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, 2015
or
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____to______
Commission file 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.
| o Large accelerated filer | o Accelerated filer | o 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 o No x
As of March 4, 2015, the registrant had 497,553,103 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 | |
| Consolidated Balance Sheets as of January 31, 2015 (Unaudited) and October 31, 2014 (Audited) | F-1 | |
| Consolidated Statements of Operations (Unaudited) for the Three Months Ended January 31, 2015 and 2014 | F-2 | |
| Consolidated Statement of Stockholders’ Equity (Deficit) for the Three Months Ended January 31, 2015 (Unaudited) | F-3 | |
| Consolidated Statements of Cash Flows (Unaudited) for the Three Months Ended January 31, 2015 and 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 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 4 |
| Item 6. | Exhibits | 4 |
| Signatures | 5 | |
| i |
TRANS-PACIFIC AEROSPACE COMPANY, INC.
Consolidated Balance Sheets
| January 31, | October 31, | |||||||
| 2015 | 2014 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash | $ | 36,304 | $ | 50,089 | ||||
| Prepaid expenses | 3,960 | 1,584 | ||||||
| Total current assets | 40,264 | 51,673 | ||||||
| Non-Current assets | ||||||||
| Office equipment, net of accumulated depreciation of $3,799 and $3,498, respectively | 4,607 | 4,908 | ||||||
| Security deposit | 1,584 | 1,584 | ||||||
| Total non-current assets | 6,191 | 6,492 | ||||||
| Total assets | $ | 46,455 | $ | 58,165 | ||||
| LIABILITIES AND STOCKHOLDERS' (DEFICIT) | ||||||||
| Current liabilities | ||||||||
| Accounts payable and accrued expenses | $ | 125,557 | $ | 108,320 | ||||
| Income taxes payable | 1,951 | 1,951 | ||||||
| Accrued salary and payroll taxes | 20,433 | 20,433 | ||||||
| Accrued interest payable | 12,389 | 5,555 | ||||||
| Other payables - related parties | 68,700 | 68,700 | ||||||
| Convertible note payable, net of discount | 202,458 | 233,747 | ||||||
| Convertible note payable, currently in default | 260,000 | 260,000 | ||||||
| Derivative liabilities - conversion option | 221,353 | 207,891 | ||||||
| Total current liabilities | 912,841 | 906,597 | ||||||
| Total liabilities | 912,841 | 906,597 | ||||||
| Stockholders' (deficit) | ||||||||
| Preferred stock, par value $0.001, 5,000,000 shares authorized. | ||||||||
| No shares issued and outstanding at January 31, 2015 and October 31, 2014 | – | – | ||||||
| Common stock, par value $0.001, 500,000,000 shares authorized. | ||||||||
| 218,755,257 shares issued and outstanding at January 31, 2015 and 179,447,431 shares issued and outstanding at October 31, 2014 | 218,755 | 179,447 | ||||||
| Additional paid-in capital | 16,885,395 | 15,461,785 | ||||||
| Common stock to be issued | 204,093 | 64,093 | ||||||
| Accumulated Deficit | (17,642,678 | ) | (16,064,350 | ) | ||||
| Total Trans-Pacific Aerospace Company Inc. stockholders' equity | (334,435 | ) | (359,025 | ) | ||||
| Non-controlling interest in subsidiary | (531,951 | ) | (489,407 | ) | ||||
| Total stockholders' (deficit) | (866,386 | ) | (848,432 | ) | ||||
| Total liabilities and stockholders' (deficit) | $ | 46,455 | $ | 58,165 | ||||
See accompanying notes to unaudited condensed consolidated financial statements.
| F-1 |
TRANS-PACIFIC AEROSPACE COMPANY, INC.
