UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended June 30, 2016

 

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

 

For the transition period from ____________ to____________

 

Commission File No. 000-49655

 

NAC GLOBAL TECHNOLOGIES, INC.

(Exact name of registrant as specified in its charter)

 

Nevada		87-0678927
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

 

4720 Salisbury Road

Jacksonville, FL 32256

(Address of principal executive offices)

 

(904) 493-6496

(Registrant’s telephone number, including area code)

 

n/a

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒     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 ☒     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 definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☒
(Do not check if a smaller reporting company)

 

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

 

As of August 12, 2016, there were 119,412,014 shares of common stock, $0.001 par value, of the registrant issued and outstanding.

 

 

 

NAC GLOBAL TECHNOLOGIES, INC.

QUARTERLY REPORT ON FORM 10-Q

For the quarter ended March 31, 2016

 

	Page Number
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements	3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	14
Item 3. Quantitative and Qualitative Disclosures About Market Risk	17
Item 4. Controls and Procedures	17
PART II - OTHER INFORMATION
Item 1. Legal Proceedings	18
Item 1A. Risk Factors	18
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	18
Item 3. Defaults Upon Senior Securities	18
Item 4. Mine Safety Disclosures	18
Item 5. Other Information	18
Item 6. Exhibits	19
SIGNATURES	20

 

 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

NAC GLOBAL TECHNOLOGIES, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

		June 30,				December 31,
		2016				2015
ASSETS
Current assets:
Cash		$	24,725			$	16,674
Accounts receivable, net of allowance of doubtful accounts of $11,003 and $0			88,910				88,150
Inventories			31,705				33,348
Other current assets			-				1,500
Total current assets			145,340				139,672
Property and equipment, net			559				838
Total assets		$	145,899			$	140,510
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Accounts payable		$	718,615			$	648,983
Accounts payable - related party			166,699				111,358
Accrued expenses			221,877				99,103
Customer deposits			20,920				29,552
Short term debt			47,515				57,844
Short-term debt - related parties			331,500				339,500
Derivative liability			-				2,017,903
Total current liabilities			1,507,126				3,304,243
Long-term convertible debt, net of discount of $0 and $2,090			520,001				521,033
Stockholders' deficit
Common stock, $0.001 par value;  150,000,000 shares authorized; 36,412,014 and 35,662,014 shares issued and outstanding			36,412				35,662
Additional paid-in capital			788,664				289,892
Accumulated deficit			(2,706,304	)			(4,010,320	)
Total stockholders' deficit			(1,881,228	)			(3,684,766	)
Total liabilities and stockholders' deficit		$	145,899			$	140,510

 

See accompanying notes to unaudited consolidated financial statements.

 

 

NAC GLOBAL TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

		Three months ended June 30,								Six months ended June 30,
		2016				2015				2016				2015
Revenues
Revenues - third parties		$	122,868			$	192,207			$	227,016			$	306,643
Revenues - related parties			11,340				4,678				11,340				13,323
Total Revenues			134,208				196,885				238,356				319,966
Cost of goods sold			97,578				135,889				163,822				227,286
Gross profit			36,630				60,996				74,534				92,680
Operating expenses
Selling, general and administrative expenses			145,910				201,823				270,970				465,697
Net loss from operations			(109,280	)			(140,827	)			(196,436	)			(373,017	)
Other income			-				1,139				-				1,139
Interest expense			(13,444	)			(207,711	)			(39,679	)			(374,886	)
Loss on debt extinguishment			-				(9,047	)			-				(43,925	)
Derivative gain (loss)			935,344				180,625				1,540,131				470,136
Net income (loss)		$	812,620			$	(175,821	)		$	1,304,016			$	(320,553	)
Net income (loss) per share - Basic		$	0.02			$	(0.01	)		$	0.04			$	(0.01	)
Net income (loss) per share - Diluted			0.01			$	(0.01	)			0.02			$	(0.01	)
Weighted average shares outstanding - Basic			36,094,706				25,511,265				36,094,706				25,393,498
Weighted average shares outstanding - Diluted			68,206,081				25,511,265				67,888,773				25,393,498

 

See accompanying notes to unaudited consolidated financial statements.

