10QSB 1 nighthawk10q.htm NIGHTHAWK 10Q SB
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB/A
(MARK ONE)
______X_____ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) Of The Securities
Exchange Act of 1934
For the quarterly period ended September 30, 2003
____________ TRANSITION REPORT UNDER SECTION 13 OR 15(d) Of The Securities
Exchange Act of 1934
Commission File Number 0-30786
NIGHTHAWK SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEVADA 87-0627349
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
10715 GULFDALE
SUITE 200
SAN ANTONIO, TEXAS 78216
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, WITH AREA CODE: (210) 341-4811
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 twelve 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 __X__ No _____
State the number of shares outstanding of each of the issuer's classes of common
equity as of the latest practicable date:
Class Outstanding at October 12, 2004
----- --------------------------------
Common 30,597,408
NIGHTHAWK SYSTEMS, INC.
TABLE OF CONTENTS
FORM 10-QSB
PART I
FINANCIAL INFORMATION
Item 1 Financial Statements (unaudited)
Report of Independent Registered Public Accounting Firm 3
Condensed consolidated balance sheet as of September 30, 2003 4
Condensed consolidated statements of operations for the
three and nine months ended September 30, 2003 and 2002 5
Condensed consolidated statement of stockholders'
deficit for the nine months ended September 30, 2003 6
Condensed consolidated statements of cash flows for the nine
months ended September 30, 2003 and 2002 7
Notes to condensed consolidated financial statements 8
Item 2 Management's Discussion and Analysis or Plan of Operation 13
Item 3 Evaluation of Disclosure Controls and Procedures 16
PART II
OTHER INFORMATION
Item 1 Legal proceedings 16
Item 2 Changes in securities and use of proceeds 17
Item 3 Defaults upon senior securities 17
Item 4 Submission of matters to a vote of securities holders 17
Item 5 Other information 17
Item 6 Exhibits and reports on Form 8-K 18
PART I - FINANCIAL INFORMATION
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
Nighthawk Systems, Inc.
We have reviewed the accompanying condensed consolidated balance sheet of
Nighthawk Systems, Inc. and subsidiary as of September 30, 2003, the related
condensed consolidated statements of operations for the three-month and
nine-month periods ended September 30, 2003 and 2002, the condensed consolidated
statement of stockholders' deficit for the nine-month period ended September 30,
2003, and the condensed consolidated statements of cash flows for the nine-month
periods ended September 30, 2003 and 2002. These interim condensed consolidated
financial statements are the responsibility of the Company's management.
We conducted our reviews in accordance with standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with the
standards of the Public Company Accounting Oversight Board (United States), the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying condensed consolidated financial statements referred
to above for them to be in conformity with accounting principles generally
accepted in the United States of America.
As discussed in Note 9 to these condensed consolidated financial statements, the
Company has restated its September 30, 2003 condensed consolidated balance
sheet, its condensed consolidated statements of operations for the three-month
and nine-month periods ended September 30, 2003 and 2002, its condensed
consolidated statements of stockholders' deficit for the nine-month period ended
September 30, 2003, and its condensed consolidated statement of cash flows for
the nine-month periods ended September 30, 2003 and 2002.
GELFOND HOCHSTADT PANGBURN, P.C.
Denver, Colorado
September 8, 2004
3
NIGHTHAWK SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 2003
(UNAUDITED AND RESTATED)
ASSETS
Current assets :
Cash $ 4,167
Accounts receivable, net of allowance for
doubtful accounts of $134 47,593
Inventories 119,813
Other 29,987
-------------
Total current assets 201,560
Furniture, fixtures and equipment, net 19,047
Intangible assets, net 8,658
-------------
$ 229,265
=============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 476,159
Accrued expenses 222,929
Lines of credit 19,842
Notes payable:
Related parties 109,311
Other 354,830
Deferred revenue 16,771
Customer deposit 60,000
Other related party payable 48,912
-------------
Total liabilities 1,308,754
-------------
Commitments and contingencies
Stockholders' deficit:
Preferred stock; $0.001 par value; 5,000,000
shares authorized; none issued and outstanding -
Common stock; $0.001 par value; 50,000,000
shares authorized; 22,604,235 issued
and outstanding 22,604
Additional paid-in capital 2,774,431
Accumulated deficit (3,876,524)
-------------
Total stockholders' deficit (1,079,489)
-------------
$ 229,265
=============
The accompanying notes are an integral part of these financial statements.
4
NIGHTHAWK SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED AND RESTATED)
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
2003 2002 2003 2002
------------ ------------ ------------ ------------
Product sales, net $ 209,279 $ 132,131 $ 904,551 $ 292,533
Cost of goods sold 145,380 79,279 522,979 171,970
------------ ------------ ------------ ------------
Gross profit 63,899 52,852 381,572 120,563
------------ ------------ ------------ ------------
Selling, general and administrative expenses 287,876 839,233 911,946 2,530,173
Reversal of 2002 consulting expense - - (39,000) -
------------ ------------ ------------ ------------
Loss from continuing operations (223,977) (786,381) (491,374) (2,409,610)
Discontinued operations
Loss from operations
of discontinued segment (5,778) (5,967) (14,472) (89,467)
Gain on disposal of
discontinued segment 92,443 - 92,443 -
------------ ------------ ------------ ------------
(137,312) (792,348) (413,403) (2,499,077)
------------ ------------ ------------ ------------
Interest expense:
Related parties 4,726 5,046 11,387 23,102
Other 5,113 3,311 23,600 11,090
------------ ------------ ------------ ------------
9,839 8,357 34,987 34,192
------------ ------------ ------------ ------------
Net loss $ (147,151) $ (800,705) $ (448,390) $ (2,533,269)
============ ============ ============ ============
Net loss per basic and diluted common share $ (0.01) $ (0.04) $ (0.02) $ (0.14)
============ ============ ============ ============
Weighted average shares outstanding,
basic and diluted 22,994,057 19,614,067 22,970,851 18,087,279
============ ============ ============ ============
The accompanying notes are an integral part of these financial statements.
