NOTE 5: Legal
On March 25, 2011, the Company signed a settlement agreement with Trafalgar whereby the pending litigation between both parties was settled out of court. The terms of the agreement dismissed all litigation against Trafalgar, to settle all debt owed to Trafalgar, the dismissal of all litigation against NAS and its subsidiaries and certain directors as well as the release of all liens and encumbrances on NAS assets in the UCC-1 filings held by Trafalgar. The following is the terms of settlement with Trafalgar: (i) a payment of $300,000 was paid on March 25, 2011 per the terms of the agreement; (ii) an executed promissory note in the principal amount of $200,000 payable within 6 months from the settlement date of March 25, 2011, and accruing interest at the rate of seven percent (7%) simple interest per annum; (iii) a total of 7,645,821 shares of NAS common stock shares issued to the Trafalgar on April 6, 2011; (iv) NAS shall provide to Trafalgar a Rule 144 opinion letter in the form acceptable to the both parties, if necessary and/or applicable; and (v) an exchange of mutual unconditional and irrevocable general releases and dismissals of all claims, disputes, liens, encumbrances, defenses between the parties through the settlement agreement date of March 25, 2011. Trafalgar is to deliver to the NAS appropriate releases of all liens and encumbrances including, without limitation, all UCC liens within 91 days of the settlement date of March 25, 2011, providing that NAS does not enter into bankruptcy within the 91 days. The amount owed to Trafalgar with interest was $3,800,000. The settlement agreement with Trafalgar allowed for the Company to write off the principle and interest of the debt balance for a gain in extinguishment of debt in the amount of $2,881,000, after the settlement terms noted above. Noted above the promissory note, in the event of a default with the promissory note the $200,000, including any and all interest accrued will become due on demand pursuant to the terms of the promissory note.
On June 9, 2010, a writ of garnishment was filed against our subsidiary Intecon’s bank account for our outstanding balanced owed to one of our vendors, Summit Electric. Our current outstanding balance owed to Summit Electric is $61,000. This writ was established to collect funds from us by garnishing money in our subsidiaries bank accounts. At the time of the court ordered garnishment the accounts held a balance of $1,200 and have been sent to Summit Electric under the writ. To date we still have an outstanding balance with Summit Electric and are working towards payment to this vendor.
On October 2, 2010, a writ of garnishment was filed against our subsidiary Intecon’s bank account for our outstanding balanced owed to one of our vendors, Border States. This writ was established to collect funds from us
8
by garnishing money in our subsidiaries bank accounts. At the time of the court ordered garnishment the accounts held a balance of $90,000 which was sent to Border States under the writ on October 15, 2010. As of March 31, 2011, our outstanding balance owed to Border State was $100,000. Noted that our outstanding balance was $100,000, we negotiated a payment to Border States in the amount of $70,000 to pay off our outstanding balance. The Company recognized a gain in extinguishment of the debt in the amount of $30,000. As of April 4, 2011, the Company has repaid this vendor in full.
NOTE 6: Operating lease agreements
On May 25, 2011, the Company renegotiated the terms of its leasing agreement with the facility located in Tempe Arizona. Per the terms of the agreement, the cost per square foot was reassessed which reduced our lease payments. Additionally, the Company forgave our current outstanding balance owed to them for the past nine months totaling $90,000. As of June 30, 2011, the Company owed rent for the facility in the amount of $6,100.
NOTE 7: Fair value
In accordance with authoritative guidance, the table below sets forth the Company's financial assets and liabilities measured at fair value by level within the fair value hierarchy. Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
| | | | | | | |
| Fair value at June 30, 2011(unaudited) |
| Total | | Level 1 | | Level 2 | | Level 3 |
Assets: | | | | | | | |
Total | $ -- | | $ -- | | $ -- | | $ -- |
| | | | | | | |
Liabilities: | | | | | | | |
Convertible debt, net of beneficial conversion feature | $ 102,193 | | $ 102,193 | | -- | | -- |
| | | | | | | |
Equity: | | | | | | | |
Drawdown of stock converted from debt | 28,576 | | 28,576 | | -- | | -- |
Total | $ 130,769 | | $ 130,769 | | $ -- | | $ -- |
| | | | | | | |
| Fair value at December 31, 2010 |
| Total | | Level 1 | | Level 2 | | Level 3 |
Assets: | | | | | | | |
Total | $ -- | | $ -- | | $ -- | | $ -- |
| | | | | | | |
Liabilities: | | | | | | | |
Convertible debt, net of beneficial conversion feature | $ 220,788 | | $ 220,788 | | $ -- | | $ -- |
Total | $ 220,788 | | $ 220,788 | | $ -- | | $ -- |
NOTE 8: Stockholders’ deficit
The authorized common stock of the Company consists of 200,000,000 shares of common stock with par value of $0.001; as of June 30, 2011 the Company has 185,445,993 shares outstanding. Our wholly owned subsidiary, ISS, has 125,000 shares of preferred stock authorized with a par value of $1.00; these shares have no voting rights and no dividend preferences. No preferred shares were issued as of June 30, 2011.