 

 

NAC GLOBAL TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

		Six months ended June 30,
		2016				2015
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)		$	1,304,016			$	(320,553	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities			-
Stock compensation expense			21,750				90,000
Derivative gain			(1,540,131	)			(470,136	)
Loss on debt extinguishment			-				43,925
Bad debt expense			11,003				-
Amortization of debt discounts and deferred financing costs			2,090				293,856
Depreciation expense			279				280
Changes in operating assets and liabilities
Accounts receivable			(11,763	)			(19,460	)
Inventory			1,643				(3,176	)
Prepaid expenses			1,500				16,500
Accounts payable			69,632				166,963
Accounts payable - related party			55,341				(66,122	)
Accrued expenses			122,774				112,385
Customer deposits			(8,632	)			36,566
Net cash provided by (used in) operating activities			29,502				(118,972	)
CASH FLOWS FROM INVESTING ACTIVITIES
Net cash provided by (used in) investing activities			-				-
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term debt			-				16,176
Payments of short-term debt			(10,329	)			(14,461	)
Payments of short-term debt - related parties			(8,000	)			(10,000	)
Proceeds from convertible debt			-				81,000
Payments of convertible debt			(3,122	)			-
Net cash provided by (used in) financing activities			(21,451	)			72,715
NET INCREASE (DECREASE) IN CASH			8,051				(46,257	)
CASH AT BEGINNING OF YEAR			16,674				8,224
CASH AT END OF PERIOD		$	24,725			$	(38,033	)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid		$	14,815			$	11,926
Income taxes paid			-				-
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVTIES
Debt discount resulting from derivative liability		$	-			$	270,116
Reclassification of derivative warrants to equity			477,772				-

 

See accompanying notes to unaudited consolidated financial statements.

 

 

NAC GLOBAL TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 1 - BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Operations

 

NAC Global Technologies, Inc. (referred to herein as “we”, “our”, and “NAC Global”) is an engineering services, R&D, and manufacturing company. We have one wholly-owned subsidiary, NAC Drive Systems, Inc. (“NAC”; and together with NAC Global, the “Company”), a manufacturer and supplier of harmonic gearing technology (“HGT”) that operates in the robotics, automation, and medical industries amongst others. HGT is a premier technology in industries where very high precision, long-life, compactness, light weight, and reliability are important factors. In addition to robotics applications, we see HGT use expanding across multiple industries and geographies including aerospace, energy, and defense. We are partnered with CTKM Beijing Harmonic Drive, LTD., the national supplier of HGT to the China Space Agency. We manufacture our HGT components in Beijing, China, and perform final assembly and quality control in Port Jervis, New York. Our corporate headquarters is located in Jacksonville, Florida.

 

Basis of Presentation

 

The accompanying unaudited interim consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States (“US GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by US GAAP for complete financial statements and should be read in conjunction with the audited financial statements and notes thereto contained in the Company’s Form 10-K (the “Form 10-K”) filed with the Securities and Exchange Commission on May 16, 2016. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results to be expected for future quarters or for the full year. Notes to the financial statements which substantially duplicate the disclosure contained in the audited financial statements for fiscal 2015 as reported in the Form 10-K have been omitted. 

 

Principles of consolidation

 

The consolidated financial statements include the accounts of NAC Global and its wholly-owned subsidiary, NAC. All intercompany accounts and transactions are eliminated in consolidation.

 

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 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.

 

Concentration of risks

 

The Company maintains its cash primarily in one financial institution. The balance, at times may exceed federally insured limits. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant risk to cash.

 

Three customers accounted for approximately 25%, 14%, and 14%, respectively, of the Company’s revenues for the six months ended June 30, 2016. Two customers accounted for approximately 30%, and 10%, respectively, of the Company’s revenues for the six months ended June 30, 2015. In addition, these customers accounted for 67% and 21% of the Company’s accounts receivable balance at June 30, 2016 and June 30, 2015, respectively.

 

 

												Accounts
				Customer				% of Total				Receivable
Six Months Ended June 30, 2016		Customer		Sales				Revenue				(AR)				% of AR
		1		$	59,940				25	%		$	25,920				29	%
		2		$	32,942				14	%		$	23,400				12	%
		3		$	32,760				14	%		$	10,860				26	%
				$	125,642				53	%		$	60,180				67	%

 

												Accounts
				Customer				% of Total				Receivable
Six Months Ended June 31, 2015		Customer		Sales				Revenue				(AR)				% of AR
		1		$	97,275				30	%			23,403				21	%
		2		$	32,760				10	%		$	0				0	%
				$	130,035				40	%		$	23,403				21	%

 

The Company sells to both domestic and international customers. For the six months ended June 30, 2016 and 2015, revenues generated through transactions with international customers amounted to 0% and approximately 15% (10% Hong Kong, 5% other), respectively, of the Company’s total revenues.

 

NAC currently purchases all of its drive components from one supplier. The loss of this supplier could cause delays and a possible loss of sales which would affect operating results adversely.

 

Fair value measurements

 

The carrying amounts reported in the consolidated balance sheets for accounts receivable and payables, inventory and debt are a reasonable estimate of fair value because of the short period of time between the origination of such instruments and their expected realization and, if applicable, the stated rate of interest is equivalent to rates currently available.

