10-Q 1 f10qmaster93010.htm QUARTERLY REPORT FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2010 Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q


R

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


For the quarterly period ended:  September 30, 2010


£

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.)


P.O. Box 531744 Henderson, Nevada 89053

 (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  R   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 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 R


Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

  Yes £   No R


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

 

Class

Outstanding as of April 1, 2011

Common Stock, $.001  par value

145,534,260

 

NATIONAL AUTOMATION SERVICES, INC. CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

 

 

 

 

 

 

SEP 30, 2010

 

DEC 31, 2009

 

 

 

 

(unaudited)

 

(audited)

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

CURRENT ASSETS

 

 

 

 

 

 

     Cash

$

135,474

$

42,384

 

 

     Accounts receivable, net of allowance of doubtful accounts of $25,333 at September 30,

          2010, $25,780 at December 31, 2009

 

204,593

 

367,098

 

 

     Inventory

 

412,667

 

450,110

 

 

     Prepaid fees

 

56,667

 

 

 

 

          Total current assets

 

809,401

 

859,592

 

 

PROPERTY AND EQUIPMENT, net of accumulated depreciation of $121,284 at September 30, 2010, $90,390 at December 31, 2009

 

82,833

 

140,157

 

 

OTHER ASSETS

 

 

 

 

 

 

     Security deposit

 

5,535

 

5,535

 

 

     Deferred financing fees

 

125,000

 

--

 

 

     Intangible asset - net of accumulated amortization of $134,119 at September 30, 2010,

          $107,095 at December 31, 2009

 

9,010

 

36,034

 

 

          Total other assets

 

222,378

 

181,726

 

 

      TOTAL ASSETS

$

1,031,779

$

1,041,318

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ DEFICIT

 

 

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

 

 

     Accounts payables

$

1,286,389

$

1,301,316

 

 

     Accrued liabilities

 

1,839,950

 

959,111

 

 

     Deferred revenue

 

--

 

50,777

 

 

     Current portion of loans and capital leases

 

28,553

 

37,473

 

 

     Current portion of secured redeemable debentures

 

2,347,001

 

2,347,001

 

 

     ABL line of credit

 

758,398

 

758,398

 

 

     Convertible debt, net of beneficial conversion feature of $15,967 at September 30, 2010

          and $87,159 at December 31, 2009

 

39,033

 

37,841

 

 

     Related party payable

 

165,913

 

165,913

 

 

          Total current liabilities

 

6,465,237

 

5,657,830

 

 

Long-term loans and capital leases

 

15,700

 

19,582

 

 

     Total liabilities

 

6,480,937

 

5,677,412

 

 

STOCKHOLDERS’ DEFICIT

 

 

 

 

 

 

     Stock held in escrow

 

(70,000)

 

--

 

 

     Common stock $0.001 par value, 200,000,000 authorized, 176,476,315 shares issued

          outstanding as of September 30, 2010, 90,081,416 shares issued outstanding at

          December 31, 2009

 

176,477

 

90,081

 

 

     Additional paid in capital

 

9,377,830

 

8,251,062

 

 

     Stock payable (receivable), net of $17,343 receivable

 

50,656

 

(17,343)

 

 

     Accumulated deficit

 

(14,984,121)

 

(12,959,894)

 

 

          Total stockholders’ deficit

 

(5,449,158)

 

(4,636,094)

 

 

          TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT

$

1,031,779

$

1,041,318

 











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



3





 

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

 

 

 

 

 

 

 

 

 

 

 

 

THREE MONTHS ENDED SEP 30, 2010

 

THREE MONTHS ENDED SEP 30, 2009

 

NINE MONTHS ENDED SEP 30, 2010

 

NINE MONTHS ENDED SEP 30, 2009

 

 

 

 

 

 

 

 

 

 

 

 

REVENUE

$

336,430

$

846,099

$

1,647,920

$

3,084,735

 

 

COST OF REVENUE

 

266,103

 

721,726

 

1,518,458

 

2,750,799

 

 

GROSS PROFIT

 

70,327

 

124,373

 

129,462

 

333,936

 

 

 

 

 

 

 

 

 

 

 

 

 

OPERATING EXPENSES

 

 

 

 

 

 

 

 

 

 

     Selling, general and administrative expenses

 

424,934

 

317,008

 

1,137,457

 

1,268,142

 

 

     Consulting fees

 

7,630

 

282,364

 

19,075

 

580,592

 

 

     Professional fees and related expenses

 

78,055

 

41,950

 

596,035

 

558,194

 

 

     TOTAL OPERATING EXPENSES

 

510,619

 

641,322

 

1,752,567

 

2,406,928

 

 

 

 

 

 

 

 

 

 

 

 

 

OPERATING LOSS

 

(440,292)

 

(516,949)

 

(1,623,105)

 

(2,072,992)

 

 

 

 

 

 

 

 

 

 

 

 

 

OTHER EXPENSE

 

 

 

 

 

 

 

 

 

 

     Interest expense, net

 

100,032

 

255,759

 

401,122

 

803,600

 

 

 

 

 

 

 

 

 

 

 

 

 

     TOTAL OTHER EXPENSE

 

100,032

 

255,759

 

401,122

 

803,600

 

 

 

 

 

 

 

 

 

 

 

 

 

LOSS BEFORE PROVISION FOR INCOME TAXES

 

(540,324)

 

(772,708)

 

(2,024,227)

 

(2,876,592)

 

 

 

 

 

 

 

 

 

 

 

 

 

PROVISION FOR INCOME TAXES

 

--

 

14,950

 

--

 

14,950

 

 

 

 

 

 

 

 

 

 

 

 

 

NET LOSS

$

(540,324)

$

(787,658)

$

(2,024,227)

$

(2,891,542)

 

 

 

 

 

 

 

 

 

 

 

 

 

BASIC AND DILUTED LOSS PER SHARE

$

(0.01)

$

(0.01)

$

(0.02)

$

(0.04)

 

 

 

 

 

 

 

 

 

 

 

 

 

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - BASIC AND DILUTED

 

106,476,315

 

87,305,697

 

100,798,047

 


78,648,412

 






















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



4




.

 

NATIONAL AUTOMATION SERVICES, INC.

 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 (unaudited)

 

 

 

 

 

 

 

 

NINE MONTHS ENDED SEP 30, 2010

 

NINE MONTHS ENDED SEP 30, 2009

 

 

Operating Activities

 

 

 

 

 

 

     Net loss

$

(2,024,227)

$

(2,891,542)

 

 

     Cash used by operating activities:

 

 

 

 

 

 

          Allowance for doubtful accounts

 

(447)

 

7,157

 

 

          Depreciation and amortization

 

84,348

 

80,473

 

 

          Stock for services

 

199,807

 

495,774

 

 

          Accretion of debt discount and premium

 

--

 

347,045

 

 

          Accretion of convertible notes beneficial conversion feature

 

90,192

 

--

 

 

     Changes in assets

 

 

 

 

 

 

          Decrease (increase) in receivables

 

162,952

 

(35,761)

 

 

          Decrease in other receivables

 

--

 

76,147

 

 

          Decrease (increase) decrease in inventories

 

37,443

 

(380,237)

 

 

          Decrease in prepaid expenses

 

11,333

 

235,977

 

 

          Decrease in other assets

 

--

 

10,319

 

 

     Changes in liabilities

 

 

 

 

 

 

          (Decrease) in deferred revenue

 

(50,777)

 

--

 

 

          Increase in accounts payable and accrued liabilities

 

1,091,268

 

847,640

 

 

     Cash used by operating activities

 

(398,108)

 

(1,207,008)

 

 

 

 

 

 

 

 

 

Investing Activities

 

 

 

 

 

 

     Purchase of property and equipment

 

--

 

(14,734)

 

 

     Cash used by investing activities

 

--

 

(14,734)

 

 

 

 

 

 

 

 

 

Financing Activities

 

 

 

 

 

 

     Proceeds from sale of stock

 

449,000

 

916,837

 

 

     Proceeds from convertible notes

 

55,000

 

--

 

 

