4
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
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FORM
10-K
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the fiscal year ended
December 31, 2009
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or
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the transition period from: _____________ to
_____________
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HAWK SYSTEMS,
INC.
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(Exact name of
registrant as specified in its charter)
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Delaware
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000-49864
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65-1089222
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(State
or Other Jurisdiction
of
Incorporation or Organization)
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Commission
File
Number
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(I.R.S.
Employer
Identification
No.)
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2385
NW Executive Center Drive, Suite 100
Boca
Raton, FL 33431
(Address
of Principal Executive Office) (Zip Code)
(561)
962-2885
(Registrant’s
telephone number, including area code)
N/A
(Former
name or former address, if changed since last report)
———————
Securities
registered pursuant to Section 12(b) of the Act: None
Securities
registered pursuant to Section 12(g) of the Act:
Common
Stock, par value $0.01
———————
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes
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No
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Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes
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No
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Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 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
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No
þ
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this chapter) is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.
¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act (Check one):
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Large
accelerated filer
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Accelerated
filer
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Non-accelerated
filer
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Smaller
reporting company
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(Do
not check if a smaller reporting company)
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes
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No
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The
aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant, as of June 30, 2009, was
approximately $3,816,522 based upon the closing price reported for such
date on the OTC Bulletin Board. For purposes of this disclosure, shares of
common stock held by persons who hold more than 5% of the outstanding shares of
common stock and shares held by executive officers and directors of the
registrant have been excluded because such persons may be considered to be
affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
Indicate
the number of shares outstanding of each of the registrant’s classes of common
stock, as of the latest practicable date: 65,361,332 as of April 15,
2010
DOCUMENTS
INCORPORATED BY REFERENCE: NONE
HAWK
SYSTEMS, INC.
Table
of Contents
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PART
I
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FORWARD-LOOKING
STATEMENTS
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ITEM
1.
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BUSINESS
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1
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ITEM
2.
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PROPERTIES
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5
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ITEM
3.
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LEGAL
PROCEEDINGS
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5
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PART
II
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ITEM
5.
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MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
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6
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ITEM
7.
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MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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7
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ITEM
8.
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FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
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10
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ITEM
9.
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CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
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11
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ITEM
9A(T)
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CONTROLS
AND PROCEDURES
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11
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ITEM
9B.
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OTHER
INFORMATION
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12
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PART
III
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ITEM
10.
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DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
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13
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ITEM
11.
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EXECUTIVE
COMPENSATION
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15
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ITEM
12.
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SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
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17
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ITEM
13.
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CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
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19
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ITEM
14.
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PRINCIPAL
ACCOUNTANT FEES AND SERVICES
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19
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PART
IV
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ITEM
15.
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EXHIBITS
AND FINANCIAL STATEMENT SCHEDULES
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20
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SIGNATURES
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21
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PART
I
FORWARD-LOOKING
STATEMENTS
This
Annual Report on Form 10-K (“Annual Report”) contains forward-looking
statements that have been made pursuant to the provisions of Section 21E of
the Securities Exchange Act of 1934, as amended, and the Private Securities
Litigation Reform Act of 1995 and concern matters that involve risks and
uncertainties that could cause actual results to differ materially from
historical results or from those projected in the forward-looking statements.
Discussions containing forward-looking statements may be found in the material
set forth under “Business,” “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and in other sections of this Annual
Report. Words such as “may,” “will,” “should,” “could,” “expect,” “plan,”
“anticipate,” “believe,” “estimate,” “predict,” “potential,” “continue” or
similar words are intended to identify forward-looking statements, although not
all forward-looking statements contain these words. Although we believe that our
opinions and expectations reflected in the forward-looking statements are
reasonable as of the date of this Annual Report, we cannot guarantee future
results, levels of activity, performance or achievements, and our actual results
may differ substantially from the views and expectations set forth in this
Annual Report. We expressly disclaim any intent or obligation to update any
forward-looking statements after the date hereof, to conform such statements to
actual results or to changes in our opinions or expectations.
ITEM
1. BUSINESS
Hawk
Systems, Inc. (the “Company” or “Hawk Systems”) is a Delaware corporation formed
in February 2001. Prior to the merger in February 2009, we were
engaged in the business of acquiring and managing parking lots and garages in
New York City and surrounding areas through our subsidiary, Parking Pro, Inc., a
New York corporation (“Parking Pro”). On February 19, 2009, pursuant
to the terms of an Agreement and Plan of Merger (the “Merger Agreement”) between
the Company (formerly known as Explorations Group, Inc.), Hawk Acquisition
Corp., a wholly-owned Florida subsidiary of the Company (“Hawk Acquisition”) and
Hawk Biometric Technologies, Inc., a Florida corporation (“Hawk Biometric”),
Hawk Acquisition merged with Hawk Biometric. Pursuant to the merger, Hawk
Biometric was the surviving entity and became a wholly-owned subsidiary of the
Company. As a result of the merger, we are now a developer of innovative
fingerprint authentication technology that we believe offers high degrees of
security, convenience, and ease of use in applications such as automobile locks
and potentially identity theft protection. We believe that this type
of technology can also be used in banking, healthcare, hotel/casino operations,
employee time clock and attendance, stadium security, sporting and gaming
applications where identity management is required.
Overview
Hawk
Biometric was incorporated on October 25, 2007. Immediately upon its
inception, Hawk Biometric acquired patented technology from Hawk Biometrics of
Canada, Inc., a Canadian corporation formed in 2002, covering the use of
fingerprint technology to permit the operation of a vehicle only by an
authorized driver. In addition, the Company acquired ideas for other
potential related technologies.
Hawk
Systems’ current product offering is based on
US Patent 6,927,668 The Hawk Print
Access Security System (PASS)
which is owned by Hawk Biometric and we are
working on developing a prototype using the technology under pending patent
US Patent Application SN
11/622,48, The Hawk Touch & Go POS
which is
presently owned by Mr. David Coriaty our founder and member of our board of
directors. We are currently using the technology under the pending POS patent
under a verbal licensing agreement with Mr. Coriaty, however, we anticipate
formalizing this arrangment in a written agreement in the
future
. It is also our intention to file
additional process patents as warranted to further expand our product
offerings.
Biometric
Technology Background
As the
level of security breaches and transaction fraud increases, management believes
the need for highly secure identification and personal verification technologies
is becoming apparent. One solution to providing highly secure
identification and personal verification solutions is the extensive array of
existing biometric technologies. Biometrics are automated methods of
recognizing a person based on a physiological or behavioral
characteristic. Among the unique features measurable by various
biometric technologies and used for unique identification purposes are face,
fingerprints, hand geometry, handwriting, iris, retinal, vein and
voice. Traditional fingerprint scanning technology uses an image of
the surface of the finger to match and authenticate access.
Managment
believes that the Hawk Systems’ advantages over traditional fingerprint scanning
include the follwing:
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Fingerprint Read vs.
Scan:
The fingerprint is read vs. a scan, resulting in “live”
data.
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5 Layers Deep:
Figure 1
illustrates how the Company’s technology penetrates 5 epidermal layers of
skin, removing the effects of surface
variations.
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Eliminates fingerprint
“spoofing”:
The Company’s technology completely eliminates the
ability to fraudulently mimic a fingerprint using the “gummi bear”
approach as there is no surface
scanning
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Removal of data security
concerns:
After the fingerprint is read, it is converted by a
unique algorithm into a numeric sequence, which cannot be used for access
without algorithmic decryption. This algorithm-based approach
is similar to the concept behind the RSA SecureID card, which utilizes a
seed and algorithm to generate a unique password number every 60
seconds.
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Reduction of data
storage:
The numeric sequences used by the reader take up
significantly less data storage that the corresponding fingerprint image
used by traditional scanners.
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Alternate action
programming:
By placing a different finger on the scanner, an
alternate programming action will be initiated. This permits
the automotive products to operate in a “valet” mode that is accessible by
any driver and the ATM products to switch to a “distressed” mode that will
trigger a silent alarm in the event someone attempts to force the user to
take money out against their will.
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Automotive
Market Analysis
Market
Size
According
to the Bureau of Transportation Statistics, there were approximately 254.4
million registered vehicles on the road in the US in 2007.
1
Over 8.7 million vehicles of the
total were fleet vehicles registered to governments, rental companies and
commercial entities.
2
This total includes cars and trucks
weighing less than 19,501 lbs. The average length of time a fleet
vehicle remains in service ranges from 29 to 46 months.
3
Market
Opportunity
We
believe that there is a substantial market for our
Print Access Security System (PASS)
automotive security product in North America, particularly for fleet
vehicles due to both the number of vehicles in service and the level of vehicle
turnover based on average length of service.
We intend
to enter into discussions with various government, corporate and rental company
fleet management groups during the initial deployment period to explore the
possibility of entering into a business relationship.
We also
plan on discussing potential licensing and subcontract partnerships with the
major automotive security product manufacturers, offering them an opportunity to
enhance the value of their products by including biometric access capability.
Currently, we have no agreements in place to sell the PASS
product.
____________________________
1
http://www.bts.gov/publications/national_transportation_statistics/html/table_01_11.html.
2
Bobit
Publishing Company, Automotive Fleet Research Department, Automotive Fleet
Factbook 2008, Redondo Beach, CA, 2009
3
Id
.
ATM
Market Analysis
Market
Size
According
to a survey by Javelin Strategy and Research in 2007, Americans suffered $49
billion in identity theft related losses.
4
Almost 8.5 million Americans were
effected by identity theft and fraud in 2007.
5
Market
Opportunity
In
August, 2008, several debit-card "identities" were stolen by a skimming
device
placed on a
bank's ATM in Cape Coral, Florida.
6
With only a four digit security
code for protection, it has become increasingly likely that people will
experience some type of loss due to compromise of their ATM card
security. We believe that our
Touch & Go POS
patent
pending technology will minimize a significant amount of ATM card theft and
fraud.
We are
currently in discussions with a Florida regional bank about the potential use of
the
Touch & Go POS
biometric security technology in its operations on a pilot basis. We
believe that an initial pilot project will produce valuable product enhancement
feedback as well as provide a reference customer for potential future sales
opportunities. We also intend to seek discussions with additional
financial institutions, as well as ATM network operators and ATM original
equipment manufacturers (“OEMs”) relative to both additional deployments and
technology licensing or subcontract agreements.
Technology
and Main Products
Hawk
Biometric currently holds a U.S. patent for the process of Fingerprint
Enrollment & Verification Module (“FEVM”) for use on various types of
transportation within the U.S. The FEVM can read the unique biometric profile of
an individual fingerprint and thereafter transmit this unique data to a module
with stored information and either allow or decline door locks or
ignition.
Issued
Patent:
1.
US Patent 6,927,668 The Hawk Print Access Security System (PASS)
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a.
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A
fingerprint enrollment and verification module is connected to the
electrical circuit of a vehicle to prevent operation of the vehicle by
unauthorized users. The module has a sensor that creates a template of a
fingerprint when a finger is placed on the module. The module has a flash
memory to store enrolled templates and a verification step. After a
fingerprint has been enrolled in the module, any operation of that vehicle
is possible only after the user's fingerprint is verified to match the
enrolled template (Print Access Security System US Patent
6927668)
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b.
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The
Print Access Security System is designed to take advantage of the
dramatically superior security features offered by biometrics together
with the convenience of never losing your “key”. The encrypted algorithm
that is created by the fingerprint reader provides a level of security
that resides literally in the hands of the car’s owner. This system does
not rely on manufactured chip sets, key blanks or even access
pins.
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Patent
Pending:
1.
US Patent Application SN 11/622,488, The Hawk ATM Touch & Go
POS
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a.
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The
use of a wireless system for the creation of a personal identification
data set (“PIDS”) for communication to a secure server within a controlled
facility.
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We
believe that the Touch & Go Biometric POS application will provide
convenience with added security against identity theft and fraud to both
financial institutions and consumers. We believe that consumers will
be able to benefit with savings by being a VIP member of the participating
retailer. The consumer will simply sign up at the POS location and enroll
multiple fingerprints into the Company’s system which will be attached to the
consumer’s account of choice, (i.e. Visa, MasterCard, Amex, and Debit). From
that point forward all the consumer will do is Touch &
Go.
Currently,
we are in discussions with a regional bank regarding the development of a
prototype for use in its branches, which we believe is the first step in
developing this product. We have not yet developed or manufactured a
product using this concept and do not currently have any agreements in
place.
This
patent application is presently registered with the United States Patent Office
in the name of its inventors, Mr. David Coriaty, a member of our board of
directors, and Craig Casey. Mr. Casey subsequently assigned his
interest in the patent to Mr. David Coriaty in April 2010. We are
currently using the technology under this patent application pursuant to a
verbal licensing agreement with Mr. Coriaty, however, we anticipate formalizing
this arrangement in a written agreement in the future.
_____________________
4
Privacy Rights
Clearinghouse, "Identity Theft Survey and Studies: How many Identity Theft
Victims are There?", 2003-2010 (citing
Javelin Strategy & Research Survey,
2007 Identity Fraud Survey Report, 2007).
5
Id.
6
Consumer
Reports, Jan. 2010.
Sales
Distribution and Partnerships
We are
dedicated to building our business based on application of our technology in a
variety of markets. We intend to work with OEMs, value added
retailers and end user customers to maximize the number of potential routes to
market for our products.
Manufacturing
We have
established a relationship with Florida MicroElectronics (“FME”) to manufacture
our PASS system. FME is an electronic manufacturing services company
located in West Palm Beach, Florida. Its 40,000 sq. ft. facility is
ISO 9001 and TS 16949 registered. We believe that FME provides a
combination of experience, core capabilities and resources in advanced
microcircuits which we can utilize to design and manufacture our
products. FME offers product design and development, prototype
services and flexible automated/semi-automated electronic component
manufacturing services.
Competition
There are
numerous companies that produce biometric, fingerprint-based security
solutions. Many of those solutions use a surface scan that produces a
digital image of the fingerprint. This approach, which involves
scanning the surface of the finger and identifying “constellation points” for a
match, has two major caveats which have impeded the wide scale deployment: data
storage size and security.
A high
resolution image requires fairly sizable amount of data storage, which can
easily be seen with today’s mega-pixel digital cameras. Scaling the
number of images to some of the potential biometric security applications
requires significant amount of data storage capacity.
A
potentially larger issue for traditional fingerprint scanning technology
involves the security of the fingerprint scan and the ability for data
compromise. One Japanese researcher, Tsutomu Matsumoto, in 1992 was
able to “spoof” a fingerprint scanner by using a gelatin found in gummy
bears.
7
We believe that our technology
resolves this issue by reading five layers deep of the epidermal layer of skin,
rendering surface level fingerprint duplication impossible.
Research
and Development
Research
and development involves the development of both the design and actual
components of our fingerprint authentication technology as well as activities
that enable us to keep abreast of the dynamic and evolving industry for these
products. Research and development expenses totaled $109,491 and $15,942 for the
fiscal years ended December 31, 2009 and 2008, respectively.