On November 19, 2010, the Company issued to one individual the sum of 3,250,000 shares of common stock in consideration $85,000 in cash, or $0.026 per share, of which we have received on November 9, 2010, $12,500, on November 23, 2010, $10,000, on December 3, 2010, $20,000, on January 10, 2011, $2,500 and on January 18, 2011, $5,000. As of June 30, 2011 we have an outstanding balance owed in the amount of $25,000
On February 20, 2011, the Company terminated its service agreement with X-Clearing Corporation, the Company’s stock transfer agent (services for X-Clearing were completed as of December 31, 2010), and entered into a service agreement with its new stock transfer agent Worldwide Stock.
9
On March 8, 2011, the Company issued to one individual the sum of 3,500,000 shares of common stock in consideration for services rendered and to be rendered at a value of $164,500 or $0.047 per share.
On March 18, 2011, the Company terminated its agreement with Ascendiant Capital. The Company has since removed the 70,000,000 shares from escrow and the shares back into treasury.
On March 25, 2011, the Company issued to one individual the sum of 10,000,000 shares of common stock in consideration for cash at a value of $300,000 or $0.03 per share; paid directly to Trafalgar as a part of the Trafalgar settlement agreement (see Note 5, Legal).
On March 25, 2011, the Company issued to one individual the sum of 7,500,000 shares of common stock in consideration for cash at a value of $75,000 or $0.01 per share.
On March 25, 2011, the Company settled negotiations with Trafalgar, the settlement and associated press release were filed in 8-K dated March 29, 2011.
On March 28, 2011, the Company issued to one individual the sum of 1,000,000 shares of common stock in consideration for employment retention at a value of $30,000 or $0.03 per share, based upon the agreement date.
On March 28, 2011, the Company issued to one individual the sum of 1,000,000 shares of common stock in consideration for employment retention at a value of $48,000 or $0.048 per share, based upon the agreement date.
On March 28, 2011, the Company issued to one individual the sum of 750,000 shares of common stock in consideration for employment retention at a value of $36,000 or $0.048 per share, based upon the agreement date.
On March 28, 2011, the Company issued to two individuals the sum of 696,666 shares of common stock in consideration for services rendered and finder’s fee agreement at a value of $20,900 or $0.03 per share.
On March 31, 2011, the Company issued to two individuals the sum of 4,250,000 shares of common stock in consideration for cash valued at $85,000 or $0.02 per share; the Company negotiated a settlement of all outstanding obligations with Border States in the amount of $70,000. Noted that our outstanding balance was $100,000, the Company recognized a gain in extinguishment of the debt in the amount of $30,000. Paid directly to Border States, the cash was used in repayment of Border States agreement and legal fees and settled on April 4, 2011 (see Note 5, Legal).
On March 31, 2011, the Company issued to 24 employees the sum of 4,256,279 shares of common stock in consideration for repayment of salary cuts made in May, 2009. The shares were issued at a value of $425,628 or $0.10 per share based upon the agreement stipulated for the salary reimbursement. The Company issued 310,000 shares valued at $31,000 in error the shares were returned on April 4, 2011.
On March 31, 2011, the Company issued to one employee the sum of 205,000 shares of common stock in consideration for repayment of salary cuts made in May, 2009. The shares were issued at a value of $10,250 or $0.05 per share based upon the agreement stipulated for the salary reimbursement.
On March 31, 2011, the Company had a stock payable in the amount of $420,520 in consideration for the settlement of litigation with Trafalgar Capital on March 25, 2011.
On April 6, 2011, the Company issued to Trafalgar Capital the sum of 7,645,821 shares of common stock in consideration for settlement agreement dated March 25, 2011. The shares were issued at a value of $420,520 or $0.055 per share.
On April 30, 2011, the Company issued to one individual the sum of 2,000,000 shares of common stock in consideration for services rendered. The shares had a value of $0.049 per share for a total of $98,000.
On May 11, 2011, the Company issued to one individual the sum of 2,500,000 shares of common stock for cash consideration at a value of $0.02 per share for a total of $50,000.
On May 20, 2011, the Company issued to one individual the sum of 2,000,000 shares of its common stock as part of a collateral agreement. The shares were issued in an equity draw down agreement. As of June 30, 2011, the shares have a value of $28,576, based on the fair market value of the remaining debt to be converted as the
10
individual draws against the shares held. The remaining shares have been recorded as a stock receivable as of June 30, 2011.
On May 23, 2011, the Company issued to one individual the sum of 6,200,000 shares of its common stock as part of a convertible note agreement. The agreement was partially converted into common stock at a value of $0.02 or $124,000.
On June 2, 2011, the Company entered into a convertible note agreement whereby we authorized to reserve a specific number of shares for collateral to cover the convertible notes. The total shares issued into escrow for holding is approximately 19,876,000. As of August 15, 2011 the shares have not been issued only held in escrow with our transfer agent.
