UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB/A
(Amendment No. 1)
ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2004
COMMISSION FILE NO. 0-30786
NIGHTHAWK SYSTEMS, INC.
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(Exact name of registrant as specified in its charter)
NEVADA 87-0627349
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(State or other jurisdiction of (IRS Employer Identification
incorporation or organization) No.)
10715 GULFDALE, STE 200
SAN ANTONIO, TEXAS 78258
(210) 341-4811
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(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.001
par value
Check whether the issuer (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
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes[x] No[ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB.[ ]
Registrant's revenues for its most recent fiscal year were $610,180.
As of April 12, 2005 there were 36,507,560 shares of common stock, par value
$.001 per share, of the registrant issued and outstanding.
Transitional Small Business Disclosure Format Used (Check one): Yes[ ] No[x]
TABLE OF CONTENTS
PART I
Item 1. Description of Business 1
Item 2. Description of Property 4
Item 3. Legal Proceedings 4
Item 4. Submission of Matters to a Vote of Security Holders 5
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters 5
Item 6. Management's Discussion and Analysis or Plan of Operation 6
Item 7. Financial Statements 12
Item 8. Changes in and Disagreements with Accountants on Accounting and Financial 12
Disclosure
Item 8A. Controls and Procedures 12
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(A) of the Exchange Act of 1934, as amended 13
Item 10. Executive Compensation 14
Item 11. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters 15
Item 12. Certain Relationships and Related Transactions 16
Item 13. Exhibits, Financial Statements and Reports on Form 8-K 18
Item 14. Principal Accountant Feeds and Services 19
Signatures and Certifications
i
Purpose of Amendment
This Amendment No. 1 to Form 10-KSB is being filed to amend Part III, Item 13 to
remove Exhibit 5.1 Opinion of Counsel, Amy Trombly, Esq. and to add page numbers
to the document.
Part 1
ITEM 1. DESCRIPTION OF BUSINESS
General
Nighthawk Systems, Inc. ("Nighthawk" or "the Company") designs and manufactures
intelligent remote power control products that are easy to use, inexpensive and
can remotely control virtually any device from any location. Our proprietary,
wireless products are ready to use upon purchase, so they are easily installed
by anyone, regardless of technical ability, and are also easily integrated into
third-party products, systems and processes. They allow for intelligent control
by interpreting instructions sent via paging and satellite media, and execution
of the instructions by 'switching' the electrical current that powers the
device, system or process. Our intelligent products can be activated
individually, in pre-defined groups, or en masse, and for specified time periods
with a simple click of a mouse or by dialing a telephone number.
Our products have been uniquely designed and programmed to be simple and ready
to use upon purchase by anyone, almost anywhere, at affordable prices. As such,
it is the Company's goal to have its products become commonplace, accepted and
used by businesses and consumers alike in their daily routines.
We save consumers and businesses time, effort and expense by eliminating the
need for a person to be present when and where an action needs to be taken. By
utilizing existing wireless technology, we give our users the flexibility to
move their application from place to place, without re-engineering their
network. Currently, most commercial control applications utilize telephone or
Internet connections, which tether the system to a single location and have
associated installation and monthly charges. Our products make companies more
profitable by eliminating installation costs and monthly charges for telephone
or Internet connections, and allow control of unmanned or remote locations that
operate on traditional electrical power, solar or battery generated power.
Effective February 1, 2002, the Company acquired 100% of the issued and
outstanding shares of Peregrine Control Technologies, Inc. ("PCT") in exchange
for 14,731,200 post reverse split shares of the Company's common stock. In
conjunction with the acquisition and the change in focus of the Company's
business, the Company changed its name to Peregrine, Inc. on January 10, 2002
and later to Nighthawk Systems, Inc. on April 29, 2002. Prior to the
acquisition of PCT, the Company had conducted a reverse split of its shares on a
1:100 basis, and had 4,600,256 shares outstanding. The acquisition was recorded
as a reverse acquisition, with PCT being the accounting survivor.
PCT was originally incorporated as a Colorado company in 1992, and operated as a
family-owned business specializing in paging repair. Through knowledge gained
in the operation of the business, the Company began developing a specialized
circuit board that could receive paging signals and switch electrical power. In
its simplest form, the technology gave the user the ability to turn devices "on"
or "off" from or to remote sites. Through limited marketing, the Company was
able to solve specific control problems for both large and small companies
through customization of the original circuit board.
As of the date of this report, the Company has eight full time employees.
MISSION STATEMENT
To become the premier provider of intelligent, wireless remote power control
products and services that allow businesses and consumers to save time and money
through more efficient management of resources.
THE MARKETPLACE
The controls industry is characterized by companies that sell remote asset
management and tracking systems and related products. It is the Company's
belief that there is almost no limit to the size of the remote control market;
the application of remote control is limited only by one's imagination.
Companies both large and small are seeking ways to save money and lower the risk
of liability by replacing processes that require human intervention with
processes that can be controlled remotely without on-site human intervention.
Today, the remote control of physical assets and processes is performed
primarily through the use of telephone and Internet based systems. However,
these connections are expensive, requiring high monthly fees, and more
importantly, they restrict the remote control to the availability of the
physical connection between the person operating the remote control and the
asset to be controlled. In contrast, Nighthawk's products are wireless and can
therefore be operated from any location, without our device being connected to a
telephone line or Internet connection. This means that the asset does not have
to be tethered to a fixed location in order to be accessed. Moreover,
Nighthawk's products are designed to work with a variety of wireless media
including paging and satellite-based systems. Almost any device that runs off of
an electrical current, whether battery, solar or line generated, can be
controlled by a Nighthawk device. The Company has identified primary markets
(Electric Utility, IT Professional, Emergency Management and Traffic Control),
as well as secondary markets (Irrigation, Outdoor Advertising, Oil/Gas and
Security) for its products.
1
TECHNOLOGY AND PRODUCTS
Nighthawk products have been in service for over six years, primarily to fit
custom applications. Customers using Nighthawk products today include IBM, the
Naval Air Warfare Center - Weapons Division, Mercury Online Solutions, and a
number of electric utilities around the country. The Company has three
distinguishing features that are not shared by its competitors in the market:
(i) its proprietary firmware and software (which together provide the
intelligence for our solutions); (ii) the design of its products (which provides
the ease with which they are installed and operated), and; (iii) the
wireless-based medium typically used to operate its products (which allows for
low cost access, security and flexibility). The Company's products are shipped
ready for use and are pre-programmed before shipment to the customer.
Nighthawk's products and suggested applications:
- NH1 & NH100: rebooting or on/off applications to a single device.
- NH8: rebooting or on/off applications for up to eight electrical devices
from a single unit.
- CEO700: whole house disconnect/reconnect for the Electric Utility market.
- PT1000: designed for OEM integration and control of up to eight devices.
- PT1-LC: designed for load control programs in the Electric Utility
market.
- PT FAS: designed to aid in firehouse automation, the PT FAS will
simultaneously print instructions, activate alarms, turn on lights, turn
off stoves, open baydoors and activate outdoor flashing lights. The PT FAS
is a low cost way for fire departments to automate critical tasks.
- Hydro 1: remote irrigation control.
- AL100: remote public alert systems.
- ST1500: utilizing the Orbcomm satellite system, the ST1500 allows for
rebooting and on/off applications for up to three devices anywhere in the
world.
All of Nighthawk's products can be and have been modified to fit custom
applications.
Through innovative engineering, Nighthawk's products typically utilize a common
paging signal found virtually worldwide. Paging is often used because it is
very secure, inexpensive, and easy to use. Customers can choose to source their
own paging service or Nighthawk will arrange for the service directly. The
Company also offers Windows-based software packages that enable customers to
activate the remote control units from a PC. Paging, when combined with
Nighthawk's proprietary firmware and software, allows for a "group call" feature
whereby a user can access multiple sites at the same time using a single paging
number. This exponentially increases the functionality and ease of use of the
products. It is important to note that the Company's products can be adapted to
function with any wireless, or wireline-based, communications medium.
In September 2003, the Company signed an agreement to become a value-added
reseller for Orbcomm, a low-earth orbit ("LEO") satellite system. This
relationship expands Nighthawk's coverage beyond the reach of paging and
cellular systems and allows the Company to offer global solutions for companies
that have global needs. Additionally, satellite technology enables Nighthawk's
products to be used in conjunction with monitoring equipment due to the two-way
communication capability. Unlike paging, which allows for one-way
communication, satellite communications allow the customer to get confirmation
from the device that the control has been effectuated or that the flow, for
example, of liquids being monitored has been shut off or turned on, as the case
may be.
The Company completes the assembly of its products at its Denver, Colorado
facility. The Company sub-contracts for assembly of various components, and
utilizes several vendors for parts that do not require assembly. Parts and
sub-assembly services are widely available. During the final assembly process,
individual units are programmed depending on their destination or customer
requirements, tested, and then shipped to the customer for installation.
In July 2003, the Company sold back the assets and liabilities it had acquired
from Vacation Communication, Inc. in September 2001 to the original owners of
Vacation Communication, Inc. The assets disposed of in the sale consisted
primarily of a retail paging customer base. The Company now purchases wholesale
paging services from paging carriers, including Vacation Communication, Inc.,
for regional, nationwide and international coverage. The Company utilizes these
paging carriers to offer paging services to customers that buy Nighthawk
products, but do not have their own private paging networks. Several customers
own their own private paging networks and, hence, do not require Nighthawk to
arrange for their paging services.
PATENTS PENDING
The Company has two patent applications pending at the U.S. Patent Office: one
is titled "Remote Disconnect for Utility Meters" and is for whole house
disconnect systems, and the second is titled "Paging Remote Disconnect Systems"
and is for the remote wireless control for turning on and off electrical and
telephonic lines.
Under the first patent application, the user dials a pager number that is
pre-programmed into the unit. The paging service then transmits a signal to a
radio frequency ("RF") receiver in the module. The signal is then decoded and
sent to a processor. The processor then causes a relay to open or close in
accordance with the decoded signal in order to connect or disconnect the
electrical power.
2
Under the second application, a user simply plugs the power cord or
telecommunication line of their device, such as a computer or appliance, into
the outlet of the module. The user is then able to dial a pager number that is
pre-programmed. The paging service then transmits a signal to an RF receiver in
the module. The signal is then decoded and sent to a processor. The processor
then causes a relay to open or close in accordance with the decoded signal in
order to activate the power supply or to turn the power off to the electronic
device or to connect or disconnect the telecommunications line.
COMPETITION
We have three distinguishing features that are not shared by our competitors in
the market: (i) our proprietary firmware and software, which together provide
intelligent solutions; (ii) the design of our products, which provides the ease
with which they are installed and operated; and (iii) the wireless-based medium
typically used to operate our products, which allows for low cost access,
security and flexibility.
Utility competition. Two of our competitors, Comverge, Inc. and Canon
Technologies, Inc. evolved from software companies, and advertise that they
provide complete, end-to-end solutions for utility load management. Their
services are relatively expensive, and must be engineered into the utility's
network. As an alternative, we offer equipment that is off-the-shelf and ready
to use upon purchase, is easily installed and much less expensive. It is our
belief that we offer a much more affordable solution that allows the utility to
utilize information which already exists within its own network. Paging offers
inexpensive and reliable access to the units, and also allows for a group call
feature that enhances the ability to implement an effective load control
program. As evidence of this, the Alabama Municipal Electric Authority ordered
5,000 Nighthawk load control circuit boards as part of a retro-fit of technology
originally installed by Fisher Pierce. In addition, we repaired load control
units during 2004 that were originally manufactured by KeySpan Energy and sold
to PECO Energy. In light of advances made by us, KeySpan Energy no longer makes
load control units, but has recommended to PECO Energy that they contact us for
their load control needs. There is one other competitor that provides
paging-based control boards and represents the closest direct competition to us,
BLP Components, Ltd. This competitor provides components to us, and entered into
the market when we were experiencing financial difficulties. The paging
technology utilized by this competitor limits their coverage to urban areas.
There is another competitor by the name of Telemetric Corporation within the
electric utilities market, but their product is more expensive because it
utilizes cellular technology, and it also does not afford the same coverage area
as paging.
Rebooting competition. Remote rebooting of computers has historically utilized
telephone lines or Internet-based technology to access the product. To our
knowledge, we are the only company that offers paging-based rebooting units. Our
units are competitively priced in comparison to alternative products, and offer
the distinct advantage of being wireless, thus allowing the units to be moved
from place to place without moving lines and incurring installation charges.
Wireless competition. Wireless remote control through the use of radio signals
has historically been performed utilizing private system data radios, cellular
telephones, or satellite-based systems. While our technology can be modified to
utilize any of these wireless media, our core expertise has been in the use of
paging. This medium, combined with our proprietary technology, allows for a high
level of security, the lowest overall cost and greatest control flexibility.
Only a handful of small, undercapitalized companies utilize paging for this
purpose. To our knowledge, we are the only company emphasizing paging technology
that manufactures a product that is ready-to-use upon receipt.
SALES AND DISTRIBUTION
The Company believes that it has the opportunity to meet current demand for
applications of its technology within specific markets, and to create
opportunities in many other markets as well. Despite historically having little
or no marketing resources to target these markets, customers in our targeted
markets have found that the Company's technology successfully meets their needs.
As such, Nighthawk will focus significant direct, and supplier-based, sales
efforts in these industries.
Nighthawk's intelligent products attach to existing customer hardware and act as
a "brain", receiving wireless instructions sent from a remote location, allowing
the hardware to perform as instructed. As mentioned above, Nighthawk's products
are typically set up to receive these instructions via a paging protocol, which
allows for secure, reliable and low cost operation. Nighthawk products
literally serve as the "intelligence" between the wireless service medium and
the hardware that must perform the desired action. As such, we believe
substantial opportunities exist to partner with wireless service providers as
well as hardware manufacturers and dealers, each of which stand to gain from the
use of Nighthawk's products. The Company will also attempt to establish itself
as a supplier of products to paging and other wireless service providers, and
establish dealer networks in a number of markets, including, but not limited to,
computer controls, utilities, irrigation, traffic control, and wide area
notification.
