Attached files
file | filename |
---|---|
EX-32.1 - Trans-Pacific Aerospace Company, Inc. | v211514_ex32-1.htm |
EX-21.1 - Trans-Pacific Aerospace Company, Inc. | v211514_ex21-1.htm |
EX-31.1 - Trans-Pacific Aerospace Company, Inc. | v211514_ex31-1.htm |
EX-31.2 - Trans-Pacific Aerospace Company, Inc. | v211514_ex31-2.htm |
EX-10.13 - Trans-Pacific Aerospace Company, Inc. | v211514_ex10-13.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM 10-K
x
|
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
|
For
the fiscal year ended October 31, 2010
|
|
or
|
|
¨
|
TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
|
For
the transition period from
to
Commission
file number: 333-148447
Trans-Pacific
Aerospace Company, Inc.
(Exact
Name of registrant as specified in its charter)
Nevada
|
36-4613360
|
|||
(State
or Other Jurisdiction of
Incorporation) |
(I.R.S.
Employer Identification
Number) |
2975
Huntington Drive, Suite 107
San
Marino, California 91108
|
(Address
of principal executive offices)
|
(626)
796-9804
|
(Registrant’s
telephone number, including area
code)
|
Securities
registered pursuant to Section 12(b) of the Act:
None
Securities
registered pursuant to under Section 12(g) of the Act:
None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
Yes
¨
No x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Exchange Act.
Yes ¨ No
x
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the past 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes x No
¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes
¨ No
¨
Indicate
by check mark if disclosure of delinquent filers in response to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of the registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company (as
defined in Rule 12b-2 of the Act):
Large
accelerated filer ¨
|
Accelerated
filer ¨
|
Non-accelerated
filer ¨
|
Smaller
reporting company x
|
(Do
not check if a smaller reporting company)
|
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act)
Yes ¨ No
x
State the
aggregate market value of voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was
last sold, or the average bid and asked price of such common equity, as of the
last business day of the registrant’s most recently completed second fiscal
quarter: $1,833,933.
State the
number of shares outstanding of each of the registrant’s classes of common
stock, as of the latest practicable date: 37,000,286 shares as of February 11,
2011.
TABLE
OF CONTENTS
Page
|
||
PART
I
|
||
Item
1.
|
Business
|
1
|
Item
1A.
|
Risk
Factors
|
6
|
Item
1B.
|
Unresolved
Staff Comments
|
12
|
Item
2.
|
Properties
|
12
|
Item
3.
|
Legal
Proceedings
|
12
|
Item
4.
|
[Intentionally
omitted]
|
12
|
PART
II
|
||
Item
5.
|
Market
for Registrant’s Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities
|
13
|
Item
6.
|
Selected
Financial Data
|
13
|
Item
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
13
|
Item
7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
15
|
Item
8.
|
Financial
Statements and Supplementary Data
|
16
|
Item
9.
|
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
|
17
|
Item
9A.
|
Controls
and Procedures
|
17
|
Item
9B.
|
Other
Information
|
17
|
PART
III
|
||
Item
10.
|
Directors,
Executive Officers and Corporate Governance
|
18
|
Item
11.
|
Executive
Compensation
|
20
|
Item
12.
|
Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder
Matters
|
24
|
Item
13.
|
Certain
Relationships and Related Transactions and Director
Independence
|
26
|
Item
14.
|
Principal
Accountant Fees and Services
|
27
|
PART
IV
|
||
Item
15.
|
Exhibits
and Financial Statement Schedules
|
28
|
Signatures
|
30
|
CAUTIONARY
NOTICE
This
annual report on Form 10-K contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Those
forward-looking statements include our expectations, beliefs, intentions and
strategies regarding the future. Such forward-looking statements relate
to, among other things, Godfrey (China) Limited’s successful qualification of
its production facilities; Godfrey’s commencement of manufacturing operations;
our distribution of Godfrey’s products; our working capital requirements and
results of operations; the further approvals of regulatory authorities;
production and/or quality control problems; the denial, suspension or revocation
of privileged operating licenses by regulatory authorities; overall industry
environment; competitive pressures and general economic conditions. These
and other factors that may affect our financial results are discussed more fully
in “Risk Factors” and “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” included in this report. We caution
readers not to place undue reliance on any forward-looking statements. We
do not undertake, and specifically disclaim any obligation, to update or revise
such statements to reflect new circumstances or unanticipated events as they
occur, and we urge readers to review and consider disclosures we make in this
and other reports that discuss factors germane to our business. See in
particular our reports on Forms 10-K, 10-Q, and 8-K subsequently filed from time
to time with the Securities and Exchange Commission.
Item
1.
|
Business
|
General
We are
engaged in the business of designing, manufacturing and selling aerospace
quality component parts for commercial and military aircraft, space vehicles,
power plants and surface and undersea vessels. Our initial products
will be self-lubricating spherical bearings for commercial
aircraft. These bearings are integral to the operation of commercial
aircraft and help with several flight-critical tasks, including aircraft flight
controls and landing gear. As of the date of this report, we have not
commenced commercial manufacture or sale of our products.
We
commenced our aircraft component business in February 1, 2010. To date, our
operations have focused on assisting Godfrey (China) Limited, a Hong Kong
corporation, in the development of its production facility in Guangzhou, China
and the design and engineering of Godfrey’s initial product line of spherical
bearings. We own 25% of the capital stock of
Godfrey. Although we have no written agreements with Godfrey
concerning our distribution of its products, we expect to market and distribute
the products manufactured by Godfrey. We expect Godfrey to complete
the testing and qualification of its initial line of bearings in the second
quarter of 2011 and commence manufacturing operations in the third quarter of
2011. We expect to commence marketing and distribution of sale of
Godfrey’s initial product line of spherical bearings in the fourth quarter of
2011.
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.
We
believe our strategy will permit us to compete more effectively with our larger
competitors, who generally have greater financial resources, by:
|
·
|
Reducing
our capital requirements by focusing on the design and engineering
portions of the value chain;
|
- 1
-
|
·
|
Utilizing
our partners' established raw material access, manufacturing facilities
and sales and distribution
networks;
|
|
·
|
Entering
emerging international markets that have little in-country component parts
manufacturing capacity and little established
competition;
|
|
·
|
Taking
advantage of local sales "offset" regulations that require aircraft
original equipment manufacturers (OEMs) such as Airbus and Boeing to
procure and utilize local made components for incorporation into products
sold; and
|
|
·
|
Partnering
with existing aerospace companies and investors within our initial target
markets to provide us with working capital, political and economic
resources and regional business and cultural
expertise.
|
We
currently have no joint venture or other business relationship in place for the
manufacture or sale of our products other than our arrangements with
Godfrey.
Godfrey
(China) Limited
Our
initial operations have focused on the Chinese bearings market and will be
conducted in partnership with Godfrey (China) Limited, a Hong Kong corporation
located in Guangzhou, China. On March 30, 2010, we acquired 25%
of the outstanding share capital of Godfrey in exchange for our contribution to
Godfrey of technology used for the design and production of SAE-AS81820, 81934
and 81935 self-lubricated spherical bearings, bushings and rod-end
bearings. These bearings and component parts are designed to meet the
specifications and standards of the U.S. Navy and are widely used in the
manufacture of commercial aircraft, among other products.
In
September 2010, Godfrey opened a production facility in Guangzhou, China. As of
the date of this report, the facility is undergoing the qualification process
for approval by the United States Navy. If approved, the
Guangzhou facility will be placed on the Society of Automotive Engineers (SAE)
Qualified Producers List, allowing all Chinese and international airframe
manufacturers, sub-tier suppliers, MRO facilities, airlines and distributors to
purchase parts produced there. The Guangzhou facility, located in
close proximity to Hong Kong, would be the first facility in China qualified for
the production of SAE-AS81820, 81934 and 81935 spherical bearings, bushings and
rod end bearings. We currently expect that the Guangzhou facility
will complete the qualification process in the second quarter of
2011. The current schedule would enable the Guangzhou facility to
commence commercial deliveries in the fourth quarter of 2011.
In
addition to our 25% ownership of the outstanding capital shares of Godfrey, two
members of our board of directors also beneficially own the capital shares of
Godfrey. Mr. Peter Liu owns 20% of the capital shares of Godfrey and
Mr. Alex Kam is an officer and director of a company that owns 5% of the capital
shares of Godfrey. Our chief executive officer, William McKay serves
as the chief executive officer of Godfrey. Godfrey is presently
managed by a six person board of managers, which at this time includes three
members of our board of directors, Messrs. McKay, Liu and Kam.
At the
present time, we have no agreements with Godfrey or its shareholders concerning
the governance of Godfrey or our participation in its operations. We
believe that Godfrey is dependent on our design and manufacturing expertise and
we also believe, based on our communications with the U.S. Navy, that the
qualification of Godfrey’s production facility and its sale of bearing products
will be conditioned on our direct involvement in the manufacturing and
distribution process. While we are in discussions with Godfrey
concerning our formal role in the manufacturing and distribution of its
products, as of the date of this report there are no understandings or
arrangements concerning our participation in the Godfrey
operations.
Products
We are
engaged in the business of designing, manufacturing and selling aerospace
quality component parts for commercial and military aircraft, space vehicles,
power plants and surface and undersea vessels. Our product designs
address over 3,000 component parts that are utilized in new and used commercial
aircraft and military aircraft, space vehicles, power plants and surface and
undersea vessels. Our initial products will be self-lubricating
spherical bearings for commercial aircraft. These bearings are
integral to the operation of commercial aircraft and help with several
flight-critical tasks, including aircraft flight controls and landing
gear.
- 2
-
Spherical
bearings facilitate proper power transmission from one plane surface to another,
provide for articulation of mating parts and reduce friction. In
general, a spherical bearing permits angular rotation about a central point in
two orthogonal directions within a specified angular limit based on the bearing
geometry. Typically, these bearings support a rotating shaft in the bore of the
inner ring that must move not only rotationally, as most shafts, but also at
angle. Spherical bearings permit freedom of rotation on the two axes
that are not parallel with the shaft axis (although some bearings do permit this
also). Comprised of one ball and one race, the ball is essentially a
sphere with a hole bored through the center and the race is a ring that
surrounds the ball. The ends of the sphere extend out past the surface of the
race. These bearings are not used in rotational applications, but are used in
misalignment applications or in hinging applications.
Spherical bearings act much like an
elbow, wrist or knee joint acts in that they allow for slight rotation and
severe misalignment. In aircraft they are used on doors, hatches,
landing gears, some flight control surfaces, slats, leading edges and trailing
edges and on horizontal and vertical stabilizers. They are also used in engines
as engine hangers and to open and close stator vanes.
Customers
and Market
We plan
to supply bearings for use in commercial, military and private aircraft, naval
vessels, power plants, wind turbines and sophisticated commercial
applications. Our potential customers include large aerospace
companies such as Airbus, Boeing, Embraer, COMAC, General Electric, Rolls Royce,
Pratt & Whitney, Honeywell and various aftermarket channels.
Manufacturing
and Operations
We have
not commenced commercial manufacture of our products. Our initial
operations have focused on the Chinese bearings market and will be conducted in
partnership with Godfrey (China) Limited, a Hong Kong corporation located in
Guangzhou, China. In September 2010, Godfrey opened a production
facility in Guangzhou, China. As of the date of this report, the
facility is undergoing the qualification process for approval by the
United States Navy. If approved, the Guangzhou facility will be
placed on SAE Qualified Producers List, allowing all Chinese and international
airframe manufacturers, sub-tier suppliers, MRO facilities, airlines and
distributors to purchase parts produced there. We currently
expect that the Guangzhou facility will complete the qualification process in
the second quarter of 2011. The current schedule would enable the
Guangzhou facility to commence commercial deliveries in the fourth
quarter of 2011.
Our
strategy is to leverage our product design and engineering expertise to form
business relationships with local partners in markets outside the United States
who will provide manufacturing, sales and distribution capabilities, similar to
our relationship with Godfrey. Our initial target markets are China,
India and the Middle East. We intend to partner in these foreign
markets with local businesses that have manufacturing or distribution resources
and then establish in-country production facilities using our product design and
engineering expertise, and thereby take advantage of economies available only to
local producers. We intend to serve as the primary distributor of
products manufactured by our foreign partners.
In
addition to our partners’ foreign based operations, we plan to establish our own
manufacturing facility in the United States to provide component parts to U.S.
military weapon systems and commercial aerospace end users. We
currently have no business relationships in place for the manufacture or sale of
our products, other than our arrangements with Godfrey through its facility in
Guangzhou, China which we are assisting in the qualification to SAE-AS81820,
81934 and 81925.
The
production of our spherical bearings will occur in six general steps: (1)
machining of ball and race; (2) preparation of self-lubricating liners; (3)
assembly of race and liner; (4) swaging of ball in race; (5) final curing; and
(6) final machining. These general steps take approximately 14 days to complete
and employ a variety of tools, equipment and processes, some of which can be
outsourced or performed at different facilities. For the foreseeable
future, we expect that our production facilities and those of our partners, such
as Godfrey, will outsource the machining of the ball and race and the
preparation of the liners. All other steps will be conducted at our
production facilities or the facilities of our foreign
partners. Godfrey’s production facility in Guangzhou, China is
presently capable of conducting all production steps, other than the machining
of the ball and race, the preparation of the liners and final grinding of the
bearings, at a capacity that will handle demand for the foreseeable
future.
- 3
-
Sales,
Marketing and Distribution
We have
not commenced commercial sales of our products. Our current strategy
is to form business relationships with local partners in markets outside the
United States who will provide sales, marketing, and manufacturing
capabilities. We will supply our product design and engineering
expertise and also serve as the primary distributor of products manufactured by
our joint venture partners.
Our
initial sales, marketing and distribution efforts will focus on the
self-lubricated spherical bearings, bushings and rod-ends to be manufactured by
Godfrey at its production facility, in Guangzhou, China. At the
present time, we have no agreements with Godfrey or its shareholders concerning
our participation in the distribution of Godfrey’s products. However,
we believe, based on our communications with the U.S. Navy, that the
qualification of Godfrey’s production facility and its sale of bearing products
will be conditioned on our direct involvement in the distribution
process. While we are in discussions with Godfrey concerning our
formal role in the distribution of its products, as of the date of this report,
there are no understandings or arrangements concerning our participation in the
distribution of Godfrey’s products.
We expect
to supplement the sales activities of our local-market partners with direct
sales efforts by our executive management and internal sales
staff. We intend to implement a strategic brand management
initiative that will seek to position the Trans-Pacific name as a global brand
with local roots in various foreign countries. In addition to
standard primary touch points including OEMs, airlines and MROs, we will also
reach out to leading bearing distributors, the sub-assembly industry and
others. We do not expect to market to the U.S. military until such
time as we have established a U.S. based manufacturing facility. Our
marketing elements will include:
|
·
|
Participation
in major air and aerospace trade shows (e.g., China International Aviation
& Aerospace Exhibition; Farnborough/Paris;
Dubai);
|
|
·
|
Participation
in trade fairs (for airlines and MROs) sponsored by Boeing, Airbus and
Embrae;
|
|
·
|
Trade
publicity;
|
|
·
|
Key
market tours to coincide with government-sponsored
expositions;
|
|
·
|
Sponsorship
of “best practice” seminars for airlines and MROs;
and
|
|
·
|
Sales
support materials for distributors (promotional collateral and product
DVDs).
|
Competition
The
markets within the aerospace industry that we plan to serve are relatively
fragmented and we face several competitors for many of the products and services
we provide. Due to the global nature of the commercial aircraft industry,
competition in these categories comes from both U.S. and foreign companies.
Competitors in our product offerings range in size from divisions of large
public corporations that have significantly greater financial, technological and
marketing resources than we do, to small privately-held entities, with only one
or two components in their entire product portfolios. The largest
competitors in the sale of spherical bearings for the commercial aircraft
industry are Minebea Co. Ltd., an international manufacturer of bearing products
headquartered in Tokyo, Japan and traded on the Nikkei Stock Exchange, and RBC
Bearings, Inc., an international manufacturer of bearing products headquartered
in Oxford, Connecticut and traded on the NASDAQ Stock Market.
We expect
to compete on the basis of engineering, manufacturing and marketing high quality
products which meet or exceed the performance and maintenance requirements of
our customers, consistent and timely delivery, and superior customer service and
support. Additionally, we plan to take advantage of established long term
relationships and sales "offset" regulations (in China and our other target
markets) that require aircraft OEMs such as Airbus and Boeing to procure and
utilize local made components for incorporation into products sold.
