UNITED STATES 

SECURITIES AND EXCHANGE COMMISSION 

Washington, D.C. 20549 

 

FORM 10-Q/A

Amendment No. 1 

 

þ

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended: MARCH 31, 2015

 

☐

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ___ to ___

 

NATIONAL AUTOMATION SERVICES, INC.

 (Exact name of registrant as specified in its charter) 

 

Nevada		000-53755		26-1639141
(State or jurisdiction of incorporation or organization)		(Commission File No.)		(I.R.S. Employer Identification No.)

  

8965 S Eastern Ave Suite 120E, Las Vegas NV 89123

 (Address of principal executive offices) (Zip Code)

 

877-871-6400

  (Registrant’s telephone number, including area code)

 

The registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act 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 þ  No☐

 

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ  No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company: See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☐	Accelerated filed ☐
Non-accelerated filer   ☐	Smaller reporting company þ

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐  No þ

 

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date;

 

As of May 20, 2015, the issuer had 4,849,064 shares of common stock outstanding.

 

 

EXPLANATORY NOTE

 

We are filing this Quarterly Report on Form 10-Q/A (the “Amended Filing”) to amend our Quarterly Report on Form 10-Q for the quarter ended March 31, 2015, which was filed with the Securities and Exchange Commission (“SEC”) on May 20, 2015 (the “Original Filing”). We are amending the Original Filing to restate our unaudited condensed consolidated financial statements as of March 31, 2015 and for the three-month periods ended March 31, 2015 and 2014 due to the incorrect valuation of certain intangible assets of our subsidiary, JD Field Services (“JD”), that we acquired in February 2014 and due to incorrect accounting of certain convertible notes that we entered into.

  

In the unaudited condensed consolidated financial statements included in the Original Filing, we reported our re-calculation of the fair value of the acquisition of JD based on a valuation report of certain intangible assets and the retrospective adjustment of the previously reported fair values. However, subsequent to the filing of the Original Filing, we discovered that a number of the valuation metrics in the valuation report required amendment which ended up having a material impact on the intangible asset valuation performed, including in particular the customer relationships, requiring correction of the previously issued valuation of intangible assets in the unaudited condensed consolidated financial statements included in the Original Filing.

 

In addition, in the fourth quarter 2014 and first quarter of 2015, we entered into a series of convertible notes with conversion discounts, beneficial conversion features and coupon rates. We determined that we incorrectly accounted for the conversion features of the convertible notes as beneficial conversion features and should have accounted for them as derivatives in accordance with ASC Topic No. 815-15 “Derivatives and Hedging; Embedded Derivatives” (“Topic No. 815-15”).  Topic No. 815-15 requires us to bifurcate and separately account for the conversion features as an embedded derivative contained in our convertible notes.  We are required to carry the embedded derivative on our balance sheet at fair value and account for any unrealized change in fair value as a component of results of operations.  We valued the embedded derivative using a binomial pricing model.

 

An explanation of the impact on our unaudited condensed consolidated financial statements, and a detailed reconciliation of amounts as originally reported to restated amounts are contained in Note 2 to the accompanying restated financial statements contained in Part I — Item 1 of this Amended Filing.

 

For the convenience of the reader, this Amended Filing sets forth the Original Filing, as modified and superseded where necessary to reflect the restatement. The following items have been amended as a result of, and to reflect, the restatement:

 

·

Part I — Item 1. Financial Statements;

·

Part I — Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations;

·

Part I — Item 4. Controls and Procedures;

·

Part II — Item 1A. Risk Factors; and

·

Part II — Item 6. Exhibits.

 

In accordance with applicable SEC rules, this Amended Filing includes new certifications required by Rule 13a-14 under the Securities and Exchange Act of 1934 (“Exchange Act”) from our Chief Executive Officer and Chief Financial Officer dated as of the date of filing of this Amended Filing.

 

Except for the items noted above, no other information included in the Original Filing is being amended or updated by this Amended Filing. This Amended Filing continues to describe the conditions as of the date of the Original Filing and, except as contained herein; we have not updated or modified the disclosures contained in the Original Filing. Accordingly, this Amended Filing should be read in conjunction with our filings made with the SEC subsequent to the filing of the Original Filing, including any amendments to those filings.

 

 

TABLE OF CONTENTS 

 

PART I – FINANCIAL INFORMATION		4
Item 1: Financial Statements		4
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		22
Item 3.  Quantitative and Qualitative Disclosures About Market Risk		27
Item 4.  Controls and Procedures		27
PART II – OTHER INFORMATION		28
Item 1.  Legal Proceedings		28
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds		29
Item 3.  Defaults Upon Senior Securities		29
Item 4.  Mine Safety Disclosures		29
Item 5.  Other Information		29
Item 6.  Exhibits		30
SIGNATURES		31

 

 

PART I – FINANCIAL INFORMATION

 

Item 1: Financial Statements

 

NATIONAL AUTOMATION SERVICES, INC.,  CONDENSED CONSOLIDATED BALANCE SHEETS

 

		MAR 31, 2015				DEC 31, 2014
ASSETS		(unaudited) (restated)
CURRENT ASSETS
Cash		$	113,287			$	72,165
Accounts receivable, net			1,120,213				1,221,671
Other receivables			50,000				60,000
Prepaid expenses			1,099,256				1,353,033
Total current assets			2,382,756				2,706,869
Property, plant and equipment, net			16,454,207				16,683,881
Intangible assets, net			283,000				283,000
Security deposit			750				750
Deferred financing fees, net			179,998				189,349
TOTAL ASSETS		$	19,300,711			$	19,863,849
LIABILITIES AND STOCKHOLDERS’ DEFICIT
CURRENT LIABILITIES
Accounts payable and accrued liabilities		$	4,441,415			$	5,294,325
Deferred revenue			201,709				—
Current portion of loans, capital leases and line of credit			3,826,089				4,507,322
Current portion of convertible debt, net of discount of $635,489 and $444,544			576,997				158,737
Derivative liability			2,011,258				1,189,718
Mandatorily redeemable contingent liability			100,000				100,000
Current portion of related party payable			1,027,568				112,536
Total current liabilities			12,185,036				11,362,638
LONG TERM LIABILITIES
Long term portion of convertible debt, net of discount of $113,701 and $133,205			426,401				406,914
Long term related party payable, net of discount of $107,650 and $0, net of current portion			2,350				984,667
Long term loans, capital leases			8,429,501				8,666,493
Total liabilities			21,043,288				21,420,712
STOCKHOLDERS’ DEFICIT
Preferred stock $0.001 par value, 10,000,000 authorized, 0 and 0 shares issued outstanding, net			—				—
Common stock $0.001 par value, 75,000,000 authorized, 4,484,184 and 4,019,738 shares issued outstanding, net			4,485				4,020
Additional paid in capital			15,042,533				14,924,999
Stock payable			—				33,278
Accumulated deficit			(16,789,595	)			(16,519,160	)
Total stockholders’ deficit			(1,742,577	)			(1,556,863	)
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT		$	19,300,711			$	19,863,849

 

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

  

 

NATIONAL AUTOMATION SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) 

		THREE MONTHS ENDED MAR 31, 2015 (restated)				THREE MONTHS ENDED MAR 31, 2014
REVENUE		$	5,392,233			$	2,004,606
Less: returns and allowances			—				(13,027	)
NET REVENUE			5,392,233				1,991,579
COST OF REVENUE			4,284,923				1,580,162
GROSS PROFIT			1,107,310				411,417
OPERATING EXPENSES
Selling, general and administrative expenses			195,685				263,866
Professional fees and related expenses			168,976				21,878
Forgiveness of accrued officer compensation			—				(39,626	)
TOTAL OPERATING EXPENSES			364,661				246,118
OPERATING INCOME			742,649				165,299
OTHER INCOME, non-operating
Gain on bargain purchase acquisition of JD			—				(1,464,515	)
Gain on change in fair value of derivative liabilities			(717,375	)			—
TOTAL OTHER INCOME, non-operating			(717,375	)			(1,464,515	)
OTHER EXPENSE, non-operating
Interest expense, net			1,730,459				125,209
TOTAL OTHER EXPENSE, non-operating			1,730,459				125,209
(LOSS) INCOME BEFORE PROVISION FOR INCOME TAXES			(270,435	)			1,504,605
PROVISION FOR INCOME TAXES			—				—
NET (LOSS) INCOME		$	(270,435	)		$	1,504,605
BASIC (LOSS) INCOME PER SHARE		$	(0.07	)		$	0.48
DILUTED (LOSS) INCOME PER SHARE		$	(0.07	)		$	0.45
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING  BASIC			3,819,223				3,131,381
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING DILUTED			3,819,223				3,330,090

  

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

 

 

NATIONAL AUTOMATION SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) 

		THREE MONTHS ENDED MAR 31, 2015 (restated)				THREE MONTHS ENDED  MAR 31, 2014
Operating Activities
Net (loss) income		$	(270,435	)		$	1,504,605
Cash used by operating activities
Depreciation and amortization			398,795				113,463
Amortization of debt discount on notes payable			525,091				920
Change in fair value of derivative liabilities			62,746				—
Stock issued for services			27,176				—
Forgiveness of accrued officer compensation			—				(39,626	)
Gain on bargain purchase of JD Field Services			—				(1,464,515	)
Changes in assets
Decrease (increase) accounts receivables			101,458				(148,841	)
Decrease other assets			10,000				—
Decrease (increase) prepaid expenses			253,777				(8,654	)
Changes in liabilities
Increase deferred revenue			201,709				—
(Decrease) increase accounts payable and accrued liabilities			(638,213	)			21,276
Cash provided (used) by operating activities			672,104				(21,372	)
Investing Activities
Cash retained by subsidiary			—				104,816
Cash paid for fixed assets			—				(105,233	)
Cash used for investing activities			—				(417	)
Financing activities
Proceeds from line of credit			2,388,028				172,373
Proceeds from convertible notes payable			409,250				50,000
Proceeds on note payable			85,817				—
Deferred financing fees			(25,000	)			—
Payments for note payable			(931,841	)			(196,707	)
Payments for leases			(7,350	)			(9,033	)
Payments on line of credit			(2,549,886	)			—
Cash (used) provided by financing activities			(630,982	)			16,633
Increase (decrease) in cash			41,122				(5,156	)
Cash at beginning of the year			72,165				17,696
Cash at end of the year		$	113,287			$	12,540
SUPPLEMENTAL CASH FLOW
Cash paid for interest		$	304,809			$	58,601
Cash paid for income taxes		$	—			$	—
SUPPLEMENTAL DISCLOSURE OF NON CASH INVESTING AND FINANCING TRANSACTIONS
Stock issued for acquisition of JD		$	—			$	413,000
Capitalized leases		$	—			$	132,000
Financed assets		$	134,770			$	—
Stock for conversion of debt and interest		$	42,750			$	—
Debt discount		$	694,088			$	—
Derivative liability		$	758,794			$	—
Settlement of derivative on conversion of debt		$	28,043			$	—

 

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

 

 

NATIONAL AUTOMATION SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

NOTE 1: Organization and basis of presentation

 

Basis of Financial Statement Presentation

 

The accompanying unaudited condensed consolidated financial statements of National Automation Services, a Nevada corporation (“NAS” or the “Company”), have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted in accordance with such rules and regulations. The information furnished in the consolidated financial statements includes normal recurring adjustments and reflects all adjustments, which, in the opinion of management, are necessary for a fair presentation of such financial statements.