3
In early 2005, the Company expanded its sales force, hiring two seasoned sales
professionals and has also established relationships with a number of
distributors that service the electric utility industry
PREDECESSOR OPERATIONS
The Company was incorporated as TPI, Inc., under the laws of the State of Utah
on April 26, 1983. In 1985, the Corporation changed its situs from Utah to
Nevada and its name to Connections Marketing Corp. In July 1992, the
shareholders of the Corporation voted to change the name to LSI Communications,
Inc. (LSI).
On June 21, 1999, the Company entered into a Plan of Acquisition with Coaching
Institute, Inc., a Utah corporation, wherein the Company issued 2,500,000
shares of common stock for 85,000 shares, 85% of the outstanding common stock of
Coaching Institute, Inc. The agreement provided for the Company to receive
options to acquire the remaining 15% of the issued and outstanding stock of
Coaching Institute, Inc. in exchange for 2,045,455 shares of the Company's
common stock. In February 1, 2001, the Company exercised its option by issuing
to Coaching Institute, Inc. 2,045,455 shares of its common stock valued at
$2,045. After the acquisition, both companies were surviving with Coaching
Institute, Inc. being a wholly owned subsidiary of LSI Communications, Inc.
The acquisition of Coaching Institute, Inc. was recorded using the purchase
method of a business combination. Operating activities have been included from
Coaching Institute in the consolidated financials since June 21, 1999. Due to
the common ownership of Coaching and LSI, the Company valued the acquisition of
Coaching Institute at its historical cost, which was $34,728.
.
In November 2001, the Company sold the assets and liabilities of Coaching
Institute, Inc. to a major shareholder. The Company recognized a loss on the
sale of $574,236. At the time of the reverse acquisition of PCT, the Company had
no assets or liabilities, or ongoing operations.
NASD OTC Bulletin Board Quotations
From July 8, 2002 through May 23, 2003, our common stock traded on the Over the
Counter Bulletin Board ("OTCBB") under the symbol "NIHK". From May 27, 2003
until November 25, 2003 our stock was traded on the pink sheets under the same
symbol, after which our stock resumed trading on the OTCBB. For information
concerning these stock quotations during the past two years, see the section
entitled "Market for Common Equity And Related Stockholder Matters." The
quotations presented do not represent actual transactions or broker/dealer
markups, markdowns or commissions. On November 25, 2003, Nighthawk was cleared
to resume trading on the OTCBB.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's sales and operations departments are in leased facilities located
at 8200 East Pacific Place, Suite 204, Denver, Colorado. The lease for this
facility expired on March 2002, but the Company has maintained use of the
facilities on a month-to-month basis since that time. The leased property
consists of approximately 2400 square feet, for which the Company pays $1,650
per month. It consists of office space and a manufacturing floor. The
Company's executive offices are located in 679 square feet of leased office
space at 10715 Gulfdale, Suite 200, San Antonio, Texas. The Company leases the
space at a monthly rate of $815.
ITEM 3. LEGAL PROCEEDINGS
In May 2003, the Company was sued by a former Board member, Charles McCarthy,
seeking recovery for the value of 350,000 shares, or $209,500, and $120,000 due
his law firm under a retainer agreement between the Company and his firm.
McCarthy 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 him to settle the case for $55,000.
Under the Settlement Agreement and Release, we made a cash payment to McCarthy
of $10,000 during October 2004, a cash payment of $15,000 in January 2005 and
will settle the remaining balance in the fourth quarter of 2005.
The Company, along with the current officers and board members and several
former directors, were sued by Lawrence Brady, a former director of the Company,
and his son Mark Brady, who served for a period of time as Chief Financial
Officer, for, among other things, breach of contract for unlawful termination
and failure to provide stock allegedly promised. 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.
4
Certain claims and lawsuits have arisen against the Company in its normal course
of business. The Company believes that such claims and lawsuits have not had,
and will not have, a material adverse effect on the Company's financial
position, cash flow or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a shareholder vote in 2004. However, the
Company held a special shareholders' meeting on January 6, 2005 to vote to
increase the number of authorized common shares. The results are as follows:
1. To approve an amendment to the Amended and Restated Articles of
Incorporation of Nighthawk Systems, Inc. to increase the number of
authorized shares of our common stock from 50,000,000 to 200,000,000
VOTES FOR VOTES AGAINST ABSTENTIONS
17,833,098 1,585,559 102,600
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Market for Common Equity
From July 8, 2002 through May 23, 2003, our common stock traded on the Over the
Counter Bulletin Board ("OTCBB") under the symbol "NIHK". From May 27, 2003
until November 25, 2003 our stock was traded on the pink sheets under the same
symbol, after which our stock resumed trading on the OTCBB. The CUSIP number is
65410X-10-4. Knight Securities, L.P., Schwab Capital Markets, L.P. and ACAP
Financial, Inc. are among the most active market makers for the stock. From
February 1, 2002 through July 8, 2002, our common stock traded on the OTCBB
under the symbol "PGRN." Prior to February 1, 2002, the stock traded on the
OTCBB under the symbol "LSIM".
The following is a table of the high and low bid prices of our stock for each of
the four quarters of the fiscal years ended December 31, 2004 and 2003, and the
first quarter of fiscal 2005:
QUARTER ENDED. . . HIGH LOW QUARTER ENDED HIGH LOW
------------------ ---- ---- ------------------ ----- -----
December 31, 2004. 0.23 0.09 December 31, 2003 $0.29 $0.15
September 30, 2004 0.25 0.12 September 30, 2003 0.32 0.15
June 30, 2004. . . 0.38 0.20 June 30, 2003 0.72 0.25
March 31, 2004 . . 0.35 0.18 March 31, 2003 0.73 0.20
These quotations reflect interdealer prices, without retail mark-up, mark-down
or commission and may not represent actual transactions.
(b) Security Holders
The number of record holders of our common stock at year-end 2004 was 197
according to our transfer agent. This figure excludes an indeterminate number of
shareholders whose shares are held in "street" or "nominee" name.
(c) Dividends
There have been no cash dividends declared or paid since the inception of the
company, and no cash dividends are contemplated in the foreseeable future. The
company may consider a potential dividend in the future in either common stock
or the stock of future operating subsidiaries.
(d) Sales of Unregistered Securities
During the three month period ended September 30, 2002, we received a total of
$168,900 in exchange for 1,524,000 unregistered shares of our common stock and
1,524,000 warrants. The warrants are exercisable for 2 years from their date of
issuance, with 435,000 exercisable at $0.75 per share, and the remainder at
$0.20 per share.
Subsequent to September, 30, 2002, we received $42,500 in exchange for 425,000
unregistered shares of our common stock and 425,000 warrants with exercise
prices of $0.20 which are exercisable for two years from their date of issuance.
5
In October 2002, the Board of Directors agreed to issue Steven H. Jacobson, the
Chief Executive Officer, 1,000,000 unregistered shares of our common stock in
lieu of approximately $120,000 in unpaid cash compensation that was due him
under his employment contract for the period from December 1, 2001 through
September 30, 2002.
In 2002, we sold 2,479,000 shares of common stock to twenty-one investors for
cash at a weighted average price of $0.45 per share. Warrants to purchase
2,479,000 shares of common stock were also included in these sales at an
exercise price of $0.25 per share for 1,869,000 of the warrants and at $0.75 per
share for 435,000 of the warrants. We did not publicly offer the securities and
the investors were all accredited investors. No underwriters were involved in
the sales.
In 2003, we sold 1,575,000 shares of common stock to seven investors for cash at
a weighted average price of $0.17 per share. Warrants to purchase 1,575,000
shares of common stock at an exercise price of $0.25 per share were also
included in these sales. We did not publicly offer the securities and the
investors were all accredited investors. No underwriters were involved in the
sales.
Between January 1, 2004 and March 31, 2004, we sold 858,333 shares of common
stock to nine investors for cash at a price of $0.15 per share. Warrants to
purchase 858,333 shares of common stock at an exercise price of $0.25 per share
were also included in these sales. We did not publicly offer the securities and
the investors were all accredited investors. No underwriters were involved in
the sales.
Between May 31, 2004 and June 15, 2004, we sold 1,162,000 Special Warrants to
five investors for cash at a price of $0.20 per Special Warrant. Each Special
Warrant is convertible into one share of our common stock and one warrant to
purchase a share of our common stock at an exercise price of $0.30 per share.
First Associates Investments, Inc. was the underwriter in this offering. They
received a commission of 8% of the total proceeds raised and the right to
purchase 12.5% of the amount of the Special Warrants sold in the offering, or
142,250 Special Warrants.
The securities described immediately above were issued to investors in reliance
upon an exemption from the registration requirements of the Securities Act of
1933, as set forth in Section 4(2) under the Securities Act of 1933 and Rule 506
of Regulation D promulgated thereunder relative to sales by an issuer not
involving any public offering, to the extent an exemption from such registration
was required. All purchases of the securities described immediately above this
paragraph represented to us in connection with their purchase that they were
accredited investors and were acquiring the shares for investment purposes only
and not for distribution, that they could bear the risks of the investment and
could hold the securities for an indefinite period of time. The purchasers
received written disclosures that the securities had not been registered under
the Securities Act of 1933 and that any resale must be made pursuant to a
registration statement or an available exemption from such registration. Each
participant in the offering or offerings described above was given access to
full and complete information regarding us, together with the opportunity to
meet with our officers and directors for purposes of asking questions and
receiving answers in order to facilitate such participant's independent
evaluation of the risks associated with the purchase of our securities.
ITEM 6. 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.
("the Company"), actual results and business performance may differ materially
from that projected or estimated in such forward-looking statements. 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 Company's
audited financial statements for the years ended December 31, 2004 and 2003.
General
The Company's financial results include the accounts of Nighthawk Systems, Inc.
(formerly Peregrine, Inc.) and its subsidiary, Peregrine Control Technologies,
Inc. ("PCT"). Effective February 1, 2002, the two companies were brought
together under common management through an acquisition in which Peregrine, Inc.
acquired all of the outstanding shares of PCT. Because Peregrine, Inc. issued
more shares to acquire PCT than it had outstanding just prior to the
acquisition, the transaction was accounted for as a reverse acquisition of
Peregrine, Inc. by PCT. Peregrine, Inc. subsequently changed its name to
Nighthawk Systems, Inc.
6
The Company designs and manufactures intelligent remote monitoring and power
control products that are easy to use, inexpensive and can remotely control
virtually any device from any location. Our proprietary, wireless products are
ready to use upon purchase, so they are easily installed by anyone, regardless
of technical ability, and are also easily integrated into third-party products,
systems and processes. They allow for intelligent control by interpreting
instructions sent via paging and satellite media, and executing the instructions
by 'switching' the electrical current that powers the device, system or process.
Our intelligent products can be activated individually, in pre-defined groups,
or en masse, and for specified time periods with a simple click of a mouse or by
dialing a telephone number.
Our products have been uniquely designed and programmed to be simple and ready
to use upon purchase by anyone, almost anywhere, at affordable prices. As such,
it is the Company's goal to have its products become commonplace, accepted and
used by businesses and consumers alike in their daily routines.
We save consumers and businesses time, effort and expense by eliminating the
need for a person to be present when and where an action needs to be taken. By
utilizing existing wireless technology, we give our users the flexibility to
move their application from place to place, without re-engineering their
network. Currently, most commercial control applications utilize telephone
lines, which tether the system to a single location and have associated
installation and monthly charges. Our products make companies more profitable
by eliminating installation costs and monthly charges for telephone lines, and
allow for remote control of unmanned or remote locations that may operate on
traditional electrical power, or solar or battery generated power.
Active applications for our intelligent products include, but are not limited
to:
- Rebooting unmanned computer stations
- Remote switching of residential power
- Managing power on an electrical grid
- Activation/deactivation of alarm and warning devices
- Displaying or changing a digital or printed message or warning sign
- Turning pumps on or off
- Turning heating or cooling equipment on or off
Companies both large and small are seeking ways to save money and lower the risk
of liability by replacing processes that require human intervention with
processes that can be controlled remotely without on-site human intervention.
Today, the remote control of industrial or commercial assets and processes is
performed mainly through the use of telephone-line based systems. Opportunities
exist for companies that provide intelligent wireless solutions, as telephone
lines are expensive and limited in availability and function. Nighthawk's
products are wireless, and can be designed to work with a variety of wireless
media. The number of applications for wireless remote control is virtually
limitless. The Company has identified primary markets (Utility, IT
Professional, Traffic Control), as well as secondary markets (Irrigation,
Outdoor Advertising, Oil/Gas, Security) for its products.
During 2003, the Company spent a significant amount of time resolving corporate
governance and operational issues. This process culminated in the resignation
of the Company's Chief Executive Officer in March 2003, the resignations of five
board members including one who served as the Company's Chief Operating Officer
during 2002, the disqualification and subsequent resignation of a sixth board
member, and the disposal of the Company's paging operations that were originally
purchased during 2001.
The Company has historically had minimum funds available to it to support its
operations and has been largely dependent on the private equity placements with
accredited investors to fund its negative cash flows. As such, minimum capital
has been available historically to fund and sustain sales and marketing efforts.
In August 2004, the Company signed a financing arrangement with Dutchess Private
Equities, II, L.P. ("Dutchess") which was amended on August 26, 2004 and on
September 24, 2004. Under the terms of the amended arrangement, the Company
received a total of $250,000 under a debenture during the three-month period
ended September 30, 2004. The Company also signed an investment agreement
under which, subsequent to the December 2004 effectiveness of its SB-2
registration statement filed with the Securities and Exchange Commission
("SEC"), Dutchess has agreed to purchase up to $10.0 million in common
stock from the Company, at the Company's discretion, over the next three
years, subject to certain limitations including the Company's then current
trading volume. As is more fully explained in Liquidity and Capital Resources
below, the Company began utilizing the investment agreement in December 2004 in
order to implement a sales and marketing effort designed to generate revenues
during 2005. This effort for 2005 should include the following:
- Hiring sales and marketing personnel. The Company plans to increase its
sales force with experienced salespeople to effectively target existing and
new markets. Those individuals that are specialized in a field will be
assigned to those market applications of our products.