     Increase in bank overdraft

 

--

 

20,684

 

 

     Proceeds of deferred financing fees

 

--

 

215,299

 

 

     Related party payable, net

 

--

 

26,000

 

 

     Payment of line of credit

 

(1,672)

 

(1,478)

 

 

     Payments for loans and capital leases

 

(11,130)

 

(16,442)

 

 

     Payments on ABL line

 

--

 

(47,656)

 

 

     Cash provided by financing activities

 

491,198

 

1,113,244

 

 

 

 

 

 

 

 

 

Increase (decrease) in cash

 

93,090

 

(108,498)

 

 

Cash at beginning of year

 

42,384

 

108,498

 

 

 

 

 

 

 

 

 

Cash at end of year

$

135,474

$

--

 

 

 

 

 

 

 

 

 

     Cash paid for interest

$

6,500

$

6,039

 

 

     Cash paid for income taxes

$

--

$

--

 

 

 

 

 

 

 

 

 

Supplemental Non Cash Investing And Financing Transactions

 

 

 

 

 

 

     Capital lease

$

--

$

31,246

 

 

     Debt and interest converted to stock

$

126,000

$

--

 

 

     Deferred financing fees

$

125,000

$

--

 

 

     Accounts payable paid with stock

$

224,550

$

--

 

 

     Common stock held in escrow

$

70,000

$

--

 

 

     Issuance of stock prepaid

$

68,000

$

--

 

 

     Disposal of assets

$

26,429

$

--

 


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



5




NATIONAL AUTOMATION SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


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 (“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 interim condensed 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.  Although management believes the disclosures and information presented are adequate to make the information not misleading, these interim condensed consolidated financial statements should be read in conjunction with the Company’s most recent audited financial statements and notes thereto included in its December 31, 2009 Annual Report on Form 10-K.  Operating results for the period ended September 30, 2010 are not necessarily indicative of the results that may be expected for the year ending December 31, 2010. As used in these Notes to the Consolidated Financial Statements, the terms the "Company", "we", "us", "our" and similar terms refer to National Automation Services and, unless the context indicates otherwise its consolidated subsidiaries. Significant accounting policies disclosed therein have not changed except as noted below.


These financial statements have been presented in accordance with the rules governing a smaller reporting company for the periods ended September 30, 2010 and 2009.


Business Overview


          

National Automation Services, Inc. is a holding company formed to acquire and operate specialized automation control companies located in the Southwestern United States. Currently, the Company owns 100% of the capital stock of two operating subsidiaries: (1) ISS, a Nevada corporation, based in Henderson, Nevada and (2) Intecon, an Arizona corporation, based in Tempe, Arizona.


We conduct our business and operations through these two wholly-owned subsidiaries. Overall, the Company serves a diverse set of industries which utilize automation systems and controls, including water valley waste and treatment facilities, entertainment, hospitality, mining, medical, and manufacturing.


Since the acquisition of its current operating subsidiaries, the Company has strived to position itself as a leading system integrator and certified Underwriters Laboratories panel fabrication facility. The Company currently focuses on two distinct lines of business: (1) industrial automation and control and (2) automation manufacturing, which comprises the bulk of contracts that the Company currently maintains under its building contracts. The Company’s management runs the company as one unit and does not have two distinct business segments.


The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany transactions and accounts have been eliminated in consolidation.


Potential Derivative Instruments


We periodically assess our financial and equity instruments to determine if they require derivative accounting. Instruments which may potentially require derivative accounting are conversion features of debt and common stock equivalents in excess of available authorized common shares.


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



6




NATIONAL AUTOMATION SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


Revenue Recognition


As required by the Revenue Recognition Topic of Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”), the Company is required to use predetermined contract methods in determining the current value for revenue.


          

Project Contracts Project revenue is recognized on a progress-basis - the Company invoices the client when it has completed the specified portion of the agreement, thereby, ensuring the client is legally liable to the Company for payment of the invoice. On progress-basis contracts, revenue is not recognized until this criteria is met. The Company generally seeks progress-based agreements when a job project takes longer than 30 days to complete.


Service Contracts Service revenue is recognized on a completed project basis - the Company invoices the client when it has completed the services, thereby, ensuring the client is legally liable to the Company for payment of the invoice. On service contracts, revenue is not recognized until the services have been performed. The Company generally seeks service based agreements when project based contracts have been completed.


In all cases, revenue is recognized as earned by the Company. Though contracts may vary between a progress-basis and completed project basis, as the client becomes liable to the Company for services provided, as defined in the agreement, the client is then invoiced and revenue is accordingly recognized and recorded.  The Company does not recognize or record any revenues for which it does not have a legal basis for invoicing or legally collecting.


Stock Based Compensation


Stock based compensation is accounted for using the Equity-Based Payments to Non-Employee Topic of the FASB ASC, which establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity's equity instruments or that may be settled by the issuance of those equity instruments. We determine the value of stock issued at the date of grant. We also determine at the date of grant the value of stock at fair market value or the value of services rendered (based on contract or otherwise) whichever is more readily determinable.

.

Fair Value Accounting


As required by the Fair Value Measurements and Disclosures Topic of the FASB ASC, fair value is measured based on a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows: (Level 1) observable inputs such as quoted prices in active markets; (Level 2) inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and (Level 3) unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.


The three levels of the fair value hierarchy are described below:


Level 1

     Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;


Level 2

     Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability;


Level 3

     Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by little or no market activity).


See Note 8 Fair value, for additional information.





7





NATIONAL AUTOMATION SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


NOTE 2: Recently adopted and recently issued accounting guidance


Adopted


Subsequent events: In February 2010, the FASB issued amended guidance on subsequent events to alleviate potential conflicts between FASB guidance and SEC requirements. Under this amended guidance, SEC filers are no longer required to disclose the date through which subsequent events have been evaluated in originally issued and revised financial statements. This guidance was effective immediately and we adopted these new requirements for the period ended September 30, 2010. The adoption of this guidance did not have a material impact on our financial statements.


In June 2009, the FASB issued changes to the accounting for transfers of financial assets. These changes remove the concept of a qualifying special-purpose entity and remove the exception from the application of variable interest accounting to variable interest entities that are qualifying special-purpose entities; limits the circumstances in which a transferor derecognizes a portion or component of a financial asset; defines a participating interest; requires a transferor to recognize and initially measure at fair value all assets obtained and liabilities incurred as a result of a transfer accounted for as a sale; and requires enhanced disclosure; among others. We adopted these new requirements as of September 30, 2010, and did not have a material impact on our financial statements.


Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the AICPA, and the SEC did not, or are not believed by management to, have a material impact on the Company's present or future consolidated financial statements


NOTE 3: Going concern


The accompanying financial statements have been prepared in conformity with generally accepted accounting principles, which contemplate continuation of the Company as a going concern. Our operating revenues are insufficient to fund our operations and our assets already are pledged to Trafalgar as collateral for our outstanding $3,600,000 (including interest) of indebtedness. The Company has experienced recurring net losses, had a net loss of $(2,024,227) for the nine months ended September 30, 2010, an accumulated deficit of $(14,984,121) as of nine months ended September 30, 2010, and a working capital deficiency of $(5,655,836) at September 30, 2010.


Based on the above facts, management determined that there was substantial doubt about the Company’s ability to continue as a going concern.


               We continue to seek sources of additional capital. We intend to try to improve our cash and cash flow from operations by encouraging faster payments, and if necessary granting discounts for prompt payment, of our receivables while simultaneously delaying payments to our vendors.  


Also, we plan to increase our revenue by increasing our visibility and the awareness of our Company, and our products and services, by engaging in more aggressive sales, marketing and advertising activity.  We intend to develop and implement strategies to market ongoing maintenance and service contracts to our current as well as our past customers, and we plan to package these continuing services as part of our industrial automation design and manufacturing services. We intend to implement cost reduction synergies such as centralizing procurement and estimating activities at our corporate hub using dedicated teams of trained employees, rather than having these tasks performed at our branch offices.



