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 June 30, 2004
[ ] 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, TX 78216
---------------------------------------
(Address of Principal Executive offices)
Registrant's telephone number, with area code: (303) 337-4811
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
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Report of Independent Registered Public Accounting Firm 3
Condensed consolidated balance sheet as of June 30, 2004 4
Condensed consolidated statements of operations for the
three and six months ended June 30, 2004 and 2003 5
Condensed consolidated statement of stockholders'
deficit for the six months ended June 30, 2004 6
Condensed consolidated statements of cash flows for the
six months ended June 30, 2004 and 2003 7
Notes to condensed consolidated financial statements 8
Item 2 Management's Discussion and Analysis or Plan of Operation 12
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 16
Item 3 Defaults upon senior securities 16
Item 4 Submission of matters to a vote of securities holders 16
Item 5 Other information 17
Item 6 Exhibits and reports on Form 8-K 17
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 June 30, 2004, the related
condensed consolidated statements of operations for the three-month and
six-month periods ended June 30, 2004 and 2003, the condensed consolidated
statement of stockholders' deficit for the six-month period ended June 30,
2004, and the condensed consolidated statements of cash flows for the six-month
periods ended June 30, 2004 and 2003. 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 8 to these condensed consolidated financial statements, the
Company has restated its June 30, 2004 condensed consolidated balance sheet, and
its condensed consolidated statements of operations, stockholders' equity and
cash flows for the three-month and six-month periods then ended.
GELFOND HOCHSTADT PANGBURN, P.C.
Denver, Colorado
September 8, 2004
3
Nighthawk Systems, Inc.
Condensed Consolidated Balance Sheet
June 30, 2004
(unaudited and restated)
ASSETS
Current assets:
Cash $ 2,032
Accounts receivable, net of allowance for
doubtful accounts of $134 53,274
Inventories 114,518
Other 37,749
------------
Total current assets 207,573
Furniture, fixtures and equipment, net 16,920
Intangible assets, net 8,658
------------
$ 233,151
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 404,339
Accrued expenses 227,025
Line of credit 19,842
Notes payable:
Related parties 109,695
Other 401,722
Customer deposits 63,740
------------
Total liabilities (all current) 1,226,363
Commitments and contingencies
Stockholders' deficit:
Preferred stock; $0.001 par value; 5,000,000
shares authorized; 5,000 shares issued and outstanding;
liquidation preference $12,500 5
Common stock; $0.001 par value; 50,000,000
shares authorized; 26,533,688 issued and outstanding 26,534
Additional paid-in capital 3,291,794
Special warrants 188,775
Accumulated deficit (4,500,320)
------------
Total stockholders' deficit (993,212)
------------
$ 233,151
============
The accompanying notes are an integral
part of these financial statements.
4
Nighthawk Systems, Inc.
Condensed Consolidated Statements of Operations
(unaudited)
Three months ended June 30, Six months ended June 30,
--------------------------- -------------------------
2004 2004
Restated 2003 Restated 2003
------------ ------------ ------------ ------------
Product sales, net $ 161,387 $ 528,095 $ 264,225 $ 695,271
Cost of goods sold 108,057 284,487 180,623 379,017
------------ ------------ ------------ ------------
Gross profit. 53,330 243,608 83,602 316,254
Selling, general and administrative expenses 264,865 340,205 540,945 654,853
Reversal of 2002 consulting expense - (39,000) - $ (39,000)
------------ ------------ ------------ ------------
Loss from operations (211,535) (57,597) (457,343) (299,599)
------------ ------------ ------------ ------------
Interest expense:
Related parties 2,227 3,718 5,600 6,661
Other 38,571 11,025 56,589 18,487
------------ ------------ ------------ ------------
Loss from continuing operations (252,333) (72,340) (519,532) (324,747)
------------ ------------ ------------ ------------
Discontinued operations:
Income from operations of
discontinued segment 10,713 23,508
------------ ------------
Net loss (252,333) (61,627) (519,532) (301,239)
Less: Preferred stock dividends (197) - (197) -
------------ ------------ ------------ ------------
Net loss to common stockholders $ (252,530) $ (61,627) $ (519,729) $ (301,239)
============ ============ ============ ============
Loss from continuing operations per
basic and diluted common share $ (0.01) * $ (0.02) $ (0.02)
============ ============ ============ ============
Income from discontinued operations per
basic and diluted common share * *
============ ============
Net loss to common stockholders per
basic and diluted common share $ (0.01) * $ (0.02) $ (0.01)
============ ============ ============ ============
Weighted average common shares outstanding,
basic and diluted 25,911,034 21,632,681 25,434,668 21,484,056
============ ============ ============ ============
* Less than $0.01 per share
The accompanying notes are an integral
part of these financial statements.