5
NIGHTHAWK SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
NINE MONTHS ENDED SEPTEMBER 30, 2003
(UNAUDITED AND RESTATED)
Additional
Common Stock Paid-in Accumulated Stockholder
Shares Amount Capital Deficit Receivable Total
---------- ------- ---------- ----------- ---------- -----------
Balances, December 31,
2002 22,808,780 $22,809 $2,815,863 $(3,428,134) $(118,629) $ (708,091)
Common stock and warrants
issued for cash, net
of issuance costs 675,000 675 127,325 128,000
Common stock and warrants
issued for interest expense 25,000 25 11,475 11,500
Cancellation of
consulting arrangement (300,000) (300) (38,700) (39,000)
Common stock received for sale
of discontinued segment (150,000) (150) (28,350) (28,500)
Common stock received for
stockholder receivable (454,545) (455) (113,182) 118,629 4,992
Net loss (448,390) (448,390)
---------- ------- ---------- ----------- ---------- -----------
Balances, September 30,
2003 22,604,235 $22,604 $2,774,431 $(3,876,524) $ - $(1,079,489)
========== ======= ========== =========== ========== ===========
The accompanying notes are an integral part of these financial statements.
6
NIGHTHAWK SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED AND RESTATED)
Nine months ended September 30,
2003 2002
----------- ------------
Net cash used in operating activities
of continuing operations: $ (670,572) $ (443,130)
Cash flows from investing activities:
Purchases of furniture, fixtures and
equipment (12,655) -
------------ ------------
Net cash used in investing activities (12,655) -
------------ ------------
Cash flows from financing activities:
Proceeds from notes payable, related
parties 43,733 59,000
Payments on notes payable, related
Parties (40,495) (93,400)
Payments made on factoring arrangement,
net (82,502) -
Payments on notes payable, other (14,383) (10,000)
Proceeds from notes payable, other 250,000 30,000
Net payments on lines of credit,
related party - (415)
Net payments on lines of credit, other - (10,052)
Advances to stockholder (920)
Payments by stockholder - 920
Net proceeds from issuance of common
stock and warrants 128,000 448,900
------------ ------------
Net cash provided by financing
activities 284,353 424,033
------------ ------------
Cash used by discontinued operations (25,636) (7,003)
------------ ------------
Net decrease in cash (424,510) (26,100)
Cash, beginning 428,677 30,311
------------ ------------
Cash, ending $ 4,167 $ 4,211
============ ============
Supplemental disclosures of cash
flow information:
Cash paid for interest $ 6,690 $ 12,398
============ ============
Supplemental disclosure of non-cash
investing and financing activities:
Exchange of shares for shareholder
receivable
Carrying value of receivable
from shareholder $ 118,629
Value of stock returned to and
retired by Company (113,637)
------------
Compensation expense on settlement
of receivable from shareholder $ 4,992
============
Disposition of discontinued segment
Carrying value of assets $ 26,176
Liabilities (90,119)
Value of stock returned to and
retired by Company (28,500)
------------
Gain on disposition of
discontinued segment $ (92,443)
============
The accompanying notes are an integral part of these financial statements.
7
NIGHTHAWK SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
1. Basis of presentation:
The accompanying unaudited condensed consolidated financial statements, which
include the accounts of Nighthawk Systems, Inc. and its subsidiary PCT
(collectively referred to herein as "the Company"), have been prepared in
accordance with accounting principles generally accepted in the U.S. for interim
financial information. In the opinion of management, all adjustments (consisting
of only normal recurring items), which are necessary for a fair presentation
have been included. The results for interim periods are not necessarily
indicative of results that may be expected for any other interim period or for
the full year. These condensed consolidated financial statements should be read
in conjunction with a reading of the financial statements and notes thereto
included in the Company's Form 10-KSB annual report for 2003 filed with the
Securities and Exchange Commission (the "SEC").
Going concern, results of operations and management's plans:
The Company has incurred operating losses for several years. These losses have
caused the Company to operate with limited liquidity and have created a
stockholders' deficit and working capital deficiency of $1,079,489 and
$1,107,194 respectively, as of September 30, 2003. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans to address these concerns include:
1. Raising working capital through additional borrowings.
2. Raising equity funding through sales of the Company's common stock or
preferred stock.
3. Improving working capital through increased sales of the Company's products
and services.
The accompanying financial statements do not include any adjustments relating to
the recoverability and classification of assets or the amounts of liabilities
that might be necessary should the Company be unsuccessful in implementing these
plans, or otherwise be unable to continue as a going concern.
In August 2004, the Company signed a financing arrangement with Dutchess Private
Equities, II, L.P. ("Dutchess") which was amended on August 26, 2004 and on
September 24, 2004. Under the terms of the amended arrangement, the Company
received $100,000 under a convertible debenture on August 11, 2004, $25,000 on
August 26, 2004, and $125,000 under the debenture on September 27, 2004.
Interest accrues on the debenture at an annual rate of 8%. The debenture can be
converted into common shares anytime prior to its maturity on August 10, 2007 at
the lesser of (i) 75% of the lowest closing bid price on the date of conversion,
or (ii) twelve and a half cents ($0.125)per common share. Any portion of the
debenture that remains outstanding at August 10, 2007 will automatically convert
into common shares. The number of shares converted at any time is limited so as
not to exceed 4.99% of the outstanding shares of Nighthawk common stock
outstanding. In addition, Dutchess was issued a warrant to purchase up to
250,000 shares of common stock at a price of twelve and a half cents ($0.125)
for a period of up to five years. The Company also signed an investment
agreement under which Dutchess agreed to purchase up to $10.0 million in common
stock from the Company, at the Company's discretion, over the next three years,
subject to certain limitations including the Company's then current trading
volume. The Company also signed a consulting agreement with a company in which
an employee of Dutchess is a member of management. Under the agreement, the
company was issued 500,000 shares of Company common stock.
2. Related party transactions:
During the nine months ended September 30, 2003, the Company repaid $3,495 on
notes payable to an officer of the Company. The Company also paid $25,504 on a
note payable to an officer/director of the Company, which is included in cash
used by discontinued operations in the accompanying financial statements. During
the nine-month period ending September 30, 2003, two officers of the Company
loaned the Company $43,733, of which $37,000 was repaid.
3. Inventories
Inventories at September 30, 2003 consist entirely of parts and pre-
manufactured component parts. The Company monitors inventory for turnover and
obsolescence, and records reserves for excess and obsolete inventory as
appropriate. The Company did not have a reserve for excess or obsolete inventory
as of September 30, 2003.
4. Revenue recognition and major customers
Revenue from product sales is recognized when all significant obligations of the
Company have been satisfied. Revenues from equipment sales are recognized
either on the completion of the manufacturing process, or upon shipment of the
equipment to the customer, depending on the Company's contractual obligations.
