UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
———————
FORM 10-K/A
(Amendment No. 1)
———————
| þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2009 | |
| or | |
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the transition period from: _____________ to _____________ | |
| HAWK SYSTEMS, INC. | ||
| (Exact name of registrant as specified in its charter) |
| Delaware | 000-49864 | 65-1089222 | ||
(State or Other Jurisdiction of Incorporation or Organization) | Commission File Number | (I.R.S. Employer Identification No.) |
2385 NW Executive Center Drive, Suite 100
Boca Raton, FL 33431
(Address of Principal Executive Office) (Zip Code)
(561) 962-2885
(Registrant’s telephone number, including area code)
N/A
(Former name or former address, if changed since last report)
———————
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01
———————
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ¨ No þ
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):
| Large accelerated filer | o | Accelerated filer | o |
| Non-accelerated filer | o | Smaller reporting company | þ |
| (Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No þ
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant, as of June 30, 2009, was approximately $3,816,522 based upon the closing price reported for such date on the OTC Bulletin Board. For purposes of this disclosure, shares of common stock held by persons who hold more than 5% of the outstanding shares of common stock and shares held by executive officers and directors of the registrant have been excluded because such persons may be considered to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date: 65,361,332 as of April 15, 2010.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
HAWK SYSTEMS, INC.
Table of Contents
PART II | |||||
ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA | 1 | |||
PART IV | |||||
ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES | 2 | |||
SIGNATURES | 4 |
Explanatory Note
Hawk Systems, Inc. (“Company,” “Hawk,” “we,” “us,” or, “our”) is filing this Amendment No. 1 (the “Form 10-K/A”) to its annual report previously filed on Form 10-K with the SEC on April 15, 2010: (i) to revise Item 8. Financial Statements and Supplementary Data to correct a scrivener’s error. Pursuant to Rule 12b-15 under the Securities Exchange Act of 1934, as a result of this amended report, the certifications pursuant to Section 302 and Section 906 of the Sarbanes-Oxley Act of 2002, filed and furnished, respectively, as exhibits to the Form 10-K have been re-executed and re-filed as of the date of this Form 10-K/A and are included as exhibits hereto.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required to be included in this Annual Report appear at the end of this Annual Report beginning on page F-1.
1
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) 1. The following financial statements for Hawk Systems, Inc. and Subsidiaries are filed as a part of this report:
Report of Independent Certified Public Accountants
Consolidated Balance Sheets— December 31, 2009 and 2008
Consolidated Statements of Operations—Years ended December 31, 2009 and 2008.
Consolidated Statements of Shareholders' Deficit —Years ended December 31, 2009 and 2008.
Consolidated Statements of Cash Flows—Years ended December 31, 2009 and 2008.
2. Notes to Consolidated Financial Statements
Schedules are omitted because of the absence of conditions under which they are required or because the information is included in the financial statements or notes thereto.
(b) Exhibits.
| Exhibit No. | Description | |
2.1 | Agreement and Plan of Merger, dated February 19, 2009, by and among Explorations Group, Inc., Hawk Acquisition Corp., and Hawk Biometric Technologies, Inc. (incorporated by reference to Exhibit 10 to the Company's Current Report on Form 8-K filed with the SEC on February 26, 2009). | |
3.1 | Certificate of Amendment to Certificate of Incorporation filed with the State of Delaware on January 2, 2009 (incorporated by reference to Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q filed with the SEC on August 19, 2009). | |
3.2 | Certificate of Amendment to Certificate of Incorporation filed with the State of Delaware on May 27, 2009 (incorporated by reference to Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q filed with the SEC on August 19, 2009). | |
3.3 | Certificate of Correction to the Certificate of Amendment to Certificate of Incorporation filed with the State of Delaware on March 17, 2010 (incorporated by reference to Exhibit 3.3 to the Company's Annual Report on Form 10-K filed with the SEC on April 15, 2010). | |
3.4 | Certificate of Amendment to Certificate of Incorporation of Hawk Systems, Inc. filed with the State of Delaware on March 18, 2010 (incorporated by reference to Exhibit 3.4 to the Company's Annual Report on Form 10-K filed with the SEC on April 15, 2010). | |
10.1 | Unsecured Promissory Note, dated September 16, 2009, in the principal amount of $50,000 executed by Hawk Systems, Inc. in favor of Mark Spanakos (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the SEC on September 24, 2009). | |
10.2 | Unsecured Promissory Note, dated September 16, 2009, in the principal amount of $100,000 executed by Hawk Systems, Inc. in favor of Delilah Holdings, LLC (incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed with the SEC on September 24, 2009). | |
10.3 | Employment Agreement between the Company and David Coriaty dated May 1, 2009 (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q filed with the SEC on August 19, 2009). | |
10.4 | Employment Agreement between the Company and Robert E. McCann III dated May 12, 2009 (incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q filed with the SEC on August 19, 2009). | |
10.5 | Amendment to Employment Agreement between the Company and Robert E. McCann III dated August 14, 2009 (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on August 19, 2009) | |
10.6 | Exclusive Investment Banking Agreement, dated as of June 4, 2008, by and between Hawk Biometric Technologies, Inc., and Cresta Capital Strategies, LLC (incorporated by reference to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on August 19, 2009). | |
10.7 | Letter Agreement amending Exclusive Investment Banking Agreement, dated February 13, 2009, by and between Hawk Biometric Technologies, Inc., and Cresta Capital Strategies, LLC (incorporated by reference to Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on August 19, 2009). | |
10.8 | Amendment No. 2 to the Exclusive Investment Banking Agreement, dated November 23, 2009, by and between Hawk Systems, Inc., and Cresta Capital Strategies, LLC (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on November 25, 2009). |
2
10.9 | Unsecured Promissory Note, dated November 23, 2009, in the principal amount of $250,000 executed by Hawk Systems, Inc. in favor of Cresta Capital Strategies, LLC (incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q filed with the SEC on November 25, 2009). | |
10.10 | Employment Agreement by and between Hawk Systems, Inc. and Michael Diamant dated December 15, 2009 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 10-K filed with the SEC on December 29, 2009). | |
10.11 | Amendment No. 1 to the Employment Agreement by and between Hawk Systems, Inc. and Michael Diamant dated January 19, 2010 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 10-K filed with the SEC on January 20, 2010). | |
10.12 | Stipulation of Settlement by and between Hawk Systems, Inc. and Leonard Tucker, as co-Trustee of the Tucker Family Spendthrift Trust dated January 25, 2010 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 10-K filed with the SEC on January 29, 2010). | |
10.13 | Consulting Agreement by and between Hawk Systems, Inc. and Griffin Enterprises LLC dated February 23, 2010 (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the SEC on March 1, 2010). | |
10.14 | Unsecured Promissory Note, dated January 31, 2010, in the principal amount of $100,000 executed by Hawk Systems, Inc. in favor of David Coriaty (incorporated by reference to Exhibit 10.14 to the Company's Annual Report on Form 10-K filed with the SEC on April 15, 2010). | |
10.15 | Unsecured Promissory Note, dated February 1, 2010, in the principal amount of $40,000 executed by Hawk Systems, Inc. in favor of David Coriaty (incorporated by reference to Exhibit 10.15 to the Company's Annual Report on Form 10-K filed with the SEC on April 15, 2010). | |
10.16 | Amendment No. 1 to the Employment Agreement by and between Hawk Systems, Inc. and David Coriaty dated April 9, 2010 (incorporated by reference to Exhibit 10.16 to the Company's Annual Report on Form 10-K filed with the SEC on April 15, 2010). | |
14.1 | Code of Conduct (incorporated by reference to Exhibit 3(i).4 to the Company's Annual Report on Form 10-KSB filed with the SEC on March 31, 2004). | |
21.1 | Subsidiaries of Hawk Systems, Inc. (incorporated by reference to Exhibit 21.1 to the Company's Annual Report on Form 10-K filed with the SEC on April 15, 2010). | |
31.1 | Certification of Principal Executive Officer, pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended, adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.* | |
31.2 | Certification of Principal Financial Officer, pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as amended, 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.* |
__________________
* Filed herewith.