5
Nighthawk Systems, Inc.
Condensed Consolidated Statement of Stockholders' Deficit
Six Months Ended June 30, 2004
(unaudited and restated)
Preferred Stock Common Stock Additional
------------------ --------------------- Paid-in Special Accumulated
Shares Amount Shares Amount Capital Warrants Deficit TOTAL
--------- ------- ----------- -------- ----------- --------- ------------- ----------
Balances, December
31, 2003 - - 24,320,902 $ 24,321 $ 2,855,289 - $ (3,980,591) $(1,100,981)
Common stock and warrants
issued and options exercised
for cash 1,488,333 1,488 235,862 $188,775 426,125
Common stock
issued for services 365,000 365 62,735 63,100
Common stock and warrants
issued for interest 33,750 34 34,466 34,500
Conversion of
notes payable to common stock 375,000 375 80,141 80,516
Preferred stock
issued for cash 5,000 $ 5 12,495 12,500
Issuance of stock
options to consultant 10,560 10,560
Cancellation
of shares (50,000) (50) 50 -
Series A
preferred dividends 703 1 196 (197) -
Net loss (519,532) (519,532)
--------- ------- ----------- -------- ----------- --------- ------------- ----------
Balances,
June 30, 2004 5,000 $ 5 26,533,688 $26,534 $ 3,291,794 $188,775 $ (4,500,320) $(993,212)
========= ======= =========== ======== =========== ========= ============= ==========
The accompanying notes are an integral
part of these financial statements.
6
Nighthawk Systems, Inc.
Condensed Consolidated Statements of Cash Flows
(unaudited)
Six months ended June 30,
-------------------------
2004
Restated 2003
---------- ----------
Cash flows from operating activities:
Net loss $(519,532) $(301,239)
---------- ----------
Adjustments to reconcile net loss to
net cash used in operating activities:
Income from operations of discontinued segment - (23,508)
Depreciation and amortization 3,854 2,836
Common stock issued for services 63,100 -
Common stock and warrants issued for interest 34,500 11,500
Issuance of stock options to consultants 10,560 -
Cancellation of consulting agreement - (39,000)
Change in assets and liabilities:
Decrease (increase) in accounts receivable (11,357) 120,926
Increase in inventories (39,189) (124,297)
Increase in accounts payable 11,801 80,882
Increase in accrued expenses 35,313 31,981
Decrease in deferred revenue - (354,114)
Increase in customer deposits 196 60,000
Increase in other assets (2,394) (47,054)
---------- ----------
Total adjustments 106,384 (279,848)
---------- ----------
Net cash used in operating activities (413,148) (581,087)
---------- ----------
Cash flows from investing activities:
Purchases of furniture, fixtures and equipment - (14,158)
---------- ----------
Net cash used in investing activities - (14,158)
---------- ----------
Cash flows from financing activities:
Repayment of cash overdraft (3,902) -
Proceeds from notes payable, related parties 25,516 43,733
Payments on notes payable, related parties (34,655) (40,052)
Payments made on factoring arrangement, net - (82,502)
Proceeds from notes payable, other 25,000 200,000
Payments on notes payable, other (10,404) (14,383)
Payments on other related party payable (25,000) -
Net proceeds from issuance of common stock 237,350 128,000
Proceeds from issuance of preferred stock 12,500 -
Net proceeds from issuance of special warrants 188,775 -
---------- ----------
Net cash provided by financing activities 415,180 234,796
---------- ----------
Cash provided by discontinued operations 7,480
----------
Net increase (decrease) in cash 2,032 (352,969)
Cash, beginning - 428,677
---------- ----------
Cash, ending $ 2,032 $ 75,708
========== ==========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 17,222 $ 4,708
========== ==========
Supplemental disclosure of non-cash investing and financing activities:
Conversion of note payable and accrued interest to common stock
Note payable $ 71,640
Accrued interest 8,876
----------
$ 80,516
==========
Preferred stock dividends $ 197
==========
The accompanying notes are an integral
part of these financial statements.
