Item 1. Description of Business
Corporate History
Tactical Air Defense Services, Inc. (TADS) is a Nevada public corporation that offers air combat training, mid-air refueling, ground-threat support, aerial fire-fighting, and specialty aerial services to the U.S. and Foreign Militaries and other Federal and State Agencies. TADS is certified by the United States Government as a private-sector military contractor and has been granted the required security clearances.
The executive offices of TADS are located in West Palm Beach, Florida.
As a result of the U.S. Base Foreclosure Act, the overall downsizing of the armed forces of the U.S. and its foreign allies, and the advanced age of the U.S. military air fleet, there is insufficient equipment and personnel to meet demands for combat air training and mid-air refueling training. The wars in Iraq and Afghanistan and various regional conflicts and terrorist’s acts, have only added to this crisis. The private-sector is now being asked to fill a role once the exclusive domain of the military, and the capabilities of civilian contractors are well recognized, and are frequently proven superior and more efficient than public-sector contractors.
Through an exclusive lease arrangement, TADS has the only Soviet ILyushin IL-78/76 aircraft in the U.S. In addition to their mid-air refueling capabilities, the ILyushin aircraft are the only planes ever built for the purpose of aerial fire-fighting, and are recognized as far superior to any other aircraft in existence for this purpose. The ILyushin aircraft are dedicated water-bombers that are capable of quickly and efficiently disbursing large quantities of water or fire retardant to defeat the increasing damage from the extensive forest fires in the Western U.S. and other areas. Due to the escalating forest fire crisis in the Western U.S., and the unique capabilities and exclusivity of its ILyushin aircraft, TADS has experienced significant interest for fire-fighting services from both Federal and State Agencies.
In order to meet present and future military, environmental, and financial threats, the United States and its allies must continue to commit billions of dollars to training, preparedness, and execution. These needs cannot be met without the support of the private-sector. We believe that there is currently no other private-sector contractor which can adequately fulfill these diverse and urgent demands, and we believe that TADS possesses the aircraft, personnel, and operational skills necessary to claim a significant piece of this rapidly growing and highly-profitable market for diverse air support services.
TADS Corporate History
TADS was incorporated in the State of Nevada on July 9, 1998 under the name Natalma Industries, Inc. Originally, TADS operated as a junior mining company engaged in the exploration of mining properties. We were unsuccessful in locating a joint venture partner to assist us in the development of our mining claims. As a result, TADS was unable to pay for and perform the exploration and development required in its agreement with the owners of its properties and lost our rights to the mining claims. Our management at the time, therefore determined that it was in the best interest of our shareholders that we seek potential operating businesses and business opportunities with the intent to acquire or merge with another business, which led to the purchase substantially all of the assets of AeroGroup Incorporated (the “AeroGroup Acquisition”).
AeroGroup Corporate History
AeroGroup Incorporated commenced its operations and business plan as a contractor of military flight training as AeroGroup International Corporation in January 2002, and eventually merged with and acquired AeroGroup Incorporated, which was, prior to such time, a non-operating entity called Diversified Resources Group, Inc.
In June of 2006, AeroGroup, through its subsidiaries, acquired two MiG 29 aircraft in Ukraine, and four flight simulators (which we then purchased from AeroGroup in the AeroGroup Acquisition) from three entities controlled by Mark Daniels, a Director, majority beneficial shareholder, and an Officer of TADS. AeroGroup also acquired various government licenses and permits that enable it to trade, own and operate military class aircraft and to bid for government contracts. Specifically, AeroGroup acquired the following intellectual property from Mark Daniels:
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Copyrights to a specialized Fighter Aircraft training course syllabus, specially created by AeroGroup in training pilots to use this aircraft’s Flight Control Navigation Panel; and
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Assignments of Provisional applications for utility patents filed relating to methods of operational training uses of fighter aircraft by civilian corporations of these types of military aircraft for training of military personnel, specifically, Pat. Pend. 60805870; Kfir, Pat. Pend. 60805885; A-4 Skyhawk, Pat Pend. 60805877; and MiG 29, Pat Pend. 60805888.
AeroGroup has provided operational training support for Flight training with the Royal Netherlands Air Force in Melbourne Florida in 2003 and in Jacksonville Florida in 2004.
Air Combat Training
Air combat training exercises are currently conducted by the training commands of the United States Air Force, United States Navy, and of most of our NATO, SEATO, and foreign allies. Neither the U. S. Department of Defense (the “DoD”) nor its allies have sufficient personnel, support equipment, or access to foreign enemy aircraft, to meet current demand. In many instances our European allies have neither the facilities nor the extensive airspace required for fighter combat training or fighter bombing training that TADS can provide.
TADS intends to provide the highest standard of air combat training to the U.S. military and its allies, and to other domestic and foreign agencies.
U.S. Military Training
A crucial component to aerial combat training involves training against actual foreign adversary aircraft which are typically Russian, ex-Soviet block, or Chinese. However, because the U.S. military has little to no access to “enemy” aircraft, the status-quo has been to use aged U.S. military aircraft operating as the adversarial or “Red Air” aircraft. The status-quo leaves much to be desired because aged U.S. military aircraft do not possess the flying characteristics or capabilities of sophisticated enemy combat aircraft, nor do they emit the same electronic, radar, or visual signals.
Through its agreement with a U.S. company licensed by the U.S. DoD to import foreign weapons of war and one of only five companies in the world approved by the Ukrainian Ministry of Defense to purchase and export military equipment, TADS can provide unique Red Air aggressor squadrons consisting of the only 4 th generation MIG 29’s, Sukhoi SU-27’s, and ILyushin IL-78’s available in the U.S., and which aircraft are the actual fighter aircraft currently used by substantially all of the former Soviet block countries and non-allied nations.
In connection with contracts to provide adversary combat aircraft to the U.S. military, TADS would supply various support services such as adversary pilots, parts and service and maintenance of the adversary aircraft, tactical training, actual aggressor simulated combat, and classroom instruction.
TADS, through AeroGroup, has been awarded a $207 million government contract to provide air combat training and support to the U.S. military. The contract has been finalized and awarded to TADS, the funding amount has been stipulated, and the requirements of the contract have been established. TADS is now awaiting for the contract to be “tasked” by various customers which require the services established in the contract, for the final definitive contract face page to be signed, and for the funds are MIPRed from the customers and secured for the contract. Although TADS believes that the $207 million contract awarded to TADS will be “tasked”, signed, and the funds MIPRed and secured, no assurances can be given.
Foreign Air Combat Training
Unlike the training of the U.S. military, air combat training of foreign allied militaries typically entails air combat training techniques and strategies using U.S. military aircraft such as the, which such foreign militaries have already purchased. Although a commercial endeavor, it has been a strategic decision of the U.S. government to supply U.S. fighter aircraft to its allies. However, the ability and resources of the U.S. military to thereafter train the foreign purchasers of its aircraft is extremely limited and sub-par.
As a result, there is a backlog of allied countries that have purchased’s and other U.S. fighter aircraft, and that have immediate and ongoing need for air combat training. TADS is able to offer to foreign militaries actual combat training from highly experienced U.S. fighter pilots, classroom training, and parts, service, and maintenance protocols for their aircraft. TADS also has the capability to either train on foreign soil and foreign military bases to fulfill multi-year contracts, or to provide a turn-key solution by hosting foreign militaries on U.S. soil, and therein provide not only pilots, training protocols, and parts, service, and maintenance, but also the air-bases, bombing ranges, fueling services, housing requirements, etc.
TADS is currently fulfilling a $6.4 million contract for the Belgian Air Force (“BAF”). The BAF contract was awarded to TADS in October of 2007, and tasked in March of 2008. The contract requires classroom and air combat training using’s at the Kleine-Brogel Air Base in Belgium, using BAF facilities, equipment, and materials, and initially consists of two instructor pilots. The BAF has expressed interest in increasing the number of pilots after year-one, although no assurances can be given that this event will occur.
Through the BAF contract, TADS has also recently graduated four pilots from the Air Force of a Middle-Eastern ally, and is currently pursuing a direct contract for additional training services with said allied Air Force, although no assurances can be given that a final contract will be awarded to TADS.
In addition, TADS is currently in the early phases of air combat training contracts with other allied and NATO countries to provide training, support, and services, and although TADS believes that it is well-positioned to be awarded any and all of these foreign contracts, no assurances can be given.
Ground-Threat Support
The U.S. military regularly trains against “enemy” ground-threats, typically Russian and Ukrainian Air Defense surface-to-air missile systems. These systems make up approximately 95% of all known ground-threats used by perceived hostile states and groups around the world such as North Korea, Syria, Iran, the Taliban, etc.
Notably, however, the U.S. DoD has been unable to acquire and support working examples of said Russian and Ukrainian systems with which to train. As a replacement, the U.S. military uses replica or “same signal” practice units which offer a sub-par training experience due to at times materially different physical and electronic characteristics.
To the best of our knowledge, TADS, through its agreement with a supplier of Russian systems, is the only U.S. company able to provide and support Russian and Ukrainian joint-threat emitter (“JTE”) systems in good working condition, and as a result we can provide a much more effective and value-added training experience to the U.S. and allied militaries.
As a direct consequence of our proposals to several DoD entities, a public Request for Information was issued, and TADS, through its agreement with the supplier of Russian systems, proposed selling this equipment with support contracts to operate and maintain the equipment. It was determined that TADS through said supplier was the only company capable of providing and operating this equipment, and we are currently waiting for funding to be issued to be awarded a contract.
Although said JTE contract is anticipated be initially be budgeted for $5 million, the JTE program budget is approximately $500 million per year, and we anticipate, but cannot guarantee that TADS will be awarded a final JTE contract, that said contract budget will be expanded from the initial $5 million, and that TADS is well-positioned to be awarded additional ground-threat support contracts.
Mid-Air Refueling
As demonstrated by the debacle between Boeing and AES in the awarding of the next generation of mid-air refueling aircraft, mid-airrefueling is big business, and the U.S. fleet of mid-air refueling aircraft, which were all built in the 1950’s and 1960’s, is operating well below the required levels. With its aging fleet and the uncertainty of the delivery of new tankers, there is an immediate need for the military to outsource re-fueling training.
TADS operates the only ILyushin IL-78 refueling tanker aircraft available in the U.S., and is in the process of acquiring additional aircraft. The IL-78 is used for mid-air refueling by most air forces in the world including Russia, most former Soviet republics, China, India, Pakistan, Cuba, Libya, Syria, and many others. The TADS IL-78 is the Midas version, which is presently undergoing final preparation by TADS in Texas for certification, and is configured for mid-air refueling. It is capable of re-fueling at an airspeed exceeding 400 knots, and can deliver fuel to three aircraft simultaneously. TADS will provide its IL-78 for re-fueling during air combat training sessions and for contract re-fueling of U.S. military squadrons.
TADS is currently in Phase IV, the final phase, of $207 million government contract, a part of which provides airborne refueling training and ancillary services, and we anticipate but cannot guarantee that this will lead to execution and fulfillment of a contract.
In preliminary discussions with TADS, U.S. DoD representatives expressed their intentions to contract with TADS for the use of its fleet of IL-78’s for mid-air refueling services as soon as it is operational, although no assurances can be given that these discussions will lead to the awarding of a final contract to TADS.
In addition, as the only company able to provide an IL-78 within the U.S., TADS has been asked by a large U.S. defense contractor to provide an IL-78 and support for approximately 500 hours of flight-time. TADS is currently in advances discussions, and anticipates receiving a letter-of-intent in due course, although no assurances can be given. Said defense contractor is a manufacturer of fighter jets, and is in the final stages of signing a contract with a foreign ally which has requested that the defense contractor demonstrate that the fighter jets to be purchased can be refueled specifically from an IL-78.
Aerial Fire-Fighting
In addition to its military operation capabilities, the IL-76/78 is the only large aircraft ever built for the purpose of aerial water-bombing, and is considered by most fire-fighting experts as the most capable. The ILyushin IL-76/78 aircraft are dedicated water-bombers that are capable of quickly and efficiently disbursing large quantities of water or fire retardant to defeat the increasing damage from the extensive forest fires in the Western U.S. and other areas. Due to the escalating forest fire crisis in the Western U.S., and the unique capabilities and exclusivity of its ILyushin aircraft, TADS has experienced a significant increase in demand for water-bombing services from both Federal and State agencies.
With a cruising speed of up to 800 knots per hour, the IL-76/78 can reach most locations in the world in approximately twelve hours. When fitted with a triple-tank reservoir system, it can hold approximately 18,000 gallons of water or fire-retardant, the largest capacity of any water-bombing aircraft in existence. In a single pass over a forest fire the IL-76/78 can disburse enough liquid to cover an area exceeding 200 yards wide and 600 yards long which is over a third of a mile in length and the equivalent of two rows of six football fields. To see the IL-76/78 disburse thousands of gallons over a wide area at extremely low altitude is overwhelming and convincing of its superiority in this role. The IL-76/78 can then be re-filled and ready to take off for another cycle within minutes.
As exemplified by the state-of emergency declared by California recently, the United States Forest Service estimates that forest fires will be a permanent threat, and TADS is preparing to lease additional IL-76/78 aircraft specifically configured for water-bombing. In addition to the substantial revenue stream that TADS anticipates from these services, we believe that the publicity that can result from these fire-fighting operations will be priceless.
TADS is exploring opportunities with State and Federal agencies in connection with providing aerial fire-fighting services to combat the seemingly ever-growing devastation of forest fires, and anticipates but cannot guarantee that these discussions will lead to the final award of a contract in 2009 or 2010.
Specialty Aerial Services
In addition to its use as a mid-air refueling aircraft and as an aerial fire-fighter, the unique characteristics of the IL-78/76 “super-tanker” make extremely desirable for a number of specialty aerial services.
Versatile Cargo Support
The IL78/76 aircraft is a versatile workhorse that can be configured for heavy cargo and used for transport of military vehicles and equipment, and commercial air cargo services. The IL-78/76 has unique performance capabilities and is famous for its ability to operate in extreme conditions and from marginal landing areas.
TADS is currently in discussion with a division of the U.S. DoD to supply helicopter transport services, and anticipates but can be assured that a letter-of-intent is forthcoming. The criteria for such services are anticipated to be no less than 1,000 hours per year.
Oil-Spill Support
The IL78/76 is also very well suited to address the problem of ocean oil-spills. Currently, smaller aircraft are deployed to drop specific chemicals onto oil-spills which cause the oil to coagulate and thereby aid in clean-up. TADS has had initial discussions, in connection with providing an IL-78/76, with a number of private contractors engaged in this operation.
Competition
The capabilities of companies which provide similar air combat training services are limited. Typically, our competitors operate a small number of older-generation aircraft. They therefore generally neither have the aircraft required to fulfill the current contracts in the awards process, and nor do they have the infrastructure necessary should they be awarded a contract. TADS will contemplate the acquisition of competing operators having additional assets, to ensure TADS’ superiority in the air combat training, re-fueling, air support, and fire-fighting businesses.
As the only company able to offer the services of an ILyushin IL-78/76 in the U.S., TADS is positioned to be awarded contracts which require the specifications of the ILyushin aircraft for mid-air refueling, fire-fighting, and specialty air services.
In addition, TADS is not aware of any other U.S. company which can procure, support, and maintain Russian or Ukrainian ground-threat support equipment. The U.S. DoD itself has attempted to supply and maintain such equipment, but has been able only to supply non-functioning equipment which provide only a visual target for its combat pilots, and not the specific electronic signals emitted by Russian and Ukrainian equipment against which our military operates.
Government Approval and Regulation
Our proposed business is heavily regulated. All of our operations involve intense government approval and oversight. Prior to awarding contracts other than on a “bid for service” basis, military agencies are required to publish their proposed award of a contract with details of such contract. During this time period, other persons may submit objections or counter bids on these contracts.
Our aircraft operations will also be subject to all regulations of the Federal Aviation Administration that relate to civil “experimental” aircraft, and will be subject to airworthiness standards and operating procedures of the Federal Aviation Administration. Additionally, our pilots, instructors and mechanics also must generally be appropriately certified to perform their duties by the Federal Aviation Administration and are required to comply with strict recurrency flight training rules and medical certification.
In addition to the foregoing, government agencies will require that we have and maintain a proper safety program, an approved parts program and an approved maintenance program, each of which must be sufficient to support the contracts that we undertake to perform and each of which must be continually kept current.
Under our Training Contract, we are also subject to audit and inspection to ensure that we are in compliance with all of the foregoing requirements insofar as they relate to providing services under this agreement. If we are not in compliance we could be fined and we risk suspension or loss of the contract.
Additionally, we may be subject to rules of foreign governments with respect to operations of our aircraft over their territories.
Effect of Government Regulation
As evidenced by the Justification and Approval for the Training Contract, we believe that it is not common for branches of the United States military to issue contracts to private entities for the training of military personnel in combat and other military exercises. No assurance can be made, therefore, that other government agencies will outsource their training or flight support services, or that the government agencies that we deal with will not change their policy with respect to such contracts to not renew or issue new contracts to us or others in our business sector. Additionally, due to terrorist or other national safety concerns, no assurance can be made that Bureau of Alcohol, Tobacco, and Firearms will not restrict or prohibit the renewal of a permit to private companies such as us, to own and operate our military aircraft.
Development of Programs
During fiscal 2005 we spent approximately $88,000 in developing our training syllabus with no expenditures in fiscal 2006, fiscal 2007, or as of December 31, 2008 for these programs. We believe that we are required to have a strong and efficient training syllabus in order to maintain and bid for additional military training contracts. We have also begun development of an approved parts program, a safety program and maintenance program, all of which are required to be in effect prior to being tasked on any military contracts.
AeroGroup Assets Acquired
The AeroGroup assets (the “AeroGroup Assets”) acquired from AeroGroup in December 2006 include:
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Two MiG 29 “Fulcrum” fighter aircraft, which were appraised in late 2005 at $2,800,000 each (pre-modification) which are located in the Ukraine and are being prepared to be shipped to the United States for reassembly;
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Four Singer Link tactical jet simulators, and related equipment, recently appraised in late 2005 $285,000 each (pre-modification) currently located at the Company’s facility at the Grayson County Airport;
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Assignments of copyrights to a specialized Fighter Aircraft training course syllabus, specially created by AeroGroup for training pilots to use this aircraft’s Flight Control Navigation Panel;
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Assignments of provisional applications for utility patents filed relating to methods of operational training uses of fighter aircraft by civilian corporations of these types of military aircraft for training of military personnel, specifically, Pat. Pend. 60805870; Kfir, Pat. Pend. 60805885; A-4 Skyhawk, Pat Pend. 60805877; and MiG 29, Pat Pend. 60805888;
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Assignment of a Federal Aviation Administration issued license as an Aircraft Dealer;
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Rights as assignee under three subcontracts and one contract to provide combat, primary and other flight training, as well as training research, in the and various other types of aircraft to military personnel of the U.S. Armed Forces and to the armed forces of certain NATO aligned countries (the “Training Contracts”);
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Assignment of a sublease of facilities at the Grayson County Airport in Grayson, Texas, including aircraft hangars, land and office space;
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Assignment of an option to enter into an exclusive agreement with Air Support Systems, LLC, to lease IL-78 tanker aircraft which are used primarily in air-to-air refueling operations; and
It is intended that the AeroGroup Assets will be used by the Company in connection with both “basic flight training” and “combat flight training” of military pilots. The Company may use the its assets to provide U.S. and NATO military pilots with a “real life” opportunity to train against threat-type aircraft whose performance and flight characteristics are superior in some respects to those of U.S. and NATO fighter aircraft.
As a result of the U.S. Base Foreclosure Act, the overall downsizing of the armed forces of the U.S. and its foreign allies, and the advanced age of the U.S. military air fleet, there is insufficient equipment and personnel to meet demands for combat air training and mid-air refueling training. The wars in Iraq and Afghanistan and various regional conflicts and terrorist’s acts, have only added to this crisis. The private-sector is now being asked to fill a role once the exclusive domain of the military, and the capabilities of civilian contractors are well recognized, and are frequently proven superior and more efficient than public-sector contractors.
Due to the escalating forest fire crisis in the Western U.S., and the financial and environmental costs associated with this crisis, fire-fighting preparedness and capability have become a top priority at both the State and Federal levels of government. Again, the private sector is being asked to provide services that were previously the domain of the public-sector.
In order to meet present and future military, environmental, and financial threats, the United States and its allies must continue to commit billions of dollars to training, preparedness, and execution. These needs cannot be met without the support of the private-sector. We believe that there is currently no other private-sector contractor which can adequately fulfill these diverse and urgent demands, and we believe that TADS possesses the aircraft, personnel, and operational skills necessary to claim a significant piece of this rapidly growing and highly-profitable market for diverse air support services.
TADS Corporate History
TADS was incorporated in the State of Nevada on July 9, 1998 under the name Natalma Industries, Inc. Originally, TADS operated as a junior mining company engaged in the exploration of mining properties. We were unsuccessful in locating a joint venture partner to assist us in the development of our mining claims. As a result, TADS was unable to pay for and perform the exploration and development required in its agreement with the owners of its properties and lost our rights to the mining claims. Our management at the time, therefore determined that it was in the best interest of our shareholders that we seek potential operating businesses and business opportunities with the intent to acquire or merge with another business, which led to the purchase substantially all of the assets of AeroGroup Incorporated (the “AeroGroup Acquisition”).
Since the AeroGroupo Acquisition, TADS has achieved a number of operational successes:
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January 2007 -TADS is contracted through U.S. Army-RDECOM/CASU to provide pilot training and other aircraft services.
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October 2007-Current - TADS through AeroGroup is the first commercial company to provide pilot training to the Belgian Air Force, via a contract awarded through U.S. Air Force - Air Education and Training Command (AETC).
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December 2007 - TADS executes an exclusive lease arrangement with Air Support Systems, LLC to lease the only Soviet ILyushin aircraft available in the U.S. The ILyushin aircraft are the mid-air refueling aircraft of choice for non-U.S. militaries around the world, and are capable of refueling 3 aircraft simultaneously. In addition, the ILyushin aircraft are the only planes ever made for the purpose of aerial fire-fighting and water-bombing, and are recognized as far superior to any other aircraft in existence for this purpose.
AeroGroup Corporate History
AeroGroup Incorporated commenced its operations and business plan as a contractor of military flight training as AeroGroup International Corporation in January 2002, and eventually merged with and acquired AeroGroup Incorporated, which was, prior to such time, a non-operating entity called Diversified Resources Group, Inc.
In June of 2006, AeroGroup, through its subsidiaries, acquired two MiG 29 aircraft in Ukraine, and four flight simulators (which we then purchased from AeroGroup in the AeroGroup Acquisition) from three entities controlled by Mark Daniels, a Director, majority beneficial shareholder, and an Officer of TADS. AeroGroup also acquired various government licenses and permits that enable it to trade, own and operate military class aircraft and to bid for government contracts. Specifically, AeroGroup acquired the following intellectual property from Mark Daniels:
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Copyrights to a specialized Fighter Aircraft training course syllabus, specially created by AeroGroup in training pilots to use this aircraft’s Flight Control Navigation Panel;
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Assignments of Provisional applications for utility patents filed relating to methods of operational training uses of fighter aircraft by civilian corporations of these type of military aircraft for training of military personnel, specifically, Pat. Pend. 60805870; Kfir, Pat. Pend. 60805885; A-4 Skyhawk, Pat Pend. 60805877; and MiG 29, Pat Pend. 60805888; and
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Rights to the exclusive use of the AeroGroup name.