Regulations
and Laws
The
commercial aircraft component industry is highly regulated by the original
equipment manufacturers (“OEM”), including Boeing and Airbus, and both the
Federal Aviation Administration, or the FAA, in the United States and by the
Joint Aviation Authorities in Europe and other agencies throughout the world.
We, and the components we manufacture, are required to be certified or approved
by one or more of these agencies and/or, in many cases, by individual OEMs in
order to sell our parts for use in commercial aircraft. Our foreign
sales may be subject to similar approvals or U.S. export control restrictions,
however, our management believes that there are no currently existing export
restrictions for the products we wish to sell.
- 4
-
In order
to sell component parts to the OEMs of commercial aircraft in the United States,
our products must be approved by an OEM or government agency, such as the U.S.
Navy. These production approval holders provide quality control and
performance criteria and oversight and, in effect, generally limit the number of
suppliers directly servicing the commercial aerospace new parts market. In order
to directly sell component parts to the aftermarket, we must conform to a
separate set of FAA regulations providing for an independent parts manufacturing
authority, or PMA, process, which enables suppliers who conform to FAA PMA
requirements to sell products to the aftermarket, irrespective of whether the
supplier is an approved supplier to the OEM for original equipment or
products.
Our
Chinese partner, Godfrey, is currently undergoing the qualification process for
approval by the United States Navy, the qualifying agency for
SAE-AS81820, 81934 and 81935 self-lubricating spherical bearings, bushings and
rod-end bearings. Upon acquiring such approval, Godfrey’s spherical
bearings will be eligible for sale to OEMs in the U.S. Since the PMA
process is unavailable to manufacturers in China, products produced at Godfrey’s
facilities in China will not be entitled to be sold in the U.S. aftermarket
directly by Godfrey. However, we intend to establish a facility in
the United States through which we would be able to sell to the aftermarket the
parts manufactured by Godfrey’s facilities in China.
In
addition, sales of many of our products that will be used on aircraft owned by
non-U.S. entities are subject to compliance with U.S. export control laws. Our
management believes that none of the products we intend to design or manufacture
currently are listed as restricted commodities on the U.S. Commerce Control List
and that none of the products nor the technology to manufacture the products
currently are subject to export license requirements from any agency of the
United States federal government.
Our
operations are also subject to a variety of worker and community safety laws.
The Occupational Safety and Health Act mandates general requirements for safe
workplaces for all employees. In addition, OSHA provides special procedures and
measures for the handling of certain hazardous and toxic
substances.
Intellectual
Property
We have
various trade secrets, proprietary information and other intellectual property
rights, which we believe, in the aggregate but not individually, are important
to our business.
Environmental
Matters
We are
subject to federal, state and local environmental laws and regulations,
including those governing discharges of pollutants into the air and water, the
storage, handling and disposal of wastes and the health and safety of employees.
We also may be liable under the Comprehensive Environmental Response,
Compensation, and Liability Act or similar state laws for the costs of
investigation and clean-up of contamination at facilities currently or formerly
owned or operated by us, or at other facilities at which we have disposed of
hazardous substances. In connection with such contamination, we may also be
liable for natural resource damages, government penalties and claims by third
parties for personal injury and property damage. Agencies responsible for
enforcing these laws have authority to impose significant civil or criminal
penalties for noncompliance. We believe we are currently in material compliance
with all applicable requirements of environmental laws. We do not anticipate
material capital expenditures for environmental compliance in fiscal
2011.
Employees
As of the date of this report, we have
one employee. We expect to add additional employees in fiscal 2011
subject to Godfrey’s commencement of manufacturing operations.
- 5
-
Company
History
We were
initially incorporated in the State of Nevada in June 2007, as Gas Salvage
Corp., for the purpose of engaging in the exploration and development of oil and
gas. In July 2008, we changed our corporate name to Pinnacle Energy
Corp. and from July 2007 through February 2010 we focused on the acquisition and
development of oil and gas resources.
In the
first quarter of 2010, our board of directors approved a change in our business
model whereby we would divest our oil and gas properties and acquire the
aircraft component part design, engineering and manufacturing business of Harbin
Aerospace Company, LLC. The transaction closed on February 1, 2010
and was structured as our acquisition of Harbin in exchange for
our:
·
|
Issuance
of 8,000,000 million shares of our common
stock.
|
|
·
|
Issuances
of a Series A common stock purchase warrant to purchase 4,000,000 shares
of our common stock at an exercise price of $0.50 per share. The Series A
warrant becomes exercisable on the date that we recognize revenue equal to
or exceeding $50,000,000 for any consecutive twelve-month period and
expires on January 31, 2015.
|
|
·
|
Issuance
of a Series B common stock purchase warrant to purchase 4,000,000 shares
of our common stock at an exercise price of $1.00 per share. The Series B
warrant becomes exercisable on the date that we recognize revenue equal to
or exceeding $100 million for any consecutive twelve-month period and
expires on January 31, 2018.
|
|
·
|
Assumption
of $460,000 of liabilities of
Harbin.
|
William
McKay, who was appointed as our chief executive officer and director upon the
consummation of the asset acquisition, was the chief executive officer of Harbin
and his wife, Nikki Lynn McKay, is the sole member of Harbin. As part
of the acquisition, we assumed $200,000 of obligations under a note payable,
plus $11,737 of accrued interest, held by the mother-in-law of Mr.
McKay. The note bears interest at 7% per annum and all principal and
interest was due and payable on March 31, 2011. On June 4, 2010, we
entered into an amended and restated convertible promissory note with holder,
pursuant to which all principal and interest under the note is
convertible at $0.058 per share and the term of the note was extended to June 3,
2011. In June 2010, we issued 2,200,000 shares of our common stock to
the holder upon conversion of $127,600 of principal under the note.
Following
completion of the Harbin acquisition, on February 10, 2010, we completed the
sale of all of our oil and gas business interest in exchange for cancellation of
all obligations under an outstanding promissory note having a principal amount
of $1,000,000. On March 20, 2010, we changed our corporate name to
Trans-Pacific Aerospace Company, Inc.
Available
Information
Our
website is located at www.transpacificaerospace.com. The information
on or accessible through our website is not part of this annual report on
Form 10-K. A copy of this annual report on Form 10-K is
located at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C.
20549. Information on the operation of the Public Reference Room can be obtained
by calling the SEC at 1-800-SEC-0330. The SEC also maintains an
internet site that contains reports and other information regarding our filings
at www.sec.gov.
In this
report we make, and from time-to-time we otherwise make, written and oral
statements regarding our business and prospects, such as projections of future
performance, statements of management’s plans and objectives, forecasts of
market trends, and other matters that are forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. Statements containing the words or
phrases “will likely result,” “are expected to,” “will continue,” “is
anticipated,” “estimates,” “projects,” “believes,” “expects,” “anticipates,”
“intends,” “target,” “goal,” “plans,” “objective,” “should” or similar
expressions identify forward-looking statements, which may appear in documents,
reports, filings with the Securities and Exchange Commission, news releases,
written or oral presentations made by officers or other representatives made by
us to analysts, stockholders, investors, news organizations and others, and
discussions with management and other of our representatives. For such
statements, we claim the protection of the safe harbor for forward-looking
statements contained in the Private Securities Litigation Reform Act of
1995.
- 6
-
Our
future results, including results related to forward-looking statements, involve
a number of risks and uncertainties. No assurance can be given that the
results reflected in any forward-looking statements will be
achieved. Any forward-looking statement speaks only as of the date on
which such statement is made. Our forward-looking statements are based
upon assumptions that are sometimes based upon estimates, data, communications
and other information from suppliers, government agencies and other sources that
may be subject to revision. Except as required by law, we do not undertake
any obligation to update or keep current either (i) any forward-looking
statement to reflect events or circumstances arising after the date of such
statement, or (ii) the important factors that could cause our future
results to differ materially from historical results or trends, results
anticipated or planned by us, or which are reflected from time to time in any
forward-looking statement.
In
addition to other matters identified or described by us from time to time in
filings with the SEC, there are several important factors that could cause our
future results to differ materially from historical results or trends, results
anticipated or planned by us, or results that are reflected from time to time in
any forward-looking statement. Some of these important factors, but not
necessarily all important factors, include those set out below.
Risks
Relating to Our Company and Business
We do not have a
significant operating history and, as a result, there is a limited amount of
information about us on which to make an investment
decision. We were incorporated in June 2007 to engage in the
business of oil and gas exploration. We terminated that business line
in February 2010 and since then have been engaged in the business of designing,
manufacturing and selling aerospace quality component parts for commercial and
military aircraft, space vehicles, power plants and surface and undersea
vessels. To date, our operations have focused on assisting Godfrey
(China) Limited, a Hong Kong corporation, in the development of its production
facility in Guangzhou, China and the design and engineering of Godfrey’s initial
product line of spherical bearings. While our chief executive officer, William
McKay, has significant experience in the bearing manufacturing industry, our
company has no prior operating experience in the manufacture or distribution of
bearings. Accordingly, there is little operating history upon which
to judge our current operations or future success. The likelihood of
our success must be considered in light of the problems, expenses, complications
and delays frequently encountered in connection with the development of a new
business.
We are a
development-stage business that has not commenced revenue producing operations
and expects to incur operating losses until such time, if ever, as we are able
to develop significant revenue. To date, we have not commenced
commercial manufacture or sales of our aircraft component products. Accordingly,
we have not generated any revenues from these operations nor have we realized a
profit from our operations, and there is little likelihood that we will generate
significant revenues or realize any profits in the short term. As we
try to build our aircraft component business, we expect a significant increase
in our operating costs. Consequently, we expect to continue to incur operating
losses and negative cash flow until we generate significant revenue from the
sale of our products.
The
report of our independent registered public accounting firm for the fiscal year
ended October 31, 2010 states that due to our losses from operations and lack of
working capital there is substantial doubt about our ability to continue as a
going concern.
Our business is
capital intensive and we will need additional capital to execute our business
plan and fund operations, and we may not be able to obtain such capital on
acceptable terms or at all. As of October 31, 2010, we had
total assets of $58,620 and a working capital deficit of
$348,639. Since October 31, 2010, our working capital has decreased
as a result of continuing losses from operations. We estimate that we
require approximately $2 million of additional working capital over the next 12
months in order to fund our marketing and distribution of the initial line of
aircraft component products to be manufactured by Godfrey and to fund our
expected operating losses as we endeavor to build revenue and achieve a
profitable level of operations. However, there are no commitments or
understandings at this time with any third parties for their provision of
capital to us.
- 7
-
The
report of our independent registered public accounting firm for the fiscal year
ended October 31, 2010 states that due to our losses from operations and lack of
working capital there is substantial doubt about our ability to continue as a
going concern.
We will
endeavor to raise the additional required funds through various financing
sources, including the sale of our equity and debt securities and, subject to
our commencement of significant revenue producing operations, the
procurement of commercial debt financing. However, there can be no
guarantees that such funds will be available on commercially reasonable terms,
if at all. If such financing is not available on satisfactory terms,
we may be unable to expand or continue our business as desired and operating
results may be adversely affected. In addition, any financing
arrangement may have potentially adverse effects on us or our
stockholders. Debt financing (if available and undertaken) will
increase expenses, must be repaid regardless of operating results and may
involve restrictions limiting our operating flexibility. If we issue
equity securities to raise additional funds, the percentage ownership of our
existing stockholders will be reduced and the new equity securities may have
rights, preferences or privileges senior to those of the holders of our common
stock.
Our
ability to obtain additional capital on acceptable terms or at all is subject to
a variety of uncertainties, including:
· our
ability to generate revenue and net income;
· investors'
perceptions of, and demand for, aircraft component products;
· conditions
of the U.S. and other capital markets in which we may seek to raise
funds;
· our
future results of operations, financial condition and cash flows;
· governmental
regulation; and
· economic,
political and other conditions in the United States and other
countries.
Our products are
subject to certain approvals and qualification, and the failure to obtain such
approvals and qualification would materially reduce our revenues and
profitability. Obtaining product approvals from regulatory
agencies and customers is essential to servicing the aerospace market. We will
require a substantial number of product approvals to enable us to provide
products we intend to manufacture and sell. Qualification standards
are rigorous and parts manufactured at such facilities must meet various
qualification testing criteria. If we (or our joint venture partners)
are unable to obtain necessary product approvals or qualification it could
result in lost sales and materially reduce our revenues and
profitability.
Godfrey may not
be able complete the product qualification process and commencement of
manufacturing operations by our estimated dates, or at all. In
September 2010, Godfrey (China) Limited opened a production facility in
Guangzhou, China. As of the date of this report, the facility is
undergoing the qualification process for approval by the United
States Navy. We currently expect that the Guangzhou facility will
complete the qualification process in the second quarter of 2011, in which case
we expect it will commence commercial manufacturing operations in the third
quarter of 2011. However, no assurance can be given that Godfrey will
be able complete the product qualification process and commence manufacturing
operations by the estimated dates, or at all.
We do not have
any written agreements concerning our involvement with Godfrey and, as a result,
cannot provide any assurance of the nature of our benefit, if any, from the
commercial activities of Godfrey apart from our 25% ownership interest.
To date, our operations have focused on assisting Godfrey
(China) Limited , in the development of its production facility in Guangzhou,
China and the design and engineering of Godfrey’s initial product line of
spherical bearings. We own 25% of the capital stock of
Godfrey. As of the date of this report, we have no agreements with
Godfrey or its shareholders concerning the governance of Godfrey or our
participation in its operations. We believe that Godfrey is dependent
on our design and manufacturing expertise and we also believe, based on our
communications with the U.S. Navy, that the qualification of Godfrey’s
production facility and its sale of bearing products will be conditioned on our
direct involvement in the manufacturing and distribution
process. While we are in discussions with Godfrey concerning our
formal role in the manufacturing and distribution of its products, as of the
date of this report, there are no understandings or arrangements concerning the
nature of our participation in the Godfrey operations or the economic terms of
any such participation. As result, there can be no assurance that our
participation in the operations of Godfrey will be meaningful or that we will
derive significant revenues or profits apart from any distributions based on our
25% ownership interest.
- 8
-
Our business
strategy is dependent on our ability to establish local market joint ventures
outside the United States. A critical element of our business
strategy is to establish joint venture or other business relationships with
local partners in markets outside the United States who will provide
manufacturing and sales capabilities. We established our initial business
relationship with our Chinese partner, Godfrey, however, there is no assurance
that we will be successful in establishing additional joint venture or other
business relationships with local partners on terms acceptable to
us. In addition, our reliance on local market partners and
joint venture structures will expose us to several risks,
including:
· limited
or reduced operational control over foreign market operations;
· limited
or reduced ability to control capital requirements of or cash flows from foreign
operations;
· risks
associated with doing business in certain foreign markets where the legal system
is less developed or subject to corrupt influences, resulting in uncertainties
affecting our ability to protect our interest or pursue dispute
resolution;
· logistical
and communications challenges posed by under-developed
infrastructures;
· changes
in local government policies, such as changes in laws and regulations (or the
interpretation thereof), restrictions on imports and exports, sources of supply,
duties or tariffs, the introduction of measures to control inflation and changes
in the rate or method of taxation; and
· where
our international operations utilize a local currency as its functional
currency, changes in currency exchange rates between the U.S. dollar and
functional other currencies will likely have an impact on our
earnings.
Because we have
few proprietary rights, others can provide products substantially equivalent to
ours. We hold no patents. Although we have
developed designs and processes for our line of spherical bearing products, we
believe that most of the technology used by us in the design of our products is
generally known and available to others. Consequently, others can
develop spherical bearing products similar to ours. We rely on a
combination of confidentiality agreements and trade secret law to protect our
confidential information. In addition, we restrict access to
confidential information on a ‘‘need to know’’ basis. However, there
can be no assurance that we will be able to maintain the confidentiality of our
proprietary information. If our proprietary rights are
violated, or if a third party claims that we violate their proprietary rights,
we may be required to engage in litigation. Proprietary rights
litigation tends to be costly and time consuming. Bringing or
defending claims related to our proprietary rights may require us to redirect
our human and monetary resources to address those claims.
