TACTICAL AIR DEFENSE SERVICES, INC. - FORM 10-Q - November 23, 2009

Attached files

file filename
EX-31.1 - EXHIBIT 31.1 - TACTICAL AIR DEFENSE SERVICES, INC.tac_311.htm
EX-31.2 - EXHIBIT 31.2 - TACTICAL AIR DEFENSE SERVICES, INC.tac_312.htm
EX-32.2 - EXHIBIT 32.2 - TACTICAL AIR DEFENSE SERVICES, INC.tac_ex322.htm
EX-32.1 - EXHIBIT 32.1 - TACTICAL AIR DEFENSE SERVICES, INC.tac_ex321.htm



 
 
 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D. C. 20549

FORM 10-Q
 
(Mark One)
X Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2009.

 o Transition Report Pursuant to Section 13 or 15(d)\ of the Securities Exchange Act

For the transition period from
____________________
 
Commission File No.     333-79405

TACTICAL AIR DEFENSE SERVICES, INC.
(Exact name of small business issuer as specified in its charter)

Nevada
88-0455809
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)

1515 Perimeter Rd
West Palm Beach, FL 33406
 (Address of principal executive offices)

(305) 781-2929
 (Issuer's telephone number)
 
Securities registered under Section 12(b) of the Exchange Act:
None

Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $0.001 par value per share
(Title of Class)

Securities registered under Section 12(b) of the Exchange Act:
None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $0.001 par value per share
(Title of Class)
 
Indicate by check mark whether the Registrant (1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days:  Yes  x    No  ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  ¨     Accelerated filer  ¨     Non-Accelerated filer  ¨ Small Business Issuer  x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  ¨    No x

Indicate the number of shares outstanding of each of the issuer’s classes of Common Stock, as of the latest practicable date.
 
Class
  
Outstanding at November 15, 2009
Common Stock, $0.001 par value 
  
1,262,924,132
 

 
 
 

INFORMATION RELATING TO FORWARD-LOOKING STATEMENTS
 
In addition to historical information, this Form 10-Q contains statements relating to our future results (including certain projections and business trends) that are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act), and are subject to the “safe harbor” created by those sections. Words such as “expects”, “anticipates”, “intends”, “plans”, “believes”, “estimates”, “suggests”, “seeks”, “will” and variations of such words and similar expressions are intended to identify forward-looking statements.  These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results and performance to be materially different from any future results or performance expressed or implied by these forward-looking statements. These factors include, among other things, our capital needs, the competitiveness of the business in our industry, our strategies, our ability to attract and retain qualified officers and directors, demand for the services we provide, both nationally and in the regions in which we operate, the functioning of our information systems, the effect of existing or future government regulation and federal and state legislative and enforcement initiatives on our business, our clients’ ability to pay us for our services, our ability to successfully implement our acquisition and development strategies, the effect of liabilities and other claims asserted against us, the effect of competition in the markets we serve, our ability to successfully defend the Company, its subsidiaries, and its officers and directors on the merits of any lawsuit or determine its potential liability, if any, and other factors.
 
Although we believe that these statements are based upon reasonable assumptions, we cannot guarantee future results and readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s opinions only as of the date of this filing. There can be no assurance that (i) we have correctly measured or identified all of the factors affecting our business or the extent of these factors’ likely impact, (ii) the available information with respect to these factors on which such analysis is based is complete or accurate, (iii) such analysis is correct or (iv) our strategy, which is based in part on this analysis, will be successful. The Company undertakes no obligation to update or revise forward-looking statements

All references in this Annual Report on Form 10/K to the “Company,” “we,” “our,” or “us,” ” refer to TADS and its subsidiaries as constituted subsequent to the acquisition of substantially all of the assets of AeroGroup Incorporated on December 15, 2006, except where the context makes clear that the reference is only to TADS. Information about the Company and the principal terms of this acquisition are set forth below.



 
 
 

INDEX TO FORM 10-Q FILING

TABLE OF CONTENTS

PART I
FINANCIAL INFORMATION
 
  
  
  
Page Numbers
PART I - FINANCIAL INFORMATION
  
  
     
Item 1.
  
       Condensed Consolidated Financial Statements (unaudited)
  
  
 
  
       Condensed Consolidated Balance Sheets
  
4
 
  
            Condensed Consolidated Statements of Income
  
5
   
       Condensed Consolidate Statement of Equity
    
 
  
       Condensed Consolidated Statement of Cash Flows
  
6
 
  
          Notes to Condensed Consolidated Financial Statements
  
7
Item 2.
  
       Management Discussion & Analysis of Financial Condition and Results of Operations
  
25
Item 3
  
    Quantitative and Qualitative Disclosures About Market Risk
  
27
Item 4.
  
    Controls and Procedures
  
27
   
PART II - OTHER INFORMATION
  
  
     
Item1
  
    Legal Proceedings
  
28
Item1A
  
    Risk Factors
  
31
Item 2.
  
    Unregistered Sales of Equity Securities and Use of Proceeds
  
31
Item 3.
  
    Defaults Upon Senior Securities
  
31
Item 4.
  
    Submission of Matters to a Vote of Security Holders
  
31
Item 5
  
    Other information
  
31
Item 6.
  
    Exhibits
  
31
 
 
CERTIFICATIONS
  
     
 
Exhibit 31 – Management certification
  
     
 
Exhibit 32 – Sarbanes-Oxley Act
  


 
 
PART I

ITEM 1 – FINANCIAL STATEMENTS

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions for Form 10-Q and Rule 10-01 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.  In the opinion of management, all adjustments considered necessary for a fair presentation have been included.  All such adjustments are of a normal recurring nature.  Operating results for the three month period ended September 30, 2009 are not necessarily indicative of the results that may be expected for the year ending December 31, 2009.