8




NATIONAL AUTOMATION SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


NOTE 4: Loans, capital lease


The following tables represent the outstanding balance of loans for the Company as of September 30, 2010, and December 31, 2009.

 

 

Period Ended September 30,

2010

(unaudited)

 

Year Ended December 31, 2009

(audited)

Promissory note payable in monthly installments of $367 at an interest rate of 2.9%, collateralized by a vehicle due August 2010.

 $


--

$


2,098

Key Bank loan payable in monthly installments of $2,620 due February 2010.

 


--

 


5,148

South Bay Capital loan at an interest rate 12%

 

10,926

 

10,926

Capital lease

 

33,327

 

38,883

Loans and capital lease sub total

 

44,253

 

57,055

Less: current portion loans and capital leases

 

(28,553)

 

(37,473)

Total

 $

15,700

$

19,582


Loans


On July 25, 2008, the Company entered into a loan agreement with South Bay Capital in the amount of $75,926. Per the terms of the verbal agreement no interest was to be accumulated. On December 19, 2008 the Company repaid South Bay in the amount of $65,000.  On September 15, 2009, the Company secured the remaining balance of the loan with a written promissory note. The note bears an interest rate of 12% for the remaining balance of $10,926, and was applied retrospectively to the note as of January 1, 2009.  As of September 30, 2010, $10,926 of the debt still remains outstanding with total interest of $41,039.


NOTE 5: Convertible notes


During the quarter ended December 31, 2009, we issued to 4 individuals convertible debentures for $125,000. The notes bear interest at the rate of 20% per year and mature in six (6) months on varying dates starting with May 7, 2010. The notes were convertible into the Company’s common stock at a fixed value of $0.05 per share.


As of September 30, 2010, the Company has converted all of the notes; noted above, totaling $125,000 of the convertible notes at a value of $0.045 per share and issued to these four individuals collectively 2,620,000 shares of the Company’s common stock (see Note 7, Stockholders’ deficit).


On September 1, 2010, the Company entered into a Convertible note agreement with one individual for $50,000. The note bears interest at the rate of 20% per year and matures in six (6) months. The note is convertible into the Company’s restricted common stock at a fixed value of $0.05 per share.


On September 21, 2010, the Company entered into a Convertible note agreement with one individual for $5,000. The note bears interest at the rate of 20% per year and matures in six (6) months. The note is convertible into the Company’s restricted common stock at a fixed value of $0.05 per share.


The notes are convertible into the Company’s common stock at a value of $0.05 per share. We have accounted for the conversion option as a Beneficial Conversion Feature (“BCF”) until such time as the note is converted or to the individual maturity dates. The conversion option was valued using the BCF and is calculated at the intrinsic value on the date of grant. The following table represents the BCF on the various notes:




9




NATIONAL AUTOMATION SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


Description

 

Note

value

 


Calc’d

BCF

Value

 

Interest

Accrued

as of

9/30/2010

 

Amortized

 BCF

Value

Convertible note issued on September 1, 2010, at a 20% interest rate for six months, convertible to shares of stock at $0.05 per share

 

$

50,000

 

$

18,000

 

$

829

 

$

2,983

Convertible note issued on September 21, at a 20% interest rate for six months, convertible to shares of stock at $0.05 per share

 

$

5,000

 

$

1,000

 

$

25

 

$

50

Total

 

$

55,000

 

$

19,000

 

$

854

 

$

3,033


NOTE 6: Deferred financing fees


On April 7, 2010, the Company entered into a Securities Purchase Agreement with Ascendiant Capital Group, LLC (“Ascendiant”), pursuant to which Ascendiant agreed to purchase up to $5,000,000 worth of shares of our common stock from time to time over a 24-month period upon approval of the Company’s Form S-1 registration statement. The Company issued to Ascendiant Capital 1,470,589 share of common stock valued at $125,000 or $0.08 per share as a commitment fee based on the security agreement (see Note 7, Stockholders’ deficit). The commitment fees have been deferred until the terms of the agreement have been met which include the acceptance of the Company’s S-1 registration statement. The Company filed an S-1 on June 24, 2010, amended on June 30, 2010, and amended July 30, 2010. Once the acceptance of the Form S-1 was considered by the SEC the deferred financing fees will be amortized over the life of the agreement indicated at 24 months. As of August 31, 2010, the Form S-1 was withdrawn based upon a decision made by Management (see Note 10: Subsequent Events for additional details).


NOTE 7: Legal


On April 23, 2009, the Company entered into a lawsuit against Trafalgar Capital Specialized Investment Fund, FIS (“Trafalgar”). The Company is the Plaintiff, charging Trafalgar with usurious lending practices. We noted that the pending litigation is estimatable; however, as the litigation is still in the pre-discovery stages we are not able to indicate the outcome. On July 7, 2009 we received a notice of default from Trafalgar that we have violated the terms of our secured loan and credit facility agreements by failing to make certain payments when due and breaching certain covenants.


The lender has accelerated our outstanding indebtedness, and accordingly it has the right to execute and foreclose on all of our assets, including the stock in our subsidiaries, and/or the personal guarantee executed in favor of the lender by Robert Chance, our CEO.


We reclassified all Trafalgar related debt to current due to the default notice, and have amortized the remaining balance of the deferred financing fees and debt premiums/discounts as of December 31, 2009. The Company has not made any payments to Trafalgar as of March 31, 2010 due to the pending litigation against Trafalgar.


In November 2009 we were served with the complaint Trafalgar filed on October 30, 2009 in the Court against us, our two subsidiaries and Robert Chance, our CEO.  Trafalgar’s complaint seeks repayment of the amounts we allegedly owe under the subject loan and other credit agreements we enter into, plus interest and attorneys fees, and foreclosure on all of our assets (we had pledged such assets as collateral pursuant to the terms of the Security Agreement we executed in connection with such agreements).  The complaint also alleges that we fraudulently induced Trafalgar to extend to us the approximately $3 million in total financing we received.  


As noted above, in April 2009 we had filed a complaint in the same Court against Trafalgar, alleging that the subject agreements under which Trafalgar had extended financing to us, and under which it now is suing us, were unenforceable.  We believe Trafalgar’s allegations are without merit.  We mounted a vigorous defense and moved the Court to consolidate these two actions.   The Court entered a scheduling order setting the April 2009 action for the trial docket on November 1, 2010, and a calendar call on October 28, 2010.



10




NATIONAL AUTOMATION SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


A discovery cutoff date was set for July 16, 2010 and July 23, 2010, respectively and dispositive motions in the cases were due August 27, 2010, the extension was a joint request to the Court to amend the discovery and trial schedule for the April 2009 case so that NAS’ claims and Trafalgar’s claims proceed on the same discovery track.


In addition to the indicated cutoff for August 27, 2010, the Company also noted that the court ordered the parties to mediate the case by September 17, 2010.  As of September 30, 2010, the Company was still in settlement negotiations with Trafalgar. The Company settled negotiations on March 25, 2011 (see Note 10 Subsequent Events for additional details).


On June 9, 2010, a writ of garnishment was filed against our subsidiary Intecon’s bank account for our outstanding balanced owed to one of our vendors, Summit Electric. Our current outstanding balance owed to Summit Electric is $61,000. This writ was established to collect funds from us by garnishing money in our subsidiaries bank accounts. At the time of the court ordered garnishment the accounts held a balance of $1,200 and have been sent to Summit Electric under the writ. To date we still have an outstanding balance with Summit Electric and are working towards payment to this vendor.


NOTE 8: Fair value


In accordance with authoritative guidance, the table below sets forth the Company's financial assets and liabilities measured at fair value by level within the fair value hierarchy. Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.


