UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

[Mark One]

x           QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended April 30, 2015

 

or

 

o           TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _____to______

 

Commission file number: 333-148447

 

Trans-Pacific Aerospace Company, Inc.

(Exact name of registrant as specified in its charter)

 

Nevada	36-4613360
(State of Incorporation)	(IRS Employer Ident. No.)

 

2975 Huntington Drive, Suite 107 San Marino, CA	91108
(Address of Principal Executive Offices)	(Zip Code)

 

Registrant's telephone number: (626) 796-9804

 

Not applicable

(Former name, former address or former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such reports). Yes x No o

 

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

 

o Large accelerated filer

o Accelerated filer

o Non-accelerated filer

x Smaller reporting company

 

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

 

As of June 15, 2015, the registrant had 3,717,148,116 shares of its $0.001 par value common stock issued and outstanding.

 

 

TRANS-PACIFIC AEROSPACE COMPANY, INC.

  

		Page
	PART I – FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Balance Sheets as of April 30, 2015 (Unaudited) and October 31, 2014 (Audited)	F-1
	Consolidated Statements of Operations  (Unaudited) for the Three and Six Months Ended April 30, 2015 and 2014	F-2
	Consolidated Statement of Stockholders’ Equity (Deficit) for the Six Months Ended April 30, 2015 (Unaudited)	F-3
	Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended April 30, 2015 and 2014	F-4
	Notes to Unaudited Consolidated Financial Statements	F-5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	2
Item 4.	Controls and Procedures	3
	PART II – OTHER INFORMATION
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	4
Item 6.	Exhibits	4
Signatures		5

 

 

PART I – FINANCIAL INFORMATION

 

Item 1.

Financial Statements.

 

TRANS-PACIFIC AEROSPACE COMPANY, INC.

Consolidated Balance Sheets

 

		April 30,				October 31,
		2015				2014
		(Unaudited)
ASSETS
Current assets
Cash		$	23,399			$	50,089
Prepaid expenses			1,584				1,584
Total current assets			24,983				51,673
Non-Current assets
Office equipment, net of accumulated depreciation of $4,100 and $3,498, respectively			4,306				4,908
Security deposit			1,584				1,584
Total non-current assets			5,890				6,492
Total assets		$	30,873			$	58,165
LIABILITIES AND STOCKHOLDERS' (DEFICIT)
Current liabilities
Accounts payable and accrued expenses		$	110,556			$	108,320
Income taxes payable			1,951				1,951
Accrued salary and payroll taxes			20,433				20,433
Accrued interest payable			6,386				5,555
Other payables - related parties			66,975				68,700
Convertible note payable, net of discount			99,974				233,747
Convertible note payable, currently in default			260,000				260,000
Derivative liabilities - conversion option			204,963				207,891
Total current liabilities			771,238				906,597
Total liabilities			771,238				906,597
Stockholders' (deficit)
Preferred stock, par value $0.001, 5,000,000 shares authorized.
No shares issued and outstanding at April 30, 2015 and October 31, 2014			–				–
Common stock, par value $0.001, 4,500,000,000 shares authorized.
1,571,934,788 shares issued and outstanding at April 30, 2015 and 179,447,431 shares issued and outstanding at October 31, 2014			1,571,935				179,447
Additional paid-in capital			17,252,985				15,461,785
Common stock to be issued			64,093				64,093
Accumulated Deficit			(19,060,790	)			(16,064,350	)
Total Trans-Pacific Aerospace Company Inc. stockholders' equity			(171,777	)			(359,025	)
Non-controlling interest in subsidiary			(568,588	)			(489,407	)
Total stockholders' (deficit)			(740,365	)			(848,432	)
Total liabilities and stockholders' (deficit)		$	30,873			$	58,165

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

TRANS-PACIFIC AEROSPACE COMPANY, INC.

Unaudited Consolidated Statements of Operations

 

		For the Three Months ended								For the Six Months Ended
		April 30,								April 30,
		2015				2014				2015				2014
Operating expenses
Professional fees		$	10,745			$	171,353			$	76,510			$	178,119
Consulting			72,000				357,478				99,000				627,228
Other general and administrative			1,154,112				591,523				2,650,293				1,139,226
Total operating expenses			1,236,857				1,120,354				2,825,803				1,944,573
Operating loss from continuing operations			(1,236,857	)			(1,120,354	)			(2,825,803	)			(1,944,573	)
Interest expense, net			(137,032	)			(48,459	)			(194,756	)			(74,615	)
Change in fair value of derivative liabilities			61,762								431,298
Derivative expenses			(142,623	)			–				(486,360	)			–
Loss before income taxes		$	(1,454,750	)		$	(1,168,813	)		$	(3,075,621	)		$	(2,019,188	)
Income taxes			–				–				–				–
Net Loss			(1,454,750	)			(1,168,813	)			(3,075,621	)			(2,019,188	)
Less: Loss attributable to non-controlling interest		$	(36,637	)		$	(129,443	)		$	(79,181	)		$	(192,443	)
Net Loss attributable to the Company		$	(1,418,113	)		$	(1,039,370	)		$	(2,996,440	)		$	(1,826,745	)
Basic and dilutive net loss from operations per share		$	(0.00	)		$	(0.01	)		$	(0.01	)		$	(0.02	)
Weighted average number of common shares outstanding, basic and diluted			635,333,259				121,377,676				406,603,216				112,751,955

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

TRANS-PACIFIC AEROSPACE COMPANY, INC.