The bearing
industry is highly competitive, and competition could reduce our profitability
or limit our ability to grow. The global bearing industry is
highly competitive, and we compete with several U.S. and non-U.S.
companies. We compete primarily based on product qualifications,
product line breadth, service and price. Virtually all of our
competitors are presently better able to manage costs than us and many have
greater financial resources than we have. Due to the competitiveness
in the bearing industry we may not be able to increase prices for our products
to cover increases in our costs, and we may face pressure to reduce prices,
which could materially reduce our revenues, gross margin and profitability.
Competitive factors, including changes in market penetration, increased price
competition and the introduction of new products and technology by existing and
new competitors could materiality affect our ability to build revenue and
achieve profitability.
Weakness in the
commercial aerospace industry, as well as the cyclical nature of our customers'
businesses generally, could materially reduce our revenues and profitability.
The commercial aerospace industry is cyclical and tends to decline in
response to overall declines in industrial production. Margins are
highly sensitive to demand cycles, and our potential customers historically have
tended to delay large capital projects during economic downturns. As
a result, our business also will be cyclical, and the demand for our products by
these customers depends, in part, on overall levels of industrial production,
general economic conditions and business confidence levels. Downward
economic cycles have affected our customers and historically reduced sales of
our aircraft component products. Any future material weakness in
demand in the commercial aerospace industry could materially reduce our revenues
and profitability.
- 9
-
Fluctuating
supply and costs of raw materials and energy resources could materially reduce
our revenues, cash flow from operations and profitability. Our
business (and those of our foreign joint ventures) will be dependent on the
availability and costs of energy resources and raw materials, particularly
steel, generally in the form of specialty stainless and chrome steel, which are
specialized steel products used almost exclusively in the aerospace industry.
The availability and prices of raw materials and energy sources may be subject
to curtailment or change due to, among other things, new laws or regulations,
suppliers' allocations to other purchasers, interruptions in production by
suppliers, changes in exchange rates and worldwide price levels. Accordingly,
our business is subject to the risk of price fluctuations and periodic delays in
the delivery of certain raw materials. Disruptions in the supply of raw
materials and energy resources could temporarily impair our ability to
manufacture our products for our customers or require us to pay higher prices in
order to obtain these raw materials or energy resources from other sources,
which could thereby affect our net sales and profitability.
Unexpected
equipment failures, catastrophic events or capacity constraints may increase our
costs and reduce our sales due to production curtailments or
shutdowns. Our manufacturing processes (and those of our joint
venture partners) will be dependent upon critical pieces of equipment, such as
presses, turning and grinding equipment, as well as electrical equipment, such
as transformers, and this equipment may, on occasion, be out of service as a
result of unanticipated failures. In addition to equipment failures,
our facilities also will be subject to the risk of catastrophic loss due to
unanticipated events such as fires, explosions, earthquakes or violent weather
conditions. In the future, we may experience material plant shutdowns
or periods of reduced production as a result of these types of equipment
failures or catastrophes. Interruptions in production capabilities
will inevitably increase our production costs and reduce sales and earnings for
the affected period.
We may incur
material losses for product liability and recall related
claims. Our aircraft component part business is subject to a
risk of product and recall related liability in the event that the failure, use
or misuse of any of our products results in personal injury, death, or property
damage or our products do not conform to our customers'
specifications. If one of our products is found to be defective, or
otherwise results in a product recall, significant claims may be brought against
us. To date, we have not commenced commercial sales of our products
and we do not currently maintain product liability insurance coverage for
product liability. Any product liability or recall related claims may
result in material losses related to these claims and a corresponding reduction
in our cash flow and net income.
Environmental
regulations may impose substantial costs and limitations on our
operations. We are subject to various federal, state and local
environmental laws and regulations, including those governing discharges of
pollutants into the air and water, the storage, handling and disposal of wastes
and the health and safety of employees. These laws and regulations could subject
us to material costs and liabilities, including compliance costs, civil and
criminal fines imposed for failure to comply with these laws and regulatory and
litigation costs.
Risks
Relating to Our Common Stock
Provisions of our
articles of incorporation, our bylaws and Nevada law could delay or prevent a
change in control of us, which could adversely affect the price of our common
stock. Our articles of incorporation, our bylaws and Nevada
law could delay, defer or prevent a change in control of us, despite the
possible benefit to our stockholders, or otherwise adversely affect the price of
our common stock and the rights of our stockholders. For example, our
articles of incorporation permit our board of directors to issue one or more
series of preferred stock with rights and preferences designated by our board of
directors. We are also subject provisions of the Nevada control share
laws that may limit voting rights in shares representing a controlling interest
in us. These provisions could also discourage proxy contests and make
it more difficult for you and other stockholders to elect directors other than
the candidates nominated by our board.
- 10
-
Trading in our
common shares on the OTC Bulletin Board is limited and sporadic making it
difficult for our stockholders to sell their shares or liquidate their
investments. Our common shares are currently listed for public
trading on the OTC Bulletin Board. We consider our common stock to be “thinly
traded” and any last reported sale prices may not be a true market-based
valuation of the common stock. There can be no assurance that an
active market for our common stock will develop. In addition, the
stock market in general, and early stage public companies in particular, have
experienced extreme price and volume fluctuations that have often been unrelated
or disproportionate to the operating performance of such
companies. If we are unable to develop a trading market for our
common shares, you may not be able to sell your common shares at prices that you
consider to be fair or at times that are convenient for you, or at
all.
The limited and
sporadic trading in our common shares also could affect our ability to raise
further working capital and adversely impact our
operations. Because we currently expect to finance our
operations primarily through the sale of our equity securities, the limited and
sporadic trading in our common stock could be especially detrimental to our
liquidity and our continued operations. Investors in public companies
tend to place a value on the investment security’s liquidity and,
likewise, tend to be less interested in investing in securities for which there
is not an established trading market. In addition, because public
companies tend to raise equity capital based on (and usually at a discount to)
current trading prices, a thinly traded security may result in a trading price
at the time of an equity raise that is less than a fair value for our shares,
thus resulting in greater equity dilution to our shareholders. Any
reduction in our ability to raise equity capital in the future would force us to
reallocate funds, if any are available, from other planned uses and would have a
significant negative effect on our business plans and operations, including our
ability to continue our current operations.
Our common stock
may be deemed a "penny stock", which would make it more difficult for our
investors to sell their shares. Our common stock may be
subject to the "penny stock" rules adopted under Section 15(g) of the Exchange
Act. The penny stock rules apply to non-Nasdaq listed companies whose common
stock trades at less than $5.00 per share or that have tangible net worth of
less than $5,000,000 ($2,000,000 if the company has been operating for three or
more years). These rules require, among other things, that brokers
who trade penny stock to persons other than "established customers" complete
certain documentation, make suitability inquiries of investors and provide
investors with certain information concerning trading in the security, including
a risk disclosure document and quote information under certain
circumstances. Many brokers have decided not to trade penny stocks
because of the requirements of the penny stock rules and, as a result, the
number of broker-dealers willing to act as market makers in such securities is
limited. If we remain subject to the penny stock rules for any significant
period, it could have an adverse effect on the market, if any, for our
securities. As long as our securities are subject to the penny stock
rules, investors will find it more difficult to dispose of our
securities.
We are not a
Section 12 registrant, which means that we are not subject to the SEC’s proxy
rules and our shareholders are not subject to the SEC’s beneficial ownership
reporting rules. As of the date of this report, we are
required to file certain periodic reports with the SEC, including annual reports
on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K,
pursuant to Section 15(d) of the Securities Exchange Act of
1934. Most SEC reporting companies, including all U.S. domiciled SEC
reporting companies whose shares are listed on the NYSE, AMEX or NASDAQ, file
reports with the SEC pursuant to Section 12 of the Exchange
Act. These so-called “Section 12 registrants” are required to file
with the SEC, in addition to the aforementioned reports we are required to file,
proxy or information statements in connection with any action taken by
shareholders of the reporting company, and their shareholders are required to
file with the SEC beneficial ownership reports on Schedules 13D and 13G pursuant
to Section 13 of the Exchange Act and Forms, 3, 4 and 5 pursuant to Section 16
of the Exchange Act. We will become a Section 12 registrant at such
time as we attain $10 million in assets and 500 record holders of our common
stock or we otherwise volunteer to become a Section 12
registrant. However, until such time as we become a Section 12
registrant, you will not have the benefit of the disclosure provided by SEC
mandated proxy statement or information statements in connection with any voting
or consents by our shareholders nor will you have the benefit of the disclosure
provided by way of beneficial ownership reports by our
shareholders.
The Financial
Industry Regulatory Authority, or FINRA, has adopted sales practice requirements
which may also limit a stockholder's ability to buy and sell our
stock. In addition to the "penny stock" rules described above,
FINRA has adopted rules that require that in recommending an investment to a
customer, a broker-dealer must have reasonable grounds for believing that the
investment is suitable for that customer. Prior to recommending speculative low
priced securities to their non-institutional customers, broker-dealers must make
reasonable efforts to obtain information about the customer's financial status,
tax status, investment objectives and other information. Under
interpretations of these rules, FINRA believes that there is a high probability
that speculative low priced securities will not be suitable for at least some
customers. FINRA requirements make it more difficult for
broker-dealers to recommend that their customers buy our common stock, which may
limit your ability to buy and sell our stock and have an adverse effect on the
market for our shares.
- 11
-
Investors should
not anticipate receiving cash dividends on our common
stock. We have never declared or paid any cash dividends
or distributions on our common stock and intend to retain our future earnings,
if any, to support operations and to finance expansion. Therefore, we
do not anticipate paying any cash dividends on our common stock in the
foreseeable future.
Sales of a
substantial number of shares of our common stock may adversely affect the market
price of our common stock or our ability to raise additional
capital. Sales of a substantial number of shares of our common
stock in the public market, or the perception that large sales could occur,
could cause the market price of our common stock to decline or limit our future
ability to raise capital through an offering of equity securities. The sale of
substantial amounts of our common stock in the public market could create a
circumstance commonly referred to as an "overhang" and in anticipation of which
the market price of our common stock could fall. The existence of an overhang,
whether or not sales have occurred or are occurring, also could make more
difficult our ability to raise additional financing through the sale of equity
or equity-related securities in the future at a time and price that we deem
reasonable or appropriate. Our articles of incorporation permits the issuance of
up to 150,000,000 shares of common stock and 5,000,000 shares of preferred
stock. As of January 25, 2011, we had an aggregate of 112,000,714 shares of our
common stock and 5,000,000 shares of our preferred stock authorized but
unissued. Thus, we have the ability to issue substantial amounts of stock in the
future. No prediction can be made as to the effect, if any, that market sales of
our common stock will have on the market price for our common stock. Sales of a
substantial number could adversely affect the market price of our
shares.
Not
applicable.
Our
executive offices are located in San Marino, California. We lease approximately
480 square feet at the rate of $729 per month pursuant to a two year lease
expiring in November 2012. At such time as our increased operations
warrant, we intend to acquire larger leased properties in the general Los
Angeles, California area.
No legal
proceedings are currently pending or, to our knowledge, threatened against us
that, in the opinion of our management, could reasonably be expected to have a
material adverse effect on our business or financial condition or results of
operations.
Item
4. [Intentionally
Omitted.]
- 12
-
Item
5.
|
Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Repurchases of Equity Securities
|
Market
Information
Our
common stock is quoted on the OTC Bulletin Board under the symbol "TPAC". The
following table indicates the quarterly high and low last sale prices for shares
of our common stock on the OTC Bulletin Board for the fiscal years ending
October 31, 2010 and October 31, 2009.
2010
|
Low
|
High
|
||||||
Fourth
Quarter
|
$ | 0.11 | $ | 0.22 | ||||
Third
Quarter
|
$ | 0.05 | $ | 0.17 | ||||
Second
Quarter
|
$ | 0.15 | $ | 0.36 | ||||
First
Quarter
|
$ | 0.19 | $ | 0.40 | ||||
2009
|
Low
|
High
|
||||||
Fourth
Quarter
|
$ | 0.31 | $ | 0.53 | ||||
Third
Quarter
|
$ | 0.31 | $ | 0.75 | ||||
Second
Quarter
|
$ | 0.20 | $ | 0.68 | ||||
First
Quarter
|
$ | 0.41 | $ | 1.26 |
Holders
of Record
As of
February 11, 2011, we had outstanding 37,000,286 shares of common stock, held by
22 shareholders of record.
Dividend
Policy
We have
never declared or paid cash dividends on our common stock. We presently intend
to retain earnings to finance the operation and expansion of our business and do
not anticipate declaring cash dividends in the foreseeable future.
Not
applicable.
We
intend for this discussion to provide the reader with information that will
assist in understanding our financial statements, the changes in certain key
items in those financial statements from year to year, and the primary factors
that accounted for those changes, as well as how certain accounting principles
affect our financial statements. This discussion should be read in
conjunction with our consolidated financial statements and accompanying notes as
of and for the fiscal years ended October 31, 2010 and October 31, 2009 included
elsewhere in this report.
Overview
We are
engaged in the business of designing, manufacturing and selling aerospace
quality component parts for commercial and military aircraft, space vehicles,
power plants and surface and undersea vessels. Our initial products
will be self-lubricating spherical bearings for commercial
aircraft. These bearings are integral to the operation of commercial
aircraft and help with several flight-critical tasks, including aircraft flight
controls and landing gear. As of the date of this report, we have not
commenced commercial manufacture or sale of our products.
- 13
-
We
commenced our aircraft component business in February 1, 2010. To date, our
operations have focused on assisting Godfrey (China) Limited, a Hong Kong
corporation, in the development of its production facility in Guangzhou, China
and the design and engineering of Godfrey’s initial product line of spherical
bearings. We own 25% of the capital stock of
Godfrey. Although we have no written agreements with Godfrey
concerning our distribution of its products, we expect to market and distribute
the products manufactured by Godfrey. We expect Godfrey to complete
the testing and qualification of its initial line of bearings in the second
quarter of 2011 and commence manufacturing operations in the third quarter of
2011. We expect to commence the marketing and distribution of
Godfrey’s spherical bearings in the fourth quarter of 2011.
Results
of Operations - Years Ended October 31, 2010 and 2009
We have
not commenced revenue producing operations and do not expect to until the fourth
quarter of 2011, at the earliest, at which time we expect to commence the
distribution of Godfrey’s line of spherical bearings. During the 2010
fiscal year, we incurred $2,374,259 of expenses compared to $526,809 during
fiscal 2009. Our operating expenses consist primarily of general and
administrative expenses and the increase in operating expenses from fiscal 2009
to fiscal 2010 was attributable primarily to a $1,434,991 increase in stock
compensation in fiscal 2010 compared to the prior year. We expect our
operating expenses will significantly increase at such time as we commence the
distribution of Godfrey’s spherical bearings.
During
the 2010 fiscal year, we incurred a net loss from continuing operations of
$5,050,612 compared to a net loss from continuing operations of $606,809 during
fiscal 2009. The increase in our net loss in 2010 was attributable
primarily to the $1,434,991 increase in stock compensation in fiscal 2010 and
approximately $2,469,404 of charges in 2010 relating to the impairment of the
assets we acquired from Harbin Aerospace Company, LLC in February
2010. We acquired from Harbin certain 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. We perform an annual
review for impairment of our intangible assets, and at an annual review at
October 31, 2010 it was determined that the Harbin intellectual property
was fully impaired, resulting in an impairment charge in fiscal 2010 of
$2,469,404.
Financial
Condition
Liquidity
and Capital Resources
As of
October 31, 2010, we had total assets of $58,620 and a working capital deficit
of $348,639. Since October 31, 2010, our working capital has
decreased as a result of continuing losses from operations. We
estimate that we require approximately $2 million of additional working capital
over the next 12 months in order to fund our expected marketing and distribution
of the initial line of aircraft component products to be manufactured by Godfrey
and to fund our expected operating losses as we endeavor to build revenue and
achieve a profitable level of operations. However, there are no
commitments or understandings at this time with any third parties for their
provision of capital to us.
We will
endeavor to raise the additional required funds through various financing
sources, including the sale of our equity and debt securities and, subject to
our commence of significant revenue producing operations, the procurement of
commercial debt financing. However, there can be no guarantees that
such funds will be available on commercially reasonable terms, if at
all. If such financing is not available on satisfactory terms, we may
be unable to expand or continue our business as desired and operating results
may be adversely affected. In addition, any financing arrangement may
have potentially adverse effects on us or our stockholders. Debt
financing (if available and undertaken) will increase expenses, must be repaid
regardless of operating results and may involve restrictions limiting our
operating flexibility. If we issue equity securities to raise
additional funds, the percentage ownership of our existing stockholders will be
reduced and the new equity securities may have rights, preferences or privileges
senior to those of the holders of our common stock.