Unaudited Consolidated Statements of Operations
| For the Three Months Ended | ||||||||
| January 31, | ||||||||
| 2015 | 2014 | |||||||
| Operating expenses | ||||||||
| Professional fees | $ | 65,765 | $ | 6,766 | ||||
| Consulting | 27,000 | – | ||||||
| Other general and administrative | 1,496,182 | 817,052 | ||||||
| Total operating expenses | 1,588,947 | 823,818 | ||||||
| Operating loss from continuing operations | (1,588,947 | ) | (823,818 | ) | ||||
| Interest expense, net | (57,724 | ) | (26,556 | ) | ||||
| Derivative expenses | 25,799 | – | ||||||
| Loss before income taxes | $ | (1,620,872 | ) | $ | (850,374 | ) | ||
| Income taxes | – | – | ||||||
| Net Loss | (1,620,872 | ) | (850,374 | ) | ||||
| Less: Loss attributable to non-controlling interest | $ | (42,544 | ) | $ | (63,000 | ) | ||
| Net Loss attributable to the Company | $ | (1,578,328 | ) | $ | (787,374 | ) | ||
| Basic and dilutive net loss from operations per share | $ | (0.01 | ) | $ | (0.01 | ) | ||
| Weighted average number of common shares outstanding, basic and diluted | 185,331,761 | 104,407,507 | ||||||
See accompanying notes to unaudited condensed consolidated financial statements.
| F-2 |
TRANS-PACIFIC AEROSPACE COMPANY, INC.
Consolidated Statement of Stockholders' Equity (Deficit)
| Additional | Common | Non | ||||||||||||||||||||||||||
| Common Stock | Paid-In | Stock | Controlling | Accumulated | ||||||||||||||||||||||||
| Shares | Amount | Capital | To Be Issued | Interest | Deficit | Total | ||||||||||||||||||||||
| 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 | 31,987,382 | 31,987 | 509,613 | 541,600 | ||||||||||||||||||||||||
| Common stock issued in lieu of finders fees | 9,413,380 | 9,413 | (9,413 | ) | – | |||||||||||||||||||||||
| Common stock issued for services & compensation | 20,893,566 | 20,894 | 928,785 | 949,679 | ||||||||||||||||||||||||
| Acquisition of ownership interest in Godfrey | 800,000 | 800 | 72,800 | (73,600 | ) | – | – | |||||||||||||||||||||
| Common stock issued upon conversion of notes payable | 15,562,444 | 15,562 | 143,351 | 158,913 | ||||||||||||||||||||||||
| Amortization of stock options | 926,956 | 926,956 | ||||||||||||||||||||||||||
| Imputed interest | 18,200 | 18,200 | ||||||||||||||||||||||||||
| Note discount | 82,500 | 82,500 | ||||||||||||||||||||||||||
| Forgiveness of payables to officer | 631,600 | 631,600 | ||||||||||||||||||||||||||
| Loss on Minority interest | (372,854 | ) | (372,854 | ) | ||||||||||||||||||||||||
| Net loss from continuing operations for the year ended October 31, 2014 | (3,305,046 | ) | (3,305,046 | ) | ||||||||||||||||||||||||
| Balances, October 31, 2014 | 179,447,431 | $ | 179,447 | $ | 15,461,785 | $ | 64,093 | $ | (489,407 | ) | $ | (16,064,350 | ) | $ | (848,432 | ) | ||||||||||||
| Common stock issued for cash | 140,000 | 140,000 | ||||||||||||||||||||||||||
| Common stock issued for services & compensation | 2,000,000 | 2,000 | 38,000 | 40,000 | ||||||||||||||||||||||||
| Common stock issued upon conversion of notes payable | 37,307,826 | 37,308 | 8,821 | 46,129 | ||||||||||||||||||||||||
| Conversion of derivative liability to common stock | 59,739 | 59,739 | ||||||||||||||||||||||||||
| Amortization of stock options | 1,312,500 | 1,312,500 | ||||||||||||||||||||||||||
| Imputed interest | 4,550 | 4,550 | ||||||||||||||||||||||||||
| Loss on Minority interest | (42,544 | ) | (42,544 | ) | ||||||||||||||||||||||||
| Net loss from continuing operations for the three months ended January 31, 2015 | (1,578,328 | ) | (1,578,328 | ) | ||||||||||||||||||||||||
| Balances, January 31, 2015 (Unaudited) | 218,755,257 | $ | 218,755 | $ | 16,885,395 | $ | 204,093 | $ | (531,951 | ) | $ | (17,642,678 | ) | $ | (866,386 | ) | ||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
| F-3 |
TRANS-PACIFIC AEROSPACE COMPANY, INC.