Consolidated Statement of Stockholders' Equity (Deficit)

 

										Additional				Common				Non
		Common Stock								Paid-In				Stock To				Controlling				Accumulated
		Shares				Amount				Capital				Be Issued				Interest				Deficit				Total
Balances, October 31, 2013			100,790,659			$	100,790			$	12,157,394			$	137,693			$	(116,553	)		$	(12,759,304	)		$	(479,980	)
Common stock issued for cash			31,987,382				31,987				509,613																541,600
Common stock issued in lieu of finders fees			9,413,380				9,413				(9,413	)															–
Common stock issued for services & compensation			20,893,566				20,894				928,785																949,679
Acquisition of ownership interest in Godfrey			800,000				800				72,800				(73,600	)			–								–
Common stock issued upon conversion of notes payable			15,562,444				15,562				143,351																158,913
Amortization of stock options											926,956																926,956
Imputed interest											18,200																18,200
Note discount											82,500																82,500
Forgiveness of payables to officer											631,600																631,600
Loss on Minority interest																			(372,854	)							(372,854	)
Net loss from continuing operations for the year ended October 31, 2014																							(3,305,046	)			(3,305,046	)
Balances, October 31, 2014			179,447,431			$	179,447			$	15,461,785			$	64,093			$	(489,407	)		$	(16,064,350	)		$	(848,432	)
Common stock issued for cash			228,000,000				228,000				(18,000	)			–												210,000
Common stock issued in lieu of finders fees			57,019,761				57,020				(57,020	)															–
Common stock issued for services & compensation			387,000,000				387,000				38,000																425,000
Common stock issued upon conversion of notes payable			720,467,596				720,468				(506,370	)															214,098
Conversion of derivative liability to common stock											322,990																322,990
Amortization of stock options											2,002,500																2,002,500
Imputed interest											9,100																9,100
Loss on Minority interest																			(79,181	)							(79,181	)
Net loss from continuing operations for the six months ended April 30, 2015																							(2,996,440	)			(2,996,440	)
Balances, April 30, 2015			1,571,934,788			$	1,571,935			$	17,252,985			$	64,093			$	(568,588	)		$	(19,060,790	)		$	(740,365	)

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

TRANS-PACIFIC AEROSPACE COMPANY, INC.

Unaudited Consolidated Statements of Cash Flows

 

		For the Six Months Ended
		April 30,
		2015				2014
Cash flows from operating activities:
Net Loss		$	(3,075,621	)		$	(2,019,188	)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock based compensation			2,427,500				1,353,157
Amortization of debt discount			174,933				62,770
Imputed interest expense			9,100				9,100
Change in fair value of derivative liabilities			(431,298	)			–
Derivative expense			486,360				–
Interest converted to common stock			9,892				1,500
Depreciation expense			602				602
Change in operating assets and liabilities:
Prepaid and deferred expenses			–				(5,694	)
Accounts payable and accrued expenses			2,236				(76,000	)
Accrued interest payable			831				1,245
Net cash used in operating activities			(395,465	)			(672,508	)
Cash flows from financing activities:
Common stock issued for cash			210,000				230,000
Convertible note issued for cash			160,500				135,000
Other payables - related parties			(1,725	)			285,300
Net cash provided by financing activities			368,775				650,300
Net increase / decrease in cash			(26,690	)			(22,208	)
Cash, beginning of the period			50,089				27,456
Cash, end of the period		$	23,399			$	5,248
Supplemental cash flow disclosure:
Interest paid		$	–			$	–
Income taxes paid		$	–			$	–
Supplemental disclosure of non-cash transactions:
Common stock issued for payment on outstanding liabilities		$	49,892			$	51,000
Common stock issued for conversion of notes payable		$	214,098			$	37,500
Conversion of derivative liability to common stock		$	322,990			$	–
Deferred financing costs		$	–			$	2,500
Common stock issued for finders fees		$	–			$	250
Beneficial conversion feature of convertible note payable		$	–			$	135,000
Derivative liabilities		$	204,963			$	–

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

Trans-Pacific Aerospace Company, Inc.

Notes to Consolidated Financial Statements

April 30, 2015

 

NOTE 1 – BACKGROUND AND ORGANIZATION

 

Organization

 

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

 

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

 

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

 

On April 5, 2013, the Company entered into separate Securities Purchase Agreements with Tina Kwan, Betty Li and Harbin Aerospace Company, LLC (“Harbin”), each of whom are holders of the capital stock of Godfrey (China) Limited (“Godfrey”), the Company’s 25%-owned Hong Kong subsidiary engaged in the development of the production facility in Guangzhou, China.

 

Pursuant to the Securities Purchase Agreements, Tina Kwan and Betty Li each agreed to transfer to the Company 125,000 shares of the capital stock of Godfrey and Harbin agreed to transfer to the Company 50,000 shares of the capital stock of Godfrey in consideration of the Company’s issuance of 2,000,000 shares of its common stock to each of Ms. Kwan and Ms. Li and 800,000 shares of its common stock to Harbin. In addition, the Company agreed that in the event all of the stock holders of Godfrey sell 100% of the issued and outstanding shares of Godfrey for cash, the Company will pay to Kwan, Li and Harbin the cash amount they would have received had they retained their Godfrey shares. The Godfrey shares transferred by Kwan, Li and Harbin represented all of the shares of capital stock of Godfrey held by them.

 

On June 21, 2013, upon closing of the transactions under the Securities Purchase Agreements, the Company increased its ownership of Godfrey from 25% to 55%.