The
report of our independent registered public accounting firm for the fiscal year
ended October 31, 2010 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.
- 14
-
Off-Balance
Sheet Arrangements
We do not
have any off-balance sheet financing arrangements.
Not
applicable.
- 15
-
Index
To Financial Statements
Page
|
||
Report
of Independent Registered Public Accounting Firm
|
F-1
|
|
Balance
Sheets at October 31, 2010 and 2009
|
F-2
|
|
Statements
of Operations for the Years Ended October 31, 2010 and 2009 and the period
of inception (June 5, 2007) to October 31, 2010
|
F-3
|
|
Statements
of Changes In Stockholders’ Deficit for the period of inception (June 5,
2007) to October 31, 2010
|
F-4
|
|
Statements
of Cash Flows for the Years Ended October 31, 2010 and 2009 and the period
of
inception (June 5, 2007) to October 31, 2010
|
F-5
|
|
Notes
to Financial Statements
|
F-6
|
- 16
-
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors
Trans-Pacific
Aerospace Company, Inc.
San
Marino, California
We have
audited the accompanying balance sheets of Trans-Pacific Aerospace Company, Inc.
(the “Company”) (a development stage company) as of October 31, 2010 and 2009
and the related statements of operations, stockholders' deficit and cash flows
for the twelve month periods then ended. The financial statements
for the period from inception (June 5, 2007) through October 31, 2008 were
audited by other auditors whose report expressed an unqualified opinion on those
statements. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We
conducted our audit in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Trans-Pacific Aerospace Company,
Inc. as of October 31, 2010 and 2009 and the results of its operations and cash
flows for the period described above in conformity with accounting principles
generally accepted in the United States of America.
The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. As discussed in Note 1 to the
financial statement, the Company suffered a net loss from operations and has not
yet established an ongoing source of revenues sufficient to cover its operating
costs, which raises substantial doubt about its ability to continue as a going
concern. Management’s plans regarding those matters are also
described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/
M&K CPAS, PLLC
www.mkacpas.com
Houston,
Texas
February
15, 2011
F-1
TRANS-PACIFIC
AEROSPACE COMPANY, INC.
(A
Development Stage Company)
Balance
Sheets
October
31,
|
October
31,
|
|||||||
2010
|
2009
|
|||||||
ASSETS
|
||||||||
Current
assets
|
||||||||
Cash
and cash equivalents
|
$ | 58,620 | $ | 7,417 | ||||
Total
current assets
|
58,620 | 7,417 | ||||||
Assets
of discontinued operations, net
|
- | 1,000,000 | ||||||
Total
assets
|
$ | 58,620 | $ | 1,007,417 | ||||
LIABILITIES
AND STOCKHOLDERS' (DEFICIT)
|
||||||||
Current
liabilities
|
||||||||
Accounts
payable and accrued expenses
|
$ | 7,351 | $ | 27,557 | ||||
Accounts
payable - related party
|
4,379 | 10,000 | ||||||
Accrued
salary and payroll taxes
|
76,519 | 66,948 | ||||||
Due
to Godfrey (China) Ltd
|
30,000 | - | ||||||
Accrued
interest payable
|
- | 93,335 | ||||||
Convertible
note payable - related party, net of debt discount of $51,832 and $0,
respectively
|
37,023 | - | ||||||
Convertible
note payable, net of debt discount of $7,452 and $0,
respectively
|
252,547 | - | ||||||
Total
current liabilities
|
407,259 | 197,840 | ||||||
Notes
payable, related to discontinued operations
|
- | 1,000,000 | ||||||
Total
liabilities
|
407,259 | 1,197,840 | ||||||
Stockholders'
(deficit)
|
||||||||
Preferred
stock, 5,000,000 shares authorized. No shares issued and outstanding at
October 31, 2010 and October 31, 2009
|
- | - | ||||||
Common
stock, par value $0.001, 150,000,000 shares authorized. 33,200,286 shares
issued and outstanding at October 31, 2010 and 11,192,083 shares issued
and outstanding at October 31, 2009
|
33,200 | 11,192 | ||||||
Additional
paid-in capital
|
5,339,451 | 749,591 | ||||||
Common
stock payable
|
165,000 | - | ||||||
Deficit
accumulated during the development stage
|
(5,886,290 | ) | (951,206 | ) | ||||
Total
stockholders' (deficit)
|
(348,639 | ) | (190,423 | ) | ||||
Total
liabilities and stockholders' (deficit)
|
$ | 58,620 | $ | 1,007,417 |
See
accompanying notes to financial statements
F-2
TRANS-PACIFIC
AEROSPACE COMPANY, INC.
(A
Development Stage Company)
Statements
of Operations
For
the Period
|
||||||||||||
of
Inception,
|
||||||||||||
For
the
|
from
June 5,
|
|||||||||||
Year
Ended
|
2007,
through
|
|||||||||||
October
31,
|
October
31,
|
|||||||||||
2010
|
2009
|
2010
|
||||||||||
Operating
expenses
|
||||||||||||
Professional
fees
|
$ | 73,748 | $ | 28,856 | $ | 102,603 | ||||||
Consulting
|
187,500 | 40,000 | 227,500 | |||||||||
Other
general and administrative
|
2,113,011 | 457,953 | 2,573,303 | |||||||||
Total
operating expenses
|
2,374,259 | 526,809 | 2,903,406 | |||||||||
Operating
loss from continuing operations
|
(2,374,259 | ) | (526,809 | ) | (2,903,406 | ) | ||||||
Impairment
of goodwill
|
(2,469,404 | ) | - | (2,469,404 | ) | |||||||
Interest
expense, net
|
(206,949 | ) | (80,000 | ) | (300,286 | ) | ||||||
Net
loss from continuing operations
|
$ | (5,050,612 | ) | $ | (606,809 | ) | $ | (5,673,096 | ) | |||
Discontinued
operations
|
||||||||||||
Net
gain (loss) from discontinued operations
|
115,527 | (283,137 | ) | (213,194 | ) | |||||||
Net
loss from operations
|
$ | (4,935,084 | ) | $ | (889,946 | ) | $ | (5,886,290 | ) | |||
Basic
and dilutive net loss from continuing operations per share
|
$ | (0.23 | ) | $ | (0.04 | ) | ||||||
Basic
and dilutive net loss from discontinued operations per
share
|
$ | 0.01 | $ | (0.02 | ) | |||||||
Basic
and dilutive net loss attributable to Trans-Pacific Aerospace Company,
Inc. per share
|
$ | (0.22 | ) | $ | (0.06 | ) | ||||||
Weighted
average number of common shares outstanding, basic and
diluted
|
21,911,185 | 14,250,422 |
See
accompanying notes to financial statements
F-3
TRANS-PACIFIC
AEROSPACE COMPANY, INC.
(A
Development Stage Company)
Statement
of Stockholders' Equity (Deficit)
Deficit
|
||||||||||||||||||||||||
Accumulated
|
||||||||||||||||||||||||
Additional
|
during
the
|
|||||||||||||||||||||||
Common Stock
|
Paid-In
|
Common
Stock
|
Development
|
|||||||||||||||||||||
Shares
|
Amount
|
Capital
|
Payable
|
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 | ||||||||||||
Retirement
of common shares
|
(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 payable 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 | ) |
See
accompanying notes to financial statements
F-4
TRANS-PACIFIC
AEROSPACE COMPANY, INC.
(A
Development Stage Company)
Statements
of Cash Flows
For
the Period
|
||||||||||||
of
Inception
|
||||||||||||
Years
Ended
|
from
June 5,
|
|||||||||||
October
31,
|
2007,
through
|
|||||||||||
2010
|
2009
|
October
31, 2010
|
||||||||||
Cash
flows from operating activities:
|
||||||||||||
Net
loss from continuing operations
|
$ | (5,050,612 | ) | $ | (606,809 | ) | $ | (5,673,096 | ) | |||
Gain
(loss) from discontinued operations
|
115,527 | (283,137 | ) | (213,194 | ) | |||||||
Adjustments
to reconcile net loss to
|
||||||||||||
net
cash used in operating activities:
|
||||||||||||
Stock
based compensation
|
1,814,491 | 379,500 | 2,198,739 | |||||||||
Amortization
of debt discount
|
177,503 | - | 177,503 | |||||||||
Gain
on disposal of discontinued assets
|
(115,527 | ) | - | (115,527 | ) | |||||||
Loss
from impairment of goodwill
|
2,469,404 | - | 2,469,404 | |||||||||
Depreciation
expense
|
- | 7,500 | 17,500 | |||||||||
Loss
from settlment with common stock
|
22,460 | - | 22,460 | |||||||||
Impairment
of fixed assets
|
- | 82,500 | 82,500 | |||||||||
Impairment
of oil & gas interests
|
- | 190,000 | 190,000 | |||||||||
Change
in operating assets and liabilities:
|
||||||||||||
Accounts
receivable
|
- | 19,006 | - | |||||||||
Due
to Godfrey (China) Ltd
|
30,000 | - | 80,380 | |||||||||
Accounts
payable and accrued expenses
|
107,041 | 37,557 | 147,170 | |||||||||
Accrued
salary and payroll taxes
|
114,571 | 66,948 | 181,519 | |||||||||
Accrued
interest payable
|
29,482 | 80,002 | 120,245 | |||||||||
Net
cash used in operating activities
|
(285,660 | ) | (26,933 | ) | (314,397 | ) | ||||||
Cash
flows from investing activities
|
||||||||||||
Sale
of equipment
|
82,500 | - | 82,500 | |||||||||
Notes
receivable
|
(26,000 | ) | - | (26,000 | ) | |||||||
Equipment
|
- | - | (100,000 | ) | ||||||||
Oil
& gas working interest
|
- | - | (100,000 | ) | ||||||||
Net
cash provided by (used in) investing activities
|
56,500 | - | (143,500 | ) | ||||||||
Cash
flows from financing activities:
|
||||||||||||
Common
stock issued for cash and contributed capital
|
280,362 | 24,982 | 516,517 | |||||||||
Net
cash provided by financing activities
|
280,362 | 24,982 | 516,517 | |||||||||
Net
increase (decrease) in cash
|
51,203 | (1,951 | ) | 58,620 | ||||||||
Cash,
beginning of the period
|
7,417 | 9,368 | - | |||||||||
Cash,
end of the period
|
$ | 58,620 | $ | 7,417 | $ | 58,620 | ||||||
Supplemental
cash flow disclosure:
|
||||||||||||
Interest
paid
|
- | - | - | |||||||||
Taxes
paid
|
- | - | - | |||||||||
Supplemental
disclosure of non-cash transactions:
|
||||||||||||
Common
stock issued for payment on outstanding liabilities
|
$ | 136,000 | $ | - | $ | 136,000 | ||||||
Common
stock issued for payment on outstanding wages
|
$ | 105,000 | $ | - | $ | 105,000 | ||||||
Common
stock issued for conversion of notes payable
|
$ | 127,600 | $ | - | $ | 127,600 | ||||||
Retirement
of common shares
|
$ | - | $ | 5,250 | $ | 5,250 | ||||||
Acquisition
of oil and gas properties in exchange for note payable
|
$ | - | $ | 1,000,000 | $ | 1,000,000 | ||||||
Acquisition
of tooling assets
|
$ | 82,500 | $ | - | $ | 82,500 | ||||||
Acquisition
of goodwill
|
$ | 2,469,404 | $ | - | $ | 2,469,404 | ||||||
Beneficial
conversion feature of convertible note payable
|
$ | 216,455 | $ | - | $ | 216,455 |
See
accompanying notes to financial statements
F-5
Trans-Pacific
Aerospace Company, Inc.
(A
Development Stage Company)
Notes
to Unaudited Financial Statements
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, our Board of Directors decided to dispose of our oil and gas
business interests and focus on the aircraft component
market. On February 10, 2010, we completed the sale of all of
our 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. See Note 11 – Discontinued Operations for further
discussion.
In March
2010, the Company changed its name to Trans-Pacific Aerospace Company,
Inc.
On July
27, 2008, the Company completed a three-for-one stock split of the Company’s
common stock. The share and per-share information disclosed within
this Form 10-K reflect the completion of this stock split.
Business
Overview
The
Company was in the business of acquiring and developing oil and gas properties
until February 2010.
In
September 2007, the Company acquired a 44.5% leasehold interest (35.6% net
revenue interest) in a producing gas well on 40 acres in Lincoln County,
Oklahoma, known as Holmes #1. The gas well drilled was put into
production in November, 2007. At the time the Company acquired its
interest in Holmes #1, the Company also acquired, for $100,000, a 50% interest
in a portable nitrogen rejection unit.
The
Holmes #1 well had been shut down awaiting repairs to its nitrogen rejection
unit. A geologist’s report dated December 18, 2007 indicated that the
lease was selling between 85 and 100 MCF per day, however volumetric
calculations of the Holmes #1 reservoir have not yet been
performed. The unamortized acquisition cost remained on the balance
sheet during the production period, since volumetric calculations were not
completed. The well dried up in 2009 and the Company
determined this well was fully impaired as of July 31, 2009, and accordingly,
the Company recorded an impairment charge of $190,000 on the Holmes well and an
impairment charge on equipment of $82,500 during the fiscal year ended October
31, 2009 which is reflected in the statement of operations as part of the net
loss from discontinued operations.
On
September 1, 2008 the Company acquired working interests in six oil and gas
wells located in Pawnee County, Oklahoma for $1,000,000, payable September 1,
2013. Interest at an annual rate of 8% was due monthly. The working
interests consisted of a 25.5% working interest (20.4% net revenue interest) in
two wells, a 20% working interest (16% net revenue interest) in three wells and
a 17% working interest (13.6% net revenue interest) in the remaining
well. Volumetric calculations of the wells had not yet been
performed. An examination as to whether the wells warranted
impairment based on expected revenue hinged upon performance of volumetric
calculations. On February 10, 2010, we completed the sale of all of
our 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. See Note 11 – Discontinued Operations for further
discussion.
F-6
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 our products.
The
Company designs, manufactures and sells aerospace quality component parts for
commercial and military aircraft, space vehicles, power plants and surface and
undersea vessels. These parts have applications in both newly
constructed platforms and as spares for existing platforms. The
Company’s initial products are self-lubricating spherical bearings that help
with several flight-critical tasks, including aircraft flight controls and
landing gear.
Going
Concern
The
Company's financial statements are prepared using the accrual method of
accounting in accordance with accounting principles generally accepted in the
United States of America, and have been prepared on a going concern basis, which
contemplates the realization of assets and the settlement of liabilities in the
normal course of business. The Company incurred a net loss from
continuing operations of $5,050,612 and a gain from discontinued operations of
$115,527 during the year ended October 31, 2010, and an accumulated deficit of
$5,886,290 since inception. The Company has not yet established
an ongoing source of revenues sufficient to cover its operating costs and to
allow it to continue as a going concern. The ability of the Company
to continue as a going concern is dependent on the Company obtaining adequate
capital to fund operating losses until it becomes profitable. If the
Company is unable to obtain adequate capital, it could be forced to cease
development of operations.
In order
to continue as a going concern, develop a reliable source of revenues, and
achieve a profitable level of operations the Company will need, among other
things, additional capital resources. Management’s plans to continue
as a going concern include raising additional capital through sales of common
stock and or a debt financing. However, management cannot provide any
assurances that the Company will be successful in accomplishing any of its
plans.
The
ability of the Company to continue as a going concern is dependent upon its
ability to successfully accomplish the plans described in the preceding
paragraph and eventually secure other sources of financing and attain profitable
operations. The 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
Company maintains its accounting records on an accrual basis in accordance with
generally accepted accounting principles in the United States of America
("U.S. GAAP").
On March
30, 2010, the Company acquired 25% of the outstanding share capital of Godfrey
(China) Limited, a Hong Kong corporation (“Godfrey”), in exchange for the
Company’s technology used for the design and production of SAE-AS81820, 81934
and 81935 self-lubricated spherical bearings, bushings and rod-end
bearings. The Company
legally owns 25% of Godfrey. The investment in Godfrey has been
accounted for under the Equity Method whereby the investment in Godfrey is
treated as an asset. Income and losses proportional to the Company’s
investment in Godfrey respectively increase or decrease the carrying value of
the investment. Losses are only recognized to the
extent of the company’s investment in Godfrey. When and if the
carrying value becomes zero, losses become suspended and are recognized only
when Godfrey realizes income. At October 31, 2010 there
weresuspended losses of $363,652. See Note 4 for further
discussion.