 
3
 

CONDENSED CONSOLIDATED BALANCE SHEET
   
SEPTEMBER 30,
2009
    
DECEMBER 31,
2008
  
ASSETS
            
Current Assets:
            
Cash
  
$
17
      
23,156
  
    Accounts Receivable-Net of Allowance For
    Doubtful Accounts $250,000
    
-0-
      
250,000
  
Total Current Assets
    
17
      
273,156
  
Property and Equipment, net
    
88,000
      
88,000
  
                 
TOTAL ASSETS
    
88,017
      
361,156
  
LIABILITIES AND STOCKHOLDERS' EQUITY
                
Current Liabilities:
                
Accounts payable
    
18,395
      
7,762
  
Accrued liabilities
    
62,236
      
473,454
  
Short-Term Debentures, including accrued interest, net of debt discount of $2,590,041
    
1,434,331
      
504,904
  
Total Current Liabilities
    
1,514,962
      
986,120
  
TOTAL LIABILITIES
    
1,514,962
      
986,120
  
COMMITMENTS
                
STOCKHOLDERS' EQUITY:
                
S   Series A Preferred stock-$.001 par value; 50,000,000 shares authorized; - shares issued and outstanding - 6,400,000
   
-0-
      
6,400
  
     Common stock-$.001 par value; 30,000,000,000 shares authorized; - 1,480,309,286 and 855,203,856 shares issued and outstanding at September 30, 2009 and December 31, 2008, respectively
    
1,480,309
      
855,204
  
Additional paid-in-capital
    
35,565,847
      
36,403,936
  
Unearned compensation
                
Deficit accumulated during the development stage
    
(38,473,101
)
    
(37,890,504
)
TOTAL STOCKHOLDERS' EQUITY
    
(1,426,945
)
    
(624,964
) 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
  
$
88,017
      
361,156
  

The accompanying notes are an integral part of these condensed consolidated financial statements.
 

 
4
 

TACTICAL AIR DEFENSE SERVICES, INC.
(A Development Stage Company, Commencing January 1, 2006)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three and Nine months Ended September 30, 2009 and 2008
(Unaudited)
   
Three Months Ended
September 30,
    
Nine months Ended
September 30,
  
   
2009
    
2008
    
2009
    
2008
  
REVENUES
  
$
-
    
$
-
    
$
-
    
$
-
  
OPERATING COSTS
                                
GENERAL AND ADMINISTRATIVE EXPENSES
    
161,319
      
620,746
      
552,591
      
1,612,770
  
TOTAL COSTS
    
161,319
      
620,746
      
552,591
      
1,612,770
  
OPERATING LOSS
    
(161,319
)
    
(620,746
)
    
(552,591
)
    
(1,612,770
)
OTHER (EXPENSE) INCOME:
                                
Derivative loss on derivative liabilities
            
-
              
-
  
Write-down of fixed assets
                                
Forgiveness of liquidated damages
            
-
              
-
  
Interest expense
    
(20,000
)
    
-
      
(30,000
)
    
(551,600
)
Other
            
-
              
-
  
TOTAL OTHER EXPENSES
    
(20,000
)
    
-
      
(30,000
)
    
(551,600
)
NET LOSS
  
$
(181,319
)
    
(620,746
)
  
$
(582,591
)
  
$
(2,164,370
)
Preferred stock dividend
                                
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS
  
$
(181,319
)
    
(620,746)
    
$
(582,591
)
  
$
(2,164,370
)
                                 
Loss per common share - basic and diluted
  
$
(.00
)
    
(.02
)
  
$
(.00
)
  
$
(.09
)
                                 
Weighted average number of shares outstanding - basic and diluted
    
1,288,309,286
      
29,600,840
      
1,071,756,571
      
23,427,182
  

  
The accompanying notes are an integral part of these condensed consolidated financial statements.
 


 
5
 

TACTICAL AIR DEFENSE SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

   
Nine months Ended
September 30,
  
   
2009
    
2008
  
CASH FLOWS FROM OPERATING ACTIVITIES
            
Net (loss)
  
$
(582,591
)
  
$
(2,164,370
)
Adjustments to reconcile net loss to net cash
used in operating activities:
                
Bad debt reserve
    
250,000
          
Stock-based compensation
    
296,668
      
1,828,589
  
Changes in operating assets and liabilities:
                
Accounts receivable
    
-0-
          
Accounts payable
    
10,633
      
-
  
Accrued liabilities
    
(411,218
)
    
367,625
  
Net Cash Used in Operating Activities
    
(436,508
)
    
(31,844
)
CASH USED IN INVESTING ACTIVITIES
                
Purchase of property and equipment
    
-0-
      
-0-
  
Net Cash Used in Investing Activities
    
-0-
      
-0-
  
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
                
Proceeds from sale of common stock
    
25,000
      
175,000 
  
Due to related parties, net
    
388,369
      
-
  
Net Cash Provided by Financing Activities
    
413,369
      
175,000
  
Increase (Decrease) in cash
    
(23,139
)
    
143,156
  
Cash - Beginning of period
    
23,156
      
-0-
  
Cash - End of period
  
$
17
    
$
143,156
  
Interest paid
            
-
  
Taxes paid
            
-
  
Non-cash Transactions:
                
Conversion of debt plus accrued interest to equity
          
$
2,706,224
  
 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 


 
6
 

TACTICAL AIR DEFENSE SERVICES, INC.
(Unaudited)
 
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, maintenance training, 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:

 
·
14,989,900 shares of restricted Common Stock of TADS, constituting a majority of the then outstanding Common Stock of TADS.
   
 
·
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.
   
 
·
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.
   
 
·
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.
     
 
·
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.
 
7
 
·
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.
     
 
·
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.
     
 
·
Assumption by TADS of Aero’s obligations for accrued expenses totaling $136,000.
 
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.

Basis of Presentation

The results for the third quarter of 2009 are not necessarily indicative of the results to be expected for the full fiscal year and have not been audited. 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 September 30, 2009. 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. These financial statements should be read in conjunction with the financial statements and notes thereto that were included in the Company’s latest annual report within its Form 10-K for the year ended December 31, 2008.

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 significant working capital deficiency as of September 30, 2009 of approximately $1,600,000.

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 2009. 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, maintenance training, aerial fire-fighting, ground-threat support, and other aerial services. 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 2007-2009, 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.

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.


 
8
 

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 September 30, 2009, the Company did not have any assets placed into service. As a result, there was no depreciation expense for the nine months ended September 30, 2009.

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 aircraft and flight simulators. 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.

GOODWILL AND OTHER INTANGIBLE ASSETS

In June 2001, the FASB issued Statement No. 142 Goodwill and Other Intangible Assets.  This statement addresses financial accounting and reporting for acquired goodwill and other intangible assets and supersedes APB Opinion No. 17, Intangible Assets.  It addresses how intangible assets that are acquired individually or with a group of other assets (but not those acquired in a business combination) should be accounted for in financial statements upon their acquisition.  This Statement also addresses how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements.

Goodwill and intangible assets with indefinite useful lives are not amortized. Intangible assets with finite useful lives are amortized generally on a straight-line basis over the periods benefited, with a weighted average useful life of 15 years.