7
- Product marketing including print media and attendance at trade shows.
This method has proved the most effective for the Company to date, and it
plans to increase its presence in the current space to attract new
customers.
- An improved Internet presence, including an e-commerce website for retail
sales.
- Leveraging existing customer relationships by up-selling new products or
fully integrating systems with the Company's products.
- The establishment of distribution and dealer networks. Through an
effective dealer network, the Company can increase awareness in its
products and utilize a dealer's sales force to actively promote its
products.
- New applications in irrigation control, civil defense and emergency
management. The current product design can be altered with little cost to
the Company to be effectively implemented into a wide array of fields.
Through the commitment of funding, the Company can now research all
possible applications and begin to market directly to new customers.
- The development and launch of a product designed to be used for multiple
purposes by consumers.
In addition to the marketing and sales objectives, the Company has identified
the following strategic goals for 2005:
- Joint ventures with wireless service providers and equipment
manufacturers.
- The identification of complementary products and companies for potential
acquisition.
Comparison of Years Ended December 31, 2004 and 2003
Revenue
The components of revenue, including revenues from discontinued operations, and
their associated percentages of total revenues, for the fiscal years ended
December 31, 2004 and 2003 are as follows:
YEARS ENDED DECEMBER 31,
-------------------------
2004 2003
---- -----
Product Revenues
-----------------------------------
Nighthawk NH1, NH2 & NH8. . . . . . $ 186,492 31% $ 508,352 47%
PT1 LC. . . . . . . . . . . . . . . 64,536 11% 319,615 30%
PT 1000 & PT Boards . . . . . . . . 99,256 16% 128,914 12%
CEO 700 . . . . . . . . . . . . . . 197,508 32% 28,557 3%
Other product . . . . . . . . . . . 11,938 2% 5,945 0%
Freight . . . . . . . . . . . . . . 6,848 1% 20,624 2%
------------------------- ----- ---------- ----
Total product revenues. . . . . . . 566,578 93% 1,012,007 94%
Airtime sales . . . . . . . . . . . 43,602 7% 18,786 2%
------------------------- ----- ---------- ----
Revenues from continuing operations 610,180 100% 1,030,793 96%
Discontinued operations
-----------------------------------
Airtime sales . . . . . . . . . . . - 0% 45,880 4%
------------------------- ----- ---------- ----
Total revenues. . . . . . . . . . . $ 610,180 100% $1,076,673 100%
====================================================
8
Revenues from continuing operations are made up of product sales and airtime
billed to customers for Nighthawk Systems, Inc. products, while revenues from
discontinued operations consist of airtime revenues generated by the Company's
paging operations, which were disposed of effective July 31, 2003. Revenues
from continuing operations declined $420,613 or 41% between years primarily due
to the completion of two large contracts during 2003. Combined, the two
contracts contributed $749,600 or 74%, of total product revenues for 2003. One
of the contracts was for the Company's Nighthawk NH2 product and produced
revenues of $432,600 in 2003. The second contract was for the Company's PT1 LC
product and produced revenues of approximately $317,000 in 2003. This contract
was approximately 81% complete as of December 31, 2003. Sales of the Company's
CEO-700 product increased $168,951 or 592% between years and offset to some
degree the effects of the large 2003 contracts. During 2004 and 2003, the
Company spent approximately $9,200 and $6,000, respectively, on product
advertising due to limited availability of operating funds.
Cost of goods sold declined $219,730 or 33% between years and increased as a
percentage of product revenues from 64% in 2003 to 72% in 2004. As a result,
the Company's gross margin decreased from 36% in 2003 to 28% in 2004. This
decrease in gross margin is due primarily to the overall decrease in product
volume between years. Lower production volume limits the Company's ability to
cover fixed costs of production. In addition, 47% of sales were generated by
the Company's higher margin rebooting products during 2003 as compared to only
31% in 2004.
Selling, general and administrative ("SG&A) expenses stayed relatively flat,
increasing $21,681, approximately 2%, from 2003 to 2004. The comparative figure
for 2003 SG&A expenses is net of $333,000 related to the reversal of 2002
deferred compensation and the reversal of 2002 consulting expenses in 2003.
Although the Company reduced employee and employee related costs, insurance,
telecommunications and travel costs, the reductions were more than offset by
increased expenditures in 2004 for consulting and public relations related
activities as well as $55,000 for a legal settlement with a former director.
During 2003, the Company canceled the remaining 300,000 shares that were
originally issued to members of its board of directors during 2002, as it
determined that the associated services were not performed. This resulted in a
reversal of $300,000 of deferred compensation that was originally recorded in
2002. During the second quarter of 2003, the Company authorized the
cancellation of 300,000 shares of common stock previously issued during 2002. A
$33,000 reduction in consulting expense was recorded during the second quarter
of 2003 related to this cancellation, as the Company's 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.
The Company's loss from operations during 2004 was $1,140,117 as compared to a
loss of $584,553 in 2003. The increased net loss was the result of decreased
revenues and decreased gross margin in 2004 as well as the adjustments in 2003
operating expenses related to deferred compensation and consulting expenses.
Net interest expense for 2004 was $236,634 as opposed to $45,875 in 2003, an
increase of $190,759. The increase in interest expense in 2004 is primarily due
to the value of warrants issued to creditors who exchanged approximately
$242,000 in notes and accrued interest for warrants and common stock, and the
recognition of approximately $92,000 in beneficial conversion expenses related
to the debenture agreement between the Company and Dutchess Private Equities,
II, L.P.
Airtime sales were approximately $65,700 in 2003, $45,800 of which is included
in discontinued operations. The majority of the airtime revenues produced during
2003 were produced by retail paging customers rather than by the Company's
equipment customers. The Company sold the customer base, as well as related
assets and obligations originally purchased from Vacation, back to the owners of
Vacation and recognized a gain of $92,443 in 2003. This segment produced a net
loss from operations of $14,472 during 2003 prior to its disposal. The airtime
revenues included in 2004 and 2003 revenues from continuing operations resulted
from airtime related to Nighthawk equipment sales rather than the traditional
paging revenues associated with Vacation.
The net loss for 2004 was $1,376,751 or $0.05 per share as compared to a net
loss of $552,457 or $0.03 per share in 2003. The increased net loss and net loss
per share was the result of decreased revenues and decreased gross margin,
interest expense associated with note conversions and our funding arrangement
with Dutchess in 2004, as well as the adjustments in 2003 operating expenses
related to deferred compensation and consulting expenses.
Liquidity and Capital Resources
The Company's financial statements for the year ended December 31, 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 year ended December 31, 2004, the Company reported a net loss
of approximately $1.38 million and has a stockholders' deficit as of December
31, 2004 of approximately $1.24 million. In addition, the Company had a working
capital deficiency of approximately $1.04 million on this date. The Report of
Independent Registered Public Accounting Firm on the Company's financial
statements as of and for the year ended December 31, 2004 includes a "going
concern" explanatory paragraph which means that the auditors expressed
substantial doubt about the Company's ability to continue as a going concern.
During the year ended December 31, 2004, cash used in operating activities was
$851,884. Although the Company recorded a net loss of $1,376,751 for 2004,
$557,387 in recorded expenses were non-cash expenses.
9
There were no cash flows from investing activities during 2004.
Net cash provided by financing activities for 2004 was $913,002 and resulted
primarily from the sale of common stock and warrants and the issuance of notes
payable. The Company issued 1,488,333 shares of common stock in return for
$237,350 in net cash proceeds, 5,000 shares of preferred stock in return for
$12,500 in cash proceeds, and received $188,775 in net proceeds from the
issuance of Special Warrants during 2004. As mentioned above, the Company also
received $250,000 from Dutchess during August 2004, and received an additional
$250,000 from Dutchess in December 2004 in return for a second note. These cash
inflows were offset to some degree by payments on notes payable.
Until the Company is able to generate positive cash flows from operations in an
amount sufficient to cover its current liabilities and debt obligations as they
become due, it will remain reliant on borrowing funds or selling equity to meet
those obligations. The Company has historically sold its equity securities
through private placements with various individuals. Raising funds in this
manner typically requires much time and effort to find new accredited investors,
and the terms of such an investment must be negotiated for each investment made.
Cash from these types of investments has historically been generated in amounts
of $50,000 or less, in an unpredictable manner, making it difficult to fund and
implement a broad-based sales and marketing program.
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 that 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, net of issuance costs of $43,625.
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 after orders were received during 2004
resulted in higher production costs per unit. Because the Company has some
fixed costs of production, delays or work stoppages due to inventory shortages
causes inefficiency in production. In addition, ordering parts in smaller
quantities does not allow the Company to take advantage of volume discounts
offered by some of its suppliers. These delays and inefficiencies ultimately
result in decreased or slower cash flows and delays in follow-up orders from
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. The
creditor was 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.
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.
10
In August 2004, the Company signed a financing arrangement with 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 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. On December 3, 2004 Dutchess loaned the Company an additional $250,000
under a second note (Second Dutchess Note). The Second Dutchess Note had no
stated interest rate but had a face value of $300,000 and matured April 3, 2005,
resulting in an implied annual rate of 72.8%. The note was intended to be
repaid via puts exercised under the investment agreement, with the Company
making payments of the greater of $75,000 every 30 days or 50% of each put until
the note is paid in full.
On January 18, 2005, Dutchess loaned the Company an additional $225,000. The
note has no stated interest rate but has a face amount of $270,000 and matures
on May 18, 2005. In connection with the note, Dutchess was issued 250,000
shares of common stock as an incentive and the Company also signed a consulting
agreement with a company in which an employee of Dutchess is a member of
management. Under the consulting agreement, the company was issued 500,000
shares of Company common stock.
On April 7, 2005, Dutchess loaned the Company an additional $488,500. The note
has no stated interest rate but has a face amount of $586,200 and matures on
June 7, 2005. A portion of the proceeds of this loan was used to repay the note
dated December 3, 2004 with a face amount of $300,000, which matured on April 3,
2005. In connection with the note, Dutchess was issued 250,000 shares of common
stock as an incentive and the Company signed a consulting agreement with a
company in which an employee of Dutchess is a member of management. Under the
consulting agreement, the company was issued 300,000 shares of Company common
stock.
During the period from January 1, 2005 through April 12, 2005, the Company
exercised six (6) puts to Dutchess totaling 1,276,610 shares for proceeds of
$222,726. Of the total proceeds, $142,635 was used to repay portions of
previously issued notes to Dutchess and $80,091 went to the Company.
On March 9, 2005, Dutchess exercised 250,000 warrants at $0.125 each, for total
proceeds of $31,250, $15,000 of which was applied to outstanding notes.
Also during the period from January 1, 2005 through April 12, 2005, Dutchess
elected to convert at total of $75,000 of the 36-month convertible note for
600,000 shares of the Company's common stock.
Although no assurance may be given that it will be able to do so, the Company
expects to be able to continue to access funds under this arrangement to help it
fund near-term and long-term sales and marketing efforts, and to cover cash flow
deficiencies.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those estimates.
Revenue recognition
Revenue from product sales is recognized when all significant obligations of the
Company have been satisfied. Revenues from equipment sales are recognized
either on the completion of the manufacturing process, or upon shipment of the
equipment to the customer, depending on the Company's contractual obligations.
The Company occasionally contracts to manufacture items, bill for those items
and then hold them for later shipment to customer-specified locations. There
were no bill and hold items at December 31, 2004. Revenue related to airtime
billing is recognized when the service is performed. Some customers pre-pay
airtime on a quarterly or annual basis and the pre-paid portion is recorded as
deferred revenue. Deferred revenue, included in accrued liabilities on the
balance sheet at December 31, 2004, is approximately $6,500.
Stock-based compensation
We believe that stock-based compensation is a critical accounting policy that
affects our financial condition and results of operations. Statement of
Financial Accounting Standards ("SFAS") No. 123, Accounting for Stock-Based
Compensation defines a fair-value based method of accounting for stock-based
employee compensation plans and transactions in which an entity issues its
equity instruments to acquire goods or services from non-employees, and
encourages but does not require companies to record compensation cost for
stock-based employee compensation plans at fair value. The Company has chosen to
continue to account for employee stock-based compensation using the intrinsic
value method prescribed in Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees ("APB No. 25") and related
interpretations.
11
In December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 123R "Share-Based Payment", which addresses the accounting for share-based
payment transactions. SFAS 123R eliminates the ability to account for
share-based compensation transactions using APB 25, and instead, generally
requires that such transactions be accounted and recognized in the statement of
operations based on their fair value. SFAS No. 123R will be effective for small
business issuers as of the beginning of the first interim or annual reporting
period that begins after December 15, 2005. SFAS No. 123R offers the Company
alternative methods of adopting this standard. The Company has not yet
determined which alternative method it will use. Depending upon the number and
terms of options that may be granted in future periods, the implementation of
this standard could have a material impact on the Company's financial position
and results of operations.
ITEM 7. FINANCIAL STATEMENTS
The audited consolidated balance sheet of the Company as of December 31, 2004
and related consolidated statements of operations, stockholders' deficit and
cash flows for the years ended December 31, 2004 and 2003 are included,
following Item 14, in sequentially numbered pages numbered F-1 through F-19. The
page numbers for the financial statement categories are as follows:
INDEX
------
PAGE
------
Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . F-1
Consolidated Balance Sheet as of December 31, 2004. . . . . . . . . . . . . . . . . . . . . . . F-2
Consolidated Statements of Operations for the Years Ended December 31, 2004 and 2003. . . . . . F-3
Consolidated Statements of Stockholders' Deficit for the Years Ended December 31, 2004 and 2003 F-4
Consolidated Statements of Cash Flows for the Years Ended December 31, 2004 and 2003. . . . . . F-5
Notes to Consolidated Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . F-7
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 8A. CONTROLS AND PROCEDURES
The Company's management, including the Company's principal executive officer
and principal financial officer, has evaluated the effectiveness of the
Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934) as of the year ended
December 31, 2004, the period covered by the Annual Report on Form 10-KSB. Based
upon that evaluation, the Company's principal executive officer and principal
financial officer have concluded that the disclosure controls and procedures
were effective as of December 31, 2004 to provide reasonable assurance that
material information relating to the Company is made known to management
including the CEO/CFO.
