10QSB 1 nighthawk10q.htm NIGHTHAWK 10Q SB
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, 2003
____________ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF The Securities
Exchange Act of 1934
Commission File Number 0-30786
NIGHTHAWK SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEVADA 87-0627349
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
10715 GULFDALE
SUITE 200
SAN ANTONIO, TEXAS 78216
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, WITH AREA CODE: (210) 341-4811
Indicate by, check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes __X__ No _____
State the number of shares outstanding of each of the issuer's classes of
common equity as of the latest practicable date:
Class Outstanding at November 14, 2003
----- --------------------------------
Common 21,129,235
NIGHTHAWK SYSTEMS, INC.
TABLE OF CONTENTS
FORM 10-QSB
PART I
FINANCIAL INFORMATION
Item 1 Financial Statements (unaudited)
Condensed consolidated balance sheet as of September 30, 2003 3
Condensed consolidated statements of operations for the
three and nine months ended September 30, 2003 and 2002 4
Condensed consolidated statement of stockholders'
deficit for the nine months ended September 30, 2003 5
Condensed consolidated statements of cash flows for the nine months ended September 30, 2003 and 2002 6
Notes to condensed consolidated financial statements 7
Item 2 Management's Discussion and Analysis or Plan of Operation 10
Item 3 Evaluation of Disclosure Controls and Procedures 13
PART II
OTHER INFORMATION
Item 1 Legal proceedings 14
Item 2 Changes in securities and use of proceeds 14
Item 3 Defaults upon senior securities 14
Item 4 Submission of matters to a vote of securities holders 14
Item 5 Other information 14
Item 6 Exhibits and reports on Form 8-K 14
2
PART I - FINANCIAL INFORMATION
NIGHTHAWK SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 2003
ASSETS
Current assets :
Cash $ 4,167
Accounts receivable, net of allowance for
doubtful accounts 63,620
Inventories 119,813
Other 29,987
-------------
Total current assets 217,587
Furniture, fixtures and equipment, net 19,047
Intangible assets, net 8,658
-------------
$ 245,292
=============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 492,186
Accrued expenses 222,929
Lines of credit 19,842
Notes payable:
Related parties 109,311
Other 354,830
Deferred revenue 16,771
Customer deposit 60,000
Other related party payable 48,912
-------------
Total liabilities 1,324,781
-------------
Commitments and contingencies
Stockholders' deficit:
Preferred stock; $0.001 par value; 5,000,000
shares authorized; none issued and outstanding -
Common stock; $0.001 par value; 50,000,000
shares authorized; 21,129,235 issued and outstanding 21,129
Additional paid- in capital 2,475,906
Accumulated deficit (3,576,524)
-------------
Total stockholders' deficit (1,079,489)
-------------
$ 245,292
=============
The accompanying notes are an integral part of these financial statements.
3
NIGHTHAWK SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended September 30, Nine months ended September 30,
2003 2002 2003 2002
------------ ------------ ------------ ------------
Product sales, net $ 199,989 $ 132,131 $ 895,261 $ 292,533
Other 9,290 - 9,290 -
------------ ------------ ------------ ------------
209,279 132,131 904,551 292,533
Cost of goods sold 145,380 79,279 522,979 171,970
------------ ------------ ------------ ------------
Gross profit 63,899 52,852 381,572 120,563
------------ ------------ ------------ ------------
Selling, general and administrative expenses 287,876 839,233 911,946 2,230,173
Reversal of 2002 consulting expense - - (39,000) -
------------ ------------ ------------ ------------
Loss from continuing operations (223,977) (786,381) (491,374) (2,109,610)
Discontinued operations
Loss from operations
of discontinued segment (5,778) (5,967) (14,472) (89,467)
Gain on disposal of
operating segment 92,443 - 92,443 -
------------ ------------ ------------ ------------
(137,312) (792,348) (413,403) (2,199,077)
------------ ------------ ------------ ------------
Interest expense:
Related parties 4,726 5,046 11,387 23,102
Other 5,113 3,311 23,600 11,090
------------ ------------ ------------ ------------
9,839 8,357 34,987 34,192
------------ ------------ ------------ ------------
Net loss $ (147,151) $ (800,705) $ (448,390) $ (2,233,269)
============ ============ ============ ============
Net loss per basic and diluted common share $ (0.01) $ (0.04) $ (0.02) $ (0.13)
============ ============ ============ ============
Weighted average shares outstanding 21,519,057 18,139,067 21,495,851 17,098,993
============ ============ ============ ============
The accompanying notes are an integral part of these financial statements.