The Company occasionally contracts to manufacture items, bill for those items
and then hold them for later shipment to customer-specified locations.
8
During the nine months ended September 30, 2003, the Company's two largest
customers accounted for approximately 55% and 33% of sales respectively. During
the three months ended September 30, 2003, the Company's two largest customers
accounted for approximately 39% and 32% of sales. During the nine months ended
September 30, 2002, the Company's two largest customers accounted for
approximately 19% and 16% of sales. During the three months ended September 30,
2002, the Company's two largest customers accounted for approximately 36% and
22% of sales.
5. Net loss per share
Basic net loss per share is computed by dividing the net loss applicable to
common stockholders by the weighted-average number of shares of common stock
outstanding for the period. Diluted net loss per share reflects the potential
dilution that could occur if dilutive securities were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the Company, unless the effect of such inclusion would reduce
a loss or increase earnings per share. In 2001 the Company issued 2,075,000
shares under stock-based compensation arrangements, which were to be earned in
future periods. Until they were earned, or canceled, during the year ended
December 31, 2002, these shares were considered options for purpose of computing
basic and diluted earnings per share. For the three and nine month periods ended
September 30, 2003 and 2002, the effect of the inclusion of dilutive shares
would have resulted in a decrease in loss per share. Accordingly, the weighted
average shares outstanding have not been adjusted for dilutive shares.
6. Stock transactions:
On April 16, 2003, the Company received $100,000, $98,000 net of offering costs,
from an investor in exchange for the issuance of 500,000 shares of common stock
at $0.20 per share, and warrants to purchase $200,000 of additional common stock
on or before September 30, 2003 at the lesser of $0.25 per share or 50% of the
consecutive 10-day average closing price prior to the purchaser's election to
exercise the warrant; or on or before March 31, 2004, at the lesser of $0.37
per share or 50% of any consecutive 10-day average closing price prior to the
purchaser's election to exercise the warrant; or on or before September 30,
2004, at the lesser of $1.00 per share or 50% of any consecutive 10-day
average closing price prior to the purchaser's election to exercise the warrant;
or on or before March 31, 2005, at the lesser of $2.00 per share or 50% of any
consecutive 10-day average closing price prior to the purchaser's election to
exercise the warrant.
The Company also received $35,000, $30,000 net of offering costs, during the
second quarter of 2003 in exchange for the issuance of 175,000 shares of its
common stock and the issuance of 175,000 warrants to purchase shares of common
stock at $0.40 per share which are exercisable for two years.
During the third quarter of 2003, the Company canceled 300,000 shares of common
stock previously issued to a consultant during 2002. A $39,000 reduction in
consulting expense was recorded during the second quarter of 2003 related to
this cancellation, as the Board of Directors determined that the shares had not
been properly authorized for issuance, and that there was a lack of sufficient
evidence that any services had been performed.
7. Notes payable
On May 13, 2003, the same investor that invested $100,000 (see Note 6 above)
loaned $200,000 to the Company in exchange for a 90-day note that is convertible
into common shares of the Company at the lender's option beginning on the 91st
day at a price of no more than $0.20 per share. During September 2003, the same
investor loaned the Company an additional $50,000 under an unsecured, short term
arrangement. During October 2003, the same investor loaned an additional
$100,000 under a second unsecured, short term arrangement. Both of these notes
were scheduled to mature on October 31, 2003. Subsequent to the maturity dates
of the notes, the lender has continued to renew the notes for 90-day periods. In
April 2004, the Company reached an agreement with the investor under which, in
return for an additional $25,000 in borrowings and the extension of the maturity
dates of his three notes to July 31, 2004, the Company granted the creditor a
secured position in the assets of the Company. The Company also agreed to pay
the creditor cash interest at an annual rate of 8% retroactive to the signing of
the notes, and future interest monthly at an annual rate of 8% on the new total
of $375,000 in notes, with $750 of the monthly interest due being paid in cash
and the remainder being paid in stock at a rate of $0.20 per share. For the
period of March through June of 2004, the Company issued 33,750 shares to the
creditor for $6,750 of interest owed under this arrangement. In August 2004, the
creditor extended the maturity dates of the notes to October 31, 2004, and
converted $50,000 of his convertible note to common stock of the Company at the
prescribed rate of $0.20 per share.
9
In July 2004, the creditor also loaned the Company an additional $60,000 under a
90-day arrangement for the purpose of purchasing parts needed to complete orders
that had been placed by the Company's customers as of that date. Under this
arrangement, the creditor will receive varying percentages of the cash collected
from those customers until his note balance, plus interest at the annual rate of
10% is collected in full.
Effective June 30, 2004, a creditor of the Company converted $71,640 in
principal and $8,876 in accrued interest into 375,000 shares of the Company's
common stock and a warrant to purchase 375,000 shares of common stock at $0.25
per share. Based on a calculation using Black-Scholes, the warrant's fair value
at that date was $27,750.
In August 2004, the Company issued 739,423 common shares and warrants to
purchase 739,423 common shares at $0.20 per share to two individuals and a
company in exchange for approximately $110,000 in notes payable and accrued
interest owed them by the Company.
8. Legal matters
In May 2003, the Company was sued by a former Board member seeking recovery for
the value of 350,000 shares, or $209,500, and $120,000 due his firm under a
retainer agreement between the Company and his firm. The former Board member had
previously signed a settlement agreement with the Company in which he agreed to
cancel all potential claims against the Company and its directors in return for
150,000 unregistered shares trading at a value of $0.60 or higher. The Company
does not believe it owes the former Board member anything beyond the settlement
agreement and has actively defended its position. No assurance can be given,
however, as to the ultimate outcome of the case.
In an 8-K/A filed on July 17, 2003, the Company disclosed that two key
employees, Arlen Felsen and Steve Jacobson, who were both also former board
members, had resigned from the employment and/or the Board of the Company and
that the Company had commenced an internal investigation of five specific items
prior to their resignations. As a result of the internal investigation, the
Company reached an agreement with each of the employees. Specifically, as part
of the agreement with Arlen Felsen, effective July 31, 2003 the Company sold
back to him the remaining assets and liabilities of the Company's paging
business segment which were originally purchased with or originated as a result
of the purchase of Vacation Communications, Inc., d/b/a Gotta Go Wireless. In
return, the Company received 150,000 shares of Nighthawk common stock, and Mr.
Felsen facilitated the return of approximately $34,000 in cash to the Company
that had been held in an account under his control. The Company recognized a
gain on this transaction of $92,443, and has presented the financial results of
this paging business segment as discontinued operations in the accompanying
financial statements.