 

Pursuant to the Agreement, the Company had issued 4,000,000 shares of its common stock to Ms. Kwan and Ms. Li, which as of June 21, 2013, the acquisition date, the shares were valued at $368,000 based on the closing market price on that date. The 800,000 shares to Harbin were valued at $73,600 and were issued during the quarter ended April 30, 2014. On June 21, 2013, the transactions were approved by the Hong Kong SAR Government. The acquisition increased current liabilities from related parties by $179,053 and incomes taxes owed to Hong Kong by $322; offset by an increase in impairment expense of $528,101, and a decrease in non-controlling interest of $70,774. The impairment was immediately recognized due to the fact that Godfrey has not produced any revenue in its operations and lacks sufficient capital to implement its business plan. As Godfrey’s statement of operations was not significant to the Company’s, no pro forma information will be presented below.

 

Business Overview

 

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

 

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

 

 

Going Concern

 

The Company's financial statements are prepared using the accrual method of accounting in accordance with accounting principles generally accepted in the United States of America, and have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. The Company incurred a net loss from operations of $2,996,440 during the six months ended April 30, 2015, and an accumulated deficit of $19,060,790 at April 30, 2015. The Company has not yet established an ongoing source of revenues sufficient to cover its operating costs and to allow it to continue as a going concern. The ability of the Company to continue as a going concern is dependent on the Company obtaining adequate capital to fund operating losses until it becomes profitable. If the Company is unable to obtain adequate capital, it could be forced to cease development of operations.

 

Management’s plans to continue as a going concern include raising additional capital through sales of common stock and/or a debt financing. However, management cannot provide any assurances that the Company will be successful in accomplishing any of its plans.

 

The Company anticipates that losses will continue until such time, if ever, that the Company is able to generate sufficient revenues to support its operations. The accompanying financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (U.S.) for interim financial information and with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X promulgated by the Securities and Exchange Commission (“SEC”) and reflect all adjustments, consisting of normal recurring adjustments and other adjustments, which management believes are necessary to fairly present the financial position, results of operations and cash flows of the Company, for the respective periods presented. The results of operations for an interim period are not necessarily indicative of the results that may be expected for any other interim period or the year as a whole. The accompanying unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto in the Company’s Annual Report on Form 10-K for the year ended October 31, 2014, filed with the SEC on February 13, 2015.

 

Consolidation

 

Accounting policies used by the Company and the Company’s subsidiaries conform to US GAAP. Significant policies are discussed below. The Company’s consolidated accounts include the Company’s accounts and the accounts of the Company’s subsidiaries of which we own a 50% interest or greater.

 

These consolidated financial statements include the accounts of the parent company Trans-Pacific Aerospace Company, Inc., and the majority owned subsidiary: Godfrey. All intercompany transactions have been eliminated.

 

Non-controlling interests

 

The Company accounts for changes in our controlling interests of subsidiaries according to Accounting Codification Standards 810 – Consolidations (“ASC 810”). ASC 810 requires that the Company record such changes as equity transactions, recording no gain or loss on such a sale.

 

The Company’s non-controlling interest arises from the purchase of equity in Godfrey. It represents the portion of Godfrey that is not owned. ASC 810 requires that the Company account for the equity and income or loss on that operation separately from the Company’s other activities. In the equity section of the Consolidated Balance Sheet, the Company presents the portion of the negative equity attributable to non-controlling interests in Godfrey. In the Consolidated Statement of Operations, the Company presents the portion of current period net loss in Godfrey attributable to non-controlling interests.

 

 

Use of Estimates

 

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

 

Cash and Equivalents

 

Cash and equivalents include investments with initial maturities of three months or less. The Company maintains its cash balances at credit-worthy financial institutions that are insured by the Federal Deposit Insurance Corporation ("FDIC") up to $250,000. There were no cash equivalents at April 30, 2015 and October 31, 2014.

 

Concentration of Credit Risk

 

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

 

Impairment of Long-Lived Assets

 

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

 

Indefinite-lived Intangible Assets

 

The Company has an indefinite-lived intangible asset (goodwill) relating to purchased blueprints, formulas, designs and processes for manufacturing and production of self-lubricated spherical bearings, bushings and rod-end bearings. The indefinite-lived intangible asset is not amortized; rather, it is tested for impairment at least annually by comparing the carrying amount of the asset with the fair value. An impairment loss is recognized if the carrying amount is greater than fair value.

 

Fair Value of Financial Instruments

 

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

 

 

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

 

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

 

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

 

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

 

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

 

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

 

						Fair Value Measurements at
						April 30, 2015 (Unaudited)
		Carrying
		Value
		April 30,
		2015					Level 1				Level 2				Level 3
Liabilities:
Convertible notes payable, net		$	99,974			$	–			$	–			$	99,974
Convertible notes payable – currently in default		$	260,000			$	–			$	–			$	260,000
Derivative liabilities		$	204,963			$	–			$	–			$	204,963

 

						Fair Value Measurements at
						October 31, 2014
		Carrying
		Value
		October 31,
		2014				Level 1				Level 2				Level 3
Liabilities:
Convertible notes payable, net		$	233,747			$	–			$	–			$	233,747
Convertible notes payable – currently in default		$	260,000			$	–			$	–			$	260,000
Derivative liabilities		$	207,891			$	–			$	–			$	207,891

 

 

The Company believes that the market rate of interest as of April 30, 2015 and October 31, 2014 was not materially different to the rate of interest at which the convertible notes payable were issued. Accordingly, the Company believes that the fair value of the convertible notes payable approximated their carrying value at April 30, 2015 and October 31, 2014 due to short term maturity.