In performing this assessment, management uses the income approach and the similar transactions method of the market approach to develop the fair value of the acquisition in order to assess its potential impairment of goodwill. The income approach is based on a discounted cash flow model which relies on a number of factors, including operating results, business plans, economic projections and anticipated future cash flows. Rates used to discount future cash flows are dependent upon interest rates and the cost of capital at a point in time. The similar transactions method is a market approach methodology in which the fair value of a business is estimated by analyzing the prices at which companies similar to the subject, which are used as guidelines, have sold in controlling interest transactions (mergers and acquisitions). Target companies are compared to the subject company, and multiples paid in transactions are analyzed and applied to subject company data, resulting in value indications. Comparability can be affected by, among other things, the product or service produced or sold, geographic markets served, competitive position, profitability, growth expectations, size, risk perception, and capital structure. There are inherent uncertainties related to these factors and management’s judgment in applying them to the analysis of goodwill impairment. It is possible that assumptions underlying the impairment analysis will change in such a manner that impairment in value may occur in the future.

 
9

REVENUE RECOGNITION
 
The Company recognizes revenue in accordance with the Securities and Exchange Commission, Staff Accounting Bulletin (SAB) No. 104, “Revenue Recognition” (“SAB No. 104”). SAB 104 clarifies application of generally accepted accounting principles related to revenue transactions. The Company also follows the guidance in EITF Issue No. 00-21, Revenue Arrangements with Multiple Deliverables ("EITF Issue No. 00-21"), in arrangements with multiple deliverables.

The Company recognizes revenues when all of the following criteria are met: (1) persuasive evidence of an arrangement exists, (2) delivery of products and services has occurred, (3) the fee is fixed or determinable and (4) collectability is reasonably assured.

The Company receives revenue for aerial combat training services and associated services..  Training contracts are generally are for one year, and are renewable year to year thereafter.  Revenue for consulting services is recognized as the services are provided to customers.  Milestone payments are recognized as revenue upon achievement of contract-specified events and when there are no remaining performance obligations.

In certain cases, the Company enters into agreements with customers that involve the delivery of more than one product or service.  Revenue for such arrangements is allocated to the separate units of accounting using the relative fair value method in accordance with EITF Issue No. 00-21. The delivered item(s) is considered a separate unit of accounting if all of the following criteria are met: (1) the delivered item(s) has value to the customer on a standalone basis, (2) there is objective and reliable evidence of the fair value of the undelivered item(s) and (3) if the arrangement includes a general right of return, delivery or performance of the undelivered item(s) is considered probable and substantially in the control of the vendor. If all the conditions above are met and there is objective and reliable evidence of fair value for all units of accounting in an arrangement, the arrangement consideration is allocated to the separate units of accounting based on their relative fair values.

 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 short-term investments as of September 30, 2009.

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 quarters ended March 31, 2008 and 2009 because their inclusion would have had been anti-dilutive.
 

 
10
 
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 September 30, 2009, 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:

·
  
expected volatility -   350%-450%
 
·
  
expected dividend – none
 
·
  
risk-free interest rate - 4.75%-5.00%
 
·
  
Contractual term - 3-5 years


 
11
 

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."
 
Recent Accounting Pronouncements

In April 2009, the FASB issued FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly (FSP 157-4), and FSP FASB 107-1 and Accounting Principles Board (APB) 28-1, Interim Disclosures about Fair Value of Financial Instruments (FSP 107-1). These two staff positions relate to fair value measurements and related disclosures. The FASB also issued a third FSP relating to the accounting for impaired debt securities titled FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments (FSP 115-2). These standards are effective for interim and annual periods ending after September 15, 2009. The Company has determined that FSP 157-4 and FSP 115-2 do not currently apply to its activities and has adopted the disclosure requirements of FSP 107-1.

In May 2009, the FASB issued Statement No. 165, “Subsequent Events” (“SFAS 165”), which establishes general standards of accounting for, and requires disclosure of, events that occur after the balance sheet date but before financial statements are issued or are available to be issued.  The Company adopted the provisions of SFAS 165 for the quarter ended September 30, 2009.  The adoption of these provisions did not have a material effect on the Company’s consolidated financial statements.
 
The Company evaluated subsequent events through the time of filing this Quarterly Report on Form 10-Q on August 14, 2009.

EITF 08-6, which is effective January 1, 2009, clarifies the accounting for certain transactions and impairment considerations involving equity method investments and is applied on a prospective basis to future transactions.

EITF 08-7, which is effective January 1, 2009, clarifies that a defensive intangible asset (an intangible asset that the entity does not intend to actively use, but intends to hold to prevent others from obtaining access to the asset) should be accounted for as a separate unit of accounting and should be assigned a useful life that reflects the entity’s consumption of the expected benefits related to the asset. EITF 08-7 is applied on a prospective basis to future transactions.

FSP EITF 03-6-1 clarifies that share-based payment awards that entitle holders to receive nonforfeitable dividends before they vest will be considered participating securities and included in the earnings per share calculation pursuant to the two class method. The effect of adoption of FSP EITF 03-6-1 was not material to the Company’s consolidated results of operations.

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 was adopted on January 1, 2009, and did not affect the Company’s consolidated financial position or consolidated results of operations.
 
In September 2009, the FASB issued SFAS No. 166, Accounting for Transfers of Financial Assets, an amendment to SFAS No. 140 (SFAS 166). SFAS 166 eliminates the concept of a “qualifying special-purpose entity,” changes the requirements for derecognizing financial assets, and requires additional disclosures in order to enhance information reported to users of financial statements by providing greater transparency about transfers of financial assets, including securitization transactions, and an entity’s continuing involvement in and exposure to the risks related to transferred financial assets. SFAS 166 is effective for fiscal years beginning after November 15, 2009. The Company will adopt SFAS 166 in fiscal 2010 and is evaluating the impact it will have on the consolidated results of the Company.

In September 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R) (SFAS 167). The amendments include: (1) the elimination of the exemption for qualifying special purpose entities, (2) a new approach for determining who should consolidate a variable-interest entity, and (3) changes to when it is necessary to reassess who should consolidate a variable-interest entity. SFAS 167 is effective for the first annual reporting period beginning after November 15, 2009 and for interim periods within that first annual reporting period. The Company will adopt SFAS 167 in fiscal 2010 and is evaluating the impact it will have on the consolidated results of the Company.
 