There were no changes in the Company's internal control over financial reporting
that occurred during the Company's last fiscal quarter that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting. However, as noted in previous filings,
throughout 2002 and until March 26, 2003, the Company's former Chief Executive
Officer was responsible for, among other duties, opening the mail, making
accounting entries, writing checks and producing financial reports.
Disbursements of cash and stock issuances were made during this time period that
were not substantiated as relating to Company business, or were made in error.
At the meeting of the Board of Directors held on March 26, 2003, the former
Chief Executive Officer resigned, and the Chief Financial Officer, H. Douglas
Saathoff, was appointed as his replacement by the board of directors.
Consequently, Mr. Saathoff held both the position of Chief Executive Officer and
Chief Financial Officer, but procedures were implemented subsequent to March 26,
2003 to segregate responsibilities in order to reduce the opportunities for a
single person to be in a position to both perpetrate and conceal errors or
irregularities in the normal course of business. In addition, the new Chief
Executive Officer and the board of directors initiated a process to establish
and implement a written policy on disclosure controls and procedures and hired a
corporate controller on January 1, 2005 to add additional oversight to the
accounting function. On April 12, 2005, the Board of Directors agreed that Mr.
Saathoff should no longer act as both Chief Executive Officer and Chief
Financial Officer. Mr. Saathoff relinquished his duties as Chief Financial
Officer as of April 12, 2005 and Daniel P. McRedmond, the Company's Corporate
Controller assumed the role of the Company's Principal Accounting and Financial
Officer.
12
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT OF 1934, AS AMENDED
The following persons are executive officers and directors of the Company:
H. Douglas Saathoff, 43 - Chief Executive Officer, Chief Financial Officer
H. Douglas "Doug" Saathoff, CPA, joined the Company as its full-time Chief
Financial Officer on January 1, 2003 after serving in that capacity on a
part-time consulting basis beginning in October 2002. On March 26, 2003, he was
promoted to the position of Chief Executive Officer. Prior to joining the
Company, he served as Chief Financial Officer for ATSI Communications, Inc.
(AMEX: AI), from June 1994 through July 2002 and as a Board Member of ATSI's
publicly traded subsidiary, GlobalSCAPE, Inc. (GSCP.OB) from April 1997 through
June 2002. During his tenure at ATSI, he was directly responsible for
establishing and monitoring all accounting, financial, internal reporting and
external reporting functions, and had primary responsibility for fundraising
efforts. ATSI raised over $60 million in debt and equity financing from both
individuals and institutions during Doug's tenure, and moved from the Canadian
OTC market to the U.S. OTC market and eventually to a listing on the American
Stock Exchange in February 2000. ATSI grew from San Antonio-based start-up with
11 employees to an international operation with in excess of 500 employees and
operations in the U.S., Mexico, Costa Rica, Guatemala and El Salvador with
annual revenues in excess of $60 million. He was instrumental in the acquisition
of subsidiaries and customer bases, as well as the divestiture of GlobalSCAPE in
June 2002. Prior to joining ATSI, Doug served as the Accounting Manager,
Controller and Financial Reporting Manager for U.S. Long Distance Corp. from
1990 to 1993. While at USLD he was responsible for supervising all daily
accounting functions, developing internal and external financial reporting of
budgeted and actual information, and for preparing financial statements for
shareholders, lending institutions and the Securities and Exchange Commission.
Doug also served as Senior Staff Accountant for Arthur Andersen & Co. where he
planned, supervised and implemented audits for clients in a variety of
industries, including telecommunications, oil & gas and financial services. Doug
graduated from Texas A&M University with a Bachelor of Business Administration
degree in Accounting.
Myron Anduri, 49 - President
Mr. Anduri joined the Company in January 2000 and was promoted to President in
December 2003 from his previous position as Vice President of Sales. From 1999
to 2000 he was Vice President-New Business Development for Kyocera Solar Inc. of
Scottsdale, Arizona. While with Kyocera, he worked to develop new market areas
for the company's solar power products. From 1997 to 1999 he served as Vice
President- Telecommunications Division, a $21 million international unit, where
he managed all sales and engineering efforts. From 1993-1997 Mr. Anduri was
Senior Vice President-Marketing and Sales for Photocomm Inc. a Nasdaq-traded
company based in Scottsdale Arizona, which was ultimately acquired by Kyocera in
1997. He also served as Vice President-Industrial Division of Photocomm from
1989-1993 and was the Rocky Mountain Regional Manager from 1987-89. Mr. Anduri
holds a BA in Economics from Colorado State University.
Max Polinsky, 47 - Chairman of the Board
Mr. Polinsky was elected a member of the Board in April 2002 and is a member of
our audit committee. He is a director and principal of Venbanc, Inc., an
investment and merchant bank located in Winnipeg, Manitoba Canada that he
founded with a partner in 1994. Venbanc specializes in the structuring and
financing of start-up companies and provides follow-up financial and management
advisory assistance. It has successfully funded and taken public several
companies in Canada and the United States in the past ten years. Prior to this
Mr. Polinsky was the general manager of City Machinery Ltd., a nationwide power
transmission parts distributor with offices across Canada. He began his career
as a stockbroker at Canarim Investment Corp. (now Canaccord Capital) in 1982.
Mr. Polinsky graduated with honors from the University of Manitoba with a degree
in Business Administration, Finance Major.
13
Patrick A. Gorman, 40 - Board Member
Mr. Gorman was elected a member of the Board in April 2002, and is a member of
the compensation committee. He is the managing director of Gorman and
Associates, Inc., a strategic consulting firm for corporate and government
affairs. Since its inception, the company has been dedicated to being the
preeminent business development firm for companies seeking to do business with
the Fortune 500 as well as the advisory firm of choice in understanding the
federal government in Washington, D.C. Mr. Gorman's focus at Gorman and
Associates, Inc. includes law and the legislative process, communications,
government relations, and operations. Over the last 10 years, he has advised
corporations, NGOs, non-profits, and individuals on issues pertaining to
criminal law, the environment, telecommunications, international trade, fund
raising, community development, media relations, and alternative dispute
resolution. Mr. Gorman is a member of the Advisory Board of New Media
Strategies, Inc., an Internet service provider focused on public relations,
communications, and viral marketing. Mr. Gorman is also a Board member of the
Echo Hill Campership Fund, a local non-profit whose mission is to send the
neediest, very low-income, inner-city youths to camp on the Chesapeake Bay. Mr.
Gorman is admitted to practice law in Maryland and the District of Columbia and
has successfully appeared at the administrative, district, circuit, and
appellate court levels.
On November 26, 2003, each member of the Board of Directors was elected for a
one-year term or until their successor shall have been elected and qualified.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
The following officers, directors and others failed to timely file the indicated
reporting forms during 2004.
Myron Anduri, President, Form 4 filed January 9, 2004.
Myron Anduri, President, Form 4 filed October 6, 2004.
Steven Jacobson, 10% owner, Form 3, filed September 27, 2004.
Patrick Gorman, Director, Form 4 filed February 11, 2005.
Max Polinsky, Chairman, Form 4 filed February 11, 2005.
Nighthawk Systems, Inc. has adopted a code of ethics that applies to the
executive officers of the Company, including its Chief Executive Officer,
President and Principal Accounting and Financial Officer. A copy of the
Company's code of ethics will be provided free of charge to any person upon
request. Requests may be made by phone at 210 341-4811.
ITEM 10. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
LONG TERM
ANNUAL COMPENSATION COMPENSATION AWARDS PAYOUTS
SECURITIES
OTHER ANNUAL RESTRICTED UNDERLYING ALL OTHER
NAME AND PRINCIPAL. . . . . COMPENSATION STOCK OPTIONS/SARS LTIP COMPENSATION
POSITION . . . . . . . . . YEAR SALARY BONUS ($) AWARD ($) (#) PAYOUTS ($)
($)
H. Douglas Saathoff,
Chief Executive
Officer (a) . . . . . . . 2004 $120,000 $- - - - - -
2003 $115,000 $- - - 500,000 - -
Myron Anduri,
President (b) . . . . . . . 2004 $120,000 $- - - - - -
2003 $84,125 $- - - 250,000 - -
NOTES:
(a) H. Douglas Saathoff was named the Chief Executive Officer in March 2003.
Myron Anduri was named President in December 2003. Mr. Anduri was given 181,416
shares of the Company's common stock in exchange for $22,276 in debt he had
incurred on the Company's behalf and for which the Company had recognized a
liability to Mr.
PERCENT OF TOTAL
NUMBER OF OPTIONS/SARS EXERCISE
SECURITIES GRANTED TO OR BASE
UNDERLYING EMPLOYEES IN FISCAL PRICE EXPIRATION
NAME OPTIONS GRANTED YEAR 2004 ($/SH) DATE
No options or stock appreciation rights were granted to executive officers of
the registrant in 2004.
14
Max Polinsky received 150,000 shares in return for serving as Chairman of the
Board through his term ending November 13, 2003. Patrick Gorman received 100,000
shares for serving as a board member through his term ending November 13, 2003.
Both Mr. Polinsky and Mr. Gorman were granted 75,000 options to purchase common
shares at a price of $0.22 per share in return for one year of service on the
board beginning November 13, 2003. On December 8, 2004, both Mr. Polinsky and
Mr. Gorman were granted 500,000 options to purchase common shares at a price of
$0.09 per share in return for services rendered.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED SHAREHOLDER MATTERS
BENEFICIAL OWNERS OF MORE THAN 5% OF NIGHTHAWK SYSTEMS, INC. COMMON STOCK
NAME AND ADDRESS OF BENEFICIAL AMOUNT AND NATURE OF PERCENT OF
TITLE OF CLASS. . . . . . . . . .. . OWNER BENEFICIAL OWNERSHIP CLASS
Common stock. . . . . . . . . Steven Jacobson 3,705,317 (a)(b) 9.6%
6600 E Hampden Ave
3rd Floor
Denver, CO 80224
Common stock. . . . . . . . . . Herbert I. Jacobson 2,636,800 (c) 7.1%
1011 S. Valentia St., #87
Denver, CO 80247
Common stock. . . . . . . . . . Myron Anduri 3,124,815 (d) 8.2%
P.O. Box 1051
Fairplay, CO 80440
Common stock. . . . . . . . . . Tomas Revesz 3,156,884 (e) 8.3%
P.O. Box 2498
McAllen, TX 78502
NOTES:
(a) Includes 150,000 shares under options which are vested or vest within 60
days, and 1,875,317 shares held under in an irrevocable voting agreement with
Myron Anduri which was executed on September 8, 2003 and which will survive for
a period of five years from that date. See Note (d) below.
(b) Includes 550,000 shares held in a trust that expires on 6/11/06 for
Aaron Guth and 550,000 shares held in a trust that expires on 3/31/09 for Adam
Guth. Steve Jacobson acts as trustee for both trusts, and has all rights
afforded any shareholder, including voting rights, until the trusts expire.
(c) Includes an indeterminate number of shares held in the name of Mr.
Jacobson's wife, Sharon Jacobson.
(d) Includes 431,416 shares and 166,666 under warrants and options,
respectively, which are exercisable within 60 days. Also includes 1,875,317
shares held under an irrevocable voting agreement with Steve Jacobson which was
executed on September 8, 2003 and which will survive for a period of five years
from that date. Pursuant to this agreement, Mr. Anduri has the right to vote
the proxy of said shares on all matters submitted to a vote of the shareholders
with the single exception of votes on any proposal to change fifty one percent
(51%) or more of the ownership of the Company. Mr. Anduri receives no economic
benefits from the shares subject to this Voting Agreement.
(e) Includes 2,010,050 shares under warrants, exercisable at any time up to
March 31, 2005, and 750,000 shares that are convertible at any time under a
promissory note. The warrants expired unexercised on April 1, 2005.
15
BENEFICIAL OWNERS OF MORE THAN 5% OF NIGHTHAWK SYSTEMS, INC. COMMON STOCK
NAME AND ADDRESS OF BENEFICIAL AMOUNT AND NATURE OF PERCENT OF
TITLE OF CLASS. . . . . . . . . .. . OWNER BENEFICIAL OWNERSHIP CLASS
Common stock. . . . . . . . . Max Polinsky 925,000 (a) 2.6%
138 Portage Ave. East, Ste. 406
Winnipeg, Manitoba R2CAO1
Common stock. . . . . . . . . . Patrick Gorman 675,000 (b) 1.9%
1666 K Street NW, Ste 500
Washington, D.C. 20006
Common stock. . . . . . . . . . H. Douglass Saathoff 781,658 (c) 2.2%
25106 Callaway
San Antonio, TX 78258
Common stock. . . . . . . . . . Myron Anduri 3,124,815 (d) 8.2%
P.O. Box 1051
Fairplay, CO 80440
Common stock Directors and officers as a group 5,506,473 13.7%
NOTES:
(a) Includes 200,000 shares that are owned by Venbanc, Inc., of which Mr.
Polinsky is a partner, and 575,000 shares under options exercisable within 60
days.
(b) Includes 575,000 shares under options exercisable within 60 days.
(a) Includes 333,334 shares under options exercisable within 60 days.
(d) Includes 431,416 shares and 166,666 under warrants and options,
respectively, which are exercisable within 60 days. Also includes 1,875,317
shares held under an irrevocable voting agreement with Steve Jacobson which was
executed on September 8, 2003 and which will survive for a period of five years
from that date. Pursuant to this agreement, Mr. Anduri has the right to vote
the proxy of said shares on all matters submitted to a vote of the shareholders
with the single exception of votes on any proposal to change fifty one percent
(51%) or more of the ownership of the Company. Mr. Anduri receives no economic
benefits from the shares subject to this Voting Agreement.