Unaudited Consolidated Statements of Cash Flows
| For the Three Months Ended | ||||||||
| January 31, | ||||||||
| 2015 | 2014 | |||||||
| Cash flows from operating activities: | ||||||||
| Net Loss | $ | (1,620,872 | ) | $ | (850,374 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Stock based compensation | 1,352,500 | 576,989 | ||||||
| Amortization of debt discount | 46,340 | 20,537 | ||||||
| Imputed interest expense | 4,550 | 4,550 | ||||||
| Derivative expense | (25,799 | ) | – | |||||
| Depreciation expense | 301 | 301 | ||||||
| Amortization of deferred financing costs | – | 400 | ||||||
| Prepaid and deferred expenses | (2,376 | ) | 792 | |||||
| Accounts payable and accrued expenses | 17,237 | (9,999 | ) | |||||
| Accounts payable - related party | – | 75,700 | ||||||
| Accrued interest payable | 6,834 | 1,068 | ||||||
| Net cash used in operating activities | (221,285 | ) | (180,036 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Common stock issued for cash | 140,000 | 100,000 | ||||||
| Convertible note issued for cash | 67,500 | 55,000 | ||||||
| Net cash provided by financing activities | 207,500 | 155,000 | ||||||
| Net increase / decrease in cash | (13,785 | ) | (25,036 | ) | ||||
| Cash, beginning of the period | 50,089 | 27,456 | ||||||
| Cash, end of the period | $ | 36,304 | $ | 2,420 | ||||
| Supplemental cash flow disclosure: | ||||||||
| Interest paid | $ | – | $ | – | ||||
| Income taxes paid | $ | – | $ | – | ||||
| Supplemental disclosure of non-cash transactions: | ||||||||
| Common stock issued for payment on outstanding liabilities | $ | 40,000 | $ | – | ||||
| Common stock issued for conversion of notes payable | $ | 46,129 | $ | – | ||||
| Conversion of derivative liability to common stock | $ | 59,739 | $ | – | ||||
| Deferred financing costs | $ | – | $ | 2,500 | ||||
| Common stock issued for finders fees | $ | – | $ | 250 | ||||
| Beneficial conversion feature of convertible note payable | $ | – | $ | 57,500 | ||||
| Derivative liabilities | $ | 221,353 | $ | – | ||||
See accompanying notes to unaudited condensed consolidated financial statements.
| F-4 |
Trans-Pacific Aerospace Company, Inc.
Notes to Unaudited Consolidated Financial Statements
January 31, 2015
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 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 and were issued during the quarter ended April 30, 2014. On June 21, 2013, the transactions were approved by the Hong Kong SAR 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.
Business Overview
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.
| F-5 |
Going Concern
The Company's financial statements are prepared using the accrual method of accounting in accordance with accounting principles generally accepted in the United States of America, and have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. The Company incurred a net loss from operations of $1,578,328 during the three months ended January 31, 2015, and an accumulated deficit of $17,642,678 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, 2014, filed with the SEC on February 13, 2015.
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.
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.
| F-6 |
Use of Estimates
The preparation of the financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Actual results could differ from those estimates.
Cash and Equivalents
Cash and equivalents include investments with initial maturities of three months or less. The Company maintains its cash balances at credit-worthy financial institutions that are insured by the Federal Deposit Insurance Corporation ("FDIC") up to $250,000. There were no cash equivalents at January 31, 2015 or October 31, 2014.
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.