On June 29, 2011, the Company subscribed to one individual the sum of 130,000 shares of its common stock as a part of a convertible note agreement. The shares were converted at $0.05 per share for a total value of $6,500; the shares were issued on July 6, 2011 (see Note 9, Subsequent events).
On June 30, 2011, the Company subscribed to one individual the sum of 3,866,667 shares of its common stock as a part of a convertible note agreement. The shares were converted at $0.015 per share for a total value of $58,000; the shares were issued on July 6, 2011 (see Note 9, Subsequent events).
NOTE 9: Subsequent events
On July 6, 2011, the Company issued from stock payable to one individual the sum of 130,000 shares of its common stock as a part of a convertible note agreement. The shares were converted at $0.05 per share for a total value of $6,500.
On July 6, 2011, the Company issued from stock payable to one individual the sum of 3,866,667 shares of its common stock as a part of a convertible note agreement. The shares were converted at $0.015 per share for a total value of $58,000.
On July 7, 2011, the Company issued to one individual the sum of 2,000,000 shares of its common stock as a part of a service agreement. The shares were valued at $0.02 per share or $40,000.
The Company has evaluated subsequent and, other than noted above, there are no such events that would have a material impact on the financial statements.
11
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Safe Harbor for Forward-Looking Statements
When used in this Quarterly Report, the words “may,” “will,” “expect,” “anticipate,” “continue,” “estimate,” “project,” “intend,” and similar expressions are intended to identify forward-looking statements within the meaning of Section 27a of the Securities Act and Section 21e of the Exchange Act regarding events, conditions, and financial trends that may affect the Company’s future plans of operations, business strategy, operating results, and financial position. Persons reviewing this Quarterly Report are cautioned that any forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties and that actual result may differ materially from those included within the forward-looking statements as a result of various factors. Such factors include, but are not limited to, general economic factors and conditions that may directly or indirectly impact our financial condition or results of operations.
Overview:
On March 25th, 2011, NAS, together with Intecon, Inc., and Intuitive Systems Solutions, Inc., have settled all pending litigation and mutually agreed to end and drop all claims between NAS and Trafalgar Capital Specialized Investment Fund, Luxembourg, Trafalgar Capital Sarl, Trafalgar Capital Advisors (collectively, "Trafalgar") regarding all debt, equity and financing agreements and any and all existing liens, covenants, conditions and encumbrances between National Automation Services, Inc. and Trafalgar Capital. Under the terms of the settlement, NAS removed all Trafalgar debt from its books and all liens on its assets shall be released in consideration a payment of $300,000 in cash, a promissory note $200,000 and approximately seven million shares of restricted NAS stock to Trafalgar Capital. Per the terms of the agreement, the UCC-1 filings against the Company’s asset’s will be lifted in ninety one (91) days after settlement, so long as NAS does not declare bankruptcy during such ninety one day period. For further information see Part II Item 1, Legal Proceedings. Accordingly, we are seeking additional financing.
On June 27, 2011, pursuant to the terms noted above in the litigation settlement with Trafalgar, the Company was able to file terminations of all UCC-1 encumbrances from Trafalgar. The Company cleared the ninety one (91) day requirement and did not declare bankruptcy. During the period of our litigation with Trafalgar, since our initial filing in April of 2009, the Company had spent considerable time and resources in these proceedings. Such resources placed a strain on the Company’s resources and its business plans to seek acquisitions. In the months subsequent to the settlement agreement, the Company has been in the process of re-engaging customers for business, re-tooling dormant subsidiaries, and pursuing opportunities to increasing our depleted backlog.
With the ninety one (91) days clear, the Company has engaged accounts receivables funding, and actively pursuing the acquisition of purchase order/contract financing. These financing resources will help our cash flow process and can be used to increase our organic growth (for additional information on capital see below Liquidity and Capital Resources/ Plan of Operation for the Next Twelve Months). Additionally, we are actively seeking acquisitions which will help us in our overall inorganic growth of the Company. We are using our existing criterion for seeking out acquisitions, this existing criteria is summarized below:
·
Established businesses with a proven track record: We seek established businesses with a proven operating track record strong financial performance, positive operating results, established or growing contract backlogs, and/or the potential for positive operating cash flow.
·
Opportunity for growth of our industrial business.
·
Opportunity to expand into new geographical markets: We seek businesses that have an established presence in local metropolitan markets in which we have no presence and which preferably are near our existing regional footprint.
Any additional information concerning our acquisition strategy (see Effect Strategic Acquisitions) can be found in our Audited Form 10-K filing for the year ending December 31, 2010.
The Company is aware of its instability, and has noted on several occasions the ability to continue as a going concern. We are in the process of correcting such instability and as noted above and within the Liquidity and Capital Resources (noted below) and are actively pursuing projects which will help cure the Company’s current status.