 
12
 

In September 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles (SFAS 168). SFAS 168 replaces FASB Statement No. 162, The Hierarchy of Generally Accepted Accounting Principles, and establishes the FASB Accounting Standards Codification TM (the Codification) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with generally accepted accounting principles (GAAP). SFAS 168 is effective for interim and annual periods ending after September 15, 2009.
In September 2009, Accounting Standards Codification (“ASC”) became the source of authoritative U.S. GAAP recognized by the Financial Accounting Standards Board (“FASB”) for nongovernmental entities, except for certain FASB Statements not yet incorporated into ASC. Rules and interpretive releases of the SEC under federal securities laws are also sources of authoritative U.S. GAAP for registrants. The discussion below includes the applicable ASC reference.

The Company adopted ASC Topic 810-10 Consolidation (formerly SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements – an amendment of ARB No. 51) effective January 2, 2009. Topic 810-10 changes the manner of presentation and related disclosures for the noncontrolling interest in a subsidiary (formerly referred to as a minority interest) and for the deconsolidation of a subsidiary. The presentation changes are reflected retrospectively in the Company’s unaudited condensed consolidated financial statements.

ASC Topic 815-10 Derivatives and Hedging (formerly SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities) was adopted by the Company effective January 2, 2009. The guidance under Topic 815-10 changes the manner of presentation and related disclosures of the fair values of derivative instruments and their gains and losses.
The Company adopted ASC Topic 825-10 Financial Instruments (formerly, FASB Staff Position No. SFAS 107-1 and APB No. 28-1, Disclosures about the Fair Value of Financial Instruments), which requires quarterly disclosure of information about the fair value of financial instruments within the scope of Topic 825-10. The Company adopted this pronouncement effective April 1, 2009.
In April 2009, the Company adopted ASC Topic 820-10-65 Fair Value Measurements and Disclosures (formerly FASB Staff Position No. SFAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly). The standard provides additional guidance for estimating fair value in accordance with Topic 820-10-65 when the volume and level of activity for the asset or liability have significantly decreased and includes guidance on identifying circumstances that indicate if a transaction is not orderly. The Company adopted this pronouncement effective April 1, 2009 with no impact on its consolidated financial statements.

The Company adopted, ASC Topic 855-10 Subsequent Events (formerly SFAS 165, Subsequent Events) effective April 1, 2009. This pronouncement changes the general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued.

In June 2009, the FASB finalized SFAS No. 167, Amending FASB interpretation No. 46(R), which was included in ASC Topic 810. The provisions of ASC 810 amend the definition of the primary beneficiary of a variable interest entity and will require the Company to make an assessment each reporting period of its variable interests. The provisions of this pronouncement are effective January 1, 2010. The Company is evaluating the impact of the statement on its consolidated financial statements.
  
In July 2009, the FASB issued SFAS No. 168, The Hierarchy of Generally Accepted Accounting Principles. SFAS 168 codified all previously issued accounting pronouncements, eliminating the prior hierarchy of accounting literature, in a single source for authoritative U.S. GAAP recognized by the FASB to be applied by nongovernmental entities. SFAS 168, now ASC Topic 105-10 Generally Accepted Accounting Principles, is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The adoption of this pronouncement did not have an effect on the consolidated financial statements.

In August 2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-05, Measuring Liabilities at Fair Value, which clarifies, among other things, that when a quoted price in an active market for the identical liability is not available, an entity must measure fair value using one or more specified techniques. The Company adopted the pronouncement effective July 1, 2009 with no impact on its consolidated financial statements.

In October 2009, the FASB issued ASU No. 2009-13, Multiple-Deliverable Revenue Arrangements, which revises the existing multiple-element revenue arrangements guidance and changes the determination of when the individual deliverables included in a multiple-element revenue arrangement may be treated as separate units of accounting, modifies the manner in which the transaction consideration is allocated across the separately identified deliverables and expands the disclosures required for multiple-element revenue arrangements. The pronouncement is effective for financial statements issued after December 31, 2010. The Company does not expect the pronouncement to have a material effect on its consolidated financial statements.


 
13
 

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
 
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. The share purchase price carried certain anti-dilution rights whereby the share purchase price would be amended if the average closing price of the shares, during the 30-day period following the closing of the offering, was less than the share purchase price.  The new share purchase price would become the anti-dilution reference price, and additional shares would be issued to reflect the new share purchase price. Notwithstanding any of the above, the new, share purchase price would 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.

Pursuant to a Securities Purchase Agreement, in March, 2008, the Company sold 3,000,000 shares of restricted Common Stock to one investor at a purchase price of $0.01 per share. The gross proceeds of the offering totaled $30,000.

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.


 
14
 

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.

Pursuant to a Securities Purchase Agreement, in May, 2009, the Company sold 5,000,000 shares of restricted Common Stock to one investor at a purchase price of $0.005 per share. The gross proceeds of the offering totaled $25,000.

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

2006 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.


 
15
 
Second Quarter of 2007

Between April 1, 2007 and September 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 September 30, 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
16

Between April 1, 2008 and September 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 September 30, 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.

Third Quarter of 2009

Between July 31, 2009 and November 15, 2009, the Company received loans totaling $57,542.46, retired Promissory Notes totaling $162,964.54, and retired 216,885,154 shares of Common Stock of the Company.  The Company issued Debentures totaling $520,996, which Debentures are convertible into TADS 416,796,800 shares of Common Stock at a conversion price of $0.00125 per share. The Debentures bear annual interest of 12%, are due three years from the date of issuance, and carry full-ratchet anti-dilution provisions.

Additional Indebtedness

Between July 1, 2008 and April 30, 2009, the Company received proceeds of Short-Terms loans (the “Short-Term Loans”) totaling $742,863 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 carried 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 holders. The reference price was 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 lowest purchase price is currently $0.01 and which principle is equal to 148,572,658 shares of the Company’s Common Stock, which Common Stock has been issued.

Between April 30, 2009 and July 31, 2009, the Company received proceeds of Short-Terms loans (the “Short-Term Loans”) totaling $109,188. 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 reference price is 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 lowest purchase price is currently $0.005 and which principle new loans equals 51,774,471 shares of the Company’s Common Stock, which Common Stock has not yet been issued.

On April 15, 2009, the Company issued a Promissory Note to Mark Daniels for $159,878.63 in consideration for unpaid salary and expenses accrued from April 1, 2008 through April 15, 2009.  The terms of the Promissory Note have been revised to increase the term of 120 days with an annual interest rate 12%, and in the event of non-payment in full by the due-date of the Promissory Note, on the unpaid balance, the annual interest rate increases retroactively to 18% and the note-holder shall receive additional consideration of 100% annual stock coverage at a share reference price equal to a 50% discount to the 30-day trailing average price of the Common Stock of the Company.

