U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended March 31, 2006
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from _________ to ________
Commission File Number: 0-30786
NIGHTHAWK SYSTEMS, INC
----------------------
(Exact name of small business issuer as specified in its charter)
Nevada 87-0627349
------ ----------
(State or other jurisdiction of (I.R.S Employer
incorporation or organization) Identification No.)
10715 Gulfdale, Suite 200
San Antonio, TX 78216
----------------------
(Address of principal executive offices)
210 341-4811
------------
(Issuer's telephone number)
__________________________________________________________________
(Former name, former address and former fiscal year, if changed since last
report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
As of May 22, 2006, there were 69,050,611 shares of common stock, par value
$.001 per share, of the registrant issued and outstanding.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
1
INDEX
Part I FINANCIAL INFORMATION
Item 1 Financial Statements (unaudited)
Condensed consolidated balance sheet as of March 31, 2006 3
Condensed consolidated statements of operations for the
three months ended March 31, 2006 and 2005 4
Condensed consolidated statement of stockholders'
deficit for the three months ended March 31, 2006 5
Condensed consolidated statements of cash flows for the
three months ended March 31, 2006 and 2005 6
Notes to condensed consolidated financial statements 8
Item 2 Management's Discussion and Analysis or Plan of Operation 14
Item 3 Controls and Procedures 18
Part II OTHER INFORMATION
Item 1 Legal Proceedings 19
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 19
Item 3 Defaults Upon Senior Securities 19
Item 4 Submissions of Matters to a Vote of Security Holders 19
Item 5 Other Information 24
Item 6 Exhibits and Reports on Form 8-K 19
Signatures and Certifications 20
2
NIGHTHAWK SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 2006
ASSETS
Current assets:
Cash $ 109,900
Accounts receivable, net of allowance for doubtful accounts of $147 79,410
Inventories 160,832
Prepaids 639,127
------------
Total current assets 989,269
------------
Furniture, fixtures and equipment, net 19,908
Intangible and other assets 19,548
------------
$ 1,028,725
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 292,847
Accrued expenses 338,227
Line of credit 19,792
Notes payable:
Related parties 13,947
Other 381,322
------------
Total current liabilities 1,046,135
------------
Long-term liabilities:
Convertible debt 2,104,836
------------
Commitments and contingencies
Stockholders' deficit:
Preferred stock, $0.001 par value; 5,000,000 shares authorized; no shares issued and outstanding -
Common stock; $0.001 par value; 200,000,000 shares authorized; 66,579,232 issued and outstanding 66,579
Additional paid- in capital 7,176,854
Accumulated deficit (9,365,679)
------------
Total stockholders' deficit (2,122,246)
------------
$ 1,028,725
============
The accompanying notes are an integral part of these financial statements.
3
NIGHTHAWK SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31,
2006 2005
------------ ------------
Revenue $ 141,387 $ 171,222
Cost of goods sold 98,812 104,524
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Gross profit 42,575 66,698
Selling, general and administrative expenses 757,220 561,660
------------ ------------
Loss from operations (714,645) (494,962)
Interest expense:
Related parties 684 691
Other 600,352 130,627
------------ ------------
Total interest expense 601,036 131,318
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Net loss (1,315,681) (626,280)
Less: preferred stock dividends - (219)
------------ ------------
Net loss to common stockholders $(1,315,681) $ (626,499)
============ ============
Net loss per basic and diluted common share $ (0.02) $ (0.02)
============ ============
Net loss to common stockholders per basic and diluted common share $ (0.02) $ (0.02)
============ ============
Weighted average common shares outstanding - basic and diluted 58,219,769 33,733,867
The accompanying notes are an integral part of these financial statements.
4
Nighthawk Systems, Inc.