In addition, AeroGroup has provided operational training support for the Air forces of various allied countries:
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July 2002 - AeroGroup is the first commercial company to provide Tactical Fighter support to the Royal Canadian Air Force. AeroGroup began a program flying Hawker Hunter and A-4 Skyhawk fighter aircraft as adversary bandits in training Air Combat Maneuvers and Electronic Counter Measure training, similar as to the TopGun School that the U.S. Navy provides to U.S. pilots.
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June 2003 - AeroGroup is the first commercial company to be given approval from the U.S. Department of State and SAF/IA (Secretary of the Air Force-International Affairs) to provide a first test-trial of Operational Detachment Support Training for Royal Netherlands Air Force (RNLAF) pilots and ground maintenance crews.
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January 2004 - Second test-trial approved by the U.S. Department of State and SAF/IA for AeroGroup to provide Operational Detachment Support Training for RNLAF pilots and ground maintenance crews, which 3-month training exercise was unprecedented as it was the longest period that the RNLAF had conducted this type of training within the United States.
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May 2005 through 2007 - Aerogroup is awarded and executes a contract from the United Kingdom Royal Air Force (RAF) via the Savannah Combat Readiness Training Center (CRTC), to provide ground handling and maintenance support for UK -AWACS aircraft at CRTC-Savannah, Shaw AFB, and the Beaufort, S.C. USMC base.
Flight & Combat Training, and Other Aerial Support Services
TADS intends to provide the armed forces of the U.S. and its allies with a vast array of training services and support functions including, but not limited to, military-grade facilities and bombing ranges, air combat instruction and tactical training, actual aggressor simulated combat, classroom instruction, and air combat and basic and advanced jet fighter flight simulation, and would also provide the airspace scheduling, fueling, aircraft parts, service, and maintenance.
Air combat simulation exercises are currently conducted by the training commands of the United States Air Force, United States Navy, and of most of our NATO, SEATO, and foreign allies. Neither the U. S. Department of Defense nor its allies have sufficient training and support equipment and personnel to meet current demand. In many instances, our European allies have neither the facilities nor the extensive airspace required for fighter combat training or fighter bombing training that TADS can provide.
Our flight training services will focus on two major components, “initial qualification” flight training and continuation flight training, both of which consist of ground, simulator and in the air flight training. In addition, we are preparing to perform other flight training support services as described herein.
TADS is currently in discussion with a division of the U.S. Department of Defense to provide aerial training services and other services, and anticipates but cannot guarantee that these discussions will lead to the final award of a contract.
Initial Qualification Flight Training
Initial qualification flight training consists of the training of military pilots that have only recently become qualified in their aircraft and of more experienced pilots returning for recurrency training. Initial qualification flight training involves aircraft specific flight theory, flight maneuvers, aerodynamics, emergency in flight procedures as they relate to combat in a specific aircraft. Pilots and other crew members are also trained in cockpit resource management, which focuses on division of duties between pilot and co-pilot and utilization of resources within the aircraft cockpit to complete the flight plan and address emergencies. Initial qualification training involves many hours of classroom instruction in aircraft systems operations, air-to-air flight maneuvers, tactics, formation flying, instrument training and air-to-ground tactics. In flight instruction is generally provided only once the pilot has shown proficiency in ground instruction and flight simulator instruction.
Continuation Flight Training
Continuation flight training focuses on combat and other advanced maneuvers and is conducted after the pilot completes initial qualification training and returns to a “full service” training facility where he is provided refresher or upgrade training to sharpen his or her combat skills. We intend to focus the training venue on NATO customers who would use our facilities and ranges to qualify, in some cases, and re-qualify in other cases in specific combat skills like air-to-air, air-to-ground, electronic countermeasure training, air-refueling training, and other advanced maneuvers. We anticipate that we will utilize our flight simulators to aid in ground training for continuation flight training. Additionally, we believe that use of “foreign” aircraft, such as MiG 29 aircraft greatly enhances the air-to-air / Red Air combat training program.
Mid-Air Refueling
TADS has under exclusive contract the only Ilyushin IL-76/78 refueling tanker aircraft available in the U.S., and is discussions to acquire contracts for additional aircraft. The IL-76/78 is used by countries around the world, including Russia, most former Soviet republics, China, India, Pakistan, Cuba, Libya, Syria, and many others, for mid-air refueling, military air cargo, troop transport, and other heavy-lift duties, and is capable of operating in extreme conditions. The IL-76/78 aircraft are the largest and fastest aircraft of this category in the world. The TADS IL-76/78 is presently undergoing final preparation for certification by TADS, is configured for mid-air refueling, is capable of re-fueling at an airspeed exceeding 400 knots, and can deliver fuel to three aircraft simultaneously. TADS intends to provide these aircraft for re-fueling during the air-combat training sessions and for contract re-fueling of U.S. military squadrons.
TADS is currently in discussion with a division of the U.S. Department of Defense to provide airborne refueling training services, and other services, and anticipates but cannot guarantee that these discussions will lead to the final award of a contract.
Aerial Fire-Fighting
In addition to its military operation capabilities, the IL-76/78 is the only large aircraft ever built for the purpose of aerial water-bombing, and is considered by most fire-fighting experts as the most capable. The Ilyushin IL-76/78 aircraft are dedicated water-bombers that are capable of quickly and efficiently disbursing large quantities of water or fire retardant to defeat the increasing damage from the extensive forest fires in the Western U.S. and other areas. Due to the escalating forest fire crisis in the Western U.S., and the unique capabilities and exclusivity of its Ilyushin aircraft, TADS has experienced a significant increase in demand for water-bombing services from both Federal and State agencies.
With a cruising speed of up to 800 knots per hour, the IL-76/78 can reach most locations in the world in approximately twelve hours. When fitted with a triple-tank reservoir system, it can hold approximately 18,000 gallons of water or fire-retardant, the largest capacity of any water-bombing aircraft in existence. In a single pass over a forest fire the IL-76/78 can disburse enough liquid to cover an area exceeding 200 yards wide and 600 yards long which is over a third of a mile in length and the equivalent of two rows of six football fields. To see the IL-76/78 disburse thousands of gallons over a wide area at extremely low altitude is overwhelming and convincing of its superiority in this role. The IL-76/78 can then be re-filled and ready to take off for another cycle within minutes.
As exemplified by the state-of emergency declared by California recently, the United States Forest Service estimates that forest fires will be a permanent threat, and TADS is preparing to lease additional IL-76/78 aircraft specifically configured for water-bombing. In addition to the substantial revenue stream that TADS anticipates from these services, we believe that the publicity that can result from these fire-fighting operations will be priceless.
TADS is currently in discussion with potential customers in connection with providing aerial fire-fighting services to combat the seemingly ever-growing devastation of forest fires, and anticipates but cannot guarantee that these discussions will lead to the final award of a contract.
Government Licenses
In order to own and operate military aircraft and to enter into government contracts we are required to have certain government licenses and permits.
The Company, through the AeroGroup Acquisition, as of September 21, 2006, was issued a license as a registered importer of “Implements of War: former military aircraft and related parts,” with the exclusion of guns and ammunition, from the United States Bureau of Alcohol, Tobacco and Firearms (Registration No. A-67-262-0921). We are required to renew this registration annually. We must maintain this license in order to import, own, and operate the kinds of military aircraft that we need in order to fulfill our training contracts. We are dependent on having qualified personnel as members of our management in order to maintain this license.
Through the AeroGroup Acquisition, we are also registered as a government contractor through the United States Central Contractors Registration office, and we have recently become registered with the United States Department of Defense Trade Control. We are required to maintain our registration with the Central Contractor Registration in order to be eligible to bid on government contracts.
Government Contracts
The Company’s business is dependent on our ability to bid for, negotiate, secure, and perform under specialized government and agency contracts. We have recently been awarded a number of service contracts, and we are in various stages of discussions for the awarding of additional service contracts related to flight and combat training, mid-air refueling, aerial fire-fighting, and other aerial support services, although no assurances can be given that these discussions will lead to the awarding of additional contracts.
Belgian Air Force Training Contract
On October 23, 2007, Tads was awarded, through the AeroGroup Acquisition, contract FA3002-08-C-0003 to train the Belgian Air Force pilots at facilities located in Belgium (the “BAF Contract”).
The BAF Contract is a 1-year contract which can be renewed annually for an additional 2 years in the aggregate. The BAF Contract was recently renewed for a second year. The BAF Contract specifies providing classroom, flight, and combat training to the Belgian Air Force using up to 8 of our pilots. The Company is not required to provide either aircraft or facilities as both are provided by the Belgian Air Force.
Recently, in February of 2008, after a delay due to a protest of the awarding of the BAF Contract to the Company by a competitor, which protest was resolved in favor of the Company, and due to the interference of third-party, the Company successfully began execution of the BAF Contract, commencing with an initial 2 training pilots. We currently have 4 training pilots in operation in Belgium, and have been requested to increase the number of training pilots to 8 which we anticipate achieving within the next 60 to 90 days, although assurances can be given.
Training Contract
In November of 2006, AeroGroup entered into a definitive Training Contract with the U.S. Army RDECOM memorializing the terms of the Justification and Approval and further expanding the scope of services to permit use of fourth generation fighter aircraft other than the, such as our MiG 29 jets (the “F-16 Training Contract”). The Training Contract, which has been assigned to TADS, initially will require us to have access to at least seven jet aircraft and other fourth generation fighter jet aircraft ( i.e. MiG-29, SU-27, or) and to provide basic and continuation combat flight training.
The Training Contract specifically requires that we have in place, prior to accepting performance obligations thereunder, parts, maintenance and safety programs that are satisfactory based on government standards. While we originally anticipated beginning performance on this contract in April 2007, we have not been able to do so as a result of interference by a third party. These programs are designed to ensure the reliability and dispatch readiness of our aircraft. We will be required to update and keep these programs current. We will be subject to regular inspections by the contracting party for compliance with these programs.
In addition, the Training Contract requires that program managers, pilots, ground crew, and other personnel we utilize in connection with our services have certain minimum training and experience qualifications.
Customers and Competition
We are dependent on a small, limited pool of customers for our services. The Company’s aerial training and mid-air refueling services will only be requested, if at all, by United States and NATO aligned military agencies with specific needs, and by contractors for these services who sub-contract to us. Our fire-fighting and water-bombing services will only be requested, if at all, by various State and Federal agencies.
The contract procurement process is lengthy and the government military organizations and the State and Federal agencies that are our primary target customers are often delayed and cautious when issuing contracts such as we are pursuing. These customers have strict regulations and policies with respect to procuring services from private-sector companies for fulfillment of their contracts. In addition, unless no other competitors are available, the contracts we target are generally required to request bids before awarding contracts. While we believe, based on our experience, that no other entities are currently able to provide services most of these services, no assurance can be made that new entities with more resources then us will enter into this business.
Parts Availability
Almost all parts used in the aircraft that we fly have limitations on their useful life. The useful life of the parts used in our aircraft are based on the number of hours flown and/or the age of the parts. In addition, many parts have performance limitations that require replacement or inspection in the event of accident or flight that exceeds the flight envelope of the aircraft. Finally, developments such as accidents of similar aircraft may lead us to replace or repair suspect parts to prevent such accidents on our aircraft. Therefore, in order to maintain our aircraft in airworthy condition, we will be required to obtain and utilize an inventory of surplus parts. We will also be required to keep excess parts in locations other than our headquarters so as to enable on-site repairs when providing services outside of Grayson County Airport. In addition, the aircraft we intend to utilize will be specialized military aircraft some of which were manufactured overseas. These parts are available from very few manufacturers and can be difficult to procure.
With respect to United States jet aircraft that we might operate, a number of both domestic and foreign parts manufacturers are available who supply and related parts. Additionally, based on management’s experience in restoration and operation of other aircraft, we believe that certain surplus parts for United States military aircraft can be easily retrieved at reasonable or nominal prices, from AMARC (Aerospace Maintenance and Regeneration Center), which is also commonly known as the military aircraft “bone-yard” that is part of Davis-Monthan Air Force Base at Tucson Arizona.
If we are not able to maintain an adequate supply of replacement parts, we will not be able to develop or maintain a parts program or a maintenance program and will therefore, not be eligible to accept work orders under our contracts.
Intellectual Property
We own patent applications to a number of procedures that related to the methods of conversion of military aircraft for use by civilian entities in training military personnel. These patents, which were acquired through the AeroGroup Acquisition, are as follows:
Aircraft
Patent
Falcon
Pat. Pend. 60805870
Kfir
Pat. Pend. 60805885
A-4 Skyhawk
Pat Pend. 60805877
MiG
Pat Pend.
No assurance can be made that we will be awarded patents or that they will not be challenged. Moreover, no assurance can be made that competitors will not utilize similar procedures to privatize military aircraft.
Additionally, we have a copyright on an Pilot Training Syllabus used in training pilots in use of a fire control navigation panel.
Government Approval and Regulation
Our proposed business is heavily regulated. All of our operations involve intense government approval and oversight. Prior to awarding contracts other than on a “bid for service” basis, military agencies are required to publish their proposed award of a contract with details of such contract. During this time period, other persons may submit objections or counter bids on these contracts.
Our aircraft operations will also be subject to all regulations of the Federal Aviation Administration that relate to civil “experimental” aircraft, and will be subject to airworthiness standards and operating procedures of the Federal Aviation Administration. Additionally, our pilots, instructors and mechanics also must generally be appropriately certified to perform their duties by the Federal Aviation Administration and are required to comply with strict recurrency flight training rules and medical certification.
In addition to the foregoing, government agencies will require that we have and maintain a proper safety program, an approved parts program and an approved maintenance program, each of which must be sufficient to support the contracts that we undertake to perform and each of which must be continually kept current.
Under our Training Contract, we are also subject to audit and inspection to ensure that we are in compliance with all of the foregoing requirements insofar as they relate to providing services under this agreement. If we are not in compliance we could be fined and we risk suspension or loss of the contract.
Additionally, we may be subject to rules of foreign governments with respect to operations of our aircraft over their territories.
Effect of Government Regulation
As evidenced by the Justification and Approval for the Training Contract, we believe that it is not common for branches of the United States military to issue contracts to private entities for the training of military personnel in combat and other military exercises. No assurance can be made, therefore, that other government agencies will outsource their training or flight support services, or that the government agencies that we deal with will not change their policy with respect to such contracts to not renew or issue new contracts to us or others in our business sector. Additionally, due to terrorist or other national safety concerns, no assurance can be made that Bureau of Alcohol, Tobacco, and Firearms will not restrict or prohibit the renewal of a permit to private companies such as us, to own and operate our military aircraft.
Development of Programs
During fiscal 2005 we spent approximately $88,000 in developing our training syllabus with no expenditures in fiscal 2006, fiscal 2007, or fiscal 2008, for these programs. We believe that we are required to have a strong and efficient training syllabus in order to maintain and bid for additional military training contracts. We have also begun development of an approved parts program, a safety program and maintenance program, all of which are required to be in effect prior to being tasked on any military contracts.
Employees
As of December 31, 2008, we have five full time employees.
Accounting Treatment; Change Of Control
The AeroGroup Acquisition has been accounted for as a "reverse acquisition," as AeroGroup owns a vast majority of the outstanding shares of the Company's Common Stock as a result of the AeroGroup Acquisition. Consequently, AeroGroup is deemed to be the accounting acquirer in the reverse acquisition and TADS is deemed the legal acquirer. Therefore the assets and liabilities and the historical operations of AeroGroup prior to the AeroGroup Acquisition will be reflected in the financial statements and will be recorded at the historical cost basis of AeroGroup. The consolidated financial statements for the Company after completion of the Acquisition includes the assets and liabilities of both TADS and AeroGroup, historical operations of AeroGroup, and operations of TADS from the closing date of the AeroGroup Acquisition.
Except as described herein and under the Asset Purchase Agreement, as amended, no arrangements or understandings exist among present or former controlling stockholders with respect to the election of members of the Company's board of directors and, to our knowledge, no other arrangements exist that might result in a future change of control of the Company.
AeroGroup Assets Acquired
The AeroGroup assets (the “AeroGroup Assets”) acquired from AeroGroup in December 2006 include:
●
Two MiG 29 “Fulcrum” fighter aircraft, which were appraised in late 2005 at $2,800,000 each (pre-modification) which are located in the Ukraine and are being prepared to be shipped to the United States for reassembly;
●
Four Singer Link tactical jet simulators, and related equipment, recently appraised in late 2005 $285,000 each (pre-modification) currently located at the Company’s facility at the Grayson County Airport;
●
Assignments of copyrights to a specialized Fighter Aircraft training course syllabus, specially created by AeroGroup for training pilots to use this aircraft’s Flight Control Navigation Panel;
●
Assignments of provisional applications for utility patents filed relating to methods of operational training uses of fighter aircraft by civilian corporations of these type of military aircraft for training of military personnel, specifically, Pat. Pend. 60805870; Kfir, Pat. Pend. 60805885; A-4 Skyhawk, Pat Pend. 60805877; and MiG 29, Pat Pend. 60805888;
●
Assignment of a Federal Aviation Administration issued license as an Aircraft Dealer;
●
Rights as assignee under three subcontracts and one contract to provide combat, primary and other flight training, as well as training research, in the and various other types of aircraft to military personnel of the U.S. Armed Forces;
●
Assignment of a sublease of facilities at the Grayson County Airport in Grayson, Texas, including aircraft hangars, land and office space;
●
Rights to the exclusive use of the AeroGroup name; and
●
Assignment of an option to enter into an exclusive agreement with Air Support Systems, LLC, to lease IL-78 tanker aircraft which are used primarily in air-to-air refueling operations.
It is intended that the AeroGroup Assets will be used by the Company in connection with both “basic flight training” and “combat flight training” of military pilots. The Company may use the MiG’s and other assets to provide U.S. and NATO military pilots with a “real life” opportunity to train against threat-type aircraft whose performance and flight characteristics are superior in some respects to those of U.S. and NATO fighter aircraft.
WHERE YOU CAN FIND MORE INFORMATION
You are advised to read this Form 10-K in conjunction with other reports and documents that we file from time to time with the SEC. In particular, please read our Quarterly Reports on Form 10-Q and Current Reports on Form 8-K that we file from time to time. You may obtain copies of these reports directly from us or from the SEC at the SEC’s Public Reference Room at 100 F. Street, N.E. Washington, D.C. 20549, and you may obtain information about obtaining access to the Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains information for electronic filers at its website http://www.sec.gov.
ITEM 1A
ITEM 1A - Risk Factors
An investment in our common stock involves a high degree of risk. You should carefully consider the following information about these risks, together with the other information contained in this Annual Report on Form 10-K, before investing in our common stock. If any of the events anticipated by the risks described below occur, our results of operations and financial condition could be adversely affected which could result in a decline in the market price of our common stock, causing you to lose all or part of your investment.
BECAUSE WE ARE QUOTED ON THE OTCBB INSTEAD OF AN EXCHANGE OR NATIONAL QUOTATION SYSTEM, OUR INVESTORS MAY HAVE A TOUGHER TIME SELLING THEIR STOCK OR EXPERIENCE NEGATIVE VOLATILITY ON THE MARKET PRICE OF OUR STOCK.
Our common stock is traded on the OTCBB. The OTCBB is often highly illiquid, in part because it does not have a national quotation system by which potential investors can follow the market price of shares except through information received and generated by a limited number of broker-dealers that make markets in particular stocks. There is a greater chance of volatility for securities that trade on the OTCBB as compared to a national exchange or quotation system. This volatility may be caused by a variety of factors, including the lack of readily available price quotations, the absence of consistent administrative supervision of bid and ask quotations, lower trading volume, and market conditions. Investors in our common stock may experience high fluctuations in the market price and volume of the trading market for our securities. These fluctuations, when they occur, have a negative effect on the market price for our securities. Accordingly, our stockholders may not be able to realize a fair price from their shares when they determine to sell them or may have to hold them for a substantial period of time until the market for our common stock improves.
FAILURE TO ACHIEVE AND MAINTAIN EFFECTIVE INTERNAL CONTROLS IN ACCORDANCE WITH SECTION 404 OF THE SARBANES-OXLEY ACT COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS AND OPERATING RESULTS.
It may be time consuming, difficult and costly for us to develop and implement the additional internal controls, processes and reporting procedures required by the Sarbanes-Oxley Act. We may need to hire additional financial reporting, internal auditing and other finance staff in order to develop and implement appropriate additional internal controls, processes and reporting procedures. If we are unable to comply with these requirements of the Sarbanes-Oxley Act, we may not be able to obtain the independent accountant certifications that the Sarbanes-Oxley Act requires of publicly traded companies.
If we fail to comply in a timely manner with the requirements of Section 404 of the Sarbanes-Oxley Act regarding internal control over financial reporting or to remedy any material weaknesses in our internal controls that we may identify, such failure could result in material misstatements in our financial statements, cause investors to lose confidence in our reported financial information and have a negative effect on the trading price of our common stock.
Pursuant to Section 404 of the Sarbanes-Oxley Act and current SEC regulations, beginning with our annual report on Form 10-K for our fiscal period ending December 31, 2007, we will be required to prepare assessments regarding internal controls over financial reporting and beginning with our annual report on Form 10-K for our fiscal period ending December 31, 2008, furnish a report by our management on our internal control over financial reporting. We have begun the process of documenting and testing our internal control procedures in order to satisfy these requirements, which is likely to result in increased general and administrative expenses and may shift management time and attention from revenue-generating activities to compliance activities. While our management is expending significant resources in an effort to complete this important project, there can be no assurance that we will be able to achieve our objective on a timely basis. There also can be no assurance that our auditors will be able to issue an unqualified opinion on management’s assessment of the effectiveness of our internal control over financial reporting. Failure to achieve and maintain an effective internal control environment or complete our Section 404 certifications could have a material adverse effect on our stock price.
In addition, in connection with our on-going assessment of the effectiveness of our internal control over financial reporting, we may discover “material weaknesses” in our internal controls as defined in standards established by the Public Company Accounting Oversight Board, or the PCAOB. A material weakness is a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. The PCAOB defines “significant deficiency” as a deficiency that results in more than a remote likelihood that a misstatement of the financial statements that is more than inconsequential will not be prevented or detected.
In the event that a material weakness is identified, we will employ qualified personnel and adopt and implement policies and procedures to address any material weaknesses that we identify. However, the process of designing and implementing effective internal controls is a continuous effort that requires us to anticipate and react to changes in our business and the economic and regulatory environments and to expend significant resources to maintain a system of internal controls that is adequate to satisfy our reporting obligations as a public company. We cannot assure you that the measures we will take will remediate any material weaknesses that we may identify or that we will implement and maintain adequate controls over our financial process and reporting in the future.