3
SIGNATURES
In accordance with the requirements of Section 13 and 15(d) of the Securities Exchange Act of 1934, Hawk Systems, Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| HAWK SYSTEMS, INC. | |||
| Date: May 4, 2010 | By: | /s/ Michael Diamant | |
| Michael Diamant | |||
| Chief Executive Officer and Director | |||
4
EXHIBIT INDEX
| Exhibit No. | Description | |
2.1 | Agreement and Plan of Merger, dated February 19, 2009, by and among Explorations Group, Inc., Hawk Acquisition Corp., and Hawk Biometric Technologies, Inc. (incorporated by reference to Exhibit 10 to the Company's Current Report on Form 8-K filed with the SEC on February 26, 2009). | |
3.1 | Certificate of Amendment to Certificate of Incorporation filed with the State of Delaware on January 2, 2009 (incorporated by reference to Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q filed with the SEC on August 19, 2009). | |
3.2 | Certificate of Amendment to Certificate of Incorporation filed with the State of Delaware on May 27, 2009 (incorporated by reference to Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q filed with the SEC on August 19, 2009). | |
3.3 | Certificate of Correction to the Certificate of Amendment to Certificate of Incorporation filed with the State of Delaware on March 17, 2010 (incorporated by reference to Exhibit 3.3 to the Company's Annual Report on Form 10-K filed with the SEC on April 15, 2010). | |
3.4 | Certificate of Amendment to Certificate of Incorporation of Hawk Systems, Inc. filed with the State of Delaware on March 18, 2010 (incorporated by reference to Exhibit 3.4 to the Company's Annual Report on Form 10-K filed with the SEC on April 15, 2010). | |
10.1 | Unsecured Promissory Note, dated September 16, 2009, in the principal amount of $50,000 executed by Hawk Systems, Inc. in favor of Mark Spanakos (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the SEC on September 24, 2009). | |
10.2 | Unsecured Promissory Note, dated September 16, 2009, in the principal amount of $100,000 executed by Hawk Systems, Inc. in favor of Delilah Holdings, LLC (incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed with the SEC on September 24, 2009). | |
10.3 | Employment Agreement between the Company and David Coriaty dated May 1, 2009 (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q filed with the SEC on August 19, 2009). | |
10.4 | Employment Agreement between the Company and Robert E. McCann III dated May 12, 2009 (incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q filed with the SEC on August 19, 2009). | |
10.5 | Amendment to Employment Agreement between the Company and Robert E. McCann III dated August 14, 2009 (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on August 19, 2009) | |
10.6 | Exclusive Investment Banking Agreement, dated as of June 4, 2008, by and between Hawk Biometric Technologies, Inc., and Cresta Capital Strategies, LLC (incorporated by reference to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on August 19, 2009). | |
10.7 | Letter Agreement amending Exclusive Investment Banking Agreement, dated February 13, 2009, by and between Hawk Biometric Technologies, Inc., and Cresta Capital Strategies, LLC (incorporated by reference to Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on August 19, 2009). | |
10.8 | Amendment No. 2 to the Exclusive Investment Banking Agreement, dated November 23, 2009, by and between Hawk Systems, Inc., and Cresta Capital Strategies, LLC (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on November 25, 2009). | |
10.9 | Unsecured Promissory Note, dated November 23, 2009, in the principal amount of $250,000 executed by Hawk Systems, Inc. in favor of Cresta Capital Strategies, LLC (incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q filed with the SEC on November 25, 2009). | |
10.10 | Employment Agreement by and between Hawk Systems, Inc. and Michael Diamant dated December 15, 2009 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 10-K filed with the SEC on December 29, 2009). | |
10.11 | Amendment No. 1 to the Employment Agreement by and between Hawk Systems, Inc. and Michael Diamant dated January 19, 2010 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 10-K filed with the SEC on January 20, 2010). | |
10.12 | Stipulation of Settlement by and between Hawk Systems, Inc. and Leonard Tucker, as co-Trustee of the Tucker Family Spendthrift Trust dated January 25, 2010 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 10-K filed with the SEC on January 29, 2010). | |
10.13 | Consulting Agreement by and between Hawk Systems, Inc. and Griffin Enterprises LLC dated February 23, 2010 (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the SEC on March 1, 2010). | |
10.14 | Unsecured Promissory Note, dated January 31, 2010, in the principal amount of $100,000 executed by Hawk Systems, Inc. in favor of David Coriaty (incorporated by reference to Exhibit 10.14 to the Company's Annual Report on Form 10-K filed with the SEC on April 15, 2010). | |
10.15 | Unsecured Promissory Note, dated February 1, 2010, in the principal amount of $40,000 executed by Hawk Systems, Inc. in favor of David Coriaty (incorporated by reference to Exhibit 10.15 to the Company's Annual Report on Form 10-K filed with the SEC on April 15, 2010). |
5
10.16 | Amendment No. 1 to the Employment Agreement by and between Hawk Systems, Inc. and David Coriaty dated April 9, 2010 (incorporated by reference to Exhibit 10.16 to the Company's Annual Report on Form 10-K filed with the SEC on April 15, 2010). | |
14.1 | Code of Conduct (incorporated by reference to Exhibit 3(i).4 to the Company's Annual Report on Form 10-KSB filed with the SEC on March 31, 2004). | |
21.1 | Subsidiaries of Hawk Systems, Inc. (incorporated by reference to Exhibit 21.1 to the Company's Annual Report on Form 10-K filed with the SEC on April 15, 2010). | |
31.1 | Certification of Principal Executive Officer, pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended, adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.* | |
31.2 | Certification of Principal Financial Officer, pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as amended, 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.* |
__________________
* Filed herewith.
6
INDEX TO FINANCIALS
| Page | ||||
Reports of Independent Registered Public Accounting Firms | F-2 | |||
Consolidated Balance Sheets as of December 31, 2009 and 2008 | F-3 | |||
Consolidated Statements of Operations for the Years Ended December 31, 2009 and 2008 | F-4 | |||
Consolidated Statements of Changes in Stockholders’ Deficit for the Years Ended December 31, 2009 and 2008 | F-5 | |||
Consolidated Statements of Cash Flows for the Years Ended December 31, 2009 and 2008 | F-6 | |||
Notes to Consolidated Financial Statements | F-7 | |||
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To The Board of Directors and
Stockholders of Hawk Systems, Inc.