Governmental
Regulation
We are
subject to the laws and regulations which apply to all businesses in general.
The cost of compliance with all such regulations is minimal. We do not believe
we are subject to any specific regulations as a result of our business and did
not spend any material amounts during the fiscal year ended December 31, 2009 on
compliance with environmental laws.
Employees
We
outsource the design and manufacturing of our product to a contract
manufacturer. This allows us to maintain a small full time staff to
handle administrative functions. As of December 31, 2009, we had one
(1) full time employee. We believe that our future success will
depend in large part on our ability to attract, integrate, retain and motivate
highly qualified sales and managerial personnel, and upon the continued service
of our senior management. The competition for qualified personnel in our
industry and graphical location is intense, and there can be no assurance that
we will be successful in attracting, integrating, retaining and motivating a
sufficient number of qualified personnel to conduct our business in the future.
From time to time, we also employ independent contractors to support our
marketing and sales organization. We have never had a work stoppage, and no
employees are represented under collective bargaining agreements. We consider
our relations with our employee to be good.
_______________________
7
ITU-T Workshop on Security, Seoul; May
14, 2002.
ITEM
1A. RISK FACTORS
Not
required for smaller reporting companies.
ITEM 1B.
UNRESOLVED STAFF
COMMENTS
Not
applicable.
ITEM
2. PROPERTIES
Our
executive offices are located at 2385 NW Executive Center Drive, Suite 100, Boca
Raton, FL 33431. The facility is a virtual office, which we rent
pursuant to a services agreement for a cost of approximately $225 per month on a
month-to-month basis. We believe that the virtual office is adequate
for our current needs and we do not anticipate the need to move to a larger
facility until we have hired several additional employees.
ITEM 3. LEGAL PROCEEDINGS
On June
9, 2009, Leonard Tucker, as co-Trustee of the Tucker Family Spendthrift Thrust
(“Trust”), filed a complaint against us in the 15th Judicial Circuit of Palm
Beach County. Michelle Tucker, the other co-Trustee of the Trust, was formerly
the President and Chief Executive Officer of the Company. The Trust
held a Class A, Series A Convertible Bond (“Bond”) issued by us in the principal
amount of $25,000, which was convertible into shares of our securities such
that, upon complete conversion of the Bond, the aggregate number of shares owned
by the Bondholder would be equal to 10% of all of our outstanding capital stock
and capital stock reserved in conjunction with existing corporate obligations
(i.e. options, warrants, etc.). In its complaint, the Trust alleged breach
of contract and specific performance for our failure to issue certain shares
under the Bond after the Trust provided notice of election to convert $24,000 in
principal and accrued interest of the Bond on April 29, 2009. On
January 25, 2010, we entered into a settlement agreement (“Settlement
Agreement”) with the Trust in order to settle the ongoing litigation between us
and the Trust. In accordance with the terms of the Settlement
Agreement, we agreed to issue the Trust 3,960,030 shares of our Common Stock and
64,165 shares of our Series B Preferred Stock (collectively, the “Securities”).
We subsequently issued the Securities to the Trust and therefore, we have
no further obligation under the Bond. Under the terms of the
Settlement Agreement, we and the Trust agreed to release and forever discharge
each other, our present officers, agents and employees from any and all claims
and demands which have been or may have been based upon any facts or
circumstances that arose or existed on or prior to the date of the Settlement
Agreement. We executed the release February 23, 2010 and the Trust
executed the release on March 3, 2010. The Trust filed a stipulation
and order of dismissal with prejudice with the 15th Judicial Circuit Court of
Palm Beach County and the judge entered an order of dismissal with prejudice on
February 26, 2010.
ITEM
5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES.
Market
Information
Our
Common Stock is quoted on the Over-the-Counter Bulletin Board (“OTCBB”), under
the symbol “HWSY.” Prior to that, our Common Stock was quoted under
the symbol “EXGI.” On April 7, 2010, we effected a 1-for-6 reverse
split of our Common Stock. As a result, our symbol has had the letter “D”
appended to the end of it for 20 days from the date of the reverse
split.
The
following table sets forth, for the periods presented, the high and low bid
price ranges of our Common Stock as reported on the OTCBB prior to giving effect
to our 1-for-6 reverse stock split. The over-the-counter market quotations
reflect inter-dealer prices, without retail mark-up, mark-down or commission and
may not necessarily represent actual transactions.
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High
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Low
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Fiscal
year ended December 31, 2008:
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First
Quarter
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$
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0.020
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$
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0.017
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Second
Quarter
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$
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0.018
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$
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0.008
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Third
Quarter
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$
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0.010
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$
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0.008
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Fourth
Quarter
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$
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0.090
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$
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0.013
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Fiscal
year ended December 31, 2009:
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First
Quarter
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$
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0.03
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$
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0.24
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Second
Quarter
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$
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0.25
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$
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0.13
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Third
Quarter
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$
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0.21
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$
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0.11
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Fourth
Quarter
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$
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0.15
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$
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0.05
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Holders
As of
March 31, 2010, we had approximately 86 stockholders of record, solely based
upon the count our transfer agent provided us as of that date. This number does
not include:
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any
beneficial owners of common stock whose shares are held in the names of
various dealers, clearing agencies, banks, brokers and other fiduciaries,
or
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broker-dealers
or other participants who hold or clear shares directly or indirectly
through the Depository Trust Company, or its nominee, Cede &
Co.
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Dividends
We have
never declared or paid dividends on our Common Stock. We intend to use retained
earnings, if any, for the operation and expansion of our business, and therefore
do not anticipate paying cash dividends in the foreseeable future. In
addition, the General Corporation Law of the State of Delaware prohibits us from
declaring and paying a dividend on our Common Stock at a time when we do not
have either (as defined under that law):
|
|
·
|
a
surplus, or, if we do not have a
surplus,
|
|
|
·
|
net
profit for the year in which the dividend is declared and for the
immediately preceding year.
|
Equity
Compensation Plan
As of
December 31, 2009, we did not have any employee compensation plans under
which our equity securities were authorized for issuance.
Unregistered
Sales of Equity Securities
Except as
provided herein, all unregistered sales of securities issued during the fiscal
year ended December 31, 2009 have been previously reported on the Company’s
quarterly reports on Form 10-Q or current reports on Form 8-K.
On
October 7, 2009, our board of directors approved the issuance of 4,500,000
shares of our restricted Common Stock (on a pre-reverse split basis) to an
entity controlled by our former chief executive officer, chief financial officer
and director, Mr. Eric Brown, as reimbursement for a payment made by the entity
on our behalf pursuant to a consulting agreement between us and a
consultant. The shares were not physically issued untill January 14,
2010. We believe that the issuance was exempt from registration under
Section 4(2) of the Securities Act of 1933, as amended (“Securities
Act”).
The
issuances of securities were exempt from registration under the Securities Act
in reliance upon Section 4(2) of the Securities Act and/or
Regulation D promulgated thereunder as transactions by an issuer not
involving a public offering. The securities are restricted securities for
purposes of the Securities Act. A legend was placed on the certificate
representing the securities providing that the securities have not been
registered under the Securities Act and cannot be sold or otherwise transferred
without an effective registration or an exemption therefrom.
ITEM 6.
SELECTED FINANCIAL
DATA.
Not
required for smaller reporting companies under Regulation S-K.
ITEM
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
Our
predecessor, Explorations Group, Inc., operated parking garages in New York City
through its operating subsidiary Parking Pro, Inc. (“Parking Pro”). On
February 19, 2009, we acquired Hawk Biometric through a merger transaction
between our subsidiary Hawk Acquisition and Hawk Biometric whereby Hawk
Acquisition merged with and into Hawk Biometric (the “Merger”). The Merger has
been accounted for as a reverse merger in the form of a recapitalization with
Hawk Biometric as the successor. The recapitalization has been given retroactive
effect in the accompanying financial statements, and the accompanying
consolidated financial statements represent those of Hawk Biometric for all
periods prior to the consummation of the Merger.
Hawk
Biometric is a developer of innovative fingerprint authentication technology
that offers high degrees of security, convenience, and ease of use in
applications such as automobile locks and identity theft protection. We believe
technology can also be used in banking, healthcare, hotel/casino operations,
employee time clock and attendance, stadium security, sporting and gaming
applications where identity management is required.
We intend
to either sell or spin-off Parking Pro in the near future, as we anticipate
focusing on our technology business. We do not anticipate that proceeds, if any,
will be material.
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES:
Our
financial statements and accompanying notes have been prepared in accordance
with accounting principles generally accepted in the United States of America.
The preparation of these financial statements requires our management to make
estimates, judgments and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses. We continually evaluate the accounting
policies and estimates we use to prepare the consolidated financial statements.
We base our estimates on historical experiences and assumptions believed to be
reasonable under current facts and circumstances. Actual amounts and results
could differ from these estimates made by management.
We do not
participate in, nor have we created, any off-balance sheet special purpose
entities or other off-balance sheet financing.
We have
identified the accounting policies below as critical to our business operations
and the understanding of our results of operations.
Principles of consolidation
-
The accompanying consolidated financial statements include the accounts of the
Company and our wholly-owned subsidiaries, Parking Pro and Hawk Biometric. All
significant intercompany transactions have been eliminated.
Cash
- We maintain cash in
bank accounts which may, at times, exceed federally insured limits. We have not
experienced any loss on these accounts.
Accounts receivables -
Accounts receivable are reported at their outstanding unpaid principal balances
reduced by an allowance for doubtful accounts. We estimate doubtful accounts
based on historical bad debts, factors related to specific customers' ability to
pay, and current economic trends. We write off accounts receivable against the
allowance when a balance is determined to be uncollectible.
Property and equipment
-
Depreciation of property and equipment is provided for by the straight-line
method over the estimated useful lives of the related assets. Long-lived assets
are reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of the asset may not be recoverable.
Intangible assets
- Intangible
assets are carried at cost less accumulated amortization. Amortization is
computed on the straight-line method over the ten-year estimated useful life of
the assets. We periodically review the carrying value of our intangible assets
to determine whether impairment may exist. We consider relevant cash flow and
profitability information, including estimated future operating results, trends
and other available information, in assessing whether the carrying value of the
intangible assets can be recovered. If it is determined that the carrying value
of the intangible assets will not be recovered from the undiscounted future cash
flows, the carrying value of the assets would be considered impaired. An
impairment charge is measured as any deficiency in the amount of estimated fair
value of the intangible assets over carrying value.
Revenue Recognition
- We
recognize revenue in accordance with Staff Accounting Bulletin (“SAB”)
No. 104, “Revenue Recognition in Financial Statements”. Under SAB No.104,
we recognize revenue when the following criteria have been met: persuasive
evidence of an arrangement exists, the fees are fixed and determinable, no
significant Company obligations remain and collection of the related receivable
is reasonable assured.
Share-based Compensation -
We
account for stock-based compensation in accordance with SFAS No. 123(R),
“Share-Based Payment.” Under the fair value recognition provisions of this
statement, share-based compensation cost is measured at the grant date based on
the fair value of the award and is recognized as expense over the requisite
service period. Liability classified share-based awards are re-measured at fair
value each reporting period. Determining the fair value of share-based awards at
the grant date requires judgment, including estimating expected dividends. In
addition, judgment is required in estimating the amount of share-based awards
that are expected to be forfeited. If actual results differ significantly from
these estimates, stock-based compensation expense and our results of operations
could be materially affected.
RESULTS
OF OPERATIONS
COMPARISON
OF THE RESULTS OF OPERATIONS FOR THE FISCAL YEARS ENDED DECEMBER 31, 2009 AND
2008
Revenues
We
generated $0 revenue for the fiscal year ended December 31, 2009 as well as for
the comparable period in 2008. Our technology products were not yet available
for sales and licensing during the fiscal year ended December 31, 2008 and our
PASS system was in testing with a potential customer during the fiscal year
ended December 31, 2009, but it did not result in a sale.
General
and Administrative Expenses
General
and administrative expenses are comprised of costs of salaries, expenses related
to the compliance requirements of a publicly traded company, expenses incurred
in the process of identifying and qualifying suitable acquisition targets, and
other general and administrative expenses.
For the
fiscal year ended December 31, 2009, our general and administrative expenses
totaled $2,496,757, as compared to $673,818 for the fiscal year ended December
31, 2008. The increase in these expenses was primarily the result of
approximately $1.2 million in stock-based compensation expenses during the
fiscal year ended December 31, 2009, salaries, as well as expenses incurred as a
result of the reverse merger and becoming a public company in 2009.
Research
and Development Expenses
Research
and development expenses are comprised of the development of both the design and
actual components of our fingerprint authentication technology as well as
activities that enable us to keep abreast of the dynamic and evolving industry
for these products. Research and development expenses totaled $109,491 for the
fiscal year ended December 31, 2009, as compared to $15,942 for the fiscal year
ended December 31, 2008. The increase was as a result of expenses relating to
the testing and installation of prototype units of our automotive product in
vehicles, as well as expenses incurred in producing the prototype units of our
automotive product.
Interest
Expense
Interest
expense totaled $71,293 for the fiscal year ended December 31, 2009, as compared
to $0 for the fiscal year ended December 31, 2008. We began incurring interest
expense upon the issuance of our convertible debenture on April 30, 2009,
including interest at the rate of 10% per annum as well as the amortization of
the financing costs and the discount related to its beneficial conversion
feature and related warrant. In addition, we issued two unsecured
promissory notes on September 16, 2009 in the aggregate principal amount of
$150,000, which accrue interest at the rate of 12% per annum.
Net
Loss
Our net
profit or loss is computed as our total revenues less expenses. For the fiscal
year ended December 31, 2009, net loss decreased to $(2,659,062) compared
to $(15,689,760) during the fiscal year ended December 31, 2008. The net
loss during the fiscal year ended December 31, 2009 is primarily attributed to
the result of the commencement of product development operations, activities
pursuant to the reverse merger, and expenses related to our pursuit of suitable
acquisition targets that would complement our business activities. The net loss
during the fiscal year ended December 31, 2008 was primarily due to a
$15,000,000 impairment charge to the value of the patent acquired from Hawk
Biometrics of Canada in May 2008, when it was subsequently determined that the
patent was imparied in accordance with SFAS 144, as the expected cash flows to
be generated were $0 at the time of valuation.
LIQUIDITY
AND CAPITAL RESOURCES
Our
continuation as a going concern is dependent upon, among other things, our
ability to obtain additional financing when and as needed and to generate
sufficient cash flow to meet our obligations on a timely basis. We currently do
not have adequate capital to continue our business activities and are seeking
new sources of capital. No assurance can be given that we will be able to obtain
such financing on acceptable terms. Our independent registered public accounting
firm, in their reports on our financial statements for the year ended December
31, 2009 expressed substantial doubt about our ability to continue as a going
concern. These circumstances could complicate our ability to raise additional
capital. Our financial statements do not include any adjustments to the carrying
amounts of our assets and liabilities that might result from the outcome of this
uncertainty.