Condensed Consolidated Statement of Stockholders' Deficit
Three months ended March 31, 2006
Common stock Additional
-------------------------- paid-in Accumulated
Shares Amount capital deficit Total
------------ ------------ ------------ ------------ ------------
Balances, December 31, 2005 46,477,158 $ 46,477 $ 5,464,436 $(8,049,998) $(2,539,085)
Common stock issued for Dutchess puts, net of commissions 12,615,074 12,615 1,142,768 1,155,383
Common stock issued as incentive for notes payable 1,712,000 1,712 147,168 148,880
Common stock issued for consulting services 4,925,000 4,925 232,075 237,000
Conversion of accrued expenses to common stock 850,000 850 34,150 35,000
Amortization of beneficial conversion feature on notes payable 153,269 153,269
Net loss (1,315,681) (1,315,681)
------------ ------------ ------------ ------------ ------------
Balances, March 31, 2006 66,579,232 $ 66,579 $ 7,173,866 $(9,365,679) $(2,122,246)
============ ============ ============ ============ ============
5
NIGHTHAWK SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31,
2006 2005
------------ ----------
Cash flows from operating activities:
Net loss $(1,315,681) $(626,280)
------------ ----------
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 2,384 1,681
Employee options vested 2,988 -
Loan discounts and warrants 111,250 66,063
Beneficial conversion feature 153,269 -
Common stock issued for consulting services 177,000 15,000
Common stock issued for interest 88,109 -
Shares issued as incentives on notes payable 193,192 50,250
Note payable issued for consulting services 24,850 -
Amortization of prepaid consulting expense - 121,666
Changes in assets and liabilities:
(Increase) decrease in accounts receivable 3,795 (35,754)
(Increase) decrease in inventories (80,955) (9,976)
(Increase) decrease in prepaids (2,756) 23,596
Increase (decrease) in accounts payable 7,598 (38,739)
Increase in accrued expenses 29,841 24,275
------------ ----------
Total adjustments 710,565 218,062
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Net cash used in operating activities of continuing operations (605,116) (408,218)
------------ ----------
Cash flows from investing activities:
Purchases of furniture, fixtures and equipment (8,861) (1,973)
------------ ----------
Net cash used in investing activities (8,861) (1,973)
------------ ----------
Cash flows from financing activities:
Proceeds from notes payable, related parties - 339
Payments on notes payable, related parties (448) (550)
Proceeds from notes payable, other 635,000 225,000
Payments on notes payable, other (1,880) (127,765)
Payments on long term notes payable - (13,399)
Net proceeds from the sale of common stock, and the exercise of puts and warrants - 312,547
------------ ----------
Net cash provided by financing activities 632,672 396,172
------------ ----------
Net (decrease) increase in cash 18,695 (14,019)
------------ ----------
Cash, beginning balance 91,205 61,118
------------ ----------
Cash, ending balance $ 109,900 $ 47,099
============ ==========
6
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
Supplemental disclosures of cash flow information: QUARTERLY PERIOD ENDED MARCH 31,
2006 2005
------------ ----------
Cash paid for interest $ 8,269 $ 18,312
============ ==========
Supplemental disclosure of non-cash investing and financing activities:
Common shares issued as payments on notes payable, other $ 1,205,334
============
Conversion of accrued expenses to common stock $ 35,000 $ 56,620
============ ==========
Conversion of notes payable and accrued interest to common stock
Notes payable $ 29,498
Accrued interest 1,752
----------
Total amount converted $ 31,250
==========
Preferred stock dividends issued in common stock $ 219
==========
The accompanying notes are an integral part of these financial statements.
7
NIGHTHAWK SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2006 AND 2005
(unaudited)
1. ORGANIZATION, GOING CONCERN, RESULTS OF OPERATIONS AND MANAGEMENT'S PLANS
ORGANIZATION
Nighthawk Systems, Inc. ("the Company") designs and manufactures intelligent
remote power control products that are easy to use, inexpensive and can remotely
control virtually any device from any location. The Company's proprietary,
wireless products are ready to use upon purchase, so they are easily installed
by anyone, regardless of technical ability, and are also easily integrated into
third-party products, systems and processes. They allow for intelligent control
by interpreting instructions sent via wireless media, and executing the
instructions by 'switching' the electrical current that powers the device,
system or process. Nighthawk's intelligent products can be activated
individually, in pre-defined groups, or en masse, and for specified time periods
with a simple click of a mouse or by dialing a telephone number.
GOING CONCERN, RESULTS OF OPERATIONS AND MANAGEMENT'S PLANS
The Company incurred a net loss of approximately $1.3 million during the
quarter ended March 31, 2006 and had a stockholders' deficit and working
capital deficiency of approximately $2.1 million and $57,000 respectively,
as of March 31, 2006. 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:
- Raising working capital through additional borrowings.
- Raising equity funding through sales of the Company's common stock.
- Implementation of the Company's sales and marketing plans.