 

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value maximize the use of observable inputs and minimize the use of unobservable inputs. The Company utilizes a three-level valuation hierarchy for disclosures of fair value measurements, defined as follows:

 

Level 1: inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

 

Level 2: inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the assets or liability, either directly or indirectly, for substantially the full term of the financial instruments.

 

Level 3: inputs to the valuation methodology are unobservable and significant to the fair value.

 

The following table presents the derivative financial instruments, the Company’s only financial liabilities measured and recorded at fair value on the Company’s consolidated balance sheets on a recurring basis, and their level within the fair value hierarchy as of June 30, 2016 and December 31, 2015.

 

As of June 30, 2016

Amount

Level 1

Level 2

Level 3

Embedded conversion derivative liability

$

-

-

-

$

-

Warrant derivatives

-

-

-

-

$

-

$

-

$

-

$

-

 

 

As of December 31, 2015		Amount				Level 1				Level 2				Level 3
Embedded conversion derivative liability		$	791,563				-				-			$	791,563
Warrant derivatives			1,226,340				-				-				1,226,340
		$	2,017,903			$	-			$	-			$	2,017,903

 

The following table provides a summary of the changes in fair value, including net transfers in and/or out, of the derivative financial instruments, measured at fair value on a recurring basis using significant unobservable inputs:

 

Balance at December 31, 2015		$	2,017,903
Unrealized derivative gain included in other expenses			(1,540,131	)
Reclassification of derivative warrants to equity			(477,772	)
Balance at June 30, 2016		$	-

 

The fair value of the derivative liability is calculated at the time of issuance and the Company records a derivative liability for the calculated value. The derivative liability is marked to market at each reporting period and changes in the fair value of the derivative liability are recorded in other income (expense) in the consolidated statements of operations.

 

The following are the assumptions used for derivative instruments valued using the Black-Scholes option pricing model:

 

		At April 25,				At December 31,
		2016				2015
Market value of stock on measurement date		$	0.0182			$	0.04
Risk-free interest rate			0.19 - 1.38	%			0.65 - 1.76	%
Dividend yield			0	%			0	%
Volatility factor			174 – 263	%			174 - 228	%
Term			0.71 - 4.46 years				0.02 - 4.78 years

 

Basic and diluted net income (loss) per share

 

Net income (loss) per share is calculated by dividing the net income (loss) available to common stockholders by the weighted average number of shares outstanding during the period. Diluted earnings per share reflect the potential dilution of securities that could share in earnings of an entity. Diluted income per share reflects the potential dilution that would occur if outstanding stock options and warrants were exercised utilizing the treasury stock method. In a loss year, dilutive common equivalent shares are excluded from the loss per share calculation as the effect would be anti-dilutive. 

 

 

A reconciliation of the components of basic and diluted net income (loss) per common share for the three months ended June 30, 2016 and June 30, 2015 is presented in the tables below:

 

		2016												2015
		Income (Loss) $				Weighted Average Common Shares Outstanding				Per Share $				Income (Loss) $				Weighted Average Common Shares Outstanding				Per Share $
Basic:
Income (loss) attributable to common stock			812,620				36,412,014				0.02				(175,821	)			25,511,265				(0.01	)
Effective of Dilutive Securities:
Convertible debt			(227,244	)			31,794,067				–				–				–				–
Diluted:
Income (loss) attributable to common stock, including assumed conversions			585,376				68,206,081				0.02				(144,732	)			25,272,729				(0.01	)

 

A reconciliation of the components of basic and diluted net income (loss) per common share for the six months ended June 30, 2016 and June 30, 2015 is presented in the tables below:

 

		2016												2015
		Income (Loss) $				Weighted Average Common Shares Outstanding				Per Share $				Income (Loss) $				Weighted Average Common Shares Outstanding				Per Share $
Basic:
Income (loss) attributable to common stock			1,304,016				36,094,706				0.04				(320,553	)			25,393,498				(0.01	)
Effective of Dilutive Securities:
Convertible debt			(246,936	)			31,794,067				–				–				–				–
Diluted:
Income (loss) attributable to common stock, including assumed conversions			1,057,080				67,888,773				0.02				(144,732	)			25,272,729				(0.01	)

 

 

Reclassifications

 

Certain amounts in the consolidated financial statements of the prior period were reclassified to conform with the current period financial statement presentation.

 

Recently adopted accounting pronouncements

 

The Company has implemented all new accounting pronouncements that are in effect and that may impact its financial statements and does not believe that there are any other new pronouncements that have been issued that might have a material impact on its financial position or results of operations.