We have
funded our operations primarily through loans from our officers, directors,
related parties and certain other third parties. We issued a $100,000
convertible debenture in April 2009 and two promissory notes in
September 2009 in the aggregate principal amount of $150,000. We
have also issued promissory notes in the aggregate principal amount of $140,000
to David Coriaty, a member of our board of directors, for various loans he has
provided to us during 2009 and 2010. We used the proceeds from such loans to pay
salaries, accounting, legal, consulting, and investment banking fees. We
anticipate seeking to sell additional equity or debt securities or obtain a
credit facility in order to finance our growth. The sale of additional equity or
convertible debt securities will likely result in additional dilution to our
stockholders. The incurrence of indebtedness would result in an increase in our
fixed obligations and could result in borrowing covenants that would restrict
our operations. There can be no assurance that financing will be available in
amounts or on terms acceptable to us, if at all. If financing is not available
when required or is not available on acceptable terms, we may be unable to
develop or enhance our products or services, and, we will likely not be able to
continue any business activities. Any of these events could have a material and
adverse effect on our business, results of operations and financial condition.
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required to be included in
this Annual Report appear at the end of this Annual Report beginning on page
F-1.
ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM
9A(T). CONTROLS AND PROCEDURES
(a) Evaluation
of Disclosure Controls and Procedures
As of the
end of the period covered by this report, management carried out an evaluation
of the effectiveness of the design and operation of the Company's disclosure
controls and procedures (as defined in Rule 13a-15(e) under the Securities
Exchange Act of 1934). In designing and evaluating its disclosure
controls and procedures, management recognized that disclosure controls and
procedures, no matter how well conceived and operated can provide only
reasonable, but not absolute, assurance that the objectives of the disclosure
controls and procedures are met. Additionally, in designing
disclosure controls and procedures, management was necessarily required to apply
its judgment in evaluating the cost-benefit relationship of possible disclosure
controls and procedures. The design of any disclosure controls and
procedures also is based in part upon certain assumptions about the likelihood
of future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future
conditions.
Based
upon that evaluation, our chief executive officer concluded that our disclosure
controls and procedures were not effective to ensure that the information
required to be disclosed by us in the reports that we file or submit under the
Exchange Act are recorded, processed, summarized and reported within the time
periods specified in rules and forms of the SEC due to the limited resources of
the Company, as of December 31, 2009 and the lack of centralized and continuity
of management. We believe that the appropriate steps are now being taken by the
Company to reduce this risk on a going-forward basis. We hired our chief
executive officer effective January 15, 2010 and we are seeking to hire
additional personnel to assist with the preparation of financial statements,
subject to the availability of adequate funds, and make additional changes in
our financial reporting systems and procedures wherever necessary and
appropriate to ensure their effectiveness and will make appropriate disclosures
regarding any observations and changes as required in future
periods.
(b) Management’s
Report on Internal Control Over Financial Reporting
The
Company’s management is responsible for establishing and maintaining adequate
internal control over financial reporting for the Company. In order
to evaluate the effectiveness of internal control over financial reporting, as
required by Section 404 of the Sarbanes-Oxley Act, management has conducted an
assessment, taking into consideration the criteria described in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (“COSO”). Because of the inherent limitations,
internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate. Based on its assessment,
management has concluded that the Company’s internal control over financial
reporting was ineffective as of December 31, 2009.
The
matter involving internal controls and procedures that our management considered
to be a material weakness under the standards of the Public Company Accounting
Oversight Board is that due to financial constraints, we do not currently have a
chief financial officer or a full-time person performing such
function. During the fiscal year ended December 31, 2009, we have
used outside consultants to assist us in meeting our financial reporting
obligations. This increases the possibility for misstatement in the
financial statements to occur and not be detected in a timely manner. This
deficiency could cause the financial statements and the underlying financial
records to be misstated. In addition, it creates the opportunity for possible
irregularities to exist and continue without detection on a timely
basis. Accordingly, management has determined that these control
deficiencies constitute a material weakness. The material weakness is
anticipated to be remediated during the fiscal year ended December 31, 2010
through the hiring of an appropriate full or part-time chief financial
officer.
The
Annual Report does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial
reporting. Management’s report was not subject to attestation by the
Company’s independent registered public accounting firm pursuant to temporary
rules of the Securities and Exchange Commission that permit the Company to
provide only management’s report in this Annual Report.
(c)
Changes in Internal Control Over
Financial Reporting
.
There
were no changes in our internal control over financial reporting identified in
connection with the evaluation required by paragraph (d) of Exchange Act Rules
13a-15 or 15d-15 that occurred during our last fiscal quarter that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
ITEM 9B.
OTHER
INFORMATION.
None.
PART
III
ITEM
10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The
following table sets forth the names and positions of our directors and
executive officers as of March 31,
2010:
|
Name
|
|
Age
|
|
Position
|
|
Michael
Diamant
|
|
53
|
|
Chief
Executive Officer and Director
|
|
David
Coriaty
|
|
40
|
|
Director
|
|
Antonio
DeRisi
|
|
42
|
|
Director
|
|
Mark
Spanakos
|
|
50
|
|
Director
|
|
Edward
Sebastiano
|
|
52
|
|
Director
|
The
following sets forth biographical information concerning our directors and
executive officers for at least the past five years:
Michael Diamant
. Mr. Diamant
has been our chief executive officer and a member of our board of directors
since January 2010. Mr. Diamant has over 29 years professional experience
planning, managing and implementing strategic systems, specializing in critical
business systems deployment and operations turnaround. He was the Vice President
and Chief Technology Officer of MoreDirect, Inc. from May 2000 December 2009,
where he directed the strategic planning, implementation and support of
technology for an information technology eProcurement company. He spearheaded
integrating MoreDirect’s Traxx system with leading business-to-business and
enterprise resource planning systems such as Ariba, SAP, PeopleSoft and Oracle
using cXML, EDI, OCI and custom interfaces. Mr. Diamant initiated upgrades of
MoreDirect’s website availability, business continuity plan, innovative supply
chain features and internal business processes, in addition to adding new
website functionality such as Purchase Approval, Software Licensing and numerous
customer-specific web sites. Prior to that, from November 1999 to May 2000, Mr.
Diamant was the Chief Technology Officer for ilife.com, Inc., now known as
Bankrate.com, a personal finance portal. While at ilife.com, he initiated
infrastructure projects involving availability, fault tolerance, wireless access
and capacity planning. Prior to ilife, Mr. Diamant held technical management
positions at PowerCerv, Signature Flight Support, The Continuum Company, Martin
Marietta, The Johns Hopkins University Applied Physics Laboratory and
Westinghouse. Mr. Diamant earned Bachelor of Arts and Master of Science degrees
from the University of Pennsylvania and a Master of Science degree from The
Johns Hopkins University. Mr. Diamant has published several articles and papers
on eProcurement deployment and return on investment, distributed computing and
network design/implementation. The particular experience,
qualifications, attributes or skills that led the board to conclude that Mr.
Diamant should serve as a member of the board of directors included his
knowledge of the technology industry and his previous executive management
experience.
David Coriaty
. Mr.
Coriaty has been a member of the board of directors of the Company since
February 2009. Mr. Coriaty is one of the founders of Hawk Biometrics
and one of the inventors of Hawk Biometrics’ patented technology. Mr.
Coriaty has launched multiple business ventures including internet start-ups and
a sports representation agency that works with well-known NFL and MLB
athletes. The particular experience, qualifications, attributes or
skills that led the board to conclude that Mr. Coriaty should serve as a member
of the board of directors included his knowledge as founder of the Company and
co-inventor of the Company’s technology.
Antonio
DeRisi
. Mr. DeRisi has been a member of the board of directors
of the Company since February 2009. Mr. DeRisi has more than twenty
years retail experience managing multiple retail locations in and around
Montreal, Canada. Mr. DeRisi is currently the president of the Chamber of
Commerce for the City of St. Leonard in Montreal, Canada. He owns a
distribution center that distributes all types of products, including food and
non-food items, to retail stores and distributors throughout
Canada. Mr. DeRisi holds the Canadian equivalent of a bachelor of
science in business administration from Dawson College located in Montreal,
Canada. The particular experience, qualifications, attributes or
skills that led the board to conclude that Mr. DeRisi should serve as a member
of the board of directors included his knowledge of the Company and his previous
business management and distribution experience.
Mark Spanakos
. Mr.
Spanakos has been a member of the board of directors of the Company since
February 2009. Mr. Spanakos has experience in the financial markets
and owns a seat on the New York Mercantile Exchange (NYMEX). The
particular experience, qualifications, attributes or skills that led the board
to conclude that Mr. Spanakos should serve as a member of the board of directors
included his financial industry experience.
Edward
Sebastiano
. Mr. Sebastiano has been a member of the board of
directors of the Company since February 2009. Mr. Sebastiano has more
than twenty five years of experience in the financial markets. Since
November 2007, he has been the president of, and a partner in, EPTrading Inc., a
commodities trading company in New York City. Prior to that from January 2005,
Mr. Sebastiano was the president and owner of Esco Commodities, also a
commodities trading company in New York City. He is also the founder of GFA, a
public relations and management company. The particular experience,
qualifications, attributes or skills that led the board to conclude that Mr.
Sebastiano should serve as a member of the board of directors included his
knowledge of the company and his financial industry experience.
COMPLIANCE
WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section
16(a) of the Exchange Act requires our officers, directors, and persons who own
more than ten percent of a registered class of our equity securities to file
reports of securities ownership and changes in such ownership with the SEC.
Officers, directors, and greater-than-ten-percent stockholders are required by
SEC regulations to furnish us with copies of all Section 16(a) forms that they
file.
Based
solely upon a review of Forms 3, Forms 4, and Forms 5 furnished to us pursuant
to Rule 16a-3 under the Exchange Act, we believe that all such forms required to
be filed pursuant to Section 16(a) of the Exchange Act during the year ended
December 31, 2009 were timely filed, as necessary, by the officers, directors,
and security holders required to file such forms, except for the
following:
Mr.
Michael Diamant filed an untimely Form 3;
Mr. David
Coriaty filed a Form 5 as a result of his failure to file his initial Form 3 and
a Form 4 with respect to one transaction;
Mr.
Antonio DeRisi filed a Form 5 as a result of his failure to file his initial
Form 3;
Mr.
Edward Sebasiano filed a Form 5 as a result of his failure to file his initial
Form 3;
Mr. Mark
Spanakos filed a Form 5 as a result of his failure to file his initial Form
3;
C.L.R.,
Associates, Inc. filed a Form 5 as a result of its failure to file its initial
Form 3 and a Form 4 with respect to nine transactions;
Grand
Columbus Holding Inc. did not file a Form 4 with respect to three
transactions;
Greystone
Business Credit II, LLC filed an untimely Form 3;
Greystone
Real Estate Holdings Corp. filed an untimely Form 3;
Greystone
& Co. Holdings L.L.C. filed an untimely Form 3; and
Stephen
Rosenberg 2004 Descendants' Trust filed an untimely Form 3.
Family
Relationships
There are
no family relationships between or among the directors and executive officers of
the Company.
Involvement
in Legal Proceedings
To the
best of the Company's knowledge, during the past ten years, none of the
proceedings described in Item 401(f) of Regulation S-K occurred with respect to
a present director or executive officer of the Company except that Mr. David
Coriaty filed for personal bankruptcy which was discharged in May
2004.
On
December 1, 2004, we adopted a Code of Conduct that applies to all employees of
the Company, which includes our principal executive officer and
principal financial officer who are currently employees of the Company. We
are currently in the process of adopting a Code of Ethics in addition to the
Code of Conduct that only applies to our principal executive officer, principal
financial officer, principal accounting officer or controller, or persons
performing similar functions. A copy of the Code of Conduct can be found as
Exhibit 99 to our Form 10-KSB filed for the year ended December 31, 2004. We
undertake to provide to any person without charge, upon request a copy of such
Code of Ethics once adopted, by writing to the Company's chief executive officer
at c/o Hawk Systems, Inc. 2385 Executive Center Drive, Suite 100, Boca Raton, FL
33431.
Committees
of the Board
Our board
of directors has not yet established an audit, nominating or compensation
committee. Our full board of directors will perform those functions
until such time as those committees are established. We have not yet
identified an audit committee financial expert meeting the required criteria and
qualifications to serve on our audit committee once it is established, however,
we anticipate identifying one in the future.
Director
Nominations
The board
of directors identifies director candidates through numerous sources, including
recommendations from directors, executive officers and our stockholders. The
board of directors seeks to identify those individuals most qualified to serve
as board members and will consider many factors with regard to each candidate,
including judgment, reputation, integrity, diversity, prior experience, the
interplay of the candidate’s experience with the experience of other directors
and the candidate’s willingness to devote the time and effort required for board
responsibilities. Our board of directors has not yet adopted any formal
procedures by which stockholders may recommend nominees to the Company’s board
of directors.
ITEM
11: EXECUTIVE COMPENSATION
The
following table sets forth certain information relating to the compensation paid
to (i) Michael Diamant, our Chief Executive Officer and Director, (ii) David
Coriaty, a member of our board of directors and former president, chief
executive officer, and chairman, and (iii) Robert McCann III, our former chief
executive officer (collectively, the “named executive officers”), during our
fiscal years ended December 31, 2009 and 2008.
2009
Summary Compensation Table
|
Name
and Principal Position
|
|
Year
|
|
Salary
($)
|
|
|
Option
Award(s)
($)
|
|
|
Total
($)
|
|
|
Michael
Diamant, Chief Executive Officer and Director (1)
|
|
2009
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
2008
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
David
Coriaty, Director and
Former
President, Chief
Executive Officer and Chairman (2)
|
|
2009
|
|
|
500,000
|
(3)
|
|
|
—
|
|
|
|
500,000
|
|
|
|
|
2008
|
|
|
252,363
|
|
|
|
—
|
|
|
|
252,363
|
|
|
Eric
Brown,
Former
Chief Executive Officer, Chief Financial Officer and
Director
|
|
2009
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
2008
|
|
|
50,000
|
(4)
|
|
|
—
|
|
|
|
50,000
|
|
|
Robert
E. McCann,
Former
Chief Executive Officer (5)
|
|
2009
|
|
|
90,211
|
|
|
|
0
|
(6)
|
|
|
90,211
|
|
|
|
|
2008
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
———————
(1) Mr.
Diamant was appointed chief executive officer in December 2009, effective
January 15, 2010, and did not receive any compensation as our executive officer
during the fiscal year ended December 31, 2009.
(2) Mr.
David Coriaty was appointed president and chief executive officer in February
2009 and resigned from both positions in May 2009. Mr. Coriaty was
also appointed executive chairman in May 2009 and resigned from the position in
September 2009.