12
Financial Information
The following tables set forth for the periods indicated selected historical statements of operations data. The information contained in the tables below should be read in conjunction with the “Liquidity and Capital Resources,” “Financial Commitments” and “Critical Accounting Policies and Estimates” sections included in this management’s discussion and analysis, as well as the consolidated financial statements and notes thereto included in Item 1 of this Quarterly Report.
Results of Operations
A:
Three Months Ended June 30, 2011 compared to Three Months Ended June 30, 2010
| | | | | | | | | | |
| | Three Months Ended June 30, | | |
| | (unaudited) | | | |
| | 2011 | | 2010 | | % Change | |
Revenue | | $ | 68,804 | | $ | 948,127 | | | (93) | % |
Cost of revenue | | | 108,996 | | | 844,438 | | | (87) | % |
Total gross profit (loss) | | | (40,192) | | | 103,689 | | | (139) | % |
| | | | | | | | | | |
Operating expenses | | | | | | | | | | |
Selling, general and administrative expenses | | | 179,925 | | | 385,681 | | | (53) | % |
Consulting fees | | | 9,500 | | | 11,445 | | | (17) | % |
Professional fees and related expenses | | | 247,126 | | | 309,724 | | | (20) | % |
Total operating expenses | | | 436,551 | | | 706,850 | | | (38) | % |
Operating loss | | | (476,743) | | | (603,161) | | | (21) | % |
| | | | | | | | | | |
Interest expense, net | | | 118,112 | | | 216,366 | | | (45) | % |
Gain on extinguishment of debt | | | (89,477) | | | -- | | | (100) | % |
Total other expense | | | 28,635 | | | 216,366 | | | (87) | % |
Net income (loss) | | $ | (505,378) | | $ | (819,527) | | | 38 | % |
Operating Loss; Net Income. For the three months ended June 30, 2011, compared to the three months ended in fiscal 2010, we had a decrease in revenues of $(879,323), or (93)%, and a decrease in our cost of revenue $(735,442), or (87)% (which resulted in an decrease in our gross profit by $(143,881) or (139)% to $(40,192). Additionally, our operating loss decreased by $126,418, or 21%, to $(476,743). We had our net loss decrease by $314,149, or 38%, to $(505,378). We attributed our decrease in operating expenses due to the downturn of our staff and additionally the decrease in our interest expense due to the write-off of Trafalgar. We also attribute a gain on extinguishment of debt to our write-off of accounts payable as of June 30, 2011.
Revenue. For the three months ended June 30, 2011, our consolidated revenue decreased by $(879,323), or (93)%, to $68,804. This decrease principally was due to a decrease in (1) the number of new jobs we received and commenced, and (2) work delays on existing jobs included in our December 31, 2010 backlog of $400,000. Due to the downturn of the economy, our customers have delayed projects which decrease revenues for the Company. The Company is currently seeking other projects to increase its revenues.
Cost of Revenue; Gross Profit. Our cost of revenues decreased by $(735,442), or (87)% to $108,996. Our cost of revenue is comprised of direct materials, direct labor, manufacturing overhead and other job related costs. The decrease in our cost of revenue is due to our controls in labor costs and manufacturing overhead, we also saw a down-turn in our cost of revenue due to a decrease in our contract revenue during the three months ended June 30, 2011.
Operating Expenses. Although consolidated operating expenses for the three months ended June 30, 2011 decreased by $270,299, or (38)%, to $436,551, we had an operating loss of $(476,743), compared to the three months ended June 30, 2010 operating expenses of $706,850 and operating loss of $(603,161).
Selling, General and Administrative Expenses. Our selling, general and administrative expenses decreased by $205,756, or (53)% to $179,925. Decrease is due to a reduction of staff.
13
Consulting fees. Our consulting fees, which are attributable to investor relations services, decreased by $1,945, or (17)%, to $9,500 as we did not enter into any significant agreements in the current three month period of 2011.
Professional Fees and Related Expenses. Professional fees principally represent costs accounting fees, these costs decreased by $62,598, or (20)%, to $247,126, the decreased amount of professional fees was attributed to a decrease in legal fees over the comparative period in 2010.
Interest Expense, Net. Interest expense, net decreased by $98,254, or (45)%, to $118,112, which represents the convertible note interest incurred for the current three month period ending June 30, 2011.