Income Taxes

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

 

The accounting guidance for uncertainties in income tax prescribes a comprehensive model for the financial statement recognition, measurement, presentation, and disclosure of uncertain tax positions taken or expected to be taken in income tax returns. The Company recognizes a tax benefit from an uncertain tax position in the consolidated financial statements only when it is more likely than not that the position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits and a consideration of the relevant taxing authority’s widely understood administrative practices and precedents.

 

Equipment

 

Equipment is recorded at cost and depreciated using straight line methods over the estimated useful lives of the related assets. The Company reviews the carrying value of long-term assets to be held and used when events and circumstances warrant such a review. If the carrying value of a long-lived asset is considered impaired, a loss is recognized based on the amount by which the carrying value exceeds the fair market value. Fair market value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved. The cost of normal maintenance and repairs is charged to operations as incurred. Major overhaul that extends the useful life of existing assets is capitalized. When equipment is retired or disposed, the costs and related accumulated depreciation are eliminated and the resulting profit or loss is recognized in income. As of April 30, 2015, the useful lives of the office equipment ranged from five years to seven years.

 

Issuance of Shares for Non-Cash Consideration to Non-Employees

 

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

 

 

Stock-Based Compensation

 

Stock-based compensation cost to employees is measured by the Company at the grant date, based on the fair value of the award, over the requisite service period under ASC 718. For options issued to employees, the Company recognizes stock compensation costs utilizing the fair value methodology over the related period of benefit.

 

Beneficial Conversion Features

 

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

 

Net Loss Per Share

 

The Company adopted the standard issued by the FASB, which requires presentation of basic earnings or loss per share and diluted earnings or loss per share. Basic income (loss) per share (“Basic EPS”) is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share (“Diluted EPS”) are similarly calculated using the treasury stock method except that the denominator is increased to reflect the potential dilution that would occur if dilutive securities at the end of the applicable period were exercised. There were convertible notes, 2,000,000 Series A Warrants, 2,000,000 Series B Warrants and options for 140,666,667 shares outstanding as of April 30, 2015 that are not included in the calculation of Diluted EPS as their impact would be anti-dilutive.

 

		For the Six Months Ended April 30,
		2015				2014
Net loss attributable to the Company		$	(2,996,440	)		$	(1,826,745	)
Basic and diluted net loss from operations per share		$	(0.01	)		$	(0.02	)
Weighted average number of common shares outstanding, basic and diluted			406,603,216				112,751,955

 

Recently Adopted and Recently Enacted Accounting Pronouncements

 

In June 2014, the FASB issued ASU 2014-10, Development Stage Entities (Topic 915): Elimination of Certain Financial Reporting Requirements. ASU 2014-10 eliminates the distinction of a development stage entity and certain related disclosure requirements, including the elimination of inception-to-date information on the statements of operations, cash flows and stockholders' equity. The amendments in ASU 2014-10 will be effective prospectively for annual reporting periods beginning after December 15, 2014, and interim periods within those annual periods, however early adoption is permitted. The Company adopted ASU 2014-10 during the quarter ended May 31, 2014, thereby no longer presenting or disclosing any information required by Topic 915.

 

 

The Company reviewed all recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the AICPA, and the SEC and they did not or are not believed by management to have a material impact on the Company's present or future financial statements.

 

In August 2014, the FASB issued the FASB Accounting Standards Update No. 2014-15 “Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”).

 

In connection with preparing financial statements for each annual and interim reporting period, an entity’s management should evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or within one year after the date that the financial statements are available to be issued when applicable). Management’s evaluation should be based on relevant conditions and events that are known and reasonably knowable at the date that the financial statements are issued (or at the date that the financial statements are available to be issued when applicable). Substantial doubt about an entity’s ability to continue as a going concern exists when relevant conditions and events, considered in the aggregate, indicate that it is probable that the entity will be unable to meet its obligations as they become due within one year after the date that the financial statements are issued (or available to be issued). The term probable is used consistently with its use in Topic 450, Contingencies.

 

When management identifies conditions or events that raise substantial doubt about an entity’s ability to continue as a going concern, management should consider whether its plans that are intended to mitigate those relevant conditions or events will alleviate the substantial doubt. The mitigating effect of management’s plans should be considered only to the extent that (1) it is probable that the plans will be effectively implemented and, if so, (2) it is probable that the plans will mitigate the conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern.

 

If conditions or events raise substantial doubt about an entity’s ability to continue as a going concern, but the substantial doubt is alleviated as a result of consideration of management’s plans, the entity should disclose information that enables users of the financial statements to understand all of the following (or refer to similar information disclosed elsewhere in the footnotes):

 

	a.	Principal conditions or events that raised substantial doubt about the entity’s ability to continue as a going concern (before consideration of management’s plans)
	b.	Management’s evaluation of the significance of those conditions or events in relation to the entity’s ability to meet its obligations

 

c.

Management’s plans that alleviated substantial doubt about the entity’s ability to continue as a going concern.

 

If conditions or events raise substantial doubt about an entity’s ability to continue as a going concern, and substantial doubt is not alleviated after consideration of management’s plans, an entity should include a statement in the footnotes indicating that there is substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or available to be issued). Additionally, the entity should disclose information that enables users of the financial statements to understand all of the following:

 

	a.	Principal conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern
	b.	Management’s evaluation of the significance of those conditions or events in relation to the entity’s ability to meet its obligations

 

c.

Management’s plans that are intended to mitigate the conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern.

 

The amendments in this Update are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted.

 

Management does not believe that any recently issued, but not yet effective accounting pronouncements, when adopted, will have a material effect on the accompanying financial statements.