4
NIGHTHAWK SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
NINE MONTHS ENDED SEPTEMBER 30, 2003
Additional
Common Stock Paid-in Accumulated Stockholder
Shares Amount Capital Deficit Receivable Total
---------- ------- ---------- ----------- ---------- -----------
Balances, December 31,
2002 21,333,780 $21,334 $2,517,338 $(3,128,134) $(118,629) $ (708,091)
Common stock and warrants
issued for cash, net
of issuance costs 675,000 675 127,325 128,000
Common stock and warrants
issued for interest expense 25,000 25 11,475 11,500
Cancellation of (39,000)
consulting arrangement (300,000) (300) (38,700)
Shares received for sale
of operating segment (150,000) (150) (28,350) (28,500)
Exchange of shares for
receivable (454,545) (455) (113,182) 118,629 (4,992)
Net loss (448,390) (301,239)
---------- ------- ---------- ----------- ---------- -----------
Balances, September 30,
2003 21,129,235 $21,129 $2,475,906 $(3,576,524) $ - $(1,079,489)
========== ======= ========== =========== ========== ===========
The accompanying notes are an integral part of these financial statements.
5
NIGHTHAWK SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended September 30,
2003 2002
Net cash used in operating activities of continuing operations: $ (674,921) $ (443,130)
Cash flows from investing activities:
Purchases of furniture, fixtures and equipment (12,655) -
------------ ------------
Net cash used in investing activities (12,655) -
------------ ------------
Cash flows from financing activities:
Proceeds from notes payable, related parties 43,733 59,000
Payments on notes payable, related parties (65,999) (93,400)
Payments made on factoring arrangement, net (82,502) -
Payments on notes payable, other (14,383) (10,000)
Proceeds from notes payable, other 250,000 30,000
Net payments on lines of credit, related party - (415)
Net payments on lines of credit, other - (10,052)
Advances to stockholder (920)
Payments by stockholder - 920
Net proceeds from issuance of common stock
and warrants 139,500 448,900
------------ ------------
Net cash provided by financing activities 270,349 424,033
------------ ------------
Cash used by discontinued operations (7,283) (7,003)
------------ ------------
Net decrease in cash (424,510) (26,100)
Cash, beginning 428,677 30,311
------------ ------------
Cash, ending $ 4,167 $ 4,211
============ ============
Supplemental disclosures of cash flow information:
Cash paid for interest $ 6,690 $ 12,398
============ ============
The accompanying notes are an integral part of these financial statements.
6
NIGHTHAWK SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
1. Basis of presentation:
In November 2001, Peregrine, Inc. ("Peregrine"), formerly known as LSI
Communications, Inc., sold the assets and liabilities of its investment in a
majority owned subsidiary to a major stockholder. On February 1, 2002, the
Company acquired Peregrine Control Technologies, Inc. ("PCT") a Colorado
company. The transaction represents a reverse acquisition of Peregrine by PCT,
since PCT owns approximately 76% of the post acquisition shares of the
consolidated entity immediately after the completion of the transaction. At the
date of the transaction, Peregrine was a shell company with no net assets. For
accounting purposes, the acquisition was treated as an acquisition of Peregrine
by PCT and a recapitalization of PCT. The historical stockholders' deficit of
PCT has not been retroactively restated since the shares exchanged in the
transaction were on a one-for-one basis. On April 29, 2002, Peregrine changed
its name to NightHawk Systems, Inc. The accompanying condensed consolidated
financial statements include the accounts of NightHawk Systems, Inc. and its
subsidiary PCT (collectively referred to herein as "the Company").
Interim financial statements:
The condensed consolidated financial statements of the Company for the three
and nine month periods ended September 30, 2003 and 2002, have been prepared by
the Company without audit by the Company's independent auditors. In the opinion
of the Company's management, these financial statements reflect all
adjustments, including normal recurring adjustments, considered necessary to
present fairly the Company's condensed consolidated financial position at
September 30, 2003, the results of operations for the three and nine months
ended September 30, 2003 and 2002, and the changes in stockholders' deficit for
the nine months ended September 30, 2003.
Certain information and note disclosures normally included in the Company's
annual financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been condensed or
omitted. 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 2002 filed with the
Securities and Exchange Commission (the "SEC"). The results of operations for
the nine months ended September 30, 2003 are not necessarily indicative of the
results to be expected for the full year.
Going concern, results of operations and management's plans:
The Company has incurred operating losses for several years. These losses have
caused the Company to operate with limited liquidity and have created a
stockholders' deficit and working capital deficiency of $1,079,489 and
$1,107,194 respectively, as of September 30, 2003. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans to address these concerns include:
1. Raising working capital through additional borrowings.
2. Raising equity funding through sales of the Company's common stock or
preferred stock.
3. Improving working capital through increased sales of the Company's
products and services.