On April 15, 2009, the Company issued a Promissory Note to Alexis Korybut for $114,425.77 in consideration for unpaid salary and expenses accrued from April 1, 2008 through April 15, 2009.  The terms of the Promissory Note have been revised to increase the term to 120 days with an annual interest rate 12%, and in the event of non-payment in full by the due-date of the Promissory Note, on the unpaid balance, the annual interest rate increases retroactively to 18% and the note-holder shall receive additional consideration of 100% annual stock coverage at a share reference price equal to a 50% discount to the 30-day trailing average price of the Common Stock of the Company.  On September 3, 2009, the Promissory Note was retired.
17

 
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.


 
18
 
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 Daniel

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 third 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 new employment agreement with the Company and for accrued and unpaid salary. The Company issued an aggregate amount of 121,975,720 restricted shares of Common Stock to Mark Daniels Irrevocable Trust III in April, 2009.  The shares were issued in consideration for accrued and unpaid salary and expenses owed to Mr. Daniels, for his retirement of 4,000,000 Series A Preferred Shares including cancellation of any accrued dividends, and for Mr. Daniels executing a new employment agreement with the Company upon his assuming the role of Chief Executive Officer. 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 including any accrued dividends, which Preferred share retirement occurred in April, 2009. In addition, in April, 2009, the Company issued to Mr. Miller 10,000,000 shares of Common Stock as per a Settlement Agreement signed between Mr. Miller and the Company and other parties in April, 2009.  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.  The shares of Common Stock have subsequently been retired as per agreement between the Company and Alexis Korybut.

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.

 
19
 

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.  The Company issued 1,000,000 restricted shares of Common Stock to Mr. Lawrence Cusack in April, 2009, as consideration for unpaid salary while serving as an employee of the Company in 2008.  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 second 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 third quarter of 2008 as further compensation for acting as a Director of the Company. The Company issued 1,000,000 restricted shares Common Stock to Peter Maffitt, a Director of the Company, in April, 2009, as 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 second  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 third quarter of 2008 as further compensation for acting as a Director of the Company. The Company issued 1,000,000 restricted shares of Common Stock to Charles DeAngelo, a Director of the Company, in April, 2009 as 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 was cancelled on April 30, 2009.  No registration rights were issued in connection with these shares.


 
20
 
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 for consulting services in the third quarter of 2007.  No registration rights were issued in connection with these shares.

Issuance of Common Stock to Joint Strategy Group, Inc.

The Company issued 5,000,000 restricted shares of Common Stock to Joint Strategy Group, Inc. 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. The Company issued 68,263,808 restricted shares of Common Stock to Joint Strategy Group, Inc. in April, 2009, as consideration for unpaid consulting fees accrued from July 1, 2008 through April 15, 2009, and as consideration for a new consulting 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 of Common Stock to Plumtree Capital Management LLC in July, 2008 as compensation for accrued and unpaid consulting fees and expenses to July, 2008. The Company issued 82,885,154 restricted shares of Common Stock to Plumtree Capital Management LLC in April, 2009 as consideration for unpaid salary and expenses accrued from July 1, 2008 through April 15, 2009, and as consideration for a new employment agreement with the Company. No registration rights were issued in connection with these shares.  The shares of Common Stock have subsequently been retired as per agreement between the Company and Plumtree Capital Management LLC.

Issuance of Common Stock to M&A Advisors LLC

The Company issued 2,000,000 restricted shares of Common Stock  in the third quarter of 2008 and 2,000,000 restricted shares of Common Stock in April, 2009, to M&A Advisors LLC 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.


 
21
 

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 in the fourth quarter of 2008 and 3,000,000 restricted shares of Common Stock in April, 2009, to the Tictin Law Group 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 Julius Astrada in the fourth quarter of 2008 as compensation for marketing services. No registration rights were issued in connection with these shares.

Issuance of Common Stock to Bradley Hacker

The Company issued 1,000,000 restricted shares of Common Stock to Bradley Hacker in April, 2009 as compensation for fees associated with bookkeeping services for the third and fourth quarters of 2008 and the first quarter of 2009. No registration rights were issued in connection with these shares.

Issuance of Common Stock to Air Support Systems, LLC

The Company issued 100,000,000 restricted shares of Common Stock to Air Support Systems, LLC in April, 2009 as consideration under the terms of an agreement between Air Support Systems, LLC and the Company for the exclusive lease of its ILyushin IL-78 aircraft. No registration rights were issued in connection with these shares.  The shares of Common Stock have subsequently been retired as per agreement between the Company and Air Support Systems, LLC.


Issuance of Common Stock to Dakota Aviation Consultants, LLC

The Company issued 100,000,000 restricted shares of Common Stock to Dakota Aviation Consultants, LLC in April, 2009 as consideration under the terms of a consulting agreement between Dakota Aviation Consultants, LLC and the Company. No registration rights were issued in connection with these shares.

Issuance of Common Stock to the Dakota Fears Trust

The Company issued 100,000,000 restricted shares of Common Stock to the Dakota Fears Trust in April, 2009 as consideration under the terms of a Short-Term Loan agreement between the Dakota Fears Trust and the Company. No registration rights were issued in connection with these shares.

Issuance of Common Stock to the Gary Fears Trust

The Company issued 83,980,742 restricted shares of Common Stock to the Gary Fears Trust in April, 2009, of which 30,000,000 shares were issued as consideration for an investment of $300,000 in September of 2008, and 53,980,742 shares were issued under the terms of a Short-Term Loan agreement between the Gary Fears Trust and the Company. No registration rights were issued in connection with these shares.
 
 
22
Retirement of Common Stock

The Company retired 45,000,000 shares of its Common Stock in May, 2009, which had been issued to International Tactical Training Center, Inc. in advance consideration for services which services were subsequently not delivered.

The Company retired 30,000,000 shares of its Common Stock in November, 2009, which had been issued to Alexis Korybut, as per agreement between the Company and Alexis Korybut.

The Company retired 86,885,154 shares of its Common Stock in November, 2009, which had been issued to Plumtree Capital Management, LLC, as per agreement between the Company and Plumtree Capital Management LLC.

The Company retired 100,000,000 shares of its Common Stock in November, 2009, which had been issued to Air Support Systems, LLC, as per agreement between the Company and Air Support Systems, LLC.

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;
 
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 three months ended March 31, 2008 and 2009 because their inclusion would have had been anti-dilutive.

Issuance of Series A Preferred Stock

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 Federal Financial Partners, LLC.