7
NIGHTHAWK SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2004 AND 2003
(unaudited)
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
both a stockholders' deficit and working capital deficiency of approximately
$1.0 million as of June 30, 2004. 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 and the reduction of expenses.
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). 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. 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.
During the six months ended June 30, 2004, the Company's largest customer
accounted for 44% of sales, and the Company purchased 53% of its inventory from
a single supplier. During the three months ended June 30, 2004, three customers
accounted for 36%, 14% and 13% of sales, respectively. During the six months
ended June 30, 2003, two customers accounted for approximately 49% and 30% of
sales, respectively. During the three months ended June 30, 2003, two customers
accounted for approximately 49% and 36% of sales, respectively.
Inventories
Inventories at June 30, 2004 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 June 30,
2004.
8
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 three and six month periods
ended June 30, 2004 and 2003, 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.
Stock-based compensation
The Company has elected to continue to account for stock option grants in
accordance with APB 25 and related interpretations. 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. No
employee options were issued or vested during the three month and six month
periods ending June 30, 2003. The Company issued employee options in September,
October and November 2003 that vest over three year periods. The Company has not
recognized compensation expense during the three and six month periods ended
June 30, 2004 because the exercise price of the options equaled or exceeded the
market price of the Company's common stock on the dates the options were
granted. The weighted average fair value at date of grant for options granted
during 2003 was from $0.009 to $0.027. 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 June 30,
---------------------------
2004 2003
----------------- ----------
Net loss applicable to common stockholders: $ (252,530) $ (67,627)
As reported
Total stock-based employee compensation expense determined
under fair value based method for all employee awards, net
of related tax effects (3,341) -
----------------- ----------
Pro forma net loss applicable to common stockholders $ (255,871) $( 67,627)
----------------- ----------
Pro forma net loss per share applicable to common stockholders:
As reported:
Basic and diluted $ (0.01) $ *
Pro forma:
Basic and diluted $ (0.01) $ *
* Less than $0.01 per share
Six Months Ended June 30,
--------------------------
2004 2003
------------- ----------
Net loss applicable to common stockholders: $ (519,729) $(301,239)
As reported
Total stock-based employee compensation expense determined
under fair value based method for all employee awards, net
of related tax effects (6,795) -
------------- ----------
Pro forma net loss applicable to common stockholders $ (526,524) $(301,239)
------------- ----------
Pro forma net loss per share applicable to common stockholders:
As reported:
Basic and diluted $ (0.02) $ (0.01)
Pro forma:
Basic and diluted $ (0.02) $ (0.01)
9
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.
During the first six months of 2004, the Company issued 330,000 options to
purchase common stock of the Company to non-employees which vested immediately.
The weighted average fair value at date of grant for the options granted during
the first six months of 2004 was $0.032. In accordance with SFAS 123, the
Company recognized $10,560 in expense related to these options during the period
ended June 30, 2004.
For the purposes of the above, 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:
2004 2003
Dividend yield 0.0% 0.0%
Expected volatility 1.122 1.229 - 1.316
Risk-free interest rate 4.50% 4.50%
Expected life in years 3 1 - 3
2. Related party transactions:
During the six months ended June 30, 2004, the Company repaid $9,655 on notes
payable to two officers of the Company, as well as $25,000 to a shareholder and
former director under an arrangement entered into in December 2003. The Company
also borrowed and repaid approximately $25,000 from a company in which its
Chairman is a partner.