The accompanying financial statements do not include any adjustments relating
to the recoverability and classification of assets or the amounts of
liabilities that might be necessary should the Company be unsuccessful in
implementing these plans, or otherwise be unable to continue as a going
concern.
7
2. Related party transactions:
During the nine months ended September 30, 2003, the Company repaid $3,496 on
notes payable to an officer of the Company, and $25,504 on notes payable to an
officer/director of the Company. During the nine month period ending September
30, 2003, two officers of the Company loaned the Company $43,733, of which
$37,000 was repaid.
3. Inventories
Inventories at September 30, 2003 consist entirely of parts and pre-
manufactured component parts. The Company monitors inventory for turnover and
obsolescence, and records reserves for excess and obsolete inventory as
appropriate. The Company did not have a reserve for excess or obsolete
inventory as of September 30, 2003.
4. Revenue recognition and major customers
Revenues from product sales are recognized when persuasive evidence of an
arrangement exists, delivery has occurred, the sales price is fixed or
determinable and collectibility is probable. Generally, the criteria are met
upon shipment of products on an F.O.B destination point basis and transfer of
title to customers. In certain instances, the Company will recognize revenue
prior to shipment when the customer requests in writing that the transaction be
on a bill and hold basis, the risk of ownership has passed to the customer, the
manufactured equipment is segregated, complete and ready for shipment, and
there is a fixed schedule for delivery of the equipment and no specific
performance obligations exist.
During the nine months ended Septmeber 30, 2003, the Company's two largest
customers accounted for approximately 55% and 33% of sales respectively.
5. Net loss per share
Basic net loss per share is computed by dividing the net loss applicable to
common stockholders by the weighted-average number of shares of common stock
outstanding for the 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. In 2001 the Company issued
2,075,000 shares under stock-based compensation arrangements, which were to be
earned in future periods. Until they were earned, or canceled, during the year
ended December 31, 2002, these shares were considered options for purpose of
computing basic and diluted earnings per share. For the three and nine month
periods ended September 30, 2003 and 2002, the effect of the inclusion of
dilutive shares would have resulted in a decrease in loss per share.
Accordingly, the weighted average shares outstanding have not been adjusted for
dilutive shares.
6. Stock transactions:
On April 16, 2003, the Company received $100,000, $98,000 net of offering
costs, from an investor in exchange for the issuance of 500,000 shares of
common stock at $0.20 per share, and warrants to purchase $200,000 of
additional common stock on or before September 30, 2003 at the lesser of US
$0.25 per share or 50% of the consecutive 10-day average closing price prior to
the purchaser's election to exercise the warrant; or on or before March 31,
2004, at the lesser of US $0.37 per share or 50% of any consecutive 10-day
average closing price prior to the purchaser's election to exercise the
warrant; or on or before September 30, 2004, at the lesser of US $1.00 per
share or 50% of any consecutive 10-day average closing price prior to the
purchaser's election to exercise the warrant; or on or before March 31, 2005,
at the lesser of US $2.00 per share or 50% of any consecutive 10-day average
closing price prior to the purchaser's election to exercise the warrant.
On May 13, 2003, the same investor loaned $200,000 to the Company in exchange
for a 90-day note that is convertible into common shares of the Company at the
lender's option on the 91st day at a price of no more than US$0.20 per share.
Should the Company sell any shares during the period the note is outstanding
for less than US$0.20 per share, the conversion price would be lowered to match
that selling price. The Company will have the right to prepay the note anytime
prior to the 91st day with no penalty. Interest on the note for the 90-day
period will be 25,000 shares of the Company's common stock, valued at $0.46 per
share, which was the market value of the common stock on the date of issuance.
Should the lender choose not to convert the note, and should the Company fail
to repay the note when due, the Company will incur a penalty of 25,000 common
shares per month. The Company also agreed to register all shares underlying the
agreement on a best-efforts basis. During August 2003, the Company and the
investor agreed to extend the note until December 1, 2003.
The Company also received $35,000, $30,000 net of offering costs, during the
second quarter of 2003 in exchange for the issuance of 175,000 shares of its
common stock and the issuance of 175,000 warrants to purchase shares of common
stock at $0.40 per share which are exercisable for two years.
During the third quarter of 2003, the Company canceled 300,000 shares of common
stock previously issued to a consultant during 2002. A $39,000 reduction in
consulting expense was recorded during the second quarter of 2003 related to
this cancellation, as the Board of Directors determined that the shares had not
been properly authorized for issuance, and that there was a lack of sufficient
evidence that any services had been performed.