(3) Includes
deferred compensation in the aggregate amount of $231,566, which as of April 1,
2010 has not been paid.
(4) This
amount is accrued but not paid.
(5) Mr.
Robert McCann was appointed chief executive officer in May 2009 and terminated
in October 2009.
(6) In
connection with Mr. McCann’s termination on October 28, 2009, we cancelled his
stock option to purchase 7,800,000 shares of Common Stock at an exercise price
of $0.16 per share which had previously been granted in May 2009.
Narrative
Disclosure to 2009 Summary Compensation Table
Michael Diamant Employment
Agreement
On
December 15, 2009, we entered into an Employment Agreement with Mr. Michael
Diamant (the “Diamant Employment Agreement”), which was amended on
January 19, 2010 (the “Diamant Amendment”, together with the Diamant
Employment Agreement, the “Diamant Agreement”), pursuant to which Mr. Diamant
was hired to serve as our Chief Executive Officer. The term of the
Diamant Agreement commenced on January 15, 2010 for a one (1) year term
which will automatically extend for subsequent one (1) year periods unless
either party notifies the other not later than sixty (60) days prior to the then
current expiration date that such party does not intend for the Diamant
Agreement to automatically extend. Pursuant to the terms of the Diamant
Agreement, Mr. Diamant is entitled to receive a signing bonus equal to
$160,000 and an annual salary equal to $500,000, payable in equal monthly
installments. In addition, the Diamant Agreement provides that on
May 12, 2010 Mr. Diamant is entitled to receive an option to purchase
8,000,000 shares of our Common Stock(calculated on a post-reverse split basis)
at an exercise price equal to $0.36 (on a post-reverse split basis). The option
may be exercised for a term of five (5) years and will be fully vested and
non-cancellable at the time of the grant. The Diamant Agreement further provides
for an annual bonus opportunity of up to $200,000 during each year of the term
of the Diamant Agreement based upon performance criteria to be established
jointly by the Compensation Committee and Mr. Diamant within sixty (60) days of
the commencement of the Diamant Agreement and approved by our board of directors
each year.
If the
Diamant Agreement is terminated for any reason, we would be required to pay Mr.
Diamant his earned and accrued salary and bonus, if any, plus all reimbursable
expenses. If the Diamant Agreement is terminated for any reason other
than our terminating Mr. Diamant for cause, Mr. Diamant would additionally be
entitled to receive payments equal to twelve (12) months of his base
salary.
The
foregoing description of the Diamant Employment Agreement is qualified in its
entirety by the full text of the Diamant Employment Agreement, which was filed
as Exhibit 10.1 to the Current Report on Form 8-K filed with the SEC
on December 29, 2009 and the full text of the Diamant Amendment which was
filed as Exhibit 10.1 to the Current Report on Form 8-K filed with the
SEC on January 20, 2010, each of which are incorporated herein by
reference.
David Coriaty Employment
Agreement
On May 1,
2009, we entered into an Employment Agreement with Mr. David Coriaty (the
“Coriaty Employment Agreement”), which was amended on April 9, 2010 (the
“Coriaty Amendment”, together with the Coriaty Employment Agreement, the
“Coriaty Agreement”), pursuant to which Mr. Coriaty was hired to serve as our
Chairman. The term of the Coriaty Agreement commenced on May 1, 2009
for a one (1) year term which will automatically extend for subsequent one (1)
year periods unless either party notifies the other not later than ninety (90)
days prior to the then current expiration date that such party does not intend
for the Coriaty Agreement to automatically extend. Pursuant to the terms of the
Coriaty Agreement, Mr. Coriaty is entitled to receive an annual salary
equal to $500,000, payable in equal monthly installments. In
addition, the Coriaty Agreement provides that Mr. Coriaty is entitled to convert
any accrued but unpaid salary into shares of Common
Stock at a conversion
price equal to the average closing bid price of the Common Stock on the twenty
(20) trading days immediately prior to such conversion date or such price as our
board of directors shall determine and Mr. Coriaty shall approve. If
the Coriaty Agreement is terminated for any reason, we would be required to pay
Mr. Coriaty his earned and accrued salary plus all reimbursable
expenses.
The
description of the Coriaty Employment Agreement is qualified in its entirety by
the full text of the Coriaty Employment Agreement, which was filed as
Exhibit 10.1 to the Quarterly Report on Form 10-Q filed with the SEC
on August 19, 2009 and the full text of the Coriaty Amendment which is filed as
Exhibit 10.16 to this Annual Report, each of which are incorporated herein
by reference.
Outstanding
Equity Awards at December 31, 2009
There
were no outstanding equity incentive awards held by our named executive officers
as of December 31, 2009.
DIRECTOR
COMPENSATION
None of
the members of our board of directors received compensation for their services
on the board of directors during the fiscal year ended December 31,
2009.
DIRECTOR
INDEPENDENCE
Our board
of directors has determined that there are presently no independent directors
based on the independence standards contained in the Marketplace Rules of the
NASDAQ Stock Market, although these independent director standards do not
directly apply to us because we do not have any securities that are listed on
NASDAQ.
ITEM
12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The
following table sets forth certain information regarding beneficial ownership of
our Common Stock as of April 6, 2010 by (i) each person (or group of
affiliated persons) who is known by the Company to own more than
five percent of the outstanding shares of Common Stock, (ii) each director
and executive officer, and (iii) all of the Company’s directors and executive
officers as a group. Beneficial ownership is determined in accordance with the
rules of the Securities and Exchange Commission (“SEC”) and generally includes
voting or investment power with respect to securities. Shares of our Common
Stock which may be acquired upon conversion of preferred stock or exercise of
stock options or warrants which are currently exercisable or convertible or
which become exercisable or convertible within 60 days after the date indicated
in the table are deemed beneficially owned by the holders thereof. Subject to
any applicable community property laws, the persons or entities named in the
table below have sole voting and investment power with respect to all shares
indicated as beneficially owned by them. All share amounts shown below are prior
to the 1-for-6 reverse stock split.
|
Title
of Class
|
Name
and Address of Beneficial Owner (1)
|
Amount
and
Nature
of
Beneficial
Ownership
|
Percent
of
Class Prior
to
Reverse
Split
(2)
|
Percent
of
Class After
Reverse
Split
(3)
|
|
Security Ownership of
Management:
|
|
|
|
|
Common
Stock
|
Michael
Diamant (4)
|
8,000,000
|
16.8%
|
12.2%
|
|
Common
Stock
|
David
Coriaty (5)
|
6,465,000
|
14.0%
|
9.9%
|
|
Common
Stock
|
Antonio
De Risi (6)
|
8,000,000
|
16.8%
|
12.2%
|
|
Common
Stock
|
Edward
Sebastiano (7)
|
8,000,000
|
16.8%
|
12.2%
|
|
Common
Stock
|
Mark
Spanakos (8)
|
8,000,000
|
16.8%
|
12.2%
|
|
|
Officer
& Directors as a Group (5 persons)
|
38,465,000
|
54.8%
|
58.8%
|
|
Security Ownership of Certain Beneficial
Owners:
|
|
|
|
|
Common
Stock
|
Grand
Columbus Holding Inc. (9)
|
4,787,500
|
12.0%
|
1.2%
|
|
Common
Stock
|
Greystone
Business Credit II, LLC (10)
|
4,000,000
|
10.1%
|
1.0%
|
|
Common
Stock
|
The
Tucker Family Spendthrift Trust (11)
|
10,376,530
|
22.5%
|
9.9%
|
|
Common
Stock
|
C.L.R.,
Associates, Inc. (12)
|
5,374,000
|
11.9%
|
8.2%
|
———————
* Less
than 1%
|
(1)
|
Unless
otherwise noted, the principal address of each of the directors and
officers listed above is c/o Hawk Systems, Inc., 2385 NW Executive Center
Drive, Suite 100, Boca Raton, FL
33431.
|
|
(2)
|
Assuming
39,759,345 shares of Common Stock issued and outstanding as of
April 2, 2010. With respect to any securities not outstanding which
are subject to such options, warrants, rights or conversion privileges,
such shares are deemed to be outstanding for the purpose of computing
the percentage of outstanding securities of the class owned by such
person but are not deemed to be outstanding for the purpose of computing
the percentage of the class by any other
person.
|
|
(3)
|
Assuming
approximately 65,564,258 shares of Common Stock issued and outstanding
after the Reverse Split and after giving effect to the conversion of all
of the outstanding shares of Series B Preferred Stock issued in
connection with the Merger. Of the shares of Series B Preferred Stock
outstanding immediately prior to the Reverse Split, 64,165 shares of
Series B Preferred Stock, which are convertible into 6,416,500 shares
of Common Stock, were issued subsequent to the merger and are not
automatically convertible into Common Stock in connection with the Reverse
Split. Accordingly, these shares have not been included for purposes of
the calculation above.
|
|
(4)
|
Includes
an option the Company has agreed to issue to Mr. Diamant on
May 12, 2010, whereby Mr. Diamant will have the right to
purchase 8,000,000 shares of the Company’s Common Stock on a post-Reverse
Split basis at an exercise price of $0.36 per share, exercisable for a
period of five (5) years from the date of
issuance.
|
|
(5)
|
This
amount consists of 105,890 shares of Series B Preferred Stock, which
are convertible into the number of shares of Common Stock listed
above.
|
|
(6)
|
This
amount consists of 80,000 shares of Series B Preferred Stock, which
are convertible into the number of shares of Common Stock listed
above.
|
|
(7)
|
This
amount consists of 80,000 shares of Series B Preferred Stock, which
are convertible into the number of shares of Common Stock listed
above.
|
|
(8)
|
This
amount consists of 80,000 shares of Series B Preferred Stock, which
are convertible into the number of shares of Common Stock listed
above.
|
|
(9)
|
The
stockholder’s address is 34 15
th
Street, Brooklyn, New York 11215.
|
|
(10)
|
The
stockholder’s address is 152 W 57
th
Street, 11
th
Floor, New York, NY 10019.
|
|
(11)
|
The
stockholder’s address is c/o Penson Financial Services Inc.,
1700 Pacific Avenue, #1400, Dallas, Texas 75201 according to the
records of our transfer agent. This amount includes 64,165 shares of
Series B Preferred Stock, which are convertible into 6,416,500 shares
of Common Stock. These shares of Series B Preferred Stock were issued
subsequent to the merger are not automatically convertible into Common
Stock in connection with the Reverse Split, however, they may be
voluntarily converted by the holder at any time. The amount shown as
the percentage of Common Stock owned after the Reverse Split assumes
the shares of Series B Preferred Stock are not converted. Leonard
Tucker and Michelle Tucker are co-Trustees of The Tucker Family
Spendthrift Trust (the “Trust”) and may be deemed to have beneficial
ownership of the securities owned by the
Trust.
|
|
(12)
|
The
stockholder’s address is 5732 Wind Drift Lane, Boca Raton, FL 33433. This
amount consists of 53,740 shares of Series B Preferred Stock, which
are convertible into the number of shares of Common Stock listed above.
Mr. Burt J. Rhodes is the sole executive officer of C.L.R.,
Associates, Inc. (“CLR”) and his wife, Mrs. Carole L. Rhodes is the
sole director and shareholder of CLR and as a result, Mr. and
Mrs. Rhodes have shared voting power and the power to dispose or to
direct the disposition of the shares of Series B Preferred Stock held
of record by CLR. Thus, Mr. and Mrs. Rhodes may be deemed to be
the beneficial owners of the shares owned by
CLR.
|
ITEM
13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE
On
January 6, 2009, Mr. Edward Sebastiano issued a promissory note in the principal
amount of $168,000 for the benefit of the Company for prior amounts loaned to
him during 2008. The note accrues interest at the rate of 11% per
annum. Monthly payments of interest only in the amount of $1,540 are
due on the 15th day of each month beginning January 15, 2009. The
principal amount of the note and all accrued but unpaid interest was due on
December 31, 2009. On February 23, 2009, the board of directors of
the Company agreed to extend the maturity date to December 31,
2010. The note is secured by an interest in the 8,000,000 shares of
the Company’s Common Stock owned by Mr. Sebastiano.
On
September 16, 2009, we issued an unsecured promissory note in the principal
amount of $50,000 to Mr. Mark Spanakos, a member of our board of directors. The
note accrues interest at a rate of 12% per annum and all accrued and unpaid
interest is due and payable on the date that is the earlier of (i) September 16,
2010, or (ii) ten (10) business days from the date of closing by the Company of
any equity financing in the aggregate of not less than Seven Hundred Fifty
Thousand Dollars ($750,000).
As of
December 31, 2009, we owed Mr. David Coriaty, a member of the Company’s board of
directors, approximately $204,048, which Mr. Coriaty had previously loaned to
the Company for working capital, including the payment of
expenses. The loan is not interest-bearing and payable on
demand.
Effective
January 31, 2010, we issued a promissory note to Mr. David Coriaty, a member of
our board of directors, in the principal amount of $100,000 for previous loans
provided to us in October 2009 for the payment of expenses. The note
accrues interest at the rate of 10% per annum and is payable at maturity on June
30, 2010.
Effective
February 1, 2010, we issued a promissory note to Mr. David Coriaty, a member of
our board of directors, in the principal amount of $40,000 for loans provided to
us in January 2010 for the payment of expenses. The note accrues
interest at the rate of 10% per annum and is payable at maturity on June 30,
2010.
Review,
Approval or Ratification of Transactions with Related Persons
We
believe that the terms of all of the above transactions are commercially
reasonable and no less favorable to us than we could have obtained from an
unaffiliated third party on an arm’s length basis. While we do not maintain
a written policy with respect to related party transactions, our board of
directors routinely reviews potential transactions with those parties we have
identified as related parties prior to the consummation of the transaction. We
also generally require that all related parties recuse themselves from
negotiating and voting on behalf of the Company in connection with related party
transactions.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND
SERVICES
AUDIT AND
NON-AUDIT FEES
The
following presents fees for professional audit services rendered by Liebman
Goldberg & Hymowitz, LLP for the audit of the Company’s annual financial
statements for 2008 and 2009:
|
|
|
2008
|
|
|
2009
|
|
|
|
|
$
|
47,850
|
|
|
$
|
37,000
|
|
|
Audit
related fees
|
|
|
-
|
|
|
|
-
|
|
|
Tax fees
|
|
$
|
1,800
|
|
|
|
-
|
|
|
All
other fees
|
|
|
-
|
|
|
|
52,000
|
|
|
Total
|
|
$
|
49,650
|
|
|
$
|
89,500
|
|
Audit Fees
: For
2008, consists of fees billed for professional services rendered for the audit
of Explorations Group, Inc. (now known as Hawk Systems, Inc.) consolidated
financial statements and review of the interim consolidated financial statements
included in quarterly reports in connection with statutory and regulatory
filings or engagements, as well as the audit of Hawk Biometric’s financial
statements for the period ended September 30, 2008 and fiscal year ended
December 31, 2008.