 

The condensed consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany transactions and accounts have been eliminated in consolidation. These financial statements have been presented in accordance with the rules governing a smaller reporting company for both periods of March 31, 2015 and March 31, 2014.

 

These condensed consolidated financial statements should be read in conjunction with the consolidated audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K filed with the SEC, from which the balance sheet information as of December 31, 2014 was derived, as adjusted for the Company’s finalization of the JD Field Services (“JD”) acquisition.

 

Management determined that under the guidance of Financial Accounting Standards Board Accounting Standards Codification (“FASB” “ASC”) 805, an adjustment to record additional purchase price allocation was necessary as a part of the acquisition of JD on February 24, 2014. The “measurement” period under ASC 805 allows for retrospective adjustment of the business combination for one year from the acquisition date, or when all necessary information for the adjustment is available. After the measurement period, there is no revision allowed for subsequent information that is unrelated to the facts and circumstances existing at the time of the acquisition, except for error correction. Management recognizes that it had this one year period to apply corrective changes from the bargain purchase to intangible and tangible asset value and, as such it has re-measured the intangible asset value, and recognized a gain on its bargain purchase which has been reflected in the fiscal year ended December 31, 2014, and for the three months ended March 31, 2014 (See Note 15: Acquisition for further information).

 

Business Overview

 

NAS is a public holding company with subsidiaries which provide services for the domestic oil and gas industry. The Company’s business plan takes action with expansion through carefully selected acquisitions. The Company’s services are needed by a wide variety of oil and natural gas industry providers in both private and public sectors. The Company’s focus is to increase shareholder value through these carefully selected companies with NAS bringing oversight and resources to each, which is intended to allow them to maximize profitability and growth opportunities within their markets, and expanding their customer base. This strategy is intended to allow for rapid advancement in overall assets and revenue streams for the Company.

 

On February 24, 2014, the Company entered into a purchase and sale agreement with JD. This is the first of several anticipated acquisitions that NAS has as a part of its growth strategy. JD provides oilfield services to the oil and gas industry primarily focused around those activities that are related to the drilling, operation(s) and maintenance of the well-site. They are licensed in all states west of the Mississippi River including Alaska to do trucking, but are focused primarily in the Rocky Mountain Region. Oilfield services provided include heavy haul, water haul, and rig moving services as well as equipment, supplies, and specialty long hauling services. JD also provides oil and gas equipment rental services, hot shot, roustabout services and construction site development services. JD also operates a fabrication division that builds special-order oil and gas equipment and trucks for customers.

 

Reverse Stock Split

 

On September 11, 2014, the Company amended its Certificate of Incorporation to implement a reverse stock split in the ratio of 1 share for every 200 shares of common stock. This amendment was approved and filed on record by the Nevada Secretary of State, effective September 11, 2014.  On December 11, 2014, FINRA approved the reverse stock split for the Company. All the relevant information relating to numbers of shares and per share information contained in these consolidated financial statements has been retrospectively adjusted to reflect the reverse stock split for all periods presented.

 

 

Use of Estimates

 

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Concentrations of Credit and Business Risk

 

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash. The Company places its cash with high credit quality financial institutions and generally limits the amount of credit exposure to the amount in excess of the Federal Deposit Insurance Corporation coverage limit of $250,000. As of March 31, 2015, the Company did not have cash in any one banking institution that exceeded this limit.

 

Derivative Financial Instruments

 

The Company evaluates its convertible instruments, options, warrants or other contracts to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for under FASB ASC Topic 815, “Derivatives and Hedging.” The result of this accounting treatment is that the fair value of the derivative is marked-to-market each balance sheet date and recorded as a liability. In the event that the fair value is recorded as a liability, the change in fair value is recorded in the statement of operations as other income (expense). Upon conversion or exercise of a derivative instrument, the instrument is marked to fair value at the conversion date and then that fair value is reclassified to equity. Equity instruments that are initially classified as equity that become subject to reclassification under FASB ASC Topic 815 are reclassified to liabilities at the fair value of the instrument on the reclassification date. We analyzed the derivative financial instruments (the Convertible Note), in accordance with FASB ASC 815. The objective is to provide guidance for determining whether an equity-linked financial instrument is indexed to an entity’s own stock. This determination is needed for a scope exception which would enable a derivative instrument to be accounted for under the accrual method. The classification of a non-derivative instrument that falls within the scope of FASB ASC 815-40-05 “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock” also hinges on whether the instrument is indexed to an entity’s own stock. A non-derivative instrument that is not indexed to an entity’s own stock cannot be classified as equity and must be accounted for as a liability. There is a two-step approach in determining whether an instrument or embedded feature is indexed to an entity’s own stock. First, the instrument’s contingent exercise provisions, if any, must be evaluated, followed by an evaluation of the instrument’s settlement provisions. The Company utilized binomial models that value the derivative liability within the notes based on a probability weighted discounted cash flow model. The Company utilized the fair value standard set forth by the Financial Accounting Standards Board, defined as the amount at which the assets (or liability) could be bought (or incurred) or sold (or settled) in a current transaction between willing parties, that is, other than in a forced or liquidation sale.

 

Prepaid Expenses

 

Amounts paid in advance for a benefit not yet received. This type of expense normally includes costs paid in one fiscal year (or period) that benefits a future year (or period).

 

Property, Plant and Equipment

 

As required by the Property, Plant and Equipment Topic of the FASB ASC, the Company is required to use a predetermined method in calculating depreciation expense. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, which is generally ten/fifteen years for heavy machinery, five years for vehicles, two to three years for computer software/hardware and office equipment and three to seven years for furniture, fixtures and office equipment. Leasehold improvements are amortized over the shorter of the lease term or the estimated useful lives. Upon the sale or retirement of property or equipment, the cost and related accumulated depreciation or amortization is removed from our balance sheet with the resulting gain or loss reflected in our results of operations. Maintenance costs are expensed as incurred. Due to the nature of the equipment, major repairs are capitalized as they reflect an adjustment to the overall value of the equipment and its useful life can be extended.

 

 

In evaluating the salvage value service equipment the Company uses a standard of, Machinery and Equipment - Worth approximately 10 - 30% of purchase price after 10-15 years depending on the asset. Vehicles - Worth approximately 20% of purchase price after 10-15 years depending on the asset. These salvage values are based on industry averages for the type of machinery and equipment used in oilfield services.

 

Intangibles

 

As required by the Intangible Asset Topic of the FASB ASC, Intangibles and Goodwill provides guidance on financial accounting and reporting related to goodwill and other intangibles, other than the accounting at acquisition for goodwill and other intangibles acquired in a business combination or an acquisition. Amortization of intangibles is determined by whether they have a definite useful life period or are indefinite.  Those intangibles that are amortized are done so over their useful lives. The Company has elected to use a useful life of seven years or 84 months for its customer list. The definite life reflects the expected dissipation of the expected cash flow from the customer base of JD. Intangibles are tested for impairment annually and/or tested for impairment if a known triggering event occurs.

 

Allowance for Doubtful Accounts

 

As required by the Receivables Topic of FASB ASC, the Company is required to use a predetermined method in calculating the current value for its bad debt on overall accounts receivable.

 

The Company estimates its accounts receivable risks to provide allowances for doubtful accounts accordingly. The Company believes that its credit risk for accounts receivable is limited because of the way in which it conducts business largely in the areas of contracts. Accounts receivable includes the accrual of work in process for project contracts and field service revenue. The Company recognizes that there is a potential of not being paid in a twelve (12) month period. The Company’s 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. The Company assesses 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. The Company reviews all accounts to ensure that all efforts have been exhausted before noting that a customer will not pay for services rendered. The evaluation is inherently subjective and estimates may be revised as more information becomes available.

 

Sales Taxes

 

The Company collects sales tax. The amount received is credited to a liability account as payments are received or invoices are generated. At any point in time, this account represents the net amount owed to the taxing authority for amounts collected but not yet remitted. Sales taxes are then remitted to the appropriate taxing jurisdictions.

 

Earnings (loss) per share basic and diluted

 

Earnings per share is calculated in accordance with the Earnings per Share Topic of the FASB ASC. The weighted-average number of common shares outstanding during each period is used to compute basic earnings (loss) per share. Diluted earnings per share is computed using the weighted average number of shares plus dilutive potential common shares outstanding.

 

Potentially dilutive common shares consist of employee stock options, warrants, and other convertible securities, and are excluded from the diluted earnings per share computation in periods where the Company has incurred net loss. During the three months ended March 31, 2015, the Company recorded net loss, resulting in no dilutive common shares, and during the three months ended March 31, 2014, the Company incurred net income, resulting in dilutive common shares.

 

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 (For additional information see Note 13: Fair value).

 

 

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).

 

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.

