|8. COMMITMENTS AND CONTINGENCIES
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.
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 Companys common stock (to be issued in 300,000 share blocks on a quarterly basis).
The shares were valued based on the closing stock price on the date of the agreement. The initial term of the Employment Agreement
expired on January 31, 2011 and automatically renewed for an additional one-year term. During the year ended October 31, 2011,
Mr. McKay waived $37,025 of the salaries owed to him. During the year ended October 31, 2012, Mr. McKay waived $330,000 of the
salaries owed to him which was treated as a capital contribution increasing additional paid in capital by $330,000. As of October
31, 2012 and 2011, the total accrued salaries owed to Mr. McKay were $0 and $150,000, respectively.
1, 2011, a Complaint was filed in the Superior Court of the State of California, in Orange County, California, by Trans-Pacific
Aerospace Company, Inc. and one of our shareholders, Harbin Aerospace Company, LLC, against Monarch Bay Associates, LLC, a FINRA
member firm, and certain of its officers, employees and affiliates, including David Walters, Keith Moore, Mathew Szot and Cardiff
Partners, LLC (Defendants). The Complaint alleges that Monarch Bay Associates entered into investment banking agreements
initially with Harbin Aerospace and then subsequently with Trans-Pacific Aerospace based upon certain misrepresentations and omissions
of material fact by Monarch Bay and its principals, David Walters and Keith Moore. The Complaint further alleges that Monarch
Bay, Walters, Moore and Szot breached their fiduciary duties owed to Trans-Pacific Aerospace and Harbin Aerospace and otherwise
engaged in acts of securities and common law fraud, professional negligence and unlawful practices under the California Business
and Professions Code. The Complaint seeks, among other things, (i) general and special damages in an amount to be proven at trial;
(ii) the rescission of certain material agreements entered into between Trans-Pacific Aerospace or Harbin Aerospace, on the one
hand, and the Defendants, on the other, and (iii) the Defendants return of all cash and stock-based compensation received from
either Trans-Pacific Aerospace or Harbin Aerospace in breach of the defendants fiduciary duties or applicable law. David
Walters and Keith Moore are former members of the board of directors of Trans-Pacific Aerospace and Walters and Mathew Szot are
former executive officers of Trans-Pacific Aerospace. The Defendants as a group are believed to own in excess of 9% of the issued
and outstanding common shares of Trans-Pacific Aerospace.
On September 12, 2011, the Defendants filed
a Cross-Complaint against Trans-Pacific Aerospace or Harbin Aerospace alleging the claims of Trans-Pacific Aerospace and Harbin
Aerospace were released pursuant to a Settlement Agreement and Release dated October 19, 2010 between Trans-Pacific Aerospace and
the Defendants. In their Cross-Complaint, the Defendants allege that although Harbin Aerospace was not a party to the Settlement
Agreement and Release, Harbin Aerospace had effectively transferred to Trans-Pacific Aerospace any claims Harbin Aerospace had
against the Defendants as part of Harbin Aerospaces sale of assets to Trans-Pacific Aerospace in February 2010, and that
such claims were then effectively released by Trans-Pacific Aerospace by way of the Settlement Agreement and Release dated October
On December 5, 2011, the Defendants filed a
First Amended Cross-Complaint against the Company and Harbin Aerospace for declaratory relief, breach of contract, specific performance,
and indemnity, alleging that the claims of the Company and Harbin were released pursuant to the aforementioned settlement agreement.
The Company and Harbin have filed an Answer to the First Amended Cross-Complaint denying the allegations and setting forth affirmative
defenses. The Company and Harbin believe that the allegations contained within this First Amended Cross-Complaint are meritless.
On January 30, 2013, the Company, Harbin, the
Defendants, and other parties entered into a settlement agreement (the Settlement Agreement) resolving the action.
Under the terms of the Settlement Agreement, Defendant Cardiff Partners, LLC (Cardiff) agreed to return 3,728,503
shares of the Companys common stock to the Company for cancellation. The Company agreed that Cardiff could retain
2,000,000 shares of the Companys common stock, and that the retained shares would be subject to a lock-up/leak-out arrangement.
In addition, the parties agreed to amend certain Series A and Series B common stock purchase warrants held by Cardiff to extend
the expiration date of said warrants to March 20, 2021 and to allow for the vesting of such warrants upon a change in control
of the Company. In addition, the Company agreed to indemnify the Defendants for certain matters arising out of the Settlement
Agreement and for certain matter arising out the Defendants status or conduct as a director, officer, employee or agent
of the Company. The parties agreed to dismiss the action with prejudice and the Company, Harbin, and the other parties, on
the one hand, and the Defendants, on the other hand, have agreed to a full and complete settlement and general release of all claims
asserted by the parties regarding the subject matter of the action. The court shall retain jurisdiction to enforce the terms
of the Settlement Agreement.
In October 2010, the Company entered into a
lease of its administrative offices. The lease expires November 30, 2012 and currently calls for monthly rental payments of $792
pursuant to a month to month agreement.