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.
| F-7 |
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, other payables, 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, 2015 (Unaudited) | ||||||||||||||||
| Carrying | ||||||||||||||||
| Value | ||||||||||||||||
| January 31, | ||||||||||||||||
| 2015 | Level 1 | Level 2 | Level 3 | |||||||||||||
| Liabilities: | ||||||||||||||||
| Convertible notes payable, net | $ | 202,458 | $ | – | $ | – | $ | 202,458 | ||||||||
| Convertible notes payable – currently in default | $ | 260,000 | $ | – | $ | – | $ | 260,000 | ||||||||
| Derivative liabilities | $ | 221,353 | $ | – | $ | – | $ | 221,353 | ||||||||
| Fair Value Measurements at | ||||||||||||||||
| October 31, 2014 | ||||||||||||||||
| Carrying | ||||||||||||||||
| Value | ||||||||||||||||
| October 31, | ||||||||||||||||
| 2014 | Level 1 | Level 2 | Level 3 | |||||||||||||
| Liabilities: | ||||||||||||||||
| Convertible notes payable, net | $ | 233,747 | $ | – | $ | – | $ | 233,747 | ||||||||
| Convertible notes payable – currently in default | $ | 260,000 | $ | – | $ | – | $ | 260,000 | ||||||||
| Derivative liabilities | $ | 207,891 | $ | – | $ | – | $ | 207,891 | ||||||||
| F-8 |
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, 2015 and October 31, 2014 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, 2015 and October 31, 2014.
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.
The accounting guidance for uncertainties in income tax prescribes a comprehensive model for the financial statement recognition, measurement, presentation, and disclosure of uncertain tax positions taken or expected to be taken in income tax returns. The Company recognizes a tax benefit from an uncertain tax position in the consolidated financial statements only when it is more likely than not that the position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits and a consideration of the relevant taxing authority’s widely understood administrative practices and precedents.
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, 2015, 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 received 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.
| F-9 |
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.
Beneficial Conversion Features
From time to time, the Company may issue convertible notes that may contain an embedded 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.
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 138,000,000 shares outstanding as of January 31, 2015 that are not included in the calculation of Diluted EPS as their impact would be anti-dilutive.
| For the Three Months Ended January 31, | ||||||||
| 2015 | 2014 | |||||||
| Net loss attributable to the Company | $ | (1,578,328 | ) | $ | (787,374 | ) | ||
| Basic and diluted net loss from operations per share | $ | (0.01 | ) | $ | (0.01 | ) | ||
| Weighted average number of common shares outstanding, basic and diluted | 185,331,761 | 104,407,507 | ||||||
Recently Adopted and Recently Enacted Accounting Pronouncements
In June 2014, the FASB issued ASU 2014-10,
Development Stage Entities (Topic 915): Elimination of Certain Financial Reporting Requirements. ASU 2014-10 eliminates the distinction
of a development stage entity and certain related disclosure requirements, including the elimination of inception-to-date information
on the statements of operations, cash flows and stockholders' equity. The amendments in ASU 2014-10 will be effective prospectively
for annual reporting periods beginning after December 15, 2014, and interim periods within those annual periods, however early
adoption is permitted. The Company adopted ASU 2014-10 during the quarter ended May 31, 2014, thereby no longer presenting or disclosing
any information required by Topic 915.
| F-10 |
The Company reviewed all recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the AICPA, and the SEC and they did not or are not believed by management to have a material impact on the Company's present or future financial statements.
In August 2014, the FASB issued the FASB Accounting Standards Update No. 2014-15 “Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”).
In connection with preparing financial statements for each annual and interim reporting period, an entity’s management should evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or within one year after the date that the financial statements are available to be issued when applicable). Management’s evaluation should be based on relevant conditions and events that are known and reasonably knowable at the date that the financial statements are issued (or at the date that the financial statements are available to be issued when applicable). Substantial doubt about an entity’s ability to continue as a going concern exists when relevant conditions and events, considered in the aggregate, indicate that it is probable that the entity will be unable to meet its obligations as they become due within one year after the date that the financial statements are issued (or available to be issued). The term probable is used consistently with its use in Topic 450, Contingencies.