 

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.

 

In all cases, revenue is recognized as earned by the Company. 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.

 

NOTE 2: Restatement of Prior Periods

 

The condensed consolidated financial statements for the first quarter of 2015 presented in this amended report are restated to correct certain intangible assets which the Company valued incorrectly at the time of issuance and to further correct the accounting treatment of certain convertible notes we entered into which require assessment under derivative accounting.

 

In the unaudited condensed consolidated financial statements included in the Quarterly Report on Form 10-Q for the period ended March 31, 2015 filed with the SEC on March 20, 2015 (the “Original Filing”), we reported our re-calculation of the fair value of the acquisition of JD based on a valuation report of certain intangible assets and the retrospective adjustment of the previously reported fair values. However, subsequent to the filing of the Original Filing, we discovered that a number of the valuation metrics in the valuation report required amendment which ended up having a material impact on the intangible asset valuation performed, including in particular the customer relationships, requiring correction of the previously issued valuation of intangible assets in the unaudited condensed consolidated financial statements included in the Original Filing.

 

In addition, in the fourth quarter 2014 and first quarter of 2015, the Company entered into a series of convertible notes with conversion discounts, beneficial conversion features and coupon rates. The Company determined that it incorrectly accounted for the conversion features of the convertible notes as beneficial conversion features and should have accounted for them as derivatives in accordance with ASC Topic No. 815-15 “Derivatives and Hedging; Embedded Derivatives” (“Topic No. 815-15”).  Topic No. 815-15 requires the Company to bifurcate and separately account for the conversion features as an embedded derivative contained in its convertible notes.  The Company is required to carry the embedded derivative on its balance sheet at fair value and account for any unrealized change in fair value as a component of results of operations.  The Company valued the embedded derivative using a binomial pricing model.

 

 

The effect of the restatement on the condensed consolidated balance sheets, the condensed consolidated statements of income and condensed consolidated statements of cash flows for the quarter ended March 31, 2015 are presented in the following tables:

 

 

ASSETS		As originally reported at MAR 31, 2015				Restatement Adjustments				As restated MAR 31, 2015
Intangible assets, net		$	4,574,857			$	4,291,857	(1)		$	283,000
Other assets			19,017,711								19,017,711
TOTAL ASSETS		$	23,592,568			$	4,291,857			$	19,300,711
Derivative liability		$	—			$	2,011,258	(1)		$	2,011,258
Convertible notes, net of discount			1,156,790				(153,392	)(1)			1,003,398
Other liabilities			18,028,632								18,028,632
TOTAL LIABILITIES			19,185,422				1,857,866				21,043,288
DEFICIT
Common stock			4,485								4,485
Additional paid in capital			15,975,939				(933,406	)(1)			15,042,533
Accumulated deficit			(11,573,278	)			(5,216,317	)(1)			(16,789,595	)
TOTAL DEFICIT			4,407,146				(6,149,723	)			(1,742,577	)
TOTAL LIABILITIES AND STOCKHOLDER’S DEFICIT		$	23,592,568			$	(4,291,857	)(1)		$	19,300,711

(1)

Adjustment reflects correction of an error.

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS		As originally reported at MAR 31, 2015				Restatement Adjustments				As restated MAR 31, 2015
TOTAL OPERATING INCOME		$	606,113			$	136,536	(1)		$	742,649
OTHER (INCOME) / EXPENSE
Interest expense, net			669,713				1,060,746	(1)			1,730,459
Gain on change in fair value of derivative liabilities			—				(717,375	)(1)			(717,375	)
TOTAL OTHER (INCOME) / EXPENSE			669,713				343,371				1,013,084
NET INCOME		$	(63,600	)		$	(206,835	)		$	(270,435	)
BASIC (LOSS) INCOME PER SHARE		$	(0.02	)						$	(0.07	)
DILUTED (LOSS) INCOME PER SHARE		$	(0.02	)						$	(0.07	)
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING  BASIC			3,819,223								3,819,223
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING  BASIC			3,819,223								3,819,223

(1)

Adjustment reflects correction of an error.

  

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS		As originally reported at MAR 31, 2015				Restatement Adjustments				As restated MAR 31, 2015
Net loss		$	(63,600	)			(206,835	)(1)		$	(270,435	)
Cash used by operating activities
Amortization of debt discount on notes payable			—				525,091	(1)			525,091
Change in fair value of derivative liabilities			—				62,746	(1)			62,746
Accretion of convertible notes BCF			244,466				(244,466	)(1)			—
Depreciation and amortization			535,331				(136,536	)(1)			398,795
Other			(44,093	)			—				(44,093	)
Cash provided by operating activities			672,104				—				672,104
Cash used for investing activities			—				—				—
Cash used for financing activities			(630,982	)			—				(630,982	)
Increase in cash			41,122				—				41,122
Cash at beginning of the year			72,165				—				72,165
Cash at the end of the year		$	113,287							$	113,287

 

SUPPLEMENTAL DISCLOSURE OF NON CASH INVESTING AND FINANCING TRANSACTIONS
Beneficial conversion feature on convertible debt		$	(470,630	)		$	470,630	(1)		$	—
Debt discount		$	(35,000	)		$	729,088	(1)		$	694,088
Derivative liability		$	—			$	758,794	(1)		$	758,794
Settlement of derivative on conversion of debt		$	—			$	28,043	(1)		$	28,043

(1)

Adjustment reflects correction of an error.

 

 

NOTE 3: Recently adopted and recently issued accounting guidance

 

Adopted

 

In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. The new standard provides guidance as to management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted. This standard was adopted on December 31, 2014. The adoption of the above guidance did not have an impact on the Company’s financial position, result of operations or cash flow.

 

In November 2014, FASB issued ASU No. 2014-17, Business Combinations (Topic 805): Pushdown Accounting. Current generally accepted accounting principles (GAAP) offer limited guidance for determining whether and at what threshold an acquiree (acquired entity) can reflect the acquirer’s accounting and reporting basis (pushdown accounting) in its separate financial statements. An election to apply pushdown accounting in a reporting period after the reporting period in which the change-in-control event occurred should be considered a change in accounting principle in accordance with Topic 250, Accounting Changes and Error Corrections. If pushdown accounting is applied to an individual change-in-control event, that election is irrevocable.  This ASU is effective on November 18, 2014. After the effective date, an acquired entity can make an election to apply the guidance to future change-in-control events or to its most recent change-in-control event. This standard was adopted in November, 2014. The adoption of the above guidance did not have an impact on the Company’s financial position, result of operations or cash flow.

 

Issued

 

In February 2015, FASB issued ASU No. 2015-02, Consolidation. The amendments in this update affect reporting entities that are required to evaluate whether they should consolidate certain legal entities. All legal entities are subject to reevaluation under the revised consolidation model. This ASU is effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. For all other entities, the amendments in this update are effective for fiscal years beginning after December 15, 2016, and for interim periods within fiscal years beginning after December 15, 2017.

 

In January 2015, FASB issued ASU No. 2015-01, Income Statement—Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items. This Update eliminates from GAAP the concept of extraordinary items. Subtopic 225-20, Income Statement Extraordinary and Unusual Items, required that an entity separately classify, present, and disclose extraordinary events and transactions. Presently, an event or transaction is presumed to be an ordinary and usual activity of the reporting entity unless evidence clearly supports its classification as an extraordinary item. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015.

 

In November 2014, FASB issued ASU No. 2014-18, Business Combinations (Topic 805): Accounting for Identifiable Intangible Assets in a Business Combination. This ASU is effective for the first transaction within the scope of the accounting alternative that occurs in fiscal years beginning after December 15, 2015 and for interim and annual periods thereafter. If the first transaction occurs in a fiscal year beginning after December 15, 2016, then this is effective for the interim period that includes the date of the transaction and for interim and annual periods thereafter.

 

In November 2014, FASB issued ASU No. 2014-16, Derivatives and Hedging (Topic 815): Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity. This ASU is effective for fiscal years beginning after December 15, 2015, and interim periods beginning after December 15, 2016. Early adoption, including adoption in an interim period, is permitted. If an entity early adopts the amendments in an interim period, any adjustments shall be reflected as of the beginning of the fiscal year that includes that interim period.

 

 

Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the American Institute of Certified Public Accountants, and the SEC did not, or are not believed by management to, have a material impact on the Company’s present or future financial position, results of operations or cash flows.

 

NOTE 4: Liquidity resources and future capital requirements

 

For the three months ended March 31, 2015, the Company had a working capital deficit of $9,802,280 and a stockholders’ deficit of $1,742,577, which raises substantial doubt regarding the Company’s ability to continue as a going concern.

 

The Company has incurred substantial operating losses and negative cash flows from operations. Management plans to address these losses by acquiring business with operating income and that have cash flows from operations. The first of these acquisitions was completed on February 24, 2014 in which the Company acquired JD Field Services, Inc. In addition, the Company is seeking to refinance and extend terms of its loans, lines of credit and long-term debt. Also the Company amended its Certificate of Incorporation to implement a reverse stock split in the ratio of 1 share for every 200 shares of common stock (and was approved by FINRA on December 11, 2014).  

 

In 2014, the Company implemented its plan to acquire companies with income from operations and positive cash flows. The Company’s total cash increased approximately by $100,800, or 806%, to approximately $113,300 for the three months ended March 31, 2015, compared to approximately $12,500 for the three months ended March 31, 2014. The Company’s consolidated cash flows for the three months ended March 31, 2015, and 2014 and total operating income for March 31, 2015 and 2014 were as follows:

 

		MAR 31, 2015				MAR 31, 2014
Net cash provided by (used in) operating activities		$	672,100			$	(21,400	)
Net cash used in investing activities		$	—			$	(400	)
Net cash (used in ) provided by financing activities		$	(631,000	)		$	16,600
Total net (loss) income		$	(270,435	)		$	1,504,605

 

In connection with the preparation of the Company’s financial statements for the three months ended March 31, 2015, the Company has analyzed its cash needs for the next twelve months. The Company believes that its current cash position and forecasted cash flow from operations is adequate to meet its cash requirements for at least the next twelve months.