Use of
Estimates
The
preparation of the financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities, and
disclosure of contingent liabilities at the date of the financial statements and
the reported amounts of expenses during the reporting period. Actual
results could differ from those estimates.
F-7
Cash and
Equivalents
Cash and
equivalents include investments with initial maturities of three months or
less. The Company maintains its cash balances at credit-worthy
financial institutions that are insured by the Federal Deposit Insurance
Corporation ("FDIC") up to $250,000. There were no cash equivalents
at October 31, 2010 or October 31, 2009.
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 Accounting Standards Codification subtopic 360-10, Property,
Plant and Equipment (“ASC 360-10”). 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 goodwill with a cost of $2,469,404 was fully
impaired.
Fair Value of Financial
Instruments
The
Company adopted FASB ASC 820-10 on October 1, 2008. Under FASB ASC 820-10-5,
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.
F-8
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.
The
following tables provide a summary of the fair values of assets and
liabilities:
Fair
Value Measurements at
|
||||||||||||||||
October
31, 2010
|
||||||||||||||||
Carrying
Value
October 31,
2010
|
Level 1
|
Level 2
|
Level 3
|
|||||||||||||
Assets:
|
||||||||||||||||
Cash
|
$ | 58,620 | $ | 58,620 | $ | - | $ | - | ||||||||
Goodwill
in intellectual property
|
$ | - | $ | - | $ | - | $ | - | ||||||||
Investment
in Godfrey
|
$ | - | $ | - | $ | - | $ | - | ||||||||
Liabilities:
|
||||||||||||||||
Payables
|
$ | 41,170 | $ | 41,170 | $ | - | $ | - | ||||||||
Convertible
notes payable
|
$ | 289,570 | $ | - | $ | - | $ | 289,570 |
Fair
Value Measurements at
|
||||||||||||||||
October
31, 2009
|
||||||||||||||||
Carrying
Value
October 31
2009
|
Level 1
|
Level 2
|
Level 3
|
|||||||||||||
Assets:
|
||||||||||||||||
Cash
|
$ | 7,417 | $ | 7,417 | $ | - | $ | - | ||||||||
Assets
of discontinued operations
|
$ | 1,000,000 | $ | - | $ | - | $ | 1,000,000 | ||||||||
Liabilities:
|
||||||||||||||||
Payables
|
$ | 41,170 | $ | 41,170 | $ | - | $ | - | ||||||||
Notes
payable, related to discontinued operations
|
$ | 1,000,000 | $ | - | $ | - | $ | 1,000,000 |
Goodwill
and the investment in Godfrey have been recorded as fully impaired, see notes 3
and 4.
The
Company believes that the market rate of interest as of October 31, 2010 and
2009 was not materially different to the rate of interest at which the debts
were issued. Accordingly, the Company believes that the fair value of the debts
approximated their carrying value at October 31, 2010 and 2009.
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.
F-9
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 income taxes has been recorded due to the net operating loss carry
forwards totaling approximately $1,222,895 as of October 31, 2010 that will be
offset against future taxable income. The available net operating
loss carry forwards of approximately $1,222,895 will expire in various years
through 2030. No tax benefit has been reported in the financial
statements because the Company believes there is a 50% or greater chance the
carry forwards will expire unused.
Deferred
tax asset and the valuation account is as follows:
October
31,
|
|||||||||
2010
|
2009
|
||||||||
Deferred
tax asset:
|
|||||||||
NOL
Carry forward
|
$ | 415,784 | $ | 194,380 | |||||
Valuation
allowances
|
(415,784 | ) | (194,380 | ) | |||||
Total
|
$ | - | $ | - |
The
components of income tax expense are as follows:
Current
Federal Tax
|
$ | - | $ | - | |||||
Current
State Tax
|
- | - | |||||||
Change
in NOL benefit
|
221,404 | 173,551 | |||||||
Change
in valuation allowance
|
$ | (221,404 | ) | (173,551 | ) | ||||
$ | - | $ | - |
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.
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.
F-10
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. On September 16, 2010
the Company issued stock options to two members of their Board of Directors. The
options have been accounted for at a fair value as required by the Financial
Accounting Standards Board (FASB) Accounting Standards Codification Topic718.
See footnote 10 for further discussion.
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 $5,886,290 The Company’s working capital has been primarily generated
through the sales of common stock as well as revenue from its
wells. Management has provided financial data since June 5, 2007,
“Inception”, in the financial statements.
Net Loss Per
Share
The
Company adopted the standard issued by the FASB, which requires presentation of
basic earnings or loss per share and diluted earnings or loss per
share. Basic income (loss) per share (“Basic EPS”) is computed by
dividing net income (loss) available to common stockholders by the weighted
average number of common shares outstanding during the
period. Diluted earnings per share (“Diluted EPS”) is 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
6,000,000 Series A Warrants, 6,000,000 Series B Warrants and options for
4,000,000 shares outstanding as of October 31, 2010 that are not included in the
calculation of Diluted EPS as their impact would be anti-dilutive.
F-11
For
the
Year
Ended
October
31,
|
||||||||
2010
|
2009
|
|||||||
Net
loss from continuing operations
|
$ | (5,050,612 | ) | $ | (606,809 | ) | ||
Discontinued
operations
|
||||||||
Net
gain (loss) from discontinued operations
|
115,527 | (283,137 | ) | |||||
Net
loss from operations
|
$ | (4,935,084 | ) | $ | (899,946 | ) | ||
Basic
and dilutive net loss from continuing operations per share
|
$ | (0.23 | ) | $ | (0.04 | ) | ||
Basic
and dilutive net loss from discontinued operations per
share
|
$ | 0.01 | $ | (0.02 | ) | |||
Basic
dilutive net loss attributable to Trans-Pacific Aerospace Company, Inc.
per share
|
$ | (0.22 | ) | $ | (0.06 | ) | ||
Weighted
average number of common shares outstanding, basic and
diluted
|
21,911,185 | 14,250,422 |
The
weighted average number of shares included in the calculation above are
post-split.
Recently Adopted and
Recently Enacted Accounting Pronouncements
In April
2008, the FASB issued ASC 350-10, “Determination of the Useful Life of
Intangible Assets.” ASC 350-10 amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of
a recognized intangible asset under ASC 350-10, “Goodwill and Other Intangible
Assets.” ASC No. 350-10 is effective for fiscal years beginning after December
15, 2008. The adoption of this ASC did not have a material impact on the
Company’s consolidated financial statements.
In April
2009, the FASB issued ASC 805-10, “Accounting for Assets Acquired and
Liabilities assumed in a Business Combination That Arise from Contingencies — an
amendment of FASB Statement No. 141 (Revised December 2007), Business
Combinations”. ASC 805-10 addresses application issues raised by preparers,
auditors and members of the legal profession on initial recognition and
measurement, subsequent measurement and accounting and disclosure of assets and
liabilities arising from contingencies in a business combination. ASC 805-10 is
effective for assets or liabilities arising from contingencies in business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15, 2008. ASC
805-10 will have an impact on the Company’s accounting for any future
acquisitions and its financial statements.
In May
2009, the FASB issued ASC Topic 855, Subsequent Events. ASC Topic 855
established principles and requirements for evaluating and reporting subsequent
events and distinguishes which subsequent events should be recognized in the
financial statements versus which subsequent events should be disclosed in the
financial statements. ASC Topic 855 also requires disclosure of the date through
which subsequent events are evaluated by management. ASC Topic 855 was effective
for interim periods ending after June 15, 2009 and applies prospectively.
Because ASC Topic 855 impacts the disclosure requirements, and not the
accounting treatment for subsequent events, the adoption of ASC Topic 855 did
not impact the Company’s results of operations or financial condition. See Note
12 for disclosures regarding our subsequent events.
F-12
Effective
July 1, 2009, the Company adopted the Financial Accounting Standards Board
(“FASB”) Accounting Standards Codification (“ASC”) 105-10, Generally Accepted
Accounting Principles – Overall (“ASC 105-10”). ASC 105-10 establishes the
FASB Accounting Standards Codification (the “Codification”) as the source of
authoritative accounting principles recognized by the FASB to be applied by
nongovernmental entities in the preparation of financial statements in
conformity with U.S. GAAP. Rules and interpretive releases of the SEC under
authority of federal securities laws are also sources of authoritative U.S. GAAP
for SEC registrants. All guidance contained in the Codification carries an equal
level of authority. The Codification superseded all existing non-SEC accounting
and reporting standards. All other non-grandfathered, non-SEC accounting
literature not included in the Codification is non-authoritative. The FASB will
not issue new standards in the form of Statements, FASB Staff Positions or
Emerging Issues Task Force Abstracts. Instead, it will issue Accounting
Standards Updates (“ASUs”). The FASB will not consider ASUs as authoritative in
their own right. ASUs will serve only to update the Codification, provide
background information about the guidance and provide the bases for conclusions
on the change(s) in the Codification. References made to FASB guidance
throughout these financials have been updated for the Codification.
In
August 2009, the FASB issued ASU No. 2009-05, Measuring Liabilities at
Fair Value, which provides additional guidance on how companies should measure
liabilities at fair value under ASC 820. The ASU clarifies that the quoted price
for an identical liability should be used. However, if such information is not
available, an entity may use the quoted price of an identical liability when
traded as an asset, quoted prices for similar liabilities or similar liabilities
traded as assets, or another valuation technique (such as the market or income
approach). The ASU also indicates that the fair value of a liability is not
adjusted to reflect the impact of contractual restrictions that prevent its
transfer and indicates circumstances in which quoted prices for an identical
liability or quoted price for an identical liability traded as an asset may be
considered level 1 fair value measurements. This ASU is effective
October 1, 2009. The adoption of this standard did not have a material
impact on the Company’s results of operations or financial
condition.
In July
2010, the FASB issued ASC 2010-20 "Disclosures about the Credit Quality of
Financing Receivables and the Allowance for Credit Losses which expands the
disclosure requirements concerning the credit quality of an entity’s financing
receivables and its allowance for credit losses. ASC 2010-20 is effective for
interim and annual reporting periods beginning on or after December 15, 2010.
The Company does not expect the adoption of this guidance will have a material
impact on the Company’s consolidated financial statements.
In April
2010, the FASB issued ASC 2010-13 Compensation—Stock Compensation (Topic 718):
Effect of Denominating the Exercise Price of a Share-Based Payment Award in the
Currency of the Market in Which the Underlying Equity Security
Trades. ASC 2010-13 updates ASC 718 to
codify the consensus reached in EITF Issue No. 09-J, ―Effect of Denominating the
Exercise Price of a Share-Based Payment Award in the Currency of the Market in
Which the Underlying Equity Security Trades. ASC 2010-13 clarifies
that share-based payment awards with an exercise price denominated in the
currency of a market in which a substantial portion of the underlying equity
security trades should not be considered to meet the criteria requiring
classification as a liability. The updated guidance is effective for fiscal
years, and interim periods within those fiscal years, beginning on or after
December 15, 2010. Early adoption is permitted. The provision of ASC 2010-13 is
not expected to have an impact on the Company’s consolidated financial
statements.
In March
2010, the FASB (Financial Accounting Standards Board) issued Accounting
Standards Update 2010-11 (ASU 2010-11), “Derivatives and Hedging (Topic 815):
Scope Exception Related to Embedded Credit Derivatives.” The
amendments in this Update are effective for each reporting entity at the
beginning of its first fiscal quarter beginning after June 15,
2010. Early adoption is permitted at the beginning of each entity’s
first fiscal quarter beginning after issuance of this Update. The
Company does not expect the provisions of ASU 2010-11 to have a material effect
on the financial position, results of operations or cash flows of the
Company.
In
February 2010, the FASB Accounting Standards Update 2010-10 (ASU 2010-10),
“Consolidation (Topic 810): Amendments for Certain Investment
Funds.” The amendments in this Update are effective as of the
beginning of a reporting entity’s first annual period that begins after November
15, 2009 and for interim periods within that first reporting period. Early
application is not permitted. The Company’s adoption of provisions of
ASU 2010-10 did not have a material effect on the financial position, results of
operations or cash flows.
F-13
In
February 2010, the FASB issued ASU No. 2010-09 “Subsequent Events (ASC Topic
855) “Amendments to Certain Recognition and Disclosure Requirements” (“ASU No.
2010-09”). ASU No. 2010-09 requires an entity that is an SEC filer to evaluate
subsequent events through the date that the financial statements are issued and
removes the requirement for an SEC filer to disclose a date, in both issued and
revised financial statements, through which the filer had evaluated subsequent
events. The adoption did not have an impact on the Company’s financial position
and results of operations.
In
January 2010, the FASB issued an amendment to ASC 820, Fair Value Measurements
and Disclosure, to require reporting entities to separately disclose the amounts
and business rationale for significant transfers in and out of Level 1 and Level
2 fair value measurements and separately present information regarding purchase,
sale, issuance, and settlement of Level 3 fair value measures on a gross
basis. This standard is effective for interim and annual reporting
periods beginning after December 15, 2009 with the exception of disclosures
regarding the purchase, sale, issuance, and settlement of Level 3 fair value
measures which are effective for fiscal years beginning after December 15, 2010.
The adoption did not have an impact on the Company’s financial position and
results of operations.
In
January 2010, the FASB issued an amendment to ASC 505, Equity, where entities
that declare dividends to shareholders that may be paid in cash or shares at the
election of the shareholders are considered to be a share issuance that is
reflected prospectively in EPS, and is not accounted for as a stock
dividend. This standard is effective for interim and annual periods
ending on or after December 15, 2009 and is to be applied on a retrospective
basis. The adoption of this standard is not expected to have a
significant impact on the Company’s financial statements.
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.
|
F-14
The
Company acquired intangible intellectual property including blueprints,
formulas, designs and processes for manufacturing and production of
self-lubricated spherical bearings, bushings and rod-end
bearings. The transaction was deemed to be a business combination
pursuant to the FASB standards.
The
following table summarizes the entry recording the intangible assets
acquired:
Intangible
assets - goodwill
|
$ | 2,469,404 | ||
Debt
discount on convertible note
|
20,333 | |||
Common
stock
|
(8,000 | ) | ||
Additional
paid in capital
|
(1,984,000 | ) | ||
Convertible
note payable
|
(260,000 | ) | ||
Note
payable – related party
|
(200,000 | ) | ||
Accrued
interest on note payable
|
(11,737 | ) | ||
Cancellation
of HAC note receivable
|
(26,000 | ) | ||
$ | - |
These
intangible assets (goodwill) are deemed to be indefinite-lived and accordingly
are not amortized. The Company does perform an annual review
for impairment. At October 31, 2010 a valuation of the purchase price
was performed by an independent valuation expert who determined that the
intangible assets were fully impaired. Accordingly, an allowance for
impairment for the full cost of the property was established at October 31,
2010.
NOTE
4 – ACQUISITION OF INTEREST IN GODFREY (CHINA) LIMITED
On March
30, 2010, the Company acquired 25% of the outstanding share capital of Godfrey
(China) Limited, a Hong Kong corporation (“Godfrey”), in exchange for the
Company’s technology used for the design and production of SAE-AS81820, 81934
and 81935 self-lubricated spherical bearings, bushings and rod-end
bearings. The Company
legally owns 25% of Godfrey. The formation and acquisition of the interest in
Godfrey is intended to assist the Company in its focus on the Chinese bearings
market. In September 2010, Godfrey opened a production facility in
Guangzhou, China. The Company received its 25% interest in Godfrey for a 50%
interest in the intellectual property assets acquired on February 1, 2010 (as
discussed in Note 3). Since the investment in Godfrey is an active
investment, it has been accounted for under the “equity
method”. Since the independent valuation determined that the purchase
price allocation attributed no value to the intangible assets, there was no
dollar investment in Godfrey by the Company and therefore no charge to the
investment being impaired. At October 31, 2010 there were suspended
losses of $363,652.
As there
were no operations for Godfrey and the fact that Godfrey is being accounted for
as an equity investment, no proforma presentation is necessary because there was
no impact on the previously issued financial statements.
