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 September 30, 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 (I.R.S Employer
of 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 November 14, 2006 there were 77,066,699 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]
INDEX
Part I FINANCIAL INFORMATION
Item 1 Financial Statements (unaudited)
Condensed consolidated balance sheet as of September 30, 2006 2
Condensed consolidated statements of operations for the
three and nine month periods ended September 30, 2006 and 2005 3
Condensed consolidated statement of stockholders'
deficit for the nine months ended September 30, 2006 4
Condensed consolidated statements of cash flows for
the nine months ended September 30, 2006 and 2005 5
Notes to condensed consolidated financial statements 7
Item 2 Management's Discussion and Analysis or Plan of Operation 11
Item 3 Controls and Procedures 15
Part II OTHER INFORMATION
Item 1 Legal Proceedings 16
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 16
Item 3 Defaults Upon Senior Securities 16
Item 4 Submissions of Matters to a Vote of Security Holders 16
Item 5 Other Information 16
Item 6 Exhibits and Reports on Form 8-K 16
Signatures and Certifications 17
-1-
NIGHTHAWK SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 2006
ASSETS
Current assets:
Cash $ 121,790
Accounts receivable, net of allowance for doubtful accounts of $1,654 152,057
Inventories 104,625
Prepaids 793,130
------------
Total current assets 1,171,602
------------
Furniture, fixtures and equipment, net 19,299
Intangible and other assets 24,200
------------
$ 1,215,101
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 221,249
Accrued expenses 384,441
Line of credit 19,792
Notes payable:
Related parties 12,716
Other 338,601
------------
Total current liabilities 976,799
------------
Long-term liabilities:
Convertible debt 2,849,320
------------
Commitments and contingencies
Stockholders' deficit:
Preferred stock, $0.001 par value; 5,000,000 shares authorized; no shares issued
and outstanding; liquidation preference $ -
Common stock; $0.001 par value; 200,000,000 shares authorized;
74,480,015 issued and outstanding 74,480
Additional paid- in capital 7,919,493
Accumulated deficit (10,604,991)
------------
Total stockholders' deficit (2,611,018)
------------
$ 1,215,101
============
The accompanying notes are an integral part of these financial statements
-2-
Nighthawk Systems, Inc.
Condensed Consolidated Statements of Operations
Three months ended September 30, Nine months ended September 30,
2006 2005 2006 2005
----------------------- ---------------------------
Revenue $ 231,710 $ 120,973 $ 625,236 $ 390,567
Cost of goods sold 136,690 91,579 400,983 281,203
----------------------- ---------------------------
Gross profit 95,020 29,394 224,253 109,364
Selling, general and administrative expenses 555,375 476,496 1,866,749 1,626,195
----------------------- --------------------------
Loss from operations (460,355) (447,102) (1,642,496) (1,516,831)
Interest expense:
Related parties 346 627 1,677 1,466
Other 145,050 130,224 910,820 619,232
----------------------- ---------------------------
Total interest expense 145,396 130,851 912,497 620,698
----------------------- ---------------------------
Net loss (605,751) (577,953) (2,554,993) (2,137,529)
Less: preferred stock dividends (224) (664)
----------------------- ---------------------------
Net loss to common stockholders $ (605,751) $(578,177) $(2,554,993) $(2,138,193)
======================= ===========================
Net loss per basic and diluted common share $ (0.01) $ (0.01) $ (0.04) $ (0.06)
======================= ===========================
Net loss to common stockholders per basic and diluted common share $ (0.01) $ (0.01) $ (0.04) $ (0.06)
======================= ===========================
Weighted average common shares outstanding - basic and diluted 74,712,976 40,626,529 67,270,080 37,228,455
The accompanying notes are an integral part of these financial statements.
-3-
Nighthawk Systems, Inc.
Condensed Consolidated Statement of Stockholders' Deficit
Nine months ended September 30, 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, including commissions 20,130,857 20,131 1,447,955 1,468,086
Common stock issued as incentive for notes payable 5,353,666 5,354 332,626 337,980
Common stock issued for consulting services 4,925,000 4,925 232,075 237,000
Common stock converted to warrants (3,256,666) (3,257) 3,257
Warrant to purchase common stock issued(notes payable) 48,000 48,000
Conversion of accrued liabilities to common stock 850,000 850 34,150 35,000
Amortization of beneficial conversion feature on notes payable 254,280 254,280
Vesting of options 102,714 102,714
Net loss (2,554,993) (2,554,993)
------------ ------------ ------------ ------------ ------------
Balances, September 30, 2006 74,480,015 $ 74,480 $ 7,919,493 $(10,604,991) $(2,611,018)
============ ============ ============ ============ ============
The accompanying notes are an integral part of these financial statements
-4-
Nighthawk Systems, Inc.