 

NOTE 5: Accounts receivable, net

 

		MAR 31,				DEC 31,
		2015				2014
Accounts receivable		$	1,186,360			$	1,287,818
Less: allowance for doubtful accounts			(66,147	)			(66,147	)
Total		$	1,120,213			$	1,221,671

 

NOTE 6: Property, plant & equipment, net

 

		MAR 31,				DEC 31,
		2015				2014
Buildings		$	78,927			$	78,927
Furniture and fixtures			46,923				46,923
Vehicles			4,613,407				4,479,273
Machinery and equipment			13,234,926				13,234,926
Less: Accumulated depreciation			(1,519,976	)			(1,156,168	)
Total		$	16,454,207			$	16,683,881

 

Depreciation expense for the three months ended March 31, 2015, was $363,807 and for the year ended December 31, 2014, was $1,214,390.

 

NOTE 7: Other receivable

 

In August 2014, the Company entered into a term sheet to acquire additional funds for repayment of debt and capital purchases. There was a required deposit in the amount of $70,000 for the agreement to be executed. As of September 30, 2014, the Company recognized that the execution of the term sheet was not viable and therefore the Company asked for a return of the deposit as of December 31, 2014, of which $20,000 has been returned to the Company as of March 31, 2015.

 

 

NOTE 8: Intangible assets, net

 

With the purchase of JD on February 24, 2014, the Company, under guidance of FASB ASC 805, determined that an adjustment to record additional purchase price allocation was necessary. The “measurement” period under ASC 805 allows for retrospective adjustment of the business combination for one year from the acquisition date, or when all necessary information for the adjustment is available. After the measurement period, there is no revision allowed for subsequent information that is unrelated to the facts and circumstances existing at the time of the acquisition, except for error correction. Management recognizes that it had this one year period to apply corrective changes from the bargain purchase to intangible and tangible asset value and, as such the Company has re-measured the intangible asset value and recognized a gain on its bargain purchase which has been reflected retrospectively as of February 24, 2014. The Company recognized additional intangible assets which contributed to the overall value of JD (See Note 15: Acquisitions for additional details on the re-measurement). The following table represents the intangible assets:

 

		MAR 31,				DEC 31,
		2015				2014
Brand name		$	277,000			$	277,000
Domain name / website			6,000				6,000
			283,000				283,000
Less: Accumulated amortization			—				—
Total		$	283,000			$	283,000

  

		NAS MAR 31, 2014				JD MAR 31, 2014				Adjustments MAR 01, 2014				MAR 31, 2014
REVENUE		$	—			$	2,004,606			$	3,323,970			$	5,328,576
COST OF REVENUE			—				1,593,189				2,866,012				4,459,201
GROSS PROFIT			—				411,417				—				869,375
OPERATING EXPENSES
Selling, general and administrative expenses			55,557				208,309				362,607				626,473
Professional fees and related expenses			21,436				442				2,570				24,448
Forgiveness of accrued officer compensation			(39,626	)			—				—				(39,626	)
TOTAL OPERATING EXPENSES			37,367				208,751				—				611,295
OPERATING INCOME (LOSS)		$	(37,367	)		$	202,666			$	—			$	258,080
OTHER EXPENSE, non-operating
Gain on acquisition, bargain purchase of JD			—				(1,620,071	)			39,208				(1,580,863	)
Interest expense, net			70,160				55,049				53,571				178,780
TOTAL OTHER EXPENSE (INCOME), non-operating			70,160				(1,565,022	)			—				(1,402,083	)
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES			(107,527	)			1,767,688				—				1,660,163
PROVISION FOR INCOME TAXES			—				—				—				—
NET (LOSS) INCOME		$	(107,527	)		$	1,767,688			$	—			$	1,660,163
BASIC (LOSS) INCOME PER SHARE		$	(0.00	)										$	0.53
DILUTED (LOSS) INCOME PER SHARE		$	(0.00	)										$	0.50
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING BASIC			3,131,381												3,131,381
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING DILUTED			3,131,381												3,330,090

  

 

NOTE 9: Loans, capital lease and lines of credit

  

The following table represents the outstanding principle balance of loans, capital leases and lines of credit (“LOC”) and accrued interest for the Company as of March 31, 2015.

  

Description		Loan date				Maturity date				Original amount of loan				Interest rate				Balance as of   MAR 31, 2015
Ally			02	/24/2014			02	/10/2019		$	43,395				4.01	%		$	29,552
Commercial Credit Group			12	/19/2014			12	/19/2019			1,940,969				10.00	%			1,492,648
Cat Financial			02	/24/2014			11	/09/2016			186,549				5.95	%			83,491
Equify			04	/08/2014			05	/01/2019			1,480,412				7.10	%			1,266,296
Phil Timothy			02	/24/2014			03	/28/2023			2,650,000				6.00	%			2,220,528
Ford Credit			02	/24/2014			03	/16/2016			23,700				4.34	%			8,615
Ford Credit			02	/24/2014			09	/28/2015			28,700				6.54	%			8,177
Ford Credit			02	/24/2014			06	/05/2016			88,575				7.89	%			31,456
Ford Credit			02	/24/2014			02	/28/2015			56,372				6.49	%			5,977
Ford Credit			02	/24/2014			03	/29/2017			73,005				7.89	%			34,229
Ford Credit			02	/24/2014			09	/30/2015			94,000				5.74	%			11,055
Ford Credit			02	/24/2014			09	/19/2016			45,994				8.29	%			20,108
Ford Credit			09	/01/2014			08	/01/2017			43,110				5.04	%			30,516
GE Capital			09	/01/2014			08	/01/2019			213,600				6.96	%			192,333
GE Capital			09	/01/2014			08	/01/2020			203,789				6.93	%			187,502
GE Capital			09	/01/2014			08	/01/2016			48,000				9.11	%			33,007
GE Capital			02	/24/2014			10	/10/2018			189,151				6.42	%			121,653
GE Capital			02	/24/2014			07	/01/2018			153,944				7.20	%			93,898
John Deere Financial			02	/24/2014			09	/26/2017			262,350				4.00	%			142,149
Axis Capital			2	/20/2015			2	/20/2020			600,000				8.62	%			591,562
Mack Financial Services			02	/24/2014			03	/12/2016			326,746				6.00	%			80,700
Mack Financial Services			02	/24/2014			11	/09/2016			347,520				6.00	%			147,568
MACU			02	/24/2014			10	/26/2018			41,540				2.99	%			31,041
Zion’s Bank			02	/24/2014			10	/15/2026			150,000				4.86	%			122,066
Zion’s Bank			02	/24/2014			10	/10/2016			101,091				4.57	%			26,669
Zion’s Bank			02	/24/2014			09	/30/2017			7,680,000				4.57	%			4,225,706
Zion’s Bank – LOC			—				—				—				—				464,748
H&E Equipment			02	/24/2014			05	/01/2017			176,234				12.00	%			117,799
National Insurance			06	/01/2014			05	/31/2015			504,555				6.00	%			86,851
South Bay Capital			07	/25/2008			—				10,926				12.00	%			10,926
Capital lease			01	/15/2009			—				33,591				—				33,591
Goss			09	/19/2013			09	/19/2016			20,000				12.00	%			20,000
Kinney2			11	/01/2013			10	/31/2014			50,000				12.00	%			50,000
O’Connor			04	/01/2009			—				71,000				10.00	%			71,000
Hanley			04	/01/2009			—				79,913				10.00	%			79,913
Spiker			12	/31/2010			—				9,500				10.00	%			9,500
Jesse			12	/31/2010			—				9,760				10.00	%			9,760
Marlow			12	/31/2010			—				13,000				10.00	%			13,000
Goss2			02	/28/2014			11	/28/2014			50,000				10.00	%			50,000
Total debt liabilities																			12,255,590
Less: current portion																			(3,826,089	)
Total long term liabilities																		$	8,429,501

  

Line of credit

  

The Company has a $500,000 unsecured line of credit with Zion’s First National Bank. At March 31, 2015, interest was charged at LIBOR + 3.85%.  The line of credit has been renewed through June 2015. The line of credit balance as of March 31, 2015 was $ 464,748.

  

Mandatorily redeemable common stock

 

On June 6, 2014, the Company entered into a settlement and release agreement providing for the grant of an aggregate of 53,837 shares of restricted stock in consideration for the settlement of outstanding debt due under a convertible note April 11, 2011, valued at $269,186. In connection with the agreement, the Company agreed to repurchase 20,000 shares of the shares issued for $100,000 within 30 days following the completion of a planned secondary offering. No secondary offering has been commenced as of the date of this report. The agreement further provides that if the Company does not timely purchase the shares in accordance with the agreement then if the said shares have a value of less than $100,000, the holder is entitled to additional shares to compensate up to the $100,000 in value. As such as of March 31, 2015, the Company recognized a mandatorily redeemable common stock to present the obligation of the $100,000.