 

Fair value at September 30, 2010

 

Total

 

Level 1

 

Level 2

 

Level 3

Assets:

 

 

 

 

 

 

 

Total

$

--

 

$

--

 

$

--

 

$

--

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

Convertible debt, net of beneficial conversion feature

$

39,033

 

$

39,033

 

 

 

 

Total

$

39,033

 

$

39,033

 

$

--

 

$

--


 

Fair value at December 31, 2009

 

Total

 

Level 1

 

Level 2

 

Level 3

Assets:

 

 

 

 

 

 

 

Total

$

--

 

$

--

 

$

--

 

$

--

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

Convertible debt, net of beneficial conversion feature

$

37,841

 

$

37,841

 

 

 

 

Total

$

37,841

 

$

37,841

 

$

--

 

$

--


NOTE 9: Stockholders’ deficit


           

Preferred Stock


         

Our wholly owned subsidiary, ISS, has 125,000 shares of preferred stock authorized with a par value of $1.00; these shares have no voting rights and no dividend preferences.


Common Stock


On January 6, 2010, the Company issued 220,000 shares of common stock valued at $0.045 per share based upon the conversion price under our convertible note dated November 10, 2009.


On January 6, 2010, the Company issued 880,000 shares of common stock valued at $0.045 per share based upon the conversion price under our convertible note dated December 22, 2009.





11




NATIONAL AUTOMATION SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



On January 27, 2010, the Company issued 1,000,000 shares of common stock valued at $60,000 or $0.06 per share based on the fair market value on January 27, 2010, for services rendered per the consulting agreement dated January 27, 2010.


On February 9, 2010, the Company issued 700,000 shares of common stock valued at $42,000 or $0.06 per share based on the fair market value on February 9, 2010, for services rendered per our consulting agreement dated February 1, 2010.


On February 11, 2010, the Company issued to one individual 40,000 shares of common stock in consideration for $2,000 in cash, or $0.05 per share.


On February 15, 2010, the Company issued to one individual 690,000 shares of common stock in consideration for $30,000 in cash, or $0.043 per share.


On March 5, 2010, the Company issued to one individual 220,000 shares of common stock in consideration for $10,000 in cash, or $0.045 per share.


On March 8, 2010, the Company received $4,000 for the purchase of 88,000 shares of common stock in valued at $0.045 per share. The shares were issued on April 5, 2010.


On March 15, 2010, the Company issued to two individuals an aggregate of 220,110 shares of common stock in consideration for $10,000 in cash, or $0.045 per share.


On March 17, 2010, the Company issued to one individual 28,600 shares of common stock in consideration for $1,300 in cash, or $0.045 per share.


On March 19, 2010, the Company received $5,000 for the purchase of 110,000 shares of common stock in valued at $0.045 per share. The shares were issued on April 27, 2010.


On March 29, 2010, the Company received $100,000 for the purchase of 2,100,000 shares of common stock valued at $0.047 per share. The shares were issued on April 20, 2010.


On March 29, 2010, the Company received $10,000 for the purchase of 200,000 shares of common stock valued at $0.05 per share. The shares were issued on April 20, 2010.

 

On March 30, 2010, the Company issued to one individual 28,600 shares of common stock in consideration for $1,300 in cash, or $0.045 per share.


On March 30, 2010, the Company received $10,000 for the purchase of 200,000 shares of common stock valued at $0.05 per share. The shares were issued on April 20, 2010.


On April 5, 2010, the Company issued to one individual 88,000 shares of common stock in consideration for $4,000 in cash, or $0.045 per share.


On April 7, 2010, the Company issued to Ascendiant Capital 1,470,589 share of common stock valued at $125,000 or $0.08 per share based on the commitment fee per our equity financing agreement dated April 7, 2010. Ascendiant Capital Group, LLC (“Ascendiant”), pursuant to which Ascendiant and the Company entered into a Securities Purchase Agreement with Ascendiant, pursuant to which Ascendiant agreed to purchase up to $5,000,000 worth of shares of our common stock from time to time over a 24-month period upon approval of an S-1 registration statement. The agreement also indicates that 70,000,000 shares will be held in escrow for the commitment period.


On April 19, 2010, the Company issued to one individual 500,000 shares of common stock in consideration for $25,000 in cash, or $0.05 per share.


On April 19, 2010, the Company issued 700,000 shares of common stock valued at $237,157 or $0.34 per share based on a settlement agreement dated April 16, 2010. The settlement agreement was to satisfy an outstanding vendor balance owed by the Company.




12




NATIONAL AUTOMATION SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


On April 20, 2010, the Company issued to fifteen individuals the sum of 3,660,000 shares of common stock in consideration $177,000 in cash, or $0.048 per share.


On April 22, 2010, the Company issued to five individuals the sum of 1,128,000 shares of common stock in consideration $55,500 in cash, or $0.05 per share.


On April 23, 2010, the Company issued to two individuals the sum of 380,000 shares of common stock in consideration $19,000 in cash, or $0.05 per share.


On April 23, 2010, the Company issued 600,000 shares of common stock valued at $30,000 or $0.05 per share based on an employment agreement dated November 10, 2009 and amended on April 1, 2010.


On April 26, 2010, the Company issued to four individuals the sum of 430,000 shares of common stock in consideration $21,500 in cash, or $0.05 per share.


On April 27, 2010, the Company issued to three individuals the sum of 353,000 shares of common stock in consideration $16,500 in cash, or $0.047 per share.


On May 7, 2010, the Company converted its convertible debt agreement dated November 7, 2009 upon the request of the note holder and consent of the Company. The debt value of $65,000 will be converted to shares at a value of $0.05 per share, based upon the value in the convertible note agreement.


On May 14, 2010, the Company issued to eleven individuals the sum of 1,518,000 shares of common stock in consideration $75,900 in cash, or $0.05 per share.


On May 14, 2010, the Company converted its convertible debt agreement dated December 15, 2009 upon the request of the note holder and consent of the Company. The debt value of $11,000 including $1,000 of interest was converted to shares at a value of $0.05 per share, based upon the value in the convertible note agreement.


For the period ending September 30, 2010, the Company has issued 430,000 in warrants with a 1 to 1 ratio. The warrants are at a fixed price of $0.05 per share and have a vesting period of 6 months. To date no warrants have been exercised.


As of September 30, 2010, the Company had 1,000,000 shares of common stock in stock payable in consideration for services rendered valued at $68,000.


As noted, the above purchase shares of the Company’s restricted common stock were purchased under a private offering.


NOTE 10: Subsequent events


On October 2, 2010, a writ of garnishment was filed against our subsidiary Intecon’s bank account for our outstanding balanced owed to one of our vendors, Border States. Our current outstanding balance owed to Border State is $287,000. This writ was established to collect funds from us by garnishing money in our subsidiaries bank accounts. At the time of the court ordered garnishment the accounts held a balance of $81,000 and have been sent to Border States under the writ. To date we still have an outstanding balance with Border States and are working towards payment to this vendor.


On October 15, 2010, the Company entered into a Convertible note agreement with one individual for $200,000. The note bears interest at the rate of 40% per year and matures in six (6) months. The note is convertible into the Company’s restricted common stock at a fixed value of $0.05 per share.


On November 19, 2010, the Company issued to one individual the sum of 1,250,000 shares of common stock for services rendered at a value of $75,000, or $0.06 per share.




13




NATIONAL AUTOMATION SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


On November 19, 2010, the Company issued to one individual the sum of 3,250,000 shares of common stock in consideration $85,000 in cash, or $0.026 per share, of which we have received on November 9, 2010, $12,500, on November 23, 2010, $10,000, on December 3, 2010, $20,000, on January 10, 2011, $2,500 and on January 18, 2011, $5,000.


On November 19, 2010, the Company issued to one individual the sum of 400,000 shares of common stock in consideration for a convertible note on October 15, 2010. The shares were at a fair market value of $24,000, or $0.06 per share.


On November 23, 2010, the Company issued 1,000,000 shares of common stock for services rendered and to be rendered from Quality Stocks for the next six (6) months. The stock was valued at fair market value on the date of the service agreement at $0.068 per share for a total of $68,000.


On December 31, 2010, the Company signed 3 related party note agreements in the amount of $32,500. The related party notes bear an interest of 10% simple interest, there is no maturity date.


On February 20, 2011, the Company terminated its service agreement with X-Clearing Corporation, the Company’s stock transfer agent (services for X-Clearing were completed as of December 31, 2010), and entered into a service agreement with its new stock transfer agent Worldwide Stock.