 

 

NOTE 3 – PROPERTY AND EQUIPMENT

 

As of April 30, 2015 and October 31, 2014, the Company had office equipment of $4,306 and 4,908, net of accumulated depreciation of $4,100 and $3,498, respectively. For the six months ended April 30, 2015 and 2014, the Company recorded depreciation expense of $602 and $602, respectively.

 

NOTE 4 – RELATED PARTY TRANSACTIONS

 

Due to lack of sufficient funding to maintain the Company’s operations, the Company’s officers and directors loaned money to the Company for short term cash flow needs. As of April 30, 2015 and October 31, 2014, Mr. Peter Liu had payables due to him from Godfrey of $60,000 and $60,000; respectively; Mr. Kevin Gould had payables due to him of $9,000 and $9,000; respectively. The Company had receivables due from HAC amounted to $2,025 and $300 at April 30, 2015 and October 31, 2014, respectively.

 

NOTE 5 – CONVERTIBLE NOTES PAYABLE

 

As part of the acquisition of HAC, the Company assumed $260,000 of obligations under a convertible note. The convertible note assumed by the Company does not bear interest and became payable on March 12, 2011. The note is convertible into shares of the Company’s common stock at an initial conversion price of $0.25 per share. The conversion price is subject to adjustment for stock splits and combinations; certain dividends and distributions; reclassification, exchange or substitution; reorganization, merger, consolidation or sales of assets. As the convertible note does not bear interest, the Company recorded the present value of the convertible note obligation at $239,667 and accordingly recorded a convertible note payable for $260,000 and a corresponding debt discount of $20,333. Under the effective interest method, the Company accretes the note obligation to the face amount of the convertible note over the remaining term of the note. The discount was fully amortized at March 12, 2011. Debt discount expense totaled $7,452 and $12,880 for the years ended October 31, 2011 and 2010 respectively. The Company performed an evaluation and determined that the anti-dilution clause did not require derivative treatment. On September 16, 2011, the Company entered into an agreement with the note holder to extend the maturity date of the note. Pursuant to the agreement, the entire outstanding amount became fully due and payable on December 31, 2011. The note is now currently in default. For the six months ended April 30, 2015 and 2104, the Company recorded imputed interest of $9,100 and $9,100, respectively.

 

During the year ended October 31, 2014, we entered into Securities Purchase Agreements with various accredited and sophisticated investors, pursuant to which we sold Convertible Promissory Notes with interest rates ranging from 8% to 12%, in the original principal amount of $325,000 (the “Notes”). The Notes have maturity date of six months or one year from the issuance date and are convertible into our common stock, at any time after 180 days, at a price for each share of common stock equal to 50% to 60 % of the lowest closing bid price of the common stock as reported on the National Quotatons Bureau OTCQB exchange, based on formulas specified in the agreements.

 

The issuances of the Notes were exempt from the registration requirements of the Securities Act of 1933 pursuant to Rule 506 of Regulation D promulgated thereunder. The purchasers were accredited and sophisticated investors, familiar with our operations, and there was no solicitation.

 

The Company analyzed the conversion option of the Notes for derivative accounting consideration under ASC 815-15 “Derivatives and Hedging” and determined that the instrument should be classified as liabilities once the conversion option becomes effective after 180 days due to there being no explicit limit to the number of shares to be delivered upon settlement of the above conversion options for the Notes issued. During the year ended October 31, 2014, the Company repaid $112,500 of the principal amount of the Notes.

 

During the six months ended April 30, 2015, six of the convertible notes with total principal amount of $212,500 reached the 180 days and the conversion options became derivative liabilities. Using the Black-Scholes Model, the Company calculated the fair value of the conversion options and recorded derivative liabilities on the 180 day and April 30, 2015. The change in fair value was recorded as derivative expenses.

 

 

On June 13, 2014, we entered into Securities Purchase Agreements with Tangiers Investment Group LLC, pursuant to which we sold a 10% Convertible Promissory Note, in the original principal amount of $55,000 (the “Tangiers Note”). The Tangiers Note has a maturity date of June 13, 2015 and is convertible into our common stock, at any time at a price for each share of common stock equal to 60 % of the lowest closing bid price of the common stock as reported on the National Quotatons Bureau OTCQB exchange, based on a formula specified in the agreement.

 

On November 25, 2014, we entered into Securities Purchase Agreements with Tangiers Investment Group LLC, pursuant to which we sold a 10% Convertible Promissory Note, in the original principal amount of $27,500 (the “Tangiers Note 2”). The Tangiers Note 2 has a maturity date of November 25, 2015 and is convertible into our common stock, at any time at a price for each share of common stock equal to 60% of the lowest closing bid price of the common stock as reported on the National Quotatons Bureau OTCQB exchange, based on a formula specified in the agreement.

 

The issuances of the Tangiers Note 2 was exempt from the registration requirements of the Securities Act of 1933 pursuant to Rule 506 of Regulation D promulgated thereunder. The purchaser was accredited and sophisticated investors, familiar with our operations, and there was no solicitation.

 

The Company analyzed the conversion option of the Tangiers Notes for derivative accounting consideration under ASC 815-15 “Derivatives and Hedging” and determined that the instrument should be classified as liabilities due to there being no explicit limit to the number of shares to be delivered upon settlement of the above conversion options for the Tangiers Notes issued. The Company then calculated the fair value of the conversion option and recorded derivative liability on the issuance date and the subsequent period end dates.

 

On November 10, 2014, we entered into Securities Purchase Agreements with Auctus Privatge Equity Funds, LLC, pursuant to which we sold an 8% Convertible Promissory Note, in the original principal amount of $40,000 (the “Auctus Note”). The Auctus Note has a maturity date of November 10, 2015 and is convertible into our common stock, at any time at a price for each share of common stock equal to 55 % of the average of the lowest three (3) trading prices of the common stock as reported on the National Quotatons Bureau OTCQB exchange, based on a formula specified in the agreement.

