-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PVOhX/IbLXjNxg8bWWknu5dubtaCMSarv2LqLpivpya+rvRGc9q/Gcu9JgNP7Ilj Xlygk0xicKxolpe1WV9VQA== 0001231742-04-000797.txt : 20041122 0001231742-04-000797.hdr.sgml : 20041122 20041122171329 ACCESSION NUMBER: 0001231742-04-000797 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20040930 FILED AS OF DATE: 20041122 DATE AS OF CHANGE: 20041122 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NIGHTHAWK SYSTEMS INC CENTRAL INDEX KEY: 0001084475 STANDARD INDUSTRIAL CLASSIFICATION: COMMUNICATION SERVICES, NEC [4899] IRS NUMBER: 870627349 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-30786 FILM NUMBER: 041161530 BUSINESS ADDRESS: STREET 1: 8200 EAST PACIFIC PLS STREET 2: SUITE 204 CITY: DENVER STATE: CO ZIP: 80231 BUSINESS PHONE: 2103414811 MAIL ADDRESS: STREET 1: 10715 GULFDALE STREET 2: SUITE 200 CITY: SAN ANTONIO STATE: TX ZIP: 78216 FORMER COMPANY: FORMER CONFORMED NAME: PEREGRINE INC DATE OF NAME CHANGE: 20020501 FORMER COMPANY: FORMER CONFORMED NAME: LSI COMMUNICATIONS INC DATE OF NAME CHANGE: 19991117 10QSB 1 doc1.txt UNITED STATES 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 September 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 November 19, 2004 ------------------ ----------------------------------- Common 30,622,518 PART I FINANCIAL INFORMATION Item 1. Financial Statements (unaudited) Report of Independent Registered Public Accounting Firm 3 Condensed consolidated balance sheet as of September 30, 2004 4 Condensed consolidated statements of operations for the three and nine months ended September 30, 2004 and 2003 5 Condensed consolidated statement of stockholders' deficit for the nine months ended September 30, 2004 6 Condensed consolidated statements of cash flows for the nine months ended September 30, 2004 and 2003 7 Notes to condensed consolidated financial statements 8 Item 2 Management's Discussion and Analysis or Plan of Operation 13 Item 3 Evaluation of Disclosure Controls and Procedures 16 PART II OTHER INFORMATION Item 1 Legal proceedings 16 Item 2 Changes in securities and use of proceeds 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 2 PART I - FINANCIAL INFORMATION REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors Nighthawk Systems, Inc. We have reviewed the accompanying condensed consolidated balance sheet of Nighthawk Systems, Inc. and subsidiary as of September 30, 2004, the related condensed consolidated statements of operations for the three-month and nine-month periods ended September 30, 2004 and 2003, the condensed consolidated statement of stockholders' deficit for the nine-month period ended September 30, 2004, and the condensed consolidated statements of cash flows for the nine-month periods ended September 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. GELFOND HOCHSTADT PANGBURN, P.C. Denver, Colorado November 17, 2004 3
Nighthawk Systems, Inc. Condensed Consolidated Balance Sheet September 30, 2004 (unaudited) ASSETS Current assets : Cash $ 98,344 Accounts receivable, net of allowance for doubtful accounts of $134 56,148 Inventories 42,489 Other 129,794 ------------ Total current assets 326,775 Furniture, fixtures and equipment, net 14,993 Intangible assets, net 9,967 ------------ $ 351,735 ============ LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities: Accounts payable $ 371,298 Accrued expenses 210,839 Line of credit 19,842 Notes payable: Related parties 16,214 Other 391,912 Other 35,415 ------------ Total current liabilities 1,045,520 Long term liabilities: Convertible debt 231,250 Other 25,000 ------------ Total liabilities 1,301,770 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; 30,622,518 issued and outstanding 30,622 Additional paid-in capital 3,752,124 Special warrants 188,775 Accumulated deficit (4,921,561) ------------ Total stockholders' deficit (950,035) ------------ $ 351,735 ============ The accompanying notes are an integral part of these financial statements. 4
Nighthawk Systems, Inc. Condensed Consolidated Statements of Operations (unaudited) Three months ended Nine months ended September 30, September 30, -------------------------- -------------------------- 2004 2003 2004 2003 ------------ ------------ ------------ ------------ Product sales, net $ 221,723 $ 209,279 $ 485,948 $ 904,551 Cost of goods sold 163,786 145,380 344,409 522,979 ------------ ------------ ------------ ------------ Gross profit 57,937 63,899 141,539 381,572 Selling, general and administrative expenses 348,005 287,876 888,950 911,946 Reversal of 2002 consulting expense - - - (39,000) ------------ ------------ ------------ ------------ Loss from operations (290,068) (223,977) (747,411) (491,374) ------------ ------------ ------------ ------------ Interest expense: Related parties 34,041 4,726 39,641 11,387 Other 97,329 5,113 153,918 23,600 ------------ ------------ ------------ ------------ Loss from continuing operations (421,438) (233,816) (940,970) (526,361) ------------ ------------ ------------ ------------ Discontinued