NUMBER OF SECURITIES
REMAINING AVAILABLE FOR
FUTURE ISSUANCE UNDER
NUMBER OF SECURITIES EQUITY COMPENSATION
TO BE ISSUED UPON WEIGHTED AVERAGE PLANS (EXCLUDING
EXERCISE OF EXERCISE PRICE OF SECURITIES REFLECTED IN
PLAN CATEGORY. . . . . . . . . . . OUTSTANDING OPTIONS OUTSTANDING OPTIONS COLUMN (A)
(a) (b) (c)
Nighthawk Systems, Inc. 2003 Stock
Option Plan approved by security
Holders. . . . . . . . . . . . . . 3,035,000 $0.17 1,335,000
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the fourth quarter of 2003, the Company canceled the issuance of 300,000
shares of its common stock originally issued to outside directors for services,
as it determined that no associated services had been performed.
During 2003, the Company made payments of $25,504 to Arlen Felsen while he was a
director and employee to reduce amounts owed to him for the purchase of certain
assets and liabilities of Vacation Communications. Effective July 31, 2003, the
Company sold back to Mr. Felsen the assets and liabilities associated with the
original purchase and recognized a gain of $92,443 on this transaction.
During 2003, the Company paid a total of $12,678 to Myron Anduri, the Company's
current President and then Vice President of Sales, for amounts owed for
commissions and salary earned in previous periods. During 2003, Mr. Anduri
loaned the Company $7,964 under short-term notes, of which $4,203 was repaid by
December 31, 2003. As of December 31, 2003 the Company owed Mr. Anduri $38,708
under short-term note arrangements. During the twelve months ended December 31,
2004, Mr. Anduri was paid an additional $2,289 in cash and $22,278 in Company
common stock, 181,416 shares, and 181,416 warrants to purchase common stock for
$0.25 per share, for amounts outstanding under these short-term notes. Based on
calculations using Black-Scholes, the fair value of the warrants issued to Mr.
Anduri was $9,454. This amount is reflected in interest expense and additional
paid-in capital for the period ended December 31, 2004.
16
At a meeting of the Board of Directors held on March 26, 2003, H. Douglas
Saathoff was named Chief Executive Officer of the Company. During 2003, Mr.
Saathoff loaned the Company $54,100 under short-term notes, of which $45,100 was
repaid by December 31, 2003. The remaining $9,000 was repaid in 2004.
At a meeting of the Board of Directors held on March 26, 2003, the Board
accepted the resignation of Steve Jacobson as chief executive officer, but
remained as an employee of the Company. On July 9, 2003, Steve Jacobson resigned
as a member of the Company's board of directors. On September 8, 2003, the
Company entered into a separation agreement with Steve Jacobson under which,
among other things, he agreed to a) resign as an employee of the Company; b)
return 545,454 shares of stock held by him to the Company in payment of the
$118,629 he owed the Company as of that date; and c) transfer voting rights for
shares owned or held in trust by him to Myron Anduri, an employee of the Company
for five years. Under the agreement, the Company agreed to issue Steve Jacobson
450,000 options to purchase shares of the Company's common stock at $0.22 per
share, with such options vesting over a three-year period at a rate of 150,000
shares per year. As a result of the transaction, the Company recorded an
additional $39,933 in compensation expense to Steve Jacobson for amounts owed by
him to the Company upon his resignation. The Company retired the 545,454 shares
returned to the Company under the agreement.
During 2004, the Company entered into an agreement with Steve Jacobson in which
it allowed him to transfer up to 600,000 shares of his stock, which he was
contractually restricted from selling under his separation agreement until June
2005, to various consultants who had agreed to perform services for the Company.
As of December 31, 2004, 200,000 of these shares had been distributed to a
consultant and the Company recognized $20,000 in consulting expenses related to
this transaction. The remaining 400,000 shares were not distributed, and are
not included in the issued and outstanding shares of the Company as of December
31, 2004. As part of the agreement, the Company agreed to replace Mr.
Jacobson's 600,000 shares with 730,000 shares of stock that would not be
eligible for resale until November 2005. The Company recorded $13,000 in
consulting expense associated with this agreement. In addition, the Company
amended Mr. Jacobson's separation agreement to allow him to sell 50,000 shares
of common stock in each of the months of March, April, May and June 2005.
On December 19, 2003 the Company entered into a settlement and release agreement
with a former director, Herb Jacobson, and his wife. Under terms of the
agreement, Mr. & Mrs. Jacobson and the Company agreed to dismiss any and all
claims against each other in return for, among other things, payment of a total
of $25,000 over a four-month period from the Company to Mr. Jacobson. The
Company paid this amount during 2003 and 2004. In addition, Mr. and Mrs.
Jacobson, along with their son Steven Jacobson, agreed to refrain from selling,
transferring, conveying or otherwise disposing of their remaining share
ownership for a period of eighteen months subsequent to selling an aggregate of
850,000 shares. As a result of the agreement, the Company recorded a gain of
$23,912 due to a reduction in the amount previously recorded by the Company as
owed to Mr. Jacobson.
During the twelve months ended December 31, 2004, 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 558,007 shares of common stock and warrants to purchase 558,007
common shares at $0.20 per share to an individual and a company in exchange for
approximately $88,700 in notes payable plus accrued interest owed them by the
Company. The individual 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
two parties was $29,079. This amount is reflected in interest expense and
additional paid-in capital for the period ended December 31, 2004.
During the twelve months ended December 31, 2004, a business partner of the
Company's Chairman billed the Company $20,000 for consulting services.
17
ITEM 13. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K
EXHIBIT INDEX
(THOSE ATTACHED HERETO ARE SEQUENTIALLY NUMBERED)
Item 13(a)
EXHIBIT NO DESCRIPTION
------------------------------------------------- --------------------------------------------------------------------------------
3.1 Amended and Restated Articles of Incorporation effective March 2, 2005, filed
herewith.
3.2 Bylaws of the Company, incorporated by reference from Exhibit 3.2 to Form 8-K,
has filed with the SEC on February 1, 2002.
10.1 Debenture Agreement between the Registrant and Dutchess Private Equities
Fund, II, LP, dated August 10, 2004, incorporated by reference from Form
8-K filed with the SEC on August 10, 2004.
10.2 Subscription Agreement between the Registrant and Dutchess Private Equities
Fund, II, LP, dated August 10, 2004, incorporated by reference from Form
8-K filed with the SEC on August 10, 2004.
10.3 Warrant Agreement between the Registrant and Dutchess Private Equities
Fund, II, LP, dated August 10, 2004, incorporated by reference from Form
8-K filed with the SEC on August 10, 2004.
10.4. Registration Rights Agreement for Debenture between the Registrant and
Dutchess Private Equities Fund, II, LP, dated August 10, 2004,
incorporated by reference from Form 8-K filed with the SEC on August 10, 2004.
10.5 Investment Agreement between the Registrant and Dutchess Private Equities
Fund, II, LP, dated August 10, 2004, incorporated by reference from Form
8-K filed with the SEC on August 10, 2004.
10.6 Registration Rights Agreement for the Equity Line between the Registrant and
Dutchess Private Equities Fund, II, LP, dated August 10, 2004,
incorporated by reference from Form 8-K filed with the SEC on August 10, 2004.
10.7 Placement Agent Agreement with U.S. Euro Securities incorporated by reference
from Exhibit 10.14 of the SB-2 Registration Statement filed with the SEC on
November 3, 2004.
10.8 Renewal, Extension and Modification Agreement between Nighthawk Systems, Inc.
and Best Intel, Inc. dated April 14, 2004, filed herewith.
10.9 Renewal, Extension and Modification Agreement between Nighthawk Systems, Inc.
and Infrastructura Espacial, S.A. de C.V., dated April 14, 2004, filed herewith.
10.10 Renewal, Extension and Modification Agreement between Nighthawk Systems, Inc.
and Star Marketing, Inc. dated April 14, 2004, filed herewith.
10.11 Security Agreement with Best Intel, Inc. dated April 14, 2004, filed herewith.
10.12 Security Agreement with Infrastructura Espacial, S.A. de C.V., dated April 14,
2004, filed herewith.
10.13 Security Agreement with Star Marketing, Inc. dated April 14, 2004, filed
herewith.
10.14 Second Amendment to the Separation Agreement with Steve Jacobson, dated October
26, 2004, filed herewith.
10.15 Settlement Agreement and Release executed between Charles McCarthy and Nighthawk
Systems, Inc. dated October 25, 2004, filed herewith.
14 Code of Ethics, incorporated by reference from 10-KSB filed on April 13, 2004.
21. Subsidiaries of the Company are incorporated by reference from the SB-2
Registration Statement, filed with the SEC on November 3, 2004, Exhibit 21.1.
23.1 Consent of GHP Horwath
24 Power of Attorney is included on the signature page in this Annual Report on
this Form 10-KSB.
31.1 Rule 13a-14(a)/15d - 14(a) Certification of H. Douglas Saathoff, Chief Executive
Officer of Nighthawk Systems, Inc., filed herewith.
31.2 Rule 13a-14(a)/15d - 14(a) Certification of Daniel P. McRedmond, Principal
Accounting and Finacial Officer of Nighthawk Systems, Inc., filed herewith.
32.1 Certificate pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002, filed herewith.
(b) None
18
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
(1) Audit Fees:
Fees billed by GHP Horwath, P.C. for audit and review services for each of the
years ended December 31, 2004 and 2003 were $62,000 and $58,919, respectively.
(2) Audit Related Fees:
GHP billed the Company approximately $3,250 for fees during 2003 for services
related to the Company's NASD filing and a Form 8-K.
(3) Tax Fees:
GHP did not bill the Company any tax fees during 2004 or 2003.
(4) All Other Fees:
GHP did not bill the Company any other fees during 2004 or 2003.
(5) Audit Committee's Pre-Approval Policies and Procedures
(i) The audit committee of the board of directors approves the scope of
services and fees of the outside accountants on an annual basis, prior to the
beginning of the services.
(ii) The audit committee of the board of directors reviewed and approved
100% of the fees for the services above.
19
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
-------------------------------------------------------
Board of Directors
Nighthawk Systems, Inc.
We have audited the accompanying consolidated balance sheet of Nighthawk
Systems, Inc. and subsidiary ("the Company") as of December 31, 2004, and the
related consolidated statements of operations, stockholders' deficit and cash
flows for each of the years in the two-year period ended December 31, 2004.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by the management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Nighthawk Systems,
Inc. and subsidiary as of December 31, 2004, and the results of their operations
and their cash flows for each of the years in the two-year period ended December
31, 2004, in conformity with accounting principles generally accepted in the
United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to
the consolidated financial statements, the Company reported a net loss of
approximately $1.38 million during the year ended December 31, 2004, and has a
stockholders' deficit and working capital deficiency of approximately $1.24
million and $1.04 million, respectively, at December 31, 2004. These conditions
raise substantial doubt about the Company's ability to continue as a going
concern. Management's plans with regard to these matters are also described in
Note 1. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
GHP Horwath, P.C.
Denver, Colorado
March 11, 2005, except for Notes 8 and 9 as to which the date is April 12, 2005
F-1
NIGHTHAWK SYSTEMS, INC.
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2004
ASSETS
Current assets:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 61,118
Accounts receivable, net of allowance for doubtful accounts of $134. . . . . . . . . . . . . . . . . . . 45,754
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,709
Prepaids . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140,762
------------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 274,343
Furniture, fixtures and equipment, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,067
Intangible and other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,742
------------
$ 301,152
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 422,254
Accrued expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 245,805
Line of credit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,792
Notes payable:
Related parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,401
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 613,012
------------
Total current liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,316,264
------------
Long-term liabilities:
Note payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 224,479
------------
Commitments and contingencies
Stockholders' deficit:
Preferred stock, $0.001 par value; 5,000,000 shares authorized; 5,000 issued and outstanding; liquidation
preference $12,500 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,500
Common stock; $0.001 par value; 50,000,000 shares authorized; 31,959,247 issued and outstanding . . . . . 31,960
Special warrants. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 188,775
Additional paid-in capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,884,516
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5,357,342)
------------
Total stockholders' deficit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,239,591)
------------
$ 301,152
============
The accompanying notes are an integral part of these financial statements.
F-2
NIGHTHAWK SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
2004 2003
------------ ------------
Revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 610,180 $ 1,030,793
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . 438,473 658,203
------------ ------------
Gross profit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 171,707 372,590
Selling, general and administrative expenses . . . . . . . . . . . . . . . 1,311,824 1,290,143
Reversal of 2002 deferred compensation . . . . . . . . . . . . . . . . . . - (300,000)
Reversal of 2002 consulting expense. . . . . . . . . . . . . . . . . . . . - (33,000)
------------ ------------
Loss from operations. . . . . . . . . . . . . . . . . . . . . . . . . (1,140,117) (584,553)
------------ ------------
Interest expense:
Related parties. . . . . . . . . . . . . . . . . . . . . . . . . . . . 44,656 15,036
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 191,978 30,839
------------ ------------
Total interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . 236,634 45,875
------------ ------------
Loss from continuing operations. . . . . . . . . . . . . . . . . . . . . . (1,376,751) (630,428)
------------
Discontinued operations:
Loss from operations of discontinued segment. . . . . . . . . . . . . . (14,472)
Gain on disposal of discontinued segment. . . . . . . . . . . . . . . . 92,443
------------
77,971
------------ ------------
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,376,751) (552,457)
Less: preferred stock dividends. . . . . . . . . . . . . . . . . . . . . . (644)
------------ ------------
Net loss applicable to common stockholders . . . . . . . . . . . . . . . . $(1,377,395) $ (552,457)
============ ============
Loss from continuing operations per basic and diluted common share . . . . $ (0.05) $ (0.03)
============ ============
Income from discontinued operations per basic and diluted common share . . $ *
============
Net loss to common stockholders per basic and diluted common share . . . . $ (0.05) $ (0.03)
============ ============
Weighted average common shares outstanding - basic and diluted . . . . . . 27,674,693 22,021,229
============ ============
* Less than $0.01 per share
The accompanying notes are an integral part of these financial statements.