With respect to Steve Jacobson, the Company reached a Separation Agreement on
September 8, 2003 in which, among other things, Mr. Jacobson agreed to return to
the Company 454,545 shares of common stock as payment of the $118,629 receivable
due from him. The Company recognized compensation expense of approximately
$5,000 as a result of this transaction.
In letters dated September 24, 2003, a former director of the Company, Lawrence
Brady, and a former Chief Financial Officer (CFO), Mark Brady, made demands of
the Company for payment of stock and compensation. On April 16, 2004, the
Company, along with the current officers and board members and several former
directors, accepted service of a suit brought by the Bradys for, among other
things, breach of contract for unlawful termination and failure to provide
stock. The alleged breaches and other claims all stem from their service with
the Company for part of 2001 and part of 2002. The aggregate amount of damages
claimed is not specified. The case is proceeding in the state court in Denver,
Colorado. Several of the individually-named defendants have been voluntarily
dismissed by the plaintiffs. The Company plans to vigorously defend itself and
its current directors and officers. No assurance can be given, however, as to
the ultimate outcome of the case.
On November 13, 2003, the Company was notified of a complaint filed in Denver
County, Colorado by one of its directors, Herb Jacobson, for repayment of a
loan. The suit alleged, among other things, that Mr. Jacobson was owed
approximately $49,500 as the principal amount of a loan, plus interest and other
fees. The Company disputed the allegations and plans to defend this case
vigorously. On November 13, 2003 the Board of Directors of the Company removed
Mr. Jacobson as a director of the Company on the basis of his disqualification
for an apparent conflict of interest. The Company then filed a counter-suit
against Mr. Jacobson. On December 19, 2003 the Company entered into a settlement
and release agreement with Mr. Jacobson, and his wife. Under terms of the
agreement, Mr. & Mrs. Jacobson and the Company agreed to dismiss any and all
claims against each other in return for, among other things, payment of a total
of $25,000 over a four month period from the Company to Mr. Jacobson. In
addition, Mr. and Mrs. Jacobson, along with their son Steven Jacobson, agreed to
refrain from selling, transferring, conveying or
10
otherwise disposing of their remaining share ownership for a period of eighteen
months subsequent to selling an aggregate of 850,000 shares. As a result of the
agreement, the Company recorded a gain of $23,912 due to a reduction in the
amount previously recorded by the Company as owed to Mr. Jacobson.
9. Restatement
During 2003, management of the Company became aware that 1,475,000 shares of the
Company's common stock had been issued, but not accounted for by prior
management, in return for $300,000 of consulting and other services related to
the reverse acquisition of the Company by PCT in 2002. Because the services were
performed during 2002, the Company has restated its September 30, 2003 condensed
consolidated balance sheet, its condensed consolidated statements of operations
for the three-month periods ended September 30, 2003 and 2002, its condensed
consolidated statements of operations for the nine-month periods ended September
30, 2003 and 2002, and its condensed consolidated statement of stockholders'
deficit for the nine-month period ended September 30, 2003 which were previously
reported in the Company's filing on Form 10-QSB on November 19, 2003 for the
period ending September 30, 2003 in order to reflect this transaction in the
proper periods. Following is a summary comparison of amounts previously reported
with restated results:
Three Months Ended Nine Months Ended
September 30, 2002 September 30, 2002
As Previously As Previously
Restated Reported Restated Reported
Statements of Operations
- ------------------------
Revenues $ 132,131 $ 132,131 $ 292,533 $ 292,533
Cost of goods sold $ 79,279 $ 79,279 $ 171,970 $ 171,970
Selling, general and
administrative expenses $ 839,233 $ 839,233 $ 2,530,173 $ 2,230,173
Net loss ($800,705) ($800,705) ($2,533,269) $ (2,233,269)
Net loss per basic and
diluted common share ($0.04) ($0.04) ($0.14) ($0.13)
Weighted average common shares
outstanding - basic and diluted 19,614,067 18,139,067 18,087,279 17,098,993
Three Months Ended Nine Months Ended
September 30, 2003 September 30, 2003
As Previously As Previously
Restated Reported Restated Reported
Statements of Operations
- ------------------------
Net loss per basic and
diluted common share ($0.01) ($0.01) ($0.02) ($0.02)
Weighted average common shares
outstanding - basic and diluted 22,994,057 21,519,057 22,970,851 21,495,851
Statement of Stockholders' Deficit/Balance Sheet
- ------------------------------------------------
Balances as of December 31, 2002:
Common stock - shares 22,808,780 21,333,780
Common stock - amount $ 22,809 $ 21,334
Additional paid-in capital $ 2,815,863 $ 2,517,338
Accumulated deficit ($ 3,428,134) ($ 3,128,134)
Balances as of December 31, 2003:
Common stock - shares 22,604,235 21,129,235
Common stock - amount $ 22,604 $ 21,129
Additional paid-in capital $ 2,774,431 $ 2,475,906
Accumulated deficit ($ 3,876,524) ($ 3,575,524)
11
In addition, the Company has restated its condensed consolidated balance sheet
as of September 30, 2003 and its condensed consolidated statement of cash flows
for the nine-month period ended September 30, 2003 and 2002, which it originally
reported in its filing on Form 10-QSB on November 19, 2003, to properly reflect
accounts receivable and accounts payable balances, the cash flows of its
continuing and discontinued operations and proceeds from the issuance of common
stock and warrants. The net effect of the restatement was a decrease in net cash
used in operating activities of continuing operations from $674,921 to $670,572,
an increase in net cash provided by financing activities from $270,349 to
$284,353, and an increase in cash used by discontinued operations from $7,283 to
$25,636. The net effect of these restatements on the net decrease in cash for
the nine months ended September 30, 2003 and 2002 was $0.
10. Subsequent event
Subsequent to September 30, 2003, the Company received $127,850, net of offering
costs of $900, for the issuance of 858,333 shares of common stock and warrants
to purchase 858,333 additional shares for $0.25 per share. A total of 540,000
shares of common stock were issued to consultants in return for services
rendered, and 300,000 shares were issued to consultants for services to be
performed. The Company received $109,500 in cash proceeds upon the exercise of
630,000 options subsequent to September 30, 2003.
In order to provide the Company with working capital, a Canadian brokerage firm
sponsored a private placement of up to $300,000 in Special Warrants, which are
convertible into shares of common stock of the Company at $0.20 per share, and
also provide the purchaser with a warrant to purchase an equal number of shares
of common stock of the Company for a period of two years at $0.30 per share.