On March 8, 2011, the Company issued to one individual the sum of 3,500,000 shares of common stock in consideration for services rendered and to be rendered at a value of $154,000 or $0.044 per share.


On March 18, 2011 the Ascendiant agreement was cancelled. All stock provided to Ascendiant was in consideration for services rendered. The Company does not owe any additional shares of its common stock per the terms of the agreement and will not trigger any additional liquidation fees.


On March 25, 2011, the Company issued to one individual the sum of 10,000,000 shares of common stock in consideration for cash at a value of $300,000 or $0.03 per share.


On March 25, 2011, the Company issued to one individual the sum of 7,500,000 shares of common stock in consideration for cash at a value of $75,000 or $0.01 per share.


On March 25, 2011, the Company settled negotiations with Trafalgar, the settlement and associated press released were filed in 8-K dated March 29, 2011.


On March 28, 2011, the Company issued 750,000 shares of common stock valued at $36,000 in consideration for retaining an officer of the Company. The Company valued for services at fair market value on the date of the employment agreement in the amount of $0.048 per share.


On March 28, 2011, the Company issued 1,000,000 shares of common stock valued at $48,000 in consideration for retaining an officer of the Company. The Company valued for services at fair market value on the date of the employment agreement in the amount of $0.048 per share.


On March 28, 2011, the Company issued 1,000,000 shares of common stock valued at $30,000 in consideration for retaining an officer of the Company. The Company valued for services at fair market value on the date of the employment agreement in the amount of $0.03 per share.


On March 28, 2011, the Company issued 696,666 shares of common stock valued at $20,900 in consideration for services rendered per agreement dated on March 15, 2011. The Company valued the services per the terms of the agreement in the amount of $0.03 per share.


On March 31, 2011, the Company issued to two individuals the sum of 4,250,000 shares of common stock in consideration for cash at a value of $85,000 or $0.02 per share.


On March 31, 2011, the Company issued 4,461,279 shares of restricted stock common stock valued at $435,878 in consideration for salary compensation to the Company in the amount of $0.10 per share.  



14





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


Safe Harbor for Forward-Looking Statements


When used in this Quarterly Report, the words “may,” “will,” “expect,” “anticipate,”  “continue,” “estimate,” “project,” “intend,” and similar expressions are intended to identify forward-looking statements within the meaning of Section 27a of the Securities Act and Section 21e of the Exchange Act regarding events, conditions, and financial trends that may affect the Company’s future plans of operations, business strategy, operating results, and financial position.  Persons reviewing this Quarterly Report are cautioned that any forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties and that actual result may differ materially from those included within the forward-looking statements as a result of various factors.  Such factors include, but are not limited to, general economic factors and conditions that may directly or indirectly impact our financial condition or results of operations.


Overview:  


Central to an understanding of our financial condition and results of operations is our current cash shortage and our relationship with Trafalgar Capital Specialized Investment Fund, FIS (“Trafalgar”).  At March 25, 2011, although our accounts receivable were approximately $298,117, our cash on hand was approximately $2,000, and our operating revenues are insufficient to fund our operations.  Consequently, our reviewed September 30, 2010 financial statements contain, in Footnote 3, an explanatory paragraph to the effect that our ability to continue as a going concern is dependent on our ability to increase our revenue, eliminate our recurring net losses, eliminate our working capital deficit, and realize additional capital; and we can give no assurance that our plans and efforts to do so will be successful (See Item 1, Financial Statements and Supplementary Data).  Therefore, we require substantial additional funds to finance our business activities on an ongoing basis and to implement our acquisition strategy portraying our company as one able to provide a target company not only with cost savings resulting from centralized estimating, accounting and other corporate functions but also with additional working capital to finance and grow its business.  However, we owe Trafalgar an aggregate of approximately $3,800  ,000 (including interest), the repayment of which is secured by all our existing and after-acquired assets, and which indebtedness currently is in default and was accelerated by Trafalgar on July 7, 2009, and in our December 18, 2008 Credit Agreement with Trafalgar we agreed, among other things, not to issue any additional common stock without its prior written consent and not to incur any new indebtedness or to acquire the assets, business or stock of any company.  In April 2009 we commenced a legal action which seeks a declaratory judgment that the Trafalgar indebtedness violates the usury laws of the State of Florida, whose laws govern the documents, by calling for interest to be paid at a greater rate than is allowed by applicable law, and that due to their usurious nature Trafalgar may not enforce these negative covenants or any other terms of the loan documents.  As of March 25, 2011, the Company has settled its litigation with Trafalgar. For further information see Part II Item 1, Legal Proceedings.  Accordingly, we are seeking additional financing.


Business Development:


We are a Nevada corporation which, through subsidiaries based in Nevada and Arizona, designs, produces, installs and, to a significantly lesser extent, services specialized mechanical and electronic automation systems built to operate and control machinery and processes with a minimum of human intervention.  Historically, we have performed our work on projects located in the Southwestern United States.  Our business plan envisions internal growth combined with expansion through selected acquisitions designed to expand our footprint both geographically into additional states and commercially by increasing our work for industrial, as opposed to municipal, end-users.  


Financial Information


The following tables set forth for the periods indicated selected historical statements of operations data. The information contained in the tables below should be read in conjunction with the “Liquidity and Capital Resources,” “Financial Commitments” and “Critical Accounting Policies and Estimates” sections included in this management’s discussion and analysis, as well as the consolidated financial statements and notes thereto included in Item 1 of this Quarterly Report.




15




Results of Operations


A:

Three Months Ended September 30, 2010 compared to Three Months Ended September 30, 2009


 

 

Three Months Ended

September 30,

 

 

 

 

(unaudited)

 

 

 

 

 

2010

 

2009

 

% Change

 

Revenue

 

$

336,430

 

$

846,099

 

 

(60)

%

Cost of revenue

 

 

266,103

 

 

721,726

 

 

(63)

%

Total gross profit

 

 

70,327

 

 

124,373

 

 

(43)

%

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

 

424,934

 

 

317,008

 

 

34

%

Consulting fees

 

 

7,630

 

 

282,364

 

 

(97)

%

Professional fees and related expenses

 

 

78,055

 

 

41,950

 

 

86

%

 

 

 

 

 

 

 

 

 

 

 

Operating loss

 

 

(440,292)

 

 

(516,949)

 

 

(15)

%

Interest expense, net

 

 

100,032

 

 

255,759

 

 

(61)

%

       Provision for income taxes

 

 

--

 

 

14,950

 

 

(100)

%

Net loss

 

$

(540,324)

 

$

(787,658)

 

 

(31)

%


Operating Loss; Net Loss


For the three months ended September 30, 2010, compared to the three months ended in fiscal 2009, we had a decrease in revenues of $(509,669), or (60)%, and a decrease in our cost of revenue $(455,623), or (63)% (which decreased our gross profit by $(54,046), or (43)%, to $70,327). However, our operating loss decreased by $(76,657), or (15)%, to $(440,292) and our net loss decreased by $(247,334), or (31)%, to $(540,324).  As discussed below, we attribute these decreases in losses to the following:  the $455,623 or 63% decrease in our cost of revenue offset by our loss in revenue, i.e. direct costs; the $274,734 or 97% decrease in our consulting fees. We expect our net loss to continue until such time as we are able to correct our cash flow from existing and new customers in our revenue cycle.


Revenue.  For the quarter ended September 30, 2010, our consolidated revenue decreased by $(509,669), or (60)%, to $336,430. This decrease principally was due to a decrease in (1) the number of new jobs we received and commenced, and (2) work delays on existing jobs included in our December 31, 2009 backlog of $2,486,992. Due to the downturn of the economy, our customers have delayed projects which decrease revenues for the Company. The Company is currently seeking other projects to increase its revenues.


Cost of Revenue; Gross Profit.  Our cost of revenues decreased by $(455,623) or (63)%. Our cost of revenue is comprised of direct materials, direct labor, manufacturing overhead and other job related costs.  The decrease in our cost of revenue is due to our controls in labor costs and manufacturing overhead, we also saw a down-turn in our cost of revenue due to a decrease in our contract revenue during 2010.