 

 

NOTE 10: Convertible notes

 

As of March 31, 2015, the following convertible notes payable are outstanding (see Note 13: Fair Value for information on debt discount):

 

Description		Balance as of MAR 31, 2015				Balance as of DEC 31, 2014
Convertible note issued on October 1, 2014, at a 12% interest rate per annum for three (3) years, convertible to shares of common stock at discount to market price of Company common stock.		$	250,000			$	250,000
Convertible note issued on October 1, 2014, at a 12% interest rate per annum for three (3) years, convertible to shares of common stock at discount to market price of Company common stock.			245,000				245,000
Convertible note issued on October 20, 2014, at a 12% interest rate per annum for three (3) years, convertible to shares of common stock at discount to market price of Company common stock.			45,000				45,000
Convertible note issued on December 16, 2014, at a 12% interest rate per annum for one (1) year, convertible to shares of common stock at $2.00 per share or if the Company’s common stock falls below a certain price, at a discount to market price of Company common stock.			250,000				250,000
Convertible note issued on December 16, 2014, at a 10% interest rate per annum for one (1) year, convertible to shares of common stock at discount to market price of Company common stock.			219,500				249,400
Convertible note issued on December 16, 2014, at a 8% interest rate per annum for nine (9) months, convertible to shares of common stock at discount to market price of Company common stock.			104,000				104,000
Convertible note issued on January 31, 2015, at a 12% interest rate per annum for two (2) months, convertible to shares of common stock at discount to market price of Company common stock.			159,838				—
Convertible note issued on January 30, 2015, at a 8% interest rate per annum for ten (10) months, convertible to shares of common stock at discount to market price of Company common stock.			64,000				—
Convertible note issued on February 12, 2015, at a 12% interest rate per annum for six (6) months, convertible to shares of common stock at discount to market price of Company common stock.			180,000				—
Convertible note issued on February 27, 2015, at a 8% interest rate per annum for one (1) year, convertible to shares of common stock at discount to market price of Company common stock.			110,250				—
Convertible note issued on March 11, 2015, at a 8% interest rate per annum for one (1) year, convertible to shares of common stock at discount to market price of Company common stock.			35,000				—
Convertible note issued on March 12, 2015, at a 8% interest rate per annum for one (1) year, convertible to shares of common stock at discount to market price of Company common stock.			55,000				—
Convertible note issued on March 21, 2015, at a 10% interest rate per annum for six (6) months, convertible to shares of common stock at discount to market price of Company common stock.			35,000				—
Total			1,752,588				1,143,400
Less: Debt discount			(749,190	)			(577,749	)
Less: Current portion convertible debt			(576,997	)			(158,737	)
Total Long-term portion of convertible debt		$	426,401			$	406,914

  

On January 31, 2015, the Company issued a short term convertible promissory note in the principal amount of $159,838 that matured on March 29, 2015. The note bears an interest rate of 12% per annum and may be prepaid in whole or in part, subject to certain conditions. The note may be converted into shares of the Company’s common stock at a discount to the market price of the Company’s common stock.

  

On January 30, 2015, the Company issued a convertible promissory note in the principal amount of $64,000 bearing interest at the rate of 8% per annum. The note matures on November 3, 2015 and the principal and any accrued interest thereon may be prepaid, subject to certain conditions. The note may be converted into shares of the Company’s common stock at a discount to the market price of the Company’s common stock.

 

On February 12, 2015, the Company issued a convertible promissory note in the principal amount of $180,000 for a purchase price of $125,000 reflecting a $50,000 OID. The note matures six-months from the date of issuance and accrues interest at 12% per annum or the maximum rate permitted by law in an event of default. The note may be converted into shares of the Company’s commons stock at a discount to the market price of the Company’s common stock.

 

On February 27, 2015, the Company issued a convertible promissory note in the principal amount of $110,250 for a purchase price of $105,000 reflecting a 5% OID. The note matures one-year from the date of issuance and accrues interest at the rate of 8% per annum increasing to 12% per annum in an event of default. The note may be converted into shares of the Company’s commons stock at a discount to the market price of the Company’s common stock.

 

 

On March 11, 2015, the Company issued a convertible promissory note in the principal amount of $35,000 in exchange for a convertible promissory note issued to a related party originally issued on July 25, 2014. The note matures one-year from the date of issuance and bears “guaranteed” interest at the rate of 8%. The note may be converted into shares of the Company’s commons stock at a discount to the market price of the Company’s common stock.

  

On March 12, 2015, the Company issued a convertible promissory note in the principal amount of $55,000 for a purchase price of $50,000, reflecting a 10% OID. The note matures one-year from the date of issuance and bears “guaranteed” interest at the rate of 8%. The note may be converted into shares of the Company’s commons stock at a discount to the market price of the Company’s common stock.

 

On March 21, 2015, the Company issued a convertible promissory note in the principal amount of $35,000 to a related party bearing interest at the rate of 10% per annum. The note matures on September 30, 2015 and the principal and any accrued interest thereon may be prepaid, subject to certain conditions. The note may be converted into shares of the Company’s commons stock at a discount to the market price of the Company’s common stock.

 

NOTE 11: Operating lease agreement

  

On June 21, 2014, the Company entered into an operating lease agreement for our corporate offices located in Las Vegas, Nevada. The operating lease runs from July 1, 2014 for 12 months to June 30, 2015 with a non-related third party for $750 per month with no annual increase. The Company’s subsidiary JD rents its facility from a related party (see Note 12: Related party transactions).

 

NOTE 12: Related party transactions

 

On February 24, 2014, the Company assumed a 6% promissory note in the principal amount of $474,667 issued to a director and a beneficial owner of 5% or more of our common stock, in connection with the acquisition of JD. As of March 31, 2015, the Company owes an additional $45,121, as expenses that were paid by the director on behalf of the Company. As of March 31, 2015, $519,788 of principal and $32,890 of interest was outstanding.

 

On February 24, 2014, the Company assumed a 7.05% promissory note in the principal amount of $510,000 issued to a beneficial owner of 5% or more of our common stock, in connection with the acquisition of JD.   As of March 31, 2015, $507,781 of principal and $9,597 of interest was outstanding.

 

On February 27, 2015, the Company amended loans to the Company made by a related party dated April 2, 2014 and April 22, 2014, in the original principal amounts of $50,000 and $28,000, respectively such that the remaining principal was combined into one convertible debenture in the principal amount of $110,000. The debenture matures on January 30, 2020 and bears interest at the rate of 10% per annum. The note may be converted into shares of the Company’s commons stock at a discount to the market price of the Company’s common stock.

 

The Company’s subsidiary JD also rents its facility; the lease is with a related party for $10,500 per month. For the three months ended March 31, 2015, rent expense was $31,500. This lease is on a month-to-month basis.

 

NOTE 13: 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. The Company’s financial liabilities that were subject to fair value measurements consist of a debt conversion feature that has been recorded as a liability based on Level 3 unobservable inputs. Alternate probabilities would have resulted in increases or decreases in the fair value of the debt conversion feature liability:

 

		Fair value Measurements at March 31, 2015
		Total				Level 1				Level 2				Level 3
Derivative liability
Debt conversion feature		$	2,011,258				—				—			$	2,011,258
Total financial liabilities		$	2,011,258				—				—			$	2,011,258

 

 

		Fair value Measurements at December 31, 2014
		Total				Level 1				Level 2				Level 3
Derivative liability
Debt conversion feature		$	1,189,718				—				—			$	1,189,718
Total financial liabilities		$	1,189,718				—				—			$	1,189,718

  

The table below presents a summary of changes in the Company’s debt conversion feature liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended March 31, 2015: 

			MAR 31, 2015				MAR 31, 2014
Debt conversion feature:
Beginning balance		$	1,189,718			$	—
Additions			1,566,957				—
Adjustments resulting from changes in fair value recognized in earnings			(717,375	)			—
Total			2,039,300				—
Issuance of common stock			(28,042	)			—
Ending balance		$	2,011,258			$	—

  

The following table sets forth the Company’s valuation techniques and significant unobservable inputs used to determine fair value for significant Level 3 liabilities: 

Fair Value

Assets

Liabilities

Valuation Technique(s)

Significant Unobservable Input

Range

Debt conversion feature liability

March 31, 2015

$

—

$

2,011,258

Binomial option pricing model

Expected term  (years)

0.32 – 2.13

Volatility

303.94%

December 31, 2014

$

—

$

1,189,718

Binomial option pricing model

Expected term

0.71 – 2.58

Volatility

271.84%

Debt conversion feature liability

  

The fair value of the debt conversion feature liability includes the estimated timing of the events as well as the related probabilities of occurrence. The shorter/longer the period estimated to the event, the higher/lower the value of the debt conversion feature liability. The higher/lower the probability of occurrence, the higher/lower the value of the debt conversion feature liability.

  

NOTE 14: Stockholders’ deficit

 

Preferred Stock

 

On September 11, 2014, the Company amended its Certificate of Incorporation to authorize 10,000,000 shares of preferred stock with a par value of $0.001, the designations, rights and preferences of which is to be determined by the Board of Directors.

 

Common Stock

 

On December 31, 2014, the Company amended its employment contract with an executive officer of the Company. Per the agreement the Company granted 110,000 shares at a value of $0.01 per share or $1,100. These shares were issued on January 9, 2015.

 

On December 31, 2014, the Company granted 160,890 shares as a part of conversion of debt. The shares were valued based on the conversion price of $0.20 or $32,178 total value consideration of both principle and interest. These shares were issued on January 9, 2015.

 

On February 20, 2015, the Company entered into a consulting agreement. Per the terms of the agreement the Company issued 128,720 shares of the Company’s common stock at a value of $0.15 or $19,308.

  

 

On March 2, 2015, a holder of a note converted a portion of the note. The Company issued 12,077 shares at a value of $0.82 or $10,000.

 

On March 16, 2015, a holder of a note converted a portion of the note. The Company issued 13,889 shares at a value of $0.72 or $10,000.

 

On March 23, 2015, a holder of a note converted principal and interest of a note. The Company issued 15,500 shares at a value of $1.00 or $15,500.

 

On March 27, 2015, a holder of a note converted a portion of the note. The Company issued 14,620 shares at a value of $0.68 or $10,000.

 

On March 31, 2015, a holder of a note converted remaining interest on a note entered into on July 25, 2014. The Company issued 8,750 shares at a value of $0.20 or $1,750.

 

Warrants 

 

The fair value of each award discussed below is estimated on the date of grant using the Black-Scholes valuation model that uses the assumptions noted in the following table. Expected volatilities are based on volatilities from the Company’s traded common stock. The risk-free rate for the periods within the contractual life of the option is based on the U.S. Treasury bond rate in effect at the time of the grant for bonds with maturity dates at the estimated term of the options.

  

April 11, 2014
Expected volatility			294.42	%
Weighted-average volatility			294.42	%
Expected dividends			0
Expected term (in years)			0.5
Risk-free rate			0.06	%

  

Non vested warrants		Warrants				Weighted average price of warrants
Granted, non-vested at March 31, 2015			140,000			$	7.70
Total granted, non-vested at March 31, 2015			140,000			$	7.70

  

On April 11, 2014, the Company entered into two consulting agreements which had warrants, which provided a vest date based upon the completion of milestones within the consulting agreement. Once vested, the warrants would have an execution period of 360 days from date of vest to expiration at an execution value of $0.002, and conversion of 1:1. Based on the noted Black-Scholes calculation the Company estimated the weighted average price per warrant noted in the above table. As of April 11, 2015, the warrants have expired and are no longer executable.