Condensed Consolidated Statements of Cash Flows
Nine months ended September 30,
2006 2005
------------ ------------
Cash flows from operating activities:
Net loss $(2,554,993) $(2,137,529)
------------ ------------
Adjustments to reconcile net loss to net cash used in operating activities:
Bad debt expense 1,987 1,648
Depreciation and amortization 7,413 4,740
Vesting of options 102,714 -
Loan discounts and warrants 133,789 267,929
Beneficial conversion feature 254,281 -
Common stock issued for consulting services 177,000 238,031
Common stock issued for interest 88,109 -
Shares and warrants issued as incentives on notes payable 233,267 180,007
Note payable issued for consulting 74,550 -
Note payable issued for interest - 131,954
Amortization of prepaid consulting expense - 186,310
Changes in assets and liabilities:
(Increase) in accounts receivable (70,839) (18,052)
(Increase) in inventories (24,747) (51,676)
(Increase) decrease in prepaids ( 9,434) 34,482
Decrease in other assets and liabilities ( 4,652) (1,020)
Decrease in accounts payable (64,000) (121,805)
Increase in accrued expenses 91,601 116,058
------------ ------------
Total adjustments 991,039 968,606
------------ ------------
Net cash used in operating activities (1,563,954) (1,168,923)
------------ ------------
Cash flows from investing activities:
Purchases of furniture, fixtures and equipment (13,283) (4,348)
------------ ------------
Net cash used in investing activities (13,283) (4,348)
------------ ------------
Cash flows from financing activities:
Proceeds from notes payable, related parties - 1,070
Payments on notes payable, related parties (1,678) (1,658)
Proceeds from notes payable, other 1,615,000 1,026,133
Payments on notes payable, other (5,500) (20,075)
Net proceeds from the sale of common stock, and the exercise of puts and warrants - 112,093
------------ ------------
Net cash provided by financing activities 1,607,822 1,117,563
------------ ------------
Net increase (decrease) in cash 30,585 (55,708)
Cash, beginning balance. 91,205 61,118
------------ ------------
Cash, ending balance $ 121,790 $ 5,410
============ ============
-5-
Condensed Consolidated Statements of Cash Flows
(continued)
Supplemental disclosures of cash flow information:
2006 2005
---------- ----------
Cash paid for interest $ 24,409 $ 195,244
========== ==========
Supplemental disclosure of non-cash investing and financing activities:
Common shares issued as payments on notes payable, including commissions $1,482,943 $ 169,796
========== ==========
Common shares issued as incentives for notes payable $ 385,980 $ 248,300
========== ==========
Common shares issued for prepaid consulting agreements $ 207,500
==========
Conversion of accrued expenses to common stock $ 35,000 $ 83,226
========== ==========
Conversion of notes payable and accrued interest to common stock
Notes payable $ 240,623
Accrued interest 14,362
----------
Total amount converted $ 254,987
==========
Preferred stock dividends issued in common stock $ 664
==========
-6-
NIGHTHAWK SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 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
wireless power control products that enable simultaneous activation or
de-activation of multiple assets or systems on demand. Nighthawk's installed
customer base includes major electric utilities, internet service providers and
fire departments in over 40 states. Nighthawk's products also enable custom
message display, making them ideal for use in traffic control and emergency
notification situations.
Nighthawk products enable customers to wirelessly extend their reach, allowing
them to turn on, off or reboot remotely located equipment at any time, from
anywhere. Expensive truck rolls and third-party service contracts are no longer
required with Nighthawk products in place. 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 $2.5 million during the nine
month period ended September 30, 2006 and had a stockholders' deficit of
approximately $2.6 million as of September 30, 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.
In August 2004, 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 nine-month period
ending September 30, 2006, please see Note 4 - 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.
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 responsible for 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.