operations: Loss from operations of discontinued segment (5,778) (14,472) Gain on disposal of discontinued segment 92,443 92,443 ------------ ------------ Net loss (421,438) (147,151) (940,970) (448,390) Less: preferred stock dividends (223) - (420) - ------------ ------------ ------------ ------------ Net loss to common stockholders $ (421,661) $ (147,151) $ (941,390) $ (448,390) ============ ============ ============ ============ Loss from continuing operations per basic and diluted common share $ (0.01) $ (0.01) $ (0.03) $ (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) $ (0.01) $ (0.03) $ (0.02) ============ ============ ============ ============ Weighted average common shares outstanding, basic and diluted 28,714,168 22,994,057 27,190,261 22,970,851 ============ ============ ============ ============ * 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 Nine Months Ended September 30, 2004 (unaudited) 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 1,340,000 1,340 195,760 197,100 Common stock issued for interest 56,667 57 11,276 11,333 Conversion of notes payable to common stock and warrants 1,364,423 1,364 302,113 303,477 Preferred stock issued for cash 5,000 $ 5 12,495 12,500 Issuance of stock options to consultants 26,798 26,798 Warrants issued for cash 18,750 18,750 Common stock issed for debenture placement fee 100,000 100 12,400 12,500 Beneficial conversion feature of convertible debt 83,333 83,333 Common stock issued for investment agreement placement fee 2,000,000 2,000 (2,000) - Cancelation of shares (50,000) (50) 50 - Series A preferred dividends 2,193 2 (2) - Net loss (940,970) (940,970) ---------- --------- ----------- --------- ------------ --------- ------------ ------------ Balances, September 30, 2004 5,000 $ 5 30,622,518 $30,622 $3,752,124 $188,775 $(4,921,561) (950,035) ========= ========= =========== ======== =========== ======== ============ ============ The accompanying notes are an integral part of these financial statements. 6
Nighthawk Systems, Inc. Condensed Consolidated Statements of Cash Flows (unaudited) Nine months ended September 30, ----------------------- 2004 2003 ---------- ---------- Cash flows from operating activities: Net loss $(940,970) $(448,390) ---------- ---------- Adjustments to reconcile net loss to net cash used in operating activities: Loss from operations of discontinued segment - 14,472 Gain on disposition of operating segment - (92,443) Depreciation and amortization 5,781 2,127 Beneficial conversion feature 83,333 - Common stock issued for services 197,100 - Common stock and warrants issued for interest 77,616 11,500 Common stock issued for placement fee 12,500 Issuance of stock options to consultants 26,798 - Cancellation of consulting agreement - (39,000) Loss from settlement of shareholder receivable - 4,992 Change in assets and liabilities: Decrease (increase) in accounts receivable (14,231) 154,556 Decrease (increase) in inventories 32,840 (60,105) Increase in other assets and intangible assets (95,748) (23,247) Increase (decrease) in accounts payable (21,240) 129,811 Increase in accrued expenses 32,430 30,984 Decrease in deferred revenue - (415,829) Increase (decrease) in customer deposits (58,129) 60,000 Increase in other liabilities 55,000 - ---------- ---------- Total adjustments 334,050 (222,182) ---------- ---------- Net cash used in operating activities of continuing operations $(606,920) $(670,572) ---------- ---------- Cash flows from investing activities: Purchases of furniture, fixtures and equipment - (12,655) ---------- ---------- Net cash used in investing activities - (12,655) ---------- ---------- Cash flows from financing activities: Repayment of cash overdraft (3,902) - Proceeds from notes payable, related parties 25,809 43,733 Payments on notes payable, related parties (35,054) (40,495) Payments made on factoring arrangement, net - (82,502) Proceeds from issuance of convertible debt and warrants 250,000 - Proceeds from notes payable, other 85,000 250,000 Payments on notes payable, other (30,214) (14,383) Payments on other related party payable (25,000) - Net proceeds from issuance of common stock and warrants 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 705,264 284,353 ---------- ---------- Cash used in discontinued operations (25,636) ---------- Net increase (decrease) in cash 98,344 (424,510) Cash, beginning - 428,677 ---------- ---------- Cash, ending $ 98,344 $ 4,167 ========== ========== Supplemental disclosure of cash flow information: Cash paid for interest $ 21,900 $ 4,708 ========== ========== Supplemental disclosure of non-cash investing and financing activities: Conversion of notes payable and accrued interest to common stock Notes payable $ 215,015 Accrued interest 22,179 ---------- Total balance converted $ 237,194 ========== Preferred stock dividends $ 420 ========== The accompanying notes are an integral part of these financial statements. 7