 

The issuances of the Auctus Note was exempt from the registration requirements of the Securities Act of 1933 pursuant to Rule 506 of Regulation D promulgated thereunder. The purchaser was accredited and sophisticated investors, familiar with our operations, and there was no solicitation.

 

The Company analyzed the conversion option of the Auctus Note for derivative accounting consideration under ASC 815-15 “Derivatives and Hedging” and determined that the instrument should be classified as liabilities due to there being no explicit limit to the number of shares to be delivered upon settlement of the above conversion options for the Auctus Note issued. The Company then calculated the fair value of the conversion option and recorded derivative liability on the issuance date and the subsequent period end dates.

 

On February 23, 2015, we entered into Securities Purchase Agreements with KBM Worldwide, Inc., pursuant to which we sold an 8% Convertible Promissory Note, in the original principal amount of $48,000 (the “KBM Note”). The KBM Note has a maturity date of October 9, 2015 and is convertible into our common stock, at any time after 180 days, at a price for each share of common stock equal to 55 % of the average of the lowest three (3) trading prices during the ten trading days prior to the conversion date of the common stock as reported on the National Quotatons Bureau OTCQB exchange, based on a formula specified in the agreement.

 

The issuances of the KBM Note was exempt from the registration requirements of the Securities Act of 1933 pursuant to Rule 506 of Regulation D promulgated thereunder. The purchaser was accredited and sophisticated investors, familiar with our operations, and there was no solicitation.

 

The Company analyzed the conversion option of the KBM Note for derivative accounting consideration under ASC 815-15 “Derivatives and Hedging” and determined that the instrument should be classified as liabilities once the conversion option becomes effective after 180 days due to there being no explicit limit to the number of shares to be delivered upon settlement of the above conversion options for the Notes issued.

 

 

In March and April 2015, we entered into Securities Purchase Agreements with various accredited and sophisticated investors, pursuant to which we sold 8% Convertible Promissory Notes, in the original principal amount of $45,000 (the “New Note”). The New Notes have maturity dates of June 12 and October 24, 2015 and are convertible into our common stock, at any time at a price for each share of common stock equal to 55 % or 60% of the lowest closing price of the common stock as reported on the National Quotatons Bureau OTCQB exchange, based on a formula specified in the agreements.

 

The issuances of the New Notes were exempt from the registration requirements of the Securities Act of 1933 pursuant to Rule 506 of Regulation D promulgated thereunder. The purchasers were accredited and sophisticated investors, familiar with our operations, and there was no solicitation.

 

The Company analyzed the conversion option of the New Notes for derivative accounting consideration under ASC 815-15 “Derivatives and Hedging” and determined that the instrument should be classified as liabilities due to there being no explicit limit to the number of shares to be delivered upon settlement of the above conversion options for the New Notes issued. The Company then calculated the fair value of the conversion option and recorded derivative liability on the issuance date and the subsequent period end dates.

 

During the six months ended April 30, 2015, $214,098 of the convertible notes was converted to 720,467,596 shares of the Company’s common stock.

 

For the six months ended April 30, 2015 and 2014, the Company recorded derivative expense of $55,062 and $0, respectively. As of April 30, 2015 and October 31, 2014, the derivative liability amounted to $204,963 and $207,891, respectively.

 

As of April 30, 2015 and October 31, 2014, the outstanding amount of the convertible notes were $99,974 and $233,747, net of discount of $123,820 and $33,753, respectively.

 

NOTE 6 – COMMITMENTS AND CONTINGENCIES

 

Consulting Agreements

 

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

 

Employment Agreements

 

On February 1, 2010, the Company entered into an Employment Agreement with William McKay. Under the agreement, Mr. McKay will receive a base salary of $180,000, plus an initial bonus of 1,200,000 shares of the Company’s common stock (to be issued in 300,000 share blocks on a quarterly basis). The shares were valued based on the closing stock price on the date of the agreement. The initial term of the Employment Agreement expired on January 31, 2011 and automatically renewed for an additional one-year term. The agreement ended January 31, 2013 and Mr. McKay agreed to continue serve as the Company’s CEO without base salary. During the years ended October 31, 2014 and 2013, Mr. McKay waived $350,000 and $47,200 of the salaries owed to him which was treated as a capital contribution increasing additional paid in capital by $350,000 and $47,200, respectively.

 

As of April 30, 2015 and October 31, 2014, the total accrued salaries owed to Mr. McKay were $0.

Lease Agreement

 

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

 

 

NOTE 7 – CAPITAL STOCK TRANSACTIONS

 

Preferred Stock

 

The Company is authorized to issue up to 5,000,000 shares of its $0.001 preferred stock. At April 30, 2015 and October 31, 2014, there were no shares issued and outstanding, respectively.

 

Common Stock

 

The Company is authorized to issue up to 4,500,000,000 shares of its $0.001 common stock. At April 30, 2015 and October 31, 2014, there were 1,571,934,788 and 179,447,431 shares issued and outstanding, respectively.

 

Fiscal year 2014:

 

During the year ended October 31, 2014, the Company issued a total of 2,000,000 shares of common stock to its Board of Directors for services. The shares were valued at $86,000 based on the closing stock price on the date of the restricted stock grant.

 

During the year ended October 31, 2014, the Company also issued total of 18,893,566 shares of common stock to consultants for services rendered. The shares were valued at $863,679 based on the closing stock prices on the dates of the stock grants.