-7-
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 Peregrine
Control Technologies, Inc. (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. As of
September 30, 2006, the Company billed $16,415 for equipment that was being held
pending shipping instructions from a customer. 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 September 30, 2006, is approximately $15,869.
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.
-8-
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 September 30, 2006, the Company had approximately $152,057 in
accounts receivable, net of the allowance for doubtful accounts. Approximately
$132,669 of this balance was from four customers, $120,602 of which was
collected as of November 14, 2006.
During the three month period ended September 30, 2006, two customers accounted
for approximately 14% and 32% of total revenue, respectively. During the nine
month period ended September 30, 2006, one customer accounted for approximately
12% of total revenue. During the three months ended September 30, 2005, two
customers accounted for approximately 12% and 20% of total revenue,
respectively. During the nine month period ended September 30, 2005, two
customers accounted for approximately 14% and 20% of total revenue,
respectively.
During the three month period ended September 30, 2006 two suppliers accounted
for approximately 56% of the Company's purchases of pre-manufactured component
materials, during the nine month period ended September 30, 2006, three
suppliers accounted for approximately 74% 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 September 30,
2006.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs include materials and equipment costs associated
with the formulation, design, construction and testing of new product
prototypes. These costs also include contract labor and salaries, wages and
other related costs of personnel engaged in the research and development
activities. During the three month and nine month periods ended September 30,
2006, the Company incurred approximately $32,500 and $92,500, respectively, in
research and development costs related to the development of a two-way wireless
product for the utility industry. These costs are included in selling, general
and administrative expenses in the accompanying financial statements.
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.
-9-
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 each of the periods presented in the
accompanying financial statements, the effect of the inclusion of dilutive hares
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.
RECLASSIFICATIONS
Certain amounts reported in the condensed consolidated financial statements for
the three and nine month periods ended September 30, 2005 have been
reclassified to conform to the September 30, 2006 presentation.
4. NOTES PAYABLE
At September 30, 2006, notes payable consist of the following:
Related parties:
Note payable, officer; unsecured; interest at prime rate plus 5.5% (13.74% at September 30, 2006); due on demand $ 9,247
Note payable, officer; unsecured; interest at 23.99%, revolving 3,469
----------
$ 12,716
==========
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, 18.24% interest rate, revolving 13,601
-----------
$ 338,601
===========
Long Term:
Convertible debenture, 5% interest rate, due December, 2010 $ 500,000
Convertible debenture, 10% interest rate, due December, 2009 1,303,924
Convertible debenture, 10% interest rate, due March, 2011 137,084
Convertible debenture, 10% interest rate, due April, 2011 165,000
Convertible debenture, 10% interest rate, due May, 2011 92,071
Convertible debenture, 10% interest rate, due June, 2011 205,000
Convertible debenture, 10% interest rate, due July, 2011 135,000
Convertible debenture, 10% interest rate, due August, 2011 126,241
Convertible debenture, 10% interest rate, due September, 2011 185,000
----------
$2,849,320
==========
1) Based on recurring 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.
-10-
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 $55,350
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 Company recorded $7,196
in interest expense during the nine month period ending September 30, 2006
related to the beneficial conversion feature of the debenture. Additionally,
during the nine month period ending September 30, 2006, Dutchess exercised put
notices valued at $47,916 to pay down the debenture, and was issued 1,089,480
shares as a result. The debenture contains a clause calling for an early
redemption penalty of 20%.
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 Company recorded $5,502
in interest expense during the nine month period ending September 30, 2006
related to the beneficial conversion feature of the debenture. 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 $48,300
for the debenture, which is secured by put notices. The Company recorded $3,610
in interest expense during the nine month period ending September 30, 2006
related to the beneficial conversion feature of the debenture. Additionally,
during the nine month period ending September 30, 2006, Dutchess exercised put
notices valued at $37,929 to pay down the debenture, and was issued 1,307,593
shares as a result. The debenture contains a clause calling for an early
redemption penalty of 20%.
On June 15, 2006, Dutchess loaned the Company $205,000 in exchange for a
convertible debenture that is due June 15, 2011. Dutchess was issued 1,010,000
incentive shares of unregistered common stock valued by the Company at $47,470
for the debenture, which is secured by put notices. The Company recorded $4,556
in interest expense during the nine month period ending September 30, 2006
related to the beneficial conversion feature of the debenture. The debenture
contains a clause calling for an early redemption penalty of 20%.