F-3
NIGHTHAWK SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
YEARS ENDED DECEMBER 31, 2004 AND 2003
Addit- Stock-
ional holder Special Accum- Total
Preferred Stock Common Stock paid-in receiv- Warrants ulated
Shares Amount Shares Amount capital able deficit
------ ------ --------- -------- --------- ---------- --------- ----------- --------
Balances,
December 31,
2002 22,808,780 $22,809 $2,815,863 ($118,629) ($3,428,134) ($708,091)
Cancellation of
consulting
arrangement (300,000) (300) (32,700) (33,000)
Common stock
and warrants
issued for
cash, net
of issuance
costs of
7,000 1,575,000 1,575 261,425 263,000
Issuance of
stock
options to
consultants 6,825 6,825
Cancellation
of agree-
ments under
deferred
compen-
sation (300,000) (300) (299,700) (300,000)
Common
stock
issued for
services 1,116,667 1,117 233,633 234,750
Common
stock
issued
for
interest
expense 25,000 25 11,475 11,500
Shares
received
for sale
of operat-
ing segment (150,000) (150) (28,350) (28,500)
Exchange of
shares for
shareholder
receivable (454,545) (455) (113,182) 118,629 4,992
Net loss (552,457) (552,457)
------ ------ --------- -------- --------- ---------- --------- ----------- --------
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 1,488 235,863 $ 188,775 426,126
Common stock
and options
issued
for consult-
ing and
other services 2,345,000 2,345 323,228 325,573
Common
stock
issued for
interest 61,875 62 12,312 12,374
Conversion of
notes payable
to common
stock and
warrants 1,439,423 1,440 311,413 312,853
Preferred
stock
issued
for cash 5,000 $12,500 12,500
Warrants
issued
for cash 18,750 18,750
Common stock
issued for
investment
agreements,
placement fees
& incentives 2,350,000 2,350 35,150 37,500
Beneficial
Conversion
feature
of convertible
debt 92,465 92,465
Cancellation
of shares (50,000) (50) 50 -
Series A -
Preferred
dividend 3,714 4 (4)
Net loss (1,376,751) (1,376,751)
------ ------ --------- -------- --------- ---------- --------- ----------- ----------
Balances,
December 31,
2004 5,000 $12,500 31,959,247 $31,960 $3,884,516 $ - $ 188,775 ($5,357,342) ($1,239,591)
====== ======= ========== ======== ========== ========== ========= ============ ============
The accompanying notes are an integral part of these financial statements.
F-4
Nighthawk Systems, Inc.
Consolidated Statements of Cash Flows
Years ended December 31,
2004 2003
------------ -------------
Cash flows from operating activities:
Net loss $ (1,376,751) $ (552,457)
------------ -------------
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 7,707 5,859
Provision for bad debts 380 -
Settlement of other related party
payable - (23,912)
Amortization of loan discounts 15,104 -
Beneficial conversion feature 92,465 -
Common stock issued for services 205,775 234,750
Common stock issued for interest 78,658 11,500
Common stock issued for placement
fees and incentives 37,500 -
Issuance of stock options to consultants
for services 119,798 6,825
Compensation expense on settlement
of receivable from shareholder - 4,992
Reversal of 2002 deferred compensation - (300,000)
Reversal of consulting agreement - (33,000)
Change in assets and liabilities:
Decrease (increase) in accounts receivable (4,217) 160,232
Decrease (increase) in inventories 48,620 (15,621)
Increase in prepaids (105,407) (35,355)
Increase in intangible and other assets (5,084) (720)
Increase in accounts payable 29,716 53,659
Increase in accrued expenses 67,396 8,643
Decrease in deferred revenue - (432,600)
Increase (decrease) in customer deposit (63,544) 63,544
------------ -------------
Total adjustments 524,867 (369,175)
------------ -------------
Net cash used in operating activities of
continuing operations (851,884) (921,632)
------------ -------------
Cash flows from investing activities:
Purchases of furniture, fixtures
and equipment - (18,124)
------------ -------------
Net cash used in investing activities - (18,124)
------------ -------------
Cash flows from financing activities:
Cash overdraft (3,902) 3,902
Proceeds from the sale of
preferred stock 12,500 -
Proceeds from notes payable,
related parties 26,261 62,064
Payments on notes payable,
related parties (36,318) (49,302)
Payments made on factoring
Arrangement - (82,502)
Proceeds from notes payable, other 335,000 365,000
Payments on notes payable,
other and line of credit (71,664) (25,447)
Proceeds from the issuance of
convertible debt and warrants 250,000 -
Net proceeds from the issuance
of special warrants 188,775 -
Payments on other related
party payable (25,000) -
Net proceeds from issuance of
common stock and warrants 237,350 263,000
------------ -------------
Net cash provided by
financing activities 913,002 536,715
------------ -------------
Cash used in discontinued operations - (25,636)
------------ -------------
Net increase (decrease) in cash 61,118 (428,677)
Cash, beginning of year - 428,677
------------ -------------
Cash, end of year $ 61,118 $ -
============ =============
F-5
Supplemental disclosures
of cash flow information:
Cash paid for interest $ 26,228 $ 22,408
============ =============
Supplemental disclosure
of non-cash investing and
financing activities:
Conversion of notes payable
and accrued interest to common stock
Notes payable $ 224,390
Accrued interest 22,179
-------------
Total amount converted $ 246,569
============
Preferred stock dividends
issued in common stock $ 644
=====
Exchange of shares for shareholder receivable
Carrying value of receivable
from shareholder $ 118,629
Value of stock returned to
and retired by Company (113,637)
-------------
Compensation expense on settlement
of receivable from shareholder $ 4,992
=============
Disposition of operating segment
Carrying value of assets $ 26,176
Liabilities (90,119)
Value of stock returned
to and retired by Company (28,500)
-------------
Gain on disposition of
operating segment $ (92,443)
=============
The accompanying notes are an integral part of these financial statements.
F-6
NIGHTHAWK SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004 AND 2003
1. Organization, going concern, results of operations and management's
plans:
Organization:
Nighthawk Systems, Inc. ("Nighthawk" or "the Company") designs and manufactures
intelligent remote power control products that are easy to use, inexpensive and
can remotely control virtually any device from any location. The Company's
proprietary, wireless products are ready to use upon purchase, so they are
easily installed by anyone, regardless of technical ability, and are also easily
integrated into third-party products, systems and processes. They allow for
intelligent control by interpreting instructions sent via paging and satellite
media, and executing the instructions by 'switching' the electrical current that
powers the device, system or process. Nighthawk's intelligent products can be
activated individually, in pre-defined groups, or en masse, and for specified
time periods with a simple click of a mouse or by dialing a telephone number.
In November 2001, the Company 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"). The transaction
represented a reverse acquisition of the Company by PCT, since PCT owned
approximately 76% of the post acquisition shares of the consolidated entity
immediately after the completion of the transaction. At the date of the
transaction, the Company was a shell company with no net assets. For accounting
purposes, the acquisition was treated as an acquisition of the Company 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. The accompanying consolidated financial statements
include the accounts of Nighthawk Systems, Inc., and its subsidiary, PCT.
PCT was incorporated as a Colorado corporation in 1992. In September 2001, the
Company purchased certain assets and assumed certain liabilities of Vacation
Communication, Inc. (dba Gotta Go Wireless), a Colorado corporation, engaged in
providing wireless paging airtime and in pager sales. Through Vacation
Communication, the Company was able to provide paging services to customers that
purchase its remote control products and also provided paging services to retail
paging customers. Effective July 31, 2003, the Company sold back the remaining
assets and liabilities of the paging business to the original owners. Since
that date, the Company has provided paging services to customers by reselling
services that it obtains from various paging airtime vendors.
Going concern, results of operations and management's plans:
The Company incurred a net loss of approximately $1.38 million during the year
ended December 31, 2004 and had a stockholders' deficit and working capital
deficiency of approximately $1.24 million and $1.04 million, respectively, as of
December 31, 2004. These conditions raise substantial doubt about the Company's
ability to continue as a going concern. Although no assurance can be given that
such plans will be successfully implemented, management's plans to address these
concerns include:
1. Raising working capital through additional borrowings.
2. Raising equity funding through sales of the Company's common stock.
3. Implementation of a sales and marketing plan.
In August 2004, the Company signed a financing arrangement with Dutchess Private
Equities, II, L.P. ("Dutchess") which was amended on August 26, 2004 and on
September 24, 2004. Under the terms of the amended arrangement, the Company
received $100,000 under a convertible debenture on August 11, 2004, $25,000 on
August 26, 2004, and $125,000 under the debenture on September 27, 2004.
Interest accrues on the debenture at an annual rate of 8%. The debenture can be
converted into common shares anytime prior to its maturity on August 10, 2007 at
the lesser of (i) 73% of the lowest closing bid price on the date of conversion,
or (ii) twelve and a half cents ($0.125). Any portion of the debenture that
remains outstanding at August 10, 2007 will automatically convert into common
shares. The number of shares converted at any time is limited so as not to
exceed 4.99% of the outstanding shares of Nighthawk common stock outstanding. In
addition, Dutchess was issued a warrant to purchase up to 250,000 shares of
common stock at a price of twelve and a half cents ($0.125) for a period of up
to five years. 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. On
December 3, 2004 Dutchess loaned the Company an additional $250,000. The note
has no stated interest rate but has a face amount of $300,000 and matured April
3, 2005 resulting in an implied annual rate of 72.8%. The note is intended to
be repaid via puts exercised under the investment agreement with the Company
making payments of the greater of $75,000 every 30 days or 50% of each put until
the note is paid in full. In the event of default, the investor, Dutchess, has
the right to convert the note to common stock at the lesser of (i) seventy-five
(75%) of the lowest closing bid price during the fifteen (15) days immediately
preceding default or (ii) one hundred percent (100%) of the lowest bid price for
the twenty (20) trading days preceding default. 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. Subsequent to December
31, 2004, the Company issued two additional notes, exercised a number of puts
and Dutchess elected to exercise warrants and converted a portion of the
long-term note payable to common stock. See Notes 8 and 9.
Although no assurance may be given that it will be able to do so, the Company
expects to be able to continue to access funds under this arrangement to help it
fund near-term and long-term sales and marketing efforts, and to cover cash flow
deficiencies.
The 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.
F-7
2. Summary of significant accounting policies
Concentration of credit risk
Financial instruments that potentially subject the Company to concentrations of
credit risk consist primarily of trade accounts receivable. Receivables arising
from sales to customers are not collateralized and, as a result, management
continually monitors the financial condition of its customers to reduce the risk
of loss. At December 31, 2004, the Company had $45,754 in accounts receivable,
net of the allowance for doubtful accounts. Approximately $14,700 of this
balance was from one customer, which was collected subsequent to December 31,
2004.
During 2004, three customers accounted for approximately 26%, 20% and 12% of
sales, respectively. During 2003, two customers accounted for approximately 47%
and 31% of sales, respectively. The same customer represented the largest
percentage of sales in both 2004 and 2003.
During 2004, the Company's three largest suppliers accounted for approximately
47%, 11% and 11%, respectively, of the Company's purchases of pre-manufactured
component materials. During 2003, the Company's two largest suppliers accounted
for approximately 66% and 15%, respectively, of the Company's purchases of
pre-manufactured component materials.
Inventories
Inventories consist of parts and pre-manufactured component materials and
finished goods. Inventories are valued at the lower of cost or market using the
first-in, first-out (FIFO) method.
Property and equipment
Property and equipment are recorded at cost. Depreciation is recorded using the
straight-line method over the estimated useful lives of five to seven years.
Maintenance and repairs are expensed as incurred and improvements are
capitalized. Upon sale or retirement of assets, the cost and related accumulated
depreciation or amortization is eliminated from the respective accounts and any
resulting gains or losses are reflected in operations.
Intangible assets
Intangible assets include patent costs and are stated at cost. Beginning on
the date of grant, the Company will amortize the patents over the shorter of the
lives of the patents or the estimated useful lives using the straight line
method. The Company reviews these and any other long-lived assets for impairment
whenever events or changes in circumstances indicate their carrying amounts may
not be recoverable. Recoverability of an asset to be held and used is measured
by a comparison of the carrying amount of the asset to future undiscounted cash
flows expected to be generated by the asset. If the asset is considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the asset exceeds the fair value of the asset. Based on its
review, management does not believe that any impairment of intangible or other
long-lived assets exists at December 31, 2004.
Revenue recognition
Revenue from product sales is recognized when all significant obligations of the
Company have been satisfied. Revenues from equipment sales are recognized
either on the completion of the manufacturing process, or upon shipment of the
equipment to the customer, depending on the Company's contractual obligations.
The Company occasionally contracts to manufacture items, bill for those items
and then hold them for later shipment to customer-specified locations. The
Company had no bill and hold sales at December 31, 2004. Revenue related to
airtime billing is recognized when the service is performed. Some customers
pre-pay airtime on a quarterly or annual basis and the pre-paid portion is
recorded as deferred revenue. Deferred revenue, included in accrued liabilities
on the balance sheet at December 31, 2004, is approximately $6,500.
Provision for doubtful accounts
The Company reviews accounts receivable periodically for collectibility and
establishes an allowance for doubtful accounts and records bad debt expense when
deemed necessary.
Advertising
Advertising costs are expensed as incurred. For the years ended December 31,
2004 and 2003, advertising costs were approximately $9,200 and $6,000,
respectively.
F-8
Income taxes
Deferred tax assets and liabilities are recorded for the estimated future tax
effects of temporary differences between the tax basis of assets and liabilities
and amounts reported in the accompanying balance sheets, and for operating loss
and tax credit carry forwards. The change in deferred tax assets and liabilities
for the period measures the deferred tax provision or benefit for the period.