B:
Six Months Ended June 30, 2011 compared to Six Months Ended June 30, 2010
| | | | | | | | | | |
| | Six Months Ended June 30, | | |
| | (unaudited) | | | |
| | 2011 | | 2010 | | % Change | |
Revenue | | $ | 289,350 | | $ | 1,311,490 | | | (78) | % |
Cost of revenue | | | 248,259 | | | 1,252,355 | | | (80) | % |
Total gross profit (loss) | | | 41,091 | | | 59,135 | | | (31) | % |
| | | | | | | | | | |
Operating expenses | | | | | | | | | | |
Selling, general and administrative expenses | | | 528,484 | | | 712,523 | | | (26) | % |
Consulting fees | | | 35,166 | | | 11,445 | | | 207 | % |
Professional fees and related expenses | | | 478,786 | | | 517,980 | | | (8) | % |
Total operating expenses | | | 1,042,436 | | | 1,241,948 | | | (16) | % |
Operating loss | | | (1,001,345) | | | (1,182,813) | | | (15) | % |
| | | | | | | | | | |
Other expense | | | 7,343 | | | -- | | | 100 | % |
Interest expense, net | | | 260,848 | | | 301,090 | | | (13) | % |
Gain on extinguishment of debt | | | (3,001,297) | | | -- | | | 100 | % |
Total other expense | | | (2,733,106) | | | 301,090 | | | (1,008) | % |
Net income (loss) | | $ | 1,731,761 | | $ | (1,483,903) | | | (217) | % |
Operating Loss; Net Income. For the six months ended June 30, 2011, compared to the six months ended in fiscal 2010, we had a decrease in revenues of $(1,022,140), or (78)%, and a decrease in our cost of revenue $(1,004,096), or (80)% (which resulted in an decrease in our gross profit by $18,044 or (31)% to $41,091. Additionally, our operating loss decreased by $181,468, or 15%, to $(1,001,345). We had our net income increase by $3,215,664, or 217%, to $1,731,761. We attribute this significant increase to one major event which was the write-off of our debt obligation to Trafalgar per our settlement on March 25, 2011 and Border States; in the amount of $2,911,820 (see Part II Item 1- Legal proceedings.)
Revenue. For the six months ended June 30, 2011, our consolidated revenue decreased by $(1,022,140), or (78)%, to $289,350. This decrease principally was due to a decrease in (1) the number of new jobs we received and commenced, and (2) work delays on existing jobs included in our December 31, 2010 backlog of $400,000. Due to the downturn of the economy, our customers have delayed projects which decrease revenues for the Company. The Company is currently seeking other projects to increase its revenues.
Cost of Revenue; Gross Profit. Our cost of revenues decreased by $(1,004,096), or (80)% to $248,259. Our cost of revenue is comprised of direct materials, direct labor, manufacturing overhead and other job related costs. The decrease in our cost of revenue is due to our controls in labor costs and manufacturing overhead, we also saw a down-turn in our cost of revenue due to a decrease in our contract revenue during the six months of 2011.
Operating Expenses. Although consolidated operating expenses for the six months ending of 2011 decreased by $199,512, or 16%, to $1,042,436, we had an operating loss of $(1,001,345), compared to the six months ended 2010 operating expenses of $1,241,948 and operating loss of $(1,182,813).
Selling, General and Administrative Expenses. Our selling, general and administrative expenses decreased by $184,039, or 26% to $528,484.
14
Consulting fees. Our consulting fees, which are attributable to investor relations services, increased by $23,721, or 207%, to $35,166 as we entered into a consulting agreement, and did not enter into any significant agreements in the comparative period of 2010.
Professional Fees and Related Expenses. Professional fees principally represent costs for legal and accounting fees, these costs slightly decreased by $39,194, or 8%, to $478,786, the decreased amount of professional fees was incurred in conjunction with legal fees with Trafalgar and our write off of financing fees with the cancellation of our agreement with Ascendiant.
Interest Expense, Net. Interest expense, net decreased by $40,242, or 13%, to $260,848, which represents the convertible note interest incurred for the six month period ending June 30, 2011.
Gain / loss on extinguishment of debt and payables. The write-off of Trafalgar debt and a write-off of rent payable increased our net income to $1,731,761 for the period ending June 30, 2011. This is a non-recurring, non-cash economic event.
Liquidity and Capital Resources/ Plan of Operation for the Next Twelve Months
As stated above in our business overview, the Company has experienced a downturn in production. We noted that due to the litigation with Trafalgar and the downturn of the economy we have seen an impact in our revenues and cash flows. For the six month period ended June 30, 2011, our accounts receivable were $135,245, a decrease of $172,377, or 56%. At August 15, 2011 our cash on hand was approximately $3,000. In addition, we have experienced insufficient cash flow resulting from much slower payments from the contractors and others for whom we work. The Company expects that receipt of payments from our customers will likely continue until such time as the Company can improve its cash flow from operations. As such we indicated in Note 3 of our reviewed financial statements management’s assessment about the Company’s ability to continue as a going concern.
As of March 18, 2011, the Company cancelled its agreement with Ascendiant. The Company has returned to Treasury the 70,000,000 shares of stock held in escrow and expensed the deferred financing fees in the amount of $125,000.
As of April 8, 2011, the Company has signed an agreement with Versant Capital to help in our accounts receivable factoring. Under the terms of the agreement, the Company will be able to fund its working capital requirements through the sale of its outstanding accounts receivable invoices to Versant. The Company intends to use the funding proceeds to execute and perform on contracts with existing and new clients.
As of June 30, 2011, the Company entered into 2 convertible note agreements whereby the holder of the 2 notes, Asher Capital, has requested to be placed into escrow approximately 19,876,000 shares of our common stock. The escrow shares are to be held until such time as Asher converts the notes into stock. At which time the remaining balance of escrow shares will be returned to the Company.