NIGHTHAWK SYSTEMS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NINE MONTHS ENDED SEPTEMBER 30, 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 a stockholders' deficit of approximately $950,000 and a working capital deficiency of approximately $719,000 as of September 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. As noted in Note 7 to these financial statements, 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, subject to the effectiveness of an SB-2 registration statement to be filed with the Securities and Exchange Commission ("SEC") which will cover the sale of common stock to be issued to Dutchess under the agreement, 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. On November 3, 2004, the Company filed an SB-2 registration statement with the SEC to register the shares underlying the debenture and the investment agreement. 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 nine months ended September 30, 2004, the Company's largest customers accounted for 26%, 24% and 14% of sales respectively, and the Company purchased 52% and 13% of its materials from two suppliers. During the three months ended September 30, 2004, the Company's largest customers accounted for 35%, 31% and 12% of sales, respectively and the Company purchased 51% and 29% of its materials from two suppliers. During the nine months ended September 30, 2003, the Company's two largest customers accounted for approximately 55% and 33% of sales respectively. During the three months ended September 30, 2003, the Company's two largest customers accounted for approximately 39% and 32% of sales. Inventories Inventories at September 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 September 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 nine month periods ended September 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 vested during the three month and nine month periods ending September 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 nine month periods ended September 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 September 30, --------------------------------- 2004 2003 ----------- ---------- Net loss applicable to common stockholders: $ (421,661) $(147,151) As reported Total stock-based employee compensation expense determined under fair value based method for all employee awards, net of related tax effects (3,510) - ------------ ---------- Pro forma net loss applicable to common stockholders $ (425,171) $(147,151) ============ ========== Pro forma net loss per share applicable to common stockholders: As reported: Basic and diluted $ (0.01) $ (0.01) Pro forma: Basic and diluted $ (0.01) $ (0.01) * Less than $0.01 per share
Nine Months Ended September 30, ------------------------------- 2004 2003 ------------- ---------- Net loss applicable to common stockholders: $ (941,390) $(448,390) As reported Total stock-based employee compensation expense determined under fair value based method for all employee awards, net of related tax effects (10,305) - ------------- ---------- Pro forma net loss applicable to common stockholders $ (951,695) $(448,390) ============= ========== Pro forma net loss per share applicable to common stockholders: As reported: Basic and diluted $ (0.03) $ (0.02) Pro forma: Basic and diluted $ (0.04) $ (0.02)
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 March and August of 2004, the Company issued options to purchase 330,000 and 300,000 shares of common stock of the Company, respectively, to non-employees which vested immediately. The weighted average fair value at date of grant for the options granted during the first nine months of 2004 was $0.042. In accordance with SFAS 123, the Company recognized $26,798 in expense during the nine-month period ended September 30, 2004 related to these and other previously issued options to consultants which vested during the period. 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 1.094 - 1.122 1.229 - 1.316 Risk-free interest rate 4.50% 4.50% Expected life in years 2 1 - 3
2. Related party transactions: During the nine months ended September 30, 2004, the Company repaid $10,054 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. In August 2004, in an effort to improve its working capital position, 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 $107,000 in notes payable plus accrued interest owed them by the Company. One of the individuals is an officer of the Company, one is a business partner of the Company's Chairman, and the company is affiliated with the father of the Company's Chairman. Based on calculations using Black-Scholes, the fair value of the warrants issued to the three parties was $38,533. This amount is reflected in interest expense and additional paid-in capital for the periods ended September 30, 2004. 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 September of 2004, the Company issued 56,667 shares to the creditor for $11,333 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 250,000 shares of common stock of the Company. The Company is currently in discussions with the creditor regarding another extension of the maturity dates of the creditor's notes. 