When management identifies conditions or events that raise substantial doubt about an entity’s ability to continue as a going concern, management should consider whether its plans that are intended to mitigate those relevant conditions or events will alleviate the substantial doubt. The mitigating effect of management’s plans should be considered only to the extent that (1) it is probable that the plans will be effectively implemented and, if so, (2) it is probable that the plans will mitigate the conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern.
If conditions or events raise substantial doubt about an entity’s ability to continue as a going concern, but the substantial doubt is alleviated as a result of consideration of management’s plans, the entity should disclose information that enables users of the financial statements to understand all of the following (or refer to similar information disclosed elsewhere in the footnotes):
| a. | Principal conditions or events that raised substantial doubt about the entity’s ability to continue as a going concern (before consideration of management’s plans) | |
| b. | Management’s evaluation of the significance of those conditions or events in relation to the entity’s ability to meet its obligations | |
| c. | Management’s plans that alleviated substantial doubt about the entity’s ability to continue as a going concern. |
If conditions or events raise substantial doubt about an entity’s ability to continue as a going concern, and substantial doubt is not alleviated after consideration of management’s plans, an entity should include a statement in the footnotes indicating that there is substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or available to be issued). Additionally, the entity should disclose information that enables users of the financial statements to understand all of the following:
| a. | Principal conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern | |
| b. | Management’s evaluation of the significance of those conditions or events in relation to the entity’s ability to meet its obligations | |
| c. | Management’s plans that are intended to mitigate the conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern. |
The amendments in this Update are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted.
Management does not believe that any recently issued, but not yet effective accounting pronouncements, when adopted, will have a material effect on the accompanying financial statements.
| F-11 |
NOTE 3 – PROPERTY AND EQUIPMENT
As of January 31, 2015 and October 31, 2014, the Company had office equipment of $4,607 and 4,908, net of accumulated depreciation of $3,799 and $3,498, respectively. For the three months ended January 31, 2015 and 2014, the Company recorded depreciation expense of $301 and $301, respectively.
NOTE 4 – RELATED PARTY TRANSACTIONS
Due to lack of sufficient funding to maintain the Company’s operations, the Company’s officers and directors loaned money to the Company for short term cash flow needs. As of January 31, 2015 and October 31, 2014, Mr. Peter Liu had payables due to him from Godfrey of $60,000 and $60,000; respectively; Mr. Kevin Gould had payables due to him of $9,000 and $9,000; respectively. The Company had receivables due from HAC amounted to $300 and $300 at January 31, 2015 and October 31, 2014, respectively.
NOTE 5 – 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 three months ended January 31, 2015 and 2104, the Company recorded imputed interest of $4,550 and $4,550, respectively.
During the year ended October 31, 2014, we entered into Securities Purchase Agreements with various accredited and sophisticated investors, pursuant to which we sold Convertible Promissory Notes with interest rates ranging from 8% to 12%, in the original principal amount of $325,000 (the “Notes”). The Notes have maturity date of six months or one year from the issuance date and are convertible into our common stock, at any time after 180 days, at a price for each share of common stock equal to 50% to 60 % of the lowest closing bid price of the common stock as reported on the National Quotatons Bureau OTCQB exchange, based on formulars specified in the agreements.
The issuances of the Notes were exempt from the registration requirements of the Securities Act of 1933 pursuant to Rule 506 of Regulation D promulgated thereunder. The purchasers were accredited and sophisticated investors, familiar with our operations, and there was no solicitation.
The Company analyzed the conversion option of the Notes for derivative accounting consideration under ASC 815-15 “Derivatives and Hedging” and determined that the instrument should be classified as liabilities once the conversion option becomes effective after 180 days due to there being no explicit limit to the number of shares to be delivered upon settlement of the above conversion options for the Notes issued. During the year ended October 31, 2014, the Company repaid $112,500 of the principal amount of the Notes.
| F-12 |
During the three months ended January 31, 2015, three of the convertible notes with total principal amount of $91,500 reached the 180 days and the conversion options became derivative liabilities. Using the Black-Scholes Model, the Company calculated the fair value of the conversion options and recorded derivative liabilities on the 180th day and January 31, 2015. The change in fair value was recorded as derivative expenses.