We continue to seek sources of additional capital. We intend to try to improve our cash and cash flow from operations by encouraging faster payments, and if necessary granting discounts for prompt payment, of our receivables while simultaneously delaying payments to our vendors. We plan to increase our revenue by increasing our visibility and the awareness of our Company, and our products and services, by engaging in more aggressive sales, marketing and advertising activity. We intend to develop and implement strategies to market ongoing maintenance and service contracts to our current as well as our past customers, and we plan to package these continuing services as part of our industrial automation design and manufacturing services. We intend to implement cost reduction synergies such as centralizing procurement and estimating activities at our corporate hub using dedicated teams of trained employees, rather than having these tasks performed at our branch offices.
Summary of Cash Flow for the Six Months Ended June 30, 2011 and 2010 (rounded)
Our total cash decreased by approximately $60,100, or 76%, to $19,400 for the six months ended June 30, 2011, compared to $79,500 for the six months ended June 30, 2010. Our cash flows for the six months ended June 30, 2011 and 2010 were as follows:
15
| | | | | | | |
| | Six Months Ended June 30, | |
| | 2011 | | 2010 | |
Net cash used by operating activities | | $ | (219,200) | | $ | (463,900) | |
Net cash used by investing activities | | | -- | | | -- | |
Net cash provided by financing activities | | | 227,300 | | | 439,700 | |
Operating Activities
Our total cash used by operating activities decreased by $244,700, or 53% to $(219,200) for the six months ended June 30, 2011, compared to $(463,900) for the six months ended June 30, 2010. The changes in the decrease in our net income due to a write-off of the debt obligation owed to Trafalgar; we issued additional stock for services; we expensed the remaining deferred fees for the Ascendiant agreement which we cancelled in March, 2011.
Investing Activities
The Company had no investing activities for the three months ended June 30, 2011 and June 30, 2010 respectively.
Financing Activities
Our total cash provided for financing activities decreased by $212,400, or 48%, to $227,300 for the six months ended June 30, 2011, compared to $439,700 for the six months ended June 30, 2010. We saw a decrease in our sale of stock to investors for capital as compared to the period ending June 30, 2010.
Current Commitments for Expenditures
Our current cash commitments for expenditures are mainly operational and SEC compliance in nature. We seek to use current revenue to pay vendors for materials for contracts, for payroll, and related employment expenditures (i.e. benefits). The remaining cash is used for debt service and to remain current with any SEC filings that are required.
Off-Balance Sheet Arrangements
We do not have any off balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, revenues, and results of operations, liquidity or capital expenditures.
CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES
The methods, estimates and judgments we use in applying our accounting policies have a significant impact on the results we report in our financial statements and which we discussed above in this Item 2. Some of our accounting policies require us to make difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. We believe our critical accounting policies are those described below.
Allowance for Doubtful Accounts
As required by the Receivables Topic of Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”), the Company is required to use a predetermined method in calculating the current value for its bad debt on overall accounts receivable.
We estimate our accounts receivable risks to provide allowances for doubtful accounts accordingly. We believe that our credit risk for accounts receivable is limited because of the way in which we conduct business largely in the areas of contracts. Accounts receivable includes the accrual of work in process for project contracts and field service revenue. We recognize that there is a potential of not being paid in a 12 month period. Our evaluation includes the length of time receivables are past due, adverse situations that may affect a contract’s scope to be paid, and prevailing economic conditions. We assess each and every customer to conclude whether or not remaining balances outstanding need to be placed into allowance and then re-evaluated for write-off. We review all accounts to ensure that all efforts have been exhausted before noting that a customer will not pay for services
16
rendered. The evaluation is inherently subjective and estimates may be revised as more information becomes available.
Revenue Recognition
As required by the Revenue Recognition Topic of FASB ASC, the Company is required to use predetermined contract methods in determining the current value for revenue.
Project Contracts Project revenue is recognized on a progress-basis - the Company invoices the client when it has completed the specified portion of the agreement, thereby, ensuring the client is legally liable to the Company for payment of the invoice. On progress-basis contracts, revenue is not recognized until this criteria is met. The Company generally seeks progress-based agreements when a job project takes longer than 30 days to complete.
Service Contracts Service revenue is recognized on a completed project basis - the Company invoices the client when it has completed the services, thereby, ensuring the client is legally liable to the Company for payment of the invoice. On service contracts, revenue is not recognized until the services have been performed. The Company generally seeks service based agreements when project based contracts have been completed.
In all cases, revenue is recognized as earned by the Company. Though contracts may vary between a progress-basis and completed project basis, as the client becomes liable to the Company for services provided, as defined in the agreement, the client is then invoiced and revenue is accordingly recognized and recorded. The Company does not recognize or record any revenues for which it does not have a legal basis for invoicing or legally collecting.