8
7. Notes payable
During the quarter ended September 30, 2003, the same investor mentioned above
in Note 6 that had previously invested $300,000 in stock and a convertible
note, loaned the Company an additional $50,000 under an unsecured, short term
arrangement. During October 2003, the same investor loaned an additional
$100,000 under a second unsecured, short term arrangement. Both of these notes
were scheduled to mature on October 31, 2003. As of November 14, 2003, these
notes had not been repaid, and no demand for repayment had been made by the
lender.
8. Legal matters
On June 2, 2003, the Company was notified that on May 27, 2003 its registered
agent in Nevada had been served with a lawsuit in the Ninth Judicial District
Court of the State of Nevada, Douglas County. The suit, which is brought by
Charles R. McCarthy, a former board member who resigned in April 2002, is
seeking relief for damages in excess of $10,000. McCarthy served for a brief
period of time (less than four months) as a director and chairman of the board
of directors of the Company until he resigned in April 2002. He also executed a
retainer agreement with the Company on behalf of his law firm prior to becoming
a director and chairman. The suit is based on McCarthy's claims that (i) stock
which he was awarded as compensation should be unrestricted stock; (ii) he is
owed additional compensation in the form of stock, and; (iii) the Company
breached the retainer agreement with his law firm. The Company executed a
Settlement Agreement and Release with McCarthy less than one month prior to his
filing the present suit. The Company disputes his allegations and plans to
vigorously defend this lawsuit. On July 25, 2003 the Court transferred the
case, at the Company's request, from the county in which McCarthy filed the
lawsuit to Reno, Nevada.
In an 8-K/A filed on July 17, 2003, the Company disclosed that two key
employees, Arlen Felsen and Steve Jacobson, who were both also former board
members, had resigned from the employment and/or the Board of the Company and
that the Company had commenced an internal investigation of five specific items
prior to their resignations. As a result of the internal investigation, the
Company reached an agreement with each of the employees. Specifically, as part
of the agreement with Arlen Felsen, effective July 31, 2003 the Company sold
back to him the remaining assets and liabilities of the Company's paging
business segment which were originally purchased with or originated as a result
of the purchase of Vacation Communications, Inc., d/b/a Gotta GoWireless. In
return, the Company received 150,000 shares of Nighthawk common stock, and Mr.
Felsen facilitated the return of approximately $34,000 in cash to the Company
that had been held in an account under his control. The Company recognized a
gain on this transaction of $92,443, and has presented the financial results of
this paging business segment as discontinued operations in the accompanying
financial statements.
With respect to Steve Jacobson, the Company reached a Separation Agreement on
September 8, 2003 in which, among other things, Mr. Jacobson agreed to return
to the Company 454,545 shares as payment of the $118,629 receivable due from
him. The Company recognized a write-off of approximately $5,000 as a result of
this transaction.
In letters dated September 24, 2003, a former director of the Company, Lawrence
Brady, and a former Chief Financial Officer (CFO), Mark Brady, made demands of
the Company for payment of stock and compensation. Larry Brady's demand is
based on a claim for stock compensation for his service as a director during
the period of late 2001 and early 2002. Mark Brady's demand is for both cash
wages and stock compensation for his services as CFO also for the period of
late 2001 and early 2002 at which point he resigned from the Company. The
Company disputes the claims and has entered into discussions with the Brady's
concerning a possible settlement. If no settlement is reached, the Company
will vigorously defend these claims.
On November 13, 2003, the Company was notified of a complaint filed in Denver
County, Colorado by one of its directors, Herb Jacobson, for repayment of a
loan. The suit alleges, among other things, that Mr. Jacobson is owed
approximately $49,500 as the principal amount of a loan, plus interest and
other fees. The Company disputes the allegations and plans to defend this case
vigorously. On November 13, 2003 the Board of Directors of the Company removed
Mr. Jacobson as a director of the Company on the basis of his disqualification
for an apparent conflict of interest.
________________________________________________________________________
THE FINANCIAL STATEMENTS INCLUDED IN THIS FORM 10-QSB HAVE NOT BEEN REVIEWD BY
OUR INDEPENDENT PUBLIC ACCOUNTANTS AS REQUIRED BY RULE 10-01 (c)(4) OF
REGULATION S-X. UPON REVIEW BY OUR INDEPENDENT PUBLIC ACCOUNTANTS, SHOULD ANY
ADJUSTMENT(S) BE REQUIRED TO BE MADE TO THESE FINANCIAL STATEMENTS, AN AMENDED
FORM 10-QSB WILL BE FILED.