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 nine-month period ended September 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 $3,725 in payments to a financial institution. 10 4. Stock transactions: During the nine months ended September 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. A total of 1,340,000 shares of common stock were issued during the nine month period to consultants in return for $197,100 in services, and the Company received $109,500 in cash proceeds upon the exercise of 630,000 options issued to consultants 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, when the Special Offering was closed, 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 through the exercise of the warrants. Preferred stock dividends of $420 were accrued in the form of 2,193 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. In October 2004 we reached an agreement with the former board member to settle the case. Under the Settlement Agreement and Release, we made a cash payment to the former director of $10,000 during October 2004, and are scheduled to make cash payments of $20,000 in January 2005 and $25,000 in October 2005. 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, and filed a counterclaim against the plaintiffs for non-performance and breach of fiduciary duties. This counterclaim was allowed to proceed by the court over the objection of the plaintiffs. No assurance can be given, however, as to the ultimate outcome of the case. 11 7. Convertible debt and investment agreement 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%. As of September 30, 2004, the debenture was convertible 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 has recognized a debt discount of $18,750 which represents the fair value of the warrant on its date of issuance, and has recorded a beneficial conversion feature of $83,333 based on the debenture's terms for conversion as of September 30, 2004. The Company also issued a placement agent fee $12,500 in cash and 100,000 shares of common stock, valued at $12,500, for the issuance of the debenture. The Company also incurred fees of $7,500 related to the issuance of the debenture. All fees associated with the issuance of the debenture have been capitalized and will be amortized over the period the debenture is outstanding. On October 10, 2004, the conversion rate of the debenture was lowered to 73% subject to a penalty clause in the Company's agreement with Dutchess. The Company recorded an additional beneficial conversion feature of $9,132 related to this change subsequent to September 30, 2004. The Company also signed an investment agreement with Dutchess on August 10, 2004 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 issued 2.0 million shares to the placement agent involved in this transaction with Dutchess and incurred an additional $7,500 in costs related to the issuance of the investment agreement. The Company has recorded the fees and costs related to the investment agreement as an offset to additional paid-in capital in the accompanying financial statements. 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. 12 Item 2. Management's Discussion and Analysis or Plan of Operation Forward-Looking Statements Discussions and information in this document, which are not historical facts, should be considered forward-looking statements. With regard to forward-looking statements, including those regarding the potential revenues from increased sales, and the business prospects or any other aspect of NightHawk Systems, Inc.'s business, actual results and business performance may differ materially from that projected or estimated in such forward-looking statements. NightHawk Systems, Inc. ("the Company") has attempted to identify in this document certain of the factors that it currently believes may cause actual future experience and results to differ from its current expectations. Differences may be caused by a variety of factors, including but not limited to, adverse economic conditions, entry of new and stronger competitors, inadequate capital and the inability to obtain funding from third parties. The following information should be read in conjunction with the unaudited condensed consolidated financial statements included herein which are prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information. The Three Months Ended September 30, 2004 Compared to the Three Months Ended September 30, 2003 Net sales for the three month period ended September 30, 2004 were $221,723 as compared to $209,279 for the corresponding period of the prior year, an increase of 6% between periods presented. During the three months ended September 30, 2003, two customers represented approximately 71% of the Company's total sales volumes. During the three months ended September 30, 2004, three customers represented approximately 78% of the Company's revenues. Cost of goods sold increased by $18,406 or 11% to $163,786 for the three months ended September 