Retirement of Series A Preferred Stock

In April, 2009, the 6,400,000 shares of Series A Preferred Stock, of which 4,000,000 shares had been issued to Federal Financial Partners, LLC and 2,400,000 shares had been issued to Victor Miller, were cancelled and retired, as per a settlement agreement between Federal Financial Partners, LLC and Victor Miller, and the Company in which Federal Financial Partners, LLC and Victor Miller each receive 10,000,000 shares of Common Stock of the Company as consideration for the retirement of their Series A Preferred Stock and cancellation of any accrued and unpaid dividends owed to them.

As of November 15, 2009, there is no Series A Preferred Stock outstanding.
 

 
23
 

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:
 
Year Ended
  
Debentures
    
Debenture
Warrants
  
Total principal at December 31, 2007
    
5,314,912
    
$
25,274,054
  
Accrued interest
    
1,712,761
          
Unamortized debt discount
    
(2,076,820
)
        
 2008-Converted/Excercised
    
(4,950,853
)
        
Net Carrying Value at December 31, 2008 and September 30, 2009
  
$
-0-
          

 
NOTE 6 - INCOME TAXES:

There is no provision for income taxes for the quarter ended September 30, 2009. The Company has minimal net operating loss carry forwards for income tax purposes at September 30, 2009. 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:
 
   
Quarter Ended 
September 30,
  
   
2009
  
Federal statutory rate
    
(34
)%
Permanent differences
(derivative gains and losses and non-deductible interest)
    
34
%
         
Effective Tax Rate
    
-
  

NOTE 7 - STOCKHOLDERS' EQUITY:

Effective as of December 20, 2006, the Company filed an amendment to its Articles of Incorporation (the “Amendment”) to increase the Company’s authorized capital stock from 100,000,000 shares of Common Stock, par value $.001 per share only, to 350,000,000 shares, par value $.001 per share, of which 300,000,000 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, 2006, the Company has no shares of preferred stock issued or reserved for issuance, and the Company’s board of directors has never designated the rights, preferences or privileges of a preferred stock.

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.

Effective as of April 24, 2009, the Company filed an amendment to its Articles of Incorporation (the “Amendment”) to increase the Company’s authorized capital stock from 1,050,000,000 shares of Common Stock, par value $.001 per share only, to 3,050,000,000 shares, par value $.001 per share, of which 3,000,000,000 shares are Common Stock and the remaining 50,000,000 shares are a newly created class of “blank check” preferred stock.
 
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.

 
24
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 September 30, 2009 the Company has outstanding warrants to purchase Common Stock as follows:
 
   
No. of
Warrants
    
Weighted
Average
Price
  
Balance at January 1, 2005
    
12,056,428
    
$
0.15
  
Issued – 2005
    
9,645,312
    
$
0.15
  
Balance - December 31, 2005
    
21,701,740
    
$
0.15
  
Issued – 2006
    
2,266,575
    
$
0.67
  
Balance - December 31, 2006
    
23,968,315
    
$
0.20
  
Issued - 2007 - Debenture Warrants
    
9,776,494
    
$
0.14
  
Issued - 2007 - Financing Warrants
    
1,259,822
    
$
1.25
  
Exercised – 2007
    
(8,530,755
)
  
$
(0.15
)
Balance at December 31, 2007
    
26,473,876
    
$
0.20
  
Cancellation of warrants as per conversion of notes payable
    
(26,473,876
)
        
Balance at December 31, 2008 and March 31, 2009
    
-0-
          
  
NOTE 8 – COMMITMENTS:

Compensation Agreements

On June 27, 2008, the Company entered into a consulting agreement with MBC Consulting, LLC to provide 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

Pursuant to an employment agreement dated November, 2008, the Company hired David Perin, as the Company’s Chief Technology Officer and Facilities Officer at an annual salary of $60,000.  The agreement was for a period of one year. In addition, Mr. Perin was to be vested with 6,000,000 restricted shares of the Company’s Common Stock over a two-year period, which shares he has not been issued.  However, Mr. Perin was terminated by the Company’s Board of Directors in all capacities on April 14, 2009, and the Company believes that no further compensation is due to Mr. Perin.

Pursuant to an employment agreement dated February, 2009, the Company hired James O’Brien as the Company’s interim Chief Executive Officer at an annual salary of $120,000. The agreement was for a period of one year. In addition, Mr. O’Brien was to be vested with 6,000,000 restricted shares of the Company’s Common Stock and was to receive an additional 6,000,000 restricted shares of the Company’s Common Stock, which shares have not been issued to Mr. O’Brien.  Mr. O’Brien was terminated by the Company’s Board of Directors in all capacities on April 14, 2009, and the Company believes that no further compensation is due to Mr.  O’Brien.

On April 15, 2009, the Company entered into an employment agreement with Mark Daniels as Chief Executive Officer of the Company.  The term of the agreement is for one year, and provides for an annual salary of $160,000 and a signing fee of 80,000,000 restricted shares of the Company’s Common Stock.  The agreement also provides for participation by Mr. Daniels in the management bonus pool.
 
On April 15, 2009, the Company entered into an employment agreement with Alexis Korybut as Vice President of the Company.  The term of the agreement is for one year, and provides for an annual salary of $120,000 and a signing fee of 60,000,000 restricted shares of the Company’s Common Stock.  The agreement also provides for participation by Mr. Korybut in the management bonus pool.


 
25
 

On April 15, 2009, the Company entered into a consulting agreement with Joint Strategy Group, LLC to provide consulting services to the Company.  The term of the agreement is for one year, and provides for a monthly fee of $5,000 and a signing fee of 60,000,000 restricted shares of the Company’s Common Stock.  The agreement also provides for participation by Joint Strategy Group, LLC in the management bonus pool.

On June 8, 2009, the Company entered into an employment agreement with Michael Cariello as Chief Operating Officer of the Company.  The term of the agreement is for one year, and provides for an annual salary of $60,000 and a signing fee of 20,000,000 restricted shares of the Company’s Common Stock.  The agreement also provides for participation by Mr. Cariello in the management bonus pool.
 
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 April 15, 2008, the Company signed a lease agreement with Air Support Systems, LLC. for the exclusive use of its ILyushin IL-78 aerial refueling and fire-fighting aircraft. The agreement with Air Support Systems, LLC is for an initial three-year term, renewable for two subsequent three-year terms.

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.

26
·
    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 was terminated 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.

·
    On June 8, 2009, Michael Cariello was appointed by the Board of Directors of the Company as Chief Operating Officer of the Company.

·
    On July 10, 2009, Alexis Korybut was appointed by the Board of Directors of the Company as Principle Accounting Officer of the Company.