Potential Derivative Instruments
We periodically assess our financial and equity instruments to determine if they require derivative accounting. Instruments which may potentially require derivative accounting are conversion features of debt and common stock equivalents in excess of available authorized common shares.
We have determined that the conversion features of our debt instruments are not derivative instruments because they are conventional convertible debt.
Fair Value Accounting
As required by the Fair Value Measurements and Disclosures Topic of the FASB ASC, fair value is measured based on a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows: (Level 1) observable inputs such as quoted prices in active markets; (Level 2) inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and (Level 3) unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
The three levels of the fair value hierarchy are described below:
Level 1
Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
Level 2
Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability;
Level 3
Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by little or no market activity).
Debt Modification
If at any time the Company is not able to pay back outstanding debt upon the maturity date, the Company actively works with the note holder to modify the terms of the agreement. All modifications to debt are evaluated for debt extinguishment as required by the Debt Topic of the FASB ASC.
17
Stock-Based Compensation
As required by the Stock-based Compensation Topic of FASB ASC, transactions in which the Company exchanges its equity instruments for goods or services is accounted for using authoritative guidance for stock based compensation. This guidance also addresses transactions in which the Company incurs liabilities in exchange for goods or services that are based on the fair value of the Company’s equity instruments or that may be settled by the issuance of those equity instruments.
If the Company issues stock for services which are performed over a period of time, the Company capitalizes the value paid in the equity section of the Company’s financial statements as it’s a non-cash equity transaction. The Company accretes the expense to stock based compensation expense on a monthly basis for services rendered within the period.
We use the fair value method for equity instruments granted to non-employees and will use the Black-Schoels model for measuring the fair value of options, if issued. The stock based fair value compensation is determined as of the date of the grant or the date at which the performance of the services is completed (measurement date) and is recognized over the vesting periods.
If shares are issued for services to be performed over a period by a vendor, we capitalize the value paid and amortize the expense in association with services actually rendered.
Shares issued to employees are expensed upon issuance.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in rules and forms adopted by the Securities and Exchange Commission, and that such information is accumulated and communicated to management, including the President/Secretary, to allow timely decisions regarding required disclosures.
Under the supervision and with the participation of our management, including our Chief Executive Officer and Principal Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). Based upon that evaluation, our officers concluded that, as of the end of the period covered by this report, the Company has been implementing control procedures to mitigate our internal control issues which could have a material impact on our financial reporting procedures. As of the end of the period covered by this report, the Company has ineffective controls over financial reporting. Our disclosure controls and procedures were ineffective to ensure that information required to be disclosed by us in our periodic reports is recorded, processed, summarized and reported appropriately. The Company has been working towards clearing ineffective financial reporting controls and disclosures to implement proper internal controls over financial reporting.
Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a- 15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is intended to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP. Our internal control over financial reporting includes those policies and procedures that:
·
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions of our financial statements;
·
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with applicable GAAP, and that receipts and expenditures are being made only in accordance with authorizations of management and the Board of Directors; and
·
provide reasonable assurance that transactions pertaining to stock issuances are recorded as necessary to permit preparation of financial statements in accordance with applicable GAAP, and that the stock issuances are being made only in accordance with authorizations of management and the Board of Directors.
18
Under the supervision and with the participation of our management, our Chief Executive Officer, and Principal Financial Officer, we have evaluated the effectiveness of our internal control over financial reporting and as of the end of the period ending June 30, 2011, the Company feels that it is working towards clear disclosures and implementing proper internal controls over financial reporting. Our controls have since been updated in order to prevent the issues surrounding our material weakness and management feels that, moving forward, our controls over financial reporting will reduce the potential impact of material misstatements.
This annual report does not include an attestation report of the Company's registered public accounting firm regarding internal control over financial reporting.
Change in internal control over financial reporting
No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the period ending June 30, 2011, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATION
Item 1. Legal Proceedings
On March 25, 2011, the Company signed a settlement agreement with Trafalgar whereby the pending litigation between both parties was settled out of court. The terms of the agreement dismissed all litigation against Trafalgar, to settle all debt owed to Trafalgar, the dismissal of all litigation against NAS and its subsidiaries and certain directors as well as the release of all liens and encumbrances on NAS assets in the UCC-1 filings held by Trafalgar. The following is the terms of settlement with Trafalgar: (i) a payment of $300,000 was paid on March 25, 2011 per the terms of the agreement; (ii) an executed promissory note in the principal amount of $200,000 payable within 6 months from the settlement date of March 25, 2011, and accruing interest at the rate of seven percent (7%) simple interest per annum; (iii) a total of 7,645,821 shares of NAS common stock shares issued to the Trafalgar on April 6, 2011; (iv) NAS shall provide to Trafalgar a Rule 144 opinion letter in the form acceptable to the both parties, if necessary and/or applicable; and (v) an exchange of mutual unconditional and irrevocable general releases and dismissals of all claims, disputes, liens, encumbrances, defenses between the parties through the settlement agreement date of March 25, 2011. Trafalgar is to deliver to the NAS appropriate releases of all liens and encumbrances including, without limitation, all UCC liens within 91 days of the settlement date of March 25, 2011, providing that NAS does not enter into bankruptcy within the 91 days. The amount owed to Trafalgar with interest was $3,800,000. The settlement agreement with Trafalgar allowed for the Company to write off the principle and interest of the debt balance for a gain in extinguishment of debt in the amount of $2,881,000, after the settlement terms noted above. Noted above the promissory note, in the event of a default with the promissory note the $200,000, including any and all interest accrued will become due on demand pursuant to the terms of the promissory note.