30, 2004 from $145,380 for the corresponding period of the prior year, and increased as a percentage of revenues between the periods from 69% in 2003 to 74% in 2004. Approximately 72% of the Company's revenues were produced by sales of the Company's electric utility products, which traditionally produce lower margins on a per-unit basis, and only 11% were produced by sales of the Company's rebooting unit, which traditionally produces higher margins on a per-unit basis. During last year's period, approximately 34% of the Company's revenues were produced by sales of its rebooting product. As a result of the mix of products sold, the Company's gross margin decreased from 31% to 26% from last year's period to this year's period. Selling, general and administrative expenses for the three months ended September 30, 2004 increased by $60,129 or 17% to $348,005 from $287,876 for the three month period ended September 30, 2003. Although amounts incurred for salaries and related benefits declined between the periods presented, the Company accrued $55,000 during the current year period for the settlement of a claim with a former board member, and incurred approximately $100,000 in non-cash expenses related to consultants during the current year period. Interest expense increased by approximately $121,531 between the three-month periods presented. The increase was due in large part to the recording of approximately $83,000 in expense during the current year period related to the non-cash, beneficial conversion feature of the debenture agreement between the Company and Dutchess Private Equities, L.P. ("Dutchess"). In addition, the Company recognized $38,533 in interest expense during the quarter ended September 30, 2004 associated with the fair value of warrants given to three entities for the conversion of approximately $157,000 in notes payable and accrued interest to common stock and warrants to purchase common stock. The net loss from continuing operations for the three-month period ended September 30, 2004 was $421,438 compared to $233,816 for the three-month period ended September 30, 2003. Although revenues increased during the period, the increase in net loss from continuing operations was due almost entirely to the increases in selling, general and administrative expenses and interest expense noted above. The majority of these expenses were non-cash expenses. After giving consideration to prior year results for the Company's discontinued airtime operations in 2003, for which the Company recognized a gain of $92,443 during July 2003, the net loss per share was $0.01 for both periods presented. 13 The Nine Months Ended September 30, 2004 Compared to the Nine Months Ended September 30, 2003 Net sales for the nine month period ended September 30, 2004 were $485,948 compared to $904,551 for the corresponding period of the prior year. Approximately $642,231, or 71% of the product sales during the period ending September 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 was completed during the period ending September 30, 2004. Although the Company processed orders for more customers during the 2004 period than it did during the 2003 period, the orders were smaller in the current year period than the prior period. Cost of goods sold decreased by $178,570 or 52% to $344,409 for the nine months ended September 30, 2004 from $522,979 for the corresponding period of the prior year, but increased as a percentage of revenues between the periods from 58% in 2003 to 71% 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. In addition, the Company sold a larger number of its rebooting devices during last year's period than it did during this year's period, and the Company produces a relatively higher margin on a per-unit basis on this product. As a combined result of these factors, the Company's gross margin decreased from 42% to 29% from last year's period to this year's period. Selling, general and administrative expenses for the nine months ended September 30, 2004 decreased by $22,996 or 3% to $888,950 from $911,946 for the nine month period ended September 30, 2003. Although the Company incurred costs of $55,000 for a legal settlement with a former director, approximately $197,000 in consulting fees for product marketing and investor relations, and costs for the development of the Company's satellite-based unit during the nine-month period ended September 30, 2004, these costs were more than offset by reductions between the 2003 and 2004 periods presented in personnel and personnel-related costs, as well as a decrease in professional fees from legal and auditing services. During the period ending September 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 $158,572 between the nine-month periods presented, due to the value of warrants issued to creditors who exchanged approximately $237,000 in notes and accrued interest for the warrants and common stock, and the recognition of approximately $83,000 in beneficial conversion expense related to the debenture agreement between the Company and Dutchess. The net loss from continuing operations for the nine-month period ended September 30, 2004 was $940,970 compared to $526,361 for the nine-month period ended September 30, 2003. The increase was due to the near-completion of the two large orders discussed above that produced increased revenues during the first nine months of 2003, coupled with increases in consulting expenses and interest expense recorded during the 2004 period. After giving consideration to prior year results for the Company's discontinued airtime operations in 2003, for which the Company recognized a gain of $92,443 during July 2003, the net loss per share was increased from $0.02 to $0.03 between periods. 