·
    On July 10, 2009, Peter Maffitt and Charles Deangelo resigned from the Board of Directors of the Company, leaving Mark Daniels as the sole member of the Board of Directors of the Company.

·
    On July 10, Mark Daniels, acting as the sole member of the Board of Directors of the Company, appointed Michael Cariello and Alexis Korybut to the Board of Directors of the Company, where they joined Mark Daniels as the three members of the Board of Directors of the Company.

 

 
27
 

Amendment to Articles of Incorporation

On June 25, 2008, the Company, pursuant to a resolution adopted by its Board of Directors, 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.

Increase in Authorized Shares

Pursuant to a vote of the shareholders of the Company, on April 24, 2009, the authorized number of shares of Common Stock of the Company was increased from 1,000,000,000 to 3,000,000,000.  The authorized number of shares of the Company’s Series A Preferred shares remained at 50,000,000.



 
28
 

Item 2.     Management’s Discussion and Analysis or Plan of Operation

CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS

This Quarterly Report on Form 10-Q, and, specifically the Management's Discussion and Analysis may contain "forward-looking statements." The terms "believe," "anticipate," "intend," "goal," "expect," and similar expressions may identify forward-looking statements. These forward-looking statements represent the Company's current expectations or beliefs concerning future events. The matters covered by these statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those set forth in the forward-looking statements. The Company disclaims any obligation subsequently to revise any forward-looking statements to reflect events or circumstances after the date of such statements, or to reflect the occurrence of anticipated or unanticipated events. In light of the significant uncertainties inherent in the forward-looking information included herein, the inclusion of such information should not be regarded as a representation that the strategy, objectives or other plans of the Company will be achieved. The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. We undertake no duty to update this information. More information about potential factors that could affect our business and financial results is included in the section entitled "Risk Factors" of our Annual Report on Form 10-K for the year ended December 31, 2008 filed with the Securities and Exchange Commission on April 15, 2009. The following discussion should be read in conjunction with our condensed consolidated financial statements provided in this quarterly report on Form 10-Q.
 
Corporate History

Tactical Air Defense Services, Inc. (TADS) is a Nevada public corporation that offers air combat training, mid-air refueling, maintenance training, 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”).
 
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:
 
 
·
Copyrights to a specialized F-16 Fighter Aircraft training course syllabus, specially created by AeroGroup in training pilots to use this aircraft’s Flight Control Navigation Panel; and
 
·
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 F-16, 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 F-16 Flight training with the Royal Netherlands Air Force in Melbourne Florida in 2003 and in Jacksonville Florida in 2004.


 
29
 

Plan of Operation
NINE MONTHS ENDED SEPTEMBER 30, 2009
COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2008

There was no revenue or operating costs for the nine months ended September 30, 2009. For the same nine months ended September 30, 2008 the Company had no revenue.

Selling, general and administrative expenses decreased from $1,612,770 for the nine month period ended September 30, 2009 to $552,591 for the nine month period ended September 30, 2009 due to costs in 2008 issued for consulting and professional services via issuance of Common Stock.

Other income (expenses) for the nine month period ended September 30, 2009 decreased to $30,000 from $551,600 for the nine month period ended September 30, 2008. The change was due to less interest expense for loans that were either converted or cancelled in the current period.

Net loss increased from $2,164,370 for the nine month period ended September 30, 2008 to $582,591 for the nine month period ended September 30, 2009, due to the above analysis of Income and Expenses.

Current Assets

Cash decreased from $23,156 at December 31, 2008 to $17 at September 30, 2009, primarily as a result of decreases in payables and accruals in the current period.

Total assets decreased from $361,156 at December 31, 2008 to $88,017 at September 30, 2009, primarily as a result of the increase in accounts receivable allowance to $250,000.

Current liabilities decreased from $986,120 at December 31, 2008 to $1,514,962at September 30, 2009, due to increase in short term debentures with related parties in the current year offset by decrease in accrued liabilities.

Liquidity and Capital Resources

Our business involves the ownership, operation and maintenance of jet aircraft, which typically require significant amounts of capital. Some of our anticipated one time and ongoing expenses are discussed below.

Our predecessor, AeroGroup, has had no revenues during 2006. We had very little revenues during the year 2008 and year to date 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 in order to complete our business plan.

We have funded our operations and met our capital expenditures requirements primarily from the issuance of Common Stock, convertible debt securities, and warrants.

THREE MONTHS ENDED SEPTEMBER 30, 2009
COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2008

There was no revenue or operating costs for the three months ended September 30, 2009. For the same three months ended September 30, 2008 the Company had no revenue for the period.

Selling, general and administrative expenses decreased from $620,746 for the three month period ended September 30, 2008 to $161,319 for the three month period ended September 30, 2009 due to costs in 2008 issued for consulting and professional services via issuance of Common Stock.

Other income (expenses) for the three month period ended September 30, 2009 increased to $20,000 from $-0- for the three month period ended September 30, 2008. The change was due to l interest expense for loans that were either converted or cancelled in the current period.

Net loss decreased from $620m746 for the three month period ended September 30, 2008 to $181,319 for the three month period ended September 30, 2009, due to the above analysis of Income and Expenses.
 

 
30
 

Item 3.    Quantitative and Qualitative Disclosures About Market Risk
 
We do not hold any derivative instruments and do not engage in any hedging activities.
 
Item 4.    Controls and Procedures
 
Evaluation of Disclosure Controls and Procedures.  

Our principal executive officer and our principal financial officer evaluated the effectiveness of the design and operation of our disclosure controls and procedures as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (Exchange Act), as of the last day of the fiscal period covered by this report, September 30, 2009. The term disclosure controls and procedures means our controls and other procedures that are designed to ensure 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, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to management, including our principal executive and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Our principal executive officer and our principal financial officer, are responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f). Management is required to base its assessment of the effectiveness of our internal control over financial reporting on a suitable, recognized control framework, such as the framework developed by the Committee of Sponsoring Organizations (COSO). The COSO framework, published in Internal Control-Integrated Framework, is known as the COSO Report. Our principal executive officer and our principal financial officer, have has chosen the COSO framework on which to base its assessment.

Management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only management’s report in our quarterly reports on Form 10-Q for the period for the three months ended September 30, 2009.

It should be noted that any system of controls, however well designed and operated, can provide only reasonable and not absolute assurance that the objectives of the system are met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of certain events. Because of these and other inherent limitations of control systems, there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Lack Of Segregation Of Duties

Management is aware that there is a lack of segregation of duties at the Company due to the small number of employees dealing with general administrative and financial matters. However, at this time management has decided that considering the abilities of the employees now involved and the control procedures in place, the risks associated with such lack of segregation are low and the potential benefits of adding employees to clearly segregate duties do not justify the substantial expenses associated with such increases.  Management will periodically reevaluate this situation.