For 2009,
consists of fees billed for professional services rendered for the audit of Hawk
Systems, Inc. consolidated financial statements and review of the interim
consolidated financial statements included in quarterly reports in connection
with statutory and regulatory filings or engagements, as well as the audit of
Hawk Biometric’s financial statements for the period from September 30, 2008
through December 31, 2008.
Tax Fees
: For 2008,
consists of costs incurred in connection with tax compliance.
All Other Fees
: For
2009, consists of costs incurred in connection with the audit of the financial
statements for a proposed acquisition. The Company did not complete
the acquisition.
PART
IV
ITEM
15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) 1.
The following financial statements for Hawk Systems, Inc. and Subsidiaries are
filed as a part of this report:
Report of
Independent Certified Public Accountants
Consolidated
Balance Sheets— December 31, 2009 and 2008
Consolidated
Statements of Operations—Years ended December 31, 2009 and 2008.
Consolidated
Statements of Shareholders' Deficit —Years ended December 31, 2009 and
2008.
Consolidated
Statements of Cash Flows—Years ended December 31, 2009 and 2008.
2.
Notes to Consolidated Financial Statements
Schedules
are omitted because of the absence of conditions under which they are required
or because the information is included in the financial statements or notes
thereto.
(b)
Exhibits.
|
Exhibit
No.
|
Description
|
|
|
|
|
2.1
|
Agreement
and Plan of Merger, dated February 19, 2009, by and among Explorations
Group, Inc., Hawk Acquisition Corp., and Hawk Biometric Technologies, Inc.
(incorporated by reference to Exhibit 10 to the Company's Current Report
on Form 8-K filed with the SEC on February 26, 2009).
|
|
3.1
|
Certificate
of Amendment to Certificate of Incorporation filed with the State of
Delaware on January 2, 2009 (incorporated by reference to Exhibit 3.1 to
the Company's Quarterly Report on Form 10-Q filed with the SEC on August
19, 2009).
|
|
3.2
|
Certificate
of Amendment to Certificate of Incorporation filed with the State of
Delaware on May 27, 2009 (incorporated by reference to Exhibit 3.2 to the
Company's Quarterly Report on Form 10-Q filed with the SEC on August 19,
2009).
|
|
3.3
|
Certificate
of Correction to the Certificate of Amendment to Certificate of
Incorporation filed with the State of Delaware on March 17,
2010.*
|
|
3.4
|
Certificate
of Amendment to Certificate of Incorporation of Hawk Systems, Inc. filed
with the State of Delaware on March 18, 2010.*
|
|
10.1
|
Unsecured
Promissory Note, dated September 16, 2009, in the principal amount of
$50,000 executed by Hawk Systems, Inc. in favor of Mark Spanakos
(incorporated by reference to Exhibit 10.1 to the Company's Current Report
on Form 8-K filed with the SEC on September 24, 2009).
|
|
10.2
|
Unsecured
Promissory Note, dated September 16, 2009, in the principal amount of
$100,000 executed by Hawk Systems, Inc. in favor of Delilah Holdings, LLC
(incorporated by reference to Exhibit 10.2 to the Company's Current Report
on Form 8-K filed with the SEC on September 24, 2009).
|
|
10.3
|
Employment
Agreement between the Company and David Coriaty dated May 1, 2009
(incorporated by reference to Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q filed with the SEC on August 19,
2009).
|
|
10.4
|
Employment
Agreement between the Company and Robert E. McCann III dated May 12, 2009
(incorporated by reference to Exhibit 10.2 to the Company's Quarterly
Report on Form 10-Q filed with the SEC on August 19,
2009).
|
|
10.5
|
Amendment
to Employment Agreement between the Company and Robert E. McCann III dated
August 14, 2009 (incorporated by reference to Exhibit 10.3 to the
Company’s Quarterly Report on Form 10-Q filed with the SEC on August 19,
2009)
|
|
10.6
|
Exclusive
Investment Banking Agreement, dated as of June 4, 2008, by and between
Hawk Biometric Technologies, Inc., and Cresta Capital Strategies, LLC
(incorporated by reference to Exhibit 10.4 to the Company’s Quarterly
Report on Form 10-Q filed with the SEC on August 19,
2009).
|
|
10.7
|
Letter
Agreement amending Exclusive Investment Banking Agreement, dated February
13, 2009, by and between Hawk Biometric Technologies, Inc., and Cresta
Capital Strategies, LLC (incorporated by reference to Exhibit 10.5 to the
Company’s Quarterly Report on Form 10-Q filed with the SEC on August 19,
2009).
|
|
10.8
|
Amendment
No. 2 to the Exclusive Investment Banking Agreement, dated November 23,
2009, by and between Hawk Systems, Inc., and Cresta Capital Strategies,
LLC (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly
Report on Form 10-Q filed with the SEC on November 25,
2009).
|
|
10.9
|
Unsecured
Promissory Note, dated November 23, 2009, in the principal amount of
$250,000 executed by Hawk Systems, Inc. in favor of Cresta Capital
Strategies, LLC (incorporated by reference to Exhibit 10.2 to the
Company's Quarterly Report on Form 10-Q filed with the SEC on November 25,
2009).
|
|
10.10
|
Employment
Agreement by and between Hawk Systems, Inc. and Michael Diamant dated
December 15, 2009 (incorporated by reference to Exhibit 10.1 to the
Company’s Current Report on Form 10-K filed with the SEC on December 29,
2009).
|
|
10.11
|
Amendment
No. 1 to the Employment Agreement by and between Hawk Systems, Inc. and
Michael Diamant dated January 19, 2010 (incorporated by reference to
Exhibit 10.1 to the Company’s Current Report on Form 10-K filed with the
SEC on January 20, 2010).
|
|
10.12
|
Stipulation
of Settlement by and between Hawk Systems, Inc. and Leonard Tucker, as
co-Trustee of the Tucker Family Spendthrift Trust dated January 25,
2010 (incorporated by reference to Exhibit 10.1 to the
Company’s Current Report on Form 10-K filed with the SEC on January 29,
2010).
|
|
10.13
|
Consulting
Agreement by and between Hawk Systems, Inc. and Griffin Enterprises LLC
dated February 23, 2010 (incorporated by reference to Exhibit 10.1 to the
Company's Current Report on Form 8-K filed with the SEC on March 1,
2010).
|
|
10.14
|
Unsecured
Promissory Note, dated January 31, 2010, in the principal amount of
$100,000 executed by Hawk Systems, Inc. in favor of David
Coriaty.*
|
|
10.15
|
Unsecured
Promissory Note, dated February 1, 2010, in the principal amount of
$40,000 executed by Hawk Systems, Inc. in favor of David
Coriaty.*
|
|
10.16
|
Amendment
No. 1 to the Employment Agreement by and between Hawk Systems, Inc. and
David Coriaty dated April 9, 2010.*
|
|
14.1
|
Code
of Conduct (incorporated by reference to Exhibit 3(i).4 to the Company's
Annual Report on Form 10-KSB filed with the SEC on March 31,
2004).
|
|
21.1
|
Subsidiaries
of Hawk Systems, Inc.*
|
|
31.1
|
Certification
of Principal Executive Officer, pursuant to Rules 13a-14(a) and 15d-14(a)
of the Securities Exchange Act of 1934, as amended adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.*
|
|
31.2
|
Certification
of Principal Financial Officer, as required byPursuant to Rules 13a-14(a)
and 15d-14(a) of under the Securities Exchange Act of 1934, as amended
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.*
|
|
32.1
|
Certification
of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.*
|
|
32.2
|
Certification
of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.*
|
__________________
* Filed herewith.
SIGNATURES
In
accordance with the requirements of Section 13 and 15(d) of the Securities
Exchange Act of 1934, Hawk Systems, Inc. has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
|
|
HAWK SYSTEMS,
INC.
|
|
|
|
|
|
|
|
|
By:
|
/s/
Michael
Diamant
|
|
|
|
|
Michael
Diamant
|
|
|
|
|
Chief
Executive Officer and Director
|
|
|
|
|
|
|
In
accordance with the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of Hawk Systems,
Inc. and in the capacities and on the dates indicated.
|
SIGNATURE
|
|
CAPACITY
|
|
DATE
|
|
/s/
Michael Diamant
|
|
Chief
Executive Officer and Director
|
|
April
15, 2010
|
|
Michael
Diamant
|
|
|
|
|
|
|
|
|
|
|
|
/s/
David Coriaty
|
|
Director
|
|
April
15, 2010
|
|
David
Coriaty
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Antonio
DeRisi
|
|
Director
|
|
April
15, 2010
|
|
Antonio
DeRisi
|
|
|
|
|
|
|
|
|
|
|
|
/s/
|
|
Director
|
|
April
__, 2010
|
|
Mark
Spanakos
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Edward Sebastiano
|
|
Director
|
|
April
15, 2010
|
|
Edward
Sebastiano
|
|
|
|
|
|
|
|
|
|
|
EXHIBIT
INDEX
|
Exhibit
No.
|
Description
|
|
|
|
|
2.1
|
Agreement
and Plan of Merger, dated February 19, 2009, by and among Explorations
Group, Inc., Hawk Acquisition Corp., and Hawk Biometric Technologies, Inc.
(incorporated by reference to Exhibit 10 to the Company's Current Report
on Form 8-K filed with the SEC on February 26, 2009).
|
|
3.1
|
Certificate
of Amendment to Certificate of Incorporation filed with the State of
Delaware on January 2, 2009 (incorporated by reference to Exhibit 3.1 to
the Company's Quarterly Report on Form 10-Q filed with the SEC on August
19, 2009).
|
|
3.2
|
Certificate
of Amendment to Certificate of Incorporation filed with the State of
Delaware on May 27, 2009 (incorporated by reference to Exhibit 3.2 to the
Company's Quarterly Report on Form 10-Q filed with the SEC on August 19,
2009).
|
|
|
Certificate
of Correction to the Certificate of Amendment to Certificate of
Incorporation filed with the State of Delaware on March 17,
2010.*
|
|
|
Certificate
of Amendment to Certificate of Incorporation of Hawk Systems, Inc. filed
with the State of Delaware on March 18, 2010.*
|
|
10.1
|
Unsecured
Promissory Note, dated September 16, 2009, in the principal amount of
$50,000 executed by Hawk Systems, Inc. in favor of Mark Spanakos
(incorporated by reference to Exhibit 10.1 to the Company's Current Report
on Form 8-K filed with the SEC on September 24, 2009).
|
|
10.2
|
Unsecured
Promissory Note, dated September 16, 2009, in the principal amount of
$100,000 executed by Hawk Systems, Inc. in favor of Delilah Holdings, LLC
(incorporated by reference to Exhibit 10.2 to the Company's Current Report
on Form 8-K filed with the SEC on September 24, 2009).
|
|
10.3
|
Employment
Agreement between the Company and David Coriaty dated May 1, 2009
(incorporated by reference to Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q filed with the SEC on August 19,
2009).
|
|
10.4
|
Employment
Agreement between the Company and Robert E. McCann III dated May 12, 2009
(incorporated by reference to Exhibit 10.2 to the Company's Quarterly
Report on Form 10-Q filed with the SEC on August 19,
2009).
|
|
10.5
|
Amendment
to Employment Agreement between the Company and Robert E. McCann III dated
August 14, 2009 (incorporated by reference to Exhibit 10.3 to the
Company’s Quarterly Report on Form 10-Q filed with the SEC on August 19,
2009)
|
|
10.6
|
Exclusive
Investment Banking Agreement, dated as of June 4, 2008, by and between
Hawk Biometric Technologies, Inc., and Cresta Capital Strategies, LLC
(incorporated by reference to Exhibit 10.4 to the Company’s Quarterly
Report on Form 10-Q filed with the SEC on August 19,
2009).
|
|
10.7
|
Letter
Agreement amending Exclusive Investment Banking Agreement, dated February
13, 2009, by and between Hawk Biometric Technologies, Inc., and Cresta
Capital Strategies, LLC (incorporated by reference to Exhibit 10.5 to the
Company’s Quarterly Report on Form 10-Q filed with the SEC on August 19,
2009).
|
|
10.8
|
Amendment
No. 2 to the Exclusive Investment Banking Agreement, dated November 23,
2009, by and between Hawk Systems, Inc., and Cresta Capital Strategies,
LLC (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly
Report on Form 10-Q filed with the SEC on November 25,
2009).
|
|
10.9
|
Unsecured
Promissory Note, dated November 23, 2009, in the principal amount of
$250,000 executed by Hawk Systems, Inc. in favor of Cresta Capital
Strategies, LLC (incorporated by reference to Exhibit 10.2 to the
Company's Quarterly Report on Form 10-Q filed with the SEC on November 25,
2009).
|
|
10.10
|
Employment
Agreement by and between Hawk Systems, Inc. and Michael Diamant dated
December 15, 2009 (incorporated by reference to Exhibit 10.1 to the
Company’s Current Report on Form 10-K filed with the SEC on December 29,
2009).
|
|
10.11
|
Amendment
No. 1 to the Employment Agreement by and between Hawk Systems, Inc. and
Michael Diamant dated January 19, 2010 (incorporated by reference to
Exhibit 10.1 to the Company’s Current Report on Form 10-K filed with the
SEC on January 20, 2010).
|
|
10.12
|
Stipulation
of Settlement by and between Hawk Systems, Inc. and Leonard Tucker, as
co-Trustee of the Tucker Family Spendthrift Trust dated January 25,
2010 (incorporated by reference to Exhibit 10.1 to the
Company’s Current Report on Form 10-K filed with the SEC on January 29,
2010).
|
|
10.13
|
Consulting
Agreement by and between Hawk Systems, Inc. and Griffin Enterprises LLC
dated February 23, 2010 (incorporated by reference to Exhibit 10.1 to the
Company's Current Report on Form 8-K filed with the SEC on March 1,
2010).
|
|
10.14
|
Unsecured
Promissory Note, dated January 31, 2010, in the principal amount of
$100,000 executed by Hawk Systems, Inc. in favor of David
Coriaty.*
|
|
10.15
|
Unsecured
Promissory Note, dated February 1, 2010, in the principal amount of
$40,000 executed by Hawk Systems, Inc. in favor of David
Coriaty.*
|
|
|
Amendment
No. 1 to the Employment Agreement by and between Hawk Systems, Inc. and
David Coriaty dated April 9, 2010.*
|
|
14.1
|
Code
of Conduct (incorporated by reference to Exhibit 3(i).4 to the Company's
Annual Report on Form 10-KSB filed with the SEC on March 31,
2004).
|
|
|
Subsidiaries
of Hawk Systems, Inc.*
|
|
31.1
|
Certification
of Principal Executive Officer, pursuant to Rules 13a-14(a) and 15d-14(a)
of the Securities Exchange Act of 1934, as amended adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.*
|
|
31.2
|
Certification
of Principal Financial Officer, as required byPursuant to Rules 13a-14(a)
and 15d-14(a) of under the Securities Exchange Act of 1934, as amended
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.*
|
|
32.1
|
Certification
of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.*
|
|
32.2
|
Certification
of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.*
|
__________________
INDEX
TO FINANCIALS
|
|
|
|
|
|
Page
|
|
|
Reports
of Independent Registered Public Accounting Firms
|
|
|
F-2
|
|
|
Consolidated
Balance Sheets as of December 31, 2009 and 2008
|
|
|
|
|
|
Consolidated
Statements of Operations for the Years Ended December 31, 2009 and
2008
|
|
|
F-4
|
|
|
Consolidated
Statements of Changes in Stockholders’ Deficit for the Years Ended
December 31, 2009 and 2008
|
|
|
|
|
|
Consolidated
Statements of Cash Flows for the Years Ended December 31, 2009 and
2008
|
|
|
|
|
|
Notes
to Consolidated Financial Statements
|
|
|
|
|
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To The
Board of Directors and
Stockholders
of Hawk Systems, Inc.