Any failure to complete our assessment of our internal control over financial reporting, to remediate any material weaknesses that we may identify or to implement new or improved controls, or difficulties encountered in their implementation, could harm our operating results, cause us to fail to meet our reporting obligations or result in material misstatements in our financial statements. Any such failure could also adversely affect the results of the periodic management evaluations of our internal controls and, in the case of a failure to remediate any material weaknesses that we may identify, would adversely affect the annual auditor attestation reports regarding the effectiveness of our internal control over financial reporting that are required under Section 404 of the Sarbanes-Oxley Act. Inadequate internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our common stock.
RISKS RELATING TO OWNERSHIP OF OUR COMMON STOCK
Although there is presently a market for our common stock, the price of our common stack may be extremely volatile and investors may not be able to sell their shares at or above their purchase price, or at all. We anticipate that the market may be potentially highly volatile and may fluctuate substantially because of:
●
Actual or anticipated fluctuations in our future business and operating results;
●
Changes in or failure to meet market expectations;
●
Fluctuations in stock market price and volume
WE DO NOT INTEND TO PAY DIVIDENDS
We do not anticipate paying cash dividends on our common stock in the foreseeable future. We may not have sufficient funds to legally pay dividends. Even if funds are legally available to pay dividends, we may nevertheless decide in our sole discretion not to pay dividends. The declaration, payment and amount of any future dividends will be made at the discretion of the board of directors, and will depend upon, among other things, the results of our operations, cash flows and financial condition, operating and capital requirements, and other factors our board of directors may consider relevant. There is no assurance that we will pay any dividends in the future, and, if dividends are rapid, there is no assurance with respect to the amount of any such dividend.
VOLATILITY IN OUR COMMON SHARE PRICE MAY SUBJECT US TO SECURITIES LITIGATION, THEREBY DIVERTING OUR RESOURCES THAT MAY HAVE A MATERIAL EFFECT ON OUR PROFITABILITY AND RESULTS OF OPERATIONS.
As discussed in the preceding risk factors, the market for our common shares is characterized by significant price volatility when compared to seasoned issuers, and we expect that our share price will continue to be more volatile than a seasoned issuer for the indefinite future. In the past, plaintiffs have often initiated securities class action litigation against a company following periods of volatility in the market price of its securities. We may in the future be the target of similar litigation. Securities litigation could result in substantial costs and liabilities and could divert management’s attention and resources.
OPERATING HISTORY AND LACK OF PROFITS WHICH COULD LEAD TO WIDE FLUCTUATIONS IN OUR SHARE PRICE. THE PRICE AT WHICH YOU PURCHASE OUR COMMON SHARES MAY NOT BE INDICATIVE OF THE PRICE THAT WILL PREVAIL IN THE TRADING MARKET. YOU MAY BE UNABLE TO SELL YOUR COMMON SHARES AT OR ABOVE YOUR PURCHASE PRICE, WHICH MAY RESULT IN SUBSTANTIAL LOSSES TO YOU. THE MARKET PRICE FOR OUR COMMON SHARES IS PARTICULARLY VOLATILE GIVEN OUR STATUS AS A RELATIVELY UNKNOWN COMPANY WITH A SMALL AND THINLY TRADED PUBLIC FLOAT.
The market for our common shares is characterized by significant price volatility when compared to seasoned issuers, and we expect that our share price will continue to be more volatile than a seasoned issuer for the indefinite future. The volatility in our share price is attributable to a number of factors. First, as noted above, our common shares are sporadically and thinly traded. As a consequence of this lack of liquidity, the trading of relatively small quantities of shares by our shareholders may disproportionately influence the price of those shares in either direction. The price for our shares could, for example, decline precipitously in the event that a large number of our common shares are sold on the market without commensurate demand, as compared to a seasoned issuer which could better absorb those sales without adverse impact on its share price. Secondly, we are a speculative or “risky” investment due to our limited operating history and lack of profits to date, and uncertainty of future market acceptance for our potential products. As a consequence of this enhanced risk, more risk-adverse investors may, under the fear of losing all or most of their investment in the event of negative news or lack of progress, be more inclined to sell their shares on the market more quickly and at greater discounts than would be the case with the stock of a seasoned issuer. Many of these factors are beyond our control and may decrease the market price of our common shares, regardless of our operating performance. We cannot make any predictions or projections as to what the prevailing market price for our common shares will be at any time, including as to whether our common shares will sustain their current market prices, or as to what effect that the sale of shares or the availability of common shares for sale at any time will have on the prevailing market price.
Shareholders should be aware that, according to SEC Release No. 34-29093, the market for penny stocks has suffered in recent YEARSs from patterns of fraud and abuse. Such patterns include (1) control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer; (2) manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases; (3) boiler room practices involving high-pressure sales tactics and unrealistic price projections by inexperienced sales persons; (4) excessive and undisclosed bid-ask differential and markups by selling broker-dealers; and (5) the wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, along with the resulting inevitable collapse of those prices and with consequent investor losses. Our management is aware of the abuses that have occurred historically in the penny stock market. Although we do not expect to be in a position to dictate the behavior of the market or of broker-dealers who participate in the market, management will strive within the confines of practical limitations to prevent the described patterns from being established with respect to our securities. The occurrence of these patterns or practices could increase the volatility of our share price.
OUR BUSINESS PLAN CALLS FOR EXTENSIVE AMOUNTS OF FUNDING AND WE MAY NOT BE ABLE TO OBTAIN SUCH FUNDING WHICH COULD ADVERSELY AFFECT OUR BUSINESS, OPERATIONS, AND FINANCIAL CONDITION.
We will be relying on additional financing and funding. We are currently in discussions with potential sources of financing but no definitive agreements are in place. If we cannot achieve the requisite financing or complete the projects as anticipated, this could adversely affect our business, the results of our operations, prospects, and financial condition.
OUR BUSINESS PLAN RELIES ON SIGNIFICANT REVENUE FROM NATIONAL, STATE AND LOCAL GOVERNMENTS AND REDUCTION IN GOVERNMENT REVENUE COULD EFFECT OUR BUSINESS PLAN
A significant portion of our business plan relies upon our ability to successfully charge licensing and other fees to governmental agencies for our services. The recent worldwide financial crisis, coupled with dramatic reductions in state revenues due to reduced property values and the economic downturn, creates substantial additional uncertainty in both the size and administration of governmental budgets. In turn, our business plan may be adversely affected if governmental budgets are reduced, if any limitations or restrictions are placed upon the acquisition of new products or services like ours (such as a “freeze” on new products or services) or if expenditure priorities are changed, particularly if budgets available for emergency management services are reduced. We believe that our services provide a key benefit to emergency managers and the general public, and that we will ultimately be able to successfully market our services on a widespread basis but we have no control over general economic conditions or the administration of public funds, so the actual timing of the rate of adoption is subject to additional uncertainty. Should such uncertainties otherwise adversely affect the execution of our business plan, we will make appropriate adjustments to our plan, generally, and/or to the execution of our plan, specifically, in light of the then-available resources, existing prospects, and rapidly changing conditions. By way of example, if our adoption rates in the governmental sector are significantly reduced, we may elect to curtail the growth of our operations, divert more resources toward the pursuit of private sector (rather than governmental) enterprises, adjust the pricing or terms of our offerings, or any combination of the foregoing. In anticipation of the potential for a reduction in the short-term revenue from our services, particularly from our governmental prospects, we have already scaled back expenditures beyond previously planned levels.
SHOULD ONE OR MORE OF THE FOREGOING RISKS OR UNCERTAINTIES MATERIALIZE, OR SHOULD THE UNDERLYING ASSUMPTIONS PROVE INCORRECT, ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THOSE ANTICIPATED, BELIEVED, ESTIMATED, EXPECTED, INTENDED OR PLANNED.
FORWARD-LOOKING STATEMENTS
This Annual Report contains certain forward-looking statements regarding management’s plans and objectives for future operations including plans and objectives relating to our planned marketing efforts and future economic performance. The forward-looking statements and associated risks set forth in this Annual Report include or relate to, among other things, (a) our growth strategies, (b) anticipated trends in our industry, (c) our ability to obtain and retain sufficient capital for future operations, and (d) our anticipated needs for working capital. These statements may be found under “Management’s Discussion and Analysis or Plan of Operations” and “Business,” as well as in this Annual Report generally. Actual events or results may differ materially from those discussed in forward-looking statements as a result of various factors, including, without limitation, the risks outlined under “Risk Factors” and matters described in this Annual Report generally. In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained in this Annual Report will in fact occur.
The forward-looking statements herein are based on current expectations that involve a number of risks and uncertainties. Such forward-looking statements are based on assumptions described herein. The assumptions are based on judgments with respect to, among other things, future economic, competitive and market conditions, and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. Accordingly, although we believe that the assumptions underlying the forward-looking statements are reasonable, any such assumption could prove to be inaccurate and therefore there can be no assurance that the results contemplated in forward-looking statements will be realized. In addition, as disclosed elsewhere in the “Risk Factors” section of this prospectus, there are a number of other risks inherent in our business and operations which could cause our operating results to vary markedly and adversely from prior results or the results contemplated by the forward-looking statements. Management decisions, including budgeting, are subjective in many respects and periodic revisions must be made to reflect actual conditions and business developments, the impact of which may cause us to alter marketing, capital investment and other expenditures, which may also materially adversely affect our results of operations. In light of significant uncertainties inherent in the forward-looking information included in this prospectus, the inclusion of such information should not be regarded as a representation by us or any other person that our objectives or plans will be achieved.
Some of the information in this annual report contains forward-looking statements that involve substantial risks and uncertainties. Any statement in this prospectus and in the documents incorporated by reference into this prospectus that is not a statement of an historical fact constitutes a “forward-looking statement”. Further, when we use the words “may”, “expect”, “anticipate”, “plan”, “believe”, “seek”, “estimate”, “internal”, and similar words, we intend to identify statements and expressions that may be forward- looking statements. We believe it is important to communicate certain of our expectations to our investors. Forward-looking statements are not guarantees of future performance. They involve risks, uncertainties and assumptions that could cause our future results to differ materially from those expressed in any forward-looking statements. Many factors are beyond our ability to control or predict. You are accordingly cautioned not to place undue reliance on such forward-looking statements. Important factors that may cause our actual results to differ from such forward-looking statements include, but are not limited to, the risk factors discussed herein.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable to small business issuers.
ITEM 2.
ITEM 2. DESCRIPION OF PROPERTY
The Company’s address is 1515 Perimeter Rd., West Palm Beach, FL 33406, and the Company’s phone number is (561) 398-8196.
Tactical Air Defense Services, Inc. (TADS) is a Nevada public corporation that trades on the over-the-counter Bulletin Board under the ticker symbol of TADF.OB. TADS currently provides air combat training, and intends to provide mid-air refueling, aerial fire-fighting, ground-threat support, and other airborne support services to U.S. and foreign agencies including the U.S. Department of Defense, the defense departments of its allies, and other State and Federal agencies.
The executive offices of TADS are located in West Palm Beach, Florida. The aviation operations and training facilities are located at Grayson field, the former Perrin air force base, located in Denison, Texas.
Item 3.
Item 3. Legal Proceedings
Sichenzia & Ross LLP is pursuing a claim against the Company for unpaid services. We believe that this claim is without merit and are working towards resolution of the same.
General Charles Searock, the former Chief Executive Officer of International Tactical Training Center, Inc. is pursuing a claim in Texas against TADS for unpaid wages. We believe that this claim is without merit and are working towards resolution of the same.
TADS is not a party to any pending litigation or legal proceeding that is not in the ordinary course of business. To our knowledge, no such proceedings are threatened other than a threat of lawsuits from Sichenzia &Ross and General Searock.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
On December 4, 2008, the Company filed a Form 14A Proxy Statement and sent same to all shareholders of record as of November 24, 2008, which required a vote of security holders at the Annual Meeting of Shareholders held on December 28, 2008 at the executive offices of the Company, in connection with:
(1)
To elect the Company's Board of Directors to hold office until the Company's Annual Meeting of Stockholders in 2009 or until their respective successor is duly elected and qualified; and
(2)
To ratify the appointment of Lawrence Scharfman & Co., CPA P.A. as the Company's independent certified public accountant; and
(3)
To increase the Company’s authorized shares from one billion shares to three billion shares and to enact a one for ten reverse stock split; and
(4)
To ratify the name change from Tactical Air Defense Services, Inc. to AeroGroup Incorporated, to be effective as of the filing of an amendment to the Company's Articles of Incorporation with the Nevada Secretary of State; and
(5)
To transact such other business as may properly come before the Annual Meeting and any adjournment thereof.
All items proposed by the Company were approved by a majority of the shareholders of the Company.
Item 5.
Item 5. Market for Common Equity and Related Stockholder Matters
The TADS Common Stock is quoted on the Over-the-Counter Bulletin Board, under the symbol, "TADF.OB". Trading in the Common Stock in the over-the-counter market has been limited and sporadic, and the quotations set forth below are not necessarily indicative of actual market conditions. Further, these prices reflect inter-dealer prices without retail mark-up, mark-down, or commission, and may not necessarily reflect actual transactions.
As of December 31, 2008 there were 237 record holders of TADS outstanding Common Stock and 2 record holders of TADS outstanding Series A Preferred Stock.
We have not declared or paid dividends to our stockholders during this or our three most recently completed fiscal years. We do not anticipate that we will pay dividends any time in the near future.
Shareholders of AeroGroup will not be issued any of the shares issued to AeroGroup itself. Additionally, any such distribution is likely to require registration under the Securities Act.
Recent sales of unregistered securities
The common and preferred stock issued to investors was sold based or issued on an exemption from registration pursuant to Section 4(2) and Rule 506 of Regulation D of the Securities Act of 1933.
Sale of Stock
Pursuant to a 2007 Securities Purchase Agreement, in September 2007, the Company sold to four investors 382,663 shares in the aggregate of restricted Common Stock at a purchase price of $0.30 per share. The gross proceeds of this offering totaled $114,781. Under the terms of the Securities Purchase Agreement, TADS offered to sell a total of 3,333,333 shares, which could be increased to 4,000,000 shares at the sole discretion of the Company. The share purchase price carries certain anti-dilution rights whereby the share purchase price may be amended as follows: if the average closing price, as quoted in the Wall Street Journal, of the shares, during the 30-day period following the closing of the offering, is less than the share purchase price, then the new share purchase price shall become the anti-dilution reference price, and additional shares shall be issued to reflect the new share purchase price. Notwithstanding any of the above, the new, share purchase price shall not be less than $0.15. As a result of a decline in the price of the Company’s Common Stock, the anti-dilution rights kicked in and an additional 382,663 were issued in January 2008. Subsequently, pursuant to certain protective rights granted to the Investors in the Share Purchase Agreement, on January 23, 2008, and additional 382,666 shares of Common Stock was issued to the Investors, which effectively changed the purchase price of the Common Stock to $0.15 per share. Additionally, a fee of $14,500 and 114,800 shares of Common Stock was paid to an introducing agent as an introduction and expense fee.
Pursuant to a Securities Purchase Agreement, in May, 2008, the Company sold 2,500,000 shares of restricted Common Stock in the aggregate to two investors at a purchase price of $0.01 per share. The gross proceeds of the offering totaled $25,000.
Pursuant to a Securities Purchase Agreement, in September, 2008, the Company sold 30,000,000 shares of restricted Common Stock in the aggregate to two investors at a purchase price of $0.01 per share. The gross proceeds of the offering totaled $300,000.
Pursuant to a Securities Purchase Agreement, in December, 2008, the Company sold 3,000,000 shares of restricted Common Stock to one investor at a purchase price of $0.02 per share. The gross proceeds of the offering totaled $60,000.
Sale of Units
Pursuant to a 2006 Private Placement, in March, 2007, TADS sold to eleven investors an aggregate 629,911 units, each a “unit” at a purchase price of $0.55 per unit. Each unit is comprised of (i) one share of Common Stock, (ii) a Class A Warrant to purchase one share of Common Stock at $1.00 per share and expiring on March 2, 2008 and (iii) a Class B Warrant to purchase one share of Common Stock at $1.50 per share and expiring on March 2, 2010. The gross proceeds of this offering totaled $346,450. During 2006, TADS received the full advance from this financing.
Convertible Debentures
Debentures
During 2006, Aero issued to investors $200,060 aggregate principal amount of its 12% Convertible Debentures convertible into 1,333,733 shares of TADS Common Stock and warrants to purchase 1,333,733 shares of Common Stock at a per share exercise price of $.15 per share. The terms of these securities are the same as the securities issued in 2005. The Debentures mature three years from the issue date.
During 2006, Aero issued to an investor $422,176 aggregate principal amount of 8% Convertible Debentures convertible into 939,369 shares of TADS Common Stock at a conversion price of $.45 per share. The Debentures mature on April 18, 2009. Under the terms of the Debentures, the Company is prohibited from making any distribution to its Stockholders without the Debenture holders' consent.
During 2006, Aero issued to an investor $20,000 aggregate principal amount of its 12% Convertible Debentures and warrants to purchase 40,000 shares of TADS Common Stock at an exercise price of $.50 per share. The Debentures are convertible into TADS shares of Common Stock on a converted basis at $.50 per share. The terms of these securities are substantially the same as the securities issued in 2005. The Debentures mature three years from the issuance date.
The gross proceeds of the total convertible debt issued by Aero in 2006 of $642,236 were recorded net of a debt discount of $358,417. The Debenture Warrants were initially valued at $178,413 and the embedded derivatives were valued at $180,004. The debt discount is being amortized over the term of the debt.
Year Ended December 31, 2007
Between January 1, 2007 and March 31, 2007, the Company received proceeds from loans totaling $343,873. The Debentures are convertible into TADS Common Stock at conversion prices ranging from $.25 to $1.00 per share and provide for warrants to purchase 1,013,999 shares of TADS Common Stock at exercise prices ranging from $.25 to $1.00. The Debentures bear interest of 12% and are due three years from the date of issuance. The Debenture Warrants are exercisable at per share exercise prices of $.25 to $1.00 per share of Common Stock, are exercisable immediately up until the fifth anniversary of the initial warrant date, and such exercise price is subject to adjustment for subsequent lower price issuances by the Company and other customary events including stock splits, reverse stock splits, issuance of convertible securities, sale of Common Stock and spin-offs.
The gross proceeds of the $343,873 were allocated 25% or $86,084 to the Debentures and 75% or $257,789 to the Warrants. The effective conversion price of the Debentures was below the market price of TADS Common Stock at the date the various notes were issued, which resulted in a beneficial conversion feature of $86,084. In accordance with EITF 00-27 the amount allocated to the beneficial conversion feature was limited to the net proceeds of the offering.
Between April 1, 2007 and June 30, 2007, the Company received proceeds from loans totaling $493,851. The Debentures are convertible into 1,974, 486 shares of TADS Common Stock at a conversion price of $.25 per share and provide for warrants to purchase 1,974,486 shares of TADS Common Stock at an exercise price of $.25. The Debentures bear interest of 12% and are due three years from the date of issuance. The Debenture Warrants are exercisable at a per share exercise prices of $.25 per share of Common Stock, are exercisable immediately up until the fifth anniversary of the initial warrant date, and such exercise price is subject to adjustment for subsequent lower price issuances by the Company and other customary events including stock splits, reverse stock splits, issuance of convertible securities, sale of Common Stock and spin-offs.
The gross proceeds of the $493,851 were allocated 24.2% or $120,731 to the Debentures and 75.8% or $373,120 to the Warrants. The effective conversion price of the Debentures was below the market price of TADS Common Stock at the date the various notes were issued, which resulted in a beneficial conversion feature of $120,731. In accordance with EITF 00-27 the amount allocated to the beneficial conversion feature was limited to the net proceeds of the offering.
Between July 1, 2007 and December 31, 2007, the Company received proceeds from loans totaling $229,234. The Debentures are convertible into 1,053,620 shares of TADS Common Stock at a conversion price range of $.20 to $.25 per share and provide for warrants to purchase 1,053,620 shares of TADS Common Stock at an exercise price in the range of $.20 to $.25. The Debentures bear interest of 12% and are due three years from the date of issuance. The Debenture Warrants are exercisable at a per share exercise prices at a range of $.20 to $.25 per share of Common Stock, are exercisable immediately up until the fifth anniversary of the initial warrant date, and such exercise price is subject to adjustment for subsequent lower price issuances by the Company and other customary events including stock splits, reverse stock splits, issuance of convertible securities, sale of Common Stock and spin-offs.
The gross proceeds of the $229,234 were allocated 30.0% or $68,394 to the Debentures and 70.0% or $160,840 to the Warrants. The effective conversion price of the Debentures was below the market price of TADS Common Stock at the date the various notes were issued, which resulted in a beneficial conversion feature of $160,840. In accordance with EITF 00-27 the amount allocated to the beneficial conversion feature was limited to the net proceeds of the offering.
Between October 1, 2007 and December 31, 2007, the Company received proceeds from loans totaling $286,719. The Debentures are convertible into TADS Common Stock at a conversion price of $.05 per share and provide for warrants to purchase 5,734,385 shares of TADS Common Stock at an exercise price of $.05. The Debentures bear interest of 12% and are due three years from the date of issuance. The Debenture Warrants are exercisable at a per share exercise prices of $.05 per share of Common Stock, are exercisable immediately up until the fifth anniversary of the initial warrant date, and such exercise price is subject to adjustment for subsequent lower price issuances by the Company and other customary events including stock splits, reverse stock splits, issuance of convertible securities, sale of Common Stock and spin-offs.
The gross proceeds of the $286,719 were allocated 26.0% or $74,657 to the Debentures and 74.0% or $212,062 to the Warrants. The effective conversion price of the Debentures was below the market price of TADS Common Stock at the date the various notes were issued, which resulted in a beneficial conversion feature of $212,062. In accordance with EITF 00-27 the amount allocated to the beneficial conversion feature was limited to the net proceeds of the offering.
As of December 31, 2007, all of the principal and accrued interest related to the Debentures had been classified as a current liability as they were either in default or due within one year.
Year Ended December 31, 2008
Between January 1, 2008 and March 31, 2008, the Company received proceeds of loans totaling $343,873. The Debentures are convertible into TADS 6,877,460 shares of Common Stock at a conversion price of $0.05 per share and provide for warrants to purchase 6,877,460 shares of TADS Common Stock at an exercise price of $0.05. The Debentures bear interest of 12% and are due three years from the date of issuance. The Debenture Warrants are exercisable at a per share exercise price of $.05 per share of Common Stock, are exercisable immediately up until the fifth anniversary of the initial warrant date, and such exercise price is subject to adjustment for subsequent lower price issuances by the Company and other customary events including stock splits, reverse stock splits, issuance of convertible securities, sale of Common Stock and spin-offs.
The gross proceeds of the $343,873 were allocated 25% or $86,084 to the Debentures and 75% or $257,789 to the Warrants. The effective conversion price of the Debentures was at the market price of TADS Common Stock at the date the various notes were issued.