 

During the year ended October 31, 2014, the Company entered into various purchase agreements with accredited investors for the sale of 31,987,382 shares of its common stock at a price of $0.01 to $0.04 per share. Total cash proceeds from the sale of stock during the year ended October 31, 2014, was $541,600. In connection with the these stock purchase agreements, the Company issued 9,413,380 shares of common stock in lieu of finders’ fees, which represents stock offering costs. Finders’ fees are treated as a reduction in paid in capital per current accounting guidance.

 

During the year ended October 31, 2014, the Company issued 15,562,444 shares upon conversion of convertible notes amounted to $158,913.

 

Fiscal year 2015:

 

During the six months ended April 30, 2015, the Company issued 387,000,000 shares of common stock for legal and consulting services rendered. The shares were valued at $425,000 based on service invoice and the closing stock prices on the dates of the stock grants.

 

During the six months ended April 30, 2015, the company entered into various purchase agreements with an accredited investor for the sale of 228,000,000 shares of its common stock at a price of $0.005 and $0.00035 per share. Total cash proceeds from the sale of stock during the six months ended April 30, 2015, was $210,000, which was recorded as common stock to be issued.

 

During the six months ended April 30, 2015, the Company also issued 720,467,596 shares upon conversion of convertible notes amounted to $214,098.

 

 

Options and Warrants

 

A summary of option activity during the three months ended April 30, 2015 and the year ended October 31, 2014 are presented below:

 

April 30, 2015

October 31, 2014

Weighted

Weighted

Weighted

Weighted

average

average

average

average

Number of

exercise

life

Number of

exercise

life

shares

price

(years)

shares

price

(years)

Outstanding at beginning of year

52,666,667

$

0.08

6.24

52,666,667

$

0.08

10.42

Granted

138,000,000

0.0146

10.00

–

–

–

Exercised

–

–

–

–

–

–

Forfeited

50,000,000

0.08

6.24

–

–

–

Cancelled

–

–

–

–

–

–

Expired

–

–

–

–

–

–

Outstanding at end of period

140,666,667

$

0.0146

9.77

52,666,667

$

0.08

9.42

Options exercisable at end of period

37,166,667

$

0.0146

9.77

31,166,667

$

0.15

6.24

 

A summary of warrant activity during the three months ended April 30, 2015 and the year ended October 31, 2014 are presented below:

 

April 30, 2015

October 31, 2014

Weighted

Weighted

Weighted

Weighted

average

average

average

average

exercise

remaining

exercise

remaining

Number

price

contractual

Number

price

contractual

Outstanding

per share

life (years)

Outstanding

per share

life (years)

Outstanding at beginning of year

4,000,000

$

0.75

6.39

4,000,000

$

0.75

7.39

Granted

–

–

–

Exercised

–

–

–

–

–

–

Forfeited

–

–

–

–

–

–

Cancelled

–

–

–

–

–

–

Expired

–

–

–

–

–

–

Outstanding at end of year

4,000,000

$

0.75

6.24

4,000,000

$

0.75

6.39

Warrants exercisable at end of year

–

$

–

–

–

$

–

–

 

In November 2014, the Company granted options to all board members to purchase a total of 138,000,000 shares at an exercise price of $0.0146 per share of its common stock for service rendered and to replace the old options. These options vests in 4 equal amounts on the grant date, 2/9/2015, 5/9/2015, and 8/9/2015 and are exercisable within 10 years from the dates of vesting. The total estimated value using the Black-Scholes Model, based on the following variables was $2,760,000.

 

Market Price:	$0.020
Exercise Price:	$0.015
Term:	10 years
Volatility:	321%
Dividend Yield:	0
Risk Free Interest Rate:	2.25%

 

For the six months ended April 30, 2015, $2,002,500 was amortized as stock based compensation.

 

NOTE 8 – SUBSEQUENT EVENTS

 

In May 2015, the Company issued 839,384,572 shares of its common stock upon conversion of the convertible notes outstanding.

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operation

 

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

 

Forward Looking Statements

 

This quarterly report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Those forward-looking statements include our expectations, beliefs, intentions and strategies regarding the future. Such forward-looking statements relate to, among other things, Godfrey’s commencement of manufacturing operations; our distribution of Godfrey’s products; our working capital requirements; and the further approvals of regulatory authorities. There are several important factors that could cause our future results to differ materially from our forward-looking statement. Some of these important factors, but not necessarily all important factors, include our ability to acquire additional capital as and when needed; production and/or quality control problems; the denial, suspension or revocation of privileged operating licenses by regulatory authorities; overall industry environment; competitive pressures and general economic conditions; and those other risks discussed more fully in the “Risk Factors” section of in our annual report on Form 10-K for the year ended October 31, 2014 filed with the Securities and Exchange Commission on February 13, 2015. We caution readers not to place undue reliance on any forward-looking statements. We do not undertake, and specifically disclaim any obligation, to update or revise such statements to reflect new circumstances or unanticipated events as they occur, and we urge readers to review and consider disclosures we make in this and other reports that discuss factors germane to our business. See in particular our reports on Forms 10-K, 10-Q and 8-K subsequently filed from time to time with the Securities and Exchange Commission.

 

Overview

 

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

 

In the second quarter of 2013, we agreed to issue 4,800,000 shares of our common stock to three shareholders of our subsidiary, Godfrey (China) Limited (“Godfrey”), in exchange for their transfer to us of a total of 30% of the outstanding capital stock of Godfrey. One of the parties was Harbin Aerospace Company, LLC, our largest shareholder which is controlled by the wife of our chief executive officer, William R. McKay. Harbin transferred to us five percent of the capital stock of Godfrey in exchange for our issuance of 800,000 common shares. Upon the closing of the transactions, we increased our ownership of Godfrey from 25% to 55%.