 

NOTE 2 - GOING CONCERN

 

The accompanying financial statements have been prepared on a going concern basis which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the financial statements, during the three months ended June 30, 2016, the Company incurred operating losses of $109,279 and had a working capital deficit of $1,361,786. If the Company is unable to generate profits and is unable to continue to obtain financing for its working capital requirements, it may have to curtail its business sharply or cease business altogether. These factors raise substantial doubt about the Company’s ability to continue as a going concern.

 

The consolidated financial statements do not include any adjustment relating to the recoverability and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

 

The Company is taking certain steps to provide the necessary capital to continue its operations. These steps include, but are not limited to: (1) focus on sales to minimize the need for capital at this stage; (2) raise additional equity or debt financing; (3) merge with and/or acquire a larger operating company to increase revenues and improve cash flow; and (4) continue focus on reductions in cost where possible.

 

NOTE 3 - DEBT

 

Short-term debt

 

As of June 30, 2016, and December 31, 2015, the Company had a term loan with a third party financial institution for $124,000, with an outstanding balance of $47,515 and $57,844, respectively. The note is subject to annual interest of 4.5%. The term loan is collateralized by all of the assets of NAC and Conic Systems, Inc. (“Conic”), an entity owned by Vincent Genovese, the Company’s Chief Executive Officer (“CEO”), and a guarantee issued by Mr. Genovese. The Company made repayments on the term loan amounting to $10,329 during the six months ended June 30, 2016.

 

Debt with related parties

 

As of June 30, 2016 and December 31, 2015, the Company has an outstanding non-interest bearing loan from Mr. Genovese, its CEO, amounting to $6,500 and $14,500 respectively. The Company also obtained a loan from a family member of Mr. Genovese amounting to $200,000, which is subject to annual interest of 3% and has an outstanding balance of $140,000 as of June 30, 2016 and December 31, 2015. Both loans have no stated maturity dates.

  

As of both June 30, 2016 and December 31, 2015, the Company has outstanding loans with Conic and a director of the Company amounting to $140,000 and $25,000, respectively. The loan with Conic is non-interest bearing while the loan with the director is subject to annual interest of 12%. Both loans are currently past due.

 

In January and April 2014, the Company obtained two non-interest bearing loans from a shareholder of the Company, each amounting to $10,000. The loans are currently past due and have an outstanding aggregate balance of $20,000 as of June 30, 2016 and December 31, 2015. 

 

 

Convertible debt

 

A summary of the activity of our convertible notes for the three months ended June 30, 2016, is shown below:

 

Balance at December 31, 2015		$	521,033
Repayments of convertible debt			(3,122	)
Amortization of debt discounts			2,090
Balance at June 30, 2016		$	520,001

 

On April 29, 2014, we completed a private offering of a 12% Convertible Promissory Note in the principal amount of $375,000 (the "12% Convertible Note") with an institutional investor for total net proceeds to the Company of $365,000, after deducting placement agent fees and other expenses. On September 23, 2015, the 12% Convertible Note was amended and restated to reflect certain modifications, including a modified principal amount of $438,123. As of March 31, 2016, the principal amount outstanding on the 12% Convertible Note was $420,794. In April 2016, the 12% Convertible Note was further amended to extend the maturity date to December 31, 2018, with monthly payments of $5,000, commencing in July 2017. Additionally, the note holder waived voluntary conversion rights through January 1, 2018 and the 12% Convertible Promissory Note was amended to allow prepayment in part or whole at any time without penalty. As of June 30, 2016, the principal outstanding balance under the note was $420,001.

 

On January 8, 2015, we completed a private offering of a 3% Original Issue Discount Convertible Promissory Note in the principal amount of $109,000 (the "January 2015 12% Convertible Note") and 21,800 warrants to purchase shares of the Company's common stock with an accredited investor, for total net proceeds to us of $91,000 after deducting placement agent fees and expenses. The January 2015 12% Convertible Note was amended and restated to modify the aggregate principal amount to $100,000.  As of March 31, 2016, the principal amount outstanding on the January 2015 12% Convertible Note was $100,000. In April 2016, the January 2015 12% Convertible Note was further amended to extend the maturity date to December 8, 2018, with monthly payments of $1,000, commencing in July 2016. Additionally, the note holder waived voluntary conversion rights through January 1, 2018 and the January 2015 12% Convertible Note was amended to allow prepayment in part or whole at any time without penalty. As of June 30, 2016, the principal outstanding balance under the note was $100,000.

 

NOTE 4 - EQUITY

 

Common stock

 

On March 17, 2016, the Company issued 750,000 common shares to a consultant for management advisory services. The fair value of these shares amounted to $21,750 and was recognized as stock compensation expense for the six months ended June 30, 2016.

 

Warrants

 

During the six months ended June 30, 2016, the Company granted no new warrants and no warrants expired.