During a prior year the Company signed a financing arrangement with Dutchess
Private Equities, II, L.P. ("Dutchess") under which the Company received
$250,000 in exchange for a convertible debenture during August 2004. The Company
also signed an investment agreement under which Dutchess agreed to purchase up
to $10.0 million in common stock from the Company, at the Company's discretion,
over the next three years, subject to certain limitations including the
Company's then current trading volume. Although the amount and timing of
specific cash infusions available under the entire financing arrangement cannot
be predicted with certainty, the arrangement represents a contractual commitment
by Dutchess to provide funds to the Company. Since entering into the arrangement
with Dutchess, the Company has utilized the arrangement to obtain enough cash to
cover its operating cash flow deficits on a monthly basis.
For more information on transactions with Dutchess during the three month
period ending March 31, 2006, please see Note 3 - Notes payable.
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.
8
The Company's strategic initiatives for 2006 include:
- Capitalize on existing enterprise sales opportunities
- Cultivate and capitalize on indirect sales channels
- Enhance our marketing effort to support direct and indirect sales channels
- Bundle our products with ancillary products and services to enhance
revenue opportunities
- Develop and sell a device that functions on multiple wireless protocols
- Form an advisory board with relevant industry expertise and relationships
- Execute on a strategic acquisition that is scalable and complementary to
our existing business
The Report of the Company's Independent Registered Public Accounting Firm on the
Company's financial statements as of and for the year ended December 31, 2005
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. The accompanying financial statements do not include any adjustments
relating to the recoverability and classification of assets or the amounts of
liabilities that might be necessary should the Company be unsuccessful in
implementing these plans, or otherwise be unable to continue as a going concern.
2. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements, which
include the accounts of Nighthawk Systems, Inc. and its subsidiary PCT
(collectively referred to herein as "the Company"), have been prepared in
accordance with accounting principles generally accepted in the U.S. for interim
financial information. In the opinion of management, all adjustments (consisting
of only normal recurring items), which are necessary for a fair presentation
have been included. The results for interim periods are not necessarily
indicative of results that may be expected for any other interim period or for
the full year. These condensed consolidated financial statements should be read
in conjunction with the financial statements and notes thereto included in the
Company's Annual Report on Form 10-KSB for 2005 filed with the Securities and
Exchange Commission (the "SEC").
3. SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
Revenue from product sales is recognized when all significant obligations of the
Company have been satisfied. Revenues from equipment sales are recognized
either on the completion of the manufacturing process, or upon shipment of the
equipment to the customer, depending on the Company's contractual obligations.
The Company occasionally contracts to manufacture items, bill for those items
and then hold them for later shipment to customer-specified locations. The
Company had no bill and hold sales at December 31, 2005 or March 31, 2006.
Revenue related to airtime billing is recognized when the service is performed.
Some customers pre-pay airtime on a quarterly or annual basis and the pre-paid
portion is recorded as deferred revenue. Deferred revenue, included in accrued
expenses on the balance sheet at March 31, 2006, is approximately $13,073.
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.
9
CONCENTRATIONS
Financial instruments that potentially subject the Company to concentrations of
credit risk consist primarily of trade accounts receivable. Receivables arising
from sales to customers are not collateralized and, as a result, management
continually monitors the financial condition of its customers to reduce the risk
of loss. At March 31, 2006, the Company had approximately $79,410 in accounts
receivable, net of the allowance for doubtful accounts. Approximately $34,000
of this balance was from three customers, which was collected subsequent to
March 31, 2006.
During the three months ended March 31, 2006, the Company had three individual
customers that accounted for approximately 36% of total revenue. Each of theses
three customers accounted for 10% to 14% of total revenue. During the three
months ended March 31, 2005, one customer accounted for approximately 46% of
total revenue.
During the three months ended March 31, 2006, three suppliers accounted for
approximately 67% 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. If the patents
are granted, the Company will then begin to 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 March 31, 2006.
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.
10
NET LOSS PER SHARE
Basic net loss per share is computed by dividing the net loss applicable to
common stockholders by the weighted-average number of shares of common stock
outstanding for the year. Diluted net loss per share reflects the potential
dilution that could occur if dilutive securities were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the Company, unless the effect of such inclusion would reduce
a loss or increase earnings per share. For the quarter ended March 31, 2006 and
the year ended December 31, 2005, 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.