3. Notes payable
In April 2004, the Company reached an agreement with its largest creditor 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 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 $210,000 convertible note to common stock of the
Company at the prescribed rate of $0.20 per share.
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. This amount is reflected in interest expense and
additional paid-in capital for the periods ending June 30, 2004.
During the six-month period ended June 30, 2004, the Company repaid a
stockholder $7,543 owed to him under a short-term note, and made $2,861 in
payments to a financial institution.
4. Stock transactions:
During the six months ended June 30, 2004, 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. The Company
also issued options to a consultant to purchase 330,000 shares of common stock
at $0.15 per share which were exercised in full during March 2004. A total of
365,000 shares of common stock were issued during the six month period to
consultants in return for $63,100 in services, and the
10
Company received $60,000 in cash proceeds upon the exercise of 300,000 options
during the period.
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 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.
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 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.
5. Discontinued operations:
Effective July 31, 2003, the Company sold the remaining assets and liabilities
of its paging airtime business segment. The financial results of this paging
business segment are presented as discontinued operations in the accompanying
financial statements.
6. 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. Discovery in the
case has stopped due to the plaintiffs claim that he has lost his eyesight. No
assurance can be given, however, as to the ultimate outcome of the case.
The Company, along with the current officers and board members and several
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
director of the Company and chief financial officer, respectively, 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.
11
7. Subsequent events
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 to the placement agent involved in the transaction with Dutchess.
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.
During July and August 2004, the Company issued a total of 175,000 shares to
consultants in return for services rendered during the quarter, and 300,000
shares to consultants for services to be performed.
8. Restatement
As mentioned in Note 3 above, in April 2004, the Company reached an agreement
with its largest creditor 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. The amount of
retroactive interest incurred through March 31, 2004 was $15,693, which was
previously included in the financial statements included in the Company's filing
on Form 10-QSB on August 23, 2004 for the three and six month periods ended June
30, 2004. In order to recognize the interest in the proper interim period, the
Company has restated its results for the interim periods ending March 31 and
June 30, 2004.
In addition, the Company has restated its financial statements included in the
Company's filing on Form 10-QSB on August 23, 2004 for the three and six month
periods ending June 30, 2004 to include interest expense related the conversion
on June 30, 2004 of $71,640 in principal and $8,876 in accrued interest owed to
a creditor 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. See Note 3 above.
Following is a summary comparison of amounts previously reported as of or for
the periods ended June 30, 2004 with restated results:
As of or for the Periods Ended
June 30, 2004
---------------
As Previously
Restated Reported
-------- ----------
Additional paid-in capital $ 3,291,794 $ 3,264,044
Accumulated deficit $ (4,500,320) $ (4,472,570)
For the three months
ended June 30, 2004:
Interest expense, other $ 38,571 $ 26,514
Net loss $ (252,333) $ (240,276)
Net loss to common stockholders $ (252,530) $ (240,473)
Net loss to common stockholders per
basic and diluted common share $ (0.01) $ (0.01)
For the six months ended
June 30, 2004:
Interest expense, other $ 56,589 $ 28,839
Net loss $ (519,532) $ (491,782)
Net loss to common stockholders $ (519,729) $ (491,979)
Net loss to common stockholders per
basic and diluted common share $ (0.02) $ (0.02)
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 June 30, 2004 Compared to the Three Months Ended June 30,
2003
Net sales for the three month period ended June 30, 2004 were $161,387 as
compared to $528,095 for the corresponding period of the prior year, a decline
of 69% between periods presented. Approximately $447,480 or 85% of the product
sales during the quarter ending June 30, 2003 came from two customers who placed
orders totaling approximately $816,000. These orders were for the Company's NH2
rebooting device for a kiosk manufacturer and operator, and load control units
for an electric utility customer. The NH2 order was substantially completed
during fiscal 2003, while the load control unit order remains approximately 80%
complete as of June 30, 2004 pending further instructions from the customer.