On July 6, 2006, Dutchess loaned the Company $135,000 in exchange for a
convertible debenture that is due July 6, 2011. Dutchess was issued 575,000
incentive shares of unregistered common stock valued by the Company at $28,750
for the debenture, which is secured by put notices. The Company recorded $2,250
in interest expense during the nine month period ending September 30, 2006
related to the beneficial conversion feature of the debenture. The debenture
contains a clause calling for an early redemption penalty of 20%.
On August 21, 2006, Dutchess loaned the Company $160,000 in exchange for a
convertible debenture that is due August 21, 2011. Dutchess was issued 1,000,000
incentive shares of unregistered common stock valued by the Company at $35,000
for the debenture, which is secured by put notices. The Company recorded $1,778
in interest expense during the nine month period ending September 30, 2006
related to the beneficial conversion feature of the debenture. Additionally,
during the nine month period ending September 30, 2006, Dutchess exercised put
notices valued at $33,759 to pay down the debenture, and was issued
1,009,035shares as a result. The debenture contains a clause calling for an
early redemption penalty of 20%.
On September 27, 2006, Dutchess loaned the Company $185,000 in exchange for a
convertible debenture that is due September 27, 2011. In addition to the
debenture, which is secured by put notices, Dutchess was issued a warrant to
purchase 1,200,000 shares of common stock for $0.001 per share. The Company has
valued the warrant, which it considers to be equivalent to 1,200,000 shares of
common stock, at $48,000. See note 5 below. The debenture contains a clause
calling for an early redemption penalty of 20%.
In addition to the activity discussed about, during the nine month period ending
September 30, 2006, Dutchess exercised puts valued at $737,832 to pay off four
notes and one debenture, plus all related interest, that had been outstanding at
December 31, 2005, and exercised puts valued at $59,573 to pay down a debenture
that had been outstanding at December 31, 2005. Dutchess was issued 14,661,608
shares as a result of these transactions. The Company recorded $121,039 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.
During the three and nine month periods ended September 30, 2006, the Company
recognized a total of $54,680 and $254,281, respectively, in interest expense
related to the beneficial conversion feature of debentures outstanding during
the period. During the three and nine month periods ended September 30, 2006,
the Company also recognized $8,533 and $75,667, respectively, in commissions due
to a third party as a result of puts exercised by Dutchess during the period.
-11-
Subsequent to September 30, 2006, Dutchess has exercised four puts valued at
$65,432 in order to pay down the debentures issued in May, 2006 and August 2006.
The Company issued Dutchess 1,888,000 shares of common stock as a result.
On October 6, 2006, Dutchess loaned the Company $105,000 in exchange for a
convertible debenture that is due October 6, 2011. In addition to the debenture,
which is secured by put notices, Dutchess was issued a warrant to purchase
650,000 shares of common stock for $0.001 per share. The Company has valued the
warrant, which it considers to be equivalent to 650,000 shares of common stock,
at $19,250. The debenture contains a clause calling for an early redemption
penalty of 20%.
On October 25, 2006, Dutchess loaned the Company $330,000 in exchange for a
convertible debenture that is due October 25, 2011. In addition to the
debenture, which is secured by put notices, Dutchess was issued a warrant to
purchase 1,250,000 shares of common stock at $0.001 per share. The Company has
valued the warrant, which it considers to be equivalent to 1,250,000 shares of
common stock, at $62,500. The debenture contains a clause calling for an early
redemption penalty of 20%.
5. STOCKHOLDERS' DEFICIT
COMMON STOCK
During the nine month period ending September 30, 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 prepaids related to
one of the contracts as of September 30, 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.
During the nine month period ended September 30, 2006, the Company issued
options to purchase 200,000 shares to employees, 250,000 shares to a consultant
and 4,000,000 shares to its board members. The Company recognized $96,738 and
$102,714 respectively, in non-cash compensation expense for the three and nine
month periods ending September 30, 2006 for the vesting of these and previously
issued options.
