Trans-Pacific Aerospace Company, Inc.

As part of the acquisition of HAC, the Company assumed $260,000 of obligations under a convertible note. The convertible note assumed by the Company does not bear interest and became payable on March 12, 2011. The note is convertible into shares of the Company’s common stock at an initial conversion price of $0.25 per share. The conversion price is subject to adjustment for stock splits and combinations; certain dividends and distributions; reclassification, exchange or substitution; reorganization, merger, consolidation or sales of assets. As the convertible note does not bear interest, the Company recorded the present value of the convertible note obligation at $239,667 and accordingly recorded a convertible note payable for $260,000 and a corresponding debt discount of $20,333. Under the effective interest method, the Company accretes the note obligation to the face amount of the convertible note over the remaining term of the note. The discount was fully amortized at March 12, 2011. Debt discount expense totaled $7,452 and $12,880 for the years ended October 31, 2011 and 2010 respectively. The Company performed an evaluation and determined that the anti-dilution clause did not require derivative treatment. On September 16, 2011, the Company entered into an agreement with the note holder to extend the maturity date of the note. Pursuant to the agreement, the entire outstanding amount became fully due and payable on December 31, 2011. In May 2017, the Company, the note holder, and Apollo Capital Corp. (“Apollo”) entered into assignment and replacement agreements. Pursuant to the agreements, the note holder assigned $30,000 of the outstanding balance to Apollo and the Company issued a replacement note to Apollo to amend the terms as follows:

The Company analyzed the conversion option of the replacement Note for derivative accounting consideration under ASC 815-15 “Derivatives and Hedging” and determined that the instrument should be classified as liability on the agreement date due to there being no explicit limit to the number of shares to be delivered upon settlement of the above conversion options for the replacement note issued. The Company then calculated the fair value of the conversion option and discount on the replacement note. For the nine months ended July 31, 2017, the Company recorded a total of $30,000 as note discount, $76,940 as derivative expense and $106,940 as derivative liabilities for the replacement note. As of July 31, 2017, Apollo had exercised the right to fully convert the replacement note to 623,512,079 shares of the Company’s common stock.

On May 18, 2017, the Company’s Board of Directors adopted the 2017 Stock Incentive Plan (the “Plan”). The total number of shares available for the grant of either stock options or compensation stock under the Plan is 1,860,000,000 shares, subject to adjustment. On June 12, 2017, the Company filed Form S-8 with the Securities and Exchange Commission to register the shares under the Plan.

We received our initial order for electric bikes in April 2017 and recorded revenues of $1,640 and costs of goods sold of $1,150 for the nine months ended July 31, 2017. This compares to $109,140 of revenue we recognized for the nine months ended July 31, 2016 from sale of bearings. However, we had not received the amount receivable and recorded bad debt expense to write of the account receivable at October 31, 2016.

Our net cash used in operating activities for the nine months ended July 31, 2017 was $277,973, consisting primarily of our net loss of $1,537,426, change in fair value of derivative liabilities of $50,085, an increase in inventories of $9,705, an increase of prepaid and deferred expenses of $5,000, and a decrease in accounts payable and accrued expenses of 10,400, which amounts were offset by stock based compensation of $1,037,069, amortization of debt discount of $59,375, imputed interest expense of $13,125, derivative expense of $201,413, interest converted to common stock of $156, depreciation expense of $903, increase in customer deposit of $17,527 and accrued interest payable of $5,075.

Our net cash used in operating activities for the nine months ended July 31, 2016 was $410,395, consisting primarily of our net loss of $2,681,864, an increase in accounts receivable of $109,140 and a decrease in accrued interest payable of $500, which amounts were offset by stock based compensation of $2,144,398, amortization of debt discount of $41,667, imputed interest expense of $13,650, interest converted to common stock of $1,720, interest paid by shareholder of $27,186, depreciation expense of $903, prepaid debt and deferred expenses of $1,584, and $150,001 of increases in accounts payable and accrued expenses.