________________________________________________________________________
9
Item 2. Management's Discussion and Analysis or Plan of Operation
Forward-Looking Statements
Discussions and information in this document, which are not historical facts,
should be considered forward-looking statements. With regard to forward-looking
statements, including those regarding the potential revenues from increased
sales, and the business prospects or any other aspect of NightHawk Systems,
Inc.'s business, actual results and business performance may differ materially
from that projected or estimated in such forward-looking statements. NightHawk
Systems, Inc. ("the Company") has attempted to identify in this document
certain of the factors that it currently believes may cause actual future
experience and results to differ from its current expectations. Differences may
be caused by a variety of factors, including but not limited to, adverse
economic conditions, entry of new and stronger competitors, inadequate capital
and the inability to obtain funding from third parties.
The following information should be read in conjunction with the unaudited
condensed consolidated financial statements included herein which are prepared
in accordance with accounting principles generally accepted in the United
States of America for interim financial information.
The Three Months Ended September 30, 2003 Compared to the Three Months Ended
September 30, 2002
Net sales for the three month period ended September 30, 2003 were $209,279, an
increase of $77,148 or 58% from the $132,131 for the corresponding period of
the prior year. Approximately $142,000 of the product sales during the
quarter ending Sept 30, 2003 came from two customers who have placed orders
totaling approximately $816,000. These orders were for the Company's NH2
rebooting device for a kiosk manufacturer, and load control units for an
electric utility customer, and no revenues were recognized from these two
orders during the three months ending September 30, 2002. The Company plans on
completing these orders during 2003. Unless the Company receives similar size
orders prior to the completion of these two contracts, revenues from product
sales will decrease subsequent to the completion of these two contracts.
Cost of goods sold increased by $66,101 or 83% to $145,380 for the three months
ended September 30, 2003 from $79,279 for the corresponding period of the prior
year, and increased as a percentage of revenues between the periods from 60% in
2002 to 69% in 2003. Approximately 39% of the Company's revenues generated
during the quarter came from the sale of the Company's load control device,
which generates a lower margin per product than the Company's other products.
The Company's gross margin decreased from 40% to 31% from last year's period to
this year's period, due to this change in the mix of product sold.
Selling, general and administrative expenses for the three months ended
September 30, 2003 decreased by $551,357 or 66% to $287,876 from $839,233 for
the three month period ended September 30, 2002. During the quarter ended
September 30, 2002, the Company recognized $518,750 expense from the
amortization of deferred compensation, a non-cash item. No such expense was
recognized during the current year's quarter. Excluding the effect of the
amortization of deferred compensation, selling, general and administrative
expenses would have decreased approximately 10% between the two periods. This
decrease was primarily due to the recording of one-time charges related to
salary accruals during the quarter ending September 30, 2002.
10
Interest expense increased by $1,482, or 18% to $9,839 for the three months
ended September 30, 2003 from $8,357 for the corresponding period of the prior
year due to an increase in short term borrowings by the Company since the third
quarter of 2002.
The net loss for the three month period ended September 30, 2003 was $147,151
compared to $800,705 for the three month period ended September 30, 2002. The
improvement in results can be attributed to the increase in revenues and the
decrease in expenses associated with deferred compensation arrangements and
improved gross profit results. The combined effect of the items mentioned above
was an improvement in net loss per share from $0.04 in 2002 to $0.01 in 2003,
based on weighted average shares outstanding of 18.1 million and 21.5 million
during the three months ended September 30, 2002 and 2003, respectively.
The Nine Months Ended September 30, 2003 Compared to the NIne Months Ended
September 30, 2002
Net sales for the nine month period ended September 30, 2003 were $904,551, an
increase of $612,018 or 209% from the $292,533 for the corresponding period of
the prior year. Approximately $786,000 of the product sales during the nine
month period ending September 30, 2003 came from two customers who have placed
orders totaling approximately $816,000. These orders were for the Company's NH2
rebooting device for a kiosk manufacturer, and load control units for an
electric utility customer. The Company plans on completing these orders during
2003. Unless the Company receives similar size orders prior to the completion
of these two contracts, revenues from product sales will decrease subsequent to
the completion of these two contracts.
Cost of goods sold increased by $351,009 or 204% to $391,344 for the nine
months ended September 30, 2003 from $171,970 for the corresponding period of
the prior year, but decreased slightly as a percentage of revenues between the
periods from 59% in 2002 to 58% in 2003, due primarily to increased
efficiencies associated with higher sales volumes which offset increased sales
of its lower margin load control units. The Company's gross margin increased
slightly from 41% to 42% from last year's period to this year's period, due to
the benefits of the increased production from the two major contracts discussed
above.