On June 13, 2014, we entered into Securities Purchase Agreements with Tangiers Investment Group LLC, pursuant to which we sold a 10% Convertible Promissory Note, in the original principal amount of $55,000 (the “Tangiers Note”). The Tangiers Note has a maturity date of June 13, 2015 and is convertible into our common stock, at any time at a price for each share of common stock equal to 60 % of the lowest closing bid price of the common stock as reported on the National Quotatons Bureau OTCQB exchange, based on a formular specified in the agreement.
On November 25, 2014, we entered into Securities Purchase Agreements with Tangiers Investment Group LLC, pursuant to which we sold a 10% Convertible Promissory Note, in the original principal amount of $27,500 (the “Tangiers Note 2”). The Tangiers Note 2 has a maturity date of November 25, 2015 and is convertible into our common stock, at any time at a price for each share of common stock equal to 60% of the lowest closing bid price of the common stock as reported on the National Quotatons Bureau OTCQB exchange, based on a formular specified in the agreement.
The issuances of the Tangiers Note 2 was exempt from the registration requirements of the Securities Act of 1933 pursuant to Rule 506 of Regulation D promulgated thereunder. The purchaser was accredited and sophisticated investors, familiar with our operations, and there was no solicitation.
The Company analyzed the conversion option of the Tangiers Notes for derivative accounting consideration under ASC 815-15 “Derivatives and Hedging” and determined that the instrument should be classified as liabilities due to there being no explicit limit to the number of shares to be delivered upon settlement of the above conversion options for the Tangiers Notes issued. The Company then calculated the fair value of the conversion option and recorded derivative liability on the issuance date and the subsequent period end dates.
On November 10, 2014, we entered into Securities Purchase Agreements with Auctus Privatge Equity Funds, LLC, pursuant to which we sold an 8% Convertible Promissory Note, in the original principal amount of $40,000 (the “Auctus Note”). The Auctus Note has a maturity date of November 10, 2015 and is convertible into our common stock, at any time at a price for each share of common stock equal to 55 % of the average of the lowest three (3) trading prices of the common stock as reported on the National Quotatons Bureau OTCQB exchange, based on a formular specified in the agreement.
The issuances of the Auctus 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 accredited and sophisticated investors, familiar with our operations, and there was no solicitation.
The Company analyzed the conversion option of the Auctus Note for derivative accounting consideration under ASC 815-15 “Derivatives and Hedging” and determined that the instrument should be classified as liabilities due to there being no explicit limit to the number of shares to be delivered upon settlement of the above conversion options for the Auctus Note issued. The Company then calculated the fair value of the conversion option and recorded derivative liability on the issuance date and the subsequent period end dates.
During the three months ended January 31, 2015, $46,129 of the convertible notes was converted to 37,307,826 shares of the Company’s common stock.
For the three months ended January 31, 2015 and 2014, the Company recorded derivative income of $25,799 and $0, respectively. As of January 31, 2015 and October 31, 2014, the derivative liability amounted to $221,353 and $207,891, respectively.
As of January 31, 2015 and October 31, 2014, the outstanding amount of the convertible notes were $202,458 and $233,747, net of discount of $86,413 and $33,753, respectively.
| F-13 |
NOTE 6 – 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 years ended October 31, 2014 and 2013, Mr. McKay waived $350,000 and $47,200 of the salaries owed to him which was treated as a capital contribution increasing additional paid in capital by $350,000 and $47,200, respectively.
As of January 31, 2015 and October 31, 2014, the total accrued salaries owed to Mr. McKay were $0.
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 7 – CAPITAL STOCK TRANSACTIONS
Preferred Stock
The Company is authorized to issue up to 5,000,000 shares of its $0.001 preferred stock. At January 31, 2015 and October 31, 2014, there were no shares issued and outstanding, respectively.
Common Stock
The Company is authorized to issue up to 500,000,000 shares of its $0.001 common stock. At January 31, 2015 and October 31, 2014, there were 218,755,257 and 179,447,431 shares issued and outstanding, respectively.