Second Quarter of 2008
Between April 1, 2008 and June 30, 2008, the Company received proceeds of loans totaling $357,151. The Debentures are convertible into TADS 17,857,252 shares of Common Stock at a conversion price of $0.02 per share and provide for warrants to purchase 17,857,252 shares of TADS Common Stock at an exercise price of $0.02. The Debentures bear interest of 12% and are due three years from the date of issuance. The Debenture Warrants are exercisable at a per share exercise price of $0.02 per share of Common Stock, are exercisable immediately up until the fifth anniversary of the initial warrant date, and such exercise price is subject to adjustment for subsequent lower price issuances by the Company and other customary events including stock splits, reverse stock splits, issuance of convertible securities, sale of Common Stock and spin-offs.
The gross proceeds of the $357,151 were allocated 30% or $107,145 to the Debentures and 70% or $250,006 to the Warrants. The effective conversion price of the Debentures was at the market price of TADS Common Stock at the date the various notes were issued.
Third Quarter of 2008
Between July 1, 2008 and December 31, 2008, the Company received proceeds of loans totaling $95,489. The Debentures are convertible into TADS 4,774,450 shares of Common Stock at a conversion price of $0.02 per share and provide for warrants to purchase 17,857,252 shares of TADS Common Stock at an exercise price of $0.02. The Debentures bear interest of 12% and are due three years from the date of issuance. The Debenture Warrants are exercisable at a per share exercise price of $0.02 per share of Common Stock, are exercisable immediately up until the fifth anniversary of the initial warrant date, and such exercise price is subject to adjustment for subsequent lower price issuances by the Company and other customary events including stock splits, reverse stock splits, issuance of convertible securities, sale of Common Stock and spin-offs.
The gross proceeds of the $95,489 were allocated 25% or $23,872 to the Debentures and 70% or $71,617 to the Warrants. The effective conversion price of the Debentures was at the market price of TADS Common Stock at the date the various notes were issued.
Additional Indebtedness
Between July 1, 2008 and January 31, 2009, the Company received proceeds of Short-Terms loans (the “Short-Term Loans”) totaling $679,904 of which $175,000 was repaid in October, 2008. The Short-Term Loans carry a term of one year, an interest rate of 12%, and 100% stock coverage with a reference price equal to the lowest purchase price of Common Stock of the Company sold by the Company between the date of the Short-Term Loans and repayment of the Short-Term Loans. The Short-Term Loans have a lien on the receivables from the AETC Contract which stipulates that all funds received from the AETC Contract will first be directed towards paying down the Short-Term loans, with the agreement that one half of the funds repaid from the AETC receivables will be reloaned to the Company by the lien holder. The reference price has been renegotiated with the lender and is currently equal to a 50% discount to the lowest purchase price of Common Stock of the Company sold by the Company between the date of the Short-Term Loans and repayment of the Short-Term Loans, which reference price is currently $0.01 and which principle is equal to 135,980,742 shares of the Company’s Common Stock, and which shares have not yet been issued.
Conversion of Notes and Exercise of Warrants
During the period January 1, 2007 through June 8, 2007 the issuances of unregistered securities were made as a result of various warrant exercises and note conversions. In all, during this period, various holders of warrants exercised warrants to purchase 7,611,480 shares of the Company’s Common Stock. These warrants were exercisable at $.15 per share and were exercised through cashless exercise method. In addition, during this period, various holders of the convertible debentures converted $274,060 of debentures plus accrued interest of $58,521 at conversion price of $.15 per share, resulting in the issuance of 2,236,586 shares of Common Stock.
In the second quarter of 2008, the Company issued 496,617 shares of restricted Common Stock to Jack Ramsden in connection with the conversion of a Convertible Promissory Note of the Company in the aggregate amount of $74,492, including $55,000 of principle and $19,494 of accrued interest, at a conversion price of $0.15.
Agreement to Convert All Outstanding Convertible Promissory Notes
In July, 2008, the Company reached an agreement with holders of all of its Convertible Promissory Notes to convert all Convertible Promissory Notes and cancel all associated Warrants, in exchange for a reduction in the conversion price to $0.02 of all outstanding Convertible Promissory Notes. As a result of such conversion agreement, on November 20, 2008, $9,954,287 of principle of and accrued interest on outstanding Convertible Promissory Notes was converted to 497,714,345 shares of the Company’s Common Stock.
Cancellation of Indebtedness and Return of Assets
On May 29, 2008, the Company and Cambar & Associates (“Cambar”) executed a Settlement and Release Agreement. In December, 2006, TADS assumed from AeroGroup an indebtedness owed to Cambar (the “Cambar Note”) of a principle amount of $2,200,000 for the purchase of two MiG-29 aircraft and four flight simulators (the “Cambar Assets”), which indebtedness included interest to be paid on the principle.
With this Settlement and Release Agreement, the Company agreed to relinquish the Cambar Assets to Cambar, and issue to Cambar 50,000,000 Shares, as payment in full and final settlement for any claims Cambar may have against the Company, and Cambar agreed to reclaim the Cambar Assets, cancel the Cambar Note including any accrued and unpaid interest, and return to the Company for retirement the 1,000,000 Shares issued in the aggregate to Cambar and NATA as compensation for interest due on the Cambar Note in 2007, as payment in full and final settlement for any claims the Company may have against Cambar.
Issuance of Common Stock
Issuance of Common Stock to Cambar & Associates and NATA
The Company issued 500,000 restricted shares of Common Stock to NATA in the second quarter of 2007 and 500,000 restricted shares of Common Stock to Cambar & Associates in the third quarter of 2007, as compensation for interest due on the Cambar Note. Notwithstanding the above, NATA and Cambar & Associates have agreed to retire the shares as per the Settlement and Release Agreement described above. The Company issued an additional 40,000,000 restricted shares of Common Stock to NATA and 10,000,000 restricted shares of Common Stock to Cambar & Associates in the third quarter of 2008, as per the terms of the Settlement and Release Agreement described above. No registration rights were issued in connection with these shares.
Issuance of Common Stock to Fred Daniels
The Company issued an aggregate of 405,000 restricted shares of Common Stock to Mr. Fred Daniels in the first and third quarters of 2007, as compensation for service as an Officer of the Company. The Company issued an additional 1,100,000 restricted shares of Common Stock to Mr. Fred Daniels in the third quarter of 2008 as further compensation for service as an Officer and Director of the Company through April 16, 2008. No registration rights were issued in connection with these shares.
Issuance of Common Stock to Mark Daniels
The Company issued an aggregate of 1,600,000 restricted shares of Common Stock to Mr. Mark Daniels in the second quarter of 2007, as compensation in lieu of accrued and unpaid salary for his service as President and Chief Executive Officer of the Company. No registration rights were issued in connection with these shares.
Issuance of Common Stock to Mark Daniels Irrevocable Trust III
The Company issued an aggregate amount of 105,000,000 restricted shares of Common Stock to Mark Daniels Irrevocable Trust III in the 3 rd quarter of 2008. Notwithstanding the above, 52,500,000 of these shares were duplicately issued in error and were cancelled on November 20, 2008 by the Company’s transfer agent for retirement by tender to the transfer agent of a lost share affidavit by the Mark Daniels Irrevocable Trust III. The shares were issued in consideration for Mr. Daniels executing a long-term employment agreement with the Company and for accrued and unpaid salary. No registration rights were issued in connection with these shares.
Issuance of Common Stock to Victor Miller
The Company issued an aggregate of 810,000 restricted shares of Common Stock to Mr. Victor Miller in the second quarter of 2007, as compensation in lieu of accrued and unpaid salary for his service as an Officer of the Company. The Company issued an additional 2,400,000 restricted shares of Common Stock to Victor Miller in February, 2008 in consideration of Mr. Miller retiring his 2,400,000 Series A Preferred shares. Notwithstanding the above, the stock certificate representing the 2,400,000 shares of Common Stock has been lost, will be cancelled because as of December 31, 2008, it had not yet received confirmation from the transfer agent of the Company of the retirement 2,400,000 Series A Preferred shares. No registration rights were issued in connection with these shares.
Issuance of Common Stock to Alexis Korybut
The Company issued an aggregate of 30,000,000 restricted shares of Common Stock to Mr. Alexis Korybut in the first quarter of 2008, as compensation for serving as additional President, Chief Executive Officer, Treasurer, and Principle Accounting Officer of the Company. No registration rights were issued in connection with these shares.
Issuance of Common Stock to John Farley
The Company issued an aggregate of 150,000 restricted shares of Common Stock to Mr. John Farley in the first and third quarters of 2007, as compensation for his service as an Officer of the Company. The Company issued an additional 100,000 restricted shares of Common Stock to Mr. John Farley in the first quarter of 2008, as compensation as an independent provider of services to the Company. The Company issued an additional 300,000 restricted shares of Common Stock to Mr. John Farley in the third quarter of 2008, as compensation as an independent provider of services to the Company. No registration rights were issued in connection with these shares.
Issuance of Common Stock to Lawrence Cusack
The Company issued 600,000 restricted shares of Common Stock to Mr. Lawrence Cusack in the first quarter of 2008, as additional compensation for serving as an employee of the Company. The Company issued an additional 400,000 restricted shares of Common Stock to Mr. Lawrence Cusack in the third quarter of 2008, as consideration for accrued and unpaid salary for serving as an employee of the Company. No registration rights were issued in connection with these shares.
Issuance of Common Stock to Peter Maffitt
The Company issued 500,000 restricted shares Common Stock to Peter Maffitt, a Director of the Company, in the 2nd quarter of 2008 as compensation for acting as a Director of the Company. The Company issued an additional 1,000,000 restricted shares of Common Stock to Peter Maffitt in the 3rd quarter of 2008 as further compensation for acting as a Director of the Company. No registration rights were issued in connection with these shares.
Issuance of Common Stock to Charles DeAngelo
The Company issued 250,000 restricted shares of Common Stock to Charles DeAngelo, a Director of the Company, in the 2 nd quarter of 2008 as compensation for acting as a Director of the Company. The Company issued an additional 750,000 restricted shares of Common Stock to Charles DeAngelo in the 3rd quarter of 2008 as further compensation for acting as a Director of the Company. No registration rights were issued in connection with these shares.
Issuance of Common Stock to ZA Consulting
The Company issued 250,000 restricted shares of Common Stock to ZA Consulting Group in the first quarter of 2007, as compensation for investor relations services and related consulting services. The Company issued an additional aggregate of 6,000,000 restricted shares of Common Stock to ZA Consulting Group in the third quarter of 2008 in connection with a Settlement and Release Agreement reached between the parties in the 3rd quarter of 2008 and in connection with future consulting services to the Company. No registration rights were issued in connection with these shares.
Issuance of Common Stock to Gary Corley
The Company issued 200,000 restricted shares of Common Stock to Mr. Gary Corley Esq. in the fourth quarter of 2007, as compensation for legal services. The Company issued an additional 3,000,000 restricted shares of Common Stock to Mr. Gary Corley Esq. in the third quarter of 2008 as compensation for legal services. No registration rights were issued in connection with these shares.
Issuance of Common Stock to Economic Advisors, Inc.
The Company issued an aggregate of 114,800 restricted shares of Common Stock to Economic Advisors, Inc. in the fourth quarter of 2007 and the first quarter of 2008, as compensation for introducing certain accredited investors to the Company. The Company issued an additional 18,000,000 restricted shares of Common Stock to Economic Advisors, Inc. in the third quarter of 2008 in connection with a Settlement and Release Agreement reached between the parties in the third quarter of 2008. No registration rights were issued in connection with these shares.
Issuance of Common Stock to Federal Financial Partners, LLC
The Company issued an aggregate of 1,600,000 shares of restricted Common Stock to Federal Financial Partners, LLC in the first and third quarters of 2007 as compensation for consulting services to the Company. The Company issued an additional 4,000,000 shares of restricted Common Stock to Federal Financial Partners, LLC in February, 2008 in consideration of Mark Daniels retiring his 4,000,000 Series A Preferred shares. Notwithstanding the above, the stock certificate representing the 4,000,000 shares of Common Stock has been lost, will be cancelled because as of December 31, 2008, it had not yet received confirmation from the transfer agent of the Company of the retirement 4,000,000 Series A Preferred shares. No registration rights were issued in connection with these shares.
Issuance of Common Stock to Northrop Defense Consulting Corp.
The Company issued an aggregate of 2,800,000 shares restricted shares of Common Stock to Northrop Defense Consulting Corp in the third quarters of 2007. Notwithstanding the above, Northrop Defense Consulting Corp has returned said shares to the Company for further retirement. No registration rights were issued in connection with these shares.
Issuance of Common Stock to Joint Strategy Group, LLC
The Company issued 5,000,000 restricted shares of Common Stock to Joint Strategy Group, LLC in the first quarter of 2008, as compensation for consulting services to the Company. The Company issued an additional 20,000,000 restricted shares of Common Stock to Joint Strategy Group, LLC in the third quarter of 2008, as consideration for executing a long-term consulting services agreement with the Company. No registration rights were issued in connection with these shares.
Issuance of Common Stock to Thomas Pierson
The Company issued 100,000 restricted shares of Common Stock to Thomas Pierson in the first quarter of 2008 as compensation for consulting services to the Company. No registration rights were issued in connection with these shares.
Issuance of Common Stock to Charles Pearlman
The Company issued 50,000 restricted shares of Common Stock to Charles Pearlman in the second quarter of 2008 as compensation for consulting services to the Company. No registration rights were issued in connection with these shares.
Issuance of Common Stock to Plumtree Capital Management LLC
The Company issued 4,000,000 restricted shares Common Stock to Plumtree Capital Management LLC in July, 2008 as compensation for accrued and unpaid consulting fees and expenses. No registration rights were issued in connection with these shares.
Issuance of Common Stock to M&A Advisors LLC
The Company issued 2,000,000 restricted shares of Common Stock to M&A Advisors LLC in the third quarter of 2008 as compensation for consulting services to the Company. No registration rights were issued in connection with these shares.
Issuance of Common Stock to TCI Global Trading Ltd
The Company issued 30,000,000 restricted shares of Common Stock to TCI Global Trading Ltd in the third quarter of 2008 as consideration for providing ongoing consulting services to the Company. No registration rights were issued in connection with these shares.
Issuance of Common Stock to Eurotrust Capital SPA
The Company issued to Eurotrust Capital SPA an aggregate of 4,500,000 restricted shares of Common Stock in the third and fourth quarters of 2008 as compensation for consulting services to the Company. No registration rights were issued in connection with these shares.
Issuance of Common Stock to Marc Brannigan
The Company issued 7,000,000 restricted shares of Common Stock to MBC Consulting LLC in the third quarter of 2008 as compensation for accrued and unpaid consulting services to the Company. No registration rights were issued in connection with these shares.
Issuance of Common Stock to Brad Baker
The Company issued 250,000 restricted shares of Common Stock to Brad Baker in the third quarter of 2008 as compensation for serving on the board of advisors of the Company. No registration rights were issued in connection with these shares.
Issuance of Common Stock to Donald Goldstein
The Company issued 1,000,000 restricted shares of Common Stock to Donald Goldstein in the third quarter of 2008 as compensation for prior service on the Board of Directors of the Company. No registration rights were issued in connection with these shares.
Issuance of Common Stock to the Sassin Law Firm
The Company issued 666,667 restricted shares of Common Stock to the Sassin Law Firm in the third quarter of 2008 as compensation for legal services. No registration rights were issued in connection with these shares.
Issuance of Common Stock to the Ticktin Law Group
The Company issued 3,000,000 restricted shares of Common Stock to the Tictin Law Group in the fourht quarter of 2008 as compensation for legal services. No registration rights were issued in connection with these shares.
Issuance of Common Stock to Julius Astrada
The Company issued 1,000,000 restricted shares of Common Stock to the Julius Astrada in the fourth quarter of 2008 as compensation for marketing services. No registration rights were issued in connection with these shares.
Series A Preferred Stock Issuances
On March 21, 2007, the Company filed a Certificate of Designation of Series A Preferred Stock (the “Series A Certificate of Designation”) with the Secretary of State of the State of Nevada, designating a series of 50,000,000 shares of Preferred Stock of the Company, $.001 par value (the “Series A Preferred Stock”). Pursuant to the Series A Certificate of Designation, holders of the Company’s Series A Preferred Stock are entitled to:
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elect one director to the Company’s board of directors;
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vote on all other matters on a 25 votes per share Common Stock basis;
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with respect to dividend rights, rights on redemption, rights on conversion and rights on liquidation, winding up and dissolution, rank senior to all Common Stock, warrants and options to purchase Common Stock established by the Board or the Stockholders (all of such equity securities of the Corporation to which the Series A Preferred Stock ranks senior are collectively referred to herein as “Junior Stock”); and
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Each share of Series A Preferred Stock is initially convertible into 2 shares of the Common Stock of the Company, subject to adjustment for stock splits, recapitalization or other reorganizations.
In addition, the Series A Preferred Stock:
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has weighted average antidilution protection that will cause the conversion price to adjust downward in the event that the Company issues shares of Common Stock or securities convertible into Common Stock at a price of less than the conversion price of the Series A Preferred Stock then in effect; and
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may be converted into Common Stock at the option of the holder.
In addition, at any time after the closing bid price for the Company’s Common Stock on the NASDAQ OTCBB or the primary United States exchange on which the Common Stock is then traded exceeds $5.00 during any five consecutive trading days, the Company may, at its sole option, convert the Series A Preferred and any accrued but unpaid dividends into common shares at the then-applicable conversion price by providing written notice of such conversion to the holders of the Series A Preferred; provided that there is an effective registration statement under the Securities Act registering the resale of the Common Stock to be issued upon such conversion.
Each share of Series A Preferred Stock is entitled to receive a dividend of 7% per annum. The dividend begins to accrue on January 1, 2007 and will be payable quarterly thereafter. The dividend is cumulative. In the event of a liquidation or acquisition of the Company, the holders of the Series A Preferred Stock will be entitled to receive an amount equal to any accrued and unpaid dividend prior and in preference to any distributions to the holders of the Common Stock. Thereafter, the holders of the Series A Preferred Stock will be entitled to participate in distributions on an as converted to common stock basis.
Shares of Series A Preferred may be redeemed, in whole or in part, by the Company out of funds lawfully available therefore from the holders of then outstanding shares of Series A Preferred on a pro rata basis, at any time by providing written notice to the holders of the Series A Preferred owned by each holder, that number of outstanding shares of Series A Preferred owned by each holder, that number of outstanding shares of Series A Preferred that the Company has elected to purchase for the following consideration: (i) an amount equal to a price per share equal to the $4.00 plus any accrued and unpaid dividends multiplied by the number of shares of Series A Preferred being redeemed from such holder and (ii) the issuance of the number of shares of Common Stock equal to seventeen and one-half percent (17.5%) of the shares of Common Stock then issuable upon conversion of the shares of Series A Preferred being redeemed from such holder. A cash payment will be provided in lieu of any fractional shares of Common Stock.
Issuance of Preferred Securities
During fiscal 2007, the Company issued an aggregate of 6,400,000 shares of its Series A Preferred Stock; 2,400,000 shares to Mr. Victor Miller, and 4,000,000 shares to Mr. Mark Daniels, both of whom were Officers and Directors at the time of issuance of the shares. Because the Company contends that the shares of its Series A Preferred Stock were issued to Mr. Miller and Mr. Daniels without consideration, the Company has been seeking to rescind said 6,400,000 Series A Preferred shares, and have Mr. Miller and Mr. Daniels waive any accrued and unpaid dividends associated with said Series A Preferred shares. Mr. Mark Daniels has agreed to rescind the 4,000,000 Series A Preferred shares issued to him and to waive any accrued and unpaid dividends associated with said 4,000,000 Series A Preferred shares, contingent upon Mr. Miller agreeing to rescind the 2,400,000 Series A Preferred shares issued to him and to waive any accrued and unpaid dividends associated with said 2,400,000 Series A Preferred shares. However, the Company has been unable to have Mr. Miller agree to rescind the 2,400,000 shares of its Series A Preferred Stock issued to him and to waive any accrued and unpaid dividends associated with said 2,400,000 Series A Preferred shares, and is considering taking legal action against Mr. Miller. The Company believes that its contention, that the 2,400,000 shares of its Series A Preferred Stock were issued to Mr. Miller without consideration, is with merit and that it would be successful in a suit to have said shares rescinded, and have any accrued and unpaid dividends waived, in connection with the issuance of and the rescission of said 2,400,000 shares of Series A Preferred Stock.
Dividends
We may never pay any dividends to our shareholders including the holders of the Series A Preferred Stock. We did not declare any dividends for the year ended December 31, 2008. The Company contends that all Series A Preferred Stock was issued without proper consideration and is therefore not entitled to any dividends. Our Board of Directors does not intend to distribute dividends in the near future. The declaration, payment and amount of any future dividends will be made at the discretion of the Board of Directors, and will depend upon, among other things, the results of our operations, cash flows and financial condition, operating and capital requirements, and other factors as the Board of Directors considers relevant. There is no assurance that future dividends will be paid, and if dividends are paid, there is no assurance with respect to the amount of any such dividend.
Item 6.
Item 6. Management’s Discussion and Analysis or Plan of Operation
THE FOLLOWING DISCUSSION SHOULD BE READ TOGETHER WITH THE INFORMATION CONTAINED IN THE FINANCIAL STATEMENTS AND RELATED NO TES INCLUDED IN THIS ANNUAL REPORT ON FORM 10-K, THE FORWARD LOOKING STATEMENTS PROVISIONS ABOVE, AND THE RISK FACTORS ABOVE.
The Company has experienced substantial delays as a result of its inability to raise capital and the result of interference from third-parties in its contracts and business.
Plan of Operation
Liquidity and Capital Resources
The Company had had no revenues during 2007 and only $250,000 in 2008. We anticipate that our current cash on hand of $23,156 as of December 31, 2008 is sufficient to satisfy our cash requirements only through May 31, 2009. We do not have any financing commitments and no assurance can be made that we will be obtaining financing at the times and terms needed. Therefore, there is substantial doubt that we will be able to continue as a going concern. In addition, we will need substantial additional capital during the next 12 months on order to complete our business plan.
Our business may require significant amounts of capital for the execution of pending and future contracts. Some of our anticipated one time and ongoing expenses are discussed below.
The Company has funded its operations and met its capital expenditures requirements primarily through cash generated from contributions from the issuance of convertible debt securities and short-term promissory notes.
As of December 31, 2008, the Company had negative working capital in the amount of $625,000. Cash used by operating activities were $1.760,428 for the year ended December 31, 2008 compared to cash used by operating activities for the year ended December 31, 2007 of $1,604,516.
Net cash provided by financing activities for the year ended December 31, 2007 was $1,468,458 compared to $1,737,272 for the year ended December 31, 2008. The increase was predominantly due to increased debt raised in 2008.
The factors that predominantly impact working capital and therefore cash flows from operations are operating expenses.