STOCK-BASED COMPENSATION
During the first quarter of fiscal 2006, the Company adopted the provisions of,
and accounts for stock-based compensation in accordance with, the Financial
Accounting Standards Board's Statement of Financial Accounting Standards No. 123
- revised 2004 ("SFAS 123R") "Share-Based Payment" which replaced Statement of
Financial Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based
Compensation" and supersedes APB Opinion No. 25 ("APA 25"), "Accounting for
Stock Issued to Employees". Under the fair value recognition provisions of this
statement, stock-based compensation cost is measured at the grant date based on
the fair value of the award and is recognized as expense on a straight-line
basis over the requisite service period, which is the vesting period. The
Company elected the modified-prospective method, under which prior periods are
not revised for comparative purposes. The valuation provisions of SFAS 123R
apply to new grants and to grants that were outstanding as of the effective date
and are subsequently modified.
3. NOTES PAYABLE
At March 31, 2006, notes payable consist of the following:
Related parties:
Note payable, officer; unsecured; interest at prime rate plus 5.5% (12.24% at March 31, 2006); due on demand $ 9,554
Note payable, officer; unsecured; interest at 23.99%, revolving 4,393
-----------
$ 13,947
===========
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, 17.24% interest rate, revolving 17,222
Note payable, $198,000 face amount, no stated interest rate but with an implied annual rate of 41.09%,
due December 12, 2006 (2) 39,100
-----------
$ 381,322
===========
Long Term:
Convertible debenture, 5% interest rate, due December, 2010 $ 500,000
Convertible debenture, 10% interest rate, due December, 2009 1,419,836
Convertible debenture, 10% interest rate, due March, 2011 185,000
-----------
$2,104,836
===========
1) Based on discussions with the shareholder, who is a former board member,
the Company does not expect to receive a notice of default and to have the notes
called by the holder. However, no assurance may be give that this will be the
case.
11
On January 9, 2006, Dutchess loaned the Company $245,000. The note had no
stated interest rate but had a face amount of $294,000 and matured on January 9,
2007. Dutchess was issued 653,000 incentive shares of unregistered common stock
valued by the Company at $45,710 for the note, which was secured by put notices.
During the three month period ending March 31, 2006, Dutchess exercised put
notices valued at $294,000 to pay off the note and was issued 3,477,247 shares
of common stock as a result.
On February 8, 2006, Dutchess loaned the Company $205,000 in exchange for a
convertible debenture that was due February 8, 2011. Dutchess was issued
615,000 incentive shares of unregistered common stock valued by the Company at
$58,770 for the debenture, which was secured by put notices. The debenture
contained a clause calling for an early redemption penalty of 20%. During the
three month period ending March 31, 2006, Dutchess exercised put notices valued
at $246,000 to pay off the debenture and the redemption penalty, and was issued
2,429,107 shares of common stock as a result. The Company recorded the
redemption penalty as interest expense, and also recorded $68,333 in interest
expense during the period related to the beneficial conversion feature of the
debenture.
On March 16, 2006, Dutchess loaned the Company $185,000 in exchange for a
convertible debenture that is due March 16, 2011. Dutchess was issued 444,000
incentive shares of unregistered common stock valued by the Company at $44,400
for the debenture, which is secured by put notices. The debenture contains a
clause calling for an early redemption penalty of 20%.
In addition to the activity discussed about, during the three month period
ending March 31, 2006, Dutchess exercised puts valued at $540,358 to pay off
three notes and one debenture, plus all related interest, that had been
outstanding at December 31, 2005, and exercised puts valued at $135,835 to pay
down a note that had been outstanding at December 31, 2005. Dutchess was issued
6,708,720 shares as a result of these transactions. The Company recorded
$98,500 in interest expense on these notes and debentures during the period, as
well as $83,908 in interest expense related to the beneficial conversion feature
of the debenture.
In total, the Company recognized a total of $153,269 in interest expense
related to the beneficial conversion feature of debentures outstanding during
the period.
On April 19, 2006, Dutchess loaned the Company $165,000 in exchange for a
convertible debenture that is due April 19, 2011. Dutchess was issued 366,666
incentive shares of unregistered common stock valued by the Company at $33,000
for the debenture, which is secured by put notices. The debenture contains a
clause calling for an early redemption penalty of 20%.