 

December 31, 2014
Expected volatility			297.60	%
Weighted-average volatility			297.60	%
Expected dividends			0
Expected term (in years)			1.5
Risk-free rate			0.06	%

  

Non vested options		Options				Weighted average  price of Options
Granted, non-vested at March 31, 2015			35,000			$	1.65
Total granted, non-vested at March 31, 2015			35,000			$	1.65

  

On December 31, 2014, the Company entered into an amended employment agreement with its Chief Executive Officer providing for the grant of options to purchase 35,000 shares at an exercise price of $0.01 per share. The options have a term of 18 months (based on the terms of the agreement) and begin to vest on the first anniversary of the date of grant. Based on the noted Black-Scholes calculation the Company estimated the weighted average price per options noted in the above table. As of March 31, 2015, the options have not vested however management has expensed value over the life of the vesting period. As of March 31, 2015, the amount expensed is $9,619.

 

 

NOTE 15: Acquisitions

 

Acquisition of JD Field Services, Inc.

 

On February 24, 2014, the Company entered into a purchase and sale agreement with JD, its first acquisition in the oil and gas industry. JD provides oilfield services to the oil and gas industry primarily focused around those activities that are related to the drilling, operation(s) and maintenance of the well-site. They are licensed in all states west of the Mississippi River including Alaska to do trucking, but are focused primarily in the Rocky Mountain Region. Oilfield services provided include heavy haul, water haul, and rig moving services as well as equipment, supplies, and specialty long hauling services. JD also provides oil and gas equipment rental services, hot shot, roustabout services and construction site development services. JD also operates a fabrication division that builds special-order oil and gas equipment and trucks for customers.

 

As this is the Company’s first acquisition in the oil and gas industry, management did not have the historical knowledge to be able to estimate its intangible or goodwill items properly and therefore it hired a valuation consultant to estimate and value any intangible assets that may have been in existence as of the date of acquisition. The valuation report provided to management details information as to the carrying value of certain intangible assets as a part of the purchase of JD in February 2014. Management has accepted the valuation report and has determined in accordance with FASB ASC 805 there is an additional adjustment to record the additional purchase price allocation at February 24, 2014. The “measurement” period under FASB ASC 805 allows for retrospective adjustment of the business combination for one year from the acquisition date, or when all necessary information for the adjustment is available. After the measurement period, there is no revision allowed for subsequent information that is unrelated to the facts and circumstances existing at the time of the acquisition, except for error correction. Based on the measurement period the Company re-calculated the fair value of the business acquisition as follows:

 

ASSETS		FEB 24, 2014
Cash		$	104,816
Accounts receivable			1,887,074
Prepaid expense			152,892
Fixed Assets			14,138,387
Intangible assets, net			283,000
Deferred financing fees, net			29,402
LIABILITIES
A/P, accrued, loans and LOC			(14,718,056	)
Fair Market Value of Net Identifiable Assets on 2/24/2014		$	1,877,515
Purchase Price
Less: stock for consideration			(413,000	)
Bargain purchase option		$	1,464,515
Less: Bargain purchase option value previously recognized			(1,620,071	)
Re-measurement balance of bargain purchase option as of February 24, 2014		$	155,556

 

 

The Company has retrospectively adjusted the previously reported fair values to reflect these amounts as follows:

 

ASSETS		As reported at DEC 31, 2014 10-K/A				Measurement Period Adjustments				As Retrospectively Adjusted DEC 31, 2014
Accounts receivable, net		$	1,660,227			$	(438,556	)(1)		$	1,221,671
Intangible assets, net			—				283,000	(2)			283,000
Other assets			18,359,178				—				18,359,178
TOTAL ASSETS		$	20,019,405				(155,556	)		$	19,863,849
TOTAL LIABILITIES		$	21,420,712				—			$	21,420,712
EQUITY
Common stock			4,020				—				4,020
Additional paid in capital			14,924,999				—				14,924,999
Stock payable			33,278				—				33,278
Accumulated deficit			(16,363,604	)			(155,556	)(2)			(16,519,160	)
TOTAL EQUITY			(1,401,307	)			(155,556	)			(1,556,863	)
TOTAL LIABILITIES AND STOCKHOLDER’S EQUITY		$	20,019,405				(155,556	)		$	19,863,849

(1)

Adjustment reflects valuation under re-measurement as per guidance of FASB ASC 805.

(2)

Adjustment reflects additional intangibles (See Note 8: Intangibles) under re-measurement as per guidance of FASB ASC 805.

 

  

		As originally reported at MAR 31, 2014				Measurement Period Adjustments				As Retrospectively Adjusted MAR 31, 2014
TOTAL OPERATING INCOME		$	165,299			$	—			$	165,299
OTHER (INCOME) / EXPENSE
Interest expense, net			125,209				—				125,209
Gain on bargain purchase of JD			(1,620,071	)			155,556	(1)			(1,464,515	)
TOTAL OTHER (INCOME) / EXPENSE			(1,494,862	)			155,556				(1,339,306	)
NET INCOME		$	1,660,161			$	(155,556	)		$	1,504,605
BASIC (LOSS) INCOME PER SHARE		$	0.53				—			$	0.48
DILUTED (LOSS) INCOME PER SHARE		$	0.50				—			$	0.45
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING  BASIC			3,131,381								3,131,381
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING  BASIC			3,330,090								3,330,090

(1)

Adjustment reflects additional intangibles (See Note 8: Intangibles) under re-measurement as per guidance of FASB ASC 805.

  

NOTE 16: Subsequent events

  

On April 9, 2015, the Company entered into four consulting agreements. Per the terms of the agreements the Company is to issue 10,000 shares, per agreement for a total issuance of 40,000 shares of the Company’s common stock at a value of $0.85 or $34,000.

 

On April 16, 2015, a holder of a note converted a portion of the note. The Company issued 33,333 shares at a value of $0.45 or $15,000.

 

On April 17, 2015, the Company entered into two consulting agreements. Per the terms of the agreements the Company is to issue 25,000 shares, per agreement for a total issuance of 50,000 shares of the Company’s common stock at a value of $1.01 or $50,500.

 

On April 23, 2015, a holder of a note converted a portion of the note. The Company issued 16,502 shares at a value of $0.606 or $10,000.

 

On April 27, 2015, the Company entered into a consulting agreement. Per the terms of the agreement the Company is to issue 150,000 shares of the Company’s common stock at a value of $0.85 or $127,500.

 

On May 1, 2015, the Company entered into a consulting agreement. Per the terms of the agreement the Company is to issue 30,000 shares of the Company’s common stock at a value of $0.55 or $16,500.

 

On May 5, 2015, a holder of a note converted a portion of the note. The Company issued 45,045 shares at a value of $0.222 or $10,000.

 

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

  

Safe Harbor for Forward-Looking Statements

 

The following discussion and analysis should be read together with our financial statements and the related notes appearing elsewhere in this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements reflecting our current expectations that involve risks and uncertainties. See “Forward-Looking Statements” for a discussion of the uncertainties, risks and assumptions associated with these statements. Actual results and the timing of events could differ materially from those discussed in our forward-looking statements as a result of many factors, including those set forth under “Risk Factors” and elsewhere in this prospectus.

 

References to the “Company”, “we”, “our” or “us” include National Automation Services, Inc. and its consolidated subsidiaries, including JD Field Services, Inc. unless the context otherwise requires. References to “NAS” are references solely to National Automation Services, Inc.

 

Executive Overview

 

NAS is a public holding company that intends to serve various market sectors. Currently our market concentration is in the petro-chemical industry. Our business plan takes action with expansion through carefully selected acquisitions. Our goal is to acquire companies with track records of long term, stable, and profitable operations. Each subsidiary operates as its own entity with current management retained. We believe this allows our management to focus on maintaining quality while increasing current levels of revenues and profitability.

 

On February 24, 2014, we entered into a purchase and sale agreement with JD Field Services (“JD”), our first acquisition in the petro-chemical industry. JD provides oilfield services to the oil and gas industry primarily focused around those activities that are related to the drilling, operation(s) and maintenance of the well-site. They are licensed in all states west of the Mississippi River including Alaska to do trucking, but are focused primarily in the Rocky Mountain Region. Oilfield services provided include heavy haul, water haul, and rig moving services as well as equipment, supplies, and specialty long hauling services. JD also provides oil and gas equipment rental services, hot shot, roustabout services and construction site development services. JD also operates a fabrication division that builds special-order oil and gas equipment and trucks for customers.

 

As this is the Company’s first acquisition in the oil and gas industry, management did not have the historical knowledge to be able to estimate its intangible or goodwill items properly and therefore we hired a valuation consultant to estimate and value any intangible assets that may have been in existence as of the date of acquisition. The valuation report provided to management details information as to the carrying value of certain intangible assets as a part of the purchase of JD in February 2014. Management has accepted the valuation report and we have determined in accordance with FASB ASC 805 there is an additional adjustment to record the additional purchase price allocation at February 24, 2014. The “measurement” period under ASC 805 allows for retrospective adjustment of the business combination for one year from the acquisition date, or when all necessary information for the adjustment is available. After the measurement period, there is no revision allowed for subsequent information that is unrelated to the facts and circumstances existing at the time of the acquisition, except for error correction. Management recognizes that it had this one year period to apply corrective changes from the bargain purchase to intangible and tangible asset value, and as such we have re-measured the intangible asset value and the gain on our bargain purchase which has been reflected in the fiscal year ended December 31, 2014 and for the three months ended March 31, 2014.

 

As previously reported, we signed Purchase and Sale Agreements with two additional companies set to close in the first quarter of 2015, MonDak Tank of Williston, ND and Devoe Construction located in the Denver area of Colorado. Although we are still interested in pursuing these acquisitions, both of the Purchase Sale Agreements have expired in January of 2015. We continue to evaluate recent events in market conditions, oil prices, and customer demand for services to determine what effect these recent events will have on each of their operations, the industry, and other identified acquisition targets in the near term, if any.