The Special Warrants will automatically convert at the earlier of i) an
effective registration statement filed with the Securities and Exchange
Commission or receipt of a qualified prospectus by a Canadian provincial
authority, whichever comes later; or ii) one year from their date of issue. As
of June 30, 2004, the Company had issued $188,775 in Special Warrants, net of
issuance costs of $43,625.
In 2001, PCT issued 391,200 shares of its common stock in return for $391,200 in
cash proceeds. Based on a review of Company records during 2003, Company
management determined that associated warrants to purchase 391,200 shares of
common stock at $1.50 per share were never delivered to the purchasers
subsequent to their investment. Company management also determined this to be
the case with 255,000 shares issued by the Company between January and June 2002
in return for $255,000 in cash proceeds, for which warrants to purchase 255,000
shares at $1.50 per share should have been delivered. According to Company
records, all such warrants should have been exercisable for a period of two
years from their date of issuance; therefore, the warrants to purchase 391,200
shares of common stock owed to investors from 2001 expired without being
delivered to the investors. In order to fulfill the terms of their investment,
in January 2004 the Company offered new warrants to each of the investors whose
funds were received in 2001 and during the first six months of 2002 in order to
permanently replace those that were never issued. Terms of the new warrants
allowed the investors to purchase one share of Series A Preferred Stock for
$2.50 per share for every $10 originally invested in the Company. The Preferred
Stock will pay a 7% annual dividend, on a quarterly basis, in the form of
Company common stock. The Preferred Stock is convertible into common shares of
the Company on a 1 for 10 basis at any date through June 30, 2005. On that date,
all outstanding Preferred Stock will convert to common stock on a 1 for 10
basis. The new warrants to purchase Preferred Stock were to be exercised on or
before April 30, 2004. A total of 5,000 shares of Series A Preferred Stock were
purchased during the six month period ended June 30, 2004, and preferred stock
dividends of $197 were accrued in the form of 703 shares of common stock of the
Company.
In August 2004, the Company signed a financing arrangement with Dutchess Private
Equities, II, L.P. ("Dutchess") which was amended on August 26, 2004 and on
September 24, 2004. Under the terms of the amended arrangement, the Company
received $100,000 under a convertible debenture on August 11, 2004, $25,000 on
August 26, 2004, and $125,000 under the debenture on September 27, 2004.
Interest accrues on the debenture at an annual rate of 8%. The debenture can be
converted into common shares anytime prior to its maturity on August 10, 2007 at
the lesser of (i) 75% of the lowest closing bid price on the date of conversion,
or (ii) twelve and a half cents ($0.125). Any portion of the debenture that
remains outstanding at August 10, 2007 will automatically convert into common
shares. The number of shares converted at any time is limited so as not to
exceed 4.99% of the outstanding shares of Nighthawk common stock outstanding. In
addition, Dutchess was issued a warrant to purchase up to 250,000 shares of
common stock at a price of twelve and a half cents ($0.125) for a period of up
to five years. The Company also signed an investment agreement under which
Dutchess agreed to purchase up to $10.0 million in common stock from the
Company, at the Company's discretion, over the next three years, subject to
certain limitations including the Company's then current trading volume. The
Company also signed a consulting agreement with a company in which an employee
of Dutchess is a member of management. Under the agreement, the company was
issued 500,000 shares of Company common stock. The Company also issued 2.1
million shares of common stock to the placement agent involved in the
transaction with Dutchess.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
FORWARD-LOOKING STATEMENTS
Discussions and information in this document, which are not historical facts,
should be considered forward-looking statements. With regard to forward-looking
statements, including those regarding the potential revenues from increased
sales, and the business prospects or any other aspect of NightHawk Systems,
Inc.'s business, actual results and business performance may differ materially
from that projected or estimated in such forward-looking statements. NightHawk
Systems, Inc. ("the Company") has attempted to identify in this document certain
of the factors that it currently believes may cause actual future experience and
results to differ from its current expectations. Differences may be caused by a
variety of factors, including but not limited to, adverse economic conditions,
entry of new and stronger competitors, inadequate capital and the inability to
obtain funding from third parties.
The following information should be read in conjunction with the unaudited
condensed consolidated financial statements included herein which are prepared
in accordance with accounting principles generally accepted in the United States
of America for interim financial information.
The Three Months Ended September 30, 2003 Compared to the Three Months Ended
September 30, 2002
Net sales for the three-month period ended September 30, 2003 were $209,279, an
increase of $77,148 or 58% from the $132,131 for the corresponding period of the
prior year. Approximately $142,000 of the product sales during the quarter
ending Sept 30, 2003 came from two customers who have placed orders totaling
approximately $816,000. These orders were for the Company's NH2 rebooting device
for a kiosk manufacturer, and load control units for an electric utility
customer, and no revenues were recognized from these two orders during the three
months ending September 30, 2002. The Company completed all but approximately
$70,000 of these orders in fiscal 2003. Although the Company continues to
receive additional orders from one of these customers, overall revenues have
subsequently decreased after September 30, 2003 because the Company has not
received large enough orders to replace these completed contracts.
Cost of goods sold increased by $66,101 or 83% to $145,380 for the three months
ended September 30, 2003 from $79,279 for the corresponding period of the prior
year, and increased as a percentage of revenues between the periods from 60% in
2002 to 69% in 2003. Approximately 39% of the Company's revenues generated
during the quarter came from the sale of the Company's load control device,
which generates a lower margin per product than the Company's other products.
The Company's gross margin decreased from 40% to 31% from last year's period to
this year's period, due to this change in the mix of product sold.
Selling, general and administrative expenses for the three months ended
September 30, 2003 decreased by $551,357 or 66% to $287,876 from $839,233 for
the three-month period ended September 30, 2002. During the quarter ended
September 30, 2002, the Company recognized $518,750 of expense from the
amortization of deferred compensation, a non-cash item. No such expense was
recognized during the current year's quarter. Excluding the effect of the
amortization of deferred compensation, selling, general and administrative
expenses would have decreased approximately 10% between the two periods. This
decrease was primarily due to the recording of one-time charges related to
salary accruals during the quarter ending September 30, 2002.