Selling, general and administrative expenses for the nine months ended
September 30, 2003 decreased by approximately $1.3 million or 59% to $911,946
from $2,230,173 for the nine month period ended September 30, 2002. During the
nine month period ended September 30, 2002, the Company recognized
approximately $1,556,000 of expense from the amortization of deferred
compensation, a non-cash item. No such expense was recognized during the
current year's nine month period. Excluding the effect of the amortization of
deferred compensation, selling, general and administrative expenses would have
increased approximately 35% between the two periods. This increase was largely
the result of increased personnel and personnel-related costs, as well as
increases in professional fees for legal services. During the second quarter
of 2003, the Company canceled 300,000 shares of common stock previously issued
to a consultant during 2002. A $39,000 reduction in consulting expense was
recorded during the second quarter of 2002 related to this cancellation, as
the Board 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 2% between the periods presented due to increased
short term borrowings made during the second and third quarters of 2003.
The net loss for the nine month period ended September 30, 2003 was $448,390
compared to $2,233,269 for the nine month period ended September 30, 2002. The
improvement in results can be attributed in large part to the decrease in
expenses associated with deferred compensation arrangements. However, larger
volumes of production would have led to an improvement of 34% excluding the
amortization of deferred compensation. The combined effect of the items
mentioned above was an improvement in net loss per share from $0.13 in 2002 to
$0.02 in 2003, based on weighted average shares outstanding of 17.1 million and
21.5 million during the nine month periods ended September 30, 2002 and 2003,
respectively.
11
Liquidity and Capital Resources
The Company's financial statements for the nine months ended September 30, 2003
have been prepared on a going concern basis, which contemplates the realization
of assets and the settlement of liabilities and commitments in the normal
course of business. For the nine months ended September 30, 2003, the Company
reported a net loss of $448,390 and has a stockholders' deficit as of September
30, 2003 of approximately $1.1 million. In addition, the Company had a working
capital deficiency of approximately$1.1 million. The Independent Auditors'
Report on the Company's financial statements as of and for the year ended
December 31, 2002 included a "going concern" explanatory paragraph which means
that the auditors expressed substantial doubt about the Company's ability to
continue as a going concern.
During the nine month period ended September 30, 2003, the Company used cash of
$674,921 in its normal operating activities. Approximately $476,000 of this
amount was collected during December 2002 and January 2003 in the form of
prepayments or deposits on contracts that have produced the majority of the
Company's revenues during the first nine months of 2003. The remainder of the
Company's operating cash during the first nine months of 2003 has come from the
issuance of $250,000 in short term notes, and private equity placements of the
Company's common stock totaling $139,500. Almost all of these non-operating
cash inflows have come from a single investor, who also loaned the Company an
additional $100,000 under a short term note during October 2003.
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 be reliant on borrowing funds or selling equity to meet
those obligations. In an effort to increase revenues and cash flows in the
future, the Company initiated a sales and marketing plan in November 2003
targeting five key markets that can greatly benefit from the use of existing
NightHawk devices, including:
- Electrical utilities
- Computer end-users
- Traffic controls
- Emergency management
The plan will utilize direct sales efforts, as well as indirect sales efforts
through dealer networks and through improvements to its own web site. To date,
the majority of revenues have been generated from customers who have found the
Company via its web site, or through referrals from vendors or existing
customers.
The Company also believes that it can eventually generate additional revenues
by making improvements to existing products and designing new products. The
Company's announced signing of an agreement with ORBCOMM gives it the ability
to control devices at a competitive price virtually anywhere in the world using
ORBCOMM's low-earth orbit satellite infrastructure. Once the product is ready
for production, users will be able to install NightHawk's device anywhere and
activate it via the Company's website.
In an effort to improve its operating procedures and its financial results and
condition, the Company sold certain assets and liabilities of its paging
operating segment effective June 2003. This segment generated negative cash
flows during 2002 and the first seven months of 2003. As a result of this
transaction, the Company reduced its outstanding obligations by approximately
$95,000, and recognized a gain of approximately $92,000. The Company will
still be able to provide paging services to its equipment customers, but will
do so for the foreseeable future by contracting with third party paging airtime
providers.
As of December 1, 2003 the Company will have approximately $350,000 in
unsecured notes due to a single investor, of which $200,000 is convertible into
common stock at the investor's option. The Company is currently negotiating
with the investor regarding a possible extension of the due dates for these
notes, or the possible conversion of some or all of the amounts owed by the
Company under the notes. However, no assurance may be given that the Company
will be able to extend or convert any of the notes.
In addition, as of November 14, 2003, the Company had approximately 3.0
million warrants outstanding with exercise prices ranging from $0.20 to $1.50
per share that expire from November 2003 through June 2005. These warrants, to
the extent they have exercise prices below current market prices, may represent
a source of cash funds for the Company in the future. However, no assurance can
be given that the Company will receive proceeds from the exercise of these
warrants, or from any other source, without which, the Company will have
insufficient funds to execute its business plan for the next twelve months.