NOTE
5 – PROPERTY AND EQUIPMENT
The
Company purchased a 50% interest in a skid mounted nitrogen rejection unit in
October, 2005 for $100,000. The unit strips out excessive nitrogen and oxygen
from gas wells to an acceptable level of contaminants in the gas
stream. The unit was used on the Company’s gas wells commencing
November, 2007. As of July 31, 2009, the equipment was determined to
be inoperable and an impairment charge on equipment of $82,500 was recorded
during the fiscal year ended October 31, 2009.
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.
F-15
NOTE
6 - RELATED PARTY TRANSACTIONS
On June
29, 2009, the Company entered into a Support Services Agreement with Cardiff
Partners, LLC (formerly Strands Management Company, LLC) (the “Cardiff
Agreement”). Matt Szot, our former Chief Financial Officer and former
Secretary, is the Chief Financial Officer of Cardiff. Keith Moore and David
Walters, former members of our board of directors, each own a 50% interest and
is a managing member of Cardiff. Pursuant to the Cardiff
Agreement, in consideration for providing certain services to the Company,
Cardiff is entitled to a monthly fee in the amount of $10,000. The
Company also issued 50,000 shares of the Company’s common stock to Mr. Szot
pursuant to the Cardiff Agreement. The initial term of the Cardiff
Agreement expired June 28, 2010. The Company incurred $120,500 and $10,000 in
consulting fees under the terms of the agreement for the years ended October 31,
2010 and 2009, respectively, 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 payable.
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
October 19, 2010, the Company entered into a settlement and release agreement
with Cardiff Partners, LLC, Monarch Bay Associates, LLC, David Walters, Keith
Moore and Matt Szot (collectively, the "Cardiff Parties") . Under the
settlement and release agreement, the Company terminated the Cardiff Agreement,
the MBA Placement Agency and Advisory Services Agreement and all of the other
agreements and arrangements with the Cardiff Parties in exchange for issuing
1,838,649 shares of the Company’s common stock to Cardiff Partners. The
Company also agreed to a mutual release of claims with the Cardiff
Parties.
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. The Company incurred $45,000 and $15,000 under
the terms of the agreement for the nine months ended July, 2010 and 2009,
respectively. 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 Placement
Agency and Advisory Services 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 is 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 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. During the year
ended October 31, 2010, debt discount expense totaled $177,503.
William
McKay, the Company’s Chief Executive Officer and Chairman, is the Chief
Executive Officer of Godfrey (see Note 4). In May 2010, the Company sold tooling
to Godfrey (see Note 5) for $132,880. The Company had acquired the tooling on
April 12, 2010 for $82,500 in exchange for its stock. The gain from
the related party has been characterized as contributed capital. See
Note 10 for further discussion. In May, 2010, HAC received a payment
of $132,880 from Godfrey (China) Limited in respect of the purchase price for
equipment tooling that the Company provided to Godfrey. Harbin Aerospace
is 100% owned by our Chief Executive Officer and his wife. Under the terms
of our Asset Purchase Agreement with Harbin Aerospace, the payment from Godfrey
was properly payable to us and not Harbin Aerospace. Harbin Aerospace has
since applied the full amount received from Godfrey in payment of expenses on
our behalf. As of October 31, 2010, our balance sheet reflects no amount
due from Harbin Aerospace.
On
February 15, 2010, the Company entered into a Placement Agency and Advisory
Services Agreement with Monarch Bay Associates, LLC (“MBA”). MBA is a
FINRA registered firm. Keith Moore and David
Walters, former members of the Company’s board of directors, are
members of (and each owns 50% of the ownership interests in) MBA. Under the
agreement, MBA acts as the Company’s placement agent on an exclusive basis with
respect to private placements of its capital stock and as its exclusive advisor
with respect to acquisitions, mergers, joint ventures and similar
transactions. MBA will receive fees equal to (a) 8% of the
gross proceeds raised by the Company in any private placement (plus warrants to
purchase 8% of the number of shares of common stock issued or issuable by the
Company in connection with the private placement) and (b) up to 5% of the total
consideration paid or received by the Company or its stockholders in an
acquisition, merger, joint venture or similar transaction. The
initial term of the Placement Agency and Advisory Services Agreement will expire
on February 15, 2011. On October 19, 2010 the Placement Agency and
Advisory Services Agreement was terminated by mutual agreement of the
parties.
As of October 31, 2010, we owe our Chief Executive Officer $4,379 for
expenses he paid on behalf of the company.
NOTE
7 - NOTES RECEIVABLE
In
December 2009 and January 2010, the Company advanced a total of $26,000 to HAC
in exchange for HAC's secured promissory notes. Upon completion of the
Company's acquisition of HAC, the notes were cancelled. See Note 3-
Acquisition of Intangible Assets.
NOTE
8 – NOTES PAYABLE
The
Company issued a promissory note to Futures Investment Corporation on September
1, 2008 for $1,000,000 as payment for an oil and gas working interest in Pawnee
County, Oklahoma. The note is payable on September 1,
2013. Interest is payable monthly at the rate of 8% simple
interest. As of January 31, 2010, the Company was in default on the
note, as the Company had not made the monthly interest payments. On
February 10, 2010, the Company completed the sale of all of its oil and gas
business interest in exchange for cancellation of all obligations under the
promissory note. See Note 11 – Discontinued Operations for further
discussion.
F-17
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 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 $12,880 for
the year ended October 31, 2010. The Company performed an evaluation
and determined that the anti-dilution clause did not require derivative
treatment.
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 are 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 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 is 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. During
the year ended October 31, 2010, debt discount expense totaled
$177,503.
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. This note was originally part of the acquisition
of Harbin Aerospace Company (HAC), whereby 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 is due and payable on June 3, 2011.
NOTE
9 - 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. See Note 6 for further discussion.
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 initial
term of the Employment Agreement will expire on January 31, 2011 and will
automatically renew for additional one-year terms unless either party provides
notice of non-renewal prior to July 31 in any term.
F-18
Legal
There
were no legal proceedings against the Company with respect to matters arising in
the ordinary course of business.
Lease
In
October 2010 the Company entered into a lease of its administrative, offices.
The lease expires November 30, 2011 and calls for monthly rental payments of
$792.
Minimum
annual rentals for the above lease are as follows:
2011 and
thereafter $
10,296
NOTE
10 – CAPITAL STOCK TRANSACTIONS
The
Company is authorized to issue up to 150,000,000 shares of its $0.001 common
stock. At October 31, 2010, there were 33,200,286 shares issued and
outstanding. At October 31, 2009, there were 11,192,083 shares issued
and outstanding.
In July
2008, the Company completed a three-for-one stock split of the Company’s common
stock.
Nolan
Weir, former sole officer and director of the Company, returned 5,250,000 common
shares to the Company on June 29, 2009. The shares were then
cancelled. The transaction was recorded at par
value.
On June
29, 2009, the Company entered into the Cardiff Agreement. Pursuant to
the Cardiff Agreement, the Company issued 50,000 shares of the Company’s common
stock to Mr. Szot, the Company’s Chief Financial Officer and
Secretary. Accordingly, the Company recorded a stock based
compensation charge of $34,500 ($0.69 per common share) which is included in the
statement of operations for the fiscal year ended October 31,
2009. See Note 4 for further discussion.
On June
29, 2009, the Company entered into an employment agreement with David Walters,
the former Chairman Chief Executive Officer. Pursuant to
the employment agreement, the Company issued 500,000 shares of the Company’s
common stock to Mr. Walters. Accordingly, the Company recorded a
stock based compensation charge of $345,000 ($0.69 per common share) which is
included in the statement of operations for fiscal year ended October 31,
2009. See Note 4 for further discussion.
On
September 11, 2009, the Company entered into a stock purchase agreement with an
accredited investor for the sale of 52,083 shares of its common stock at a
purchase price of $0.48 per share or $2500. The sale closed on
September 11, 2009.
On
December 22, 2009, the Company entered into a stock purchase agreement with an
accredited investor for the sale of 400,000 shares of its common stock at a
purchase price of $0.25 per share or $100,000. The sale of 72,000
shares of common stock pursuant to this agreement closed on December 24,
2009. The sale of 20,000 shares of common stock pursuant to this
agreement closed on January 20, 2010. The sale of 80,000 shares of
common stock pursuant to this agreement closed on February 16,
2010. The sale of 60,000 shares of common stock pursuant to
this agreement closed on March 24, 2010. The sale of 168,000
shares of common stock pursuant to this agreement closed on April 5,
2010.
On
January 15, 2010, the Company entered into a stock purchase agreement with an
accredited investor for the sale of 120,000 shares of its common stock at a
purchase price of $0.25 per share or $30,000. The sale closed on
January 15, 2010.
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.
F-19
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 (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 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. The shares were
valued based on the closing stock price on the date of grant. 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.
During
the year ended October 31, 2010, the Company issued 900,000 shares of the
Company’s common stock to Mr. McKay valued at $191,400 pursuant to his
employment agreement. The shares were valued based on the closing
stock price on the date of the agreement.
In June
2010, the Company issued 2,200,000 shares of common stock valued at $127,600 to
the note holder reducing its principal obligation by $127,600 pursuant to
conversion requests. The shares were valued at $0.58 per share per the
agreement.
On June
5, 2010, the Company hired Equiti-Trend as the Company’s public and investor
relations, to perform public and investor relations under the terms set forth in
the engagement letter which provided for cancellation by either party on 30 days
notice. Pursuant to the engagement letter, the Company agreed to
issue Equiti-Trend up to 1,800,000 shares of the Company’s restricted common
stock as sole compensation for its services for a six-month service
period. The Company issued 300,000 restricted common shares
valued at $45,000 upon execution of the agreement. The shares were valued based
on the closing stock price on the date of the agreement.
On June 9
2010, the Company issued 328,000 shares of common stock which was valued at
$104,960 based on the closing price on the date of acquisition for the tooling
assets it acquired in April 2010 at a cost of $82,500. A loss of
$22,460 was realized on the difference between the cost of the tooling and the
value of the shares issued.
On August
20, 2010, the Company issued 300,000 shares of common stock to Keith Moore
valued at $87,000 pursuant to his employment agreement. The shares were valued
based on the closing stock price on the date of the agreement.
On August
20, 2010, the Company issued 300,000 common shares to the Company’s Board of
Directors valued at $71,250 for services. The shares were valued
based on the closing stock price on the date of the restricted stock
grant.
On
October 19, 2010 the Company issued 150,000 shares of common stock valued at
$18,000 to Matt Szot pursuant to the Cardiff Settlement Agreement (see footnote
6). The shares were valued based on the closing stock price on the date of the
agreement.
F-20
On
October 19, 2010 the Company issued 1,838,649 shares of common stock to Cardiff
Partners as part of a settlement agreement with Cardiff (see footnote 6). The
shares valued at $294,184 were based on the closing stock price on the date of
the agreement.
On
September 16, 2010 the Company granted 2,000,000 options each to Kevin Gould and
Greg Archer to purchase shares at the closing price as of September 16, 2010 of
$0.15 per share. The options were granted in connection with Mr. Gould and Mr.
Archer’s agreement to serve on the Board of Directors of the Company. The
options vest in three equal amounts on each of the next three anniversary dates
of this agreement beginning September 16, 2011. For the year ended October 31,
2010, $18,051 was amortized as stock based compensation based on the values
assigned using the Black Scholes Model.
On
October 27, 2010, the Company entered into a stock purchase agreement with an
accredited investor for the sale of 1,000,000 shares of its common stock at a
purchase price of $0.05 per share. The sale closed and cash of
$50,000 was received on October 28, 2010.
On
October 27, 2010 the Company issued 100,000 shares of common stock in lieu of
commissions which were valued at $12,000 based on the closing stock price on the
date of grant.
On
October 28, 2010 the Company issued 100,000 shares of common stock in lieu of
commissions which were valued at $9,000 based on the closing stock price on the
date of grant.
On
October 28, 2010, the Company entered into a stock purchase agreement with an
accredited investor for the sale of 1,000,000 shares of its common stock at a
purchase price of $0.05 per share or $50,000. The sale closed and
cash of $50,000 was received on October 28, 2010.
On
October 29, 2010 the Company issued 410,000 common shares to the Company’s Board
of Directors for services. The shares were valued
at $69,300 based on the closing stock price on the date of the
restricted stock grant.
On
October 29, 2010 the Company issued 110,000 common shares valued at $5,000 for
services to a vendor. The shares were valued based on the closing stock price on
the date the vendor accepted share based payment.
As of
October 31, 2010, the Company recorded a common stock payable of $165,000 for
1,200,000 common shares issuable to Equiti-Trend for services. The
shares were valued based on the closing stock price on the date of the
restricted stock grant. The agreement with Equiti-Trend (see above)
has been cancelled by the Company.
NOTE
11 – DISCONTINUED OPERATIONS
On
February 10, 2010, the Company completed the sale of all of its oil and gas
business interests in exchange for cancellation of all obligations under an
outstanding promissory note having a principal amount of $1,000,000 and accrued
interest of $115,527. The Company recorded a gain on disposal of
assets totaling $115,527 for the year ended October 31,
2010. Pursuant to FASB standards, the Company has retro-actively
presented its oil and gas business as discontinued operations.
The
Company’s gain from discontinued operations for the year ended October 31, 2010
totaled $115,527. The Company’s loss from discontinued
operations for the year ended October 31, 2009 totaled $283,137. The
Company’s loss from discontinued operations since inception through October 31,
2010 totaled $213,194. Prior year financial statements have been
restated to present the discontinued operations.
The
following schedule shows the assets of the discontinued operations as of October
31, 2009:
Pawnee
County Lease
|
$
|
1,000,000
|
||
Total
|
$
|
1,000,000
|
F-21
The
following schedule shows the liabilities of the discontinued operations as of
October 31, 2009:
Notes
payable
|
$
|
1,000,000
|
||
Total
|
$
|
1,000,000
|
NOTE
12 – SUBSEQUENT EVENTS
On
November 10, 2010 500,000 shares of common stock totaling $265,000 were issued
to each of the following Board Members: Alex Kam, Greg Archer, Ray Kwong, Kevin
Gould and Peter Liu, for a total of 2,500,000 shares. The shares were
valued based on the date of the agreement.
On
November 10, 2010 200,000 shares valued at $38,000 were issued for services to
be rendered.
On
January 12, 2011 1,100,000 shares of common stock valued at $31,900 based were
issued to Theodora Kobal upon her conversion of $31,900 of principal under the
terms of her convertible promissory note.
The
company did not have any other subsequent events through February 15, 2011 which
is the date the financial statements were available to be issued, that required
recording or disclosure in the financial statements for the year ended October
31, 2010.
F-22
Item
9. Changes
In and Disagreements with Accountants on Accounting and Financial
Disclosures
Not
applicable.
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 15d-15 under the Securities Exchange Act of
1934. Based upon that evaluation, our management, including our chief
executive officer and chief financial officer, concluded that our disclosure
controls and procedures were not effective as of October 31, 2010 for the
reasons described below.
Management’s
report on internal controls over financial reporting
Our
management is responsible for establishing and maintaining adequate internal
controls over financial reporting, as defined under Rule 15d-15(f) under
the Securities Exchange Act of 1934. Management has assessed the
effectiveness of our internal controls over financial reporting as of October
31, 2010 based on the framework established in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (“COSO”). Our
internal control system was designed to provide reasonable assurance to our
management and board of directors regarding the preparation and fair
presentation of published financial statements. An internal control material
weakness is a significant deficiency, or aggregation of deficiencies, that does
not reduce to a relatively low level the risk that material misstatements in
financial statements will be prevented or detected on a timely basis by
employees in the normal course of their work. Our management assessed the
effectiveness of our internal control over financial reporting as of October 31,
2010, and this assessment identified certain material weakness in our
internal control over financial reporting, including material weaknesses due to
our management’s lack of a financial expert or audit committee of the board of
directors; the absence of any segregation of duties in financial transactions or
reporting as a result of the fact that we have one employee; and the significant
number of adjustments made to our financial statements in the course of the
audit of our financial statements by our independent registered public
accounting firm. Based on
that evaluation, management concluded that our internal control over financial
reporting was not effective as of October 31, 2010.
This
annual report does not include an attestation report of our registered public
accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by our registered public
accounting firm pursuant to the rules of the Securities and Exchange
Commission that permit us to provide only management’s report in this annual
report.