Although the Company processed orders for more customers during the 2004 quarter
than it did during the 2003 quarter, the orders were smaller in the current year
period than the prior period. Cash flow constraints also prevented the Company
from generating more revenues during the quarter ended June 30, 2004. The
Company had a backlog of orders in excess of $300,000 early in the quarter, but
did not have the inventory on hand to process all of the orders immediately. As
a result, the Company had to wait to receive critical parts and only a portion
of the orders were processed and shipped during the period.
Cost of goods sold decreased by $176,430 or 62% to $108,057 for the three months
ended June 30, 2004 from $284,487 for the corresponding period of the prior
year, but increased as a percentage of revenues between the periods from 54% in
2003 to 67% in 2004. This increase as a percentage of revenues was largely due
to the increase in production efficiency that that Company experienced in the
12
prior year's quarter given the two large orders it was producing during that
period. The Company currently produces all its units in-house and maintains a
staff of three persons for such purposes. Salaries and benefits for these
personnel are recorded as a direct cost of sales regardless of the number of
products produced. As the number of units produced rises, the direct labor cost
associated with each unit typically decreases. The Company's gross margin
decreased from 46% to 33% from last year's period to this year's period, due to
the decreased production from the two major contracts discussed above.
Selling, general and administrative expenses for the three months ended June 30,
2004 decreased by $75,340 or 22% to $264,865 from $340,205 for the three month
period ended June 30, 2003. This decrease was largely the result of decreased
personnel and personnel-related costs, as well as a decrease in legal and
auditing fees. 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 2003
related to this cancellation, as the Board 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.
Interest expense increased by approximately $26,000 between the three-month
periods presented. 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 for the quarter ending June 30, 2004.
The net loss for the three-month period ended June 30, 2004 was $252,333
compared to $61,627 for the three-month period ended June 30, 2003. The
increased loss was largely due to a combination of lower production levels and
the resulting higher costs of production on a per unit basis, as well as
additional interest expense recorded during the 2004 period for the value of
warrants issued to a creditor along with stock in exchange for his outstanding
note and accrued interest as of June 30, 2004. The Company produced and shipped
more units during the quarter ended June 30, 2003 than in any other quarter in
its history, largely because of the two orders that produced 85% of the revenues
for that period. As mentioned above, the Company processed more orders for more
customers during the 2004 quarter than it did during the 2003 quarter, but the
orders were smaller in the current year period than the prior period. As such,
gross profit declined between the two periods. As mentioned above, cash flow
constraints prevented the Company from completing its total backlog of business
during the quarter ended June 30, 2004. If the Company had had adequate
inventory levels to produce its backlog of orders completely during the quarter,
revenues and gross profit results would have been larger, and the net loss for
the period would have been smaller. Reduced monthly selling, general and
administrative expenses also contributed to the improved results during the
month of June 2004.
After giving consideration to prior year results for the Company's discontinued
airtime operations in 2003, the net loss per share increased to $0.01 per share
from last year's quarter to this year's quarter.
The Six Months Ended June 30, 2004 Compared to the Six Months Ended June 30,
2003
Net sales for the six month period ended June 30, 2004 were $264,225 compared to
$695,271 for the corresponding period of the prior year. Approximately $605,000,
or 87% of the product sales during the quarter ending June 30, 2003 came from
two customers who placed orders totaling approximately $816,000. These orders
were for the Company's NH2 rebooting device for a kiosk manufacturer and
operator, and load control units for an electric utility customer. The NH2
order was substantially completed during fiscal 2003, while the load control
unit order remains approximately 80% complete as of June 30, 2004 pending
further instructions from the customer. Although the Company processed orders
for more customers during the 2004 quarter than it did during the 2003 quarter,
the orders were smaller in the current year period than the prior period.