Effective July 31, 2003 the Company sold the remaining assets and liabilities of
the Company's paging business segment which were originally purchased with or
originated as a result of the purchase of Vacation Communications, Inc., d/b/a
Gotta Go Wireless to their original owners. In return, the Company received
150,000 shares of Nighthawk common stock, and one of the former owners
facilitated the return of approximately $34,000 in cash to the Company that had
been held in an account under his control. The Company recognized a gain on this
transaction of $92,443, and has presented the financial results of this paging
business segment as discontinued operations in the accompanying financial
statements.
Interest expense increased by $1,482, or 18% to $9,839 for the three months
ended September 30, 2003 from $8,357 for the corresponding period of the prior
year due to an increase in short term borrowings by the Company since the third
quarter of 2002.
The net loss for the three-month period ended September 30, 2003 was $147,151
compared to $800,705 for the three month period ended September 30, 2002. The
improvement in results can be attributed to the increase in revenues, the
decrease in expenses associated with deferred compensation arrangements and
improved gross profit results. The combined effect of the items mentioned above
was a reduction in net loss per share from $0.04 in 2002 to $0.01 in 2003, based
on weighted average shares outstanding of 19.6 million and 23.0 million during
the three months ended September 30, 2002 and 2003, respectively.
The Nine Months Ended September 30, 2003 Compared to the Nine Months Ended
September 30, 2002
Net sales for the nine-month period ended September 30, 2003 were $904,551, an
increase of $612,018 or 209% from the $292,533 for the corresponding period of
the prior year. Approximately $786,000 of the product sales during the nine
month period ending September 30, 2003 came from two customers who have placed
orders totaling approximately $816,000. These orders were for the Company's NH2
rebooting device for a kiosk manufacturer, and load control units for an
electric utility customer. The Company completed all but approximately $70,000
of these orders in fiscal 2003. Although the Company continues to
13
receive additional orders from one of these customers, overall revenues have
subsequently decreased after September 30, 2003 because the Company has not
received large enough orders to replace these completed contracts.
Cost of goods sold increased by $351,009 or 204% to $522,979 for the nine months
ended September 30, 2003 from $171,970 for the corresponding period of the prior
year, but decreased slightly as a percentage of revenues between the periods
from 59% in 2002 to 58% in 2003, due primarily to increased efficiencies
associated with higher sales volumes which offset increased sales of its lower
margin load control units. The Company's gross margin increased slightly from
41% to 42% from last year's period to this year's period, due to the benefits of
the increased production from the two major contracts discussed above.
Selling, general and administrative expenses for the nine months ended September
30, 2003 decreased by approximately $1.6 million or 64% to $911,946 from
$2,530,173 for the nine month period ended September 30, 2002. During the nine
month period ended September 30, 2002, the Company recognized approximately
$1,556,000 of expense from the amortization of deferred compensation, a non-cash
item. No such expense was recognized during the current year's nine month
period. Excluding the effect of the amortization of deferred compensation,
selling, general and administrative expenses would have decreased approximately
6% between the two periods. This decrease was largely the result of the issuance
of 1,475,000 shares of the Company's common stock during the nine-month period
ended September 30, 2002 in return for $300,000 of consulting and other services
related to the reverse acquisition of the Company by PCT in 2002.
During the second quarter of 2003, the Company canceled 300,000 shares of common
stock previously issued to a consultant during 2002. A $39,000 reduction in
consulting expense was recorded during the second quarter of 2002 related to
this cancellation, as the Board of Directors determined that the shares had not
been properly authorized for issuance, and that there was a lack of sufficient
evidence that any services had been performed.
Effective July 31, 2003 the Company sold the remaining assets and liabilities of
the Company's paging business segment which were originally purchased with or
originated as a result of the purchase of Vacation Communications, Inc., d/b/a
Gotta Go Wireless to their original owners. In return, the Company received
150,000 shares of Nighthawk common stock, and one of the former owners
facilitated the return of approximately $34,000 in cash to the Company that had
been held in an account under his control. The Company recognized a gain on this
transaction of $92,443, and has presented the financial results of this paging
business segment as discontinued operations in the accompanying financial
statements.
The net loss for the nine month period ended September 30, 2003 was $448,390
compared to $2,533,269 for the nine month period ended September 30, 2002. The
improvement in results can be attributed in large part to the decrease in
expenses associated with deferred compensation arrangements. However, larger
volumes of production would have led to an improvement of 54% excluding the
amortization of deferred compensation. The combined effect of the items
mentioned above was an improvement in net loss per share from $0.14 in 2002 to
$0.02 in 2003, based on weighted average shares outstanding of 18.1 million and
23.0 million during the nine-month periods ended September 30, 2002 and 2003,
respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company's financial statements for the nine months ended September 30, 2003
have been prepared on a going concern basis, which contemplates the realization
of assets and the settlement of liabilities and commitments in the normal course
of business. For the nine months ended September 30, 2003, the Company reported
a net loss of $448,390 and has a stockholders' deficit as of September 30, 2003
of approximately $1.1 million. In addition, the Company had a working capital
deficiency of approximately $1.1 million at September 30, 2003. The Report of
Independent Registered Public Accounting Firm on the Company's financial
statements as of and for the year ended December 31, 2002 included a "going
concern" explanatory paragraph which means that the auditors expressed
substantial doubt about the Company's ability to continue as a going concern.
In an effort to improve its operating procedures and its financial results and
condition, the Company sold certain assets and liabilities of its paging
operating segment effective July 31, 2003. This segment generated negative cash
flows during 2002 and the first seven months of 2003. As a result of this
transaction, the Company reduced its outstanding obligations by approximately
$95,000, and recognized a gain of approximately $92,000. The Company will still
be able to provide paging services to its equipment customers, but will do so
for the foreseeable future by contracting with third party paging airtime
providers.
During the nine month period ended September 30, 2003, the Company used cash of
$670,572 in its normal operating activities. Approximately $476,000 of this
amount was collected during December 2002 and January 2003 in the form of
prepayments or deposits on contracts that have produced the majority of the
Company's revenues during the first nine months of 2003.
Although the Company generated $128,0000 from private equity placements of the
Company's common stock to individuals during the nine months ended September 30,
2003, the majority of the Company's non-operating cash inflows have come from a
single investor, who loaned the Company $250,000 under two short term notes
during the period and also loaned the Company an additional $100,000 under a
short term note during October 2003. Subsequent to the original maturity dates
of the notes, the lender has continued to renew the three notes for 90-day
periods. In April 2004, the Company reached an agreement with the investor under
which, in return for an additional $25,000 in borrowings and
14
the extension of the maturity dates of his three notes to July 31, 2004, the
Company granted the creditor a secured position in the assets of the Company.