Boca Raton, Florida
We have audited the accompanying consolidated balance sheets of Hawk Systems, Inc. and Subsidiaries (a Development Stage Company) as of December 31, 2009 and 2008, and the related consolidated statements of operations, stockholders’ deficit and cash flows for each of the years in the two year period ended December 31, 2009. Hawk Systems Inc. and Subsidiaries (a Development Stage Company) management is responsible for these financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of The Company as of December 31, 2009 and 2008, and the results of its operations and cash flows for each of the years in the two year period ended December 31, 2009, in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has no material revenues, has suffered recurring losses from operations and has a net capital deficiency that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Liebman Goldberg & Hymowitz, LLP
Garden City, New York
April 13, 2010
F-2
HAWK SYSTEMS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
| December 31, 2009 | December 31, 2008 | |||||||
ASSETS | ||||||||
Current assets | ||||||||
Prepaid financing costs | $ | 17,519 | $ | - | ||||
Interest Receivable | 18,480 | |||||||
TOTAL CURRENT ASSETS | 35,999 | - | ||||||
Other Assets | ||||||||
Note Receivable-Related Party | 168,000 | |||||||
Other assets | 5,838 | - | ||||||
TOTAL OTHER ASSETS | 173,838 | |||||||
TOTAL ASSETS | $ | 209,837 | $ | - | ||||
LIABILITIES & STOCKHOLDERS' DEFICIT | ||||||||
Current liabilities | ||||||||
Bank overdraft | $ | 44 | $ | 17,140 | ||||
Accounts payable | 547,049 | - | ||||||
Notes payable | 150,000 | |||||||
Bond payable | 25,000 | - | ||||||
Loan payable - related party | 313,575 | 50,705 | ||||||
Accrued liabilities | 803,911 | - | ||||||
Accrued payroll liabilities | 231,567 | - | ||||||
TOTAL CURRENT LIABILITIES | 2,071,146 | 67,845 | ||||||
Long-term liabilities | ||||||||
Due to related parties | 31,820 | |||||||
Convertible debenture, net | 44,000 | - | ||||||
TOTAL LONG-TERM LIABILITIES | 75,820 | - | ||||||
TOTAL LIABILITIES | 2,146,966 | 67,845 | ||||||
Stockholders' deficit | ||||||||
Preferred stock | ||||||||
Series B - 500,000 shares authorized, $0.01 par value, 587,347 and 599,288 shares outstanding at December 31, 2009 and December 31, 2008 (1) | 5,873 | 5,993 | ||||||
Common stock | ||||||||
100,000,000 shares authorized, $0.01 par value, 35,799,315 shares issued and outstanding at December 31, 2009 (1) | 357,993 | - | ||||||
Additional paid-in capital | 16,047,827 | 15,615,922 | ||||||
Accumulated deficit during development stage | (18,348,822 | ) | (15,689,760 | ) | ||||
TOTAL STOCKHOLDERS' DEFICIT | (1,937,129 | ) | (67,845 | ) | ||||
TOTAL LIABILITIES & STOCKHOLDERS' DEFICIT | $ | 209,837 | $ | - | ||||
(1) The October 25, 2007 (date of inception) capital accounts of the Company have been retroactively restated to reflect the number of shares of Series B Preferred Stock issued in the merger transaction. See Note 1. | ||||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-3
HAWK SYSTEMS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
| For the year ended December 31 | From October 25, 2007 (Inception) through December 31, 2009 | |||||||||||
| 2009 | 2008 | |||||||||||
REVENUE | $ | - | $ | - | $ | - | ||||||
OPERATING EXPENSES | ||||||||||||
General and Administrative | 2,496,757 | 673,818 | 3,170,575 | |||||||||
Research and Development | 109,491 | 15,942 | 125,433 | |||||||||
Total Operating Expenses | 2,606,248 | 689,760 | 3,296,008 | |||||||||
- | ||||||||||||
LOSS FROM OPERATIONS | (2,606,248 | ) | (689,760 | ) | (3,296,008 | ) | ||||||
- | ||||||||||||
OTHER INCOME (EXPENSE) | - | |||||||||||
Impairment loss | - | (15,000,000 | ) | (15,000,000 | ) | |||||||
Interest Income | 18,480 | 18,480 | ||||||||||
Interest Expense | (71,294 | ) | - | (71,294 | ) | |||||||
Total Other Income (Expense) | (52,814 | ) | (15,000,000 | ) | (15,052,814 | ) | ||||||
- | ||||||||||||
LOSS BEFORE PROVISION FOR INCOME TAXES | (2,659,062 | ) | (15,689,760 | ) | (18,348,822 | ) | ||||||
- | ||||||||||||
PROVISION FOR INCOME TAXES | - | - | - | |||||||||
- | ||||||||||||
NET LOSS | $ | (2,659,062 | ) | $ | (15,689,760 | ) | $ | (18,348,822 | ) | |||
NET LOSS PER SHARE, | ||||||||||||
BASIC AND DILUTED | $ | (0.08 | ) | $ | - | |||||||
WEIGHTED AVERAGE NUMBER OF | ||||||||||||
COMMON SHARES OUTSTANDING | ||||||||||||
BASIC AND DILUTED (2) | 35,799,315 | - | ||||||||||
(2) The October 25, 2007 (date of inception) capital accounts of the Company have been retroactively restated to reflect the number of shares of Series B Preferred Stock issued in the merger transaction. See Note 1. | ||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-4
HAWK SYSTEMS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
For the Year Ended December 31, 2009 and the Period from October 25, 2007 (inception) Through December 31, 2008
| Deficit Accumulated | ||||||||||||||||||||||||
| Preferred Stock | Common Stock | Additional | During Development | |||||||||||||||||||||
| Shares | Amount | Shares | Amount | Paid-in Capital | Stage | |||||||||||||||||||
Balance at October 25, 2007 (Inception) (3) | 599,288 | $ | 5,993 | - | $ | - | $ | 15,615,922 | $ | |||||||||||||||
- | - | - | - | - | (15,689,760 | ) | ||||||||||||||||||
Net loss | ||||||||||||||||||||||||
Balance at December 31, 2008 | 599,288 | $ | 5,993 | - | $ | - | $ | 15,615,922 | $ | (15,689,760 | ) | |||||||||||||
Deficit Accumulated | ||||||||||||||||||||||||
Preferred Stock | Common Stock | Additional | During Development | |||||||||||||||||||||
Shares | Amount | Shares | Amount | Paid-in Capital | Stage | |||||||||||||||||||
Balance at December 31, 2008 | 599,288 | $ | 5,993 | - | $ | - | $ | 15,615,922 | $ | (15,689,760 | ) | |||||||||||||
Recapitalization of the Company | 31,299,315 | 312,993 | 26,905 | |||||||||||||||||||||
Cancellation of preferred stock | (11,941 | ) | (119 | ) | ||||||||||||||||||||
Reimbursement for Consulting Agreement | 4,500,000 | $ | 45,000 | $ | 405,000 | |||||||||||||||||||
Net loss | - | - | - | - | - | (2,659,062 | ) | |||||||||||||||||
Balance at December 31, 2009 | 587,347 | $ | 5,873 | 35,799,315 | $ | 357,993 | $ | 16,047,827 | $ | (18,348,822 | ) | |||||||||||||
(3) The October 25, 2007 (date of inception) capital accounts of the Company have been retroactively restated to reflect the number of shares of Series B Preferred Stock issued in the merger transaction. See Note 1. | ||||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements. | ||||||||||||||||||||||||
F-5
HAWK SYSTEMS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
| For the year ended December 31 | From October 25, 2007 (Inception) through December 31, | |||||||||||
| 2009 | 2008* | 2009 | ||||||||||
Cash flows from operating activities: | ||||||||||||
Net loss | $ | (2,659,062 | ) | $ | (15,689,760 | ) | $ | (18,348,822 | ) | |||
Accretion of interest on convertible debenture | 44,000 | - | 44,000 | |||||||||
Reverse merger paid in capital | 667,742 | 667,742 | ||||||||||
Amortization of deferred financing costs | 11,680 | - | 11,680 | |||||||||
Adjustment to reconcile net loss to net cash (used in) operating activities | ||||||||||||
- | ||||||||||||
Changes in assets and liabilities: | - | |||||||||||
Increase (decrease) from affiliates | (168,000 | ) | - | (168,000 | ) | |||||||