Cost of goods sold decreased by $198,394 or 52% to $180,623 for the six months
ended June 30, 2004 from $379,017 for the corresponding period of the prior
year, but increased as a percentage of revenues between the periods from 55% in
2003 to 68% in 2004. This increase was largely due to the increase in
production efficiency that that Company experienced in the prior year's period
given the two large orders it was producing during that period. The Company
currently produces all its units in-house and maintains a staff of three persons
for such purposes. Salaries and benefits for these personnel are recorded as a
direct cost of sales regardless of the number of products produced. As the
number of units produced rises, the direct labor cost associated with each unit
typically decreases. The Company's gross margin decreased from 45% to 32% from
last year's period to this year's period, due to the decreased production from
the two major contracts discussed above.
13
Selling, general and administrative expenses for the six months ended June 30,
2004 decreased by $113,908 or 17% to $540,945 from $654,853 for the six month
period ended June 30, 2003. Although the Company incurred additional costs
during the six months ended June 30, 2004 for consulting fees for product
marketing and investor relations, as well as for the development of the
Company's satellite-based unit, these costs were more than offset by reductions
in personnel and personnel-related costs, as well as a decrease in professional
fees from legal and auditing services. The Company expects sales of its
satellite-based unit to begin producing revenues during the last six months of
2004. During the period ending June 30, 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 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.
Interest expense increased by approximately $37,000 between the six-month
periods presented, due to the increase in notes held by the Company's largest
creditor and the valuation of a warrant issued to a different creditor who
exchanged his note and accrued interest for the warrant and common stock. This
Company's largest creditor first loaned the Company $200,000 under a convertible
note in May 2003. He later loaned the Company an additional $150,000 under
unsecured notes during the last five months of 2003. During April 2004, the
Company reached an agreement with this creditor 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 on a
going-forward basis to pay the creditor interest monthly at an annual rate of 8%
on the new total of $375,000 in notes, with $750 of the monthly interest being
paid in cash and the remainder being paid in stock at a rate of $0.20 per share.
Effective June 30, 2004, a different 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 for the
six month period ending June 30, 2004.
The net loss for the six month period ended June 30, 2004 was $519,532 compared
to $301,239 for the six month period ended June 30, 2003. The increase was due
to the near-completion of the two large orders discussed above during 2003, and
an increase in interest expense recorded during the 2004 period for the value of
warrants issued to a creditor along with stock in exchange for his outstanding
note and accrued interest as of June 30, 2004. The Company produced and shipped
more units during the quarter ending June 30, 2003 than in any other quarter in
its history, largely because of the two orders that produced 87% of the revenues
for that period. The Company has processed more orders for more customers during
the first six months of 2004 than it did during the first half of 2003, but the
orders were smaller in the current year period than the prior period. As such,
gross profit declined and the net loss increased between the two periods.
The net loss per share from continuing operations, which exclude the results of
the Company's airtime operations segment during 2003, was $0.02 for both periods
presented.
Liquidity and Capital Resources
The Company's financial statements for the three and six months ended June 30,
2004 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 six months ended June 30, 2004, the Company
reported a net loss of $519,532 and has both a stockholders' deficit and
working capital deficiency of approximately $1.0 million as of June 30, 2004
The Report of Independent Registered Public Accounting Firm on the Company's
financial statements as of and for the year ended December 31, 2003 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.
During the six-month period ended June 30, 2004, the Company used cash of
approximately $413,000 in its normal operating activities. The Company raised
approximately $438,000 during the six months from the sale of common stock,
warrants to purchase common stock, and preferred stock. Approximately $50,000
in cash proceeds were generated from the issuance of short term notes. Funds
provided from these issuances of debt and equity were used to fund the Company's
operations during the period and to make approximately $74,000 in payments
toward the Company's debt obligations during the quarter.
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
14
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.
A challenge faced by the Company is the ability to purchase and maintain an
inventory of parts necessary to complete orders as quickly as possible after
they are received. If the Company is able to complete orders more quickly, it
can generate and collect cash from its contracts more quickly. The Company
generates recurring orders from several of its customers; therefore, the
expeditious completion of orders could lead to the generation of additional
orders from existing customers and improved cash flows for the Company. Also,
as noted earlier, the Company's cost of production will be higher on a per unit
basis if it does not maintain minimum levels of production in its facility.