 

As of June 30, 2016, the Company had outstanding warrants to purchase an aggregate of 28,771,800 shares of the Company’s common stock, which have a weighted average exercise price of $0.04, a weighted average remaining term of 4.27 years, and an intrinsic value of $23,750.

 

NOTE 5 - RELATED PARTY TRANSACTIONS

 

The Company recognized revenues for products sold to Conic, a company owned by our CEO, Mr. Genovese, amounting to $11,340 and $13,323 for the six months ended June 30, 2016 and June 30, 2015, respectively. As of June 30, 2016 and December 31, 2015, outstanding accounts receivable from Conic for such sales were $0. 

 

Conic also bills the Company for certain expenses related to warehousing, shipping and receiving, packing, quality control, drafting, testing, machining, equipment use, payroll and employee benefits, rent and occupancy costs, advertising, travel expenses and other expenses paid for by Conic on behalf of the Company. Payroll and employee benefits billed to the Company were for personnel who spend a percentage of their time on the Company’s operations. The administrative and warehouse facilities used by the Company are owned by Mr. Genovese and the allocable cost related to the use of these facilities are likewise charged to the Company by Conic. For the six months ended June 30, 2016 and June 30, 2015, Conic billed the Company fees of $56,234 and $81,748, respectively. The outstanding amount payable to Conic related to the above expenses amounted to $166,699 and $111,358 as of June 30, 2016 and December 31, 2015, respectively.

 

 

NOTE 6 - SUBSEQUENT EVENTS

 

On July 19, 2016, NAC Global Technologies, Inc., entered into a share exchange agreement (the “Exchange Agreement”) by and among the (1) Company, (2) Swiss Heights Engineering S.A., a Switzerland company (“Swiss Heights”), and (3) the shareholders of Swiss Heights (the “Selling Shareholders”). Pursuant to the terms of the Exchange Agreement, upon the consummation of the transactions contemplated by the Exchange Agreement (the “Closing”), the Selling Shareholders will transfer to the Company all of the shares of Swiss Heights held by such Selling Shareholders in exchange for (1) the issuance of 83,000,000 shares of the Company’s common stock, par value $0.001 per share (the “Exchange Shares”), and (2) warrants to purchase up to a total of 737,341,257 shares of the Company’s common stock, at an exercise price of $0.000001 per share (the “Warrants”). The foregoing share exchange closed on August 12, 2016.

 

Following the share exchange, Swiss Heights became the wholly-owned subsidiary of the Company and the Selling Shareholders own approximately 70% of the issued and outstanding shares of the Company’s common stock and 93% of the Company’s common stock on a fully-diluted basis (including outstanding warrants), based on the outstanding securities and convertible securities of the Company as of the date of the Exchange Agreement and those securities and convertible securities to be extinguished pursuant to the provisions thereof.

 

Upon the Closing, the board of directors of the Company consisted of Mr. Vincent Genovese and the Selling Shareholders, Mr. Antonio Monesi and Filippo M. Puglisi, with the remaining two seats on the five member board of directors open, which open seats will be filled by an individual to be appointed by the Selling Shareholders and an independent board member agreed by all parties. Further, the executive officers of the Company as of the Closing are Mr. Genovese as Chief Executive Officer, Mr. Monesi as President and Mr. Puglisi as Chief Financial Officer.  

 

In connection with the Exchange Agreement, Vincent Genovese, a significant shareholder and officer and director of the Company entered into a lock-up agreement with the Company and Swiss Heights on July 19, 2016 (the “ Lock-Up Agreement ”). Pursuant to the Lock-Up Agreement, Mr. Genovese agreed that beginning from July 19, 2016 and until the earlier of the one year anniversary of August 12, 2016 and the date after August 12, 2016on which the Company consummates a liquidation, merger, share exchange or other similar transaction with an unaffiliated third party that results in all of the Company’s shareholders having the right to exchange their equity holdings in the Company for cash, securities or other property, Mr. Genovese would not (i) lend, offer, pledge, hypothecate, encumber, donate, assign, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of, directly or indirectly, any shares of the Company’s common stock held by him, (ii) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of such shares or (iii) publicly disclose the intention to do any of the foregoing. However, after the six month anniversary of August 12, 2016, Mr. Genovese is permitted to transfer a number of shares of Company common stock in any day equal to 10% of the average daily volume of the shares of the Company’s common stock during the prior week.

 

 

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

 

Forward-looking Statements

 

The following discussion and analysis of our financial condition and results of operations for the three and six months ended June 30, 2016 should be read together with our consolidated financial statements and related notes included elsewhere in this quarterly report on Form 10-Q. This discussion contains forward-looking statements and information relating to our business that reflect our current views and assumptions with respect to future events and are subject to risks and uncertainties that may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. These forward-looking statements speak only as of the date of this report. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, or achievements. Except as required by applicable law, including the securities laws of the United States, we expressly disclaim any obligation or undertaking to disseminate any update or revisions of any of the forward-looking statements to reflect any change in our expectations with regard thereto or to conform these statements to actual results.