During the year ended December 2009, the Company believes that it will expend funds on the following:
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Final preparation of the leased ILyushin IL-78 which we anticipate will cost a minimum of another $250,000 to complete;
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Leasing and refurbishment of used fourth generation military aircraft, equipment, and tanker aircraft;
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Leasing and refurbishment of training facilities to fulfill pending contracts; and
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Hiring of additional employees and independent contractors to fulfill pending contracts.
We anticipate that if we are able to raise sufficient capital that we will be able to complete our programs and import additional aircraft and equipment by mid 2009. If we are not able to do so, we will not be able to perform under the Training Contract or execute pending contracts.
Immediate Expenses and Cost of Equipment
We will be required to make additional expenditures to complete the certification of the IL-76/78 under lease in order to perform our certain parts of our contracts. We anticipate the cost to be approximately $250,000. Thereafter, we may lease additional aircraft if sufficient financing alternatives are not available.
Off Balance Sheet Arrangements
As of December 31, 2008 we do not have any off balance sheet arrangements, as defined in Section 303(c) of Regulation S-B, other then as specifically disclosed in this report. Off balance sheet arrangements include, without limitation, contractual arrangements with any entity whose financial information is not consolidated with our own, under which we have:
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Guaranteed any obligation of such other entity;
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A retained or contingent interest in assets transferred to such unconsolidated entity or similar arrangement that serves as credit, liquidity or market risk support to that entity for such assets;
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Any obligation under certain derivative instruments;
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Any obligation under a material variable interest held by the registrant in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to the registrant, or engages in leasing, hedging or research and development services with the registrant.
Additionally, we do not have any relationships or transactions with persons or entities that derive benefits from any non-independent relationships other than related party transactions discussed herein.
Item 7.
Item 7. Financial Statements
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Lawrence Scharfman & Co., CPA P.A.
Certified Public Accountants
E. Sunrise Hwy
Honey Bell Circle
Suite
Boynton Beach, FL 33437
Freeport, NY 11520
Telephone: (516) 771-5900
Telephone: (561) 733-0296
Fax: (516) 771-2598
Fax: (561) 740-0613
Tactical Air Defense Services, Inc.
Crescent Court
7th Floor
Dallas, TX 75201
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have audited the accompanying balance sheet of Tactical Air Defense Services, Inc. as of December 31, 2008 and the related statements of Operations, Changes in Stockholders Equity and Cash Flows then ended. These statements are the responsibility of management. Our responsibility is to express an opinion on these financial statements based on our audits.
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 audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. 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 presentation. We believe that our audit provided a reasonable basis for our opinion.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The Company's existence is dependent upon management's ability to develop profitable operations. Management is hopeful that the Company will attain profitable status and liquidity if they are able to raise additional capital.
In our opinion, the financial statements referred to above present fairly, in all material respects the financial position of Tactical Air Defense Services, Inc. as of December 31, 2008 and the results of operations and cash flows for the year then ended in conformity with generally a in conformity with generally accepted accounting principles except that the Company erroneously overstated capital stock issued for services rendered.
Lawrence Scharfman CPA
April 15th 2008
Member:
American Institute CPAS
Florida Institute CPAS
Licensed in Florida & New York
TACTICAL AIR DEFENSE SERVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
FOR THE YEAR ENDED DECEMBER 31, 2008
The accompanying notes are an integral part of these condensed consolidated financial statements.
TACTICAL AIR DEFENSE SERVICES, INC.
(A Development Stage Company, Commencing January 1, 2006)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 30, 2008 and 2007
The accompanying notes are an integral part of these condensed consolidated financial statements.
TACTICAL AIR DEFENSE SERVICES, INC.
(A Development Stage Company, Commencing January 1, 2006)
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2008 AND 2007
The accompanying notes are an integral part of these condensed consolidated financial statements.
TACTICAL AIR DEFENSE SERVICES, INC.
(A Development Stage Company, Commencing January 1, 2006)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIENCY) EQUITY
The accompanying notes are an integral part of these condensed consolidated financial statements.
TACTICAL AIR DEFENSE SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - COMPANY AND BASIS OF PRESENTATION:
General
Tactical Air Defense Services, Inc. (“TADS”) is a Nevada public corporation that offers air combat training, mid-air refueling, ground-threat support, aerial fire-fighting, and specialty aerial services to the U.S. and Foreign Militaries and other Federal and State Agencies. TADS is certified by the United States Government as a private-sector military contractor and has been granted the required security clearances.
TADS was incorporated in the State of Nevada on July 9, 1998 under the name Natalma Industries, Inc. Originally, TADS operated as a junior mining company engaged in the exploration of mining properties. We were unsuccessful in locating a joint venture partner to assist us in the development of our mining claims. As a result, TADS was unable to pay for and perform the exploration and development required in its agreement with the owners of its properties and lost our rights to the mining claims. Our management at the time, therefore determined that it was in the best interest of our shareholders that we seek potential operating businesses and business opportunities with the intent to acquire or merge with another business, which led to the purchase substantially all of the assets of AeroGroup Incorporated (the “AeroGroup Acquisition”).
On December 15, 2006 (the “Closing Date”), TADS and three of its wholly-owned subsidiaries, Resource Financial Aviation Holdings Inc., OneSource Aviation Acquisition Inc. and Genesis Aviation Acquisition Inc., each a Nevada corporation (the “TADS Subsidiaries” and, collectively with TADS,”) acquired substantially all of the assets of AeroGroup Incorporated (“Aero or AeroGroup”), a Utah corporation, and its three wholly owned subsidiaries, OneSource Acquisition, Inc., Genesis Acquisition, Inc. and Resource Financial Holding Acquisition, Inc., each a Delaware corporation (the “AeroGroup Subsidiaries” and, collectively with AeroGroup Incorporated, “AeroGroup”), pursuant to an Asset Purchase Agreement dated July 14, 2006, as amended (the “Asset Purchase Agreement”) and in consideration of the acquisition issued stock and assumed certain indebtedness and other obligations under various warrants, a real property sublease, government and non-government aviation contracts and certain other contracts of AeroGroup (the “AeroGroup Acquisition”). As a result of the asset purchase, the Company intends to be a provider of outsourced military fighter jet pilot training to military personnel, including certain flight support services.
Since the AeroGroup Acquisition was settled through the issuance of a controlling interest in TADS Common Stock, AeroGroup is deemed to be the acquirer for accounting purposes. Furthermore, since TADS is deemed to be a shell company prior to the acquisition, purchase accounting was not applied. Therefore, the transaction was accounted for as a reverse acquisition and recapitalization of AeroGroup. Accordingly, the historical financial statements presented in the financial statements are those of AeroGroup as adjusted to reflect the recapitalization and elimination of certain assets and liabilities that were not assumed by TADS. The net liabilities not assumed by TADS were recorded as a contribution to capital totaling $4,505,560. These liabilities substantially consisted of indebtedness due to Aero’s controlling stockholder, Mark Daniels (“Daniels”).
The accompanying share information for Aero has been retroactively restated to reflect the recapitalization transactions, including the exchange of Common Stock and Common Stock equivalents of Aero for Common Stock and Common Stock equivalents of TADS based on the exchange ratio of 50 to 1.
In connection with the reverse acquisition, the consideration paid to Aero Group for the assets consisted of:
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14,989,900 shares of restricted Common Stock of TADS, constituting a majority of the then outstanding Common Stock of TADS.
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Assumption by TADS of Aero’s obligations under its convertible debentures totaling approximately $5.6 million, inclusive of accrued interest, all convertible into shares of TADS Common Stock at prices ranging $0.15 to $1.00 per share.
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Assumption by TADS of Aero’s obligation under a convertible note issued in connection with a settlement agreement in the principal amount of $250,000, with an interest rate of 12%, payable in 36 equal monthly installments of principal, plus interest. The note has a maturity date of April 13, 2011. The note is convertible into shares of Common Stock at a rate of $.50 per share.
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Assumption by TADS of Aero’s obligation under an assumed secured note payable to Daniels in the principal amount of $1,100,000, plus interest, at the rate of 12% per annum. The outstanding principal and interest is convertible into shares of TADS Common Stock at a conversion price of $.0.50 per share.
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Assumption by TADS of Aero’s' obligation under a note assumed by the Company in connection with its June 2006 asset purchase (Note 5) in the principal amount of $2.2 million, plus interest at the rate of 8% per annum. The outstanding principal and interest is convertible into shares of TADS Common Stock at a conversion price of $0.50 per share.
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Assumption by TADS of Aero’s obligations under certain outstanding warrants to purchase 23,968,315 shares of Common Stock exercisable at $0.15 per share.
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Assumption by TADS of Aero’s obligations under government contracts and subcontracts and of leases relating to its Grayson Airport facilities, a $300,000 consulting contract and property leases.
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Assumption by TADS of Aero’s obligations for accrued expenses totaling $136,000.
Effective January 1, 2006, the Company is in the development stage and its operations principally involve research and development, market analysis, and other business planning activities, and minimal revenue has been generated to date.
Aero is a Utah corporation, which was incorporated on July 31, 1984 under the name Diversified Resources Group, Inc. Aero was a provider of outsourced military fighter jet pilot training to military personnel, including certain flight support services. Effective January 1, 2006, Aero became a development stage company as it was devoting all of its present efforts to securing and establishing a new business. Accordingly, the accompanying consolidated financial statements for 2006 represent the cumulative financial statements from the commencement of the development stage through December 31, 2006
Basis of Presentation
In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting of normal recurring accruals, necessary for a fair statement of the results of operations and cash flows for the periods presented and the condensed consolidated balance sheet at December 31, 2008. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to the SEC rules and regulations.
Going Concern and Management's Plan
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate the continuation of the Company as a going concern. However, as shown in the accompanying consolidated financial statements, the Company has incurred losses from operations since inception and has a working capital deficiency as of December 31, 2008 of approximately $625,000.
December 15, 2006, TADS acquired substantially all of the assets of Aero and assumed certain contracts in exchange for the assumption by TADS of certain liabilities of Aero. Management believes the Company can raise adequate capital for the Company’s required working capital needs for 2007 including additional modifications to its aircrafts necessary to make them operational. Management also believes that it still needs substantial capital in order to carry out its business plan, which is to become a civilian provider of outsourced military aviation services which includes fighter jet pilot training, operational deployment training, aviator combat support and close air support for “Forward Controllers,”. No assurance can be given that the Company can obtain the required estimated additional working capital, or if obtained, that such funding will not cause substantial dilution to stockholders of the Company. Being a development stage company, the Company is subject to all the risks inherent in the establishment of a new enterprise and the marketing of a new product, many of which risks are beyond the control of the Company. All of the factors discussed above raise substantial doubt about the Company's ability to continue as a going concern. During 2006, Aero raised from various stockholders approximately $1,510,634 through the issuance of convertible debt securities and warrants. During 2007, the Company has raised from various financing sources approximately $1,353,677 through the issuance of convertible debt. Also, the Company received proceeds totaling $346,450 from the sale of 629,911 units comprising of one share of common stock and warrants to purchase common stock. In addition, the Company received proceeds totaling $114,781 from the sales of 382,663 shares of the Company’s common stock. In 2008, the Company received proceeds totaling $737,388 through the issuance of convertible debt, and received proceeds totaling $679,904 through January 31, 2009 from the issuance of short-term promissory notes.
These consolidated financial statements do not include any adjustments relating to the recoverability of recorded asset amounts that might be necessary as a result of the above uncertainty.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principals of Consolidation
The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Genesis Acquisition, Inc., Resource Financial Holding Acquisition, Inc. and OneSource Acquisition, Inc. All significant intercompany transactions have been eliminated.
Use of Estimates
The preparation of the condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities in the condensed consolidated financial statements and accompanying notes. The most significant estimates relate to the estimated useful lives and assessment for impairment of the Company’s property and equipment, contingencies, revenue recognition and valuation of derivative instruments. Actual results could differ from those estimates.
Property and Equipment
Property and equipment are recorded at cost. Property and equipment acquired by Aero pursuant to the June 2006 Asset Purchase Agreement (Note 3) was recorded at its then net carrying value due to the entities being controlled by Aero's majority stockholder. The provision for depreciation of operating equipment is computed on the straight line method applied to each unit of property over the estimated useful lives, generally five to ten years, commencing when the assets are placed into service.
Leasehold improvements shall be amortized over the shorter of their useful life or the remaining lease term. Upon retirement or other disposition of these assets, the cost and related accumulated depreciation of these assets are removed from the accounts and the resulting gains or losses are reflected in the results of operations.
As of December 31, 2008 and 2007, the Company did not have any assets placed into service. As a result, there was no depreciation expense for the three and nine months ended December 31, 2008 and 2007.
The Aircraft acquired pursuant to the June 2006 Asset Purchase Agreement (Note 5) were stationed in the Ukraine awaiting for disassembly and shipment to the United States of America. Additional modifications would be necessary to make them operational for use within the United States of America. The Company estimates that it would cost cost approximately $200,000 to ship the MIGs to the United States of America, and approximately $420,000 to get the MIGs fully operational. In December 2007, the Company was notified by the note holder of the note issued in connection with the June 2006 Asset Purchase Agreement, that the Company was in default of the agreement and that the holder was exercising their right to repossess the equipment. As a result, the Company recorded a charge of $6,740,000 which is included a write-down of fixed assets in the accompanying consolidated statement of operations. The note associated with this purchase was settled in the second quarter of 2008. The note balance including accrued interest and principle was for approximately $2.7 million was settled for 50 million shares of common stock. This settled all demands between the Company and the company the asset was acquired from.
Maintenance and repair costs for owned and leased flight equipment are charged to operating expense as incurred.
Revenue Recognition
Revenue is recognized once four criteria are met: (1) the Company must have persuasive evidence that an arrangement exists; (2) services have been performed and accepted by the Customer, (3) the price must be fixed and determinable; and (4) collectibility must be reasonably assured.
Fair Value of Financial Instruments
The recorded carrying values of accounts payable and accrued liabilities and interest bearing indebtedness approximate the fair value of such financial instruments. The derivative liabilities are recorded at fair value and are marked-to-market at each balance sheet date.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all short-term investments with original maturities of three months or less when purchased to be cash equivalents. The Company had no cash equivalents as of December 31, 2007.
Concentration of Credit Risk
The Company places its cash in what it believes to be creditworthy financial institutions. However, cash balances may exceed FDIC insured levels at various times during the year.
Net (Loss) Income Per Share of Common Stock
Basic net (loss) income per share of common stock are computed by dividing net (loss) income available to common stockholders by the weighted average number of shares of common stock outstanding during the periods presented.
Diluted net (loss) income per share reflects per share amounts that result if dilutive common stock equivalents are converted to common stock. Common stock equivalents, consisting of convertible debt, options and warrants, discussed in Note 7, were not included in the calculation of diluted (loss) income per share for the years ended December 31, 2007 and 2006 because their inclusion would have had been anti-dilutive.
Impairment of Long-Lived Assets
In accordance with Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," the Company reviews the carrying amount of long-lived assets on a regular basis for the existence of facts or circumstances, both internally and externally, that suggest impairment. The Company determines if the carrying amount of a long-lived asset is impaired based on anticipated undiscounted cash flows before interest from the use of the asset. In the event of impairment, a loss is recognized based on the amount by which the carrying amount exceeds the fair value of the asset. Fair value is determined based on appraised value of the assets or the anticipated cash flows from the use of the asset, discounted at a rate commensurate with the risk involved.
Convertible Notes and Warrants
The Company accounts for conversion options embedded in convertible notes in accordance with SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities" (" SFAS 133 ") and Emerging Issues Task Force (" EITF ") 00-19, "Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock" (" EITF 00-19 "). SFAS 133 generally requires companies to bifurcate conversion options embedded in convertible notes from their host instruments and to account for them as free standing derivative financial instruments in accordance with EITF 00-19. SFAS 133 provides for an exception to this rule when convertible notes, as host instruments, are deemed to be conventional as that term is described in the implementation guidance under Appendix A to SFAS 133 and further clarified in EITF 05-2 "The Meaning of "Conventional Convertible Debt Instrument" in Issue No. 00-19.”
The Company accounts for convertible notes deemed conventional and conversion options embedded in non-convertible notes which qualify as equity under EITF 00-19, in accordance with the provisions of Emerging Issues Task Force Issue (" EITF ") 98-5 "Accounting for Convertible Securities with Beneficial Conversion Features," and EITF 00-27 "Application of EITF 98-5 to Certain Convertible Instruments". Accordingly, the Company records, as a discount to convertible notes, the intrinsic value of such conversion options based upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion price embedded in the note. Debt discounts under these arrangements are amortized over the term of the related debt.
As of December 31, 2008, the Company had no derivative financial instruments.
The Company accounts for embedded conversion options in non-conventional convertible notes which do not qualify as equity under EITF 00-19, as derivative liabilities. Accordingly, the Company determines the fair value (as determined through a lattice model) of these embedded derivatives (usually conversion options and redemption rights). Such fair value is recorded as a debt discount up to the proceeds of the debt and any amount in excess of the proceeds of the debt is charged to operations at the security issuance date.
The Company accounts for the issuance of common stock purchase warrants issued and other free standing derivative financial instruments in accordance with the provisions of EITF 00-19. Based on the provisions of EITF 00-19, the Company classifies as equity any contracts that (i) require physical settlement or net-share settlement or (ii) gives the Company a choice of net-cash settlement or settlement in its own shares (physical settlement or net-share settlement). The Company classifies as assets or liabilities any contracts that (i) require net-cash settlement (including a requirement to net cash settle the contract if an event occurs and if that event is outside the control of the Company) and (ii) give the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement). The Company determines the fair value of these free standing instruments under the Black-Scholes Pricing Model using the following range of assumptions:
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expected volatility - 350%-450%
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expected dividend - none
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risk-free interest rate - 4.75%-5.00%
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contractual term - 3-5 years
Non-Employee Stock Based Compensation
The Company accounts for stock based compensation awards issued to non-employees for services, as prescribed by SFAS No. 123R, at either the fair value of the services rendered or the instruments issued in exchange for such services, whichever is more readily determinable, using the measurement date guidelines enumerated in EITF 96-18, "Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services."
Recently Adopted Accounting Policies
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. SFAS No. 159 permits entities to choose to measure eligible financial instruments at fair value. The unrealized gains and losses on items for which the fair value option has been elected should be reported in earnings. The decision to elect the fair value options is determined on an instrument by instrument basis, it should be applied to an entire instrument, and it is irrevocable. Assets and liabilities measured at fair value pursuant to the fair value option should be reported separately in the balance sheet from those instruments measured using another measurement attribute. SFAS No. 159 is effective as of the beginning of the first fiscal year that begins after November 15, 2007. The Company is currently analyzing the potential impact of adoption of SFAS No. 159 to its financial statements.
In December 2007, the FASB issued SFAS No. 141(R),“Business Combinations,” which replaces SFAS No. 141, “ Business Combinations,” which, among other things, establishes principles and requirements for how an acquirer entity recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed (including intangibles) and any noncontrolling interests in the acquired entity. SFAS No. 141(R) applies prospectively to 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. We are currently evaluating what impact our adoption of SFAS No. 141(R) will have on our financial statements.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51.” SFAS No. 160 amends ARB 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It also amends certain of ARB 51’s consolidation procedures for consistency with the requirements of SFAS No. 141(R). SFAS No. 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. We are currently evaluating what impact our adoption of SFAS No. 160 will have on our financial statements.
In December 2007, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) No. 110. This guidance allows companies, in certain circumstances, to utilize a simplified method in determining the expected term of stock option grants when calculating the compensation expense to be recorded under Statement of Financial Accounting Standards (SFAS) No. 123(R), Share-Based Payment . The simplified method can be used after December 31, 2007 only if a company’s stock option exercise experience does not provide a reasonable basis upon which to estimate the expected option term. Through 2007, we utilized the simplified method to determine the expected option term, based upon the vesting and original contractual terms of the option. On January 1, 2008, we began calculating the expected option term based on our historical option exercise data. This change did not have a significant impact on the compensation expense recognized for stock options granted in 2008.
In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities" ("SFAS No. 161"). SFAS No. 161 amends and expands the disclosure requirement for FASB Statement No. 133, "Derivative Instruments and Hedging Activities" ("SFAS No. 133"). It requires enhanced disclosure about (i) how and why an entity uses derivative instruments, (ii) how derivative instruments and related hedged items are accounted for under SFAS No. 133 and its related interpretations, and (iii) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. SFAS No. 161 is effective for the Company as of January 1, 2009.
In April 2008, FASB Staff Position No. 142-3, Determination of the Useful Life of Intangible Assets (FSP 142-3) was issued. This standard 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 FASB Statement No. 142, Goodwill and Other Intangible Assets. FSP 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is prohibited. The Company has not determined the impact on its financial statements of this accounting standard.
In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles.” SFAS No. 162 identifies the sources of accounting principles and provides entities with a framework for selecting the principles used in preparation of financial statements that are presented in conformity with GAAP. The current GAAP hierarchy has been criticized because it is directed to the auditor rather than the entity, it is complex, and it ranks FASB Statements of Financial Accounting Concepts, which are subject to the same level of due process as FASB Statements of Financial Accounting Standards, below industry practices that are widely recognized as generally accepted but that are not subject to due process. The Board believes the GAAP hierarchy should be directed to entities because it is the entity (not its auditors) that is responsible for selecting accounting principles for financial statements that are presented in conformity with GAAP. The adoption of FASB 162 is not expected to have a material impact on the Company’s consolidated financial position and results of operations.
Settled in Cash upon Conversion (Including Partial Cash Settlement). ” APB 14-1 requires the issuer to separately account for the liability and equity components of convertible debt instruments in a manner that reflects the issuer’s nonconvertible debt borrowing rate. The guidance will result in companies recognizing higher interest expense in the statement of operations due to amortization of the discount that results from separating the liability and equity components. APB 14-1 will be effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The Company is currently evaluating the impact of adopting APB 14-1 on its consolidated financial statements.
Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption.
Reclassifications
Certain prior periods' balances have been reclassified to conform to the current period's financial statement presentation. These reclassifications had no impact on previously reported results of operations or stockholders' equity.
Net Loss Per Share of Common Stock
Basic net loss per share of common stock is computed by dividing net loss available to common stockholders by the weighted average number of shares of common stock outstanding during the periods presented.
NOTE 3- ASSETS PURCHASED BY AERO
Assets Purchased By Aero
In June of 2006, Aero, through its subsidiaries, acquired certain assets from three entities (“the Selling Entities”) owned 100% by Aero's controlling stockholder, Mark Daniels. The Selling Entities acquired these assets on December 29, 2005 from an unrelated entity in exchange for assets with a fair value of $4,540,000 and a promissory note of $2,200,000. The assets acquired included two MIG29 Aircrafts and four flight simulators and certain intellectual assets. The Selling Entities obtained appraisals from certified independent appraisers dated December 2005, which valued the aircrafts and simulators at $6,740,000.