On May 17, 2006, Dutchess loaned the Company $130,000 in exchange for a
convertible debenture that is due May 17, 2011. Dutchess was issued 690,000
incentive shares of unregistered common stock valued by the Company at $41,400
for the debenture, which is secured by put notices. The debenture contains a
clause calling for an early redemption penalty of 20%.
Subsequent to March 31, 2006, Dutchess has exercised five puts valued at $97,288
in order to pay off the note due December 12, 2006, and to pay down the
debentures issued in December 2005 and March 2006. The Company issued Dutchess
1,414,713 shares of common stock as a result.
12
4. STOCKHOLDERS' DEFICIT
COMMON STOCK
During the quarterly period ending March 31, 2006, the Company issued 4,925,000
unregistered shares of common stock to consultants for services to be performed.
The Company recognized $177,000 in expense related to these contracts during the
period, and has recorded an additional $60,000 in prepaid expense related to one
of the contracts as of March 31, 2006. The Company also issued 850,000
unregistered shares of common stock to a consultant for $35,000 in services
rendered in 2004 and 2005.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
FORWARD-LOOKING STATEMENTS
Discussions and information in this document, which are not historical facts,
should be considered forward-looking statements. With regard to forward-looking
statements, including those regarding the potential revenues from increased
sales, and the business prospects or any other aspect of Nighthawk Systems,
Inc.'s business, actual results and business performance may differ materially
from that projected or estimated in such forward-looking statements. Nighthawk
Systems, Inc. ("the Company") has attempted to identify in this document certain
of the factors that it currently believes may cause actual future experience and
results to differ from its current expectations. Differences may be caused by a
variety of factors, including but not limited to, adverse economic conditions,
entry of new and stronger competitors, inadequate capital and the inability to
obtain funding from third parties.
The following information should be read in conjunction with the unaudited
condensed consolidated financial statements included herein which are prepared
in accordance with accounting principles generally accepted in the United States
of America for interim financial information.
GENERAL
The Company designs and manufactures intelligent remote monitoring and power
control products that are easy to use, inexpensive and can remotely control
virtually any device from any location. Our proprietary, wireless products are
ready to use upon purchase, so they are easily installed by anyone, regardless
of technical ability, and are also easily integrated into third-party products,
systems and processes. They allow for intelligent control by interpreting
instructions sent via paging and satellite media, and executing the instructions
by 'switching' the electrical current that powers the device, system or process.
Our intelligent products can be activated individually, in pre-defined groups,
or en masse, and for specified time periods with a simple click of a mouse or by
dialing a telephone number.
Our products have been uniquely designed and programmed to be simple and ready
to use upon purchase by anyone, almost anywhere, at affordable prices. As such,
it is the Company's goal to have its products become commonplace, accepted and
used by businesses and consumers alike in their daily routines.
We save consumers and businesses time, effort and expense by eliminating the
need for a person to be present when and where an action needs to be taken. By
utilizing existing wireless technology, we give our users the flexibility to
move their application from place to place, without re-engineering their
network. Currently, most commercial control applications utilize telephone
lines, which tether the system to a single location and have associated
installation and monthly charges. Our products make companies more profitable
by eliminating installation costs and monthly charges for telephone lines, and
allow for remote control of unmanned or remote locations that may operate on
traditional electrical power, or solar or battery generated power.
Applications for our intelligent products include, but are not limited to:
- Rebooting remotely located computer equipment
- Remote switching of residential power
- Managing power on an electrical grid
- Activation/deactivation of alarm and warning devices
- Displaying or changing a digital or printed message or warning sign
- Turning pumps on or off
- Turning heating or cooling equipment on or off
14
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 2005, the Company hired its first full-time personnel that were dedicated
only to developing sales channels and sales opportunities Throughout 2005,
the sales staff was charged with generating new business opportunities for
the Company's core products, the NH100 rebooting device and the CEO700 whole
house disconnect device. It also launched a new website during 2005 which
allows potential customers to send contact information and product inquiries
directly to the Company via the Internet.
Even though the Company did not actively market its rebooting devices during
2005, if results from the one major customer are excluded from both 2004 and
2005, sales of this product actually increased from year to year. New rebooting
customers were added, primarily within the Wireless Internet Service Provider
industry. During 2005, in spite of long sales cycles typically associated with
electric utilities, the Company added over a dozen new utilities to its CEO700
customer base. More importantly, these efforts have lead to larger potential
sales opportunities within the electric utility industry. As of December 31,
2005, the Company had submitted bids on over $6.0 million in potential product
sales within the industry, and was in contact with entities that are planning
large deployments over the next 18 months.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION
Revenue from product sales is recognized when all significant obligations of the
Company have been satisfied. Revenues from equipment sales are recognized
either on the completion of the manufacturing process, or upon shipment of the
equipment to the customer, depending on the Company's contractual obligations.