Effects of changes in enacted tax laws on deferred tax assets and liabilities
are reflected as adjustments to the tax provision or benefit in the period of
enactment. The Company's deferred tax assets have been completely reduced by a
valuation allowance because management does not believe realization of the
deferred tax assets is sufficiently assured at the balance sheet date.
Financial instruments
The carrying amounts of cash, accounts receivable and accounts payable
approximate their fair values due to their short duration. Notes with floating
or fixed interest rates approximate their fair values based on market rate
information currently available to the Company. The fair values of notes with
related parties are not practicable to estimate based upon the related party
nature of the underlying transactions.
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 years ended December 31, 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.
Use of estimates
The preparation of the financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Shipping and handling fees and costs
The Company records shipping and handling fees billed to customers as revenue,
and shipping and handling costs incurred with the delivery of its products as
cost of sales. For the years ended December 31, 2004 and 2003, the Company
recognized approximately $6,900 and $20,600, respectively, as revenue from
shipping and handling fees. For the years ended December 31, 2004 and 2003, the
Company recognized approximately $4,300 and $28,300, respectively, in cost of
sales for shipping and handling fees.
Comprehensive income
For the years ended December 31, 2004 and 2003, the Company had no components of
comprehensive income to report.
Stock-based compensation
The Company has adopted Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"). The provisions of SFAS
123 allow companies to either expense the estimated fair value of stock options
or to continue to follow the intrinsic value method set forth in Accounting
Principles Bulletin Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25") but disclose the pro forma effects on net income (loss) had the fair
value of the options been expensed. The Company has elected to continue to apply
APB 25 in accounting for its employee stock option incentive plans.
F-9
Under APB 25, where the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the date of grant, no
compensation is recognized. As all employee options were issued at or above
market during 2004 and 2003, no compensation expense was recognized in either
year. 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:
YEAR ENDED DECEMBER 31,
-------------------------
2004 2003
----------- ----------
Net loss applicable to common stockholders:
As reported $ (1,377,395) $(552,457)
Total stock-based employee compensation expense determined
under fair value based method for all employee awards, net
(68,703) (13,685)
----------- ----------
Pro forma net loss $ (1,446,098) $(566,142)
=========== ==========
Net loss per share:
As reported:
Basic and diluted $ (0.05) $ (0.03)
=========== ==========
Pro forma:
Basic and diluted $ (0.05) $ (0.03)
=========== ==========
The pro forma effect on net loss may not be representative of the pro forma
effect on net income or loss of future years due to, among other things: (i) the
vesting period of the stock options and the (ii) fair value of additional stock
options in future years.
For the purpose of the above table, the fair value of each option grant is
estimated as of the date of grant using the Black-Scholes option-pricing model
with the following assumptions:
Black-Scholes Assumptions
2004 2003
Dividend yield. . . . . . 0.00% 0.00%
Expected volatility . . . 1.167 1.229 - 1.316
Risk-free interest rate . 4.50% 4.50%
Expected life in years. . 2 years 1 to 3 years
The weighted average fair value at date of grant for options granted during 2003
ranged from $0.009 to $0.027 per share using the above assumptions. The fair
value at grant date for options granted in 2004 was $0.055 per share using the
above assumptions.
F-10
Recently issued accounting pronouncements
In December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 123R "Share-Based Payment", which addresses the accounting for share-based
payment transactions. SFAS 123R eliminates the ability to account for
share-based compensation transactions using APB 25, and instead, generally
requires that such transactions be accounted and recognized in the statement of
operations based on their fair value. SFAS No. 123R will be effective for small
business issuers as of the beginning of the first interim or annual reporting
period that begins after December 15, 2005. SFAS No. 123R offers the Company
alternative methods of adopting this standard. The Company has not yet
determined which alternative method it will use. Depending upon the number and
terms of options that may be granted in future periods, the implementation of
this standard could have a material impact on the Company's financial position
and results of operations.
In December 2003, the FASB issued Interpretation No. 46R ("FIN 46R"), a revision
to FASB Interpretation No. 46 ("FIN 46"), Consolidation of Variable Interest
Entities. FIN 46R clarifies some of the provisions of FIN 46 and exempts
certain entities from its requirements. FIN 46R requires a variable interest
entity to be consolidated by a company if that company is subject to a majority
of the risk of loss from the variable interest entity's activities or is
entitled to receive a majority of the entity's residual returns or both. FIN
46R also requires disclosures about variable interest entities that a company is
not required to consolidate but in which it had a significant variable interest.
FIN 46R is effective for variable interest entities created after December 15,
2003 for public companies and is effective for all other variable interest
entities by the beginning of the first annual reporting period beginning after
December 15, 2004 for public companies that are small business issuers. As the
Company does not currently have an interest in a VIE, the adoption of FIN 46R
did not have an impact on the Company's financial position or results of
operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments With Characteristics of both Liabilities and Equity." SFAS No. 150
establishes new standards on how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. The
provisions of SFAS No. 150 are generally effective for all financial instruments
entered into or modified after May 31, 2003, except for those provisions
relating to manditorily redeemable non-controlling interests, which have been
deferred. The Company has adopted the applicable provisions of SFAS No. 150
which did not have a material impact on the financial condition or results of
operations of the Company. However, numerous provisions have been delayed and
will be adopted in the future. Management believes that the adoption of the
delayed provisions will not have a material impact on its results of operations
or financial condition.
Reclassifications
Certain amounts reported in the 2003 consolidated financial statements have been
reclassified to conform to the 2004 presentation.
3. Discontinued operations
On September 30, 2001, the Company acquired certain assets and assumed certain
liabilities of Vacation Communication, Inc. ("VCI"), a Colorado corporation, in
exchange for $50,000 cash, 150,000 shares of the Company's common stock valued
at $150,000, and notes payable of $183,135, in a transaction accounted for as a
purchase. The Company acquired these assets and liabilities to enable it to
market and sell paging airtime to customers that purchase its equipment.
Effective July 31, 2003 the Company sold the remaining assets and liabilities
originally purchased with or originated as a result of the purchase of VCI. back
to the original owners of the operation. In return, the Company received 150,000
shares of its common stock, and the owners of VCI facilitated the return of
approximately $34,000 in cash to the Company that had been held in an account
under their control. In 2003, 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.
Revenue from discontinued operations was approximately $45,900 for the year
ended December 31, 2003.
F-11
4. Furniture, fixtures and equipment
Furniture, fixtures and equipment consist of the following at December 31, 2004:
Equipment . . . . . . . . . . $ 30,306
Furniture and fixtures. . . . 3,378
Software. . . . . . . . . . . 3,171
---------
36,855
Less accumulated depreciation (23,788)
---------
$ 13,067
=========
5. Commitments and contingencies
Leases
The Company leases office and warehouse space under month-to-month operating
leases in Denver, Colorado and San Antonio, Texas. Rent expense incurred for the
years ended December 31, 2004 and 2003 was approximately $29,600 and $26,000,
respectively.
Pending litigation
In May 2003, the Company was sued by a former Board member, Charles McCarthy,
seeking recovery for the value of 350,000 shares, or $209,500, and $120,000 due
his law firm under a retainer agreement between the Company and his firm.
McCarthy 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 him to settle the case for $55,000.
Under the Settlement Agreement and Release, we made a cash payment to McCarthy
of $10,000 during October 2004, a cash payment of $15,000 in January 2005 and
will settle the remaining balance in the fourth quarter of 2005.
The Company, along with the current officers and board members and several
former directors, were sued by Lawrence Brady, a former director of the Company,
and his son Mark Brady, who served for a period of time as Chief Financial
Officer, for, among other things, breach of contract for unlawful termination
and failure to provide stock allegedly promised. 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.
Certain claims and lawsuits have arisen against the Company in its normal course
of business. The Company believes that such claims and lawsuits have not had,
and will not have, a material adverse effect on the Company's financial
position, cash flow or results of operations.
F-12
6. Income taxes
The Company accounts for income taxes using the liability method in accordance
with SFAS No. 109, Accounting for Income Taxes. The liability method provides
that the deferred tax assets and liabilities are recorded based on the
difference between the tax bases of assets and liabilities and their carrying
amount for financial reporting purposes, as measured by the enacted tax rates
and laws that will be in effect when the differences are expected to reverse.
Deferred tax assets are carried on the balance sheet with the presumption that
they will be realizable in future periods when pre-tax income is generated.
Predicting the ability to realize these assets in future periods requires a
great deal of judgment by management. In management's judgment, the Company
cannot predict with reasonable certainty that the tax assets resulting from
losses will be fully realized in future periods. SFAS No. 109 requires a
valuation allowance to reduce the deferred tax assets reported if, based on the
weight of the evidence, it is more likely than not that some portion or all of
the deferred tax assets will not be realized. After consideration of all of the
evidence, both positive and negative, management determined that a $1,737,000
valuation allowance at December 31, 2004 was necessary to reduce the deferred
tax assets to the amount that will more likely than not be realized. The change
in the valuation allowance for the current year is a net increase of $513,000.
At December 31, 2004, the Company has approximately $5,000,000 of net operating
loss carryforwards, which expire from 2014 through 2024. The net operating loss
carryforwards include losses from the acquisition of PCT and may be subject to
certain restrictions in the future.
Income tax benefit consists of the following:
YEARS ENDED DECEMBER 31,
2004 2003
Deferred tax benefit
Federal . . . . . . . . . . . $(444,000) $(233,000)
State . . . . . . . . . . . . (69,000) (42,000)
---------- ----------
(513,000) (275,000)
Increase in valuation allowance 513,000 275,000
---------- ----------
$ - $ -
========== ==========
The difference between the expected tax (benefit) computed at the Federal
statutory income tax rate of 34% and the effective tax rate for the years ended
December 31, 2004 and 2003 follows:
YEARS ENDED DECEMBER 31,
2004 2003
AMOUNT % AMOUNT %
Computed "expected" tax (benefit) . (469,000) 34% (188,000) 34%
State income taxes, net of federal
income tax benefit. . . . . . . . . (46,000) 3% (18,000) 3%
Increase in valuation allowance . . 513,000 -37% 275,000 -50%
Non-deductible expenses and other . 2,000 0% (69,000) 13%
-----------------------------------------
$ - 0% $ - 0%
=========================================
Significant deferred tax assets and liabilities represent the future impact of
temporary differences between the financial statement and tax bases of assets
and liabilities and are as follows:
YEAR ENDED DECEMBER 31,
2004
Deferred tax assets:
Net operating loss carry forwards $ 1,737,000
Valuation allowance . . . . . . . (1,737,000)
-------------
Net deferred tax assets . . . . . . $ -
=============
F-13
7. Line of credit
The Company has $19,792 outstanding at December 31, 2004 under a $20,000
unsecured line of credit with a bank. Borrowings under the line of credit bear
interest at the Wall Street Journal's published prime rate plus 3% (8% at
December 31, 2004); interest due monthly. The line of credit is guaranteed by
three stockholders and an officer of the Company.
8. Notes payable
At December 31, 2004, notes
payable consist of the following:
Related parties:
Note payable, officer; unsecured;
interest at prime rate plus 5.5%
(10.5% at December 31, 2004);
due on demand. . . . . . . . . . . . $ 10,107
Note payable, officer; unsecured;
interest at 23.99%, due on demand . 5,294
-----------
$ 15,401
===========
Other:
Convertible note payable to
stockholder, 8% interest rate,
in default as of the date
of this report (1) . . . . . . . . . $160,000
Notes payable to stockholder,
8% interest rate, in default
as of the date of this report (1). . 165,000
Unsecured note with a financial
institution, 14.99% interest rate,
interest and principal due monthly
through November 2008 . . . . . . . 24,912
Note payable to stockholder, 10%
interest rate, in default . . . . . 600
Note payable, $300,000 face
amount, no stated interest rate
but with an implied annual rate
of 72.8%, due April 3, 2005 (2). . . 262,500
-----------
$613,012
===========
Long Term:
Convertible debenture, 8%
interest rate, due
July 11, 2007 (2). . . . . . . . . . $224,479
===========
1) The Company is currently in discussions with Mr. Revesz, the holder of
the notes that are in default as of the date of this report and expects to
extend the maturity dates on those notes as it has done several times
previously. In April 2004, the Company reached an agreement with Tomas Revesz,
its largest creditor and former board member, under which, in return for an
additional $25,000 in borrowings and the extension of the maturity dates of
three notes to July 31, 2004, the Company granted the creditor a secured
position in the assets of the Company. The Company also agreed to pay the
creditor cash interest at an annual rate of 8% retroactive to the signing of the
notes, and monthly at an annual rate of 8% on the new total of $375,000 in
notes, with $750 of the monthly interest due being paid in cash and the
remainder being paid in stock at a rate of $0.20 per share. In August 2004, the
creditor extended the maturity dates of the notes to October 31, 2004, and
converted $50,000 of the convertible notes to 250,000 shares of common stock of
the Company. For the period of March through December of 2004, the Company
issued 61,875 shares to the creditor for $12,750 of interest owed under this
arrangement. In December of 2004, the creditor extended the maturity dates of
the notes to March 31, 2005.
2) On January 18, 2005, Dutchess loaned the Company an additional $225,000.
The note has no stated interest rate but has a face amount of $270,000 and
matures on May 18, 2005. In connection with the note, Dutchess was issued
250,000 shares of common stock as an incentive and the Company also signed a
consulting agreement with a company in which an employee of Dutchess is a member
of management. Under the consulting agreement, the company was issued 500,000
shares of Company common stock.
F-14
On April 7, 2005, Dutchess loaned the Company an additional $488,500. The note
has no stated interest rate but has a face amount of $586,200 and matures on
June 7, 2005. A portion of the proceeds of this loan was used to repay the note
dated December 3, 2004 with a face amount of $300,000, which matured on April 3,
2005. In connection with the note, Dutchess was issued 250,000 shares of common
stock as an incentive and the Company signed a consulting agreement with a
company in which an employee of Dutchess is a member of management. Under the
consulting agreement, the company was issued 300,000 shares of Company common
stock.