Boca
Raton, Florida
We have
audited the accompanying consolidated balance sheets of Hawk Systems,
Inc. and Subsidiaries (a Development Stage Company) as of December
31, 2009 and 2008, and the related consolidated statements of operations,
stockholders’ deficit and cash flows for each of the years in the two year
period ended December 31, 2009. Hawk Systems Inc. and
Subsidiaries (a Development Stage Company) management is responsible for these
financial statements. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of The Company as of December
31, 2009 and 2008, and the results of its operations and cash flows for each of
the years in the two year period ended December 31, 2009, in conformity with
accounting principles generally accepted in the United States of
America.
The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has no material revenues, has suffered
recurring losses from operations and has a net capital deficiency that raise
substantial doubt about its ability to continue as a going
concern. Management’s plans in regard to these matters are also
described in Note 1. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
/s/
Liebman Goldberg & Hymowitz, LLP
Garden
City, New York
April 13,
2010
HAWK
SYSTEMS, INC. AND SUBSIDIARDIES
(A
DEVELOPMENT STAGE COMPANY)
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
December
31,
2009
|
|
|
December
31,
2008
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
|
|
Prepaid
financing costs
|
|
$
|
17,519
|
|
|
$
|
-
|
|
|
Interest
Receivable
|
|
|
18,480
|
|
|
|
|
|
|
TOTAL
CURRENT ASSETS
|
|
|
35,999
|
|
|
|
-
|
|
|
Other
Assets
|
|
|
|
|
|
|
|
|
|
Note
Receivable-Related Party
|
|
|
168,000
|
|
|
|
|
|
|
Other
assets
|
|
|
5,838
|
|
|
|
-
|
|
|
TOTAL
OTHER ASSETS
|
|
|
173,838
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
209,837
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
& STOCKHOLDERS' DEFICIT
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
|
Bank
overdraft
|
|
$
|
44
|
|
|
$
|
17,140
|
|
|
Accounts
payable
|
|
|
547,049
|
|
|
|
-
|
|
|
Notes
payable
|
|
|
150,000
|
|
|
|
|
|
|
Bond
payable
|
|
|
25,000
|
|
|
|
-
|
|
|
Loan
payable - related party
|
|
|
313,575
|
|
|
|
50,705
|
|
|
Accrued
liabilities
|
|
|
803,911
|
|
|
|
-
|
|
|
Accrued payroll
liabilities
|
|
|
231,567
|
|
|
|
-
|
|
|
TOTAL
CURRENT LIABILITIES
|
|
|
2,071,146
|
|
|
|
67,845
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
liabilities
|
|
|
|
|
|
|
|
|
|
Due
to related parties
|
|
|
31,820
|
|
|
|
|
|
|
Convertible
debenture, net
|
|
|
44,000
|
|
|
|
-
|
|
|
TOTAL
LONG-TERM LIABILITIES
|
|
|
75,820
|
|
|
|
-
|
|
|
TOTAL
LIABILITIES
|
|
|
2,146,966
|
|
|
|
67,845
|
|
|
Stockholders'
deficit
|
|
|
|
|
|
|
|
|
|
Preferred
stock
|
|
|
|
|
|
|
|
|
|
Series
B - 500,000 shares authorized, $0.01 par value, 587,347 and 599,288 shares
outstanding at December 31, 2009 and December 31, 2008 (1)
|
|
|
5,873
|
|
|
|
5,993
|
|
|
Common
stock
|
|
|
|
|
|
|
|
|
|
100,000,000
shares authorized, $0.01 par value, 35,799,315 shares issued and
outstanding at December 31, 2009 (1)
|
|
|
357,993
|
|
|
|
-
|
|
|
Additional
paid-in capital
|
|
|
16,047,827
|
|
|
|
15,615,922
|
|
|
Accumulated
deficit during development stage
|
|
|
(18,348,822
|
)
|
|
|
(15,689,760
|
)
|
|
TOTAL
STOCKHOLDERS' DEFICIT
|
|
|
(1,937,129
|
)
|
|
|
(67,845
|
)
|
|
TOTAL
LIABILITIES & STOCKHOLDERS' DEFICIT
|
|
$
|
209,837
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
The October 25, 2007 (date of inception) capital accounts of the Company
have been retroactively restated to reflect the number of shares of Series
B Preferred Stock issued in the merger transaction. See Note
1.
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
HAWK
SYSTEMS, INC. AND SUBSIDIARDIES
(A
DEVELOPMENT STAGE COMPANY)
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the year ended December 31
|
|
|
From
October 25, 2007 (Inception) through December 31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
2009
|
|
|
REVENUE
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and Administrative
|
|
|
2,496,757
|
|
|
|
673,818
|
|
|
|
3,170,575
|
|
|
Research
and Development
|
|
|
109,491
|
|
|
|
15,942
|
|
|
|
125,433
|
|
|
Total
Operating Expenses
|
|
|
2,606,248
|
|
|
|
689,760
|
|
|
|
3,296,008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
LOSS
FROM OPERATIONS
|
|
|
(2,606,248
|
)
|
|
|
(689,760
|
)
|
|
|
(3,296,008
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
OTHER
INCOME (EXPENSE)
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
Impairment
loss
|
|
|
-
|
|
|
|
(15,000,000
|
)
|
|
|
(15,000,000
|
)
|
|
Interest
Income
|
|
|
18,480
|
|
|
|
|
|
|
|
18,480
|
|
|
Interest
Expense
|
|
|
(71,294
|
)
|
|
|
-
|
|
|
|
(71,294
|
)
|
|
Total
Other Income (Expense)
|
|
|
(52,814
|
)
|
|
|
(15,000,000
|
)
|
|
|
(15,052,814
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
LOSS
BEFORE PROVISION FOR INCOME TAXES
|
|
|
(2,659,062
|
)
|
|
|
(15,689,760
|
)
|
|
|
(18,348,822
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
PROVISION
FOR INCOME TAXES
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
NET LOSS
|
|
$
|
(2,659,062
|
)
|
|
$
|
(15,689,760
|
)
|
|
$
|
(18,348,822
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
LOSS PER SHARE,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC
AND DILUTED
|
|
$
|
(0.08
|
)
|
|
$
|
-
|
|
|
|
|
|
|
WEIGHTED
AVERAGE NUMBER OF
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMMON
SHARES OUTSTANDING
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC
AND DILUTED (2)
|
|
|
31,299,315
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2)
The October 25, 2007 (date of inception) capital accounts of the Company
have been retroactively restated to reflect the number of shares of Series
B Preferred Stock issued in the merger transaction. See Note
1.
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
HAWK
SYSTEMS, INC. AND SUBSIDIARDIES
(A
DEVELOPMENT STAGE COMPANY)
CONSOLIDATED
STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
For
the Year Ended December 31, 2009 and the Period from October 25, 2007
(inception) Through December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
Deficit
Accumulated
|
|
|
|
Preferred
Stock
|
|
Common
Stock
|
|
Additional
|
|
During
Development
|
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Paid-in
Capital
|
|
Stage
|
|
|
Balance at October 25, 2007 (Inception) (3)
|
|
|
599,288
|
|
|
$
|
5,993
|
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
15,615,922
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(15,689,760
|
)
|
|
Net
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2008
|
|
|
599,288
|
|
|
$
|
5,993
|
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
15,615,922
|
|
|
$
|
(15,689,760
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deficit
Accumulated
|
|
|
|
Preferred
Stock
|
|
Common
Stock
|
|
Additional
|
|
During
Development
|
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Paid-in
Capital
|
|
Stage
|
|
|
Balance
at December 31, 2008
|
|
|
599,288
|
|
|
$
|
5,993
|
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
15,615,922
|
|
|
$
|
(15,689,760
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recapitalization
of the Company
|
|
|
|
|
|
|
|
|
|
|
31,299,315
|
|
|
|
312,993
|
|
|
|
26,905
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancellation
of preferred stock
|
|
|
(11,941
|
)
|
|
|
(119
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reimbursement
for Consulting Agreement
|
|
|
|
|
|
|
|
|
|
|
4,500,000
|
|
|
$
|
45,000
|
|
|
$
|
405,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,659,062
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2009
|
|
|
587,347
|
|
|
$
|
5,873
|
|
|
|
35,799,315
|
|
|
$
|
357,993
|
|
|
$
|
16,092,827
|
|
|
$
|
(18,348,822
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3)
The October 25, 2007 (date of inception) capital accounts of the Company
have been retroactively restated to reflect the number of shares of Series
B Preferred Stock issued in the merger transaction. See Note
1.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
|
|
HAWK
SYSTEMS, INC. AND SUBSIDIARDIES
(A
DEVELOPMENT STAGE COMPANY)
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the year ended December 31
|
|
|
From
October 25, 2007 (Inception) through December 31,
|
|
|
|
|
2009
|
|
|
|
2008*
|
|
|
|
2009
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(2,659,062
|
)
|
|
$
|
(15,689,760
|
)
|
|
$
|
(18,348,822
|
)
|
|
Accretion
of interest on convertible debenture
|
|
|
44,000
|
|
|
|
-
|
|
|
|
44,000
|
|
|
Reverse
merger paid in capital
|
|
|
667,742
|
|
|
|
|
|
|
|
667,742
|
|
|
Amortization
of deferred financing costs
|
|
|
11,680
|
|
|
|
-
|
|
|
|
11,680
|
|
|
Adjustment to reconcile net loss to net cash (used in) operating
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
Increase
(decrease) from affiliates
|
|
|
(168,000
|
)
|
|
|
-
|
|
|
|
(168,000
|
)
|
|
Increase
(decrease) in interest receivable
|
|
|
(18,480
|
)
|
|
|
-
|
|
|
|
(18,480
|
)
|
|
Increase
(decrease) in accounts payable
|
|
|
547,049
|
|
|
|
-
|
|
|
|
547,049
|
|
|
Increase
(decrease) in loan payable-related party
|
|
|
262,870
|
|
|
|
50,705
|
|
|
|
313,575
|
|
|
Increase
(decrease) in accrued liabilities
|
|
|
803,911
|
|
|
|
-
|
|
|
|
803,911
|
|
|
Increase
(decrease) from related parties
|
|
|
31,820
|
|
|
|
|
|
|
|
31,820
|
|
|
Increase
(decrease) in accrued payroll liabilities
|
|
|
231,566
|
|
|
|
-
|
|
|
|
231,566
|
|
|
Net
cash (used in) operating activities
|
|
|
(244,904
|
)
|
|
|
(15,639,055
|
)
|
|
|
(15,883,959
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from issuance of convertible debenture
|
|
|
87,000
|
|
|
|
-
|
|
|
|
87,000
|
|
|
Proceeds
from issuance of bonds and notes
|
|
|
175,000
|
|
|
|
|
|
|
|
175,000
|
|
|
Increase
in paid in capital
|
|
|
-
|
|
|
|
15,621,915
|
|
|
|
15,621,915
|
|
|
Net
cash provided by financing activities
|
|
|
262,000
|
|
|
|
15,621,915
|
|
|
|
15,883,915
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash
|
|
|
17,096
|
|
|
|
(17,140
|
)
|
|
|
(44
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash,bank
overdraft beginning of year
|
|
|
(17,140
|
)
|
|
|
-
|
|
|
|
-
|
|
|
Cash,
bank overdraft end of year
|
|
$
|
(44
|
)
|
|
$
|
(17,140
|
)
|
|
$
|
(44
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
Supplemental
Cash Flow Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Cash
paid for income taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*The Company did not commence business operations until August,
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
|
|
HAWK
SYSTEMS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2009
|
Note 1 – Nature of
Business and Summary of Significant Accounting
Policies:
|
Organization and Nature of
Operations
Since
September 2004, Hawk Systems, Inc. (formerly known as Explorations Group,
Inc.), a Delaware corporation (the “Company,” “we” “us” or “our”) was in the
business of operating parking lots and garages in New York City and the
surrounding areas through its wholly-owned operating subsidiary, Parking Pro,
Inc. (“Parking Pro”). During 2008, the Company decided to pursue a new business
direction. On February 19, 2009, pursuant to the terms of an
Agreement and Plan of Merger by and between the Company, Hawk Acquisition Corp.,
a newly formed, wholly-owned Florida subsidiary of the Company (“Hawk
Acquisition”) and Hawk Biometric Technologies, Inc., a Florida corporation
(“Hawk Biometric”), Hawk Acquisition merged with Hawk Biometric (the “Merger”).
The
former stockholders of Hawk Biometric were issued .02 shares of the Company’s
Class B Voting, Convertible Preferred Stock, par value $.01 per share
(“Series B Preferred Stock”) in exchange for each share of Hawk Biometric
Class A and Class B common stock outstanding. Each share of
Series B Preferred Stock is convertible into one hundred (100) shares of
the Company’s common stock, par value $.01 (“Common Stock”) at any time, at the
option of the holder and will automatically be converted into shares of Common
Stock on the day following the completion of a 1-for-6 reverse split of its
Common Stock (the “Reverse Split”). On March 18, 2010, the Company
filed a Certificate of Amendment to its Certificate of Incorporation with the
State of Delaware which set the effective date of the Reverse Split as April 7,
2010.
The
merger resulted in a change of control, and as such, Hawk Biometric is the
surviving entity and is a wholly-owned subsidiary of the Company. This report on
Form 10-K is presented accordingly.
On
May 27, 2009, the Company filed a Certificate of Amendment to its
Certificate of Incorporation with the State of Delaware changing its name to
Hawk Systems, Inc. On July 15, 2009, the trading symbol for the Company’s
Common Stock, which is quoted on the Over-The-Counter Bulletin Board, was
changed from EXGI to HWSY.