Effective September 25, 2006, the Company approved the exchange of 3,256,666
shares of its outstanding common stock previously issued to Dutchess for
warrants to purchase an equal number of shares of Company common stock for
$0.001 per share. As a result of the exchange, the Company reduced the number
of its shares outstanding by 3,256,666. However, because the exercise price of
the warrants is minimal, and Dutchess has seven years to exercise the warrants,
the Company has continued to value and account for the warrants as if they were
incentive shares that were originally issued with the associated debentures. As
such, the warrants issued in exchange for common stock continue to be expensed
as interest expense at the same value and over the same period as the shares
they were exchanged for. Any warrants issued with debentures to Dutchess
subsequent to September 25, 2006 that have minimal exercise prices and long
lives have also been valued at the fair value of the Company's common stock, are
being accounted for by the Company as incentive shares, and expensed as interest
expense over the lives of the associated debentures. All debentures associated
with these warrants have been recorded at their full face values in the
accompanying financial statements.
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
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.
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. As of
September 30, 2006, the Company billed $16,415 for equipment that was being held
pending shipping instructions from a customer. 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 September 30, 2006, is approximately $15,869.
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.
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.
-12-
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 2006 AND SEPTEMBER 30, 2005
The components of revenue and their associated percentages of total revenues,
for the three months ended September 30, 2006 and 2005 are as follows:
Three months ended September 30,
2006 2005 $ Change % Change
------------------- ------------------- ---------- --------
Revenues:
Rebooting products $ 57,847 25% $ 30,563 25% $ 27,284 47%
Logic boards 94,555 41% 14,774 12% $ 79,781 84%
Utility products 55,804 24% 51,895 43% $ 3,909 7%
Emergency notification products 5,960 2% 10,975 9% $ (5,015) -46%
Airtime sales 10,628 5% 9,729 8% $ 899 8%
Other product 5,025 2% 1,840 2% $ 3,185 63%
Freight 1,891 1% 1,197 1% $ 694 37%
----------- ---------- -----------
Total revenues $ 231,710 100% $ 120,973 100% $ 110,737 92%
=========== ========== ===========
Revenues for the three-month period ended September 30, 2006 were $231,710 as
compared to $120,973 for the corresponding period of the prior year, an increase
of 92% between periods. With the exception of emergency notification products,
sales of Company's core products increased between the periods presented.
Although the Company's revenues failed to increase for the fifth consecutive
quarter, the Company actually closed on significantly more contracts during the
three months ending September 30, 2006 than it had closed on in any of the
previous eight quarters. Lead times on required parts that stretched beyond
September 30, 2006 prevented the Company from completing, shipping and billing
for all orders taken during the three month period ending September 30, 2006.
A sustained sales and marketing effort, which began in 2005 and was enhanced in
2006 with the hiring of new sales and marketing personnel, has allowed the
company to stay in regular contact with and grow its customer base. A large
portion of the Company's revenues were generated during the current year quarter
by existing customers who ordered for the second or third time. A single
customer contributed approximately half of the logic board revenues during the
three month period ended September 30, 2006. This electric utility customer
purchased the Company's PT1000 logic board with specialized firmware, placed in
a customer enclosure, in order to control capacitor banks. An almost equally
large portion of revenues was generated by customers who were placing their
initial orders. Sales of the Company's emergency notification products declined
slightly between the periods presented. The Company is not yet providing
significant sales and marketing dollars towards these products as the market for
such products is still developing. The products, sold mainly to firehouses for
in-station alerting, were first sold by the Company in the latter stages of
2005. Airtime revenues increased slightly between the periods presented due to
the addition of new customers between the periods presented.
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 increased by $45,111 or 49% to $136,690 for
the three months ended September 30, 2006 from $91,579 for the corresponding
period of the prior year but decreased as a percentage of revenues between the
periods from 76% in 2005 to 59% in 2006. As a result, the Company's gross margin
increased between the periods from 24% to 41%. This improvement in gross margins
is attributable to the increase in products produced during the 2006 period as
compared to the 2005 period, which led to volume discounts for parts and
in-house production efficiencies. The increase in revenues assisted in covering
fixed overhead charges at the Company's assembly facility in Denver, Colorado.
Selling, general and administrative expenses for the three months ended
September 30, 2006 increased by $78,879 or 17% to $555,375 from $476,496 for the
three-month period ended September 30, 2005. During the current year period
presented, the Company incurred $80,000 in non-cash expenses associated with the
granting of options, which immediately vested, to purchase 4.0 million shares of
common stock to the Company's two board members. Shares underlying these options
have not been registered by the Company with the Securities and Exchange
Commission. Excluding these expenses, selling, general and administrative
expenses remained relatively flat between the periods presented.