Increase (decrease) in interest receivable | (18,480 | ) | - | (18,480 | ) | |||||||
Increase (decrease) in accounts payable | 547,049 | - | 547,049 | |||||||||
Increase (decrease) in loan payable-related party | 262,870 | 50,705 | 313,575 | |||||||||
Increase (decrease) in accrued liabilities | 803,911 | - | 803,911 | |||||||||
Increase (decrease) from related parties | 31,820 | 31,820 | ||||||||||
Increase (decrease) in accrued payroll liabilities | 231,566 | - | 231,566 | |||||||||
Net cash (used in) operating activities | (244,904 | ) | (15,639,055 | ) | (15,883,959 | ) | ||||||
Cash flows from investing activities: | - | - | - | |||||||||
Cash flows from financing activities: | ||||||||||||
Proceeds from issuance of convertible debenture | 87,000 | - | 87,000 | |||||||||
Proceeds from issuance of bonds and notes | 175,000 | 175,000 | ||||||||||
Increase in paid in capital | - | 15,621,915 | 15,621,915 | |||||||||
Net cash provided by financing activities | 262,000 | 15,621,915 | 15,883,915 | |||||||||
Net increase (decrease) in cash | 17,096 | (17,140 | ) | (44 | ) | |||||||
Cash,bank overdraft beginning of year | (17,140 | ) | - | - | ||||||||
Cash, bank overdraft end of year | $ | (44 | ) | $ | (17,140 | ) | $ | (44 | ) | |||
- | ||||||||||||
Supplemental Cash Flow Information: | ||||||||||||
Cash paid for interest | $ | - | $ | - | $ | - | ||||||
Cash paid for income taxes | $ | - | $ | - | $ | - | ||||||
*The Company did not commence business operations until August, 2008 | ||||||||||||
The accompanying notes are an integral part of these consolidated financial statements. | ||||||||||||
F-6
HAWK SYSTEMS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009
Organization and Nature of Operations
Since September 2004, Hawk Systems, Inc. (formerly known as Explorations Group, Inc.), a Delaware corporation (the “Company,” “we” “us” or “our”) was in the business of operating parking lots and garages in New York City and the surrounding areas through its wholly-owned operating subsidiary, Parking Pro, Inc. (“Parking Pro”). During 2008, the Company decided to pursue a new business direction. On February 19, 2009, pursuant to the terms of an Agreement and Plan of Merger by and between the Company, Hawk Acquisition Corp., a newly formed, wholly-owned Florida subsidiary of the Company (“Hawk Acquisition”) and Hawk Biometric Technologies, Inc., a Florida corporation (“Hawk Biometric”), Hawk Acquisition merged with Hawk Biometric (the “Merger”).
The former stockholders of Hawk Biometric were issued .02 shares of the Company’s Class B Voting, Convertible Preferred Stock, par value $.01 per share (“Series B Preferred Stock”) in exchange for each share of Hawk Biometric Class A and Class B common stock outstanding. Each share of Series B Preferred Stock is convertible into one hundred (100) shares of the Company’s common stock, par value $.01 (“Common Stock”) at any time, at the option of the holder and will automatically be converted into shares of Common Stock on the day following the completion of a 1-for-6 reverse split of its Common Stock (the “Reverse Split”). On March 18, 2010, the Company filed a Certificate of Amendment to its Certificate of Incorporation with the State of Delaware which set the effective date of the Reverse Split as April 7, 2010.
The merger resulted in a change of control, and as such, Hawk Biometric is the surviving entity and is a wholly-owned subsidiary of the Company. This report on Form 10-K is presented accordingly.
On May 27, 2009, the Company filed a Certificate of Amendment to its Certificate of Incorporation with the State of Delaware changing its name to Hawk Systems, Inc. On July 15, 2009, the trading symbol for the Company’s Common Stock, which is quoted on the Over-The-Counter Bulletin Board, was changed from EXGI to HWSY.
Hawk Biometric is a developer of innovative fingerprint authentication technology that offers high degrees of security, convenience, and ease of use in applications such as automobile locks and identity theft protection. Management believes technology can also be used in banking, healthcare, hotel/casino operations, employee time clock and attendance, stadium security, and sporting and gaming applications where identity management is required.
Basis of Presentation
Reverse Merger. The Merger has been accounted for as a reverse merger in the form of a recapitalization with Hawk Biometric as the successor. The recapitalization has been given retroactive effect in the accompanying consolidated financial statements. The accompanying consolidated financial statements represent those of Hawk Biometric for all periods prior to the consummation of the Merger and of the Company and its wholly-owned subsidiaries, Hawk Biometric and Parking Pro, subsequent to the Merger.
The consolidated balance sheet as of December 31, 2009 and the consolidated statement of operations, consolidated statement of stockholders' deficit and consolidated cash flows for the fiscal years ended December 31, 2009 and the period October 25, 2007 (date of inception) through December 31, 2008 included herein, have been prepared in accordance with the instructions for Form 10-K under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Regulation S-X under the Exchange Act. In the opinion of the management, they include all normal recurring adjustments necessary for a fair presentation of the consolidated financial statements.
Since inception, the Company has not realized any revenue from its biometric technology business. The Company has been primarily engaged in developing its fingerprint authentication technology and identifying, and pursuing acquisitions of related assets or companies. The Company has manufactured units of its biometric automotive starter product but has not yet sold any of those units. To date, the Company’s operations consist of raising capital and preparing for its first commercial product sale. There is no guarantee that the Company will be able to sell any products or generate revenues. These consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business.
F-7
HAWK SYSTEMS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009
Going Concern. We have incurred losses since inception and have an accumulated deficit of $(18,348,822) at December 31, 2009, which raises substantial doubt about our ability to continue as a going concern. We have funded our operations since inception through the issuance of debt and equity securities and loans from related parties. Should we require additional funds and are unable to acquire such funds, our ability to continue as a going concern will be severely affected. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
These factors create uncertainty whether we can continue as a going concern. Our plans to mitigate the effects of the uncertainties on our continued existence are: 1) to raise additional equity capital; 2) to restructure our existing debt; and 3) to pursue our business plan and seek to generate positive operating cash flow. Management believes that these plans may be effectively implemented in the next twelve-month period. However, our ability to continue as a going concern is dependent on the implementation and success of these plans. The financial statements do not include any adjustments in the event we are unable to continue as a going concern.