Operating Expenses


Although consolidated operating expenses for the third quarter ended of 2010 decreased by $(130,703), or (21)%, to $510,619, we had an operating loss of $(440,292), compared to the third quarter 2009 operating expenses of $641,322 and operating loss of $(516,949).  The $(76,657) decrease in our operating loss is principally due to the $(274,734), or (97)% decrease in our consulting fees.


Selling, General and Administrative Expenses.  Our selling, general and administrative expenses increased by $107,926, or 34% to $424,934, due primarily to payroll expenses incurred in the three months ended September 30, 2010 compared to the same period of 2009.


Consulting fees.  Our consulting fees, which are attributable to investor relations services, decreased by $(274,734), or (97)%, to $7,630 as we entered into less consulting agreements than in the comparative period of 2009.


Professional Fees and Related Expenses.  Professional fees principally represent costs for legal and accounting fees, these costs increased by $36,105, or 86%, to $78,055, the increased amount of professional fees was incurred in conjunction with litigation fees with Trafalgar.



16





Interest Expense, Net.  Interest expense, net decreased by $(155,727), or (61)%, to $100,032, which represents the interest expense on the Trafalgar debt for the current three month period ending September 30, 2010.  The decrease in interest expense, compared to the same period in 2009 is attributable to the remaining debt premium/discount and deferred financing fees being fully amortized as of fiscal year end December 31, 2009.


B:

Nine Months Ended September 30, 2010 compared to Nine Months Ended September 30, 2009


 

 

Nine Months Ended

September 30,

 

 

 

 

(unaudited)

 

 

 

 

 

2010

 

2009

 

% Change

 

Revenue

 

$

1,647,920

 

$

3,084,735

 

 

(47)

%

Cost of revenue

 

 

1,518,458

 

 

2,750,799

 

 

(45)

%

Total gross profit

 

 

129,462

 

 

333,936

 

 

(61)

%

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

 

1,137,457

 

 

1,268,142

 

 

(10)

%

Consulting fees

 

 

19,075

 

 

580,592

 

 

(97)

%

Professional fees and related expenses

 

 

596,035

 

 

558,194

 

 

7

%

 

 

 

 

 

 

 

 

 

 

 

Operating loss

 

 

(1,623,105)

 

 

(2,072,992)

 

 

(22)

%

Interest expense, net

 

 

401,122

 

 

803,600

 

 

(50)

%

       Provision for income taxes

 

 

--

 

 

14,950

 

 

(100)

%

Net loss

 

$

(2,024,227)

 

$

(2,891,542)

 

 

(30)

%


Operating Loss; Net Loss


For the nine months ended September 30, 2010, compared to the nine months ended in fiscal 2009, we had a decrease in revenues of $(1,436,815), or (47)%, and a decrease in our cost of revenue $(1,232,341), or (45)% (which decreased our gross profit by $(204,474), or (61)%, to $(129,462)). However, our operating loss decreased by $(449,887), or (22)%, to $(1,623,105) and our net loss decreased by $(867,315), or (30)%, to $(2,024,227).  As discussed below, we attribute losses in our selling, general and administrative expenses. However, our quarterly comparison was helped by the fact that in the nine months ended September 30, 2010 we reduced our consulting fees by $(561,517) or (97)%, and our interest expense by $(402,478) or (50)%. We expect our net loss to continue until such time as we are able to correct our cash flow from existing and new customers in our revenue cycle.


Revenue.  For the nine months ended September 30, 2010, our consolidated revenue decreased by $(1,436,815), or (47)%, to $1,647,920. This decrease principally was due to a decrease in (1) the number of new jobs we received and commenced, and (2) work delays on existing jobs included in our December 31, 2009 backlog of $2,486,992. Due to the downturn of the economy, our customers have delayed projects which decrease revenues for the Company. The Company is currently seeking other projects to increase its revenues.


Cost of Revenue; Gross Profit.  Our cost of revenues decreased by $(1,232,341) or (45)%. Our cost of revenue is comprised of direct materials, direct labor, manufacturing overhead and other job related costs.  The decrease in our cost of revenue is due to our controls in labor costs and manufacturing overhead, we also saw a down-turn in our cost of revenue due to a decrease in our contract revenue for the nine months of 2010.


Operating Expenses


Although consolidated operating expenses for the first quarter of 2010 decreased by $(654,361), or (27)%, to $1,752,567, we had an operating loss of $(1,623,105), compared to the nine months ending 2009 operating expenses of $2,406,928 and operating loss of $(2,072,992).  The $(449,887) decrease in our operating loss is principally due to the decrease in our consulting fees by $(516,517) or (97)%.


Selling, General and Administrative Expenses.  Our selling, general and administrative expenses decreased by $(130,685), or (10)%, to $1,137,457, due to the reduction of marketing and health insurance expenses.


Consulting fees.  Our consulting fees, which are attributable to investor relations services, decreased by $(516,517), or (97)%, to $19,075. The Company entered into less consulting agreements in the nine month period ended September 30, 2010, compared to 2009.  




17




Professional Fees and Related Expenses.  Professional fees principally represent costs for legal and accounting fees, these costs increased slightly $37,841, or 7% to 596,035, principally because we incurred expenses for legal fees in conjunction with our settlement negotiations with Trafalgar Capital.


Interest Expense, Net.  Interest expense, net decreased by $(402,478), or (50)%, to $401,122, which represents the interest expense on the Trafalgar debt for the current nine month period ending September 30, 2010.  The decrease in interest expense, compared to the same period in 2009 is attributable to the remaining debt premium/discount and deferred financing fees being fully amortized as of fiscal year end December 31, 2009.


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


The economic downturn has had a severe effect on us.  For the nine month period ended September 30, 2010, our accounts receivable were $204,593, a decrease of $162,505, or 44%, due to a decrease in invoiced revenue, compared to December 31, 2009. At March 25, 2011 our cash on hand was $2,000.  In addition, we have experienced insufficient cash flow resulting from much slower payments from the contractors and others for whom we work.  The Company expects that receipt of payments from our customers will likely continue until such time as the Company can improve its cash flow from operations.


We intend to improve our cash and cash flow from operations by encouraging faster payments, and if necessary granting discounts for prompt payment of our receivables while simultaneously delaying payments to our vendors.  We also hope to increase our revenue by engaging in more aggressive sales, marketing and advertising activity designed to increase our visibility and the awareness of our company, and our products and services.  We intend to develop and implement strategies to market ongoing maintenance and service contracts to our current as well as our past customers, and we plan to package these continuing services as part of our industrial automation design and manufacturing services.  We also intend to implement cost reduction synergies such as centralizing procurement and estimating activities at our corporate office using dedicated teams of trained employees, rather than having these tasks performed at our branch offices. Such centralization in a single location also would provide greater corporate control of pricing while relieving local office engineers and other personnel of those responsibilities and enabling them to devote all of their time to operational activities.  


On April 7, 2010, we entered into a Securities Purchase Agreement with Ascendiant Capital Group, LLC (“Ascendiant”), pursuant to which Ascendiant had agreed to purchase up to $5,000,000 worth of shares of our common stock from time to time over a 24-month period commencing on the effectiveness of a Form S-1, which we filed on June 24, 2010 and subsequently withdrew as of August 31, 2010. The relationship between us and this new funding group was to provide us with additional cash financing for operational and acquisition funding. With the funding available, we had planned on satisfying our then debt outstanding as a result of our operational requirements (i.e. vendors), use the funding to secure additional jobs (i.e. bonds, contractor license fees and software programming), and potentially provide us with the funding to return both the staff and executive management to their regular salary rates (from the March 2009 implementation of the 20% and 50% respective reductions in salary to help with our cash constraints). On March 18, 2011, the Company terminated its agreement with Ascendiant Capital. The Company will not incur any additional fees associated with the cancellation of this agreement. The $125,000 in deferred financing fees will be expensed in the first quarter of 2011, as of the date of cancellation.