As consideration for the purchase of these assets, Aero (i) assumed indebtedness of $1.1 million owed to Daniels by the Selling Entities, (ii) assumed obligations under a promissory note in the principal amount of $2.2 million, with interest at 8% per annum, which was originally issued in December 2005, in connection with the acquisition of aircraft and simulators by the Selling Entities, and (iii) issued a $3,440,000 unsecured promissory note to Daniels. The $1.1 million due to Daniels is collateralized by TADS assets and is guaranteed by its subsidiaries.
In reviewing the above transaction, Management determined that it had purchased a group of assets, rather than acquiring a business. Since Aero and the Selling Entities are commonly controlled, the recorded value of the assets purchased for accounting purposes is limited to the Selling Entities carrying value of the assets, which totaled $6,740,000 in June of 2006. The difference between the considerations provided to the Selling Entities of $7,051,255, inclusive of accrued interest assumed of $311,255, and the carrying value of the assets sold of $6,740,000 was $311,255. This amount was recorded as a distribution in June of 2006. Prior to this asset purchase, Aero did not have any business transactions with the Selling Entities.
In connection with the reverse acquisition, TADS assumed the notes payable of $2.2 million and $1.1 million and did not assume the note payable to Daniels of $3,440,000.
NOTE 4 - SALE OF STOCK
Pursuant to a 2007 Securities Purchase Agreement, in September 2007, the Company sold to four investors 382,663 shares in the aggregate of restricted Common Stock at a purchase price of $0.30 per share. The gross proceeds of this offering totaled $114,781. Under the terms of the Securities Purchase Agreement, TADS offered to sell a total of 3,333,333 shares, which could be increased to 4,000,000 shares at the sole discretion of the Company. The share purchase price carries certain anti-dilution rights whereby the share purchase price may be amended as follows: if the average closing price, as quoted in the Wall Street Journal, of the shares, during the 30-day period following the closing of the offering, is less than the share purchase price, then the new share purchase price shall become the anti-dilution reference price, and additional shares shall be issued to reflect the new share purchase price. Notwithstanding any of the above, the new, share purchase price shall not be less than $0.15. As a result of a decline in the price of the Company’s Common Stock, the anti-dilution rights kicked in and an additional 382,663 were issued in January 2008. Subsequently, pursuant to certain protective rights granted to the Investors in the Share Purchase Agreement, on January 23, 2008, and additional 382,666 shares of Common Stock was issued to the Investors, which effectively changed the purchase price of the Common Stock to $0.15 per share. Additionally, a fee of $14,500 and 114,800 shares of Common Stock was paid to an introducing agent as an introduction and expense fee.
Pursuant to a Securities Purchase Agreement, in May, 2008, the Company sold 2,500,000 shares of restricted Common Stock in the aggregate to two investors at a purchase price of $0.01 per share. The gross proceeds of the offering totaled $25,000.
Pursuant to a Securities Purchase Agreement, in September 2008, the Company sold 30,000,000 shares of restricted Common Stock in the aggregate to two investors at a purchase price of $0.01 per share. The gross proceeds of the offering totaled $300,000.
Pursuant to a Securities Purchase Agreement, in December, 2008, the Company sold 3,000,000 shares of restricted Common Stock to one investor at a purchase price of $0.02 per share. The gross proceeds of the offering totaled $60,000.
Sale of Units
Pursuant to a 2006 Private Placement, on March 2, 2007, TADS sold to eleven investors an aggregate 629,911 units, each a “unit” at a purchase price of $0.55 per unit. Each unit is comprised of (i) one share of Common Stock, (ii) a Class A Warrant to purchase one share of Common Stock at $1.00 per share and expiring on March 2, 2008 and (iii) a Class B Warrant to purchase one share of Common Stock at $1.50 per share and expiring on March 2, 2010. The gross proceeds of this offering totaled $346,450. During 2006, TADS received the full advance from this financing.
Convertible Debentures
Debentures
During 2006, Aero issued to investors $200,060 aggregate principal amount of its 12% Convertible Debentures convertible into 1,333,733 shares of TADS Common Stock and warrants to purchase 1,333,733 shares of Common Stock at a per share exercise price of $.15 per share. The terms of these securities are the same as the securities issued in 2005. The Debentures mature three years from the issue date.
During 2006, Aero issued to an investor $422,176 aggregate principal amount of 8% Convertible Debentures convertible into 939,369 shares of TADS Common Stock at a conversion price of $.45 per share. The Debentures mature on April 18, 2009. Under the terms of the Debentures, the Company is prohibited from making any distribution to its Stockholders without the Debenture holders' consent.
During 2006, Aero issued to an investor $20,000 aggregate principal amount of its 12% Convertible Debentures and warrants to purchase 40,000 shares of TADS Common Stock at an exercise price of $.50 per share. The Debentures are convertible into TADS shares of Common Stock on a converted basis at $.50 per share. The terms of these securities are substantially the same as the securities issued in 2005. The Debentures mature three years from the issuance date.
The gross proceeds of the total convertible debt issued by Aero in 2006 of $642,236 were recorded net of a debt discount of $358,417. The Debenture Warrants were initially valued at $178,413 and the embedded derivatives were valued at $180,004. The debt discount is being amortized over the term of the debt.
First Quarter of 2007
Between January 1, 2007 and March 31, 2007, the Company received proceeds from loans totaling $343,873. The Debentures are convertible into TADS Common Stock at conversion prices ranging from $.25 to $1.00 per share and provide for warrants to purchase 1,013,999 shares of TADS Common Stock at exercise prices ranging from $.25 to $1.00. The Debentures bear interest of 12% and are due three years from the date of issuance. The Debenture Warrants are exercisable at per share exercise prices of $.25 to $1.00 per share of Common Stock, are exercisable immediately up until the fifth anniversary of the initial warrant date, and such exercise price is subject to adjustment for subsequent lower price issuances by the Company and other customary events including stock splits, reverse stock splits, issuance of convertible securities, sale of Common Stock and spin-offs.
The gross proceeds of the $343,873 were allocated 25% or $86,084 to the Debentures and 75% or $257,789 to the Warrants. The effective conversion price of the Debentures was below the market price of TADS Common Stock at the date the various notes were issued, which resulted in a beneficial conversion feature of $86,084. In accordance with EITF 00-27 the amount allocated to the beneficial conversion feature was limited to the net proceeds of the offering.
Second Quarter of 2007
Between April 1, 2007 and June 30, 2007, the Company received proceeds from loans totaling $493,851. The Debentures are convertible into 1,974, 486 shares of TADS Common Stock at a conversion price of $.25 per share and provide for warrants to purchase 1,974,486 shares of TADS Common Stock at an exercise price of $.25. The Debentures bear interest of 12% and are due three years from the date of issuance. The Debenture Warrants are exercisable at a per share exercise prices of $.25 per share of Common Stock, are exercisable immediately up until the fifth anniversary of the initial warrant date, and such exercise price is subject to adjustment for subsequent lower price issuances by the Company and other customary events including stock splits, reverse stock splits, issuance of convertible securities, sale of Common Stock and spin-offs.
The gross proceeds of the $493,851 were allocated 24.2% or $120,731 to the Debentures and 75.8% or $373,120 to the Warrants. The effective conversion price of the Debentures was below the market price of TADS Common Stock at the date the various notes were issued, which resulted in a beneficial conversion feature of $120,731. In accordance with EITF 00-27 the amount allocated to the beneficial conversion feature was limited to the net proceeds of the offering.
Third Quarter of 2007
Between July 1, 2007 and December 31, 2007, the Company received proceeds from loans totaling $229,234. The Debentures are convertible into 1,053,620 shares of TADS Common Stock at a conversion price range of $.20 to $.25 per share and provide for warrants to purchase 1,053,620 shares of TADS Common Stock at an exercise price in the range of $.20 to $.25. The Debentures bear interest of 12% and are due three years from the date of issuance. The Debenture Warrants are exercisable at a per share exercise prices at a range of $.20 to $.25 per share of Common Stock, are exercisable immediately up until the fifth anniversary of the initial warrant date, and such exercise price is subject to adjustment for subsequent lower price issuances by the Company and other customary events including stock splits, reverse stock splits, issuance of convertible securities, sale of Common Stock and spin-offs.
The gross proceeds of the $229,234 were allocated 30.0% or $68,394 to the Debentures and 70.0% or $160,840 to the Warrants. The effective conversion price of the Debentures was below the market price of TADS Common Stock at the date the various notes were issued, which resulted in a beneficial conversion feature of $160,840. In accordance with EITF 00-27 the amount allocated to the beneficial conversion feature was limited to the net proceeds of the offering.
Fourth Quarter of 2007
Between October 1, 2007 and December 31, 2007, the Company received proceeds from loans totaling $286,719. The Debentures are convertible into TADS Common Stock at a conversion price of $.05 per share and provide for warrants to purchase 5,734,385 shares of TADS Common Stock at an exercise price of $.05. The Debentures bear interest of 12% and are due three years from the date of issuance. The Debenture Warrants are exercisable at a per share exercise prices of $.05 per share of Common Stock, are exercisable immediately up until the fifth anniversary of the initial warrant date, and such exercise price is subject to adjustment for subsequent lower price issuances by the Company and other customary events including stock splits, reverse stock splits, issuance of convertible securities, sale of Common Stock and spin-offs.
The gross proceeds of the $286,719 were allocated 26.0% or $74,657 to the Debentures and 74.0% or $212,062 to the Warrants. The effective conversion price of the Debentures was below the market price of TADS Common Stock at the date the various notes were issued, which resulted in a beneficial conversion feature of $212,062. In accordance with EITF 00-27 the amount allocated to the beneficial conversion feature was limited to the net proceeds of the offering.
As of December 31, 2007, all of the principal and accrued interest related to the Debentures has been classified as a current liability as they are either in default or due within one year.
First Quarter of 2008
Between January 1, 2008 and March 31, 2008, the Company received proceeds of loans totaling $343,873. The Debentures are convertible into TADS 6,877,460 shares of Common Stock at a conversion price of $0.05 per share and provide for warrants to purchase 6,877,460 shares of TADS Common Stock at an exercise price of $0.05. The Debentures bear interest of 12% and are due three years from the date of issuance. The Debenture Warrants are exercisable at a per share exercise price of $.05 per share of Common Stock, are exercisable immediately up until the fifth anniversary of the initial warrant date, and such exercise price is subject to adjustment for subsequent lower price issuances by the Company and other customary events including stock splits, reverse stock splits, issuance of convertible securities, sale of Common Stock and spin-offs.
The gross proceeds of the $343,873 were allocated 25% or $86,084 to the Debentures and 75% or $257,789 to the Warrants. The effective conversion price of the Debentures was at the market price of TADS Common Stock at the date the various notes were issued.
Second Quarter of 2008
Between April 1, 2008 and June 30, 2008, the Company received proceeds of loans totaling $357,151. The Debentures are convertible into TADS 17,857,252 shares of Common Stock at a conversion price of $0.02 per share and provide for warrants to purchase 17,857,252 shares of TADS Common Stock at an exercise price of $0.02. The Debentures bear interest of 12% and are due three years from the date of issuance. The Debenture Warrants are exercisable at a per share exercise price of $0.02 per share of Common Stock, are exercisable immediately up until the fifth anniversary of the initial warrant date, and such exercise price is subject to adjustment for subsequent lower price issuances by the Company and other customary events including stock splits, reverse stock splits, issuance of convertible securities, sale of Common Stock and spin-offs.
The gross proceeds of the $357,151 were allocated 30% or $107,145 to the Debentures and 70% or $250,006 to the Warrants. The effective conversion price of the Debentures was at the market price of TADS Common Stock at the date the various notes were issued.
Third Quarter of 2008
Between July 1, 2008 and December 31, 2008, the Company received proceeds of loans totaling $95,489. The Debentures are convertible into TADS 4,774,450 shares of Common Stock at a conversion price of $0.02 per share and provide for warrants to purchase 17,857,252 shares of TADS Common Stock at an exercise price of $0.02. The Debentures bear interest of 12% and are due three years from the date of issuance. The Debenture Warrants are exercisable at a per share exercise price of $0.02 per share of Common Stock, are exercisable immediately up until the fifth anniversary of the initial warrant date, and such exercise price is subject to adjustment for subsequent lower price issuances by the Company and other customary events including stock splits, reverse stock splits, issuance of convertible securities, sale of Common Stock and spin-offs.
The gross proceeds of the $95,489 were allocated 25% or $23,872 to the Debentures and 70% or $71,617 to the Warrants. The effective conversion price of the Debentures was at the market price of TADS Common Stock at the date the various notes were issued.
Additional Indebtedness
Between July 1, 2008 and January 31, 2009, the Company received proceeds of Short-Terms Loans totaling $679,904, of which $175,000 was repaid in October, 2008. The Short-Term Loans carry a term of one year, an interest rate of 12%, and 100% stock coverage with a reference price equal to the lowest purchase price of Common Stock of the Company sold by the Company between the date of the Short-Term Loans and repayment of the Short-Term Loans. The Short-Term Loans have a lien on the receivables from the AETC Contract which stipulates that all funds received from the AETC Contract will first be directed towards paying down the Short-Term Loans, with the agreement that one half of the funds repaid from the AETC receivables will be reloaned to the Company by the lien holder. The reference price has been renegotiated with the lender for good and valuable consideration and is currently a price equal to a 50% discount to the lowest purchase price of Common Stock of the Company sold by the Company between the date of the Short-Term Loans and repayment of the Short-Term Loans, which reference price is currently $0.01 and which principle is equal to 135,980,742 shares of the Company’s Common Stock, and which shares have not yet been issued.
Conversion of Notes and Exercise of Warrants
During the period January 1, 2007 through June 8, 2007 the issuances of unregistered securities were made as a result of various warrant exercises and note conversions. In all, during this period, various holders of warrants exercised warrants to purchase 7,611,480 shares of the Company’s Common Stock. These warrants were exercisable at $.15 per share and were exercised through cashless exercise method. In addition, during this period, various holders of the convertible debentures converted $274,060 of debentures plus accrued interest of $58,521 at conversion price of $.15 per share, resulting in the issuance of 2,236,586 shares of Common Stock.
In the second quarter of 2008, the Company issued 496,617 shares of restricted Common Stock to Jack Ramsden in connection with the conversion of a Convertible Promissory Note of the Company in the aggregate amount of $74,492, including $55,000 of principle and $19,494 of accrued interest, at a conversion price of $0.15.
Agreement to Convert All Outstanding Convertible Promissory Notes
In the second quarter of 2008, the Company reached an agreement with holders of all of its Convertible Promissory Notes to convert all Convertible Promissory Notes and cancel all associated Warrants, in exchange for a reduction in the conversion price to $0.02 of all outstanding Convertible Promissory Notes. As a result of such conversion agreement, on November 20,2008, $9,954,287 of principle of and accrued interest on outstanding Convertible Promissory Notes was converted to 497,714,345 shares of the Company’s Common Stock.
Cancellation of Indebtedness and Return of Assets
On May 29, 2008, the Company and Cambar & Associates (“Cambar”) executed a Settlement and Release Agreement. In December, 2006, TADS assumed from AeroGroup an indebtedness owed to Cambar (the “Cambar Note”) of a principle amount of $2,200,000 for the purchase of two MiG-29 aircraft and four flight simulators (the “Cambar Assets”), which indebtedness included interest to be paid on the principle.
With this Settlement and Release Agreement, the Company agreed to relinquish the Cambar Assets to Cambar, and issue to Cambar 50,000,000 Shares, as payment in full and final settlement for any claims Cambar may have against the Company, and Cambar agreed to reclaim the Cambar Assets, cancel the Cambar Note including any accrued and unpaid interest, and return to the Company for retirement the 1,000,000 Shares issued in the aggregate to Cambar and NATA as compensation for interest due on the Cambar Note in 2007, as payment in full and final settlement for any claims the Company may have against Cambar.
Issuance of Common Stock
Issuance of Common Stock to Cambar & Associates and NATA
The Company issued 500,000 restricted shares of Common Stock to NATA in the second quarter of 2007 and 500,000 restricted shares of Common Stock to Cambar & Associates in the third quarter of 2007, as compensation for interest due on the Cambar Note. Notwithstanding the above, NATA and Cambar & Associates have agreed to retire the shares as per the Settlement and Release Agreement described above. The Company issued an additional 40,000,000 restricted shares of Common Stock to NATA and 10,000,000 restricted shares of Common Stock to Cambar & Associates in the third quarter of 2008, as per the terms of the Settlement and Release Agreement described above. No registration rights were issued in connection with these shares.
Issuance of Common Stock to Fred Daniels
The Company issued an aggregate of 405,000 restricted shares of Common Stock to Mr. Fred Daniels in the first and third quarters of 2007, as compensation for service as an Officer of the Company. The Company issued an additional 1,100,000 restricted shares of Common Stock to Mr. Fred Daniels in the third quarter of 2008 as further compensation for service as an Officer and Director of the Company. No registration rights were issued in connection with these shares.
Issuance of Common Stock to Mark Daniels
The Company issued an aggregate of 1,600,000 restricted shares of Common Stock to Mr. Mark Daniels in the second quarter of 2007, as compensation in lieu of accrued and unpaid salary for his service as President and Chief Executive Officer of the Company. No registration rights were issued in connection with these shares.
Issuance of Common Stock to Mark Daniels Irrevocable Trust III
The Company issued an aggregate amount of 105,000,000 restricted shares of Common Stock to Mark Daniels Irrevocable Trust III in the 3 rd quarter of 2008, notwithstanding the above, however, 52,500,000 of these shares were duplicately issued in error and were cancelled on November 20, 2008 by the Company’s transfer agent for retirement upon tender to the transfer agent of a lost share affidavit by the Mark Daniels Irrevocable Trust III. The shares were issued in consideration for Mr. Daniels executing a long-term employment agreement with the Company. No registration rights were issued in connection with these shares.
Issuance of Common Stock to Victor Miller
The Company issued an aggregate of 810,000 restricted shares of Common Stock to Mr. Victor Miller in the second quarter of 2007, as compensation in lieu of accrued and unpaid salary for his service as an Officer of the Company. The Company issued an additional 2,400,000 restricted shares of Common Stock to Victor Miller in the 1st quarter of 2008 in consideration of Mr. Miller retiring his 2,400,000 Series A Preferred shares, notwithstanding the above, however, the stock certificate representing the 2,400,000 shares of Common Stock has been lost, will be cancelled because as of December 31, 2008, it had not yet received confirmation from the transfer agent of the Company of the retirement 2,400,000 Series A Preferred shares. No registration rights were issued in connection with these shares.
Issuance of Common Stock to Alexis Korybut
The Company issued an aggregate of 30,000,000 restricted shares of Common Stock to Mr. Alexis Korybut in the first quarter of 2008, as compensation for serving as additional President, Chief Executive Officer, Treasurer, and Principle Accounting Officer of the Company. No registration rights were issued in connection with these shares.
Issuance of Common Stock to John Farley
The Company issued an aggregate of 150,000 restricted shares of Common Stock to Mr. John Farley in the first and third quarters of 2007, as compensation for his service as an Officer of the Company. The Company issued an additional 100,000 restricted shares of Common Stock to Mr. John Farley in the first quarter of 2008, as compensation as an independent provider of services to the Company. The Company issued an additional 300,000 restricted shares of Common Stock to Mr. John Farley in the third quarter of 2008, as compensation as an independent provider of services to the Company. No registration rights were issued in connection with these shares.
Issuance of Common Stock to Lawrence Cusack
The Company issued 600,000 restricted shares of Common Stock to Mr. Lawrence Cusack in the first quarter of 2008, as additional compensation for serving as an employee of the Company. The Company issued an additional 400,000 restricted shares of Common Stock to Mr. Lawrence Cusack in the third quarter of 2008, as consideration for accrued and unpaid salary for serving as an employee of the Company. No registration rights were issued in connection with these shares.
Issuance of Common Stock to Peter Maffitt
The Company issued 500,000 restricted shares Common Stock to Peter Maffitt, a Director of the Company, in the 2nd quarter of 2008 as compensation for acting as a Director of the Company. The Company issued an additional 1,000,000 restricted shares of Common Stock to Peter Maffitt in the 3rd quarter of 2008 as further compensation for acting as a Director of the Company. No registration rights were issued in connection with these shares.
Issuance of Common Stock to Charles DeAngelo
The Company issued 250,000 restricted shares of Common Stock to Charles DeAngelo, a Director of the Company, in the 2 nd quarter of 2008 as compensation for acting as a Director of the Company. The Company issued an additional 250,000 restricted shares of Common Stock to Charles DeAngelo in the 3rd quarter of 2008 as further compensation for acting as a Director of the Company. No registration rights were issued in connection with these shares.
Issuance of Common Stock to ZA Consulting
The Company issued 250,000 restricted shares of Common Stock to ZA Consulting Group in the first quarter of 2007, as compensation for investor relations services and related consulting services. The Company issued an additional aggregate of 6,000,000 restricted shares of Common Stock to ZA Consulting Group in the third quarter of 2008 in connection with a Settlement and Release Agreement reached between the parties in the third quarter of 2008 and in connection with future consulting services to the Company. No registration rights were issued in connection with these shares.
Issuance of Common Stock to Gary Corley
The Company issued 200,000 restricted shares of Common Stock to Mr. Gary Corley Esq. in the fourth quarter of 2007, as compensation for legal services. The Company issued an additional 3,000,000 restricted shares of Common Stock to Mr. Gary Corley Esq. in the third quarter of 2008 as compensation for legal services. No registration rights were issued in connection with these shares.
Issuance of Common Stock to Economic Advisors, Inc.
The Company issued an aggregate of 114,800 restricted shares of Common Stock to Economic Advisors, Inc. in the fourth quarter of 2007 and the first quarter of 2008, as compensation for introducing certain accredited investors to the Company. The Company issued an additional 18,000,000 restricted shares of Common Stock to Economic Advisors, Inc. in the third quarter of 2008 in connection with a Settlement and Release Agreement reached between the parties in the third quarter of 2008. No registration rights were issued in connection with these shares.
Issuance of Common Stock to Federal Financial Partners, LLC
The Company issued an aggregate of 1,600,000 shares of restricted Common Stock to Federal Financial Partners, LLC in the first and third quarters of 2007 as compensation for consulting services to the Company. The Company issued an additional 4,000,000 shares of restricted Common Stock to Federal Financial Partners, LLC in February, 2008 in consideration of Mark Daniels retiring his 4,000,000 Series A Preferred shares. Notwithstanding the above, the stock certificate representing the 4,000,000 shares of Common Stock has been lost, will be cancelled because as of December 31, 2008, it had not yet received confirmation from the transfer agent of the Company of the retirement 4,000,000 Series A Preferred shares.. No registration rights were issued in connection with these shares.
Issuance of Common Stock to Northrop Defense Consulting Corp.
The Company issued an aggregate of 2,800,000 shares restricted shares of Common Stock to Northrop Defense Consulting Corp in the third quarters of 2007, notwithstanding the above, Northrop Defense Consulting Corp has returned said shares to the Company for further retirement. No registration rights were issued in connection with these shares.