The Company occasionally contracts to manufacture items, bill for those items
and then hold them for later shipment to customer-specified locations. There
were no bill and hold items at March 31, 2005. Revenue related to airtime
billing is recognized when the service is performed. Some customers pre-pay
airtime on a quarterly or annual basis and the pre-paid portion is recorded as
deferred revenue. Deferred revenue, included in accrued expenses on the balance
sheet at March 31, 2005, is approximately $13,073.
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.
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 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.
15
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 2006 AND MARCH 31, 2005
Revenue
The components of revenue and their associated percentages of total revenues,
for the three months ended March 31, 2006 and 2005 are as follows:
Quarterly period ended March 31,
----------------------------
2006 2005 Change % Change $
------------- ------------- ------------- -------------
Revenues:
Rebooting products $ 47,070 33% $ 21,604 13% 118% $ 25,466
Logic boards 17,465 12% 25,853 15% (32%) (8,338)
Utility products 47,998 34% 31,225 18% 54% 16,773
Emergency notification products 17,815 13% - - n/a 17,815
Hydro 1 - - 76,750 45% n/a (76,750)
Airtime sales 8,045 6% 14,233 8% (43%) (6,188)
Other product 1,392 1% 355 0% 292% 1,037
Freight 1,602 1% 1,202 1% 33% 400
------------- ------------- ------------- -------------
Total revenues $141,387 100% $171,222 100% (17%) $(29,835)
Revenues for the three-month period ended March 31, 2006 were $141,387 as
compared to $171,222 for the corresponding period of the prior year, a decrease
of 17% between periods. During the three months ended March 31, 2005, one
customer, who purchased the Company's Hydro 1 product, represented approximately
46% of the Company's total revenue. This sale was made as part of a
stated-funded project in New Mexico, and the Company has not marketed or sold
Hydro 1's since that time. The Company does not consider the Hydro 1 to be part
of its portfolio of products that it markets and sells on an ongoing basis.
Sales of the Company's core products (rebooting, utility, emergency notification
and logic boards) increased 67% between the periods due to the marketing and
sales efforts launched by the Company during 2005. Sales of the Company's
rebooting products more than doubled, as the Company began focusing on selling
to Wireless Internet Service Providers. Sales of utility products increased 18%
as the Company added new customers to its base during 2005 and the first three
months of 2006. Utility customers typically order product on a test basis, and
then reorder on a recurring basis if they are pleased with the product's
performance. Sales of the Company's logic boards decreased between the periods
presented, but during 2005 the Company began selling FAS8 firehouse alerting
systems. Fire departments began buying the FAS8 instead of using the Company's
PT1000 logic boards for their station alerting. The decrease in sales of logic
boards of approximately $8,000 was more than offset by approximately $18,000 in
sales of FAS8's.
Cost of goods sold includes parts and pre-manufactured components used to
assemble our products as well as allocated overhead for production personnel and
facilities costs. Cost of goods sold decreased by $5,712 or 5% to $98,812 for
the three months ended March 31, 2006 from $104,524 for the corresponding period
of the prior year but increased as a percentage of revenues between the periods
from 61% in 2005 to 70% in 2006. As a result, the Company's gross margin
decreased between the periods from 39% to 30%. This decrease is almost entirely
due to the sale of the higher margin Hydro 1 units during the first quarter of
2005.
Selling, general and administrative expenses for the three months ended March
31, 2006 increased by $195,560 or 35% to $757,220 from $561,660 for the
three-month period ended March 31, 2005. This increase was due to the
recognition of approximately $180,000 in noncash expenses from unregistered
stock issuances to public relations firms.
Interest expense increased $469,718 or 358% between the three-month periods
presented. The increase was due to interest expense related to the Dutchess
notes and debentures, several which were paid off during the first quarter of
2006 prior to their maturity date. When this occurs, the Company expenses any
unamortized discount associated with the debt being paid off, as well as any
unamortized beneficial conversion expense, any unamortized expense associated
with incentive shares issued with the debt, and any early redemption penalties.