Interest expense increased $14,545 or 11% between the three-month periods
presented. During 2005, the Company borrowed funds on a monthly basis from
Dutchess under short-term notes. While the Company has continued to borrow funds
from Dutchess on a monthly basis, and the amount of debt outstanding at
September 30, 2006 has increased in comparison to the amount outstanding one
year earlier, all amounts outstanding throughout the third quarter of 2006 are
under debentures that mature four to five years from their date of issuance. Any
associated expenses for loan discounts and incentive shares on these notes are
amortized over the life of the note, resulting in smaller amounts of interest
expense recorded by the Company on a monthly basis.
-13-
The net loss to common shareholders for the three-month period ended September
30,2006 was $605,751 compared to $578,177 for the three-month period ended
September 30, 2005, an increase of 5%. Although the Company produced
approximately $66,000 more gross margin dollars in the current year period than
in the prior year period, that increase was slightly more than offset by the
$80,000 non-cash expense associated with the option award to the Company's
directors discussed above, as well as the slight increase in interest expense
recognized between the periods presented. The net loss per common share for each
of the quarters presented was ($0.01).
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 2006 AND SEPTEMBER 30, 2005
The components of revenue and their associated percentages of total revenues,
for the nine months ended September 30, 2006 and 2005 are as follows:
Nine months ended September 30,
2006 2005 $ Change % Change
------------------- ------------------- ---------- --------
Revenues:
Rebooting products $ 139,563 22% $ 73,168 19% $ 66,395 48%
Logic boards 130,930 21% 54,441 14% $ 76,489 58%
Utility products 267,329 43% 131,040 33% $ 136,289 51%
Emergency notification products 44,126 7% 10,975 3% $ 33,151 75%
Hydro 1 - 76,975 20% (76,975) n/a
Airtime sales 27,755 4% 37,519 9% $ ( 9,764) -26%
Other product 10,069 2% 3,137 1% $ 6,932 69%
Freight 5,464 1% 3,312 1% $ 2,152 39%
---------- ----------- ----------
Total revenues $ 625,236 100% $ 390,567 100% $ 234,669 60%
========== =========== ==========
Revenues for the nine-month period ended September 30, 2006 were $625,236 as
compared to $390,567 for the corresponding period of the prior year, an increase
of 60% between periods. Sales of all of the Company's core products increased at
least 48% between the periods presented. During the nine months ended September
30, 2005, one customer, who purchased the Company's Hydro 1 product, represented
approximately 20% 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 a
core product that it markets and sells on an ongoing basis.
A sustained sales and marketing effort, which began in 2005 and was enhanced in
2006 with the hiring of new sales and marketing personnel, has allowed the
company to stay in regular contact with and grow its customer base. Sales to
both new and existing customers contributed significantly to revenues during the
first nine months of fiscal 2006. As a result, the company's dependence on a
few large customers has decreased, with only one customer accounting for just
slightly more than 10% of revenues generated during the nine month period ending
September 30, 2006.
Airtime revenues decreased 26%, or $9,764 between the two periods presented.
Recurring monthly airtime revenues from the Company's largest customer declined
significantly in July 2005 when that customer lost its own remote monitoring
contract with a customer, and airtime access to more than 2,400 rebooting units
was canceled. However, the Company has continued to add new customers during
this time period, and as a result airtime revenues generated during the three
month period ending September 30, 2006 exceeded airtime revenues generated
during the same fiscal quarter of 2005.
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 increased by $119,780 or 43% to $400,983
for the nine months ended September 30, 2006 from $281,203 for the corresponding
period of the prior year, but decreased as a percentage of revenues between the
periods from 72% in 2005 to 64% in 2006. As a result, the Company's gross margin
increased between the periods from 28% to 36%. This improvement in gross margins
is attributable to the increase in products produced during the 2006 period as
compared to the 2005 period, which led to volume discounts for parts and
in-house production efficiencies. The increase in revenues assisted in covering
fixed overhead charges at the Company's assembly facility in Denver, Colorado.
In addition, the gross margin for the nine month period ended September 30, 2005
was high relative to the number of products produced during the period because
of the one-time sale of the higher margin Hydro 1 units produced during that
period.