Issuance of Common Stock to Joint Strategy Group, LLC
The Company issued 5,000,000 restricted shares of Common Stock to Joint Strategy Group, LLC in the first quarter of 2008, as compensation for consulting services to the Company. The Company issued an additional 20,000,000 restricted shares of Common Stock to Joint Strategy Group, LLC in the third quarter of 2008, as consideration for executing a long-term consulting services agreement with the Company. No registration rights were issued in connection with these shares.
Issuance of Common Stock to Thomas Pierson
The Company issued 100,000 restricted shares of Common Stock to Thomas Pierson in the first quarter of 2008 as compensation for consulting services to the Company. No registration rights were issued in connection with these shares.
Issuance of Common Stock to Charles Pearlman
The Company issued 50,000 restricted shares of Common Stock to Charles Pearlman in the second quarter of 2008 as compensation for consulting services to the Company. No registration rights were issued in connection with these shares.
Issuance of Common Stock to Plumtree Capital Management LLC
The Company issued 4,000,000 restricted shares Common Stock to Plumtree Capital Management LLC in the third quarter of 2008 as compensation for accrued and unpaid consulting fees and expenses. No registration rights were issued in connection with these shares.
Issuance of Common Stock to M&A Advisors LLC
The Company issued 2,000,000 restricted shares of Common Stock to M&A Advisors LLC in the third quarter of 2008 as compensation for consulting services to the Company. No registration rights were issued in connection with these shares.
Issuance of Common Stock to TCI Global Trading Ltd
The Company issued 30,000,000 restricted shares of Common Stock to TCI Global Trading Ltd in the third quarter of 2008 as consideration for providing ongoing consulting services to the Company. No registration rights were issued in connection with these shares.
Issuance of Common Stock to Eurotrust Capital SPA
The Company issued to Eurotrust Capital SPA an aggregate of 4,500,000 restricted shares of Common Stock in the third and fourth quarters of 2008 as compensation for consulting services to the Company. No registration rights were issued in connection with these shares.
Issuance of Common Stock to Marc Brannigan
The Company issued 7,000,000 restricted shares of Common Stock to Marc Brannigan in the third quarter of 2008 as compensation for accrued and unpaid consulting services to the Company. No registration rights were issued in connection with these shares.
Issuance of Common Stock to Brad Baker
The Company issued 250,000 restricted shares of Common Stock to Brad Baker in the third quarter of 2008 as compensation for serving on the board of advisors of the Company. No registration rights were issued in connection with these shares.
Issuance of Common Stock to Donald Goldstein
The Company issued 1,000,000 restricted shares of Common Stock to Donald Goldstein in the third quarter of 2008 as compensation for prior service on the Board of Directors of the Company. No registration rights were issued in connection with these shares.
Issuance of Common Stock to the Sassin Law Firm
The Company issued 666,667 restricted shares of Common Stock to the Sassin Law Firm in the third quarter of 2008 as compensation for legal services. No registration rights were issued in connection with these shares.
Issuance of Common Stock to the Ticktin Law Group
The Company issued 3,000,000 restricted shares of Common Stock to the Tictin Law Group in the fourht quarter of 2008 as compensation for legal services. No registration rights were issued in connection with these shares.
Issuance of Common Stock to Julius Astrada
The Company issued 1,000,000 restricted shares of Common Stock to the Julius Astrada in the fourth quarter of 2008 as compensation for marketing services. No registration rights were issued in connection with these shares.
Series A Preferred Stock
On March 21, 2007, the Company filed a Certificate of Designation of Series A Preferred Stock (the “Series A Certificate of Designation”) with the Secretary of State of the State of Nevada, designating a series of 50,000,000 shares of Preferred Stock of the Company, $.001 par value (the “Series A Preferred Stock”). Pursuant to the Series A Certificate of Designation, holders of the Company’s Series A Preferred Stock are entitled to:
●
elect one director to the Company’s board of directors;
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vote on all other matters on a 25 votes per share Common Stock basis;
●
with respect to dividend rights, rights on redemption, rights on conversion and rights on liquidation, winding up and dissolution, rank senior to all Common Stock, warrants and options to purchase Common Stock established by the Board or the Stockholders (all of such equity securities of the Corporation to which the Series A Preferred Stock ranks senior are collectively referred to herein as “Junior Stock”);
●
Each share of Series A Preferred Stock is initially convertible into 2 shares of the Common Stock of the Company, subject to adjustment for stock splits, recapitalization or other reorganizations.
In addition, the Series A Preferred Stock has weighted average antidilution protection that will cause the conversion price to adjust downward in the event that the Company issues shares of Common Stock or securities convertible into Common Stock at a price of less than the conversion price of the Series A Preferred Stock then in effect may be converted into Common Stock at the option of the holder.
Diluted net loss per share reflects per share amounts that result if dilutive common stock equivalents are converted to common stock. Common stock equivalents, consisting of convertible debt, options and warrants were not included in the calculation of diluted loss per share for the year ended December 31, 2008 and 2007 because their inclusion would have had been anti-dilutive.
NOTE 5 - CONVERTIBLE DEBENTURES
As part of the reverse acquisition, the Company assumed Convertible Debentures issued by Aero. During the period May 2002 through December 31, 2006, Aero sold 4,715,895 Convertible Debentures (“Debentures”), along with Debenture Warrants to purchase 23,968,315 shares of common stock of Aero which were assumed by the Company at exercise prices ranging from $.15 to $1.00. All these notes were converted to stock at various exercise price in November 2008.
Debentures and Debenture Warrants as of December 31, 2008 consist of the following:
Issuance of Preferred Securities
During fiscal 2007, the Company issued an aggregate of 6,400,000 shares of its Series A Preferred Stock; 2,400,000 shares to Mr. Victor Miller, and 4,000,000 shares to Mr. Mark Daniels. Because the Company contends that the shares of its Series A Preferred Stock were issued to Mr. Miller and Mr. Daniels without consideration, the Company has been seeking to rescind said 6,400,000 Series A Preferred shares, and have Mr. Miller and Mr. Daniels waive any accrued and unpaid dividends associated with said Series A Preferred shares. Mr. Mark Daniels has agreed to rescind the 4,000,000 Series A Preferred shares issued to him and to waive any accrued and unpaid dividends associated with said 4,000,000 Series A Preferred shares, contingent upon Mr. Miller agreeing to rescind the 2,400,000 Series A Preferred shares issued to him and to waive any accrued and unpaid dividends associated with said 2,400,000 Series A Preferred shares. However, due to the Company’s inability to have Mr. Miller agree to rescind the 2,400,000 shares of its Series A Preferred Stock issued to him and to waive any accrued and unpaid dividends associated with said 2,400,000 Series A Preferred shares, the Company is currently contemplating legal action against Mr. Miller in connection with the issuance of said 2,400,000 shares of its Series A Preferred Stock.. The Company believes that its contention, that the 2,400,000 shares of its Series A Preferred Stock were issued to Mr. Miller without consideration, is with merit, and that it would be successful in its suit to have said shares rescinded, have any accrued and unpaid dividends waived, and have any costs and damages to the Company in connection with the issuance of and the rescission of said 2,400,000 shares of Series A Preferred Stock.
NOTE 6 - CONVERTIBLE NOTES PAYABLE:
The following table summarizes the Convertible Notes Payable at December 31, 2007 and December 31, 2008:
In connection with the Asset Purchase Agreement entered into in June 2006, Aero incurred the following debt:
(1)
A $2,200,000 promissory note that was assumed by Aero in connection with the June 2006 acquisition by Aero of the two MIG 29 aircraft and flight simulators that were ultimately acquired by Tactical Air Defense Systems. Under the terms of the note, it has a principal balloon payment in thirty-nine months of the original agreement which was dated December 31, 2005. Interest is payable at a rate of eight percent per annum. There is no penalty for payment before the maturity date. This note was assumed by TADS as part of the acquisition by TADS (Note 3) and the debt is convertible into TADS common stock at a price of $0.50 per share during the one month period prior to the maturity date. In December 2007, the Company was notified by the note holder of the note issued in connection with the June 2006 Asset Purchase Agreement that the Company was in default of the agreement and that the holder was exercising their right to repossess the equipment. As a result, the Company recorded a charge of $6,740,000 which is included as a write-down of fixed assets in the accompanying consolidated statement of operations. The note associated with this purchase was settled in the second quarter of 2008. The note balance including accrued interest and principle was for approximately $2.7 million was settled for 50 million shares of common stock. This settled all demands between the Company and the company the asset was acquired from.
(2)
A $1,100,000 secured promissory note reflecting indebtedness assumed by Aero in connection with the June 2006 acquisition of assets by Aero. This note is payable to Daniels and under the terms of the note, the note is due in installments beginning on July 1, 2008, and monthly thereafter, to and including June 30, 2011 (“the “Maturity Date”), the Company shall pay to the note holder a total of thirty-six (36) monthly installments of principal, each in the amount of $30,555, each installment of principal to be accompanied by payment of accrued and unpaid interest on the then unpaid principal balance of the Note. Interest is payable at a rate of 12% percent per annum. The note is guaranteed by the Company's subsidiaries and collateralized by all of the Company's assets. This note was assumed by TADS and the debt is convertible into TADS common stock at $.50 per share. This note was converted into 82,105,205 shares of Common Stock at a conversion price of $0.02 in consideration for cancellation of all associated warrants.
(3)
In accordance with EITF 98-5 commencing on December 15, 2006, the Company recorded a debt discount of $3,861,255 related to the intrinsic value of the beneficial conversion option of the above described debt. The embedded conversion options qualified as equity and their recorded value was limited to the gross proceeds of the debt pursuant to EITF 98-5. The debt discount is being amortized to interest expense over the term of the debt. Amortization of such debt discount totaled $2,695,318 and $69,107 for the years ended December 31, 2007 and 2006, respectfully.
NOTE 7 - INCOME TAXES:
There is no provision for income taxes for the years December 31, 2008, 2007, and 2006. The Company has minimal net operating loss carry forwards for income tax purposes at December 31, 2008. The deferred tax asset primarily attributable to the Company’s net operating loss carryforwards has been offset by a full valuation allowance.
The reconciliation of the federal statutory rate to the effective tax rate is as follows:
NOTE 7 - STOCKHOLDERS' EQUITY:
Effective as of June 25, 2008, the Company filed an amendment to its Articles of Incorporation (the “Amendment”) to increase the Company’s authorized capital stock from 300,000,000 shares of common stock, par value $.001 per share only, to 1,050,000,000 shares, par value $.001 per share, of which 1,000,000,000 shares are common stock and the remaining 50,000,000 shares are a newly created class of “blank check” preferred stock. As of December 31, 2008, the Company had 6,400,000 shares of Preferred stock issued.
On the effective date of the reverse acquisition (December 15, 2006), the Company reclassified $45,737,637 of accumulated deficits to paid-in-capital. This amount represented Aero’s accumulated deficit on December 15, 2006 which was not transferred to TADS as part of reverse acquisition.
Preferred Stock
On March 21, 2007, the Company filed a Certificate of Designation of Series A Preferred Stock (the “Series A Certificate of Designation”) with the Secretary of State of the State of Nevada, designating a series of 50,000,000 shares of Preferred Stock of the Company, $.001 par value (the “Series A Preferred Stock”).
Warrants
At December 31, 2007 and December 31, 2008 the Company has outstanding warrants to purchase common stock as follows:
NOTE 8 - COMMITMENTS:
Compensation Agreements
On September 1, 2007, the Company entered into an agreement with Joint Strategy Group, Inc., a related party, to perform long-term strategic planning, and, in such capacity, to provide general advice to TADS on business and financial matters. The term of the agreement is for two years. The agreement provides for a total fee of 500,000 restricted shares of the Company’s common stock. The common stock shall have piggy-back registration rights and full-ratchet anti-dilution rights in connection with a share reference price of $0.50 per share. The President of Joint Strategy Group, Inc., Jamie Goldstein is the son of Don Goldstein, a director of the Company. In December 2007, the Company terminated the agreement with Joint Strategy Group, Inc.
Pursuant to a compensation agreement dated March 4, 2008, Alexis Korybut, the Company’s Vice President of Finance and Administration is paid a salary of $180,000 per annum. The agreement was for a period of two years. Notwithstanding the above, the compensation agreement was amended on November, 2008 whereby Mr. Korybut thereafter receives a salary of $120,000 per year.
Pursuant to a compensation agreement dated March 17, 2008, Mark Daniels, the Company’s Chief Executive Officer is paid a salary of $250,000 per annum. The agreement was for a period of two years. In addition, as a signing bonus, the Chief Executive Officer was vested in 50,000,000 restricted shares of the Company’s common stock; no registration rights were granted. Notwithstanding the above, the compensation agreement was amended on November, 2008 whereby Mr. Daniels thereafter receives a salary of $120,000 per year.
On June 27, 2008, the Company entered into an agreement with MBC Consulting, LLC to perform financial support services. The term of the agreement is for one year. The agreement provides for a total fee of 7,000,000 restricted shares of the Company’s common stock. No registration rights were granted.
Consulting Agreement
On September 11, 2007, Mr. Mark Daniels, the Company's former Chief Executive Officer and director and founder of the Company's business, entered into a Consulting Services Agreement (the "Daniels Agreement") with the Company which was amended and restated in early November of 2007. The Daniels Agreement as amended, provides, in relevant part, that Mr. Daniels shall assign or cause any entity he owns or is in control of to assign, all government contracts (including, without limitation, the CRTC Contract relating to fourth generation fighter aircraft training) relating to flight services, flight support services or firefighting services, to the Company. In addition, Mr. Daniels agreed to introduce to the Company, on an exclusive and first right basis, any and all potential customers or contracting parties (whether government or private sector) for services provided by the Company, and to continue making introductions of potential contracting parties to the Company during the one year term of the agreement.
In addition, the Daniels Agreement provides that Mr. Daniels shall cause AeroGroup Incorporated, the seller of certain assets acquired by the Company, to pledge all shares of the Company owned by it through the sooner of delivery of the CRTC Contract or September 11, 2008, to secure the Company's rights under the Daniels Agreement. Finally, the agreement provides for strict confidentiality provisions with respect to Mr. Daniels as well as three year non-disclosure and non-compete covenants with respect to Mr. Daniel's activities.
The Daniels Agreement provides that, in consideration for the provision of continued advisory services by Mr. Daniels to the Company, Mr. Daniels shall be compensated (i) the amount of $12,000 per month (paid in arrears) through September 11, 2008, (ii) a success fee of five (5%) percent of gross proceeds, minus any accrued or paid monthly payments in (i) above, and (iii) reimbursement of reasonable expenses. In the event that the foregoing compensation is not made, the Daniels Agreement provides that Mr. Daniel's remedy is limited to collection of the above amounts and that the confidentiality and non-compete provisions shall still remain binding as against Mr. Daniels.
Lease Agreement
On October 29, 2007, the Company signed an exclusive lease agreement with Air Support Systems, LLC., for the use of its ILyushin IL-76 aircraft, an aerial firefighting supertanker. The agreement with Air Support Systems, LLC for the exclusive use of its IL-76, is for an initial five year term, renewable for two subsequent and exclusive five year terms. The Agreement provides for hourly usage payments of $8,000 per hour of engine usage to Air Support Systems, LLC in connection with contracts that do not call for a fixed fee to make the aircraft available, or, for contracts that do entail a fixed availability fee (an “Availability Fee Contract”), the Company shall pay to Air Support Systems, LLC half of such availability fee, and, after deducting and retaining for the Company the first $2,000 of any hourly usage fees received in addition to the availability fee, the Company shall pay to AirSupport Systems, LLC half of the remaining hourly usage fee. Air Support Systems, LLC is required to cover the cost of spare parts, with ordinary operational maintenance costs, fuel, oil, landing fees, and similar operational expenses paid for by the Company.
Lien Agreement
The Company has granted a lien to the holder of the Short-Term Loans on the receivables payable to the Company by the AETC for fulfillment of the BAF Contract. The lien holder has agreed to reloan to the Company 50% of the funds repaid to it from the AETC receivables.
NOTE 9 - OTHER EVENTS:
Departures of Directors or Principal Officers; Elections of Directors; Appointments of Principal Officers
●
On January 8, 2007, Fred Daniels and Victor Miller were appointed to serve as a Director of the Company, joining Mark Daniels on the Board.
●
On August 3, 2007 Mark Daniels, a Director and Officer of the Company and Victor Miller, a Director and Officer of the Company each resigned from all positions with the Company, leaving Fred Daniels as the sole Director of the Company.
●
On August 3, 2007, Donald Goldstein was appointed as a Director of the Company by Fred Daniels, joining Fred Daniels on the Board of Directors. Additionally, John Farley, our Vice President at the time, was also appointed Principal Accounting Officer.
●
On August 17, 2007 John Farley, an Officer of TADS, resigned from all positions with the Company.
●
On August 17, 2007, Alexis Korybut was appointed as a Director of the Company, joining Donald Goldstein and Fred Daniels on the Board of Directors of TADS. Additionally, Korybut was also appointed as President, Chief Executive Officer, and Principal Accounting Officer of the Company.
●
On December 7, 2007 Donald Goldstein a Director of the Company, resigned from all positions with the Company, leaving Fred Daniels and Alexis Korybut as the two remaining Directors.
●
On March 4, 2008, to fill the vacancy left by the resignation of Donald Goldstein, Peter Maffitt was appointed to serve as a Director by the majority of the Series A Preferred shares, which appointment was ratified by Alexis Korybut and Fred Daniels, the 2 remaining Directors. Peter Maffitt joined Fred Daniels and Alexis Korybut on the Board of Directors;
●
On March 4, 2008, Alexis Korybut resigned as President, Chief Executive Officer, Principal Accounting Officer, and Director, leaving Fred Daniels and Peter Maffitt as the 2 remaining members of the Board of Directors;
●
On March 4, 2008, Fred Daniels and Peter Maffitt appointed Michael Cariello as President and Chief Executive Officer of the Company, and appointed Fred Daniels as Secretary and Treasurer;
●
On March 7, 2008, the Board of Directors accepted the resignation of Fred Daniels as Secretary and Treasurer, and appointed Peter Maffitt as Secretary and Treasurer;
●
On March 15, 2008, the Board of Directors of the Company accepted the resignation of Michael Cariello as President and Chief Executive Officer, and appointed Mark Daniels as President, Chief Executive Officer, and Principle Accounting Officer;
●
On April 14, 2008, Charles Deangelo was appointed by Fred Daniels and Peter Maffitt, the two remaining members of the Board of Directors, as the third Director, thereby filling the vacancy left by the departure of Alexis Korybut. Charles Deangelo joined Peter Maffitt and Fred Daniels on the Board of Directors;
●
On April 16, 2008, the Board of Directors accepted the resignation of Fred Daniels as Director, and appointed Mark Daniels to the vacancy created by the departure of Fred Daniels, where he joined Peter Maffitt and Charles Deangelo on the Board of Directors;
●
On February 4, 2009, Mark Daniels resigned as Chief Executive Officer of the Company, but continues to serve as Director along with Peter Maffitt and Charles Deangelo;
●
On February 4, 2009, James O’Brien was appointed interim Chief Executive Officer, Secretary, and Principle Accounting Officer of the Company.
●
On April 14, 2009, Mr. Obrien resigned from all capacities with the Company.
●
On April 14, 2009, Mr. Mark Daniels was appointed as Chief Executive Officer, Secretary, and Principle Accounting Officer of the Company.
Amendment to Articles of Incorporation
On June 25, 2008, the Company, pursuant to a resolution adopted by its Board of Directors, has amended its Articles of Incorporation. Article Three is hereby deleted in its entirety and replaced as follows:
The number of shares of common stock with $0.001 par value per share that the corporation is authorized to issue is one billion and the number of shares of preferred stock with $0.001 par value per share that the corporation is authorized to issue is fifty million.
Submission of Matters to a Vote of Security Holders
On December 4, 2008, the Company filed a Form 14A Proxy Statement and sent same to all shareholders of record as of November 24, 2008, which required a vote of security holders at the Annual Meeting of Shareholders held on December 28, 2008 at the executive offices of the Company, in connection with:
(1)
To elect the Company's Board of Directors to hold office until the Company's Annual Meeting of Stockholders in 2009 or until their respective successor is duly elected and qualified; and
(2)
To ratify the appointment of Lawrence Scharfman & Co., CPA P.A. as the Company's independent certified public accountant; and
(3)
To increase the Company’s authorized shares from one billion shares to three billion shares and to enact a one for ten reverse stock split; and
(4)
To ratify the name change from Tactical Air Defense Services, Inc. to AeroGroup Incorporated, to be effective as of the filing of an amendment to the Company's Articles of Incorporation with the Nevada Secretary of State; and
(5)
To transact such other business as may properly come before the Annual Meeting and any adjournment thereof.
All items proposed by the Company were approved by a majority of the shareholders of the Company.
Recent Share Pledges
The Company has been exploring various secured and unsecured indebtedness and equity financing opportunities as well as joint ventures.
During the nine months ended December 31, 2007, the Company has conditionally placed into escrow 45,000,000 shares in the name of International Tactical Training Center, Inc., which were improperly issued in contemplation of a proposed joint venture, 30,000,000 of which shares were deposited for purposes of negotiating and collateralizing a possible secured financing transaction. As the Company has not received any proceeds from financing or a financing commitment yet from any prospective investors, or otherwise entered into definitive transaction documents that require such a pledge, the Company intends to rescind this issuance. No definitive agreement has been entered into with respect to this transaction and no assurance can be made that one will be entered into.
Item 8.
Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
In connection with the AeroGroup Acquisition, as of December 15, 2006, we dismissed our accounting firm, James Stafford, Chartered Accountants, and engaged Marcum and Kliegman, LLP, as the Company’s independent registered public accountants. The Board has approved the change in accountants and appointment of Marcum and Kliegman, LLP.
James Stafford, Chartered Accountant's audit report on the financial statements for the years ended December 31, 2005 did not contain any adverse opinion or disclaimer of opinion, and was not modified as to uncertainty, audit scope or accounting principles. James Stafford, Chartered Accountant did not serve as our accountants during fiscal year 2004. There have been no disagreements with James Stafford, Chartered Accountants on any matter of accounting principles or practices, financial statement disclosure, or auditing scopes or procedures.
Inasmuch as we had no disagreements with our former accountants on any matter of accounting principles or practices, financial statement disclosure, or auditing scopes or procedures, we did not consult with our new accountants on any such disagreement.
The Company dismissed our accounting firm, Marcum and Kliegman, LLP, as the Company’s independent registered public accountants, in April, 2008. The Board of Directors of the Company approved the change in accountants and the appointment of Lawrence Scharfman & Co., CPA PA as the Company’s independent registered public accountants, which appointment was renewed by the shareholders at the Annual Meeting of Shareholders on December 28, 2008.