Summary of Significant Accounting Policies
Codification of Accounting Standards
The issuance of FASB Accounting Standards Codification (the “Codification”) on July 1, 2009 (effective for interim or annual reporting periods ending after September 15, 2009), changes the way that U.S. generally accepted accounting principles
F-8
HAWK SYSTEMS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009
(“GAAP”) are referenced. Beginning on that date, the Codification officially became the single source of authoritative nongovernmental GAAP; however, SEC registrants must also consider rules, regulations, and interpretive guidance issued by the SEC or its staff. The switch affects the way companies refer to GAAP in financial statements and in their accounting policies. All existing standards that were used to create the Codification became superseded. Instead, references to standards will consist solely of the number used in the Codification’s structural organization. Consistent with the effective date of the Codification, financial statements for periods ending after September 15, 2009, refers to the Codification structure, not pre-Codification historical GAAP.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and the accounts of all majority-owned subsidiaries. The consolidated balance sheet is a classified presentation, which distinguishes between current and non-current assets and liabilities. The Company believes that a classified balance sheet provides a more meaningful presentation consistent with the business cycles of the Company's operations. All significant inter-company accounts and transactions have been eliminated in consolidation.
Research and Development
Pursuant to ASC 730 (formerly SFAS No. 2), research and development costs are expensed as incurred. Research and development costs for the years ended December 31, 2009 and for the period October 25, 2007 (date of inception) through December 31, 2008 were $109,491 and $15,942 respectively.
Earnings Per Common Share
We adopted ASC 260 (formerly FASB No. 128, “Earnings per Share”). The statement established standards for computing and presenting earnings per share (“EPS”). It replaced the presentation of primary EPS with a basic EPS and also requires dual presentation of basic and diluted EPS on the face of the income statement. Basic income/ (loss) per share was computed by dividing our net income/(loss) by the weighted average number of common shares outstanding during the period. The weighted average number of common shares used to calculate basic and diluted income/(loss) per common share for the year ended December 31, 2009 and for the period October 25, 2007 (date of inception) through December 31, 2008 was 31,299,315 and 0 (as a result of the recapitalization), respectively. The Company’s common stock equivalents, of outstanding options and warrants, have not been included as they are anti-dilutive.
Fair Value of Financial Instruments
The Company has adopted the required provisions of Topic 820, “Fair Value Measurements”. Those provisions relate to our financial assets and liabilities carried at fair value and our fair value disclosures related to financial assets and liabilities. Topic 820 defines fair value, expands related disclosure requirements and specifies a hierarchy of valuation techniques based on the nature of the inputs used to develop the fair value measures. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. There are three levels of inputs to fair value measurements - Level 1, meaning the use of quoted prices for identical instruments in active markets; Level 2, meaning the use of quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active or are directly or indirectly observable; and Level 3, meaning the use of unobservable inputs. Observable market data should be used when available.
The Company’s financial instruments are carried at fair value, including, cash equivalents. Virtually all of the Company’s valuation measurements are Level 1 measurements. The adoption of Topic 820 did not have a significant impact on the Company’s consolidated financial statements. As of December 31, 2009, the fair value of our long-term debt was $100,000, which exceeded the carrying value by $56,000.
Development Stage Activities and Operations
The Company is in its initial stages of formation and for the period October 25, 2007 (date of inception) through December 31, 2009, the Company had no revenues.
F-9
HAWK SYSTEMS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include the valuation of goodwill and intangible assets. Actual results could differ from those estimates.
Revenue Recognition:
The Company has not reported any revenues during fiscal year ended December 31, 2009 and for the period October 25, 2007 (date of inception) to December 31, 2008 but intends to recognize revenue in the future when earned, there is a fixed and determinable price for its product and collectability is reasonably assured when title passes.
Cash and Cash Equivalents:
We consider all highly liquid investments with original maturities of three months or less to be cash equivalents. We do not have cash balances in banks in excess of the maximum amount insured by the FDIC and other international agencies as of December 31, 2009 and 2008.
Long-Lived Assets:
In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”), long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets in question may not be recoverable. An impairment would be recorded in circumstances where undiscounted cash flows expected to be generated by an asset are less then the carrying value of that asset.
Income Taxes:
We account for income taxes under ASC 740-10 (formerly SFAS No. 109, “Accounting for Income Taxes”) (“ASC 740-10”). ASC 740-10 requires and asset and liability approach for financial reporting for incomes taxes. Under ASC 740-10, deferred taxes are provided for temporary differences between the carrying values of the assets and liabilities for financial reporting and tax purposes at the enacted rates at which these differences are expected to reverse.
We recognize deferred tax liabilities and assets for the expected future tax consequences of events that have been recognized in our consolidated financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the differences between the financial statement carrying amounts and tax basis of assets and liabilities using enacted rates in effect in the years in which the differences are expected to reverse.
Because the Company has an uncertainty regarding it as a going concern, a 100% valuation allowance has been set up for any deferred tax item.
Loss per Common Share
We apply SFAS No. 128, "Earnings per Share," which requires two presentations of earnings (loss) per share-"basic" and "diluted." Basic earnings (loss) per share is computed by dividing income or loss available to common stockholders by the weighted-average number of common shares issued and outstanding for the period. The computation of diluted earnings (loss) per share is similar to basic earnings per share, except that the weighted average number of common shares is increased to include the number of additional common shares that would have been outstanding if the potentially dilutive common shares had been issued. For the fiscal years ended December 31, 2009 and for the period October 25, 2007 (date of inception) to December 31, 2008, the potential shares of Common Stock to be issued upon exercise or conversion of outstanding stock options, warrants, convertible debenture, and Series B Preferred Stock have not been included in the determination of loss per share because the effect would be anti-dilutive.
Recent Accounting Pronouncements
In June 2009, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 168 , The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles–a Replacement of FASB Statement No. 162 , (SFAS 168). SFAS 168 establishes the FASB Accounting Standards Codification (Codification) as the single source of authoritative generally accepted accounting principles (GAAP) recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative U.S. GAAP for SEC registrants. SFAS 168 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. When effective, the Codification will supersede all existing non-SEC accounting and reporting standards. All other non-grandfathered non-SEC accounting literature not included in the Codification will become non-authoritative. We do not believe the adoption of SFAS 168 will have a material effect on our results of operations or financial position.
F-10
HAWK SYSTEMS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009
The adoption of other recently issued accounting pronouncements did not have a material effect on our financial position or results from operations. We do not expect recently issued accounting pronouncements that are not yet effective will have a material effect on our financial position or results of operations upon adoption.
Note 2 – Patents, Impairment Loss
In May 2008, Hawk Biometric issued approximately 23,000,000 shares of its common stock on a one-for-one basis to the shareholders of Hawk Biometrics of Canada, Inc. in exchange for that company’s existing patent and pending patent applications. The transaction, which was accounted for on a fair market value basis recognized the patent value at $15,000,000. Subsequently, it was determined that the patent was impaired in accordance with SFAS 144, as the expected cash flows to be generated were $0 at the time of valuation. For the year ended December 31, 2008, we recognized an impairment loss of $15,000,000.