During the first quarter of 2006, the Company recognized interest expense of
approximately $153,000 related to the beneficial conversion feature of
debentures, as well as approximately $192,000 in interest expense related for
the value of incentive shares issued to Dutchess in exchange for money loaned to
the Company. The Company also recognized approximately $77,000 in interest
expense during the period in early redemption penalties on debentures that were
paid off during the period.
16
The net loss to common shareholders for the three-month period ended March 31,
2006 was $1,315,681 compared to $626,499 for the three-month period ended March
31, 2005. The increase in net loss was due primarily to increased expenses for
public relations campaigns, and interest expense related to Dutchess notes and
debentures.
LIQUIDITY AND CAPITAL RESOURCES
The Company's financial statements for the three months ended March 31, 2006
have been prepared on a going concern basis, which contemplates the realization
of assets and the settlement of liabilities and commitments in the normal course
of business. The Company incurred a net loss of approximately $1.3 million
during the quarter ended March 31, 2006 and had a stockholders' deficit and
working capital deficiency of approximately $2.1 million and $57,000
respectively, as of March 31, 2006.
The Report of the Company's Independent Registered Public Accounting Firm on the
Company's financial statements as of and for the year ended December 31, 2005
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.
Although no assurance can be given that such plans will be successfully
implemented, management's plans to address these concerns include:
- Raising working capital through additional borrowings.
- Raising equity funding through sales of the Company's common stock.
- Implementation of the Company's sales and marketing plans.
During a prior year the Company signed a financing arrangement with Dutchess
Private Equities, II, L.P. ("Dutchess") under which the Company received
$250,000 in exchange for a convertible debenture during August 2004. The Company
also signed an investment agreement under which Dutchess agreed to purchase up
to $10.0 million in common stock from the Company, at the Company's discretion,
over the next three years, subject to certain limitations including the
Company's then current trading volume. Although the amount and timing of
specific cash infusions available under the entire financing arrangement cannot
be predicted with certainty, the arrangement represents a contractual commitment
by Dutchess to provide funds to the Company. Since entering into the arrangement
with Dutchess, the Company has utilized the arrangement to obtain enough cash to
cover its operating cash flow deficits on a monthly basis.
During the quarter ended March 31, 2006, cash used in operating activities was
approximately $605,000. Net proceeds from the issuance of a note and debentures
to Dutchess were $615,000. Major cash outlays during the quarter were
approximately $187,000 for public relations efforts, $171,000 for
payroll/employee benefits, $81,000 for inventory, $68,000 for consulting expense
and $39,000 for sales and marketing efforts.
The Company issued 12,615,074 shares to Dutchess during the quarter ended March
31, 2006 which was used to pay down $1,216,193 in debt during the period.
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 from or selling equity to
Dutchess or other parties to meet those obligations. 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.
17
ITEM 3. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures:
The Company's management, including the Company's principal executive officer
and principal accounting and financial officer, has evaluated the effectiveness
of the Company's disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the
three-month period ended March 31, 2006, the period covered by the Quarterly
Report
on Form 10-QSB. Based upon that evaluation, the Company's principal executive
officer and principal financial and accounting officer have concluded that the
disclosure controls and procedures were effective as of March 31, 2006
to provide reasonable assurance that material information relating to the
Company is made known to management including the CEO.
There were no changes in the Company's internal control over financial reporting
that occurred during the Company's last fiscal quarter that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting.
18
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
The Company is in default on two loans from Mr. Revesz, a former board member,
as of the date of this report and is in discussions to extend the maturity dates
on those notes. In April 2004, the Company reached an agreement with Tomas
Revesz under which, in return for an additional $25,000 in borrowings and the
extension of the maturity dates of three notes to July 31, 2004, the Company
granted the creditor a secured position in the assets of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS
(a) Exhibits
31.1 Certification of H. Douglas Saathoff, Chief Executive Officer and Principal
Financial and Accounting Officer, pursuant to Rule 13A-14 or 15D-14 of the
Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32 Certification pursuant to the 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K.
None
19
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
NIGHTHAWK SYSTEMS, INC.
(Registrant)
Date: May 22, 2006 By: /s/ H. Douglas Saathoff
--------------------------
H. Douglas Saathoff,
Chief Executive Officer, Principal
Accounting and Financial Officer
20