14 Liquidity and Capital Resources The Company's financial statements for the three and nine months ended September 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 nine months ended September 30, 2004, the Company reported a net loss of $941,970, and has a stockholders' deficit of approximately $950,000 and a working capital deficiency of approximately $719,000 as of September 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 nine-month period ended September 30, 2004, the Company used cash of approximately $600,000 in its normal operating activities. The Company raised approximately $439,000 during the nine months from the sale of common stock, warrants to purchase common stock, and preferred stock. Approximately $110,000 in cash proceeds were generated from the issuance of short term notes, and an additional $250,000 in proceeds were generated by the issuance of the convertible debenture with Dutchess. Funds provided from these issuances of debt and equity were used to fund the Company's operations during the period and to make approximately $102,000 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 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) 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. 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. 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. Delays caused by the purchasing of parts during the nine-month period ending September 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 were used to purchase parts required to complete orders held at that time by the Company, and the creditor is being repaid from the receipts generated by the orders, plus 10% annual interest. Although no assurance may be given that it will be able to do so, the Company anticipates that it will also be able to utilize its investment agreement with Dutchess to assist it in processing orders more expeditiously. As a result of funds expected to be raised subsequent to September 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. Additionally, in order to lessen the Company's dependence on securing large contracts for recurring cash flows, the Company is in the initial stages of developing a consumer-based product, which it believes may eventually produce recurring cash flows from sales. 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 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, the Company will pay McCarthy $55,000 in three payments over the course of one year from the date of the settlement. 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 Changes in securities and use of proceeds None 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: November 22, 2004 By: /s/ H. Douglas Saathoff ------------------------------ H. Douglas Saathoff Chief Executive Officer and Chief Financial Officer 17 EX-31 2 doc2.txt Exhibit 31 I, H. Douglas Saathoff, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of Nighthawk Systems, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report; 4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to me by others within those entities, particularly during the period in which this report is being prepared; and b) evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report my conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and 5. I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal controls over financial reporting. Date: November 22, 2004 /s/ H. DOUGLAS SAATHOFF -------------------------- H. Douglas Saathoff Chief Executive Officer and Chief Financial Officer EX-32 3 doc3.txt Exhibit 32 CERTIFICATION PURSUANT TO THE 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Nighthawk Systems, Inc. (the "Company") on Form 10-QSB for the period ended September 30, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, H. Douglas Saathoff, Chief Executive Officer and Chief Financial Officer of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to my knowledge that: The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and the financial information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company, as of, and for the periods presented in the report. /s/ H. DOUGLAS SAATHOFF -------------------------- H. Douglas Saathoff Chief Executive Officer and Chief Financial Officer November 22, 2004 -----END PRIVACY-ENHANCED MESSAGE-----