Fiscal year 2014:
During the year ended October 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 $86,000 based on the closing stock price on the date of the restricted stock grant.
During the year ended October 31, 2014, the Company also issued total of 18,893,566 shares of common stock to consultants for services rendered. The shares were valued at $863,679 based on the closing stock prices on the dates of the stock grants.
During the year ended October 31, 2014, the Company entered into various purchase agreements with accredited investors for the sale of 31,987,382 shares of its common stock at a price of $0.01 to $0.04 per share. Total cash proceeds from the sale of stock during the year ended October 31, 2014, was $541,600. In connection with the these stock purchase agreements, the Company issued 9,413,380 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.
During the year ended October 31, 2014, the Company issued 15,562,444 shares upon conversion of convertible notes amounted to $158,913.
| F-14 |
Fiscal year 2015:
During the three months ended January 31, 2015, the Company issued 2,000,000 shares of common stock for legal services rendered. The shares were valued at $40,000 based on the closing stock prices on the dates of the stock grants.
During the three months ended January 31, 2015, the company entered into various purchase agreements with an accredited investor for the sale of 28,000,000 shares of its common stock at a price of $0.005 per share. Total cash proceeds from the sale of stock during the quarter ended January 31, 2015, was $140,000, which was recorded as common stock to be issued.
During the three months ended January 31, 2015, the Company also issued 37,307,826 shares upon conversion of convertible notes amounted to $46,129.
Options and Warrants
A summary of option activity during the three months ended January 31, 2015 and the year ended October 31, 2014 are presented below:
| January 31, 2015 | October 31, 2014 | |||||||||||||||||||||||
| 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 | 6.24 | 52,666,667 | $ | 0.08 | 10.42 | ||||||||||||||||
| Granted | 138,000,000 | 0.0146 | 10.00 | – | – | – | ||||||||||||||||||
| Exercised | – | – | – | – | – | – | ||||||||||||||||||
| Forfeited | 50,000,000 | 0.08 | 6.24 | – | – | – | ||||||||||||||||||
| Cancelled | – | – | – | – | – | – | ||||||||||||||||||
| Expired | – | – | – | – | – | – | ||||||||||||||||||
| Outstanding at end of period | 140,666,667 | $ | 0.0146 | 9.77 | 52,666,667 | $ | 0.08 | 9.42 | ||||||||||||||||
| Options exercisable at end of period | 37,166,667 | $ | 0.0146 | 9.77 | 31,166,667 | $ | 0.15 | 6.24 | ||||||||||||||||
A summary of warrant activity during the three months ended January 31, 2015 and the year ended October 31, 2014 are presented below:
| January 31, 2015 | October 31, 2014 | |||||||||||||||||||||||
| 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 | 6.39 | 4,000,000 | $ | 0.75 | 7.39 | ||||||||||||||||
| Granted | – | – | – | |||||||||||||||||||||
| Exercised | – | – | – | – | – | – | ||||||||||||||||||
| Forfeited | – | – | – | – | – | – | ||||||||||||||||||
| Cancelled | – | – | – | – | – | – | ||||||||||||||||||
| Expired | – | – | – | – | – | – | ||||||||||||||||||
| Outstanding at end of year | 4,000,000 | $ | 0.75 | 6.24 | 4,000,000 | $ | 0.75 | 6.39 | ||||||||||||||||
| Warrants exercisable at end of year | – | $ | – | – | – | $ | – | – | ||||||||||||||||
| F-15 |
In November 2014, the Company granted options to all board members to purchase a total of 138,000,000 shares at an exercise price of $0.0146 per share of its common stock for service rendered and to replace the old options. These options vests in 4 equal amounts on the grant date, 2/9/2015, 5/9/2015, and 8/9/2015 and are exercisable within 10 years from the dates of vesting. The total estimated value using the Black-Scholes Model, based on a volatility rate of 321% and a call option value of $0.02, was $2,760,000. For the three months ended January 31, 2015, $1,312,500 was amortized as stock based compensation.