Selling, general and administrative expenses for the nine months ended September
30, 2006 increased by $240,554 or 15% to $1,866,749 from $1,626,195 for the
nine-month period ended September 30, 2005. This increase was due primarily to
the recognition of approximately $177,000 in noncash expenses from unregistered
stock issuances to public relations firms, as well as the recognition of $80,000
in non-cash expense associated with the vesting of options to purchase 4.0
million shares of stock which were granted to the Company's two board members.
The Company also incurred approximately $90,000 in fees for research and
development efforts on new devices capable of bi-directional communication.
These expenses were offset to some degree by decreases in legal fees incurred by
the Company between the periods presented.
Interest expense increased $291,799 or 47% between the nine-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, 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. During the second and third quarters of 2006,
monthly interest expense incurred actually declined, as most short term notes
from Dutchess had either been paid off or had been rolled into long term
debentures. These longer term arrangements allow the Company to expense loan
discounts and incentive shares over longer periods of time, resulting in lower
monthly interest accruals than shorter term notes.
The net loss to common shareholders for the nine-month period ended September
30,2006 was $2,554,993 compared to $2,138,193 for the nine-month period ended
September 30, 2005, an increase of 19%. Increased revenues and gross profit
dollars were more than offset by increases in expenses associated with public
relations firms, the non-cash expense associated with the options awarded to the
Company's two board members, and the amount of interest expense recorded during
the first quarter of 2006 associated with the early payoff of notes held by
Dutchess. The net loss per common share for the nine month period ended
September 30, 2006 was ($0.04) as compared to (0.06) for the previous year's
period presented. The improvement was the result of the increase in the weighted
average number of shares outstanding from period to period, primarily due to the
issuance of shares to Dutchess during the first quarter of 2006 which were
utilized to reduce the amounts outstanding under notes and debentures held by
Dutchess.
LIQUIDITY AND CAPITAL RESOURCES
The Company's financial statements for the nine months ended September 30, 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 $2.6 million
during the nine-month period ended September 30, 2006 and had a stockholders'
deficit of approximately $2.6 million as of September 30, 2006.
The Report of 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 to generate
additional cash flows from operations.
In August 2004, 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 nine-month period ended September 30, 2006, net cash used in
operating activities was approximately $1.6 million. This net cash flow deficit
was covered by proceeds of $1,615,000 from the issuance of a note and debentures
to Dutchess during the period. Major cash outlays during the period were
approximately $506,000 for payroll/employee benefits, $344,000 for public
relations efforts, $304,000 for inventory, $148,000 for consulting expense,
$122,000 for sales and marketing efforts, and $90,000 for product development.
The amount of net cash used in operating activities of the Company has decreased
each successive quarter throughout 2006 as the Company's sales levels have
increased at a faster rate than it has incurred expenses related to sales
production. Net cash used from operations during the first, second and third
fiscal quarters of 2006 was $605,116, $586,453 and $372,384, respectively. In
an effort to further reduce expenses, subsequent to September 30, 2006, Dutchess
and the Company agreed to terminate their consulting arrangement and to
discontinue the advanced funding of the Company through the issuance of notes.
By doing so, the Company will no longer incur $10,000 in monthly consulting fees
or fees and interest previously incurred with the issuance of new notes and
debentures. Beginning in January 2007, the Company is expecting to access funds
from Dutchess through the periodic issuances of puts under its existing
investment agreement with Dutchess.
The Company issued 19,370,736 shares to Dutchess during the nine-month period
ended September 30, 2006 which was used to pay down $1,513,348 in debt during
the period. Each note or debenture issued by the Company to Dutchess is secured
by put notices, which allow Dutchess to exercise puts in order to pay down on
the notes and debentures if they want to.
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.
-14-
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 September 30, 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 September 30,
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. However, on September 23, 2005, the Company's
Principal Accounting and Financial Officer, Daniel P. McRedmond, resigned as the
Company's Corporate Controller. As a result, the Company's Chief Executive
Officer, H. Douglas Saathoff, will serve as the Company's Principal Operating
and Principal Accounting and Financial Officer until Mr. McRedmond's successor
is hired.
-15-
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
Accounting and Financial 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
-16-
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
NIGHTHAWK SYSTEMS, INC.
(Registrant)
Date: November 14, 2006 By: /s/ H. Douglas Saathoff
---------------------------
H. Douglas Saathoff,
Chief Executive Officer, Principal
Accounting and Financial Officer
-17-