The Company also agreed to pay the creditor cash interest at an annual rate of
8% retroactive to the signing of the notes, and future interest monthly at an
annual rate of 8% on the new total of $375,000 in notes, with $750 of the
monthly interest due being paid in cash and the remainder being paid in stock at
a rate of $0.20 per share. In August 2004, the creditor extended the maturity
dates of the notes to October 31, 2004, and converted $50,000 of his convertible
note to common stock of the Company at the prescribed rate of $0.20 per share.
In July 2004, the same lender loaned the Company an additional $60,000 under a
90-day arrangement for the purpose of purchasing parts needed to complete orders
that had been placed by the Company's customers as of that date. Under this
arrangement, the creditor will receive varying percentages of the cash collected
from those customers until his note balance, plus interest at the annual rate of
10%, is collected in full.
Effective June 30, 2004, a creditor of the Company converted $71,640 in
principal and $8,876 in accrued interest into 375,000 shares of the Company's
common stock and a warrant to purchase 375,000 shares of common stock at $0.25
per share. Based on a calculation using Black-Scholes, the warrant's fair value
at that date was $27,750. This amount is reflected in interest expense and
additional paid-in capital for the periods ending June 30, 2004.
In August 2004, the Company issued 739,423 common shares and warrants to
purchase 739,423 common shares at $0.20 per share to two individuals and a
company in exchange for approximately $110,000 in notes payable and accrued
interest owed them by the Company.
Until the Company is able to generate positive cash flows from operations in an
amount sufficient to cover its current liabilities and debt obligations as they
become due, it will remain reliant on borrowing funds or selling equity to meet
those obligations. The Company has historically sold its equity securities
through private placements with various individuals. Raising funds in this
manner typically requires much time and effort to find new accredited investors,
and the terms of such an investment must be negotiated for each investment made.
Cash from these types of investments has historically been generated in amounts
of $50,000 or less, in an unpredictable manner, making it difficult to fund and
implement a broad-based sales and marketing program.
During February 2004, the Company met with several brokerage firms and private
equity groups to investigate the possibilities of raising an amount of cash
sufficient to both fund a comprehensive sales and marketing plan and improve its
working capital position from a deficit to a surplus. As a result of those
meetings, the Company announced in March 2004 that a brokerage firm based in
Vancouver, British Columbia would sponsor an offering of equity securities of
the Company. However, this offering would be performed on a best-efforts basis,
without any guarantee of success. In an effort to fund the Company's operations
in advance of such an offering, the brokerage firm sponsored a private placement
of Special Warrants which are convertible into units consisting of both one
share of common stock of the Company at $0.20 per share and a warrant to
purchase one share of common stock at $0.30 per share. This private placement
effort resulted in net proceeds of $188,775.
In August 2004, the Company signed a financing arrangement with Dutchess Private
Equities, II, L.P. ("Dutchess") which was amended on August 26, 2004 and on
September 24, 2004. Under the terms of the amended arrangement, the Company
received $100,000 under a convertible debenture on August 11, 2004, $25,000 on
August 26, 2004, and $125,000 under the debenture on September 27, 2004.
Interest accrues on the debenture at an annual rate of 8%. The debenture can be
converted into common shares anytime prior to its maturity on August 10, 2007 at
the lesser of (i) 75% of the lowest closing bid price on the date of conversion,
or (ii) twelve and a half cents ($0.125). Any portion of the debenture that
remains outstanding at August 10, 2007 will automatically convert into common
shares. The number of shares converted at any time is limited so as not to
exceed 4.99% of the outstanding shares of Nighthawk common stock outstanding. In
addition, Dutchess was issued a warrant to purchase up to 250,000 shares of
common stock at a price of twelve and a half cents ($0.125) for a period of up
to five years. The Company also signed an investment agreement under which
Dutchess agreed to purchase up to $10.0 million in common stock from the
Company, at the Company's discretion, over the next three years, subject to
certain limitations including the Company's then current trading volume. The
Company also signed a consulting agreement with a company in which an employee
of Dutchess is a member of management. Under the agreement, the company was
issued 500,000 shares of Company common stock. Although the amount and timing of
specific cash infusions available under the entire financing arrangement cannot
be predicted with certainty, the arrangement represents a contractual commitment
by Dutchess to provide funds to the Company. Although no assurance may be given
that it will be able to do so, the Company expects to be able to access funds
under this arrangement to help it fund near-term and long-term sales and
marketing efforts.
15
ITEM 3. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures:
Disclosure controls and procedures are designed to ensure that information
required to be disclosed in the reports filed or submitted under the Exchange
Act is recorded, processed, summarized and reported, within the time periods
specified in the SEC's rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed in the reports filed under the Exchange Act
is accumulated and communicated to management, including the Chief Executive
Officer and the Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosure. Within the 90 days prior to the filing
of this report, the Company carried out an evaluation, under the supervision and
with the participation of the Company's management, including the Company's
Chief Executive Officer and its Chief Financial Officer, of the effectiveness of
the design and operation of the Company's disclosure controls and procedures.
Based upon and as of the date of that evaluation, the Chief Executive Officer,
who is also the Chief Financial Officer, concluded that the Company's disclosure
controls and procedures are effective to ensure that information required to be
disclosed in the reports the Company files and submits under the Exchange Act is
recorded, processed, summarized and reported as and when required.
(b) Changes in Controls:
As disclosed by the Registrant in the 10-KSB for the year 2002 and the 10-QSB
filed for the first and second quarter of 2003, prior to January 1, 2003, the
Company did not maintain adequate internal controls related to treasury
activities. Further, in the Form 8-K/A filed by the Registrant on July 17, 2003,
the Registrant disclosed certain issues that were under internal investigation
by the Registrant. Those issues included, among other items, (i) the Company's
former Chief Executive Officer's possible use of Company funds for personal
expenses, (ii) improper accounting and failure to remit payroll taxes for the
year 2002, (iii) potential misuse and retention of Registrant funds in accounts
under the control of an officer of the Registrant. A process has been initiated
to segregate responsibilities in order to reduce the opportunities for a single
person to be in a position to both perpetrate and conceal errors or
irregularities in the normal course of business. In addition, the Chief
Executive Officer and the audit committee have initiated a process to establish
and implement a written policy on disclosure controls and procedures to be in
place as soon as possible.
Subsequent to the purchase of certain assets of Vacation Communication, Inc.
("Vacation") in September 2001, the former owner of Vacation, who is also the
company's former Chief Information Officer continued to have responsibility for
cash deposits, accounting procedures and for producing internal financial
reports related to the Company's airtime business segment. This lack of
segregation of responsibilities constituted a significant deficiency and
material weakness in the Registrant's financial controls. During the three-
month period ended June 30, 2003, the Company discovered that checks received
from customers made out to NightHawk Systems, Inc. for product sales were being
deposited into the airtime bank account controlled by the former Chief
Information Officer. Management estimates that approximately $34,000 was
erroneously deposited into the airtime bank account. Management is actively
pursing return of these funds. On July 14, 2003, the former Chief Information
Officer resigned as both an officer and as a member of the Company's Board of
Directors. As mentioned in the preceding paragraph, a process has been initiated
to segregate responsibilities in order to reduce the opportunities for a single
person to be in a position to both perpetrate and conceal errors or
irregularities in the normal course of business. As noted in the accompanying
financial statements, the Company received the funds from the former Chief
Information officer as part of an agreement reached during the three month
period ended September 30, 2003.
PART II - OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
In May 2003, the Company was sued by a former Board member seeking recovery for
the value of 350,000 shares, or $209,500, and $120,000 due his firm under a
retainer agreement between the Company and his firm. The former Board member
had previously signed a settlement agreement with the Company in which he agreed
to cancel all potential claims against the Company and its directors in return
for 150,000 unregistered shares trading at a value of $0.60 or higher. The
Company does not believe it owes the former Board member anything beyond the
settlement agreement and has actively defended its position. No assurance can be
given, however, as to the ultimate outcome of the case.
In letters dated September 24, 2003, a former director of the Company, Lawrence
Brady, and a former Chief Financial Officer (CFO), Mark Brady, made demands of
the Company for payment of stock and compensation. On April 16, 2004, the
Company, along with the current officers and board members and several former
directors, accepted service of a suit brought by the Bradys for, among
16
other things, breach of contract for unlawful termination and failure to provide
stock. The alleged breaches and other claims all stem from their service with
the Company for part of 2001 and part of 2002. The aggregate amount of damages
claimed is not specified. The case is proceeding in the state court in Denver,
Colorado. Several of the individually-named defendants have been voluntarily
dismissed by the plaintiffs. The Company plans to vigorously defend itself and
its current directors and officers. No assurance can be given, however, as to
the ultimate outcome of the case.
On November 13, 2003, the Company was notified of a complaint filed in Denver
County, Colorado by one of its directors, Herb Jacobson, for repayment of a
loan. The suit alleged, among other things, that Mr. Jacobson was owed
approximately $49,500 as the principal amount of a loan, plus interest and other
fees. The Company disputed the allegations and plans to defend this case
vigorously. On November 13, 2003 the Board of Directors of the Company removed
Mr. Jacobson as a director of the Company on the basis of his disqualification
for an apparent conflict of interest. The Company then filed a counter-suit
against Mr. Jacobson. On December 19, 2003 the Company entered into a settlement
and release agreement with Mr. Jacobson, and his wife. Under terms of the
agreement, Mr. & Mrs. Jacobson and the Company agreed to dismiss any and all
claims against each other in return for, among other things, payment of a total
of $25,000 over a four month period from the Company to Mr. Jacobson. In
addition, Mr. and Mrs. Jacobson, along with their son Steven Jacobson, agreed to
refrain from selling, transferring, conveying or otherwise disposing of their
remaining share ownership for a period of eighteen months subsequent to selling
an aggregate of 850,000 shares. As a result of the agreement, in the fourth
quarter of 2003, the Company recorded a gain of $23,912 due to a reduction in
the amount previously recorded by the Company as owed to Mr. Jacobson.
ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) On April 16, 2003, the Registrant sold 500,000 shares of common stock to Mr.
Tomas Revesz. The securities were sold at a purchase price of $0.20 per share
for an aggregate amount of consideration received by the Registrant of $90,000
in cash, net of offering costs. The Registrant also issued Mr. Revesz warrants
to purchase $200,000 of additional common stock on or before September 30, 2003
at the lesser of US $0.25 per share or 50% of the consecutive 10-day average
closing price prior to the purchaser's election to exercise the warrant; or on
or before March 31, 2004, at the lesser of US $0.37 per share or 50% of any
consecutive 10-day average closing price prior to the purchaser's election to
exercise the warrant; or on or before September 30, 2004, at the lesser of US
$1.00 per share or 50% of any consecutive 10-day average closing price prior to
the purchaser's election to exercise the warrant; or on or before March 31,
2005, at the lesser of US $2.00 per share or 50% of any consecutive 10-day
average closing price prior to the purchaser's election to exercise the warrant.
On May 13, 2003, Mr. Revesz also loaned $200,000 to the Registrant in exchange
for a 90-day note that is convertible into common shares of the Company at the
lender's option on the 91st day at a price of no more than US$0.20 per share.
Should the Registrant sell any shares during the period the note is outstanding
for less than US$0.20 per share, the conversion price would be lowered to match
that selling price. The Registrant will have the right to prepay the note
anytime prior to the 91st day with no penalty. Interest on the note for the 90-
day period will be 25,000 shares of the Company's common stock. Should Mr.
Revesz choose not to convert the note, and should the Registrant fail to repay
the note when due, the Registrant will incur a penalty of 25,000 common shares
per month. The sale is exempt under Rule 506 as there was only one purchaser
under this offering and the purchaser is an accredited investor. During August,
Mr. Revesz agreed to extend the note to December 1, 2003.
The Registrant also sold 175,000 shares of common stock and issued warrants to
purchase 175,000 shares of common stock to two individuals, Carol Vorberg and
John Gray for $30,000 and $5,000, respectively, during the second quarter of
2003. The Registrant received $30,000 net of offering costs. The securities were
sold at a price of $0.20 per share and the warrants are exercisable at a price
of $0.40, and are exercisable for two years.
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
None
ITEM 5 OTHER INFORMATION
None
17
ITEM 6 EXHIBITS AND REPORTS
(a) Exhibits
31 Certification pursuant to Rule 13A-14 or 15D-14 of the Securities Exchange
Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
32 Certification pursuant to the 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K.
None
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
NIGHTHAWK SYSTEMS, INC.
(Registrant)
Date: October 12, 2004 By: /s/ H. Douglas Saathoff
H. Douglas Saathoff
Chief Executive Officer and
Chief Financial Officer