 

Overview

 

NAC Global Technologies, Inc. (referred to herein as “we”, “our”, and “NAC Global”) is an engineering services, R&D, and manufacturing company. We have one wholly-owned subsidiary, NAC Drive Systems, Inc. (“NAC”; and together with NAC Global, the “Company”), a manufacturer and supplier of harmonic gearing technology (“HGT”) that operates in the robotics, automation, and medical industries amongst others. HGT is a premier technology in industries where very high precision, long-life, compactness, light weight, and reliability are important factors. In addition to robotics applications, we see HGT use expanding across multiple industries and geographies including aerospace, energy, and defense. Pursuant to a long-term agreement (described below), we have partnered with CTKM Beijing Harmonic Drive, LTD., who supplies HGT to the China Space Agency. We manufacture our HGT components in Beijing, China, and perform final assembly and quality control in Port Jervis, New York. Beyond our HGT platform, we are executing a plan to bring additional, synergistic subsidiary business into NAC via strategic acquisition with a focus on the energy markets. Our corporate headquarters is located in Jacksonville, Florida.

  

Results of Operations

 

Comparison of Three Months Ended June 30, 2016 and June 30, 2015

 

Revenues

 

Sales revenues for the three months ended June 30, 2016 totaled $134,208 as compared to $196,885 for the six months ended June 30, 2015. NAC generated all of our revenues through sales of our harmonic gearing product. 

 

Cost of Goods - Gross Margin

 

Gross margin was 27% for the three months ended June 30, 2016 as compared to 31% for the three months ended June 30, 2015.

 

Operating Expenses

 

Operating expenses for the three months ended June 30, 2016 totaled $145,910. This amount included $48,087 in expenses for fundraising and Securities and Exchange Commission compliance.

 

Operating expenses for the three months ended June 30, 2015, totaled $201,823, which included $28,167 in capital raising activities, $90,000 of stock based compensation and $18,186 in Securities and Exchange Commission (“SEC”) filing and compliance expenses.

 

 

Net Income (Loss)

 

The net income for the three months ended June 30, 2016 was $812,620, including $935,344 in derivative gains and $13,444 in interest expenses.

 

The net loss for the three months ended June 30, 2015, was $175,821, including $133,403 in amortized debt discount and financing costs, $74,308 in interest expenses, and a derivative gain of $180,625.

 

Comparison of Six Months Ended June 30, 2015 and June 30, 2014 

 

Revenues

 

Sales revenues for the six months ended June 30, 2016, totaled $238,356, as compared to $319,966, for the six months ended June 30, 2015. NAC Drive Systems, Inc., our wholly-owned operating subsidiary, generated all of our revenues via harmonic gearing product sales.

 

Cost of Goods - Gross Margin

 

Gross margin was 31% for the six months ended June 30, 2016, as compared to 29% for the six months ended June 30, 2015.

 

Operating Expenses 

 

Operating expenses for the six months ended June 30, 2016, totaled $270,970. This amount included $59,470 for fund raising and SEC, and $21,750 in non-cash, stock compensation expenses to a consultant.

 

Operating expenses for the six months ended June 30, 2015, totaled $465,697. This amount included $133,231 for capital raising activities, $90,000 of stock based compensation, $45,981 for accounting, $34,502 for SEC compliance and filing expenses, and $7,548 for investor relations.

 

Net Loss 

 

The net income for the six months ended June 30, 2016 was $1,304,016, including $21,750 in non-cash stock compensation expenses, $1,540,131 in derivative income, and $39,679 in interest expenses. 

 

The net loss for the six months ended June 30, 2015 was $320,553, including $293,856 in debt discount/deferred financing expenses in connection with convertible notes, $81,030 in interest expenses, $43,925 loss on debt extinguishment, and $470,136 in a derivative gain.

 

 

Liquidity and Capital Resources

 

Cash and Working Capital. The Company incurred operating losses of $196,436 for the six months ended June 30, 2016. The Company had a net income of $1,304,016 for the six months ended June 30, 2016. As of June 30, 2016, the Company had cash and a stockholders’ deficit of $24,725 and $2,706,304, respectively. As of June 30, 2016, the Company had a working capital deficit of $1,361,786. 