NOTE 8 – SUBSEQUENT EVENTS
Events subsequent to January 31, 2015 have been evaluated through the date these financial statements were issued to determine whether they should be disclosed to keep the financial statements from being misleading. Management found the following subsequent events that should be disclosed:
| · | In February 2015, the Company filed a Certificate of Change to increase the number of authorized common stock from 500,000,000 to 750,000,000. |
| · | In February and March 2015, the Company issued 182,019,761 shares of its common stock as payment for consulting services. |
| · | In February and March 2015, the Company issued 68,778,082 shares of its common stock upon conversion of the convertible notes outstanding. |
| · | In January 2015, the Company issued 10,146,201 shares of its common stock upon conversion of the convertible notes outstanding. |
| F-16 |
| 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’s commencement of manufacturing operations; our distribution of Godfrey’s products; our working capital requirements; and the further approvals of regulatory authorities. There are several important factors that could cause our future results to differ materially from our forward-looking statement. Some of these important factors, but not necessarily all important factors, include our ability to acquire additional capital as and when needed; 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; and those other risks discussed more fully in the “Risk Factors” section of in our annual report on Form 10-K for the year ended October 31, 2014 filed with the Securities and Exchange Commission on February 13, 2015. 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.
In the second quarter of 2013, we agreed to issue 4,800,000 shares of our common stock to three shareholders of our subsidiary, Godfrey (China) Limited (“Godfrey”), in exchange for their transfer to us of a total of 30% of the outstanding capital stock of Godfrey. One of the parties was Harbin Aerospace Company, LLC, our largest shareholder which is controlled by the wife of our chief executive officer, William R. McKay. Harbin transferred to us five percent of the capital stock of Godfrey in exchange for our issuance of 800,000 common shares. Upon the closing of the transactions, we increased our ownership of Godfrey from 25% to 55%.
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 our initial line of bearings. However, we expect that we will need to raise at least $2 million of capital, in order to commence international marketing and production.
| 1 |
Results of Operations
Three Months Ended January 31, 2015 and 2014
We have not commenced revenue producing operations and do not expect to until the fourth quarter of 2015, 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, 2015, we incurred $1,588,947 of operating expenses compared to $823,818 during the three months ended January 31, 2014. 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, 2015 compared to the same period in fiscal 2014 was primarily resulted from issuance of options for common stock to board of directors. We expect our operating expenses will significantly increase at such time as we commence the distribution of Godfrey’s spherical bearings.
During the three months ended January 31, 2015 and 2014, we incurred a net loss from operations of $1,620,872 and $850,374, respectively. The increase was primarily resulted from issuance of common stock options to board of directors.
For the three months ended January 31, 2015 and October 31, 2014, as a result of the increased ownership to 55% in Godfrey, we recorded non-controlling interest of $531,951 and $489,407, respectively. The net loss attributable to the Company was $1,578,328 and $787,374 for the three months ended January 31, 2015 and 2014, respectively.
Financial Condition
Liquidity and Capital Resources
As of January 31, 2015, we had total assets of $46,455 and a working capital deficit of $872,577. Since January 31, 2015, 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, 2014 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, 2015 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, 2015, 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, 2015.
Changes in internal control over financial reporting
There were no changes in our internal control over financial reporting that occurred during the first quarter of fiscal 2015 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
| 3 |
PART II
OTHER INFORMATION
|
Item 2. |
Unregistered Sales of Equity Securities and Use of Proceeds |
During the three months ended January 31, 2015, the Company entered into various purchase agreements with accredited investors for the sale of 28,000,000 shares of its common stock at $0.005 per share. Cash of $140,000 was received and the shares were issued in March 2015.
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 16, 2015 | 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 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 16, 2015 | 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 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 16, 2015 | 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, 2015, 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 16, 2015 | |
| William Reed McKay | ||||
| Title: | President and Chief Executive Officer | |||
| By: | /s/ William Reed McKay | Dated: | March 16, 2015 | |
| 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.