 

We commenced our aircraft component business in February 1, 2010. To date, our operations have focused on the development of our production facility in Guangzhou, China and the design and engineering of our initial product line of spherical bearings. Our production facility in Guangzhou, China is held and operated by our 55%-owned subsidiary, Godfrey (China) Limited, a Hong Kong corporation. Naval Air Systems Command (“NAVAIR”) of the United States Navy has completed the qualification testing of our initial line of bearings. However, we expect that we will need to raise at least $2 million of capital, in order to commence international marketing and production.

 

Results of Operations

 

Three Months Ended January 31, 2015 and 2014

 

We have not commenced revenue producing operations and do not expect to until the fourth quarter of 2015, at the earliest, at which time we expect to commence the distribution of Godfrey’s line of spherical bearings.  During the six months ended April 30, 2015, we incurred $2,825,803 of operating expenses compared to $1,944,573 during the six months ended April 30, 2014.  Our operating expenses consist primarily of professional fees, consulting fees, and other general and administrative expenses. The increase in operating expenses for the six months ended April 30, 2015 compared to the same period in fiscal 2014 was primarily resulted from issuance of options for common stock to board of directors. We expect our operating expenses will significantly increase at such time as we commence the distribution of Godfrey’s spherical bearings.

 

 

During the six months ended April 30, 2015 and 2014, we incurred a net loss from operations of $3,075,621 and $2,019,188, respectively. The increase was primarily resulted from issuance of common stock options to board of directors.

 

For the six months ended April 30, 2015 and October 31, 2014, as a result of the increased ownership to 55% in Godfrey, we recorded non-controlling interest of $568,588 and $489,407, respectively. The net loss attributable to the Company was $2,996,440 and $1,826,745 for the six months ended April 30, 2015 and 2014, respectively.

 

Financial Condition

 

Liquidity and Capital Resources

 

As of April 30, 2015, we had total assets of $30,873 and a working capital deficit of $746,255.  Since April 30, 2015, our working capital has decreased as a result of continuing losses from operations.  We estimate that we require approximately $2 million of additional working capital over the next 12 months in order to fund our expected marketing and distribution of the initial line of aircraft component products to be manufactured by Godfrey and to fund our expected operating losses as we endeavor to build revenue and achieve a profitable level of operations.  However, there are no commitments or understandings at this time with any third parties for their provision of capital to us.

 

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

 

The report of our independent registered public accounting firm for the fiscal year ended October 31, 2014 states that due to our losses from operations and lack of working capital there is substantial doubt about our ability to continue as a going concern.

 

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements, as defined in Item 303 of Regulation S-K.

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk.

 

None.

 

 

Item 4.

Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures

 

Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  The term “disclosure controls and procedures” refers to the controls and procedures of our company that are designed to ensure that information required to be disclosed by us in the reports that we file under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosures. 

 

Based upon the above-described evaluation, our management, including our chief executive officer and chief financial officer, concluded that our disclosure controls and procedures were not effective as of January 31, 2015 due to certain material weakness in our internal control over financial reporting.  An internal control material weakness is a significant deficiency, or aggregation of deficiencies, that does not reduce to a relatively low level the risk that material misstatements in financial statements will be prevented or detected on a timely basis by employees in the normal course of their work. Our management assessed the effectiveness of our internal control over financial reporting as of April 30, 2015, and this assessment identified the following material weaknesses in our internal control over financial reporting:

 

1.

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

 

2.

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

 

3.

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

 

Based on that evaluation, management concluded that our internal control over financial reporting was not effective as of April 30, 2015.

 

Changes in internal control over financial reporting

 

There were no changes in our internal control over financial reporting that occurred during the first quarter of fiscal 2015 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

 

PART II

 

OTHER INFORMATION

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

During the six months ended April 30, 2015, the Company entered into various purchase agreements with accredited investors for the sale of 228,000,000 shares of its common stock at $0.005 and $0.00035 per share. Cash of $210,000 was received and the shares were issued in March and April 2015.

 

The aforementioned issuances were made pursuant to Section 4(2) of the Securities Act of 1933, as amended (“1933 Act”) and Rule 506 thereunder.  All of the investors were accredited investors, as such term is defined in Rule 501 under the 1933 Act.  The offering was conducted by management of the Company.  No sales commissions or finders’ fees were paid by us or anyone else. The shares of common stock have not been, and will not be, registered under the 1933 Act and may not be offered or sold absent registration or an applicable exemption from the registration requirements.

 

Item 6.

Exhibits

 

Exhibit No.		Description		Method of Filing
31.1		Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.		Filed electronically herewith
31.2		Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002		Filed electronically herewith
32.1		Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350)		Filed electronically herewith
101.INS		XBRL Instance Document		Filed electronically herewith
101.SCH		XBRL Taxonomy Extension Schema Document		Filed electronically herewith
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document		Filed electronically herewith
101.LAB		XBRL Taxonomy Extension Label Linkbase Document		Filed electronically herewith
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document		Filed electronically herewith
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document		Filed electronically herewith

 

 

SIGNATURES

 

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

		TRANS-PACIFIC AEROSPACE COMPANY INC.
		(Registrant)
Date:	June 19, 2015	By:	/s/ William Reed McKay
			William Reed McKay
			President, Chief Executive Officer and Chief Financial Officer
			(Principal Executive and Financial Officer)