 

Cash Used in Operating Activities. During the six months ended June 30, 2016, net cash generated in operating activities amounted to $29,502, comprised of net income of $1,304,016, adjustments to reconcile net loss to net cash used in operating activities of $1,505,009, and changes in operating assets and liabilities of $230,495, compared to

net cash used in operating activities for the six months ended June 30, 2015 of $118,972, comprised of net loss of $320,553, negative adjustments to reconcile net loss to net cash used in operating activities of $42,075, and changes in operating assets and liabilities of $243,656

 

Cash Used in Investing Activities. During the six months ended June 30, 2016 and June 30, 2015, no cash was used in investing activities. 

 

Cash Provided by Financing Activities. During the six months ended June 30, 2016, the Company made payments of $10,329 for a secured bank note, $3,122 for a convertible note, and $8,000 for related party debt.

 

Sources of Liquidity. Our cumulative net loss since inception is $2,706,304 as of June 30, 2016 and $4,010,320 as of December 31, 2015. A combination of short-term and long-term debt and private equity sales have assisted in funding our operations and expansion. Management’s strategy to achieve growth includes making investments in plant equipment, personnel, and intellectual property development. In order to execute this strategy, we will need to raise additional capital through public or private equity offerings, debt financings or other means.

 

Without additional funding, the Company may not have sufficient cash resources to meet its needs over the next twelve (12) months. The Company can give no assurance that such additional funds will be available on reasonable terms, or available at all, or that it will generate sufficient revenue to alleviate the going concern. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.

 

Subsequent Events

 

On July 19, 2016, NAC Global Technologies, Inc., entered into a share exchange agreement (the “Exchange Agreement”) by and among the (1) Company, (2) Swiss Heights Engineering S.A., a Switzerland company (“Swiss Heights”), and (3) the shareholders of Swiss Heights (the “Selling Shareholders”). Pursuant to the terms of the Exchange Agreement, upon the consummation of the transactions contemplated by the Exchange Agreement (the “Closing”), the Selling Shareholders will transfer to the Company all of the shares of Swiss Heights held by such Selling Shareholders in exchange for (1) the issuance of 83,000,000 shares of the Company’s common stock, par value $0.001 per share (the “Exchange Shares”), and (2) warrants to purchase up to a total of 737,341,257 shares of the Company’s common stock, at an exercise price of $0.000001 per share (the “Warrants”). The foregoing share exchange closed on August 12, 2016.

 

Following the share exchange, Swiss Heights became the wholly-owned subsidiary of the Company and the Selling Shareholders own approximately 70% of the issued and outstanding shares of the Company’s common stock and 93% of the Company’s common stock on a fully-diluted basis (including outstanding warrants), based on the outstanding securities and convertible securities of the Company as of the date of the Exchange Agreement and those securities and convertible securities to be extinguished pursuant to the provisions thereof.

 

Upon the Closing, the board of directors of the Company consisted of Mr. Vincent Genovese and the Selling Shareholders, Mr. Antonio Monesi and Filippo M. Puglisi, with the remaining two seats on the five member board of directors open, which open seats will be filled by an individual to be appointed by the Selling Shareholders and an independent board member agreed by all parties. Further, the executive officers of the Company as of the Closing are Mr. Genovese as Chief Executive Officer, Mr. Monesi as President and Mr. Puglisi as Chief Financial Officer.  

 

In connection with the Exchange Agreement, Vincent Genovese, a significant shareholder and officer and director of the Company entered into a lock-up agreement with the Company and Swiss Heights on July 19, 2016 (the “Lock-Up Agreement”). Pursuant to the Lock-Up Agreement, Mr. Genovese agreed that beginning from July 19, 2016 and until the earlier of the one year anniversary of August 12, 2016 and the date after August 12, 2016on which the Company consummates a liquidation, merger, share exchange or other similar transaction with an unaffiliated third party that results in all of the Company’s shareholders having the right to exchange their equity holdings in the Company for cash, securities or other property, Mr. Genovese would not (i) lend, offer, pledge, hypothecate, encumber, donate, assign, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of, directly or indirectly, any shares of the Company’s common stock held by him, (ii) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of such shares or (iii) publicly disclose the intention to do any of the foregoing. However, after the six month anniversary of August 12, 2016, Mr. Genovese is permitted to transfer a number of shares of Company common stock in any day equal to 10% of the average daily volume of the shares of the Company’s common stock during the prior week.

 

Going Concern

 

The financial conditions evidenced by the accompanying financial statements raise substantial doubt as to our ability to continue as a going concern. Our plans include obtaining additional capital through debt or equity financing. The financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.

 

Critical Accounting Policies

 

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 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.

 

 

Revenue Recognition

 

All revenue is recognized when persuasive evidence of an arrangement exists, the service or sale is complete, the price is fixed or determinable and collectability is reasonably assured. Revenue from product sales is recognized when products are shipped to customers. The Company’s revenues include sales to customers domiciled outside of the U.S. Generally, these sales are denominated in U.S. dollars.