As part of the stock transaction, Hawk Biometric also received approximately $210,000, which is reflected in paid in capital.
Note 3 – Merger
On February 19, 2009, we completed an Agreement and Plan of Merger among the Company, Hawk Acquisition, and Hawk Biometric. The former stockholders of Hawk Biometric were issued 599,288 shares of the Company’s Series B Preferred Stock in exchange for all of the outstanding shares of Hawk Biometric Class A and Class B common stock. Each share of Series B Preferred Stock is convertible into one hundred (100) shares of our Common Stock at any time, at the option of the holder and will automatically be converted into Common Stock on the day following the completion of a 1-for-6 Reverse Split of our Common Stock.
For accounting purposes, these actions resulted in a reverse merger, and Hawk Biometric is the accounting survivor and surviving business entity; however, the Company is the surviving legal entity.
We assumed an estimated $32,500 in liabilities pursuant to the transaction. As we did not acquire any assets, we reduced paid in capital by $32,500, which represents the net liabilities acquired. These liabilities are comprised of a $25,000 bond payable and estimated accrued interest thereon. See Note 6 - Debt, Note 9 - Commitments and Contingencies and Note 10 - Subsequent Events.
Note 4 – Related party transactions
On January 6, 2009, Mr. Edward Sebastiano, a member of the Company’s board of directors, issued a promissory note in favor of the Company in the principal amount of $168,000 for loans provided to him by Hawk Biometrics of Canada, Inc. The note provided for an original maturity date of December 31, 2009, however, the board of directors of the Company agreed to extend the maturity of the note until December 31, 2010. See Note 10 - Subsequent Events.
On September 16, 2009, the Company issued an unsecured promissory note in the principal amount of $50,000 to Mr. Mark Spanakos, a member of the Company’s board of directors. See Note 6 - Debt.
As of December 31, 2009, we owed Mr. David Coriaty, a member of the Company’s board of directors, approximately $308,348, which Mr. Coriaty had previously loaned to the Company for working capital including payment of expenses. See Note 10-Subsequent Events.
Note 5 - Income Taxes
Deferred income taxes as reported on the consolidated balance sheet consists of:
December 31, 2009 | December 31, 2008 | |||||||
Deferred tax assets | $ | 103,350 | $ | -0- | ||||
Deferred tax liabilities | -0- | -0- | ||||||
Valuation allowance | (103,350) | -0- | ||||||
Total | $ | 0 | $ | 0 | ||||
As December 31, 2009, we had net operating losses (“NOL”) of approximately $689,000. This amount is available to be carried forward to offset future taxable income. The carry forwards begin to expire in 2028. We have provided a full 100% valuation allowance on the deferred tax assets at December 31, 2009 to reduce such deferred income tax assets to zero as it is the management’s belief that realization of such amounts do not meet the criteria required by generally accepted accounting principles. Management will review the valuation allowance required periodically and make adjustments as warranted.
F-11
HAWK SYSTEMS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009
Note 6 – Debt
The components of debt are summarized as follows.
| Long-Term Debt | December 31, 2009 | |||
Convertible debenture | $ | 100,000 | ||
Discount for beneficial conversion feature and warrant | (56,000 | ) | ||
Bond payable | 25,000 | |||
Notes payable | 150,000 | |||
Due to related parties | 304,348 | |||
Total | 523,348 | |||
Less current portion | (479,348 | ) | ||
$ | 44,000 | |||
On April 30, 2009, we issued a two-year $100,000 convertible debenture (“Debenture”) to an accredited investor. The Debenture bears interest, which is payable quarterly, at the rate of 10% per annum. The Debenture is convertible into 1,388,889 shares of our Common Stock at a conversion price of $0.072 per share, which was $0.068 per share above fair market value of our Common Stock on the date of issuance. Upon maturity on April 30, 2011, any unconverted outstanding principal and interest is due and payable in cash. In connection with the Debenture, we issued warrants to purchase 50,000 shares of our Common Stock at $0.25 per share (“Debentures Warrants”), which was $0.18 above the fair market value of our Common Stock on the date of issuance. The Debenture Warrants are immediately exercisable and expire on April 30, 2012. Net cash proceeds after expenses totaled approximately $87,000 and were used for working capital. We paid investment banking fees and expenses of $13,000 and issued warrants to purchase 138,899 and 5,000 shares of our Common Stock at exercise prices of $0.072 and $.25 per share, respectively, to the investment banking firm that facilitated the debenture transaction.
We recorded the Debenture at a 100% discount after giving effect to the estimated fair market value beneficial conversion feature of the Debenture and the Debenture Warrants, which was equal to $100,000 and credited to equity. The Debenture Warrants were valued using the Black Scholes Option Pricing model with the following assumptions: dividend yield of 0%, annual volatility of 310.15%, and risk free interest rate of 4.1%. The carrying value of the Debenture is being accreted to the face amount by charges to interest expense over the two year term until maturity on April 30, 2011.
We incurred financing costs totaling $35,037 pursuant to the Debenture, including investment banking and professional fees. These deferred financing costs are being amortized to interest expense over the two year term of the Debenture. After giving effect to the value of the related warrants and the financing costs, the effective rate of interest on the Debenture is 145%.
In connection with the Merger, we assumed the obligation to repay a Class A, Series A Convertible Bond (“Bond”) held by the Tucker Family Spendthrift Trust (the “Trust”). The Bond is in the principal amount of $25,000, with interest payable upon maturity at the annualized rate of 2% over the prime rate charged by Citibank, N.A. (New York City). The terms of the Bond include a conversion option that provided for conversion into a number of shares equal to 10% of the Company’s outstanding and reserved capital stock, as defined in the Bond document. On April 29, 2009, the Trust provided notice of election to convert $24,000 in principal and accrued interest of the Bond. During the fiscal year ended December 31, 2009, the Company was in litigation with the Trust regarding the Bond, however, the parties resolved their issues in January 2010. See Note 9 – Commitments and Contingencies: Litigation and Note 10 - Subsequent Events.
On September 16, 2009, the Company issued two unsecured promissory notes in the following amounts: (i) $100,000 payable to Delilah Holdings, LLC, and (ii) $50,000 payable to Mr. Mark Spanakos, a member of the Company’s board of directors. Both promissory notes accrue interest at a rate of 12% per annum and all accrued and unpaid interest is due and payable on the date that is the earlier of (i) September 16, 2010, or (ii) ten (10) business days from the date of closing by the Company of any equity financing in the aggregate of not less than Seven Hundred Fifty Thousand Dollars ($750,000). The proceeds from the promissory notes were used to pay salaries, consulting fees and legal fees.
Due to related parties consists of amounts loaned to us by Mr. David Coriaty, a member of the Company’s board of directors, during 2008 and 2009 for working capital purposes.