On June 9, 2010, a writ of garnishment was filed against our subsidiary Intecon’s bank account for our outstanding balanced owed to one of our vendors, Summit Electric. Our current outstanding balance owed to Summit Electric is $61,000. This writ was established to collect funds from us by garnishing money in our subsidiaries bank accounts. At the time of the court ordered garnishment the accounts held a balance of $1,200 and have been sent to Summit Electric under the writ. To date we still have an outstanding balance with Summit Electric and are working towards payment to this vendor.
On October 2, 2010, a writ of garnishment was filed against our subsidiary Intecon’s bank account for our outstanding balanced owed to one of our vendors, Border States. This writ was established to collect funds from us by garnishing money in our subsidiaries bank accounts. At the time of the court ordered garnishment the accounts held a balance of $90,000 which was sent to Border States under the writ on October 15, 2010. As of March 31, 2011, our outstanding balance owed to Border State was $100,000. Noted that our outstanding balance was $100,000, we negotiated a payment to Border States in the amount of $70,000 to pay off our outstanding balance. The Company recognized a gain in extinguishment of the debt in the amount of $30,000. As of April 4, 2011, the Company has repaid this vendor in full.
19
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following is a summary of all transactions involving our current sales of our unregistered equity securities. Shares issued for cash consideration paid to us are valued at the purchase price per share; all other shares are valued as stated. All shares issued were issued as “restricted” shares of our common stock except as otherwise expressly stated.
On April 6, 2011, the Company issued to Trafalgar Capital the sum of 7,645,821 shares of common stock in consideration for settlement agreement dated March 25, 2011. The shares were issued at a value of $420,520 or $0.055 per share.
On April 30, 2011, the Company issued to one individual the sum of 2,000,000 shares of common stock in consideration for services rendered. The shares had a value of $0.049 per share for a total of $98,000.
On May 11, 2011, the Company issued to one individual the sum of 2,500,000 shares of common stock for cash consideration at a value of $0.02 per share for a total of $50,000.
On May 20, 2011, the Company issued to one individual the sum of 2,000,000 shares of its common stock as part of a collateral agreement. The shares were issued in an equity draw down agreement. As of June 30, 2011, the shares have a value of $28,576, based on the fair market value of the remaining debt to be converted as the individual draws against the shares held.
On May 23, 2011, the Company issued to one individual the sum of 6,200,000 shares of its common stock as part of a convertible note agreement. The agreement was partially converted into common stock at a value of $0.02 or $124,000.
On July 6, 2011, the Company issued to one individual the sum of 130,000 shares of its common stock as a part of a convertible note agreement. The shares were converted at $0.05 per share for a total value of $6,500.
On July 6, 2011, the Company issued to one individual the sum of 3,866,667 shares of its common stock as a part of a convertible note agreement. The shares were converted at $0.015 per share for a total value of $58,000.
On July 7, 2011, the Company issued to one individual the sum of 2,000,000 shares of its common stock as a part of a service agreement. The shares were valued at $0.02 per share or $40,000.
Except as stated above, and noted in our registration statement Form 10, Form 10-K, and Form 10-Q, we have had no recent sales of unregistered securities within the past three fiscal years. There were no underwritten offerings employed in connection with any of the transactions described above. Except as stated above, the above issuances were deemed to be exempt under Rule 504 or 506 of Regulation D and/or Section 4(2) or 4(6) of the Securities Act of 1933, as amended, since, among other things, the transactions did not involve a public offering, the investors were accredited investors and/or qualified institutional buyers, the investors had access to information about our company and their investment, the investors took the securities for investment and not resale, and we took appropriate measures to restrict the transfer of the securities.
Item 3. Defaults Upon Senior Securities
None
Item 4. [REMOVED AND RESERVED]
Item 5. Other Information
None
20
Item 6. Exhibits
| | |
Exhibit No. | | Description of Exhibit |
| | |
31.1 | | Certification of Principal Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| | |
31.2 | | Certification of Principal Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| | |
32.1 | | Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| | |
32.2 | | Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| | |
21
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
NATIONAL AUTOMATION SERVICES, INC.
(Registrant)
Date:
August 15, 2011
By: /s/ Robert W. Chance
Name: Robert W. Chance
Title: President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ Jeremy W. Briggs
Name: Jeremy W. Briggs
Title: V.P. / Principal Financial Officer
22