12
Item 3. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures:
Disclosure controls and procedures are designed to ensure that information
required to be disclosed in the reports filed or submitted under the Exchange
Act is recorded, processed, summarized and reported, within the time periods
specified in the SEC's rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed in the reports filed under the Exchange
Act is accumulated and communicated to management, including the Chief
Executive Officer and the Chief Financial Officer, as appropriate, to allow
timely decisions regarding required disclosure. Within the 90 days prior to the
filing of this report, the Company carried out an evaluation, under the
supervision and with the participation of the Company's management, including
the Company's Chief Executive Officer and its Chief Financial Officer, of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures. Based upon and as of the date of that evaluation, the Chief
Executive Officer, who is also the Chief Financial Officer, concluded that the
Company's disclosure controls and procedures are effective to ensure that
information required to be disclosed in the reports the Company files and
submits under the Exchange Act is recorded, processed, summarized and reported
as and when required.
(b) Changes in Controls:
As disclosed by the Registrant in the 10-KSB for the year 2002 and the 10-QSB
filed for the first and second quarter of 2003, prior to January 1, 2003, the
Company did not maintain adequate internal controls related to treasury
activities. Further, in the Form 8-K/A filed by the Registrant on July 17,
2003, the Registrant disclosed certain issues that were under internal
investigation by the Registrant. Those issues included, among other items, (i)
the Company's former Chief Executive Officer's possible use of Company funds
for personal expenses, (ii) improper accounting and failure to remit payroll
taxes for the year 2002, (iii) potential misuse and retention of Registrant
funds in accounts under the control of an officer of the Registrant. A process
has been initiated to segregate responsibilities in order to reduce the
opportunities for a single person to be in a position to both perpetrate and
conceal errors or irregularities in the normal course of business. In addition,
the Chief Executive Officer and the audit committee have initiated a process to
establish and implement a written policy on disclosure controls and procedures
to be in place as soon as possible.
Subsequent to the purchase of certain assets of Vacation Communication, Inc.
("Vacation") in September 2001, the former owner of Vacation, who is also the
company's former Chief Information Officer continued to have responsibility for
cash deposits, accounting procedures and for producing internal financial
reports related to the Company's airtime business segment. This lack of
segregation of responsibilities constituted a significant deficiency and
material weakness in the Registrant's financial controls. During the three-
month period ended June 30, 2003, the Company discovered that checks received
from customers made out to NightHawk Systems, Inc. for product sales were being
deposited into the airtime bank account controlled by the former Chief
Information Officer. Management estimates that approximately $34,000 was
erroneously deposited into the airtime bank account. Management is actively
pursing return of these funds. On July 14, 2003, the former Chief Information
Officer resigned as both an officer and as a member of the Company's Board of
Directors. As mentioned in the preceding paragraph, a process has been
initiated to segregate responsibilities in order to reduce the opportunities
for a single person to be in a position to both perpetrate and conceal errors
or irregularities in the normal course of business. As noted in the
accompanying financial statements, the Company received the funds from the
former Chief Information officer as part of an agreement reached during the
three month period ended September 30, 2003.
13
PART II - OTHER INFORMATION
Item 1 Legal proceedings
On June 2, 2003, the Company was notified that on May 27, 2003 its registered
agent in Nevada had been served with a lawsuit in the Ninth Judicial District
Court of the State of Nevada, Douglas County. The suit, which is brought by
Charles R. McCarthy, a former board member who resigned in April 2002, is
seeking relief for damages in excess of $10,000. McCarthy served for a brief
period of time (less than four months) as a director and chairman of the board
of directors of the Company until he resigned in April 2002. He also executed a
retainer agreement with the Company on behalf of his law firm prior to becoming
a director and chairman. The suit is based on McCarthy's claims that (i) stock
which he was awarded as compensation should be unrestricted stock; (ii) he is
owed additional compensation in the form of stock, and; (iii) the Company
breached the retainer agreement with his law firm. The Company executed a
Settlement Agreement and Release with McCarthy less than one month prior to his
filing the present suit. The Company disputes his allegations and plans to
vigorously defend this lawsuit. On July 25, 2003 the Court transferred the
case, at the Company's request, from the county in which McCarthy filed the
lawsuit to Reno, Nevada.
In letters dated September 24, 2003, a former director of the Company, Lawrence
Brady, and a former Chief Financial Officer (CFO), Mark Brady, made demands of
the Company for payment of stock and compensation. Larry Brady's demand is
based on a claim for stock compensation for his service as a director during
the period of late 2001 and early 2002. Mark Brady's demand is for both cash
wages and stock compensation for his services as CFO also for the period of
late 2001 and early 2002 at which point he resigned from the Company. The
Company disputes the claims and has entered into discussions with the Brady's
concerning a possible settlement. If no settlement is reached, the Company
will vigorously defend these claims.