Summary of Cash Flow for the nine months ended September 30, 2010 and 2009 (rounded)


Our total cash and cash equivalents increased by approximately $135,500, or 100%, to $135,500 for the nine months ended September 30, 2010, compared to $0 for the nine months ended September 30, 2009. Our cash flows for the nine months ended September 30, 2010 and 2009 were as follows:


 

 

Nine Months Ended September 30,

 

 

 

2010

 

2009

 

Net cash used by operating activities

 

$

(398,100)

 

$

(1,207,000)

 

Net cash used by investing activities

 

 

--

 

 

(14,700)

 

Net cash  provided by financing activities

 

 

491,200

 

 

1,113,200

 


Operating Activities


Our total cash used by operating activities decreased by $808,900, or 67% to $(398,100) for the nine months ended September 30, 2010, compared to $(1,207,000) for the nine months ended September 30, 2009. The decrease is due to a reduction of our net loss in comparison to the same period in 2009. We also noted that in fourth



18




quarter 2009 we accreted the remaining debt premium/discount on all Trafalgar debt, therefore there was no accretion in the current nine months as compared to the same period for 2009.


Investing Activities


Our total cash (used) by investing activities decreased by $14,700, or 100% to $0 for the nine months ended September 30, 2010, compared to $(14,700) for the nine months ended September 30, 2009. The decrease is due to no current expenditures for additional fixed assets in the current period.


Financing Activities


Our total cash provided for financing activities decreased by $622,000, or 56%, to $491,000 for the nine months ended September 30, 2010, compared to $1,113,200 for the nine months ended September 30, 2009. We saw a reduction in our sale of stock to investors for capital, and we accreted the remaining deferred financing fees on all Trafalgar debt, therefore there was no accretion in the current nine months as compared to the same period for 2009.


Current Commitments for Expenditures


Our current cash commitments for expenditures are mainly operational and SEC compliance in nature. We seek to use current revenue to pay vendors for materials for contracts, for payroll, and related employment expenditures (i.e. benefits). The remaining cash is used for debt service and to remain current with any SEC filings that are required.


Off-Balance Sheet Arrangements


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


CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES


The methods, estimates and judgments we use in applying our accounting policies have a significant impact on the results we report in our financial statements and which we discussed above in this Item 2. Some of our accounting policies require us to make difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. We believe our critical accounting policies are those described below.


Potential Derivative Instruments


We periodically assess our financial and equity instruments to determine if they require derivative accounting. Instruments which may potentially require derivative accounting are conversion features of debt and common stock equivalents in excess of available authorized common shares.


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


Inventories


          

Inventory is stated at the lower cost or market, we use the weighted average cost method which consists of materials for contracted jobs, manufacturing supplies and equipment (small tools which are purchased for specific contracts and the related costs are associated with the contract). We constantly review inventory for obsolescence and write off obsolete items at the time of physical count.


Intangible Assets – Customer lists


           

Based on our branding process, customer lists have a finite life of 3 years as we transition the subsidiary to NAS branding over that timeframe. Total amortization expense on the customer list for the nine months ended September 30, 2010, was $27,023 and for the nine months ended September 30, 2009 was $35,782.




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Allowance for Doubtful Accounts


As required by the Receivables Topic of Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”), the Company is required to use a predetermined method in calculating the current value for its bad debt on overall accounts receivable.


We estimate our accounts receivable risks to provide allowances for doubtful accounts accordingly. We believe that our credit risk for accounts receivable is limited because of the way in which we conduct business largely in the areas of contracts. Accounts receivable includes the accrual of work in process for project contracts and field service revenue. We recognize that there is a potential of not being paid in a 12 month period. Our evaluation includes the length of time receivables are past due, adverse situations that may affect a contract’s scope to be paid, and prevailing economic conditions. We assess each and every customer to conclude whether or not remaining balances outstanding need to be placed into allowance and then re-evaluated for write-off. We review all accounts to ensure that all efforts have been exhausted before noting that a customer will not pay for services rendered. The evaluation is inherently subjective and estimates may be revised as more information becomes available.


Revenue Recognition


As required by the Revenue Recognition Topic of FASB ASC, the Company is required to use predetermined contract methods in determining the current value for revenue.


          

Project Contracts Project revenue is recognized on a progress-basis - the Company invoices the client when it has completed the specified portion of the agreement, thereby, ensuring the client is legally liable to the Company for payment of the invoice. On progress-basis contracts, revenue is not recognized until this criteria is met. The Company generally seeks progress-based agreements when a job project takes longer than 30 days to complete.


Service Contracts Service revenue is recognized on a completed project basis - the Company invoices the client when it has completed the services, thereby, ensuring the client is legally liable to the Company for payment of the invoice. On service contracts, revenue is not recognized until the services have been performed. The Company generally seeks service based agreements when project based contracts have been completed.


In all cases, revenue is recognized as earned by the Company. Though contracts may vary between a progress-basis and completed project basis, as the client becomes liable to the Company for services provided, as defined in the agreement, the client is then invoiced and revenue is accordingly recognized and recorded.  The Company does not recognize or record any revenues for which it does not have a legal basis for invoicing or legally collecting.


Stock Based Compensation


Stock based compensation is accounted for using the Equity-Based Payments to Non-Employee Topic of the FASB ASC, which establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity's equity instruments or that may be settled by the issuance of those equity instruments. We determine the value of stock issued at the date of grant. We also determine at the date of grant the value of stock at fair market value or the value of services rendered (based on contract or otherwise) whichever is more readily determinable.


Item 4.  Controls and Procedures


Evaluation of Disclosure Controls and Procedures


Disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in rules and forms adopted by the Securities and Exchange Commission, and that such information is accumulated and communicated to management, including the President/Secretary, to allow timely decisions regarding required disclosures.


Under the supervision and with the participation of our management, including our Chief Executive Officer and Principal Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act).  Based upon that evaluation, our officers



20




concluded that, as of the end of the period covered by this report, the Company has been implementing control procedures to mitigate our internal control issues which could have a material impact on our financial reporting procedures. As of the end of the period covered by this report, the Company has ineffective controls due to the untimely filing of this report. The Company has been working towards clearing ineffective financial reporting controls and disclosures to implement proper internal controls over financial reporting.

 

Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a- 15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is intended to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP. Our internal control over financial reporting includes those policies and procedures that:


·

pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions of our financial statements;

·

provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with applicable GAAP, and that receipts and expenditures are being made only in accordance with authorizations of management and the Board of Directors; and

·

provide reasonable assurance that transactions pertaining to stock issuances are recorded as necessary to permit preparation of financial statements in accordance with applicable GAAP, and that the stock issuances are being made only in accordance with authorizations of management and the Board of Directors.


Under the supervision and with the participation of our management, our Chief Executive Officer, and Principal Financial Officer, we have evaluated the effectiveness of our internal control over financial reporting and as of the end of the period covered by this report, the Company feels that it is working towards clear disclosures and implementing proper internal controls over financial reporting. Our controls have since been updated in order to prevent the issues surrounding our material weakness and management feels that, moving forward, our controls over financial reporting will reduce the potential impact of material misstatements.


This quarterly report does not include an attestation report of the Company's registered public accounting firm regarding internal control over financial reporting.


Change in internal control over financial reporting


No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended September 30, 2010, 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.


We are a defendant in a legal proceeding with an adverse party which has a material interest adverse to us, as set forth below.  


On April 23, 2009, we filed a complaint against Trafalgar Capital Specialized Investment Fund, FIS and Trafalgar Capital Sarl (collectively, “Trafalgar”) in the United States District Court, Southern District of Florida (the “Court”).  Our complaint seeks a declaratory judgment that the secured loans we entered into with Trafalgar in July 2008 and December 2008 violate the usury laws of the State of Florida, whose laws govern the loan documents, by calling for interest to be paid at a greater rate of interest than is allowed by applicable law, and that due to their usurious nature the loan documents are not enforceable by Trafalgar.  We also are seeking compensation for the damages we have suffered, the return of all payments we made under those loan documents, the return of all pledged collateral and the release of the security interest we granted in our assets, double the interest we paid, attorneys’ fees and punitive damages.  We are also asking the Court to order that Trafalgar be precluded from enforcing its rights under our March 2008 loan documents until it has made the payments described above regarding the usurious July and December 2008 loans.  Furthermore, in the alternative, we have alleged that Trafalgar breached our December 2008 Credit Agreement by, among other things, conducting daily sweeps of the monies deposited into the lockbox, representing the proceeds of our accounts receivable, and we also are seeking compensatory damages and attorneys’ fee.