Changes
in internal control over financial reporting
There
were no changes in our internal control over financial reporting that occurred
during the fourth quarter of fiscal 2010 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
Not
applicable.
- 17
-
The names
of our executive officers and directors and their ages, titles and biographies
as of the date of this report are set forth below:
Name
|
Age
|
Position
|
||
William
R. McKay
|
56
|
Chairman
of the Board of Directors, President, Chief Executive Officer and Chief
Financial Officer
|
||
Greg
Archer
|
56
|
Director
|
||
Kevin
Gould
|
56
|
Director
|
||
Ray
Kwong
|
56
|
Director
|
||
Alex
Kam
|
57
|
Director
|
||
Peter
Liu
|
54
|
Director
|
Mr. McKay
has served as our president, chief executive officer, chief financial officer
and chairman of our board of directors since February 1,
2010. Mr. McKay also serves as chief executive officer and a
member of the board of managers of Godfrey (China) Limited. From
March 2009 through February 2010, Mr. McKay was the founder and chief executive
officer of Harbin Aerospace Company, LLC, whose assets were acquired by us on
February 1, 2010. Prior to forming Harbin, Mr. McKay was an aerospace
industry consultant involved in aerospace projects in China and other aspects of
the industry from 2008 to 2009. From 2006 to 2008, Mr. McKay
served as chief operating officer for Acromil Corporation, an aerospace
structural component manufacturing company. Prior to Acromil,
Mr. McKay served from 1986 to 2006 in a variety of senior management roles with
Southwest Products Company, a specialized engineering consulting firm and
designer and manufacturer of plain spherical bearings used primarily in
aerospace, naval and sophisticated commercial applications, most recently
serving as a chief executive officer from 1991 to 2006. In May 2005,
Southwest Products filed for protection under Chapter 11 of the U.S. Bankruptcy
Code, which was converted to a Chapter 7 proceeding in July 2005. Mr.
McKay was a personal guarantor of commercial loans by Southwest Products and
upon Southwest Products’ bankruptcy was forced to seek protection under Chapter
7 of the U.S. Bankruptcy Code in July 2005. Mr. McKay received a
bachelors of arts degree, a law degree and a masters of business administration
from the University of Southern California. He is a member of the
California State Bar.
Mr. Archer has served as a member of
our board of directors since April 21, 2010. Mr. Archer has been
engaged as a private investor since March 2010. Prior to March 2010,
Mr. Archer was employed by Northrop Grumman Corporation in a variety of
management positions over a 24 year period of time, most recently serving as
director of procurement and global supply chain for the aerospace systems sector
of Northrup Grumman from December 2002 to March 2010. Mr. Archer is a
graduate of California State Polytechnic State University at
Pomona.
Mr. Gould has served as a member of our
board of directors since August 27, 2010. Mr. Gould has been engaged
as a private investor since July 2010. Prior to July 2010, Mr. Gould
served as chief executive officer of Piper Aircraft, Inc. from January 2009 to
July 2010 and vice president of operations of Piper Aircraft from 2005 to
January 2009. Mr. Gould holds a masters of business administration
from Harvard University, a masters of science in management from Stanford
University's Sloan program, a law degree from University of Southern California
and a bachelors of arts degree from Washington State
University.
Mr. Kwong has served as a member of our
board of directors since November 12, 2010. Since 2001,
Mr. Kwong has served as president of SNC Consulting, a cross-border
business development consulting firm. Mr. Kwong received a
masters of business administration from the University of Southern
California.
Mr. Kam has served as a member of our
board of directors since November 12, 2010. Mr. Kam also serves as a
member of the board of managers of Godfrey (China) Limited. For over
the past five years, Mr. Kam has served as president of China United Industrial
Co., Ltd., a manufacturer of consumer electronics in China. Mr. Kam
received a masters of science and bachelors of science from UCLA.
- 18
-
Mr. Liu has served as a
member of our board of directors since November 12, 2010. Mr. Liu
also serves as a member of the board of managers of Godfrey (China)
Limited. For over the past five years, Mr. Liu has served as chief
executive officer of SoCal Metals, Inc., a Los Angeles, California based metal
processing company with facilities in the United States and
China. Mr. Liu received a masters of science and a Ph.D. from Auburn
University and a bachelor of science from Zhongshan University in
China.
Our executive officers are appointed
by, and serve at the discretion of, our board of directors. There is
no family relationship between any of our executive officers or
directors. Each of our directors have been elected to serve on our
board of directors based on their experience in the aerospace industry or
Chinese based cross-border transactions.
Committee
Interlocks and Insider Participation
No member
of our board of directors is employed by us except for Mr. McKay, who is
presently employed as our president and chief executive officer. None of
our executive officers serve on the board of directors of another entity, whose
executive officers serves on the compensation committee of our board of
directors. None of our officers or employees participated in
deliberations of our board of directors concerning executive officer
compensation.
Code
of Ethics
We have
adopted a code of ethics for our chief executive officer, principal financial
officer and principal accounting officer or controller, and/or persons
performing similar functions, which is available on our website, under the link
entitled “Code of Ethics”.
Audit
Committee Financial Expert
We currently do not have an audit
committee of our board of directors. As a result, our board has not
determined any of its members to be audit committee financial
experts.
- 19
-
Summary
Compensation Table
The
following table sets forth the compensation awarded to, earned by or paid to,
our chief executive officers during the fiscal year ended October 31, 2010 and
our other two highest paid executive officers earning in excess of $100,000 for
services rendered in all capacities during the fiscal year ended October 31,
2010. In reviewing the table, please note that:
|
·
|
William
McKay has served as our chief executive officer since February 1,
2010;
|
|
·
|
David
Walters served as our chief executive officer from June 30, 2009 to
February 1, 2010; and
|
|
·
|
Matt
Szot served as our chief financial officer from June 30, 2009 to October
19, 2010.
|
Name and Principal
Position(a)
|
Year
(b)
|
Salary
(c)
|
Bonus
(d)
|
Stock
Awards
(e)
|
Option
Awards
(f)
|
All Other
Compensation
(g)
|
Total
(h)
|
|||||||||||||||||||
William
McKay, CEO
|
2010
|
135,000 | — | 191,400 | — | 9,619 | 336,019 | |||||||||||||||||||
2009
|
— | — | — | — | — | — | ||||||||||||||||||||
David
Walters, CEO
|
2010
|
— | — | 27,500 | — | — | 27,500 | |||||||||||||||||||
2009
|
60,000 | — | 345,000 | — | 40,000 | 445,000 | ||||||||||||||||||||
Matt
Szot, CFO
|
2010
|
— | — | 40,500 | — | — | 40,500 | |||||||||||||||||||
2009
|
— | — | 34,500 | — | — | 34,500 |
The
dollar amounts in columns (e) and (f) reflect the dollar amounts calculated
in accordance with Financial Accounting Standards Board Accounting Standards
Codification Topic 718, Compensation— Stock Compensation (“FASB ASC Topic 718”),
and, therefore, may not necessarily reflect actual benefits received by the
individuals. Assumptions used in the calculation of these amounts are
included in footnote (2) to our audited financial statements for the fiscal
year ended October 31, 2010.
Narrative
Disclosure to Summary Compensation Table
William McKay
On
February 1, 2010, we entered into a written employment agreement with William
McKay pursuant to which he serves as our chief executive officer and chairman of
the board for a term of one year ending on January 31, 2011, provided that
the agreement shall be subject to automatic renewals of additional one year
terms unless either party notifies the other no later than July 31st of the
then current term of its intent to terminate the agreement. No such
notice of termination has been provided by either party as of the date of this
report. Pursuant to McKay’s employment agreement, he is entitled
to:
·
|
an
annual salary of $180,00, subject to annual review by our board of
directors;
|
·
|
a
one-time bonus of 1.2 million shares of our common stock issuable in
quarterly installments of 300,000 shares over the first four quarters of
the agreement;
|
·
|
a
car allowance of $750 per
month;
|
·
|
four
weeks annual paid vacation;
|
·
|
an
annual bonus at the discretion of our board of
directors;
|
·
|
participation
in such medical, retirement and other benefit plans as we offer to our
other senior executives; and
|
·
|
in
the event of his termination by us without cause or by Mr. McKay for good
reason (as such terms are defined in the agreement) the payment of salary
and continued plan benefits for the remainder of the one year term then in
effect.
|
Column
(e) in the above table reflects the dollar amount of Mr. McKay’s 1.2 million
share bonus. As of October 31, 2010, 900,000 shares had vested and
had been issued and 300,000 shares were subject to vesting. Since
those 300,000 shares vest on January 31, 2011, the dollar value of those shares
was calculated on the assumption that they would vest in full.
- 20
-
David
Walters
Cardiff
Partners, LLC
Outstanding
Equity Awards at Fiscal Year-End 2010
The
following table sets forth information for each of the officers named in the
above summary compensation table concerning unexercised options and unvested or
unearned share awards as of October 31, 2010. In reviewing the table,
please note that none of the named officers held any options as of October 31,
2010.
Name (a)
|
Number of
Shares or
Units of
Stock That
Have Not
Vested (#)
(b)
|
Market Value
of
Shares or
Units of Stock
That Have
Not Vested
(#)
(c)
|
Equity
Incentive
Plan
Awards:
Number of
Unearned
Shares,
Units or
Other
Rights of
Stock That
Have Not
Vested (#)
(d)
|
Equity
Incentive
Plan
Awards:
Market or
Payout
Value of
Unearned
Shares,
Units or
Other
Rights of
Stock That
Have Not
Vested ($)
(e)
|
||||||||||||
William
McKay, CEO
|
300,000 | (1) | $ | 42,000 | (2) | — | — | |||||||||
David
Walters, CEO
|
— | — | — | — | ||||||||||||
Matt
Szot, CFO
|
— | — | — | — |
(1)
|
Represents
shares that have not vested under Mr. McKay’s employment agreement with
us. Pursuant to the February 2010 employment agreement we
entered into with Mr. McKay, he is entitled to a one-time bonus of 1.2
million shares of our common stock issuable in quarterly installments of
300,000 shares over the first four quarters of the
agreement. As of October 31, 2010, 900,000 shares have been
earned and issued and the final 300,000 shares will vest and become
issuable on January 31, 2011.
|
- 21
-
(2)
|
The
market value of the 300,000 shares is based on the last sale price of our
common stock ($.014 p/s) on October 29,
2010.
|
2010
Director Compensation Table
The
following table sets forth information concerning all cash and non-cash based
compensation we paid to our directors during the fiscal year ended October 31,
2010. In reviewing the table, please note:
|
·
|
No
information is provided for William McKay or David Walters since all
compensation paid to those persons for the 2010 fiscal year is included in
the summary compensation table above;
and
|
|
·
|
Messrs.
Kwong, Kam and Liu were appointed to our board on November 12,
2010.
|
Name (a)
|
Fees
Earned
or Paid
in Cash
(b)
|
Stock
Awards
(c)
|
Option
Awards
(d)
|
Non-Equity
Incentive Plan
Compensation
(e)
|
Nonqualified
Deferred
Compensation
Earnings
(f)
|
All Other
Compensation
(g)
|
Total
(h)
|
|||||||||||||||||||||
Greg
Archer
|
11,000 | 9,026 | 20,026 | |||||||||||||||||||||||||
Kevin
Gould
|
9,026 | 9,026 | ||||||||||||||||||||||||||
Keith
Moore
|
98,000 | 98,000 |
The
dollar amounts in columns (c) and (d) reflect the dollar amounts of the
awards calculated in accordance with Financial Accounting Standards Board
Accounting Standards Codification Topic 718, Compensation— Stock Compensation
(“FASB ASC Topic 718”), and, therefore, may not necessarily reflect actual
benefits received by the individuals. Assumptions used in the calculation
of these amounts are included in footnote (2) to our audited financial
statements for the fiscal year ended October 31, 2010.
Narrative
Disclosure to 2010 Director Compensation Table
We pay
each of our non-executive members of the board an attendance fee in the amount
of $2,500 per meeting attended in person and $1,250 per meeting attended
telephonically. These amounts are reflected in columns (b) and (h) in
the above table. Directors who are employees of our company receive
no compensation for services provided in that capacity, but are reimbursed for
out-of-pocket expenses in connection with attendance at meetings of our
board.
We issued
to Messrs. Archer, Gould and Moore 100,000 restricted shares of our common stock
upon their appointment to our board. The shares vest in quarterly
installments of 25,000 shares subject to the holder’s continued service on our
board. At the time of his resignation in October 2010, 50,000 shares
held by Mr. Moore were unvested and we agreed to waive the vesting condition on
those shares. The dollar amounts of these share grants are reflected
in columns (c) and (h) in the above table. We also granted 100,000
shares each to Messrs. Kwong, Kam and Liu on similar terms upon their
appointment to our board in November 2010.
In
September 2010, we entered into consulting agreements with Messrs. Archer and
Gould pursuant to which they have agreed to provide certain advisory services to
our management from time to time, in return for which we granted to each of them
non-qualified stock options to purchase 2 million shares of our common stock,
over a 10 year period from the date of vesting, at an exercise price of $0.15
per share. The options vest in three equal installments on the first
three anniversaries of the option grant. The dollar amounts of these
option grants are reflected in columns (d) and (h) in the above
table. We also granted options to purchase 2 million shares of our
common stock each to Messrs. Kwong, Kam and Liu upon their appointment to our
board of directors in November 2010 on similar terms.
- 22
-
SEC
Position on Certain Indemnification Arrangements
Our
articles of incorporation allow us to indemnify our directors and officers to
the fullest extent permitted under Nevada law. Chapter 78 of the Nevada Revised
Statutes provides for indemnification by a corporation of costs incurred by
directors, employees, and agents in connection with an action, suit, or
proceeding brought by reason of their position as a director, employee, or
agent. The person being indemnified must have acted in good faith and in a
manner he reasonably believed to be in or not opposed to the best interests of
the corporation. We intend to enter into agreements with the current
members of our board of directors and certain other employees in which we agree
to hold harmless and indemnify such directors, officers and employees to the
fullest extent authorized under Nevada law, and to pay any and all related
expenses reasonably incurred by the indemnitee.
Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted to our directors, officers or persons controlling us pursuant to the
provisions contained in our amended and restated articles of incorporation, our
amended and restated bylaws, Nevada law or otherwise, we have been informed
that, in the opinion of the SEC, such indemnification is against public policy
as expressed in the Securities Act and is therefore unenforceable. If a claim
for indemnification against such liabilities, other than the payment by us of
expenses incurred or paid by one of our directors, officers or controlling
persons in the successful defense of any action, suit, or proceeding, is
asserted by such director, officer or controlling person, we will, unless in the
opinion of our counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of whether
such indemnification by us is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of this
issue.
- 23
-
Item
12.
|
Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
|
The table
below sets forth the beneficial ownership of our common stock, as of February
11, 2011, by:
·
|
All
of our directors and executive officers,
individually;
|
·
|
All
of our directors and executive officers, as a group;
and
|
·
|
All
persons who beneficially owned more than 5% of our outstanding common
stock.
|
The
beneficial ownership of each person was calculated based on 37,000,286 shares of
our common stock outstanding as of February 11, 2011, according to the record
ownership listings as of that date and the verifications we solicited and
received from each director and executive officer. The SEC has defined
“beneficial ownership” to mean more than ownership in the usual sense. For
example, a person has beneficial ownership of a share not only if he owns it in
the usual sense, but also if he has the power (solely or shared) to vote, sell
or otherwise dispose of the share. Beneficial ownership also includes the number
of shares that a person has the right to acquire within 60 days of February 11,
2011, pursuant to the exercise of options or warrants or the conversion of
notes, debentures or other indebtedness, but excludes stock appreciation rights.
Two or more persons might count as beneficial owners of the same share. Unless
otherwise noted, the address of the following persons listed below is c/o
Trans-Pacific Aerospace Company, Inc., 2975 Huntington Drive, Suite 107, San
Marino, California 91108.