On November 13, 2003, the Company was notified of a complaint filed in Denver
County, Colorado by one of its directors, Herb Jacobson, for repayment of a
loan. The suit alleges, among other things, that Mr. Jacobson is owed
approximately $49,500 as the principal amount of a loan, plus interest and
other fees. The Company disputes the allegations and plans to defend this case
vigorously. On November 13, 2003 the Board of Directors of the Company removed
Mr. Jacobson as a director of the Company on the basis of his disqualification
for an apparent conflict of interest.
Item 2 Changes in securities and use of proceeds
(c) On April 16, 2003, the Registrant sold 500,000 shares of common stock to
Mr. Tomas Revesz. The securities were sold at a purchase price of $0.20 per
share for an aggregate amount of consideration received by the Registrant of
$90,000 in cash, net of offering costs. The Registrant also issued Mr. Revesz
warrants to purchase $200,000 of additional common stock on or before September
30, 2003 at the lesser of US $0.25 per share or 50% of the consecutive 10-day
average closing price prior to the purchaser's election to exercise the
warrant; or on or before March 31, 2004, at the lesser of US $0.37 per share or
50% of any consecutive 10-day average closing price prior to the purchaser's
election to exercise the warrant; or on or before September 30, 2004, at the
lesser of US $1.00 per share or 50% of any consecutive 10-day average closing
price prior to the purchaser's election to exercise the warrant; or on or
before March 31, 2005, at the lesser of US $2.00 per share or 50% of any
consecutive 10-day average closing price prior to the purchaser's election to
exercise the warrant.
On May 13, 2003, Mr. Revesz also loaned $200,000 to the Registrant in exchange
for a 90-day note that is convertible into common shares of the Company at the
lender's option on the 91st day at a price of no more than US$0.20 per share.
Should the Registrant sell any shares during the period the note is outstanding
for less than US$0.20 per share, the conversion price would be lowered to match
that selling price. The Registrant will have the right to prepay the note
anytime prior to the 91st day with no penalty. Interest on the note for the 90-
day period will be 25,000 shares of the Company's common stock. Should Mr.
Revesz choose not to convert the note, and should the Registrant fail to repay
the note when due, the Registrant will incur a penalty of 25,000 common shares
per month. The sale is exempt under Rule 506 as there was only one purchaser
under this offering and the purchaser is an accredited investor. During
August, Mr. Revesz agreed to extend the note to December 1, 2003.
The Registrant also sold 175,000 shares of common stock and issued 175,000
warrants to two individuals, Carol Vorberg and John Gray for $30,000 and
$5,000, respectively, during the second quarter of 2003. The Registrant
received $30,000 net of offering costs. The securities were sold at a price of
$0.20 per share and the warrants are exercisable at a price of $0.40, and are
exercisable for two years.
Item 3 Defaults upon senior securities
None
Item 4 Submission of matters to a vote of securities holders
None
Item 5 Other information
None
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
14
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 19, 2003 By: /s/ H. Douglas Saathoff
H. Douglas Saathoff
Chief Executive Officer and
Chief Financial Officer
15
Exhibit 31
CERTIFICATION OF PERIODIC REPORT
I, H. Douglas Saathoff, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of NightHawk
Systems, Inc. (the "Registrant");
2. Based on my knowledge, this quarterly 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
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this quarterly report;
4. I am responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14, 13a-15(e), 15d-14 and
15d-15(e)) for the Registrant 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 Registrant, including its
consolidated subsidiaries, is made known to me by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the Registrant's disclosure
controls and procedures and presented in this report my conclusions about the
effectiveness of the disclosure controls and procedures; and
c) disclosed in this report any change in the Registrant's
internal control over financial reporting that occurred during the Registrant's
most recent fiscal quarter that has materially affected, or is reasonably
likely to materially affect, the Registrant's internal control over financial
reporting; and
5. I have disclosed, based on our most recent evaluation, to the
Registrant's auditors and the audit committee of Registrant's board of
directors:
a) all significant deficiencies and material weaknesses in the
design or operation of internal controls over financial reporting which are
reasonably likely to adversely affect the Registrant'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 Registrant's internal
controls; and
6. I have indicated in this quarterly report in Part II, Item 3 (b) that
there were significant changes in internal controls or in other factors that
could significantly affect internal controls subsequent to the date of our most
recent evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 19, 2003
/s/ H. DOUGLAS SAATHOFF
H. Douglas Saathoff
Chief Executive Officer and
Chief Financial Officer
16
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 Septemnber 30, 2003 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 19, 2003
17