 
31
 

PART II - OTHER INFORMATION
Item 1.     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.

Mr. Charlie Searock, a former executive officer of our company, has brought a laws suit in the District Court of the 336 th Judicial District of Grayson County, Texas against us and seven other defendants on February 6, 2007, on claims of breach of an employment agreement between Searock and International Tactical Training Center, Inc. (“ITTC”). (Charles J. Searock, Jr., vs. Tactical Air Defense Services, Inc., International Tactical training Center, Inc., Mark Daniels, Victor Miller, John Farley, Gary Fears, Jamie Goldstein, and Joel Ramsden, Cause No.07-0322-336). ITTC and the Company are the only two corporate defendants named in the Searock lawsuit. Of the six individuals named as defendants, three are former ITTC management.   Searock asserts that the Company is liable for ITTC’s breach of employment agreement because he alleges that the Company acquired ITTC’s assets, and that ITTC was a former subsidiary of AeroGroup, Inc., an entity not named as a defendant in the Searock lawsuit. In addition to his claim for breach of the ITTC employment contract, Searock also asserts theories of tort liability against the defendants.   The Company denies any liability to Searock on his claim for breach of the ITTC employment contract and denies Searock has any factual basis to impose liability on the Company under any of his theories of tort liability. Specifically, the Company denies that it acquired, owns or controls ITTC’s former assets. The Company believes that this claim is without merit and is working towards resolution of the same.

In June of 2009, Victor Miller and Air 1 Flight support, an entity controlled by Victor Miller, caused an injunction to be placed on the Company to not relocate the IL-78, which the Company leases from a third party, as a result of a lien Victor Miller and Air 1 Flight Support placed on the IL-78 for unpaid services provided to the third-party leasing the IL-78 to the Company.  The Company believes that the lien and injunction are completely without merit based upon Victor Miller and Air 1 Flight Support being party to a settlement agreement between the parties including the third-party subject to the lien.  Victor Miller and Air 1 Flight Support subsequently filed a motion for contempt of court against the Company subsequent to the IL-78 having been relocated by a third-party to which the Company leases the IL-78, without the knowledge or assistance of the Company.  Victor Miller and Air 1 Flight Support subsequently filed a legal proceeding against the Company in Michigan in connection with the lien, which has resulted in a judgment against the Company.  The Company intends to contest the judgment which it was not given the opportunity to defend against for what it believes to be a fraudulent lien. The Company believes that these motions and proceedings are without merit, and the Company intends to vigorously defend itself, and pursue Victor Miller and Air 1 Flight Support for tortuous interference and material damages to the Company.

As of July 31, 2009, 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 Mr. Peer, Sichenzia &Ross, General Searock, and Victor Miller/Air 1 Flight Support.
 
Item 1A     Risk Factors 
 
POSSIBLE “PENNY STOCK” REGULATION
 
Any trading of our Common Stock in the Pink Sheets or on the OTC Bulletin Board may be subject to certain provisions of the Securities Exchange Act of 1934, commonly referred to as the “penny stock” rule.
 
Our Common Stock is deemed to be “penny stock” as that term is defined in Rule 3a51-1 promulgated under the Securities Exchange Act of 1934. Penny stocks are stock:
 
 
•
  
With a price of less than $5.00 per share;
  
•
  
That are not traded on a “recognized” national exchange;
  
•
  
Whose prices are not quoted on the Nasdaq automated quotation system (Nasdaq listed stock must still have a price of not less than $5.00 per share); or
  
•
  
In issuers with net tangible assets less than $2.0 million (if the issuer has been in continuous operation for at least three years) or $5.0 million (if in continuous operation for less than three years), or with average revenues of less than $6.0 million for the last three years.
 

 
32
 

Broker/dealers dealing in penny stocks are required to provide potential investors with a document disclosing the risks of penny stocks. Moreover, broker/dealers are required to determine whether an investment in a penny stock is a suitable investment for a prospective investor. These requirements may reduce the potential market for our Common Stock by reducing the number of potential investors. This may make it more difficult for investors in our Common Stock to sell shares to third parties or to otherwise dispose of them. This could cause our stock price to decline.
 
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.
 
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
 
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-KSB 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.


 
33
 

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.
 

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, LIMITED OPERATING HISTORY AND LACK OF PROFITS WHICH COULD LEAD TO WIDE FLUCTUATIONS IN OUR SHARE PRICE.
 
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 years 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.
 

 
34
 

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.
 
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.
 
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.

TADS is not a party to any pending litigation or legal proceeding that is not in the ordinary course of business except as described in Part II, Item 1 above. The costs and results associated with these legal proceedings could be significant and could affect the results of future operations.
 
Item 2.    Defaults Upon Senior Securities
 
There were no defaults upon senior securities during the period ended September 30, 2009.
 
Item 3.    Submission of Matters to a Vote of Security Holders
              
There were no matters submitted to the vote of securities holders during the period ended September 30, 2009.
 
Item 4.    Other Information
 
On August 20, 2009, the Company filed an amended Form 8-K in connection with ITEM 4.01 Changes in Registrant’s Certifying Accountant.  We understand that on August 11, 2009, the registration of the Company’s independent auditor, Lawrence Scharfman, CPA, with the Public Companies Accounting Oversight Board, (PCAOB), was revoked by the PCAOB.  As such, on August 15, 2009, Lawrence Scharfman, CPA was dismissed as the Company’s Independent Auditor, and Larry O’Donnell, CPA, P.A. was appointed as the Company’s Independent Auditor.

The Independent Auditor's report on the financial statements for either of the past two years did not contain an adverse opinion or a disclaimer of opinion, or was not qualified or modified as to uncertainty, audit scope, or accounting principles.

There is no information with respect to which information is not otherwise called for by this form.
 
Item 6.     Exhibits

a. Exhibit Index
 
31.1
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
   
31.2
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act.
   
32.1
Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act.
   
32.2
Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act.
 
 

 
35
 

SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
TACTICAL AIR DEFENSE SERVICES, INC.
  
       
November 23 , 2009
By:
/s/ Alexis Korybut
  
   
Name: Alexis Korybut
  
   
Title: President and Chief Executive Officer (Principal Executive)
 
 
 
 
  

 
36
 

TACTICAL AIR DEFENSE SERVICES, INC. Reports