 

Deferred revenue arises from amounts received in advance of the culmination of the earnings process and is recognized as revenue in future periods when the applicable revenue recognition criteria have been met.

 

All amounts billed to customers for shipping and handling costs are included in revenues in the consolidated statements of operations.

 

Accounts Receivable

 

Accounts receivable arise from the sale of products on trade credit terms and are stated net of an allowance for doubtful accounts. The Company performs ongoing credit evaluations of its customers which may result in the requirement of a deposit before fulfillment of the terms of the sales orders. Accounts are generally considered past due after thirty (30) days. Past due receivables do not accrue interest. An allowance for doubtful accounts is provided for those accounts receivables considered to be uncollectable based on historical experience and management’s evaluation of outstanding receivable amounts at the end of the period. The Company has determined that $11,003 and $0 allowance for doubtful accounts is required as of June 30, 2016 and December 31, 2015 respectively.

 

Inventory

 

Inventory consists primarily of purchased finished goods and packaging materials. Inventory costs are determined using the average method and are carried at the lower of cost or net realizable value. Inventory is reviewed periodically for slow-moving and obsolete items.

 

Off Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a material effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

As a smaller reporting company, as defined in Rule 12b-2 of the Exchange Act of 1934, as amended (the “Exchange Act”), we are not required to provide the information required by this item.

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

As of June 30, 2016, the Company carried out an evaluation by the Company’s Chief Executive Officer, who is also our Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. As discussed below, management has concluded that as of March 31, 2016, our disclosure controls and procedures were not effective.

 

As of June 30, 2016, we identified certain matters that constituted a material weakness in our internal controls over financial reporting. Specifically, we have difficulty in accounting for complex accounting transactions and have limited segregation of duties within our accounting and financial reporting functions. Segregation of duties within our Company is limited due to the small number of employees that are assigned to positions that involve the processing of financial information. Although we are aware that segregation of duties within our Company is limited, we believe (based on our current roster of employees and certain control mechanisms we have in place) that the risks associated with having limited segregation of duties are currently insignificant. Additional time is required to expand our staff, fully document our systems, implement control procedures and test their operating effectiveness before we can definitively conclude that we have remediated our material weakness.

 

Changes in Internal Control over Financial Reporting

 

There were no changes in the Company’s internal control over financial reporting that occurred during the period ended June 30, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Limitations of the Effectiveness of Control

 

A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations of any control system, no evaluation of controls can provide absolute assurance that all control issues, if any, within a company have been detected.

 

 

PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings

 

From time to time, the Company is subject to legal proceedings arising in the ordinary course of business. Such matters are subject to uncertainties and outcomes are not predictable with assurance. Management believes at this time that there are no ongoing matters that will have a material adverse effect on the Company's business, financial position, results of operations or cash flows.

 

Item 1A. Risk Factors

 

As a smaller reporting company, as defined in Rule 12b-2 of the Exchange Act, we are not required to provide the information required by this item.

 

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

 

(a)

None.

 

(b)

There have been no material changes to the procedures by which security holders may recommend nominees to our Board of Directors.

 

 

Item 6. Exhibits.

 

Exhibit No.		Identification of Exhibit
31.1		Certification of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act.
31.2		Certification of Principal Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act.
32.1		Certification of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act.
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.
101.INS		XBRL Instance Document
101.SCH		XBRL Taxonomy Schema
101.CAL		XBRL Taxonomy Calculation Linkbase
101.DEF		XBRL Taxonomy Definition Linkbase
101.LAB		XBRL Taxonomy Label Linkbase
101.PRE		XBRL Taxonomy Presentation Linkbase

 

 

In accordance with SEC Release 33-8238, Exhibits 32.1 and 32.2 are being furnished and not filed.

 

 

SIGNATURES

 

Pursuant to the requirements 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.

 

	NAC GLOBAL TECHNOLOGIES, INC.
Date: August 15, 2016	By:	/s/ Vincent Genovese
		Vincent Genovese Chief Executive Officer
Date: August 15, 2016	By:	/s/ Filippo Puglisi
		Filippo Puglisi Principal Financial Officer

  

 

EXHIBIT INDEX

 

Exhibit No.		Identification of Exhibit
31.1		Certification of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act.
31.2		Certification of Principal Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act.
32.1		Certification of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act.
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.
101.INS		XBRL Instance Document
101.SCH		XBRL Taxonomy Schema
101.CAL		XBRL Taxonomy Calculation Linkbase
101.DEF		XBRL Taxonomy Definition Linkbase
101.LAB		XBRL Taxonomy Label Linkbase
101.PRE		XBRL Taxonomy Presentation Linkbase

 

 

In accordance with SEC Release 33-8238, Exhibits 32.1 and 32.2 are being furnished and not filed.

 

 

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