there are no pending legal proceedings to which we or our properties are subject, except for routine litigation incurred in the normal course of business.
|
Item 2. |
Unregistered Sales of Equity Securities and Use of Proceeds |
During the three months ended January 31, 2014, the Company entered into various purchase agreements with accredited investors for the sale of 2,500,000 shares of its common stock at $0.04 per share. Cash of $100,000 was received and 2,500,000 shares were issued during the quarter ended January 31, 2014. In connection with these stock purchase agreements, the Company issued 250,000 shares of common stock in lieu of finders’ fees, which represents stock offering costs. Finders’ fees are treated as a reduction in paid in capital per current accounting guidance.
The aforementioned issuances were made pursuant to Section 4(2) of the Securities Act of 1933, as amended (“1933 Act”) and Rule 506 thereunder. All of the investors were accredited investors, as such term is defined in Rule 501 under the 1933 Act. The offering was conducted by management of the Company. No sales commissions or finders’ fees were paid by us or anyone else. The shares of common stock have not been, and will not be, registered under the 1933 Act and may not be offered or sold absent registration or an applicable exemption from the registration requirements.
| Item 6. | Exhibits |
|
Exhibit No. |
Description | Method of Filing | ||
| 31.1 | Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | Filed electronically herewith | ||
| 31.2 | Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | Filed electronically herewith | ||
| 32.1 | Certification of Principal Executive Officer and Principal Financial Officer 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 |
| 4 |
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| TRANS-PACIFIC AEROSPACE COMPANY INC. | |||
| (Registrant) | |||
| Date: | March 24, 2014 | By: | /s/ William Reed McKay |
| William Reed McKay | |||
| President, Chief Executive Officer and Chief Financial Officer | |||
| (Principal Executive and Financial Officer) | |||
| 5 |
EXHIBIT 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
Section 302 Certification
I, William Reed McKay, certify that:
1) I have reviewed this quarterly report on Form 10-Q of Trans-Pacific Aerospace Company, Inc.;
2) Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3) Based on my knowledge, the consolidated financial statements and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4) The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s fiscal quarter presented in this report that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5) The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial data information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| Date: March 24, 2014 | By: | /s/ William Reed McKay | |
|
William Reed McKay, President and Chief Executive Officer |
EXHIBIT 31.2
CERTIFICATION OF PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER
Section 302 Certification
I, William Reed McKay, certify that:
1) I have reviewed this quarterly report on Form 10-Q of Trans-Pacific Aerospace Company, Inc.;
2) Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3) Based on my knowledge, the consolidated financial statements and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4) The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s fiscal quarter presented in this report that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5) The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial data information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| Date: March 24, 2014 | By: | /s/ William Reed McKay | |
| William Reed McKay, Chief Financial Officer |
EXHIBIT 32.1
CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Trans-Pacific Aerospace Company, Inc. (the “Company”) on Form 10-Q for the quarterly period ended January 31, 2014, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, William Reed McKay, President, Chief Executive Officer and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
| By: | /s/ William Reed McKay | Dated: | March 24, 2014 | |
| William Reed McKay | ||||
| Title: | President and Chief Executive Officer | |||
| By: | /s/ William Reed McKay | Dated: | March 24, 2014 | |
| William Reed McKay | ||||
| Title: | Chief Financial Officer |
This certification is made solely for the purposes of 18 U.S.C. Section 1350, subject to the knowledge standard contained therein, and not for any other purpose.