During the period from January 1, 2005 through April 12, 2005, the Company
exercised six (6) puts to Dutchess totaling 1,276,610 shares for proceeds of
$222,726. Of the total proceeds, $142,635 was used to repay portions of
previously issued notes to Dutchess and $80,091 went to the Company.
On March 9, 2005, Dutchess exercised 250,000 warrants at $0.125 each, for total
proceeds of $31,250, $15,000 of which was applied to outstanding notes.
Also during the period from January 1, 2005 through April 12, 2005, Dutchess
elected to convert at total of $75,000 of the 36-month convertible note for
600,000 shares of the Company's common stock.
9. Stockholders' deficit
Preferred stock:
The Company has authorized 5,000,000 shares of $0.001 par value, preferred
stock. 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 (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 $644 were accrued in the form of a
stock dividend equal to 3,714 shares of common stock of the Company.
Common stock:
The Company held a special shareholders' meeting on January 6, 2005 where an
amendment to the Amended and Restated Articles of Incorporation of Nighthawk
Systems, Inc. was approved to increase the number of authorized shares of our
common stock from 50,000,000 to 200,000,000.
In October 2002, the Company issued 300,000 shares of common stock to a
consultant for services rendered, and to be rendered. At the date of the
commitment, the total consulting cost was calculated to be $33,000 based on the
fair value of the Company's common stock on that day. During the second quarter
of 2003, the Company canceled the share issuance and recorded a $33,000
reduction in consulting expense. The Company's 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.
During the fourth quarter of 2003, the Company issued a total of 1,116,667
shares of its common stock in exchange for $234,750 of consulting expense
incurred during 2003. This included a total of 450,000 shares to five
independent directors.
During 2003, the Company issued a total of 1,575,000 shares of its common stock
and 1,575,000 warrants with an exercise price of $0.25 per share in exchange for
net cash proceeds of $263,000. The warrants are exercisable within two years of
the date of each grant.
During 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. In addition, the Company received
$109,500 in cash proceeds upon the exercise of 630,000 options issued to
consultants during the period. A total of 50,000 shares, which had been issued
to a consultant in previous periods, were cancelled during 2004.
F-15
Also during 2004, 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 December 31, 2004, the Special Offering was closed and the
Company had issued $188,775 in Special Warrants, net of issuance costs of
$43,625 for a total of 1,162,000 Special Warrants to the investors and 145,250
Special Warrants to the brokerage firm.
A total of 2,345,000 shares of common stock were issued during 2004 to
consultants and others in return for $325,573 in services. One million of these
shares were issued to consultants in relation to the Dutchess funding agreement.
In addition, Dutchess received 250,000 warrants to purchase common stock of the
Company at $0.125 per share.
A total of $312,853 in notes payable and accrued interest were converted into
1,439,423 shares of common stock, 739,423 warrants to purchase common stock at
$0.20 per share and 375,000 warrants to purchase common stock at $0.25 per share
during 2004.
A total of 61,875 shares of common stock were issued during 2004 as interest
payments on notes payable.
A total of 2,350,000 shares of common stock were issued as part of investment
agreements, incentives and placement fees related to the Dutchess equity and
debt agreements during 2004.
Common stock warrant transactions during 2004 and 2003 are summarized below:
WEIGHTED
AVERAGE
EXERCISE
WARRANTS PRICE
----------- --------
Outstanding at January 1, 2003. . 2,695,200 $ 0.53
Granted . . . . . . . . . . . . . 1,575,000 0.25
Exercised . . . . . . . . . . . . - -
Forfeited . . . . . . . . . . . . (391,200) 1.50
----------- --------
Outstanding at December 31, 2003. 3,879,000 0.32
Granted . . . . . . . . . . . . . 3,530,006 0.26
Exercised . . . . . . . . . . . . - -
Forfeited . . . . . . . . . . . . (2,304,000) 0.45
Other (a) . . . . . . . . . . . . 1,510,050 0.10
----------- --------
Outstanding at December 31, 2004. 6,615,056 $ 0.19
=========== ========
(a) During 2003, the Company issued a total of 1,575,000 shares of its common
stock and 1,575,000 warrants with an exercise price of $0.25 per share in
exchange for net cash proceeds of $263,000. The warrants are exercisable within
two years of the dates of each grant. During 2004, the Company issued a total
of 3,530,006 warrants with an average exercise price of $0.26 and 2,304,000
warrants were forfeited. Up to $200,000 in warrants could be exercised prior to
March 31, 2005 at the lesser of $2.00 per share or 50% of the consecutive 10-day
average closing price prior to the election to exercise the warrant. As of
December 31, 2004, this gave the holder the right to exercise up to 2,010,050
warrants at $0.0995 each. 500,000 were included in the number of warrants
outstanding at December 31, 2003, resulting in the net addition of 1,510,050 in
2004. The warrants expired unexercised on April 1, 2005.
During the first quarter of 2005, the Company issued 463,100 shares for
consulting and other services or for the settlement of liabilities and 8,603
shares for accrued interest on notes payable and preferred dividends.
During the first quarter of 2005, the Company sold 650,000 shares of common
stock to an investor for cash at a price of $0.15 per share. Warrants to
purchase 650,000 shares of common stock at an exercise price of $0.25 per share
were also included in the sale. We did not publicly offer the securities and
the investor is an accredited investor. No underwriters were involved in the
sale.
F-16
10. Related party transactions
During the fourth quarter of 2003, the Company canceled the issuance of 300,000
shares of its common stock originally issued to outside directors for services,
as it determined that no associated services had been performed.
During 2003, the Company made payments of $25,504 to Arlen Felsen while he was a
director and employee to reduce amounts owed to him for the purchase of certain
assets and liabilities of Vacation Communications. Effective July 31, 2003, the
Company sold back to Mr. Felsen the assets and liabilities associated with the
original purchase and recognized a gain of $92,443 on this transaction.
During 2003, the Company paid a total of $12,678 to Myron Anduri, the Company's
current President and then Vice President of Sales, for amounts owed for
commissions and salary earned in previous periods. During 2003, Mr. Anduri
loaned the Company $7,964 under short-term notes, of which $4,203 was repaid
during 2003. During the year ended December 31, 2004, Mr. Anduri was paid an
additional $2,289 in cash and $22,278 in Company common stock, 181,416 shares
and 181,416 warrants to purchase Company common stock at $0.25 per share, for
amounts outstanding under these short-term notes. Based on calculations using
Black-Scholes, the fair value of the warrants issued to Mr. Anduri was $9,454.
This amount is reflected in interest expense and additional paid-in capital for
the period ended December 31, 2004.
At a meeting of the Board of Directors held on March 26, 2003, H. Douglas
Saathoff was named Chief Executive Officer of the Company. During 2003, Mr.
Saathoff loaned the Company $54,100 under short-term notes, of which $45,100 was
repaid by December 31, 2003. The remaining $9,000 was repaid in 2004.
At a meeting of the Board of Directors held on March 26, 2003, the Board
accepted the resignation of Steve Jacobson as chief executive officer, but
remained as an employee of the Company. On July 9, 2003, Steve Jacobson resigned
as a member of the Company's board of directors. On September 8, 2003, the
Company entered into a separation agreement with Steve Jacobson under which,
among other things, he agreed to a) resign as an employee of the Company; b)
return 545,454 shares of stock held by him to the Company in payment of the
$118,629 he owed the Company as of that date; and c) transfer voting rights for
shares owned or held in trust by him to Myron Anduri, an employee of the Company
for five years. Under the agreement, the Company agreed to issue Steve Jacobson
450,000 options to purchase shares of the Company's common stock at $0.22 per
share, with such options vesting over a three-year period at a rate of 150,000
shares per year. As a result of the transaction, the Company recorded an
additional $39,933 in compensation expense to Steve Jacobson for amounts owed by
him to the Company upon his resignation. The Company retired the 545,454 shares
returned to the Company under the agreement.
During 2004, the Company entered into an agreement with Steve Jacobson in which
it allowed him to transfer up to 600,000 shares of his stock, which he was
contractually restricted from selling under his separation agreement until June
2005, to various consultants who had agreed to perform services for the Company.
As of December 31, 2004, 200,000 of these shares had been distributed to a
consultant and the Company recognized $20,000 in consulting expenses related to
this transaction. The remaining 400,000 shares were not distributed, and are
not included in the issued and outstanding shares of the Company as of December
31, 2004. As part of the agreement, the Company agreed to replace Mr.
Jacobson's 600,000 shares with 730,000 shares of stock that would not be
eligible for resale until November 2005. The Company recorded $13,000 in
consulting expense associated with this agreement. In addition, the Company
amended Mr. Jacobson's separation agreement to allow him to sell 50,000 shares
of common stock in each of the months of March, April, May and June 2005.
On December 19, 2003 the Company entered into a settlement and release agreement
with a former director, Herb Jacobson, and his wife. Under terms of the
agreement, Mr. & Mrs. Jacobson and the Company agreed to dismiss any and all
claims against each other in return for, among other things, payment of a total
of $25,000 over a four-month period from the Company to Mr. Jacobson. The
Company paid this amount during 2003 and 2004. In addition, Mr. and Mrs.
Jacobson, along with their son Steven Jacobson, agreed to refrain from selling,
transferring, conveying or otherwise disposing of their remaining share
ownership for a period of eighteen months subsequent to selling an aggregate of
850,000 shares. As a result of the agreement, the Company recorded a gain of
$23,912 due to a reduction in the amount previously recorded by the Company as
owed to Mr. Jacobson.
During the year ended December 31, 2004, 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 558,007 common shares and warrants to purchase 558,007 common
shares at $0.20 per share to an individual and a company in exchange for
approximately $88,700 in notes payable plus accrued interest owed them by the
Company. The individual 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
two parties was $29,079. This amount is reflected in interest expense and
additional paid-in capital for the period ended December 31, 2004.
F-17
During the twelve months ended December 31, 2004, a business partner of the
Company's Chairman billed the Company $20,000 for consulting services.
11. Stock options
Upon the reverse acquisition of Peregrine, Inc. on February 1, 2002, the 2000
Performance Stock Option Plan (the "Plan") of PCT was automatically terminated.
As such, no options were outstanding as of December 31, 2002. This option plan
was subsequently adopted by the Company's Board effective January 1, 2003. The
Company may issue a maximum of 4,000,000 shares of common stock under the Plan.
The Plan provides for awards in the form of options, including incentive stock
options and non-qualified stock options. Under the plan, options granted vest
at a rate set by the board of directors or committee appointed by the board
directors, options are exercisable up to 10 years from the date of grant at not
less than 100% of the fair value of the common stock on the date of grant. If
the option holder owns 10% or more of the Company's common stock, the options
are exercisable at not less than 110% of the fair value of the common stock on
the date of grant. At the Company's Annual Shareholders meeting held in November
2003, the shareholders approved a name change for the plan to the Nighthawk
Systems, Inc. 2003 Stock Option Plan and increased the number of shares eligible
for distribution under the plan to 5,000,000.
During 2003, the Company granted options to purchase 375,000 shares of common
stock of the Company to non-employees, 325,000 of which vested immediately. The
remaining 50,000 vest over a three-year period. In accordance with SFAS 123,
the Company recognized approximately $6,800 in expense related to the portion of
the options vesting during 2003. A total of 1,935,000 options were issued to
employees during 2003, all of which vest in thirds on the first, second and
third anniversary dates of their issue. During 2004, 1,000,000 options, which
vested immediately, were granted to the Directors of the Company. Also during
2004, 630,000 options were granted for consulting services, which vested
immediately. The Company recognized $26,460 in expenses related to the issuance
of the options issued for consulting services.
The following summarizes the stock option activity for the years ended December
31, 2004 and 2003:
WEIGHTED
AVERAGE
EXERCISE
OPTIONS PRICE
--------- ------
2003
Outstanding at beginning of year . . . . . - $ -
Options granted. . . . . . . . . . . . . . 2,310,000 0.22
Options exercised. . . . . . . . . . . . . - -
Options forfeited or expired . . . . . . . 25,000 0.22
--------- ------
Outstanding at end of year . . . . . . . . 2,285,000 $ 0.22
========= ======
Options exercisable at year end. . . . . . 325,000 $ 0.22
========= ======
Options available for grant at end of year 2,715,000
=========
2004
Outstanding at beginning of year . . . . . 2,285,000 $ 0.22
Options granted. . . . . . . . . . . . . . 1,630,000 0.11
Options exercised. . . . . . . . . . . . . 630,000 0.18
Options forfeited or expired . . . . . . . 250,000 0.22
--------- ------
Outstanding at end of year . . . . . . . . 3,035,000 $ 0.17
========= ======
Options exercisable at year end. . . . . . 1,995,000 $ 0.14
========= ======
Options available for grant at end of year 1,335,000
=========
Options outstanding at December 31, 2004 which have not yet vested will vest on
the second and third anniversary dates of their issuance as follows: 370,000
shares in January 2005 and 370,000 shares in January 2006; 150,000 shares in
September 2005 and 150,000 shares in September 2006.
F-18
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, the Registrant has duly caused this Amendment No. 1 to
the Annual Report on Form 10-KSB to be signed on its behalf by the undersigned,
thereunto duly authorized.
Date: April 18, 2005 NIGHTHAWK SYSTEMS, INC.
By: /s/ H. DOUGLAS SAATHOFF
H. Douglas Saathoff,
Chief Executive Officer
By: /s/ DANIEL P. McREDMOND
Daniel P. McRedmond
Principal Accounting and Financial Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints H. Douglas Saathoff his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
to sign any and all amendments to this Annual Report on Form 10-KSB and to file
the same, with all exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said attorney-in-fact
and agent full power and authority to do and perform each and every act and
thing requisite and necessary to be done in connection therewith, as fully to
all intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agent, or his substitute or
substitutes, or any of them, shall do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
Signature Title Date
--------- ----- ----
/s/ Max Polinsky Director April 18, 2005
------------------
Max Polinsky
/s/ Patrick Gorman Director April 18, 2005
--------------------
Patrick Gorman
F-19