Name of Director, Executive Officer or
Nominee
|
Shares(1)
|
Percentage
|
||||||
William
R. McKay
|
8,000,000 | (2) | 21.4 | % | ||||
Ray
Kwong
|
1,775,000 | (3) | 4.8 | % | ||||
Greg
Archer
|
800,000 | (3) | 2.7 | % | ||||
Kevin
Gould
|
735,000 | (3) | 1.9 | % | ||||
Alex
Kam
|
600,000 | (3) | 1.6 | % | ||||
Peter
Liu
|
500,000 | (3) | 1.4 | % | ||||
All
directors and executive officers as a group (6 persons)
|
12,410,000 | 33.3 | % |
Name and Address of 5%
Holders
|
Shares(1)
|
Percentage
|
||||||
Harbin
Aerospace Company, LLC
2975
Huntington Drive, Suite 107
San
Marino, CA 91108
|
6,800,000 | 18.4 | % | |||||
Cardiff
Partners, LLC
30950
Rancho Viejo Road, Suite 120
San
Juan Capistrano, CA 92675
|
5,728,503 | 15.5 | % |
(1)
|
Unless
otherwise noted, the persons identified in this table have sole voting and
sole investment power with regard to the shares beneficially owned by
them.
|
|
(2)
|
Includes
300,000 shares that vest on January 31, 2010 and 6,800,000 shares held
directly by Harbin Aerospace Company, LLC, a Nevada limited liability
company, controlled by Mr. McKay’s wife.
|
|
(3)
|
Does
not include 2,000,000 shares of common stock underlying options that have
not vested.
|
- 24
-
Equity
Compensation Plan Information
Our board
of directors approved our 2010 Stock Incentive Plan in 2010. The plan
allows for incentive awards to eligible recipients consisting of:
|
·
|
Options
to purchase shares of common stock, that qualify as incentive stock
options within the meaning of the Internal Revenue
Code;
|
|
·
|
Non-statutory
stock options that do not qualify as incentive
options;
|
|
·
|
Restricted
stock awards; and
|
|
·
|
Performance
stock awards, which may be subject to future achievement of performance
criteria or free of any performance or vesting
conditions.
|
The
maximum number of shares reserved for issuance under the plan is
7,500,000. The exercise price of options granted under the plan shall
not be less than 100% of the fair market value of one share of common stock on
the date of grant, unless the participant owns more than 10% of the total
combined voting power of all classes of our stock or any parent or subsidiary
corporation of ours, in which case the exercise price shall then be 110% of the
fair market value.
In 2010,
we granted outside of our 2010 Stock Incentive Plan non-qualified stock options
to certain independent directors. We granted to Greg Archer, Kevin
Gould, Raymond Kwong, Alex Kam and Peter Liu each options to purchase 2,000,000
shares of our common stock, exercisable over a 10-year period from the date of
vesting, at an exercise price of $0.15 per share. The options vest in
three equal installments on the first three anniversaries of the date of
grant.
The
following table sets forth certain information as of October 31, 2010 about our
2010 Stock Incentive Plan and our non-plan options under which our equity
securities are authorized for issuance. The first column reflects
outstanding stock options to purchase 4,000,000 shares of common stock pursuant
to non-plan options issued to certain of our independent directors prior to
October 31, 2010. The third column reflects 7,500,000 shares
available for issuance under our 2010 Stock Incentive Plan as of
October 31, 2010.
Plan Category
|
(a)
Number of Securities
to be Issued Upon
Exercise of
Outstanding
Options, Warrants
and Rights
|
(b)
Weighted-Average
Exercise Price of
Outstanding
Options,
Warrants
and Rights
|
(c)
Number of Securities
Remaining Available
for
Future Issuance
Under
Equity Compensation
Plans
(Excluding Securities
Reflected In Column
(a))
|
|||||||||
Equity
compensation plans approved by security holders
|
— | $ | — | 7,500,000 | ||||||||
Equity
compensation plans not approved by security holders
|
4,000,000 | $ | 0.15 | — | ||||||||
Total
|
4,000,000 | $ | $0.15 | 7,500,000 |
- 25
-
The
Cardiff Agreements
On June
30, 2009, we entered into a support services agreement with Cardiff Partners,
LLC. At the time of that agreement, our chief executive officer,
David Walters, was a director and 50%-owner of Cardiff and our chief financial
officer, Matt Szot, was the chief financial officer of
Cardiff. Pursuant to the Cardiff agreement, Cardiff provided certain
services to us in return for a monthly fee of $10,000. We also issued
50,000 shares of our common stock to Mr. Szot pursuant to the Cardiff
agreement. The initial term of the Cardiff agreement expired on June
28, 2010. We incurred $40,000 in consulting fees and $34,500 in stock based
compensation under the terms of the agreement for the fiscal years ended October
31, 2009.
On
January 12, 2010, we amended the Cardiff agreement to allow Cardiff the option
to accept payment of outstanding cash compensation owed to it under the
agreements in the form of shares of our common stock. The number of
shares to be issued were to be calculated by dividing the outstanding balance to
be paid by 50% of the average of the closing prices for our common stock during
the 20 trading day period ending one trading day prior to the date that notice
accepting shares in payment is sent to us. On January 28, 2010, we issued
448,340 shares of our common stock as payment in full of $50,000 of outstanding
balances due to Cardiff.
In
addition, under the amended Cardiff agreement, Cardiff was to provide us with
transaction execution support services in connection with our acquisition of
Harbin Aerospace Company, LLC, including due diligence, business review of
relevant transaction documentation and audit support. As compensation
for the additional services, we issued to Cardiff 2,500,000 shares of our common
stock, a Series A common stock purchase warrant to purchase 2,000,000 shares of
our common stock and a Series B common stock purchase warrant to purchase
2,000,000 shares of our common stock.
On
February 15, 2010, we entered into a placement agency and advisory services
agreement with Monarch Bay Associates, LLC, a FINRA member investment banking
firm. Mr. Walters is a manager and 50%-owner of Monarch
Bay. Under the agreement, Monarch Bay was to act as our placement
agent on an exclusive basis with respect to private placements of our capital
stock and as our exclusive advisor with respect to acquisitions, mergers, joint
ventures and similar transactions. Pursuant to the agreement,
Monarch Bay would receive fees equal to (a) 8% of the gross proceeds raised by
us in any private placement, plus warrants to purchase 8% of the number of
shares of common stock issued or issuable by us in connection with any private
placement and (b) up to 5% of the total consideration paid or received by us or
our stockholders in any acquisition, merger, joint venture or similar
transaction.
On
October 19, 2010, we entered into a settlement and release agreement with
Cardiff Partners, LLC, Monarch Bay Associates, LLC, David Walters, Keith Moore
and Matt Szot, collectively referred to as the “Cardiff
parties.” Under the settlement and release agreement, we terminated
the aforementioned agreements with Cardiff and Monarch Bay and all other
agreements and arrangements between us, on the one hand, and any of the Cardiff
parties in exchange for our issuance of 1,838,649 shares of our
common stock to Cardiff Partners, LLC. We also agreed with the
Cardiff parties to mutually release each other of all claims, known or
unknown.
The
Harbin Agreements
On
February 1, 2010, we acquired from Harbin Aerospace Company, LLC certain assets
relating to aircraft component part design, engineering and
manufacturing. The transaction was structured as a business
combination in exchange for our:
|
·
|
Issuances
of a Series A common stock purchase warrant to purchase 4,000,000 shares
of our common stock at an exercise price of $0.50 per share. The Series A
warrant becomes exercisable on the date that we recognize revenue equal to
or exceeding $50,000,000 for any consecutive twelve-month period and
expires on January 31, 2015.
|
|
·
|
Issuance
of a Series B common stock purchase warrant to purchase 4,000,000 shares
of our common stock at an exercise price of $1.00 per share. The Series B
warrant becomes exercisable on the date that we recognize revenue equal to
or exceeding $100 million for any consecutive twelve-month period and
expires on January 31, 2018.
|
- 26
-
|
·
|
Assumption
of $460,000 of liabilities of
Harbin.
|
William
McKay, who was appointed as our chief executive officer and director upon the
consummation of the asset acquisition, was the chief executive officer of Harbin
and his wife, Nikki Lynn McKay, is the sole member of Harbin. As part
of the acquisition, we assumed $200,000 of obligations under a note payable,
plus $11,737 of accrued interest, held by the mother-in-law of Mr.
McKay. The note bears interest at 7% per annum and all principal and
interest was due and payable on March 31, 2011. On June 4, 2010, we
entered into an amended and restated convertible promissory note with holder,
pursuant to which all principal and interest under the note is convertible at
$0.058 per share and the term of the note was extended to June 3,
2011. In June 2010, we issued 2,200,000 shares of our common stock to
the holder upon conversion of $127,600 of principal under the note.
The
following table sets forth the aggregate fees billed to us for services rendered
to us for the fiscal years ended October 31, 2010 and 2009 by our independent
registered public accounting firms for such years, as of the filing dates, for
the audit of our consolidated financial statements for the fiscal years ended
October 31, 2010 and 2009, and assistance with the reporting requirements
thereof, the review of our condensed consolidated financial statements included
in our quarterly reports on Form 10-Q, and accounting and auditing
assistance relative to acquisition accounting and reporting.
On
January 27, 2010, our board of directors approved the engagement of M&K
CPAS, PLLC to serve as our principal independent public accountant to audit our
financial statements. Prior to January 27, 2010, our principal
independent public accountant was John Kinross-Kennedy. Audit fees
billed by M&K relate to the audits for the fiscal year ended October 31,
2010 and 2009. The accountant fees paid to John Kinross-Kennedy
relate to the firm’s review of our condensed consolidated financial statements
included in our quarterly reports on Form 10-Q for the interim periods of
fiscal year ended October 31, 2009.
M&K
CPAS, PLLC
|
2010
|
2009
|
||||||
Audit
Fees
|
$ | 23,500 | $ | 5,500 | ||||
Audit-Related
Fees
|
— | — | ||||||
Tax
Fees
|
— | — | ||||||
$ | 23,500 | $ | 5,500 |
John
Kinross-Kennedy
|
2010
|
2009
|
||||||
Audit
Fees
|
$ | — | $ | 4,000 | ||||
Audit-Related
Fees
|
— | — | ||||||
Tax
Fees
|
— | — | ||||||
$ | — | $ | 4,000 |
Audit
Committee Pre-Approval Policies
We do not
have an audit committee of our board of directors. However, our board
approves all audit fees, audit-related fees, tax fees and special engagement
fees. Our board approved 100% of such fees for the fiscal year ended
October 31, 2010.
- 27
-
(a) Financial
statements
Reference
is made to the Index and Financial Statements under Item 8 in Part II
hereof where these documents are listed
(b) Financial
statement schedules
Financial
statement schedules are either not required or the required information is
included in the consolidated financial statements or notes thereto filed under
Item 8 in Part II hereof.
(c) Exhibits
The
exhibits to this Annual Report on Form 10-K are set forth below. The
exhibit index indicates each management contract or compensatory plan or
arrangement required to be filed as an exhibit.
Number
|
Exhibit Description
|
Method of Filing
|
||
3.1
|
Articles
of Incorporation dated June 5, 2007.
|
Incorporated
by reference from the Registrant’s Registration Statement on Form SB-2
filed on January 2, 2008.
|
||
3.2
|
Certificate
of Amendment to Articles of Incorporation dated October 3,
2007.
|
Incorporated
by reference from the Registrant’s Registration Statement on Form SB-2
filed on January 2, 2008.
|
||
3.3
|
Certificate
of Change to Articles of Incorporation dated July 25,
2008.
|
Incorporated
by reference from the Registrant’s Annual Report on Form 10-K filed
on January 29, 2009.
|
||
3.4
|
Certificate
of Amendment to Articles of Incorporation dated July 31,
2008.
|
Incorporated
by reference from the Registrant’s Annual Report on Form 10-K filed
on January 29, 2009.
|
||
3.5
|
Certificate
of Amendment to Articles of Incorporation dated February 17,
2010.
|
Filed
electronically herewith.
|
||
3.6
|
Bylaws
of the Registrant, as amended June 3, 2010.
|
Incorporated
by reference from the Registrant’s Quarterly Report on Form 10-Q
filed on June 21, 2010.
|
||
10.1
|
Employment
Agreement dated June 30, 2009 between Registrant and David
Walters.
|
Incorporated
by reference from the Registrant’s Current Report on Form 8-K filed
on July 2, 2009.
|
||
10.2
|
Support
Services Agreement dated June 30, 2009 between Registrant and Cardiff
Partners, LLC.
|
Incorporated
by reference from the Registrant’s Current Report on Form 8-K filed
on July 2, 2009.
|
||
10.3
|
Amendment
No. 1 to Employment Agreement dated January 17, 2010 between Registrant
and David Walters
|
Incorporated
by reference from the Registrant’s Current Report on Form 8-K filed
on February 3,
2010.
|
- 28
-
Number
|
Exhibit Description
|
Method of Filing
|
||
10.4
|
Amendment
No. 1 dated January 17, 2010 to Support Services Agreement Registrant and
between Cardiff Partners, LLC
|
Incorporated
by reference from the Registrant’s Current Report on Form 8-K filed
on February 3, 2010.
|
||
10.5
|
Agreement
dated January 19, 2010 regarding formation of Godfrey (China)
Limited*
|
Incorporated
by reference from the Registrant’s Quarterly Report on Form 10-Q
filed on October 20, 2010.
|
||
10.6
|
Asset
Purchase Agreement dated January 27, 2010 between Registrant and Harbin
Aerospace Company, LLC.
|
Incorporated
by reference from the Registrant’s Current Report on Form 8-K filed
on February 3, 2010.
|
||
10.7
|
Form
of Series A Warrant issued by Registrant to Harbin Aerospace Company,
LLC.
|
Incorporated
by reference from the Registrant’s Current Report on Form 8-K filed
on February 3, 2010.
|
||
10.8
|
Form
of Series B Warrant issued by Registrant to Harbin Aerospace Company,
LLC.
|
Incorporated
by reference from the Registrant’s Current Report on Form 8-K filed
on February 3, 2010.
|
||
10.9
|
Convertible
Promissory Note dated February 1, 2010 issued by Registrant to Santa Anita
Co., LLC.
|
Incorporated
by reference from the Registrant’s Current Report on Form 8-K filed
on February 3, 2010.
|
||
10.10
|
Employment
Agreement dated February 1, 2010 between Registrant and William
McKay*
|
Incorporated
by reference from the Registrant’s Quarterly Report on Form 10-Q
filed on March 12, 2010.
|
||
10.11
|
Placement
Agency and Advisory Services Agreement with Monarch Bay Associates, LLC,
dated February 15, 2010*
|
Incorporated
by reference from the Registrant’s Quarterly Report on Form 10-Q
filed on March 12, 2010.
|
||
10.12
|
Settlement
and Release Agreement dated October 19, 2010 between Registrant and
Cardiff Partners, LLC.*
|
Incorporated
by reference from the Registrant’s Quarterly Report on Form 10-Q
filed on October 20, 2010.
|
||
10.13
|
Asset
Purchase Agreement dated February 10, 2010 between Registrant and Futures
Investment Corp.
|
Filed
electronically herewith.
|
||
21.1
|
List
of subsidiaries of Registrant.
|
Filed
electronically herewith.
|
||
31.1
|
Certification
under Section 302 of the Sarbanes-Oxley Act of 2002.
|
Filed
electronically herewith.
|
||
31.2
|
Certification
under Section 302 of the Sarbanes-Oxley Act of 2002.
|
Filed
electronically herewith.
|
||
32.1
|
Certifications
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C.
Section 1350.
|
Filed
electronically
herewith.
|
* Indicates management compensatory plan, contract or arrangement.
- 29
-
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this annual report on Form 10-K
to be signed on its behalf by the undersigned, thereunto duly
authorized.
TRANS-PACIFIC
AEROSPACE COMPANY, INC.
|
|||
Date:
February 15, 2011
|
By:
|
/s/William Reed McKay
|
|
William
Reed McKay
|
|||
Chief
Executive Officer
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
Signature
|
Title
|
Date
|
||
/s/ William Reed McKay
|
Chairman
of the Board,
Chief
Executive Officer and
Chief
Financial Officer
|
February
15, 2011
|
||
William
Reed McKay
|
(Principal
Executive and Financial Officer)
|
|||
/s/ Greg Archer
|
Director
|
February
15, 2011
|
||
Greg
Archer
|
||||
/s/ Kevin Gould
|
Director
|
February
15, 2011
|
||
Kevin
Gould
|
||||
/s/ Ray Kwong
|
Director
|
February
15, 2011
|
||
Ray
Kwong
|
||||
|
Director
|
February
15, 2011
|
||
Alex
Kam
|
||||
|
Director
|
February
15, 2011
|
||
Peter
Liu
|
- 30
-