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On July 7, 2009 Trafalgar sent us a notice of default stating we have violated the terms of our debt agreements by failing to make certain payments when due and breaching certain covenants, and it accelerated the due date of all of our outstanding indebtedness, and on October 30, 2009, filed a complaint against us.  In November 2009 we were served with the complaint Trafalgar filed on October 30, 2009 in the Court against us, our two subsidiaries and Robert Chance, our CEO.  Trafalgar’s Complaint seeks repayment of the amounts we allegedly owe under the subject loan and other credit agreements we enter into, plus interest and attorneys fees, and foreclosure on all of our assets (we had pledged such assets as collateral pursuant to the terms of the Security Agreement we executed in connection with such agreements).  The Complaint also alleges that we fraudulently induced Trafalgar to extend to us the approximately $3 million in total financing we received.  


As noted above, in April 2009 we had filed a complaint in the same Court against Trafalgar, alleging that the subject agreements under which Trafalgar had extended financing to us, and under which it now is suing us, were unenforceable.  We believe Trafalgar’s allegations are without merit.  We mounted a vigorous defense and moved the Court to consolidate these two actions.   The Court entered a scheduling order for the April 2009 action for a trial docket on November 1, 2010, calendar call on October 28, 2010. A discovery cutoff date was set for July 16, 2010 and July 23, 2010, respectively and dispositive motions in the cases were due August 27, 2010, the extension was a joint request to the Court to amend the discovery and trial schedule for the April 2009 case so that NAS’ claims and Trafalgar’s claims proceed on the same discovery track. In addition to the indicated cutoff for August 27, 2010, the Company also noted that the court ordered the parties to mediate the case by September 17, 2010.  As of March 25, 2011, the Company completed its settlement negotiations and filed an 8-K on March 29, 2011, indicating the settlement of litigation with Trafalgar.


On June 9, 2010, a writ of garnishment was filed against our subsidiary Intecon’s bank account for our outstanding balanced owed to one of our vendors, Summit Electric. Our current outstanding balance owed to Summit Electric is $61,000. This writ was established to collect funds from us by garnishing money in our subsidiaries bank accounts. At the time of the court ordered garnishment the accounts held a balance of $1,200 and have been sent to Summit Electric under the writ. To date we still have an outstanding balance with Summit Electric and are working towards payment to this vendor.


On October 2, 2010, a writ of garnishment was filed against our subsidiary Intecon’s bank account for our outstanding balanced owed to one of our vendors, Border States. Our current outstanding balance owed to Border State is $287,000. This writ was established to collect funds from us by garnishing money in our subsidiaries bank accounts. At the time of the court ordered garnishment the accounts held a balance of $81,000 and have been sent to Border States under the writ. To date we still have an outstanding balance with Border States and are working towards payment to this vendor.


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


The following is a summary of all transactions involving our current sales of our unregistered equity securities.  Shares issued for cash consideration paid to us are valued at the purchase price per share; all other shares are valued as stated.  All shares issued were issued as “restricted” shares of our common stock except as otherwise expressly stated.


On November 19, 2010, the Company issued to Tribe Communications the sum of 1,250,000 shares of common stock for services rendered at a value of $75,000, or $0.06 per share.


On November 19, 2010, the Company issued to Daniel McCulloch individual the sum of 3,250,000 shares of common stock in consideration $85,000 in cash, or $0.026 per share, of which we have received on November 9, 2010, $12,500, on November 23, 2010, $10,000, on December 3, 2010, $20,000, on January 10, 2011, $2,500 and on January 18, 2011, $5,000. As of March 1, 2011 we have an outstanding balance owed in the amount of $35,000.


On November 19, 2010, the Company issued to one individual the sum of 400,000 shares of common stock in consideration for a convertible note to George Donovan on October 15, 2010. The shares were at a fair market value of $24,000, or $0.06 per share.


On November 23, 2010, the Company issued 1,000,000 shares of common stock for services rendered and to be rendered from Quality Stocks for the next six (6) months. The stock was valued at fair market value on the date of the service agreement at $0.068 per share for a total of $68,000.


On March 8, 2011, the Company issued to one individual the sum of 3,500,000 shares of common stock in consideration for services rendered and to be rendered at a value of $168,000 or $0.048 per share.




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On March 18, 2011 the Ascendiant agreement was cancelled. All stock provided to Ascendiant was in consideration for services rendered. The Company does not owe any additional shares of its common stock per the terms of the agreement and will not trigger any additional liquidation fees.


On March 25, 2011, the Company issued to one individual the sum of 10,000,000 shares of common stock in consideration for cash at a value of $300,000 or $0.03 per share.


On March 25, 2011, the Company issued to one individual the sum of 7,500,000 shares of common stock in consideration for cash at a value of $75,000 or $0.01 per share.


On March 25, 2011, the Company settled negotiations with Trafalgar, the settlement and associated press released were filed in 8-K dated March 29, 2011.


On March 28, 2011, the Company issued 750,000 shares of common stock valued at $36,000 in consideration for retaining an officer of the Company. The Company valued for services at fair market value on the date of the employment agreement in the amount of $0.048 per share.


On March 28, 2011, the Company issued 1,000,000 shares of common stock valued at $48,000 in consideration for retaining an officer of the Company. The Company valued for services at fair market value on the date of the employment agreement in the amount of $0.048 per share.


On March 28, 2011, the Company issued 1,000,000 shares of common stock valued at $30,000 in consideration for retaining an officer of the Company. The Company valued for services at fair market value on the date of the employment agreement in the amount of $0.03 per share.


On March 28, 2011, the Company issued 696,666 shares of common stock valued at $20,900 in consideration for services rendered per agreement dated on March 15, 2011. The Company valued the services per the terms of the agreement in the amount of $0.03 per share.


On March 31, 2011, the Company issued to two individuals the sum of 4,250,000 shares of common stock in consideration for cash at a value of $85,000 or $0.02 per share.


On March 31, 2011, the Company issued 4,461,279 shares of restricted stock common stock valued at $435,878 in consideration for salary compensation to the Company in the amount of $0.10 per share.  


Except as stated above, and noted in our registration statement Form 10, Form 10-K, and Form 10-Q, we have had no recent sales of unregistered securities within the past three fiscal years. There were no underwritten offerings employed in connection with any of the transactions described above. Except as stated above, the above issuances were deemed to be exempt under Rule 504 or 506 of Regulation D and/or Section 4(2) or 4(6) of the Securities Act of 1933, as amended, since, among other things, the transactions did not involve a public offering, the investors were accredited investors and/or qualified institutional buyers, the investors had access to information about our company and their investment, the investors took the securities for investment and not resale, and we took appropriate measures to restrict the transfer of the securities.


Item 3.  Defaults Upon Senior Securities


On July 7, 2009 Trafalgar sent us a notice of default stating we have violated the terms of our debt agreements by failing to make certain payments when due and breaching certain covenants, and it accelerated the due date of all of our outstanding indebtedness, and on October 30, 2009, filed a complaint against us. (For additional information see Item 1: Legal proceedings)


Item 4.  [REMOVED AND RESERVED]


Item 5.  Other Information


 

None




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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.

 

 

 



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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:

April 1, 2011


   

By:    /s/ Robert W. Chance           

   

Name:  Robert W. Chance

   

Title: President and Chief Executive Officer

(Principal Executive Officer)



By:    /s/ Jeremy W. Briggs           

   

Name:  Jeremy W. Briggs

   

Title: V.P. / Principal Financial Officer

 




25