 

We continue to evaluate other companies for acquisition. The evaluation process is conducted by our acquisition board and the companies are evaluated on the following attributes: 

·

Geographic area

·

Synergies with our current core businesses

·

Niche marketing

·

Areas of expertise

·

Price/earnings ratio

  

 

·

Benefit: Customer base, proprietary products, technology, and talent base.

 

We use the following criteria to evaluate acquisition opportunities:

·

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. We consider the experience and skill of management and whether other talented personnel exist within the company or the local market.

·

Opportunity for growth of our industrial business: We look for businesses with an established base of industrial end users, to provide us an opportunity to increase synergism of our portfolio as well as market diversification.

·

Opportunity to purchase and assimilate technologies and infrastructures to further aid our operational, technological, and overhead objectives.

 

The criteria identified above are not intended to be exhaustive. Any evaluation relating to the merits of a particular business combination will be based, on the above factors as well as other considerations deemed relevant by our management. Accordingly, we may enter into a business combination that does not meet any or all of these criteria if we believe that it has the potential to create significant stockholder value.

 

Reverse Stock Split

 

On September 11, 2014, we amended our Certificate of Incorporation to implement a reverse stock split in the ratio of 1 share for every 200 shares of common stock. This amendment was approved and filed of record by the Nevada Secretary of State, effective September 11, 2014.  On December 11, 2014, FINRA approved the reverse stock split for the Company. All the relevant information relating to numbers of shares and share information contained in these consolidated financial statements has been retrospectively adjusted to reflect the reverse stock split for all periods presented.

 

Critical Accounting Policies

 

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. 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.

 

Prepaid Expenses

 

Amounts paid in advance for a benefit not yet received. This type of expense normally includes costs paid in one fiscal year (or period) that benefits a future year (or period).

 

Property, Plant and Equipment

 

As required by the Property, Plant and Equipment Topic FASB ASC, the Company is required to use a predetermined method in calculating depreciation expense. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, which is generally ten/fifteen years for heavy machinery, five years for vehicles, two to three years for computer software/hardware and office equipment and three to seven years for furniture, fixtures and office equipment. Leasehold improvements are amortized over the shorter of the lease term or the estimated useful lives. Upon the sale or retirement of property or equipment, the cost and related accumulated depreciation or amortization is removed from the Company’s balance sheet with the resulting gain or loss reflected in the Company’s results of operations. Maintenance costs are expensed as incurred. Due to the nature of the equipment, major repairs are capitalized as they reflect an adjustment to the overall value of the equipment and its useful life can be extended.

 

In evaluating the salvage value service equipment we use a standard of, Machinery and Equipment - Worth approximately 10 - 30% of purchase price after 10-15 years depending on the asset. Vehicles - Worth approximately 20% of purchase price after 10-15 years depending on the asset. These salvage values are based on industry averages for the type of machinery and equipment used in oilfield services.

 

Allowance for Doubtful Accounts

 

As required by the Receivables Topic of 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 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, we are required to use predetermined contract methods in determining the current value for revenue.

 

Service Contracts 

 

Service revenue is recognized on a completed project basis – we invoice the client when it has completed the services, thereby, ensuring the client is legally liable to us for payment of the invoice. On service contracts, revenue is not recognized until the services have been performed.

 

In all cases, revenue is recognized as earned by us. As the client becomes liable to us for services provided, as defined in the agreement, the client is then invoiced and revenue is accordingly recognized and recorded.  We do not recognize or record any revenues for which we do not have a legal basis for invoicing or legally collecting.

 

Derivative Financial Instruments

 

We evaluate our convertible instruments, options, warrants or other contracts to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for under FASB ASC Topic 815, “Derivatives and Hedging.” The result of this accounting treatment is that the fair value of the derivative is marked-to-market each balance sheet date and recorded as a liability. In the event that the fair value is recorded as a liability, the change in fair value is recorded in the statement of operations as other income (expense). Upon conversion or exercise of a derivative instrument, the instrument is marked to fair value at the conversion date and then that fair value is reclassified to equity. Equity instruments that are initially classified as equity that become subject to reclassification under FASB ASC Topic 815 are reclassified to liabilities at the fair value of the instrument on the reclassification date. We analyzed the derivative financial instruments (the Convertible Notes), in accordance with FASB ASC 815. The objective is to provide guidance for determining whether an equity-linked financial instrument is indexed to an entity’s own stock. This determination is needed for a scope exception which would enable a derivative instrument to be accounted for under the accrual method. The classification of a non-derivative instrument that falls within the scope of FASB ASC 815-40-05 “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock” also hinges on whether the instrument is indexed to an entity’s own stock. A non-derivative instrument that is not indexed to an entity’s own stock cannot be classified as equity and must be accounted for as a liability. There is a two-step approach in determining whether an instrument or embedded feature is indexed to an entity’s own stock. First, the instrument’s contingent exercise provisions, if any, must be evaluated, followed by an evaluation of the instrument’s settlement provisions. We utilized a binomial model that values the derivative liability within the notes based on a probability weighted discounted cash flow model. We utilized the fair value standard set forth by the Financial Accounting Standards Board, defined as the amount at which the assets (or liability) could be bought (or incurred) or sold (or settled) in a current transaction between willing parties, that is, other than in a forced or liquidation sale.

 

We have determined that the conversion features of our debt instruments are not derivative instruments because they are conventional convertible debt.

 

 

Summary of Consolidated Results of Operations

 

A:            Three Months Ended March 31, 2015 compared to the Three Months Ended March 31, 2014

 

		March 31,
		(unaudited)
		2015				2014				% Change
Revenue		$	5,392,233			$	2,004,606				169	%
Less: returns and allowances			—				(13,027	)			(100	)%
Total net revenue			5,392,233				1,991,579				171	%
Cost of revenue			4,284,923				1,580,162				171	%
Total gross profit			1,107,310				411,417				169	%
Operating expenses
Selling, general and administrative expenses			195,685				263,866				(26	)%
Professional fees and related expenses			168,976				21,878				672	%
Forgiveness of accrued officer compensation			—				(39,626	)			(100	)%
Total operating expenses			364,661				246,118				48	%
Operating income			742,649				165,299				349	%
Change in fair value of derivative liabilities			(717,375	)			—				100	%
Gain on extinguishment of debt			—				(1,464,515	)			100	%
Interest expense, net			1,730,459				125,209				1,282	%
Total other expense (income)			1,013,084				(1,339,306	)			176	%
Net (loss) income		$	(270,435	)		$	1,504,605				(118	)%

 

Revenue

 

Revenues primarily consisted of oilfield services/oilfield hauling services revenue. Revenue increased by $3,387,627 (net of returns and allowances) or 171% during the three months ended March 31, 2015 to $5,392,233 compared to $1,991,579 during the three months ended March 31, 2014. Revenues derived exclusively from JD Field Services (“JD”) operations which we acquired on February 24, 2014 and increased primarily due to three full months of JD operations as of March 31, 2015, compared to one month in the period ended March 31, 2014.

 

Cost of Revenue

 

Costs of revenue consist of labor and overhead for services provided by JD. Cost of revenue for the three months ended March 31, 2015 increased by $2,704,761 or 171% to $4,284,923 compared to $1,580,162 during the three months ended March 31, 2014. Cost of revenue exclusively from JD’s operations which we acquired on February 24, 2014 and increased primarily due to three full months of JD operations as of March 31, 2015, compared to one month in the period ended March 31, 2014.

 

Operating Expenses

 

Selling, general and administrative expense: Selling, general and administrative expenses (“SG&A”) consist of sales, general and administrative operating expenses. It also consists of payroll expenses for officer personnel. SG&A for the three months ended March 31, 2015 decreased by $68,181 or 26% to $195,685 compared to $263,866 during the three months ended March 31, 2014. The decrease was primarily attributable to reduction of general and administrative operating expenses from our subsidiary JD.

 

Professional fees and related expenses: Professional fees and related expenses consist of accounting, legal and related consulting fees associated with our ongoing business strategy efforts. Professional fees and related expenses for the three months ended March 31, 2015 increased by $147,098 or 672% to $168,976 compared to $21,878 during the three months ended March 31, 2014. The increase was primarily attributable to increases in consulting, accounting and legal fees.

 

Forgiveness of accrued officer compensation: Forgiveness of accrued officer compensation consists of accrual of compensation owed to our officers/management that has been forgiven by management. Forgiveness of accrued officer compensation for the three months ended March 31, 2015 was $0 which decreased by $39,626 or (100) % compared to $39,626 during the three months ended March 31, 2014.

 

 

Other Expense

 

Interest expense: Interest expense consists of interest on our outstanding debt, for the three months ended March 31, 2015, we had an increase in interest expense by $1,605,250, or 1,282%, to $1,730,459, compared to $125,209 during the three months ended March 31, 2014. The increase was primarily attributable to the increase in debt from our subsidiary JD, which we acquired on February 24, 2014, and increases in debt discount due to our convertible notes.

 

Net Income

 

As a result of the foregoing, we had net loss of $(270,435) for the three months ended March 31, 2015 compared to a net income of $1,504,605 for the three months ended March 31, 2014.

 

Liquidity and Capital Resources/ Plan of Operation for the Next Twelve Months

 

Liquidity is the ability of a company to generate funds to support its current and future operations, satisfy its obligations, and otherwise operate on an ongoing basis. Significant factors in the management of liquidity are funds generated by operations, levels of accounts receivable and accounts payable and capital expenditures.

 

Our principal liquidity requirements are to finance current operations, fund capital expenditures, including any future acquisitions, and to service our debt. Since our acquisition of JD, our principal source of liquidity has been cash generated by JD’s operations. Our other sources of liquidity have been funds generated from debt and equity issuances of our securities. We believe that cash generated from these sources will be sufficient to meet our short-term working capital requirements and long-term capital expenditure requirements for at least the next twelve months.