Although the Company had a backlog of $300,000 in customer orders in April 2004,
it only generated $161,387 in revenues during the quarter ended June 2004 as it
had to wait for the delivery of parts to process the backlog of orders. Delays
caused by the purchasing of parts during the period ending June 30, 2004
resulted in higher production costs per product because the Company has some
fixed costs associated with production of units, and therefore decreased cash
inflows during the period. The delays in purchasing also result in a delay in
receiving follow-up orders from the customers.
In an effort to assist the Company in completing orders for customers in a more
expeditious manner, in August 2004 the Company's largest creditor loaned the
Company an additional $60,000. Proceeds from this loan have been used to
purchase parts required to complete a backlog of orders held by the Company, and
the creditor will be repaid from the receipts generated by the orders, plus 10%
annual interest.
As a result of funds raised and expected to be raised subsequent to June 30,
2004 the Company believes that it will be able to initiate a sales and marketing
plan designed to utilize direct sales efforts, as well as indirect sales efforts
through dealer networks and through improvements to its own web site. The
Company also plans to utilize funds generated through debt and equity
arrangements to expedite the production of the orders it receives in an effort
to improve the Company's ability to generate cash flows from operations on a
recurring basis.
15
Item 3. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures:
As required by Rule 13a-15 of the Securities Exchange Act of 1934, the Company
conducted an evaluation of the effectiveness of the design and operation of the
Company's disclosure controls and procedures as of the date of this filing. The
evaluation was conducted under the supervision of the chief executive officer
and the chief financial officer with the support of the principal accounting
personnel who determined that the disclosure controls and procedures are
effective.
The Company's disclosure controls and procedures are designed to ensure that
records are maintained in reasonable detail to reflect accurately and fairly all
of the transactions and dispositions of assets of the Company, prevent the
unauthorized use or disposition of the Company's assets and that the information
required to be disclosed in reports filed pursuant to the Exchange Act is
accumulated and communicated to management, including the Chief Executive
Officer and Chief Financial Officer, in order to provide them with adequate time
to make decisions regarding required disclosures. There were no significant
changes in the disclosure controls or procedures since the prior public filing
by the Company that would materially affect the Company's controls.
PART II - OTHER INFORMATION
Item 1 Legal proceedings
There have been no material developments in the McCarthy lawsuit since last
reported in the Company's 10-QSB filed on May 21, 2004.
There have been no material developments in the Brady lawsuit during the second
quarterly reporting period of this year, other than the voluntary dismissal of
some of the individually named defendants. The Company, its subsidiary and the
remaining named defendants continue to contest the lawsuit vigorously. The case
is proceeding in the state court in Denver, Colorado.
Item 2 Changes in securities and use of proceeds
(c) During this reporting period, the Company sold 1,162,000 Special Warrants,
each of which is convertible into one share of common stock and one warrant to
purchase one share of common stock at $0.30 pursuant to a Rule 506 exemption of
Regulation D. The total offering price was $232,400. A total of $43,625 in
cash commissions and legal fees were paid from these proceeds, and the broker
received 187,500 Special Warrants. There were less than 35 individual purchasers
of stock and they are all accredited investors. The individuals that purchased
the Special Warrants and the amount of stock and warrants underlying their
investment are as follows:
Date. . Purchaser Investment # Shares # Warrants
- ------- ---------- ----------- --------- ----------
5-28-04 C. Vorberg $ 50,000 250,000 250,000
5-28-04 D. Hunter $ 50,000 250,000 250,000
5-28-04 R. Saville $ 60,000 300,000 300,000
5-28-04 F. Hindson $ 12,400 62,000 62,000
6-15-04 C. Vorberg $ 60,000 300,000 300,000
- ------- ---------- ----------- --------- ----------
Totals $ 232,400 1,162,000 1,162,000
=========== ========= ==========
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.
Item 3 Defaults upon senior securities
None
Item 4 Submission of matters to a vote of securities holders
None
16
Item 5 Other information
None
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
17