F-12
HAWK SYSTEMS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009
Note 7 – Stock-based Compensation
On May 12, 2009, we granted a non-qualified stock option to Mr. Robert E. McCann III, our former Chief Executive
Officer. The grant provided for the purchase of 7,800,000 shares of Common Stock at an exercise price of $0.16, which was the closing price on the date of the grant. It is exercisable immediately and carries a term of five years.
We recorded stock compensation expense totaling $1,231,872 during the quarter ending June 30, 2009, which was the estimated the fair value of these options on the date of grant. We used the Black-Scholes option-pricing model to determine the fair value with the following weighted average assumptions: Volatility, 290.47%, expected life, 3 years; risk free rate, 4.13%; dividend yield, 0%.
On October 28, 2009, Mr. McCann was terminated as Chief Executive Officer of the Company. His stock option was cancelled effective the same date. See Note 9 - Commitments and Contingencies.
On December 15, 2009, the Company entered into an employment agreement with Michael Diamant to serve as the new Chief Executive Officer of the Company, effective January 15, 2010, which was subsequently amended on January 19, 2010, effective December 15, 2009. In connection with that agreement, the Company has agreed to issue Mr. Diamant on May 12, 2010, stock options to purchase 8,000,000 shares of Common Stock (on a post-Reverse Split basis) at an exercise price of $0.36, which was equal to the closing bid price of the Common Stock on the date immediately preceding the date of the agreement (on a post-Reverse Split basis). The option will be exercisable for a period of five years from the date of grant and will be fully vested and non-cancellable at the time of the grant.
As of December 31, 2009, there were no outstanding stock options.
Note 8 – Stockholder’s Deficit
We are authorized to issue 100,000,000 shares of Common Stock, $0.01 par value, and 1,500,000 shares of Preferred Stock, $0.01 par value. There were 31,299,315 shares of Common Stock and 587,347 shares of Series B Preferred Stock outstanding on December 31, 2009. The number of shares of Series B Preferred Stock outstanding exceeded the number of authorized shares of Series B Preferred Stock by 87,337. Each share of Series B Preferred Stock is convertible into one hundred (100) shares of our Common Stock at any time at the option of the holder and will automatically be converted into Common Stock on the day following the completion of the Reverse Split. See Note 10 - Subsequent Events.
On October 7, 2009, our board of directors approved the issuance of 4,500,000 shares of our restricted Common Stock (on a pre-reverse split basis) to an entity controlled by our former chief executive officer, chief financial officer and director, Mr. Eric Brown, as reimbursement for a payment made by the entity on our behalf pursuant to a consulting agreement between us and a consultant. The shares were not physically issued until January 14, 2010. We have therefore recorded an expense of $405,000 which represents the fair value of the Common Stock based on the closing stock price of $.09 on October 7, 2009.
Note 9 – Commitments and Contingencies
Litigation – On June 9, 2009, Leonard Tucker, as co-Trustee of the Tucker Family Spendthrift Trust, filed a complaint in the 15th Judicial Circuit of Palm Beach County, seeking the issuance of 3,323,821 shares of Common Stock and 63,717 shares of preferred stock plus legal fees and costs. The Company and the Trust resolved their differences in January 2010. See Note 10 - Subsequent Events.
Contingencies – Pursuant to an agreement dated February 13, 2009, we agreed to extend and amend an investment banking agreement originally dated May 5, 2008 (“IB Agreement”) with Cresta Capital Strategies, LLC (“Cresta”). The amendment provided for a monthly fee payable to Cresta of $100,000 for a period of twelve months. We have renegotiated our relationship with Cresta, however, and on November 23, 2009, the Company and Cresta executed a second amendment to the IB Agreement which reduced the monthly fee payable to Cresta from $100,000 to $10,000. In addition, we issued to Cresta a promissory note in the amount of $250,000 in full satisfaction of the previous amounts owed Cresta. Accordingly, we have recorded an expense of $250,000 for all amounts owed to Cresta under the IB Agreement through November 2009. See Note 10 - Subsequent Events.
Commitments – On January 9, 2009, the board of directors of Hawk Biometric approved paying an annual salary of $500,000 to Mr. David Coriaty, our former Chairman and current member of the board of directors. On May 1, 2009, we entered into an employment agreement with Mr. Coriaty, which provided for a base salary of $780,000 per annum for a one-year term. The Company and Mr. Coriaty subsequently agreed to reduce his salary to $500,000 per annum for the fiscal year ended December 31, 2009. We are recording the expense over the term of the agreement.
Commitments – On May 15, 2009, we entered into an employment agreement with Mr. Henry Eckenrhode to serve as vice president of corporate operations for a term of one year. The agreement provides for a salary of $120,000 per year, payable in monthly installments. During the fiscal year ended December 31, 2009, we were recording the expense over the term of the agreement, however after the fiscal year end the parties agreed to mutually terminate the agreement in exchange for the issuance of 200,000 shares of Common Stock. See Note 10 - Subsequent Events.
Commitments – On June 1, 2009, we entered into a strategic consulting agreement with PKF Financial Consultants, Inc. for consulting services to be provided such as advising the Company on sales and licensing strategies, product licensing opportunities, alliances with manufacturers and joint venture agreements. The agreement is for a term of one year and the consultant is entitled to compensation in the amount of $10,000 per month, due at the beginning of each month beginning June 1, 2009. In addition, the Company is required to pay the consultant “success” compensation upon successful execution of a definitive agreement between the
F-13
HAWK SYSTEMS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009
Company and Magna International, Inc. (“Magna”) as follows: (i) an amount equal to 3% of any licensing fee paid by Magna to the Company within ten days of such fee being paid; (ii) an amount equal to 3% of any capital investment by Magna to the Company within ten days of such investment being paid, provided however that any obligation to pay this fee shall be solely contingent upon compliance with any applicable state or federal securities laws; and (iii) a ten year option to purchase 1,000,000 shares of the Company’s Common Stock at an exercise price equal to the closing price of the Company’s Common Stock on the day that a definitive agreement between the Company and Magna is executed, or in the event that the definitive agreement is executed on a day when the stock market is closed, the last previous trading date. The options are to vest as follows: 25% vesting effective December 31, 2009; 25% vesting effective June 30, 2010; and 50% vesting effective December 31, 2010.
Commitments – We entered into an employment agreement with Mr. Robert E. McCann, our former Chief Executive Officer, on May 12, 2009, as amended on August 14, 2009, which provided for a base salary of $240,000 per annum for a two-year term and the grant of a stock option to purchase 7,800,000 shares of Common Stock at an exercise price of $0.16 per share (the “Option”). The Option was to be fully vested upon issuance with a term of five years from date of grant. The agreement further provided for a performance bonus up to $100,000 upon the achievement of certain goals. On October 28, 2009, Mr. McCann was terminated as Chief Executive Officer of the Company and his employment agreement and stock options were cancelled as of the same date. We recorded $90,211 in compensation during the fiscal year ended December 31, 2009, which was paid in the form of cash and payment of personal expenses on behalf of Mr. McCann.