 

For the three months ended March 31, 2015, we had a working capital deficit of $9,802,280 and a stockholders’ deficit of $1,742,577, which raises substantial doubt regarding our ability to continue as a going concern. The opinion of our independent registered public accounting firm on our audited financial statements as of and for the year ended December 31, 2014 contains an explanatory paragraph regarding substantial doubt about our ability to continue as a going concern.

 

With our acquisition of JD, our revenues increased to $5,392,233 for the three months ended March 31, 2015 from $1,991,579 during the same period in 2014. This 171% increase over our previous period is part of our overall strategy of growth through our acquisition model.

 

To help recapitalize the Company, we are pursuing a four-step approach that we expect to continue during 2015 that includes the following: 

·

A 200:1 reversal stock split (which was effective December 11, 2014);

·

Applying to up-list to a national securities exchange;

·

Seeking out further of acquisition candidates;

·

Refinancing our balance sheet;

  

In addition, we have raised capital through the issuance of convertible notes which has resulted in approximately $409,250 of additional capital from January 2015 through the date of this filing.

 

Our ability to continue in our acquisition strategy and purchase established businesses with a proven track record is vital to the overall growth strategy of the Company. We continue to seek out 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.

 

The following table summarizes our cash flows during the three months ended March 31, 2015 and 2014 (rounded). 

		MAR 31, 2015				MAR 31, 2014
Net cash (used) by operating activities		$	672,100			$	(21,400	)
Net cash (used) for investing activities		$	—			$	(400	)
Net cash (used) provided by financing activities		$	(631,000	)		$	16,600

 

Net Cash Used by Operating Activities

 

Net cash provided by operating activities during the three months ended March 31, 2015 was $672,100 compared to net use $(21,400) during the three months ended March 31, 2014. The increase in net cash used in operating activities was primarily due to three full months of JD operations as of March 31, 2015, compared to one month in the prior comparable period.

 

 

Net Cash Used for Investing Activities

 

Net cash used by investing activities during the three months ended March 31, 2015 was $0 compared to $(400) during the three months ended March 31, 2014.

 

Net Cash (Used) Provided by Financing Activities

 

Net cash used by financing activities during the three months ended March 31, 2015 was $(631,000) compared to cash provided by financing activities of $16,600 during the three months ended March 31, 2014. This is attributable to payments to outstanding debt obligations.

 

We expect that we will need to increase our liquidity and capital resources in order to maintain the profitability of JD and execute our business strategy of acquiring new businesses.

 

Because the outcome of our expansion activities is highly uncertain, we cannot reasonably estimate the actual amounts necessary to successfully complete future acquisitions. In addition, other unanticipated costs may arise. As a result of these and other factors currently unknown to us, we will need to seek additional funds, through public or private equity or debt financings or other sources, such as strategic partnerships and alliances. In addition, we may seek additional capital due to favorable market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans. If we issue additional equity or debt securities, stockholders may experience additional dilution or the new equity securities may have rights, preferences or privileges senior to those of existing holders of our common stock. Additional funds may not be available when we need them, on terms that are acceptable to us, or at all. If adequate funds are not available to us on a timely basis, we may be required to delay, limit, reduce or terminate our expansion activities or other activities.

 

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.

 

Item 3.  Quantitative and Qualitative Disclosures About Market Risk.

 

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

We have adopted and maintain disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to ensure that information required to be disclosed in our reports under the Exchange Act, is recorded, processed, summarized and reported within the time periods required under the SEC’s rules and forms and that the information is gathered and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure.

 

As required by SEC Rule 15d-15(b), our Chief Executive Officer and Chief Financial Officer carried out an evaluation under the supervision and with the participation of our management, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 15d-14 as of the end of the period covered by this report. Based on the foregoing evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are not effective in timely alerting them to material information required to be included in our periodic SEC filings and to ensure that information required to be disclosed in our periodic SEC filings is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure about our internal control over financial reporting.

 

 

Material Weaknesses in Internal Control over Financial Reporting.

 

We identified the following material weaknesses that existed at March 31, 2015 in addition to the material weaknesses identified in our Annual Report on Form 10-K for the year ended 2014. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.

 

We did not design and maintain effective controls over the accounting for business combinations. In particular we did not perform adequate review of the accounting and measurement of certain intangible assets acquired through the purchase of JD, resulting in a restatement of previously issued unaudited condensed consolidated financial statements as of March 31, 2015 and for the three-month periods ended March 31, 2015.

 

In addition, we did not design and maintain effective controls over the accounting for convertible debt. In particular, we did not perform adequate review of the accounting and measurement of the debt conversion feature of derivative liabilities in connection with issuance of certain convertible debt, resulting in a restatement of previously issued audited consolidated financial statements as of and for the year ended December 31, 2014 and the unaudited condensed consolidated financial statements as set forth in this Amended Filing.

 

Plan for Remediation of the Material Weaknesses

 

We intend to remedy our material weakness with regard to documentation of internal control procedures by conducting a review and engaging management to design and implement internal control procedures which will support the current controls and reduce the risk inherent in our current control structure. We also intend to remedy our material weakness with regard to insufficient segregation of duties by hiring additional employees in order to segregate duties in a manner that establishes effective internal controls once resources become available.

 

The process of designing and implementing an effective financial reporting system 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 financial reporting system that is adequate to satisfy our reporting obligations. As we continue to evaluate and take actions to improve our internal controls over financial reporting, we may determine to take additional actions to address control deficiencies or determine to modify certain of the remediation measures described above. We cannot assure you that the measures we have taken to date, or any measures we may take in the future, will be sufficient to remediate the material weaknesses we have identified or avoid potential future material weaknesses.

 

Changes in Internal Controls

 

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 quarter ended March 31, 2015, 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

 

None.

 

Item 1A. Risk Factors.  

 

Information regarding risk factors appears in Part I, “Item 1A. Risk Factors,” in our Annual Report on Form 10-K for the year ended December 31, 2014 and in certain of our other filings with the SEC. A material change to the risk factors that appear in Part I, “Item 1A. Risk Factors,” in our Annual Report on Form 10-K for the year ended December 31, 2014 is set forth below:

 

 

We are restating certain prior condensed consolidated financial statements, which may lead to additional risks and uncertainties, including shareholder litigation and governmental investigations, events of default, loss of investor confidence, and negative impacts on our stock price.

 

As discussed in the Explanatory Note in this amended 10-Q/A and in Note 2 to the unaudited condensed consolidated financial statements included in Part I, Item 1 in this amended 10-Q/A, we are restating our unaudited condensed consolidated financial statements for the three months ended March 31, 2015 due to the incorrect valuation of certain intangible assets of our subsidiary, JD, that we acquired in February 2014 and due to incorrect accounting of certain convertible notes that we entered into. As a result of these events, we have become subject to a number of additional risks and uncertainties, including substantial unanticipated costs for accounting and legal fees in connection with or related to the restatement and potential shareholder litigation and governmental investigations. We will incur additional substantial defense and investigation costs regardless of the outcome of any such litigation or governmental investigation. Likewise, such events may cause a diversion of our management’s time and attention. If we do not prevail in any such litigation or governmental investigation, we could be required to pay substantial damages or settlement costs. In addition, the fact that we have completed a restatement may lead to the triggering of events of default under existing convertible notes, a loss of investor confidence and have negative impacts on the trading price of our common stock.

 

If we are unable to maintain effective internal control over financial reporting in the future, the accuracy and timeliness of our financial reporting may be adversely affected.

 

Maintaining effective internal control over financial reporting is necessary for us to produce reliable financial statements. In connection with the restatement of our unaudited consolidated financial statements in this amended 10-Q/A, management, including our Chief Executive Officer and Chief Financial Officer, reassessed the effectiveness of our internal control over financial reporting as of March 31, 2015. Based on this reassessment management has concluded that we continue to not maintain effective internal control over financial reporting as of March 31, 2015 because we did not have adequate controls in place to review the inputs and results of our work of specialists and the identification of events and changes in circumstances that may indicate potential impairment of intangible assets, and derivative accounting for our debt, in addition to the reasons set forth in our Annual Report on Form 10-K for the year ended December 31, 2014. These control deficiencies resulted in the restatement of our unaudited condensed consolidated financial statements as of March 31, 2015, as discussed in further detail in the Explanatory Note in this amended 10-Q/A and Note 2 to the unaudited condensed consolidated financial statements included in Part I, Item 1 in this amended 10-Q/A. We are actively engaged in developing and implementing remediation plans designed to address this and other material weaknesses. If we are unable to effectively remediate these material weaknesses or we are otherwise unable to maintain effective internal control over financial reporting, it could result in another material misstatement of our financial statements that would require a restatement, investor confidence in the accuracy and timeliness of our financial reports may be impacted, and the market price of our common stock could be negatively impacted.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

None.

 

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

 The following disclosure would have otherwise been filed on Form 8-K under the heading “Item 3.02 Unregistered Sales of Equity Securities”.

 

Conversion of Notes

 

Between April 17, 2015 and May 6, 2015, holders of convertible notes converted an aggregate principal and interest amount of $ 35,000 into an aggregate of 94,880 shares of common stock.

 

 

The securities above were offered and sold pursuant to an exemption from the registration requirements under Section 4(a)(2) of the Securities Act of 1933, as amended, since, among other things, the transactions did not involve a public offering and the securities were acquired for investment purposes only and not with a view to or for sale in connection with any distribution thereof.

 

Consulting Agreement

 

Between April 13, 2015 and May 5, 2015, we issued an aggregate of 270,000 shares of our common stock to consultants in lieu of cash consideration.

 

The securities above were offered and sold pursuant to an exemption from the registration requirements under Section 4(a)(2) of the Securities Act of 1933, as amended, since, among other things, the transactions did not involve a public offering and the securities were acquired for investment purposes only and not with a view to or for sale in connection with any distribution thereof.

 

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.
101		The following financial statements from the Company’s Quarterly Report on form 10-Q for the quarter ended March 31, 2015 are formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) Consolidated Statement of Stockholders’ Deficit, (iv) the Consolidated Statements of Cash Flow, and (iv) Notes to Consolidated Financial Statements.

 

 

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: September 23, 2015
	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: Chief Financial Officer
		(Principal Financial Officer)