Hawk
Biometric is a developer of innovative fingerprint authentication technology
that offers high degrees of security, convenience, and ease of use in
applications such as automobile locks and identity theft protection. Management
believes technology can also be used in banking, healthcare, hotel/casino
operations, employee time clock and attendance, stadium security, and sporting
and gaming applications where identity management is required.
Basis of
Presentation
Reverse Merger.
The Merger has
been accounted for as a reverse merger in the form of a recapitalization with
Hawk Biometric as the successor. The recapitalization has been given retroactive
effect in the accompanying consolidated financial statements. The accompanying
consolidated financial statements represent those of Hawk Biometric for all
periods prior to the consummation of the Merger and of the Company and its
wholly-owned subsidiaries, Hawk Biometric and Parking Pro, subsequent to the
Merger.
The
consolidated balance sheet as of December 31, 2009 and the consolidated
statement of operations, consolidated statement of stockholders'
deficit and consolidated cash flows for the fiscal years ended December 31,
2009 and the period October 25, 2007 (date of inception) through December 31,
2008 included herein, have been prepared in accordance with the instructions for
Form 10-K under the Securities Exchange Act of 1934, as amended (the
“Exchange Act”), and Regulation S-X under the Exchange Act. In the opinion
of the management, they include all normal recurring adjustments necessary for a
fair presentation of the consolidated financial statements.
Since
inception, the Company has not realized any revenue from its biometric
technology business. The Company has been primarily engaged in developing its
fingerprint authentication technology and identifying, and pursuing acquisitions
of related assets or companies. The Company has manufactured units of its
biometric automotive starter product but has not yet sold any of those units. To
date, the Company’s operations consist of raising capital and preparing for its
first commercial product sale. There is no guarantee that the Company will be
able to sell any products or generate revenues. These consolidated financial
statements have been prepared on a going concern basis, which contemplates the
realization of assets and satisfaction of liabilities in the normal course of
business.
Going Concern.
We
have incurred losses since inception and have an accumulated deficit of
$(18,348,822) at December 31, 2009, which raises substantial doubt about our
ability to continue as a going concern. We have funded our operations since
inception through the issuance of debt and equity securities and loans from
related parties. Should we require additional funds and are unable to acquire
such funds, our ability to continue as a going concern will be severely
affected. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
These
factors create uncertainty whether we can continue as a going concern. Our plans
to mitigate the effects of the uncertainties on our continued existence are: 1)
to raise additional equity capital; 2) to restructure our existing debt; and 3)
to pursue our business plan and seek to generate positive operating cash flow.
Management believes that these plans may be effectively implemented in the next
twelve-month period. However, our ability to continue as a going concern is
dependent on the implementation and success of these plans. The financial
statements do not include any adjustments in the event we are unable to continue
as a going concern.
Summary of
Significant Accounting Policies
Codification
of Accounting Standards
The
issuance of
FASB Accounting
Standards Codification
tm
(the “Codification”) on July 1, 2009 (effective for interim or annual
reporting periods ending after September 15, 2009), changes the way that
U.S. generally accepted accounting principles
HAWK
SYSTEMS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2009
(“GAAP”)
are referenced. Beginning on that date, the Codification officially became the
single source of authoritative nongovernmental GAAP; however, SEC registrants
must also consider rules, regulations, and interpretive guidance issued by the
SEC or its staff. The switch affects the way companies refer to GAAP in
financial statements and in their accounting policies. All existing standards
that were used to create the Codification became superseded. Instead, references
to standards will consist solely of the number used in the Codification’s
structural organization. Consistent with the effective date of the
Codification, financial statements for periods ending after September 15,
2009, refers to the Codification structure, not pre-Codification historical
GAAP.
Principles
of Consolidation
The
accompanying consolidated financial statements include the accounts of the
Company and the accounts of all majority-owned subsidiaries. The consolidated
balance sheet is a classified presentation, which distinguishes between current
and non-current assets and liabilities. The Company believes that a classified
balance sheet provides a more meaningful presentation consistent with the
business cycles of the Company's operations. All significant inter-company
accounts and transactions have been eliminated in consolidation.
Research
and Development
Pursuant
to ASC 730 (formerly SFAS No. 2), research and development costs are expensed as
incurred. Research and development costs for the years ended December
31, 2009 and for the period October 25, 2007 (date of inception) through
December 31, 2008 were $109,491 and $15,942 respectively.
Earnings
Per Common Share
We
adopted ASC 260 (formerly FASB No. 128, “Earnings per Share”). The statement
established standards for computing and presenting earnings per share (“EPS”).
It replaced the presentation of primary EPS with a basic EPS and also requires
dual presentation of basic and diluted EPS on the face of the income statement.
Basic income/ (loss) per share was computed by dividing our net income/(loss) by
the weighted average number of common shares outstanding during the period. The
weighted average number of common shares used to calculate basic and diluted
income/(loss) per common share for the year ended December 31, 2009 and for the
period October 25, 2007 (date of inception) through December 31, 2008
was 31,299,315 and 0 (as a result of the recapitalization),
respectively. The Company’s common stock equivalents, of outstanding
options and warrants, have not been included as they are
anti-dilutive.
Fair
Value of Financial Instruments
The
Company has adopted the required provisions of Topic 820, “Fair Value
Measurements”. Those provisions relate to our financial assets and liabilities
carried at fair value and our fair value disclosures related to financial assets
and liabilities. Topic 820 defines fair value, expands related disclosure
requirements and specifies a hierarchy of valuation techniques based on the
nature of the inputs used to develop the fair value measures. Fair value is
defined as the price that would be received to sell an asset or paid to transfer
a liability in an orderly transaction between market participants at the
measurement date. There are three levels of inputs to fair value measurements -
Level 1, meaning the use of quoted prices for identical instruments in active
markets; Level 2, meaning the use of quoted prices for similar instruments in
active markets or quoted prices for identical or similar instruments in markets
that are not active or are directly or indirectly observable; and Level 3,
meaning the use of unobservable inputs. Observable market data should be
used when available.
The
Company’s financial instruments are carried at fair value, including, cash
equivalents. Virtually all of the Company’s valuation measurements are Level 1
measurements. The adoption of Topic 820 did not have a significant
impact on the Company’s consolidated financial statements. As of
December 31, 2009, the fair value of our long-term debt was $100,000, which
exceeded the carrying value by $56,000.
Development Stage Activities
and Operations
The
Company is in its initial stages of formation and for the period October 25,
2007 (date of inception) through December 31, 2009, the Company had no
revenues.
HAWK
SYSTEMS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2009
Use of
Estimates
The
preparation of 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. Significant estimates include the valuation of goodwill
and intangible assets. Actual results could differ from those
estimates.
Revenue
Recognition
:
The
Company has not reported any revenues during fiscal year ended December 31,
2009 and for the period October 25, 2007 (date of inception) to December 31,
2008 but intends to recognize revenue in the future when earned, there is a
fixed and determinable price for its product and collectability is reasonably
assured when title passes.
Cash and Cash
Equivalents
:
We
consider all highly liquid investments with original maturities of three months
or less to be cash equivalents. We do not have cash balances in banks in excess
of the maximum amount insured by the FDIC and other international agencies as of
December 31, 2009 and 2008.
Long-Lived
Assets
:
In
accordance with Statement of Financial Accounting Standards (“SFAS”)
No. 144, “
Accounting for
the Impairment or Disposal of Long-Lived Assets”
(“SFAS 144”),
long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of the assets in question may
not be recoverable. An impairment would be recorded in circumstances where
undiscounted cash flows expected to be generated by an asset are less then the
carrying value of that asset.
Income
Taxes
:
We
account for income taxes under ASC 740-10 (formerly SFAS No. 109, “
Accounting for Income Taxes”
)
(“ASC 740-10”). ASC 740-10 requires and asset and liability approach for
financial reporting for incomes taxes. Under ASC 740-10, deferred taxes are
provided for temporary differences between the carrying values of the assets and
liabilities for financial reporting and tax purposes at the enacted rates at
which these differences are expected to reverse.
We
recognize deferred tax liabilities and assets for the expected future tax
consequences of events that have been recognized in our consolidated financial
statements or tax returns. Under this method, deferred tax liabilities and
assets are determined based on the differences between the financial statement
carrying amounts and tax basis of assets and liabilities using enacted rates in
effect in the years in which the differences are expected to
reverse.
Because
the Company has an uncertainty regarding it as a going concern, a 100% valuation
allowance has been set up for any deferred tax item.
Loss per Common
Share
We apply
SFAS No. 128, "Earnings per Share," which requires two presentations of
earnings (loss) per share-"basic" and "diluted." Basic earnings (loss) per share
is computed by dividing income or loss available to common stockholders by the
weighted-average number of common shares issued and outstanding for the period.
The computation of diluted earnings (loss) per share is similar to basic
earnings per share, except that the weighted average number of common shares is
increased to include the number of additional common shares that would have been
outstanding if the potentially dilutive common shares had been issued. For the
fiscal years ended December 31, 2009 and for the period October 25, 2007 (date
of inception) to December 31, 2008, the potential shares of Common Stock to be
issued upon exercise or conversion of outstanding stock options, warrants,
convertible debenture, and Series B Preferred Stock have not been included
in the determination of loss per share because the effect would be
anti-dilutive.
Recent
Accounting Pronouncements
In
June 2009, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 168
, The FASB Accounting
Standards Codification and the Hierarchy of Generally Accepted Accounting
Principles–a Replacement of FASB Statement No. 162
, (SFAS 168).
SFAS 168 establishes the FASB Accounting Standards Codification (Codification)
as the single source of authoritative generally accepted accounting principles
(GAAP) recognized by the FASB to be applied by nongovernmental entities. Rules
and interpretive releases of the SEC under authority of federal securities laws
are also sources of authoritative U.S. GAAP for SEC registrants. SFAS 168 is
effective for financial statements issued for interim and annual periods ending
after September 15, 2009. When effective, the Codification will supersede
all existing non-SEC accounting and reporting standards. All other
non-grandfathered non-SEC accounting literature not included in the Codification
will become non-authoritative. We do not believe the adoption of SFAS 168 will
have a material effect on our results of operations or financial
position.
HAWK
SYSTEMS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2009
The
adoption of other recently issued accounting pronouncements did not have a
material effect on our financial position or results from operations. We do not
expect recently issued accounting pronouncements that are not yet effective will
have a material effect on our financial position or results of operations upon
adoption.
Note 2 – Patents, Impairment
Loss
In
May 2008, Hawk Biometric issued approximately 23,000,000 shares of its
common stock on a one-for-one basis to the shareholders of Hawk Biometrics of
Canada, Inc. in exchange for that company’s existing patent and pending patent
applications. The transaction, which was accounted for on a fair market
value basis recognized the patent value at $15,000,000. Subsequently, it was
determined that the patent was impaired in accordance with SFAS 144, as the
expected cash flows to be generated were $0 at the time of valuation. For the
year ended December 31, 2008, we recognized an impairment loss of
$15,000,000.
As part
of the stock transaction, Hawk Biometric also received approximately $210,000,
which is reflected in paid in capital.
Note 3 –
Merger
On
February 19, 2009, we completed an Agreement and Plan of Merger among the
Company, Hawk Acquisition, and Hawk Biometric. The former stockholders of
Hawk Biometric were issued 599,288 shares of the Company’s Series B
Preferred Stock in exchange for all of the outstanding shares of Hawk Biometric
Class A and Class B common stock. Each share of Series B
Preferred Stock is convertible into one hundred (100) shares of our Common Stock
at any time, at the option of the holder and will automatically be converted
into Common Stock on the day following the completion of a 1-for-6 Reverse Split
of our Common Stock.
For
accounting purposes, these actions resulted in a reverse merger, and Hawk
Biometric is the accounting survivor and surviving business entity; however, the
Company is the surviving legal entity.
We
assumed an estimated $32,500 in liabilities pursuant to the transaction. As we
did not acquire any assets, we reduced paid in capital by $32,500, which
represents the net liabilities acquired. These liabilities are comprised of a
$25,000 bond payable and estimated accrued interest thereon. See Note 6 - Debt,
Note 9 - Commitments and Contingencies and Note 10 - Subsequent
Events.
Note 4 – Related party
transactions
On
January 6, 2009, Mr. Edward Sebastiano, a member of the Company’s board of
directors, issued a promissory note in favor of the Company in the principal
amount of $168,000 for loans provided to him by Hawk Biometrics of Canada,
Inc. The note provided for an original maturity date of December 31,
2009, however, the board of directors of the Company agreed to extend the
maturity of the note until December 31, 2010. See Note 10 - Subsequent
Events.
On
September 16, 2009, the Company issued an unsecured promissory note in the
principal amount of $50,000 to Mr. Mark Spanakos, a member of the Company’s
board of directors. See Note 6 - Debt.
As of
December 31, 2009, we owed Mr. David Coriaty, a member of the Company’s
board of directors, approximately $308,348, which Mr. Coriaty had
previously loaned to the Company for working capital including payment of
expenses. See Note 10-Subsequent Events.
Note 5 - Income
Taxes
Deferred
income taxes as reported on the consolidated balance sheet consists
of:
|
|
|
December 31, 2009
|
|
|
December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
Deferred
tax assets
|
|
$
|
103,350
|
|
|
$
|
-0-
|
|
|
Deferred
tax liabilities
|
|
|
-0-
|
|
|
|
-0-
|
|
|
Valuation
allowance
|
|
|
(103,350)
|
|
|
|
-0-
|
|
|
Total
|
|
$
|
0
|
|
|
$
|
0
|
|
As
December 31, 2009, we had net operating losses (“NOL”) of approximately
$689,000. This amount is available to be carried forward to offset
future taxable income. The carry forwards begin to expire in 2028. We
have provided a full 100% valuation allowance on the deferred tax assets at
December 31, 2009 to reduce such deferred income tax assets to zero as it is the
management’s belief that realization of such amounts do not meet the criteria
required by generally accepted accounting principles. Management will review the
valuation allowance required periodically and make adjustments as
warranted.
HAWK
SYSTEMS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2009
Note 6 –
Debt
The
components of debt are summarized as follows.
|
|
|
|
|
|
|
Long-Term
Debt
|
|
December 31,
2009
|
|
|
Convertible
debenture
|
|
$
|
100,000
|
|
|
Discount
for beneficial conversion feature and warrant
|
|
|
(56,000
|
)
|
|
Bond
payable
|
|
|
25,000
|
|
|
Notes
payable
|
|
|
150,000
|
|
|
Due
to related parties
|
|
|
304,348
|
|
|
Total
|
|
|
523,348
|
|
|
Less
current portion
|
|
|
(479,348
|
)
|
|
|
|
$
|
44,000
|
|
On
April 30, 2009, we issued a two-year $100,000 convertible debenture
(“Debenture”) to an accredited investor. The Debenture bears interest, which is
payable quarterly, at the rate of 10% per annum. The Debenture is convertible
into 1,388,889 shares of our Common Stock at a conversion price of $0.072 per
share, which was $0.068 per share above fair market value of our Common Stock on
the date of issuance. Upon maturity on April 30, 2011, any unconverted
outstanding principal and interest is due and payable in cash. In connection
with the Debenture, we issued warrants to purchase 50,000 shares of our Common
Stock at $0.25 per share (“Debentures Warrants”), which was $0.18 above the fair
market value of our Common Stock on the date of issuance. The Debenture Warrants
are immediately exercisable and expire on April 30, 2012. Net cash proceeds
after expenses totaled approximately $87,000 and were used for working capital.