Item 8A. CONTROLS AND PROCEDURES
(a)
Evaluation of disclosure controls and procedures
As of December 31, 2008, we do not have a full time internal chief financial officer. Based on an evaluation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended) required by paragraph (b) of Rule 13a-15 or Rule 15d-15, as of December 31, 2006, our Principal Executive Officer and Principal Financial Officer believe that, our disclosure controls and procedures were not effective in ensuring that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported. Our auditors, Lawrence Scharfman & Co. CPA, PA in performing their audit for the years ended December 31, 2008, 2007, and 2006, discovered conditions which they deemed to be a material weakness in the Company’s internal control related to financial reporting. Our Principal Executive Officer and Principal Financial Officer believe that the lack of a full time chief financial officer has been instrumental in leading to delays in the Company’s filings and in the prompt gathering and analysis of financial information. Management believes that hiring a full time chief financial officer is crucial to maintaining the integrity of its financial information and reports and intends to do so as funds permit.
(b)
Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f) under the Securities Exchange Act of 1934. Under the supervision and with the participation of the Chief Executive Officer, the Chief Operating Officer and the Chief Accounting Officer, we conducted an evaluation of the effectiveness of our control over financial reporting based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on our evaluation under the framework, management has concluded that our internal control over financial reporting was effective as of December 31, 2007.
This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.
(c)
Changes in Internal Control over Financial Reporting
There have not been any changes in the Company’s internal controls or in other factors that occurred during the Company’s last fiscal quarter ended December 31, 2007 that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.
Item 8B. Other Information
Prohibited Termination of Director and Principal Officer; Prohibited Election of Director; Prohibited Appointments of Principal Officer
Beginning on or about February 10, 2008, management of the Company concluded that the Company was the target of a improper scheme to procure a controlling interest in the Company, and to mislead shareholders and creditors of the Company, as follows:
On February 10, 2008, Mr. Victor Miller, having 2,400,000 Preferred Class A shares, which equals 60,000,000 share voting rights, in conjunction with an additional 70,799,800 shares of common voting rights, improperly attempted to terminate Mr. Alexis Korybut as a member of the Board of Directors of the Company, in violation of the laws of Nevada which require a super-majority of 2/3’s of the issued and outstanding capital shares of a company to terminate a director of a Nevada corporation.
Additionally, on February 10, 2008, Mr. Victor Miller, having 2,400,000 Preferred Class A shares, which is a minority of the 6,400,000 outstanding Preferred Class A shares, attempted to elect Mr. Christopher Beck, an alleged resident of Costa Rica, as a Director of the Company. However, as a majority of the Preferred Class A shares are required to exercise the right to appoint a member of the Board of Directors of the Company, the action was improper and not permissible.
Thereafter, on February 10, 2008, Mr. Christopher Beck, acting as a member of the Board of Directors of the Company (although not properly appointed) attempted to terminate Mr. Alexis Korybut as Chief Executive Officer, President, Secretary, Treasurer, and any and all other capacities representing the Company.
Additionally, on February 10, 2008, Mr. Christopher Beck, , acting as a member of the Board of Directors of the Company (although not properly appointed) attempted to have himself elected and appointed as Chief Executive Officer, President and Treasurer of the Company, and on March 3, 2008, Mr. Christopher Beck, , acting as a member of the Board of Directors of the Company (although not properly appointed) attempted to have himself elected and appointed as Secretary of the Company.
Additionally, on February 10, 2008, Mr. Christopher Beck, , acting as a member of the Board of Directors of the Company (although not properly appointed) attempted to cancel any employment agreements or any other agreements with Mr. Alexis Korybut, Mr. John Farley, Mr. Donald Goldstein, Mr. Jamie Goldstein, Mr. Gary Fears, Mr. Joel Ramsden, and Mr. Lawrence Cusack / Whitwell.
On March 4, 2008, Mr. Christopher Beck, acting as a member of the Board of Directors of the Company (although not properly appointed) improperly and without authority issued a Form 8-K in an attempt to discredit and slander Mr. Alexis Korybut and various creditors of the Company by questioning past stock, note, and warrant issuances. The Company has reviewed said past stock, note, and warrant issuances, and has determined that all issuances are legitimate, valid, and were issued for proper consideration to the Company. The Company also reiterates that it is a fully reporting company and that all past stock, note, and warrant issuances have been fully audited by a certified independent auditor, that the Company is not contemplating restating financial results for prior periods, and that said Form 8-K improperly filed by Mr. Christopher Beck be disregarded in its entirety.
Additionally, on March 7, 2008, Mr. Christopher Beck, acting as a member of the Board of Directors of the Company (although not properly appointed) improperly and without authority issued a Form 8-K in an attempt to discredit and slander Mr. Alexis Korybut, Mr. Donald Goldstein, Mr. Jamie Goldstein, and Mr. Joel Ramsden, through the dissemination of erroneous and misleading information. The Company again reiterates that it is a fully reporting company and that all past stock, note, and warrant issuances have been fully audited by a certified independent auditor, that the Company is not contemplating restating financial results for prior periods, and that said Form 8-K improperly filed by Mr. Christopher Beck be disregarded in its entirety.
Additionally, on or around February 12, 2008, Mr. Christopher Beck, acting as a member of the Board of Directors of the Company (although not properly appointed) improperly and without authority seized control of the Company’s bank accounts, and thereafter, Mr. Beck acting as a member of the Board of Directors of the Company (although not properly appointed) improperly and without authority paid to himself $15,000 of Company monies, acting as a member of the Board of Directors of the Company (although not properly appointed) improperly and without authority paid an additional $15,000 of Company monies to Mr. Victor Miller, and thereafter, acting as a member of the Board of Directors of the Company (although not properly appointed) improperly and without authority used Company monies to further attempt to implement his and Mr. Miller’s intent to procure a controlling interest of the Company.
Additionally, on or around March 12, 2008, Mr. Christopher Beck , acting as a member of the Board of Directors of the Company (although not properly appointed) improperly and without authority returned to a lender, a recently received loan to the Company of one million dollars ($1,000,000), and thereafter, management believes, made false and misleading statements to the lender in an attempt to ensure that the Company would not have access to capital to further its business. Immediately thereafter, Mr. Beck, acting as a member of the Board of Directors of the Company (although not properly appointed) improperly and without authority issued another Form 8-K in an attempt to manipulate the shares of the Company and to further the attempt to procure a controlling interest of the Company by stating that “…the company’s financial status is in critical need of capital to continue operation as a “going concern”, and in order to bring in interested investors, it will be necessary for the Company to take action to have its note holders to voluntarily, or be made to involuntarily convert notes and warrants into common stock.”. The Company again reiterates that it is a fully reporting Company, that it is audited by a certified independent auditor, that the Company is not contemplating restating financial results for prior periods, and that said Form 8-K improperly filed by Mr. Christopher Beck be disregarded in its entirety.
The Company has successfully defended itself from the improper actions devised and implemented by Mr. Victor Miller and Mr. Christopher Beck, and is investigating with legal counsel its civil and criminal prosecutorial options. In addition, the Company believes that certain individuals including Mr. Korybut and various creditors and shareholders are also investigating their legal options as a consequence of damages caused by Mr. Miller and Mr. Beck.
Entry Into Definitive Material Agreement
On October 29, 2007, the Company signed an exclusive lease agreement with Air Support Systems, LLC., for the use of its ILyushin IL-76/78 aircraft, an aerial fire-fighting supertanker. The agreement with Air Support Systems, LLC for the exclusive use of its IL-76/78, is for an initial five year term, renewable for two subsequent and exclusive five y ear terms.
The Company recently took delivery of the IL-76/78 aircraft at its Grayson County Airport facility in Grayson County, Texas. This aircraft is currently operational in the United States and is believed to be the only one of its kind in the U.S.
The Company intends to operate its IL-76/78 supertanker to solicit contracts for aerial fire-fighting and mid-air refueling. The IL-76/78 supertanker is a Russian military designed aircraft specifically designed for military applications and aerial firefighting, and has already been successfully utilized for firefighting in Greece, Russia and Indonesia, and caries a greater water payload then other commonly used aerial firefighting aircraft.
When configured with mid-air refueling drogues, the IL-76 is referred to under the type designator of “IL-78”. In this “aerial refueling” configuration, the IL-78 is capable of refueling three military aircraft simultaneously. We believe that this configuration of the aircraft will achieve the further goal of supplementing the Company’s air-to-air combat and training business.
Entry Into Definitive Material Agreement
On May 2, 2007, the Company entered into a joint-venture agreement with various parties, including various related parties, including: International Tactical Training Center, Inc., GJJ, LLC, Air Support Systems, LLC, Mark Daniels, Victor Miller, Paul Parmar, and Pegasus Defense Corporation, Inc., contingent upon the performance of certain duties, functions, and obligations by and for the mutual benefit of all parties.
On May 13, 2007, the Company entered into a second joint-venture agreement with various parties, including various related parties, including: International Tactical Training Center, Inc., GJJ, LLC, Air Support Systems, LLC, Mark Daniels, Victor Miller, Paul Parmar, Pegasus Defense Corporation, Inc., AeroGroup Incorporated, Air 1 Flight support, Inc., and Air 1 Maintenance Partnership, contingent upon the performance of certain duties, functions, and obligations by and for the mutual benefit of all parties.
On April 23, 2007 and July 23, 2007, the Company conditionally placed into escrow an aggregate of 45,000,000 shares of Common Stock of the Company in the name of International Tactical Training Center, Inc., an entity controlled at the time by Mr. Parmar. 30,000,000 of said escrowed shares were deposited in contemplation of collateralizing a possible secured financing transaction, and 15,000,000 of said escrowed shares were deposited in contemplation of the successful performance by the other parties to the joint-venture agreement.
Because the Company has not received any proceeds from financing or a financing commitment yet from any prospective investors as contemplated in the joint-venture agreement or otherwise entered into any definitive transaction document that would require such a pledge of shares of Common Stock of the Company, the Company intends on rescinding the said issuance of the 30,000,000 shares of Common Stock. Additionally, as a result of the failure of International Tactical Training Center, Inc., Paul Parmar, and Pegasus Defense Corporation, Inc., to perform their duties, functions, and obligations described in the joint-venture agreements, on August 29, 2007, the Company served Paul Parmar and Pegasus Defense Corporation, Inc. with notice of Default and Termination of the joint-venture agreements, and the Company intends on rescinding the said issuance of the 15,000,000 shares of Common Stock.
Additionally, on August 15, 2007, the Company improperly issued 10,000,000 shares of Common Stock of the Company in the name of Air 1 Flight Support, Inc., an entity affiliated with Mr. Daniels, Mr. Miller, and at the time, Mr. Parmar. Said 10,000,000 shares were subsequently rescinded by the Company in 2008.
Item 9.
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as at December 31, 2008, the name and address and the number of shares of the Company's Common Stock, with a par value of $0.001 per share, held of record or beneficially by each person who held of record, or was known by the Company to own beneficially, more than 5% of the issued and outstanding shares of the Company's Common Stock, and the name and shareholdings of each director and of all officers and directors as a group. The amounts below are based on a total of an aggregate of 855,203,856 shares of Common Stock and 6,400,000 shares of restricted, non-trading Series A Preferred Stock outstanding, which are convertible into 12,800,000 shares of Common Stock.
(1)
In general, a person is considered a beneficial owner of a security if that person has or shares the power to vote or direct the voting of such security, or the power to dispose of such security. A person is also considered to be a beneficial owner of securities which the person has the right to acquire beneficial ownership within of (60) days. In computing the number of shares beneficially owned by a person and the percentage of ownership of that person, we have included all shares of Common Stock owned or beneficially owned by that person, and the number of shares of Common Stock issuable upon conversion or exercise of all convertible securities owned or beneficially owned by such person. Those shares, however, are not deemed outstanding for the purpose of computing the percentage ownership of any other person. All Series A Preferred Stock vote on a 25 to 1 basis with the Common Stock holders for all matters submitted to vote of shareholders. In addition, the holders of the Series A Preferred Stock are entitled to appoint a designee to the board of directors.
(2)
Director
(3)
Officer
(4)
Includes controlling interests in AeroGroup, Federal Financial Partners, Northrop Defense Corp., and beneficial interest in the Mark Daniels Irrevocable Trust.
(5)
Includes controlling interest in Cambar Associates
(6)
Includes controlling interest in Plumtree Capital Management LLC and Innovation Strategies LP
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The AeroGroup Acquisition
At the time we and the AeroGroup negotiated and entered into the Asset Purchase Agreement, Mr. Mark Daniels was not an Officer, Director or affiliate of TADS. After execution of and entry into the Asset Purchase Agreement, Mr. Daniels became a Director and Officer on August 22, 2006 in order for us to secure the government licenses required to be obtained as a condition to closing the AeroGroup Acquisition. At the time of the AeroGroup Acquisition on December 15, 2006, Mark Daniels, a controlling shareholder of AeroGroup, was serving as our sole director and as Secretary and Treasurer.
As a result of the Aero Group Acquisition, AeroGroup acquired a controlling interest in TADS. Mr. Daniels is a controlling shareholder in AeroGroup and has voting and dispositive control over its TADS stock. As a result, Mr. Daniels is the beneficial owner of AeroGroup's TADS stock and owned an 81% indirect beneficial interest in TADS as of the closing of the AeroGroup Acquisition.
As consideration for the AeroGroup Acquisition, TADS assumed notes and warrants held by Mr. Daniels as follows:
●
TADS assumed the Secured Daniels Note;
●
TADS entered into the Daniels Security Agreement;
●
TADS assumed Investor Notes held by Mr. Daniels in the aggregate original principal amount of $366,602.04;
●
TADS assumed Warrants to acquire stock in AeroGroup, which Warrants will now be exercisable for the acquisition of 2,444,014 shares of Common Stock. The Warrants are exercisable at an exercise price of $.15 per share. They are immediately exercisable and have a warrant exercise term of five years. The warrants were issued between April 1, 2003 and November 12, 2005.
The terms and conditions of the foregoing instruments and agreements are described above under the heading “Material Agreements Entered Into”.
●
TADS assumed Warrants to acquire stock in AeroGroup, which Warrants will now be exercisable for the acquisition of 2,444,014 shares of Common Stock. The Warrants are exercisable at an exercise price of $.15 per share. They are immediately exercisable and have a warrant exercise term of five years. The warrants were issued between April 1, 2003 and November 12, 2005.
Mr. Daniels is a majority Stockholder of AeroGroup Incorporated. As a result of the AeroGroup Acquisition, TADS assumed AeroGroup’s obligations to issue shares of AeroGroup Common Stock pursuant to the convertible notes and warrants of AeroGroup. Conversion of those convertible securities prior to the Closing Date would have resulted in a dilution of Mr. Daniels stock in AeroGroup, Incorporated, which will no longer be the case.
Acquisition of Aircraft and Simulator Assets from Entities owned by Mr. Daniels.
In June of 2006, AeroGroup acquired substantially all of the assets of three limited liability companies owned by Mr. Daniels, OneSource Financial Holdings, LLC, Genesis Capital Services, LLC, and Resource Financial Holdings, LLC. These assets (the “Daniels Assets”) included two MiG 29 fighter jets and four full motion aircraft flight simulators. The Daniels Assets were acquired by AeroGroup in exchange for the assumption by the AeroGroup Subsidiaries of certain indebtedness incurred by Daniels in connection with his acquisition of these assets and certain other consideration. These assets were appraised by a certified aircraft appraiser and AeroGroup believes that the acquisition of these assets from Daniels was on terms that were no less favorable to it then if the Company had attempted to acquire these assets in the open market.
The Daniels Assets are part of the AeroGroup Assets acquired by the Company in the AeroGroup Acquisition.
We believe that we have executed the AeroGroup Acquisition and all of the related transactions set forth above on terms no less favorable to us than we could have obtained from unaffiliated third parties on an arms-length transaction. Additionally, all of the foregoing transactions have been approved by both a majority of the board and a majority of disinterested directors. It is our intention to ensure that all future transactions including loans or any other transactions or commitments between us, our officers and directors and their affiliates are approved by a majority of the board of disinterested board members, and are on terms obtained at an arms-length transactions that are no less favorable to us than we could obtain from unaffiliated third parties. Moreover, it is our intention to obtain estimates from unaffiliated third parties for similar goods or services to ascertain whether such transactions with affiliates are on terms that are no less favorable to us than are otherwise available from unaffiliated third parties.
Issuance of Shares of Common Stock to Executive Management and Directors
In connection with compensation agreements in 2007 and 2008, the Company issued the following shares of Common Stock in lieu of cash compensation for salary and incentive payments through December of 2008:
3,200,000 shares of Common Stock to Mr. Mark Daniels in 2007;
810,000 shares of Common Stock to Mr. Victor Miller in 2007;
405,000 shares of Common Stock to Mr. Fred Daniels in 2007;
2,400,000 shares of Common Stock to Mr. Victor Miller in February, 2008;
4,000,000 shares of Common Stock to Mr. Mark Daniels in February, 2008;
30,000,000 of Common Stock to Mr. Alexis Korybut in February, 2008;
52,500,000 shares of Common Stock to Mr. Mark Daniels in July, 2008;
4,000,000 of Common Stock to Mr. Alexis Korybut in July, 2008;
1,100,000 shares of Common Stock to Mr. Fred Daniels in July, 2008; and
1,500,000 shares of Common Stock to Mr. Peter Maffitt in May and July, 2008;
BOARD OF DIRECTORS AND OFFICERS
The following table sets forth certain information regarding our Directors and Officers.
Name
Age
Position
Mark Daniels
Director and Chairman of the Board of Directors, Secretary, and Principal Financial Officer since April 16, 2008, and Principal Executive Officer and President, since March 15, 2008
Peter Maffitt
Director since March 4, 2008
Charles DeAngelo
Director since April 14,
Mark Daniels. Mr. Mark Daniels was appointed as a Director and Chairman of the Company and as its Secretary and Treasurer on April 16, 2008 and was appointed President and Chief Executive Officer as of March 15, 2008. Mr. Daniels resigned as an Officer of the Company on February 4, 2009, and was reappointed President and Chief Executive Officer as of April 14, 2009. Currently, and since 2002, Mr. Daniels has been the sole board member, President and the Chief Executive officer of AeroGroup. Prior to that time, and since 1998, Mr. Daniels was Vice President and a Manager of Global Aviation Associates, Inc., a Florida based aircraft leasing company that leased military and non-military aircraft to government and commercial contractors. Between 1988 and 1998, Mr. Daniels was President and founder of National Search Services, Inc, an investigative services company. Between 1989 and 2001, Mr. Daniels was elected as a director of the National Aviation Museum, a Not-For-Profit corporation located in Oklahoma, where Mr. Daniel’s primary responsibility was the acquisition and importation of military fighter aircraft. Mr. Mark Daniels is primarily responsible for the development of AeroGroup’s business as an aviation government contractor to outsource fighter aircraft for training and other purposes to the U.S. Government and other countries. Mr. Daniels is also an inventor, having authored numerous patents directly related to utility and methods of military type aircraft. Certain of these patents are owned by AeroGroup and were acquired as part of the AeroGroup Acquisition. Mr. Daniels was also previously President, CEO, and a Director of the Company until August 3, 2007.
The Directors of the Company receive stock compensation for their services as members of the Board of Directors, and are entitled to reimbursement for expenses incurred in connection with their attendance at Board of Directors’ meetings. Our by-laws also provide that they may be paid a fee for their services as Directors, although we do not currently pay such fees. Officers are appointed by the Board of Directors and serve at the discretion of the Board.
Audit Committee
Because we are not an issuer listed on a national securities exchange or listed in an automated inter-dealer quotation system of a national securities association, we are not required to have an audit committee. Although we hope to have an audit committee established at some time in the near future, we have not done so yet. Since we have not established such a committee, we have not identified any member of such a committee as a financial expert.
Family Relationships
There are no family relationships among our Officers, Directors, or affiliates.
Involvement in Certain Legal Proceedings
Except as set forth herein, no Officer or Director of the Company has, during the last five years: (i) been convicted in or is currently subject to a pending a criminal proceeding; (ii) been a party to a civil proceeding of a judicial or administrative body of competent jurisdiction and as a result of such proceeding was or is subject to a judgment, decree or final order enjoining future violations of, or prohibiting or mandating activities subject to any federal or state securities or banking laws including, without limitation, in any way limiting involvement in any business activity, or finding any violation with respect to such law, nor (iii) has any bankruptcy petition been filed by or against the business of which such person was an executive officer or a general partner, whether at the time of the bankruptcy of for the two years prior thereto.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Exchange Act requires our Directors and executive Officers, and persons who beneficially own more than 10% of a registered class of our equity securities, to report their initial beneficial ownership and any subsequent changes in that beneficial ownership of our securities to the Commission. Directors, executive Officers and beneficial owners of more than 10% of our Company’s Common Stock are required by SEC regulations to furnish us with copies of all Section 16(a) forms that they file.
EXECUTIVE COMPENSATION
The following table sets forth information with respect to compensation paid by the Company in fiscal 2008 to the President and compensation to named executive officer's that exceeds $100,000 as of December 31, 2008:
[FISCAL YEAR] SUMMARY COMPENSATION TABLE
Outstanding Equity Awards At Fiscal Year-End Table
56,500,000 shares to Mark Daniels (CEO & President)
Option Exercises And Stock Vested Table
None.
PENSION BENEFITS TABLE
None.
Nonqualified Deferred Compensation Table
None.
All Other Compensation Table
None.
Perquisites Table
None.
There are no existing or planned option/SAR grants.
Employment Agreements
As of December 31, 2008, we are a party to employment agreements with Mark Daniels, CEO & President, and Alexis Korybut, Vice President.
Options/SAR Grants in Last Fiscal Year
None.
Aggregated Option Exercises and Fiscal Year-End Option Value Table
None.
Compensation of Directors
Our Directors do not receive cash compensation for their services, but may receive stock compensation. The Company does not provide additional compensation for committee participation or special assignments of the Board of Directors.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our executive officers, Directors and persons who own more than 10% of a registered class of our equity securities to file certain reports with the SEC regarding ownership of, and transactions in, our securities. Such officers, Directors, and 10% shareholders are also required by the SEC to furnish us with all Section 16(a) forms that they file.
Based solely on our review of such forms furnished to us and written representations from certain reporting persons, we believe that all filing requirements applicable to our executive officers, Directors, and more than 10% Stockholders were complied with during the fiscal year ended December 31, 2008.
AUDIT AND CERTAIN OTHER FEES PAID TO ACCOUNTANTS
Audit Fees
We have paid Larry Scharfman & Co. CPA P.A., our independent auditors fees of $25,000 for the 2007 10-K, fees of $15,000 for the 2006 10-K, and fees of $5,000 per each 2008 10QSB.
Tax and All Other Fees
We did not pay any fees to Larry Scharfman & Co. CPA P.A., for tax compliance, tax advice, tax planning or other work during our fiscal years ending December 31, 2007 and December 31, 2008.
Pre-Approval Policies and Procedures
We have implemented pre-approval policies and procedures related to the provision of audit and non-audit services. Under these procedures, our board of directors pre-approves all services to be provided by Larry Scharfman & Co. CPA P.A., the estimated fees related to these services.
With respect to the audit of our financial statements as of December 31, 2008 and for the year then ended, none of the hours expended on Larry Scharfman & Co. P.A, engagement to audit those financial statements were attributed to work by persons other than Larry Scharfman & Co. CPA P.A, full-time, permanent employees.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated.