U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended March 31, 2005
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from _________ to ________
Commission File Number: 0-30786
NIGHTHAWK SYSTEMS, INC
----------------------
(Exact name of small business issuer as specified in its charter)
Nevada 87-0627349
------ ----------
(State or other jurisdiction of (I.R.S
incorporation or organization) Employer Identification No.)
10715 Gulfdale, Suite 200
San Antonio, TX 78216
----------------------
(Address of principal executive offices)
210 341-4811
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(Issuer's telephone number)
__________________________________________________________________
(Former name, former address and former fiscal year, if changed since last
report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 [X] No [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
As of May 5, 2005 there were 37,025,035 shares of common stock, par value $.001
per share, of the registrant issued and outstanding.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
Index
Part I Financial Information
Item 1 Financial Statements (unaudited)
Report of Independent Registered Public Accounting Firm 2
Condensed consolidated balance sheet as of March 31, 2005 3
Condensed consolidated statements of operations for the three months
Ended March 31, 2005 and 2004 4
Condensed consolidated statement of stockholders' deficit for the
Three months ended March 31, 2005 5
Condensed consolidated statements of cash flows for the three months ended
March 31, 2005 and 2004 6
Notes to condensed consolidated financial statements 8
Item 2 Management's Discussion and Analysis or Plan of Operation 16
Item 3 Controls and Procedures 21
Part II Other Information
Item 1 Legal Proceedings 23
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 23
Item 3 Defaults Upon Senior Securities 23
Item 4 Submissions of Matters to a Vote of Security Holders 24
Item 5 Other Information 24
Item 6 Exhibits and Reports on Form 8-K 24
Signatures and Certifications 25
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 March 31, 2005, the related
condensed consolidated statements of operations for the three-month periods
ended March 31, 2005 and 2004, the condensed consolidated statement of
stockholders' deficit for the three-month period ended March 31, 2005, and the
condensed consolidated statements of cash flows for the three-month periods
ended March 31, 2005 and 2004. 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.
GHP Horwath, P.C.
Denver, Colorado
May 12, 2005
Nighthawk Systems, Inc.
Condensed Consolidated Balance Sheet
March 31, 2005
ASSETS
Current assets:
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 47,099
Accounts receivable, net of allowance for doubtful accounts of
$134 $ 81,508
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,685
Prepaids. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102,750
------------
Total current assets. . . . . . . . . . . . . . . . . . . . 268,042
------------
Furniture, fixtures and equipment, net . . . . . . . . . . . . . . . . . . 13,359
Intangible and other assets. . . . . . . . . . . . . . . . . . . . . . . . 13,742
------------
$ 295,143
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 383,515
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 211,708
Line of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,792
Notes payable:
Related parties. . . . . . . . . . . . . . . . . . . . . . . . . . 15,190
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 774,747
------------
Total current liabilities . . . . . . . . . . . . . . . . . 1,404,952
------------
Long-term liabilities:
Convertible debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . 183,145
------------
Commitments and contingencies
Stockholders' deficit:
Preferred stock, $0.001 par value; 5,000,000 shares authorized;
5,000 issued and outstanding; liquidation preference $12,500 . . . . . 12,500
Common stock; $0.001 par value; 200,000,000 shares authorized;
35,394,735 issued and outstanding. . . . . . . . . . . . . . . . . . . 35,395
Special warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . 188,775
Additional paid- in capital. . . . . . . . . . . . . . . . . . . . . . 4,453,998
Accumulated deficit. . . . . . . . . . . . . . . . . . . . . . . . . . (5,983,622)
------------
Total stockholders' deficit . . . . . . . . . . . . . . . . (1,292,954)
------------
$ 295,143
============
The accompanying notes are an integral part of these financial statements.
Nighthawk Systems, Inc.
Condensed Consolidated Statements of Operations
Three months ended March 31,
2005 2004
------------ ------------
Revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 171,222 $ 102,838
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104,524 72,566
------------ ------------
Gross profit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66,698 30,272
Selling, general and administrative expenses . . . . . . . . . . . . . . . 561,660 276,080
------------ ------------
Loss from operations. . . . . . . . . . . . . . . . . . . . . . . . . (494,962) (245,808)
Interest expense:
Related parties . . . . . . . . . . . . . . . . . . . . . . . . . . . 691 3,373
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130,627 18,018
------------ ------------
Total interest expense. . . . . . . . . . . . . . . . . . . . . . 131,318 21,391
------------ ------------
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (626,280) (267,199)
Less: preferred stock dividends. . . . . . . . . . . . . . . . . . . . . . (219)
------------ ------------
Net loss to common stockholders. . . . . . . . . . . . . . . . . . . . . . $ (626,499) $ (267,199)
============ ============
Net loss per basic and diluted common share. . . . . . . . . . . . . . . . $ (0.02) $ (0.01)
============ ============
Net loss to common stockholders per basic and diluted common share . . . . $ (0.02) $ (0.01)
============ ============
Weighted average common shares outstanding - basic and diluted . . . . . . 33,733,867 24,958,301
The accompanying notes are an integral part of these financial statements.
Nighthawk Systems, Inc.
Condensed Consolidated Statements of Stockholders' Deficit
Three months ended March 31, 2005
Preferred Stock Common stock
--------------- ------------
Additional
paid-in Special Accumulated
Shares Amount Shares Amount capital Warrants deficit Total
----------------------------------------------------------------------------------------------------------
Balances,
December 31, 2004
5,000 $ 12,500 31,959,247 $ 31,960 $3,884,516 $ 188,775 $(5,357,342) $(1,239,591)
---------------- -------------- ----------- -------- ---------- --------- ------------ ------------
Common stock
issued, and
puts and warrants
exercised
for cash . . . . . 1,971,310 1,971 310,576 312,547
Common stock
issued as
incentive for
notes payable 250,000 250 52,250 52,500
Common stock
and options
issued for
consulting
services 650,000 650 119,350 120,000
Conversion of
accrued
expenses to
common stock 313,100 313 56,307 56,620
Conversion of
notes payable
to common stock. . 250,000 250 31,000 31,250
Series A
preferred
dividend . . . . . 1,078 1 (1) -
Net loss . . . . . (626,280) (626,280)
---------------- -------------- ----------- -------- ---------- --------- ------------ ------------
Balances,
March 31, 2005. . 5,000 $ 12,500 35,394,735 $ 35,395 $4,453,998 $ 188,775 $(5,983,622) $(1,292,954)
================ ============== =========== ======== ========== ========= ============ ============
The accompanying notes are an integral part of these financial statements.
NIGHTHAWK SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31,
2005 2004
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Cash flows from operating activities:
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . $(626,280) $(267,199)
---------- ----------
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization. . . . . . . . . . . . . . . . 1,681 1,928
Amortization of loan discounts and warrants. . . . . . . . . 66,063 -
Common stock issued for consulting services. . . . 15,000 33,060
Amortization of incentive interest on notes payable. . . . . 50,250 -
Amortization of prepaid consulting expenses . . . . . 121,666 -
Changes in assets and liabilities:
(Increase) decrease in accounts receivable . . . . . . . . . (35,754) 28,955
(Increase) decrease in inventories . . . . . . . . . . . . . (9,976) 25,183
Decrease in prepaids . . . . . . . . . . . . . . . . . . . . 23,596 -
Decrease in other assets and liabilities . . . . . . . . . . - 665
Decrease in accounts payable . . . . . . . . . . . . . . . . (38,739) (51,595)
Increase in accrued expenses. . . . . . . . . . . 24,275 88,313
---------- ----------
Total adjustments . . . . . . . . . . . . . . . . . . . . . . . 218,062 126,509
---------- ----------
Net cash used in operating activities of continuing operations. (408,218) (140,690)
---------- ----------
Cash flows from investing activities:
Purchases of furniture, fixtures and equipment . . . . . . . (1,973) -
---------- ----------
Net cash used in investing activities . . . . . . . . . . . . . (1,973) -
---------- ----------
Cash flows from financing activities:
Cash overdraft . . . . . . . . . . . . . . . . . . . . . . . - (3,902)
Proceeds from the sale of preferred stock. . . . . . . . . . - 7,500
Proceeds from notes payable, related parties . . . . . . . . 339 -
Payments on notes payable, related parties . . . . . . . . . (550) (9,169)
Proceeds from notes payable, other . . . . . . . . . . . . . 225,000 -
Payments on notes payable, other . . . . . . . . . . . . . . (127,765) (9,299)
Payments on long term notes payable. . . . . . . . . . . . . (13,399) -
Payments on other related party payable. . . . . . . . . . . - (18,750)
Net proceeds from the sale of common stock, and the exercise
of puts and warrants. . . . . . . . . . . . . . . . . . . . . 312,547 177,350
---------- ----------
Net cash provided by financing activities . . . . . . . . . . . 396,172 143,730
---------- ----------
Net (decrease) increase in cash . . . . . . . . . . . . . . . . (14,019) 3,040
---------- ----------
Cash, beginning balance . . . . . . . . . . . . . . . . . . . . 61,118 -
---------- ----------
Cash, ending balance. . . . . . . . . . . . . . . . . . . . . . $ 47,099 $ 3,040
========== ==========
CONDENSED CONSOLIDATE STATEMENTS OF CASH FLOWS
(CONTINUED)
Supplemental disclosures of cash flow information: . . . . . . . . . . . . THREE MONTHS ENDED MARCH 31,
2005 2004
-------------- --------------
Cash paid for interest . . . . . . . . . . . . . . . . . . . . . . . . . . $ 18,312 $ 1,019
============== ==============
Supplemental disclosure of non-cash investing and financing
activities:
Common shares issued as incentive interest on notes payable . . . . . . . $ 52,500
==============
Common shares issued for prepaid consulting agreements . . . . . . . . . . $ 105,000
==============
Conversion of accrued expenses to common stock . . . . . . . . . . . . . . $ 56,620
==============
Conversion of notes payable and accrued interest to common
stock
Notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 29,498
Accrued interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,752
--------------
Total amount converted . . . . . . . . . . . . . . . . . . . . . . . . . . $ 31,250
==============
Preferred stock dividends issued in common stock . . . . . . . . . . . . . $ 219
==============
The accompanying notes are an integral part of these financial statements.
NIGHTHAWK SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2005 AND 2004
(unaudited)
1. Organization, going concern, results of operations and management's plans
Organization
Nighthawk Systems, Inc. ("the Company") designs and manufactures intelligent
remote power control products that are easy to use, inexpensive and can remotely
control virtually any device from any location. The Company's proprietary,
wireless products are ready to use upon purchase, so they are easily installed
by anyone, regardless of technical ability, and are also easily integrated into
third-party products, systems and processes. They allow for intelligent control
by interpreting instructions sent via paging and satellite media, and executing
the instructions by 'switching' the electrical current that powers the device,
system or process. Nighthawk's intelligent products can be activated
individually, in pre-defined groups, or en masse, and for specified time periods
with a simple click of a mouse or by dialing a telephone number.
Going concern, results of operations and management's plans
The Company incurred a net loss of approximately $1.38 million during the year
ended December 31, 2004 and a net loss of approximately $626,000 during the
quarter ended March 31, 2005. The Company had a stockholders' deficit and
working capital deficiency of approximately $1.24 million and $1.04 million,
respectively, as of December 31, 2004 and $1.29 million and $1.14 million
respectively, as of March 31, 2005. These conditions raise substantial doubt
about the Company's ability to continue as a going concern. Although no
assurance can be given that such plans will be successfully implemented,
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.
3. Implementation of a sales and marketing plan.
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) 73% 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. Dutchess also required the Company to hire Edgarization, LLC for
consulting services and Nighthawk issued the consulting company 500,000 shares
of common stock. The Company recorded the fair value of these shares as prepaid
consulting and will expense their value over the term of the agreement. 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.
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.
On December 3, 2004 Dutchess loaned the Company an additional $250,000. The note
had no stated interest rate but had a face amount of $300,000 and matured April
3, 2005. Under the terms of the note, Dutchess was issued 250,000 incentive
shares of common stock. The Company recorded the fair value of these incentive
shares as prepaid interest, and will expense their value over the term of the
note. Dutchess also required the Company to hire Edgarization, LLC for
consulting services and Nighthawk issued the consulting company 500,000 shares
of common stock. The Company recorded the fair value of these shares as prepaid
consulting and will expense their value over the term of the agreement. The
implied annual rate of interest is 119.7%. The note was intended to be repaid
via puts exercised under the investment agreement with the Company making
payments of the greater of $75,000 every 30 days or 50% of each put until the
note is paid in full. The note was repaid on April 7, 2005 with a partial use of
the proceeds of a new note.
On January 18, 2005, Dutchess loaned the Company an additional $225,000. The
note has no stated interest rate but has a face amount of $270,000 and matures
on May 18, 2005. Under the terms of the note, Dutchess was issued 250,000
incentive shares of common stock. The Company recorded the fair value of these
incentive shares as prepaid interest, and will expense their value over the term
of the note. Dutchess also required the Company to hire Edgarization, LLC for
consulting services and Nighthawk issued the consulting company 500,000 shares
of common stock. The Company recorded the fair value of these shares as prepaid
consulting and will expense their value over the term of the agreement. The
implied annual rate of interest is 194.5%.
On April 7, 2005, Dutchess loaned the Company an additional $488,500. The note
has no stated interest rate but has a face amount of $586,200 and matures on
June 7, 2005. A portion of the proceeds of this loan was used to repay the note
dated December 3, 2004 with a face amount of $300,000, which matured on April 3,
2005. Under the terms of the note, Dutchess was issued 250,000 incentive shares
of common stock. The Company recorded the fair value of these incentive shares
as prepaid interest, and will expense their value over the term of the note.
Dutchess also required the Company to hire Edgarization, LLC for consulting
services and Nighthawk issued the consulting company 300,000 shares of common
stock. The Company recorded the fair value of these shares as prepaid consulting
and will expense their value over the term of the agreement.
During the period from January 1, 2005 through March 31, 2005, the Company
exercised five (5) puts to Dutchess totaling 1,071,310 shares for net proceeds
of $183,797. Of the total proceeds, $125,633 was used to repay portions of
previously issued notes to Dutchess and $58,164 went to the Company.
On March 9, 2005, Dutchess exercised 250,000 warrants at $0.125 each, for total
proceeds of $31,250, $15,000 of which was applied to outstanding notes.
Also during the period from January 1, 2005 through March 31, 2005, Dutchess
elected to convert a total of $31,250 of the 36-month convertible note for
250,000 shares of the Company's common stock.
During the period from April 1, 2005 through May 5, 2005, the Company exercised
one (1) put to Dutchess totaling 205,300 shares for proceeds of $29,255.
During the period from April 1, 2005 through May 5, 2005, Dutchess elected to
convert a total of $76,250 of the 36-month convertible note for 625,000 shares
of the Company's common stock.
Although no assurance may be given that it will be able to do so, the Company
expects to be able to continue to access funds under this arrangement to help it
fund near-term and long-term sales and marketing efforts, and to cover cash flow
deficiencies.
The sales and marketing plan for 2005 includes the following:
- Hiring sales and marketing personnel. The Company increased its sales
force in the first quarter of 2005 with experienced salespeople with
the goal of effectively targeting existing and new markets.
- Product marketing including print media and attendance at trade shows.
This method has proved the most effective for the Company to date, and
it plans to increase its presence in these areas to attract new
customers.
- An improved Internet presence. The Company launched a new website in
May 2005 to improve content and to make the site more friendly to
search engines. The Company has plans to add e-commerce functionality
at a future date.
- Leveraging existing customer relationships by up-selling new products
or fully integrating systems with the Company's products.
- The establishment of distribution and dealer networks. Through an
effective dealer network, the Company can increase awareness in its
products and utilize a dealer's sales force to actively promote its
products.
- New applications in irrigation control, civil defense and emergency
management. The current product design can be altered with little cost
to the Company to be effectively implemented into a wide array of
fields. Through the commitment of funding, the Company can now
research all possible applications and begin to market directly to new
customers.
- The development and launch of a product designed to be used for
multiple purposes by consumers.
In addition to the marketing and sales objectives, the Company has identified
the following strategic goals for 2005:
- Joint ventures with wireless service providers and equipment
manufacturers.
- The identification of complementary products and companies for
potential acquisition.
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.
2. 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 the financial statements and notes thereto included in the
Company's Annual Report on Form 10-KSB for 2004 filed with the Securities and
Exchange Commission (the "SEC").
3. Significant accounting policies
Revenue recognition
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. The
Company had no bill and hold sales at December 31, 2004 or March 31, 2005.
Revenue related to airtime billing is recognized when the service is performed.
Some customers pre-pay airtime on a quarterly or annual basis and the pre-paid
portion is recorded as deferred revenue. Deferred revenue, included in accrued
expenses on the balance sheet at March 31, 2005, is approximately $15,800.
Provision for doubtful accounts
The Company reviews accounts receivable periodically for collectibility and
establishes an allowance for doubtful accounts and records bad debt expense when
deemed necessary.
Concentrations
Financial instruments that potentially subject the Company to concentrations of
credit risk consist primarily of trade accounts receivable. Receivables arising
from sales to customers are not collateralized and, as a result, management
continually monitors the financial condition of its customers to reduce the risk
of loss. At March 31, 2005, the Company had approximately $81,500 in accounts
receivable, net of the allowance for doubtful accounts. Approximately $37,655
of this balance was from one customer, which was collected subsequent to March
31, 2005.
During the three months ended March 31, 2005, one customer accounted for
approximately 46% of total revenue. During the three months ended March 31,
2004, one customer accounted for approximately 53% of total revenue.
During the three months ended March 31, 2005, the Company's largest supplier
accounted for approximately 68% of the Company's purchases of pre-manufactured
component materials.
Inventories
Inventories consist of parts and pre-manufactured component materials and
finished goods. Inventories are valued at the lower of cost or market using the
first-in, first-out (FIFO) method.
Income taxes
Deferred tax assets and liabilities are recorded for the estimated future tax
effects of temporary differences between the tax basis of assets and liabilities
and amounts reported in the accompanying balance sheets, and for operating loss
and tax credit carry forwards. The change in deferred tax assets and liabilities
for the period measures the deferred tax provision or benefit for the period.
Effects of changes in enacted tax laws on deferred tax assets and liabilities
are reflected as adjustments to the tax provision or benefit in the period of
enactment. The Company's deferred tax assets have been completely reduced by a
valuation allowance because management does not believe realization of the
deferred tax assets is sufficiently assured at the balance sheet date.
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 year. 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. For the quarter ended March 31, 200 and
the year ended December 31, 2004, 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.
Use of estimates
The preparation of the 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. Actual results could differ from those estimates.
Reclassifications
Certain amounts reported in the consolidated financial statements for the three
months ended March 31, 2004 have been reclassified to conform to the March 31,
2005 presentation.
Stock-based compensation
The Company has adopted Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"). The provisions of SFAS
123 allow companies to either expense the estimated fair value of stock options
or to continue to follow the intrinsic value method set forth in Accounting
Principles Bulletin Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25") but disclose the pro forma effects on net income (loss) had the fair
value of the options been expensed. The Company has elected to continue to apply
APB 25 in accounting for its employee stock option incentive plans.
Under APB 25, where the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the date of grant, no
compensation is recognized. As all employee options were issued at or above
market during 2004 and the first quarter of 2005, no compensation expense was
recognized in either of the periods. If compensation expense for the Company's
stock-based compensation plans had been determined consistent with SFAS 123, the
Company's net loss and net loss per share including pro forma results would have
been the amounts indicated below:
Three months ended March 31,
--------------------------------
2005 2004
---------- ----------
Net loss applicable to common stockholders:
As reported . . . . . . . . . . . . . . . . $(626,499) $(267,199)
Total stock-based employee compensation
expense determined under fair value based
method for all employee awards, net. . . . (6,148) (3,454)
---------- ----------
Pro forma net loss. . . . . . . . . . . . . $(632,647) $(270,653)
========== ==========
Net loss per share:
As reported:
Basic and diluted . . . . . . . . . . . . . $ (0.02) $ (0.01)
Pro forma:
Basic and diluted . . . . . . . . . . . . . $ (0.02) $ (0.01)
The pro forma effect on net loss may not be representative of the pro forma
effect on net income or loss of future years due to, among other things: (i) the
vesting period of the stock options and the (ii) fair value of additional stock
options in future years.
For the purpose of the above table, the fair value of each option grant is
estimated as of the date of grant using the Black-Scholes option-pricing model
with the following assumptions:
Three months ended March 31,
--------------------------------
Black-Scholes Assumptions
2005 2004
-------- --------
Dividend yield. . . . . . 0.00% 0.00%
Expected volatility . . . 1.31 1.122
Risk-free interest rate . 4.50% 4.50%
Expected life in years. . 2 years 3 years
The weighted average fair value at date of grant for options granted during the
first quarter of 2005 was $0.132 per share using the above assumptions. There
were no options granted to employees during the first quarter of 2004.
Recently issued accounting pronouncements
In December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 123R "Share-Based Payment", which addresses the accounting for share-based
payment transactions. SFAS 123R eliminates the ability to account for
share-based compensation transactions using APB 25, and instead, generally
requires that such transactions be accounted and recognized in the statement of
operations based on their fair value. SFAS No. 123R will be effective for small
business issuers as of the beginning of the first interim or annual reporting
period that begins after December 15, 2005. SFAS No. 123R offers the Company
alternative methods of adopting this standard. The Company has not yet
determined which alternative method it will use. Depending upon the number and
terms of options that may be granted in future periods, the implementation of
this standard could have a material impact on the Company's financial position
and results of operations.
3. Related party transactions
During the year ended December 31, 2004, a business partner of the Company's
Chairman billed the Company $20,000 for consulting services. The liability was
settled for 175,000 shares of the Company's common stock in the first quarter of
2005.
4. Notes payable
At March 31, 2005, notes payable consist of the following:
Related parties:
Note payable, officer; unsecured; interest at prime rate plus 5.5% (10.5% at
March 31, 2005); due on demand . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,107
Note payable, officer; unsecured; interest at 23.99%, revolving. . . . . . . . . . 5,083
---------
$ 15,190
=========
Other:
Convertible note payable to stockholder, 8% interest rate, in default as of the
date of this report (1). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $160,000
Notes payable to stockholder, 8% interest rate, in default as of the date of this
report (1). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 165,000
Unsecured note with a financial institution, 14.99% interest rate, revolving . . . 23,380
Note payable, $300,000 face amount, no stated interest rate but with an implied
annual rate of 119.7%, due April 3, 2005 (2) . . . . . . . . . . . . . . . . . . . 300,000
Note payable, $270,000 face amount, no stated interest rate but with an implied
annual rate of 194.5%, due May 18, 2005 (2). . . . . . . . . . . . . . . . . . . . 126,367
---------
$774,747
=========
Long Term:
Convertible debenture, 8% interest rate, due July 11, 2007 (2) . . . . . . . . . . $183,144
=========
1) The Company is currently in discussions with Mr. Revesz, the holder of the
notes that are in default as of the date of this report and expects to extend
the maturity dates on those notes as it has done several times previously. In
April 2004, the Company reached an agreement with Tomas Revesz, a former board
member, under which, in return for an additional $25,000 in borrowings and the
extension of the maturity dates of 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 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 the convertible notes to 250,000 shares of
common stock of the Company. For the period of March through December of 2004,
the Company issued 61,875 shares to the creditor for $12,750 of interest owed
under this arrangement. In December of 2004, the creditor extended the maturity
dates of the notes to March 31, 2005.
2) On April 7, 2005, Dutchess loaned the Company an additional $488,500. The
note has no stated interest rate but has a face amount of $586,200 and matures
on June 7, 2005. A portion of the proceeds of this loan was used to repay the
note dated December 3, 2004 with a face amount of $300,000, which matured on
April 3, 2005. Under the terms of the note, Dutchess was issued 250,000
incentive shares of common stock. The Company recorded the fair value of these
incentive shares as prepaid interest, and will expense their value over the term
of the note. Dutchess also required the Company to hire Edgarization, LLC for
consulting services and Nighthawk issued the consulting company 300,000 shares
of common stock. The Company recorded the fair value of these shares as prepaid
consulting and will expense their value over the term of the agreement.
During the period from January 1, 2005 through March 31, 2005, the Company
exercised five (5) puts to Dutchess totaling 1,071,310 shares for net proceeds
of $183,797. Of the total proceeds, $125,633 was used to repay portions of
previously issued notes to Dutchess and $58,164 went to the Company.
On March 9, 2005, Dutchess exercised 250,000 warrants at $0.125 each, for total
proceeds of $31,250, $15,000 of which was applied to outstanding notes.
Also during the period from January 1, 2005 through March 31, 2005, Dutchess
elected to convert a total of $31,250 of the 36-month convertible note for
250,000 shares of the Company's common stock.
During the period from April 1, 2005 through May 5, 2005, the Company exercised
one (1) put to Dutchess totaling 205,300 shares for proceeds of $29,255.
During the period from April 1, 2005 through May 5, 2005, Dutchess elected to
convert a total of $76,250 of the 36-month convertible note for 625,000 shares
of the Company's common stock.
5. Stockholders' Deficit
Preferred stock
Preferred stock dividends of $219 were accrued in the form of a stock dividend
equal to 1,078 shares of common stock of the Company during the first quarter of
2005.
Common stock
The Company held a special shareholders' meeting on January 6, 2005 where an
amendment to the Amended and Restated Articles of Incorporation of Nighthawk
Systems, Inc. was approved to increase the number of authorized shares of our
common stock from 50,000,000 to 200,000,000.
During the first quarter of 2005, the Company issued 463,100 shares for
consulting and other services, of which 175,000 shares were issued to a business
partner of the Company's Chairman to settle a $20,000 liability for consulting
services performed and expensed in 2004.
During the first quarter of 2005, the Company sold 650,000 shares of common
stock to an investor for cash at a price of $0.15 per share. Warrants to
purchase 650,000 shares of common stock at an exercise price of $0.25 per share
were also included in the sale. We did not publicly offer the securities and
the investor is an accredited investor. No underwriters were involved in the
sale.
In April 2005, the Company issued 250,000 shares of common stock to Prospect
Hunter, Inc. for marketing services for a period of one year beginning in April
2005.
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.
General
The Company designs and manufactures intelligent remote monitoring and power
control products that are easy to use, inexpensive and can remotely control
virtually any device from any location. Our proprietary, wireless products are
ready to use upon purchase, so they are easily installed by anyone, regardless
of technical ability, and are also easily integrated into third-party products,
systems and processes. They allow for intelligent control by interpreting
instructions sent via paging and satellite media, and executing the instructions
by 'switching' the electrical current that powers the device, system or process.
Our intelligent products can be activated individually, in pre-defined groups,
or en masse, and for specified time periods with a simple click of a mouse or by
dialing a telephone number.
Our products have been uniquely designed and programmed to be simple and ready
to use upon purchase by anyone, almost anywhere, at affordable prices. As such,
it is the Company's goal to have its products become commonplace, accepted and
used by businesses and consumers alike in their daily routines.
We save consumers and businesses time, effort and expense by eliminating the
need for a person to be present when and where an action needs to be taken. By
utilizing existing wireless technology, we give our users the flexibility to
move their application from place to place, without re-engineering their
network. Currently, most commercial control applications utilize telephone
lines, which tether the system to a single location and have associated
installation and monthly charges. Our products make companies more profitable
by eliminating installation costs and monthly charges for telephone lines, and
allow for remote control of unmanned or remote locations that may operate on
traditional electrical power, or solar or battery generated power.
Applications for our intelligent products include, but are not limited to:
- Rebooting remotely located computer equipment
- Remote switching of residential power
- Managing power on an electrical grid
- Activation/deactivation of alarm and warning devices
- Displaying or changing a digital or printed message or warning sign
- Turning pumps on or off
- Turning heating or cooling equipment on or off
Companies both large and small are seeking ways to save money and lower the risk
of liability by replacing processes that require human intervention with
processes that can be controlled remotely without on-site human intervention.
Today, the remote control of industrial or commercial assets and processes is
performed mainly through the use of telephone-line based systems. Opportunities
exist for companies that provide intelligent wireless solutions, as telephone
lines are expensive and limited in availability and function. Nighthawk's
products are wireless, and can be designed to work with a variety of wireless
media. The number of applications for wireless remote control is virtually
limitless. The Company has identified primary markets (Utility, IT
Professional, Traffic Control), as well as secondary markets (Irrigation,
Outdoor Advertising, Oil/Gas, Security) for its products.
The Company has historically had minimum funds available to it to support its
operations and has been largely dependent on private equity placements with
accredited investors to fund its negative cash flows. As such, the Company's
ability to fund and sustain sales and marketing efforts was very limited. 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 a total of $250,000 under a debenture during the three-month period
ended September 30, 2004. The Company also signed an investment agreement under
which, subsequent to the December 2004 effectiveness of its SB-2 registration
statement filed with the Securities and Exchange Commission ("SEC"), 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.
As is more fully explained in Liquidity and Capital Resources below, the Company
began utilizing this investment agreement in December 2004 and continued to
utilize this agreement in the first quarter of 2005 in order to implement a
sales and marketing effort designed to stimulate revenue growth. This sales
and marketing plan for 2005 includes the following:
- Hiring sales and marketing personnel. The Company increased its sales
force in the first quarter of 2005 with experienced salespeople with
the goal of effectively targeting existing and new markets.
- Product marketing including print media and attendance at trade shows.
This method has proved the most effective for the Company to date, and
it plans to increase its presence in these areas to attract new
customers.
- An improved Internet presence. The Company launched a new website in
May 2005 to improve content and to make the site more friendly to
search engines. The Company has plans to add e-commerce functionality
at a future date.
- Leveraging existing customer relationships by up-selling new products
or fully integrating systems with the Company's products.
- The establishment of distribution and dealer networks. Through an
effective dealer network, the Company can increase awareness in its
products and utilize a dealer's sales force to actively promote its
products.
- New applications in irrigation control, civil defense and emergency
management. The current product design can be altered with little cost
to the Company to be effectively implemented into a wide array of
fields. Through the commitment of funding, the Company can now
research all possible applications and begin to market directly to new
customers.
- The development and launch of a product designed to be used for
multiple purposes by consumers.
In addition to the marketing and sales objectives, the Company has identified
the following strategic goals for 2005:
- Joint ventures with wireless service providers and equipment
manufacturers.
- The identification of complementary products and companies for
potential acquisition.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America 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 revenue and expenses during
the reporting period. Actual results could differ from those estimates.
Revenue recognition
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. There
were no bill and hold items at March 31, 2005. Revenue related to airtime
billing is recognized when the service is performed. Some customers pre-pay
airtime on a quarterly or annual basis and the pre-paid portion is recorded as
deferred revenue. Deferred revenue, included in accrued expenses on the balance
sheet at March 31, 2005, is approximately $15,800.
Stock-based compensation
We believe that stock-based compensation is a critical accounting policy that
affects our financial condition and results of operations. Statement of
Financial Accounting Standards ("SFAS") No. 123, Accounting for Stock-Based
Compensation defines a fair-value based method of accounting for stock-based
employee compensation plans and transactions in which an entity issues its
equity instruments to acquire goods or services from non-employees, and
encourages but does not require companies to record compensation cost for
stock-based employee compensation plans at fair value. The Company has chosen to
continue to account for employee stock-based compensation using the intrinsic
value method prescribed in Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees ("APB No. 25") and related
interpretations.
In December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 123R "Share-Based Payment", which addresses the accounting for share-based
payment transactions. SFAS 123R eliminates the ability to account for
share-based compensation transactions using APB 25, and instead, generally
requires that such transactions be accounted and recognized in the statement of
operations based on their fair value. SFAS No. 123R will be effective for small
business issuers as of the beginning of the first interim or annual reporting
period that begins after December 15, 2005. SFAS No. 123R offers the Company
alternative methods of adopting this standard. The Company has not yet
determined which alternative method it will use. Depending upon the number and
terms of options that may be granted in future periods, the implementation of
this standard could have a material impact on the Company's financial position
and results of operations.
Comparison of the Three Months Ended March 31, 2005 and March 31, 2004
Revenue
The components of revenue and their associated percentages of total revenues,
for the three months ended March 31, 2005 and 2004 are as follows:
Three months Ended March 31,
--------------------------------
2005 2004 Change % Change $
--------------- ---------------- -------- ----------
Revenues:
Nighthawk NH1, NH2 & NH8. . $ 21,604 13% $ 56,858 55% -62% $(35,254)
PT 1000, PT1 LC & PT Boards 25,853 15% 14,831 14% 74% 11,022
CEO 700 . . . . . . . . . . 31,225 18% 9,935 10% 214% 21,290
Hydro 1 . . . . . . . . . . 76,750 45% - 0% n/a 76,750
Airtime sales . . . . . . . 14,233 8% 10,166 10% 40% 4,067
Other product . . . . . . . 355 0% 9,464 9% -96% (9,109)
Freight . . . . . . . . . . 1,202 1% 1,584 2% -24% (382)
-------- ----- --------- --------- ---- ---------
Total revenues. . . . . . . $171,222 100% $ 102,838 100% 66% $ 68,384
-------- ----- --------- --------- ---- ---------
Revenues for the three-month period ended March 31, 2005 were $171,222 as
compared to $102,838 for the corresponding period of the prior year, an increase
of 66% between periods. During the three months ended March 31, 2005, one
customer, who purchased the Company's Hydro 1 product, represented approximately
46% of the Company's total revenue. During the three months ended March 31,
2004, the Company's largest customer, who purchased the Company's NH1 rebooting
product, accounted for approximately 53% of total revenue.
Cost of goods sold includes parts and pre-manufactured components used to
assemble our products as well as allocated overhead for production personnel and
facilities costs. Cost of goods sold increased by $31,958 or 44% to $104,524
for the three months ended March 31, 2005 from $72,566 for the corresponding
period of the prior year but decreased as a percentage of revenues between the
periods from 71% in 2004 to 61% in 2005. The increase in the gross amount was
due to increased sales volume while the increase in gross margin was due in part
to our ability to order parts in larger quantities and spread fixed costs over
greater unit volume.
Selling, general and administrative expenses for the three months ended March
31, 2005 increased by $285,580 or 103% to $561,660 from $276,080 for the
three-month period ended March 31, 2004. The Company incurred approximately
$137,000 in non-cash expenses in the first quarter of 2005 for consulting and
other services. This represents an increase of approximately $104,000 in
non-cash expenses when compared to the quarter ended March 31, 2004. For the
three months ended March 31, 2005, the Company recognized $105,000 in consulting
expense for 500,000 shares issued to a company in which an employee of Dutchess
is a member of management. Also during the first quarter of 2005, the Company
spent $125,000 in cash for investor relations programs.
Interest expense increased $109,927 or 514% between the three-month periods
presented. The increase was due primarily to interest expense related to the
Dutchess notes, some of which have no stated interest rate but have a repayment
amount greater than the funded amount. The Company recognizes the difference
between the face amount of the notes and the amounts actually received in cash
as interest expense over the life of the loans. In addition, the value of the
incentive shares issued in conjunction with the notes is recognized as interest
expense over the life of the loans. In total, the Company recognized
approximately $66,000 in non-cash expenses related to the amortization of these
loan discounts and approximately $50,000 in non-cash expenses related to
inventive shares.
The net loss for the three-month period ended March 31, 2005 was $626,280
compared to $267,199 for the three-month period ended March 31, 2004. The
increase in net loss from continuing operations was due primarily to increased
non-cash expenses for consulting and other services, placement fees and
incentives related to fundraising efforts, and increased non-cash interest
expense.
Liquidity and Capital Resources
The Company's financial statements for the three months ended March 31, 2005
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. The Company incurred a net loss of approximately $1.38 million
during the year ended December 31, 2004 and a net loss of approximately $626,000
during the quarter ended March 31, 2005. The Company had a stockholders'
deficit and working capital deficiency of approximately $1.24 million and $1.04
million, respectively, as of December 31, 2004 and $1.29 million and $1.14
million respectively, as of March 31, 2005.
The Report of Independent Registered Public Accounting Firm on the Company's
financial statements as of and for the year ended December 31, 2004 includes a
"going concern" explanatory paragraph which means that the auditors expressed
substantial doubt about the Company's ability to continue as a going concern.
During the quarter ended March 31, 2005, cash used in operating activities was
approximately $408,000. The net loss of approximately $626,000 for the quarter
was partially offset by approximately $255,000 in non-cash expenses. Other uses
of cash were increases in accounts receivable and inventories as well as
declines in accounts payable. Cash used in operating activities in the quarter
ended March 31, 2004 was approximately $141,000. Uses of cash during the period
were the net loss for the period and a decrease in accounts payable. Sources of
cash for the period consisted primarily of adjustments for non-cash expenses,
decreases in accounts receivable and prepaid expenses as well as increases in
accrued expenses and deferred revenue.
There were no cash flows used in investing activities during the quarter ended
March 31, 2004. The Company purchased approximately $2,000 in computer
equipment in the first quarter of 2005.
Net cash provided by financing activities for the quarter ended March 31, 2005
was approximately $396,000 and resulted primarily from the sale of common stock
and warrants, the exercise of puts with Dutchess and the issuance of notes
payable to Dutchess. The Company issued 1,971,310 shares of common stock in
return for $312,547 in net cash proceeds during the period. The Company also
received $225,000 from Dutchess during the quarter in exchange for a note.
These cash inflows were offset to some degree by payments on notes payable of
approximately $142,000 during the period. Net cash provided by financing
activity for the quarter ended March 31, 2004 was approximately $144,000 and
resulted primarily from the sale of common stock offset by payments on notes
payable.
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.
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) 73% 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. Dutchess also required the Company to hire Edgarization, LLC for
consulting services and Nighthawk issued the consulting company 500,000 shares
of common stock. The Company recorded the fair value of these shares as prepaid
consulting and will expense their value over the term of the agreement. 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.
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.
On December 3, 2004 Dutchess loaned the Company an additional $250,000. The note
had no stated interest rate but had a face amount of $300,000 and matured April
3, 2005. Under the terms of the note, Dutchess was issued 250,000 incentive
shares of common stock. The Company recorded the fair value of these incentive
shares as prepaid interest, and will expense their value over the term of the
note. Dutchess also required the Company to hire Edgarization, LLC for
consulting services and Nighthawk issued the consulting company 500,000 shares
of common stock. The Company recorded the fair value of these shares as prepaid
consulting and will expense their value over the term of the agreement. The
implied annual rate of interest is 119.7%. The note was intended to be repaid
via puts exercised under the investment agreement with the Company making
payments of the greater of $75,000 every 30 days or 50% of each put until the
note is paid in full. The note was repaid on April 7, 2005 with a partial use of
the proceeds of a new note.
On January 18, 2005, Dutchess loaned the Company an additional $225,000. The
note has no stated interest rate but has a face amount of $270,000 and matures
on May 18, 2005. Under the terms of the note, Dutchess was issued 250,000
incentive shares of common stock. The Company recorded the fair value of these
incentive shares as prepaid interest, and will expense their value over the term
of the note. Dutchess also required the Company to hire Edgarization, LLC for
consulting services and Nighthawk issued the consulting company 500,000 shares
of common stock. The Company recorded the fair value of these shares as prepaid
consulting and will expense their value over the term of the agreement. The
implied annual rate of interest is 194.5%.
On April 7, 2005, Dutchess loaned the Company an additional $488,500. The note
has no stated interest rate but has a face amount of $586,200 and matures on
June 7, 2005. A portion of the proceeds of this loan was used to repay the note
dated December 3, 2004 with a face amount of $300,000, which matured on April 3,
2005. Under the terms of the note, Dutchess was issued 250,000 incentive shares
of common stock. The Company recorded the fair value of these incentive shares
as prepaid interest, and will expense their value over the term of the note.
Dutchess also required the Company to hire Edgarization, LLC for consulting
services and Nighthawk issued the consulting company 300,000 shares of common
stock. The Company recorded the fair value of these shares as prepaid consulting
and will expense their value over the term of the agreement.
During the period from January 1, 2005 through March 31, 2005, the Company
exercised five (5) puts to Dutchess totaling 1,071,310 shares for net proceeds
of $183,797. Of the total proceeds, $125,633 was used to repay portions of
previously issued notes to Dutchess and $58,164 went to the Company.
On March 9, 2005, Dutchess exercised 250,000 warrants at $0.125 each, for total
proceeds of $31,250, $15,000 of which was applied to outstanding notes.
Also during the period from January 1, 2005 through March 31, 2005, Dutchess
elected to convert a total of $31,250 of the 36-month convertible note for
250,000 shares of the Company's common stock.
During the period from April 1, 2005 through May 5, 2005, the Company exercised
one (1) put to Dutchess totaling 205,300 shares for proceeds of $29,255.
During the period from April 1, 2005 through May 5, 2005, Dutchess elected to
convert a total of $76,250 of the 36-month convertible note for 625,000 shares
of the Company's common stock.
Although no assurance may be given that it will be able to do so, the Company
expects to be able to continue to access funds under this arrangement to help it
fund near-term and long-term sales and marketing efforts, and to cover cash flow
deficiencies.
Item 3. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures:
The Company's management, including the Company's principal executive officer
and principal accounting and financial officer, has evaluated the effectiveness
of the Company's disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the
quarter ended March 31, 2005, the period covered by the Quarterly Report on Form
10-QSB. Based upon that evaluation, the Company's principal executive officer
and principal financial and accounting officer have concluded that the
disclosure controls and procedures were effective as of March 31, 2005 to
provide reasonable assurance that material information relating to the Company
is made known to management including the CEO.
There were no changes in the Company's internal control over financial reporting
that occurred during the Company's last fiscal quarter that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting. However, as noted in previous filings,
throughout 2002 and until March 26, 2003, the Company's former Chief Executive
Officer was responsible for, among other duties, opening the mail, making
accounting entries, writing checks and producing financial reports.
Disbursements of cash and stock issuances were made during this time period that
were not substantiated as relating to Company business, or were made in error.
At the meeting of the Board of Directors held on March 26, 2003, the former
Chief Executive Officer resigned, and the Chief Financial Officer, H. Douglas
Saathoff, was appointed as his replacement by the board of directors.
Consequently, Mr. Saathoff held both the position of Chief Executive Officer and
Chief Financial Officer, but procedures were implemented subsequent to March 26,
2003 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 new Chief
Executive Officer and the board of directors initiated a process to establish
and implement a written policy on disclosure controls and procedures and hired a
corporate controller on January 1, 2005 to add additional oversight to the
accounting function. On April 12, 2005, the Board of Directors agreed that Mr.
Saathoff should no longer act as both Chief Executive Officer and Chief
Financial Officer. Mr. Saathoff relinquished his duties as Chief Financial
Officer as of April 12, 2005 and Daniel P. McRedmond, the Company's Corporate
Controller assumed the role of the Company's Principal Accounting and Financial
Officer.
PART II - OTHER INFORMATION
Item 1. Legal proceedings
Charles McCarthy vs. Nighthawk Systems, Inc., Case no CV03-5406, Second Judicial
District Court, County of Washoe, State of Nevada. 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
Peregrine Control Technologies, Inc. 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 the Company's directors in
return for 150,000 unregistered shares trading at a value of $0.60 or higher. In
October 2004 the Company reached an agreement with Mr. McCarthy to settle the
case. Under the Settlement Agreement and Release, we made a cash payment to
McCarthy of $10,000 during October 2004, a cash payment of $15,000 in January
2005 and will settle the remaining balance in the fourth quarter of 2005.
Lawrence Brady and Mark Brady vs. Peregrine Control Technologies, Inc., et al,
District Court, City & County of Denver, Colorado. In April 2004, the Company,
along with the current officers and board members and several of the Company's
former directors, were sued by a former director and his son 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 as our
director and chief financial officer, respectively, for part of 2001 and part of
2002. The aggregate amount of damages claimed is not specified. The Company
filed a counterclaim against the Bradys for non-performance and breach of
fiduciary duties. This counterclaim was allowed to proceed by the court over the
objection of the Bradys.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the first quarter of 2005, the Company sold 650,000 shares of common
stock to an investor for cash at a price of $0.15 per share. Warrants to
purchase 650,000 shares of common stock at an exercise price of $0.25 per share
were also included in the sale. We did not publicly offer the securities and
the investor is an accredited investor. No underwriters were involved in the
sale.
These securities were issued to the investor in reliance upon an exemption from
the registration requirements of the Securities Act of 1933, as set forth in
Section 4(2) under the Securities Act of 1933 and Rule 506 of Regulation D
promulgated thereunder relative to sales by an issuer not involving any public
offering, to the extent an exemption from such registration was required. The
purchaser represented to us in connection with the purchase that; he is an
accredited investor and was acquiring the shares for investment purposes only
and not for distribution, that he could bear the risks of the investment and
could hold the securities for an indefinite period of time. The purchaser
received written disclosures that the securities had not been registered under
the Securities Act of 1933 and that any resale must be made pursuant to a
registration statement or an available exemption from such registration. The
participant in the offering described above was given access to full and
complete information regarding us, together with the opportunity to meet with
our officers and directors for purposes of asking questions and receiving
answers in order to facilitate such participant's independent evaluation of the
risks associated with the purchase of our securities.
Item 3. Defaults upon senior securities
The Company is in default on two loans from Mr. Revesz, a former board member,
as of the date of this report and is in discussions to extend the maturity dates
on those notes. In April 2004, the Company reached an agreement with Tomas
Revesz under which, in return for an additional $25,000 in borrowings and the
extension of the maturity dates of three notes to July 31, 2004, the Company
granted the creditor a secured position in the assets of the Company.
Item 4. Submission of matters to a vote of securities holders
The Company held a special shareholders' meeting on January 6, 2005 where an
amendment to the Amended and Restated Articles of Incorporation of Nighthawk
Systems, Inc. was approved to increase the number of authorized shares of our
common stock from 50,000,000 to 200,000,000.
Item 5. Other information
None
Item 6. Exhibits and Reports
(a) Exhibits
31.1 Certification of H. Douglas Saathoff, Chief Executive Officer, 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.
31.2 Certification of Daniel P. McRedmond, Principal Financial and Accounting
Officer, 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.
32.1 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: May 20, 2005 By: /s/ H. Douglas Saathoff
------------------------------------------
H. Douglas Saathoff,
Chief Executive Officer
Date: May 20, 2005 By: /s/ Daniel P. McRedmond
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Daniel P. McRedmond
Principal Accounting and Financial Officer