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 additional 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.

Four customers accounted for approximately 23%, 14%, 12% and 11%, respectively, of the Company’s revenues for the three months ended March 31, 2016. Three customers accounted for approximately 39%, 16% and 12%, respectively, of the Company’s revenues for the three months ended March 31, 2015. In addition, these customers accounted for 40% and 68% of the Company’s accounts receivable balance at March 31, 2016 and March 31, 2015, respectively.

							Accounts
		Customer		% of Total			Receivable
Three Months Ended March 31, 2016	Customer	Sales		Revenue			(AR)		% of AR
	1	$	24,300		23	%	$	12,960		16	%
	2	$	14,842		14	%	$	3,620		4	%
	3	$	12,050		12	%	$	8,030		10	%
	4	$	11,822		11		$	7,881		10	%
		$	63,014		60	%	$	32,491		40	%

							Accounts
		Customer		% of Total			Receivable
Three Months Ended March 31, 2015	Customer	Sales		Revenue			(AR)		% of AR
	1	$	47,952		39	%		22,680		32	%
	2	$	20,100		16	%		8,040		11	%
	3	$	14,976		12	%	$	17,784		25	%
		$	83,028		67	%	$	48,504		68	%

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 March 31, 2016 and December 31, 2015.

As of March 31, 2016	Amount		Level 1		Level 2		Level 3
Embedded conversion derivative liability	$	754,122		-		-	$	754,122
Warrant derivatives		658,994		-		-		658,994
	$	1,413,116	$	-	$	-	$	1,413,116

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		(604,787	)
Balance at March 31, 2016	$	1,413,116

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 March 31,			At December 31,
	2016			2015
Market value of stock on measurement date	$	0.025		$	0.04
Risk-free interest rate		0.59 - 1.21	%		0.65 - 1.76	%
Dividend yield		0	%		0	%
Volatility factor		170 - 260	%		174 - 228	%
Term		0.78 - 4.53 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 March 31, 2016 and March 31, 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		491,396			35,777,399		0.01		(144,732	)		25,272,729		(0.01	)

Effective of Dilutive Securities:
Convertible debt		(19,692	)		30,026,407		–		–			–		–

Diluted:
Income (loss) attributable to common stock, including assumed conversions		471,704			65,803,806		0.01		(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.