Commitments – We entered into a consulting agreement with Mr. Michael Golden on August 27, 2009 pursuant to which Mr. Golden agreed to manage the Company’s Hawk Telematics division as division President, develop the Company’s intellectual property, bring to market Hawk Telematics products, and assist the Company in corporate matters relating to intellectual property. The term of the Agreement was one year and the consultant was entitled to compensation in the amount of $20,000 per month for services rendered and a signing bonus equal to $60,000, payable at the rate of $20,000 per month for three months commencing on September 1, 2009. Additionally, the agreement provides that Mr. Golden is entitled to receive a five-year warrant to purchase 975,000 shares of the Company’s Common Stock (calculated on a post-Reverse Split basis or 5,850,000 shares of Common Stock on a pre-Reverse Split basis) at an exercise price equal to $0.90 per share (calculated on a post-Reverse Split basis or $0.15 per share on a pre-Reverse Split basis), the fair market value of the Common Stock on the date of grant (the “Warrant”). The agreement’s terms provide that the Warrant will be fully vested as of the date of grant. The agreement provides the Bonus Warrant will be fully vested on the date of grant. On October 28, 2009, the Company terminated the consulting agreement with Mr. Golden and cancelled the Warrant. We recorded $40,000 in cash compensation during the fiscal year ended December 31, 2009. We never issued the Warrant, however, and as a result of the subsequent cancellation, we did not record an expense for the Warrant.
Commitments – We entered into an employment agreement with Mr. Michael Diamant, our current Chief Executive Officer, on December 15, 2009, for a term of one year beginning January 15, 2010. The agreement will automatically extend for subsequent one (1) year periods, unless either party notifies the other not later than sixty (60) days prior to the then expiration date of the agreement that such party does not intend for the agreement to automatically extend. Pursuant to the terms of the agreement, Mr. Diamant is entitled to receive an annual salary of $500,000, payable in equal monthly installments, and a signing bonus equal to $160,000, payable within thirty days of the date of the agreement. Additionally, the agreement, as amended, provides that Mr. Diamant is entitled to receive options to purchase 4,000,000 shares of Common Stock (calculated on a post-reverse split basis) at an exercise price equal to the closing bid price of the Common Stock on the date immediately preceding the date of the agreement, which was $0.36 (calculated on a post-Reverse Split basis. The option is for a term of five years and will be fully vested and non-cancellable at the time of the grant. The agreement further provides for an annual bonus opportunity of up to $200,000 during each year of the term of the agreement based upon performance criteria to be established jointly by the Compensation Committee and Mr. Diamant within sixty (60) days of the commencement of the agreement and approved by the board of directors of the Company each year. The Company has the right to terminate the Agreement at any time and Mr. Diamant may terminate the Agreement by delivery of written notice to the Company at least sixty (60) days prior to the termination date. We did not record any expense for this agreement during the fiscal year ended December 31, 2009 since the agreement did not take effect until after the fiscal year end.
Note 10 – Subsequent Events
On January 25, 2010, we entered into a settlement agreement (“Settlement Agreement”) with the Trust in order to settle the ongoing litigation between us and the Trust. In accordance with the terms of the Settlement Agreement, we agreed to issue the Trust 3,960,030 shares of our Common Stock and 64,165 shares of our Series B Preferred Stock (collectively, the “Securities”). We subsequently issued the Securities to the Trust and therefore, we have no further obligation under the Bond. Under the terms of the Settlement Agreement, we and the Trust agreed to release and forever discharge each other, our present officers, agents and employees from any and all claims and demands which have been or may have been based upon any facts or circumstances that arose or existed on or prior to the date of the Settlement Agreement. We executed the release February 23, 2010 and the Trust executed the release on March 3, 2010. The Trust filed a stipulation and order of dismissal with prejudice with the 15th Judicial Circuit Court of Palm Beach and the judge entered an order of dismissal with prejudice on February 26, 2010.
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HAWK SYSTEMS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009
Effective January 31, 2010, we issued a promissory note to Mr. David Coriaty, a member of our board of directors, in the principal amount of $100,000 for previous loans provided to us in October 2009. The note accrues interest at the rate of 10% per annum and is payable at maturity on June 30, 2010.
Effective February 1, 2010, we issued a promissory note to Mr. David Coriaty, a member of our board of directors, in the principal amount of $40,000 for loans provided to us in January 2010. The note accrues interest at the rate of 10% per annum and is payable at maturity on June 30, 2010.
Effective February 23, 2010, the Company entered into a consulting agreement (“Consulting Agreement”) with Griffin Enterprises LLC, a Florida limited liability company (“Griffin”). Under the terms of the Consulting Agreement, Griffin will provide certain consulting and liaison services to the Company in connection with the establishment and implementation of a corporate development growth plan to enable the Company to develop and expand its business both in the private sector as well as the government sector. The Consulting Agreement has a term of three months ending on May 31, 2010 and provides for monthly compensation payable to Griffin in the amount of $20,000 which first monthly payment is due and payable on or before February 26, 2010. The remaining payments will be due and payable on the first day of each month beginning on April 1, 2010.
On February 23, 2010, the Board of Directors of the Company approved the termination of an investment banking agreement dated June 4, 2008 (“IB Agreement”), as amended on February 13, 2009 and November 23, 2009, between the Company and Cresta Capital Strategies, LLC (“Cresta”), a FINRA licensed broker-dealer. The IB Agreement was terminated due to the fact that Cresta’s services were no longer needed.
On February 23, 2010, the Board of Directors of the Company agreed to amend the employment agreement dated May 1, 2009 (the “Agreement”), between the Company and Mr. David Coriaty, a member of the Company’s Board of Directors, effective immediately. The Agreement previously provided for an annual salary of $780,000 or such other annual rate of compensation as the Board of Directors of the Company may from time to time determine (“Base Salary”), payable in equal monthly installments. The Board of Directors of the Company and Mr. Coriaty agreed to reduce his Base Salary to $500,000 for the fiscal year ended December 31, 2010. In addition, Mr. Coriaty agreed to further amend the Agreement to provide for payment of his Base Salary in the following manner: $250,000 per annum in the form of the Company’s common stock, par value $.01, to be paid quarterly to Mr. Coriaty beginning June 30, 2010 and the balance of the $250,000 to be deferred until such time as the Board of Directors and Mr. Coriaty agree otherwise. The terms of the amendment will be subject to compliance with all applicable law. The Company and Mr. Coriaty have not yet entered into a formal written amendment to the Agreement reflecting these new terms.
On February 23, 2010, the Board of Directors agreed to terminate the agreement with Mr. Hank Eckenrode and approved the issuance of 200,000 shares of Common Stock (on a pre-Reverse Split basis) to be issued to Mr. Eckenrode in exchange for his cancellation of the approximately $50,000 in past due compensation due to him, subject to entering into a formal release and satisfaction agreement.
On February 23, 2010, the Board of Directors approved an extension of the promissory note issued by Mr. Edward Sebastiano for an additional twelve months so that the note is now due on December 31, 2010.
On March 18, 2010, the Company filed a Certificate of Amendment to its Certificate of Incorporation with the State of Delaware which set the effective date of the Reverse Split as April 7, 2010. The Reverse Split was subsequently effected on April 7, 2010 and as a result, 587,347 shares of Series B Preferred Stock automatically converted into 58,734,700 shares of Common Stock. After giving effect to such conversion, there were 64,165 shares of our Series B Preferred Stock still outstanding. The balance of 435,835 shares of Series B Preferred have been returned to authorized but unissued shares of Series B Preferred Stock.
F-15