We paid investment banking fees and expenses of $13,000 and issued warrants to
purchase 138,899 and 5,000 shares of our Common Stock at exercise prices of
$0.072 and $.25 per share, respectively, to the investment banking firm that
facilitated the debenture transaction.
We
recorded the Debenture at a 100% discount after giving effect to the estimated
fair market value beneficial conversion feature of the Debenture and the
Debenture Warrants, which was equal to $100,000 and credited to equity. The
Debenture Warrants were valued using the Black Scholes Option Pricing model with
the following assumptions: dividend yield of 0%, annual volatility of 310.15%,
and risk free interest rate of 4.1%. The carrying value of the Debenture is
being accreted to the face amount by charges to interest expense over the two
year term until maturity on April 30, 2011.
We
incurred financing costs totaling $35,037 pursuant to the Debenture, including
investment banking and professional fees. These deferred financing costs are
being amortized to interest expense over the two year term of the Debenture.
After giving effect to the value of the related warrants and the financing
costs, the effective rate of interest on the Debenture is 145%.
In
connection with the Merger, we assumed the obligation to repay a Class A,
Series A Convertible Bond (“Bond”) held by the Tucker Family Spendthrift
Trust (the “Trust”). The Bond is in the principal amount of $25,000, with
interest payable upon maturity at the annualized rate of 2% over the prime rate
charged by Citibank, N.A. (New York City). The terms of the Bond include a
conversion option that provided for conversion into a number of shares equal to
10% of the Company’s outstanding and reserved capital stock, as defined in the
Bond document. On April 29, 2009, the Trust provided notice of election to
convert $24,000 in principal and accrued interest of the Bond. During
the fiscal year ended December 31, 2009, the Company was in litigation with the
Trust regarding the Bond, however, the parties resolved their issues in January
2010. See Note 9 – Commitments and Contingencies: Litigation and Note
10 - Subsequent Events.
On
September 16, 2009, the Company issued two unsecured promissory notes in
the following amounts: (i) $100,000 payable to Delilah Holdings, LLC, and (ii)
$50,000 payable to Mr. Mark Spanakos, a member of the Company’s board of
directors. Both promissory notes accrue interest at a rate of 12% per annum and
all accrued and unpaid interest is due and payable on the date that is the
earlier of (i) September 16, 2010, or (ii) ten (10) business days from the
date of closing by the Company of any equity financing in the aggregate of not
less than Seven Hundred Fifty Thousand Dollars ($750,000). The proceeds from the
promissory notes were used to pay salaries, consulting fees and legal
fees.
Due to
related parties consists of amounts loaned to us by Mr. David Coriaty, a
member of the Company’s board of directors, during 2008 and 2009 for working
capital purposes.
Note 7 – Stock-based
Compensation
On
May 12, 2009, we granted a non-qualified stock option to Mr. Robert E.
McCann III, our former Chief Executive
HAWK
SYSTEMS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2009
Officer.
The grant provided for the purchase of 7,800,000 shares of Common Stock at an
exercise price of $0.16, which was the closing price on the date of the grant.
It is exercisable immediately and carries a term of five years.
We
recorded stock compensation expense totaling $1,231,872 during the quarter
ending June 30, 2009, which was the estimated the fair value of these
options on the date of grant. We used the Black-Scholes option-pricing model to
determine the fair value with the following weighted average assumptions:
Volatility, 290.47%, expected life, 3 years; risk free rate, 4.13%; dividend
yield, 0%.
On
October 28, 2009, Mr. McCann was terminated as Chief Executive Officer of the
Company. His stock option was cancelled effective the same date. See Note
9 - Commitments and Contingencies.
On
December 15, 2009, the Company entered into an employment agreement with Michael
Diamant to serve as the new Chief Executive Officer of the Company, effective
January 15, 2010, which was subsequently amended on January 19, 2010, effective
December 15, 2009. In connection with that agreement, the Company has
agreed to issue Mr. Diamant on May 12, 2010, stock options to purchase 8,000,000
shares of Common Stock (on a post-Reverse Split basis) at an exercise price of
$0.36, which was equal to the closing bid price of the Common Stock on the date
immediately preceding the date of the agreement (on a post-Reverse Split basis).
The option will be exercisable for a period of five years from the date of grant
and will be fully vested and non-cancellable at the time of the
grant.
As of
December 31, 2009, there were no outstanding stock options.
Note 8 – Stockholder’s
Deficit
We are
authorized to issue 100,000,000 shares of Common Stock, $0.01 par value, and
1,500,000 shares of Preferred Stock, $0.01 par value. There were 31,299,315
shares of Common Stock and 587,347 shares of Series B Preferred Stock
outstanding on December 31, 2009. The number of shares of Series B
Preferred Stock outstanding exceeded the number of authorized shares of Series B
Preferred Stock by 87,337. Each share of Series B Preferred Stock is
convertible into one hundred (100) shares of our Common Stock at any time at the
option of the holder and will automatically be converted into Common Stock on
the day following the completion of the Reverse Split. See Note 10 - Subsequent
Events.
On
October 7, 2009, our board of directors approved the issuance of 4,500,000
shares of our restricted Common Stock (on a pre-reverse split basis) to an
entity controlled by our former chief executive officer, chief financial officer
and director, Mr. Eric Brown, as reimbursement for a payment made by the entity
on our behalf pursuant to a consulting agreement between us and a
consultant. The shares were not physically issued until January 14,
2010. We have therefore recorded an expense of $405,000 which
represents the fair value of the Common Stock based on the closing stock price
of $.09 on October 7, 2009.
Note 9 – Commitments and
Contingencies
Litigation
– On June 9, 2009, Leonard Tucker, as co-Trustee of the Tucker Family
Spendthrift Trust, filed a complaint in the 15th Judicial Circuit of Palm Beach
County, seeking the issuance of 3,323,821 shares of Common Stock and 63,717
shares of preferred stock plus legal fees and costs. The Company and the Trust
resolved their differences in January 2010. See Note 10 - Subsequent
Events.
Contingencies
– Pursuant to an agreement dated February 13, 2009, we agreed to extend and
amend an investment banking agreement originally dated May 5, 2008 (“IB
Agreement”) with Cresta Capital Strategies, LLC (“Cresta”). The amendment
provided for a monthly fee payable to Cresta of $100,000 for a period of twelve
months. We have renegotiated our relationship with Cresta, however, and on
November 23, 2009, the Company and Cresta executed a second amendment to the IB
Agreement which reduced the monthly fee payable to Cresta from $100,000 to
$10,000. In addition, we issued to Cresta a promissory note in the amount of
$250,000 in full satisfaction of the previous amounts owed Cresta. Accordingly,
we have recorded an expense of $250,000 for all amounts owed to Cresta under the
IB Agreement through November 2009. See Note 10 - Subsequent
Events.
Commitments
– On January 9, 2009, the board of directors of Hawk Biometric
approved paying an annual salary of $500,000 to Mr. David Coriaty, our former
Chairman and current member of the board of directors. On May 1,
2009, we entered into an employment agreement with Mr. Coriaty, which
provided for a base salary of $780,000 per annum for a one-year term. The
Company and Mr. Coriaty subsequently agreed to reduce his salary to
$500,000 per annum for the fiscal year ended December 31, 2009. We
are recording the expense over the term of the agreement.
Commitments
– On May 15, 2009, we entered into an employment agreement with Mr.
Henry Eckenrhode to serve as vice president of corporate operations for a term
of one year. The agreement provides for a salary of $120,000 per
year, payable in monthly installments. During the fiscal year ended
December 31, 2009, we were recording the expense over the term of the agreement,
however after the fiscal year end the parties agreed to mutually terminate the
agreement in exchange for the issuance of 200,000 shares of Common Stock. See
Note 10 - Subsequent Events.
Commitments
– On June 1, 2009, we entered into a strategic consulting agreement with PKF
Financial Consultants, Inc. for consulting services to be provided such as
advising the Company on sales and licensing strategies, product licensing
opportunities, alliances with manufacturers and joint venture agreements. The
agreement is for a term of one year and the consultant is entitled to
compensation in the amount of $10,000 per month, due at the beginning of each
month beginning June 1, 2009. In addition, the Company is required to pay
the consultant “success” compensation upon successful execution of a definitive
agreement between the
HAWK
SYSTEMS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2009
Company
and Magna International, Inc. (“Magna”) as follows: (i) an amount equal to 3% of
any licensing fee paid by Magna to the Company within ten days of such fee being
paid; (ii) an amount equal to 3% of any capital investment by Magna to the
Company within ten days of such investment being paid, provided however that any
obligation to pay this fee shall be solely contingent upon compliance with any
applicable state or federal securities laws; and (iii) a ten year option to
purchase 1,000,000 shares of the Company’s Common Stock at an exercise price
equal to the closing price of the Company’s Common Stock on the day that a
definitive agreement between the Company and Magna is executed, or in the event
that the definitive agreement is executed on a day when the stock market is
closed, the last previous trading date. The options are to vest as follows: 25%
vesting effective December 31, 2009; 25% vesting effective June 30, 2010; and
50% vesting effective December 31, 2010.
Commitments
– We entered into an employment agreement with Mr. Robert E. McCann, our former
Chief Executive Officer, on May 12, 2009, as amended on August 14, 2009, which
provided for a base salary of $240,000 per annum for a two-year term and the
grant of a stock option to purchase 7,800,000 shares of Common Stock at an
exercise price of $0.16 per share (the “Option”). The Option was to be fully
vested upon issuance with a term of five years from date of grant. The agreement
further provided for a performance bonus up to $100,000 upon the achievement of
certain goals. On October 28, 2009, Mr. McCann was terminated as Chief Executive
Officer of the Company and his employment agreement and stock options were
cancelled as of the same date. We recorded $90,211 in compensation during the
fiscal year ended December 31, 2009, which was paid in the form of cash and
payment of personal expenses on behalf of Mr. McCann.
Commitments
– We entered into a consulting agreement with Mr. Michael Golden on August 27,
2009 pursuant to which Mr. Golden agreed to manage the Company’s Hawk Telematics
division as division President, develop the Company’s intellectual property,
bring to market Hawk Telematics products, and assist the Company in corporate
matters relating to intellectual property. The term of the Agreement was one
year and the consultant was entitled to compensation in the amount of $20,000
per month for services rendered and a signing bonus equal to $60,000, payable at
the rate of $20,000 per month for three months commencing on September 1, 2009.
Additionally, the agreement provides that Mr. Golden is entitled to receive a
five-year warrant to purchase 975,000 shares of the Company’s Common Stock
(calculated on a post-Reverse Split basis or 5,850,000 shares of Common Stock on
a pre-Reverse Split basis) at an exercise price equal to $0.90 per share
(calculated on a post-Reverse Split basis or $0.15 per share on a pre-Reverse
Split basis), the fair market value of the Common Stock on the date of grant
(the “Warrant”). The agreement’s terms provide that the Warrant will be fully
vested as of the date of grant. The agreement provides the Bonus Warrant will be
fully vested on the date of grant. On October 28, 2009, the Company terminated
the consulting agreement with Mr. Golden and cancelled the Warrant. We recorded
$40,000 in cash compensation during the fiscal year ended December 31, 2009. We
never issued the Warrant, however, and as a result of the subsequent
cancellation, we did not record an expense for the Warrant.
Commitments
– We entered into an employment agreement with Mr. Michael Diamant, our current
Chief Executive Officer, on December 15, 2009, for a term of one year beginning
January 15, 2010. The agreement will automatically extend for
subsequent one (1) year periods, unless either party notifies the other not
later than sixty (60) days prior to the then expiration date of the agreement
that such party does not intend for the agreement to automatically extend.
Pursuant to the terms of the agreement, Mr. Diamant is entitled to receive
an annual salary of $500,000, payable in equal monthly installments, and a
signing bonus equal to $160,000, payable within thirty days of the date of the
agreement. Additionally, the agreement, as amended, provides that
Mr. Diamant is entitled to receive options to purchase 4,000,000 shares of
Common Stock (calculated on a post-reverse split basis) at an exercise price
equal to the closing bid price of the Common Stock on the date immediately
preceding the date of the agreement, which was $0.36 (calculated on a
post-Reverse Split basis. The option is for a term of five years and will be
fully vested and non-cancellable at the time of the grant. The agreement
further provides for an annual bonus opportunity of up to $200,000 during each
year of the term of the agreement based upon performance criteria to be
established jointly by the Compensation Committee and Mr. Diamant within sixty
(60) days of the commencement of the agreement and approved by the board of
directors of the Company each year. The Company has the right to terminate
the Agreement at any time and Mr. Diamant may terminate the Agreement by
delivery of written notice to the Company at least sixty (60) days prior to the
termination date. We did not record any expense for this agreement
during the fiscal year ended December 31, 2009 since the agreement did not take
effect until after the fiscal year end.
Note 10 – Subsequent
Events
On
January 25, 2010, we entered into a settlement agreement (“Settlement
Agreement”) with the Trust in order to settle the ongoing litigation between us
and the Trust. In accordance with the terms of the Settlement
Agreement, we agreed to issue the Trust 3,960,030 shares of our Common Stock and
64,165 shares of our Series B Preferred Stock (collectively, the “Securities”).
We subsequently issued the Securities to the Trust and therefore, we have
no further obligation under the Bond. Under the terms of the
Settlement Agreement, we and the Trust agreed to release and forever discharge
each other, our present officers, agents and employees from any and all claims
and demands which have been or may have been based upon any facts or
circumstances that arose or existed on or prior to the date of the Settlement
Agreement. We executed the release February 23, 2010 and the Trust
executed the release on
HAWK
SYSTEMS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2009
March 3,
2010. The Trust filed a stipulation and order of dismissal with
prejudice with the 15th Judicial Circuit Court of Palm Beach and the judge
entered an order of dismissal with prejudice on February 26, 2010.
Effective
January 31, 2010, we issued a promissory note to Mr. David Coriaty, a member of
our board of directors, in the principal amount of $100,000 for previous loans
provided to us in October 2009. The note accrues interest at the rate
of 10% per annum and is payable at maturity on June 30, 2010.
Effective
February 1, 2010, we issued a promissory note to Mr. David Coriaty, a member of
our board of directors, in the principal amount of $40,000 for loans provided to
us in January 2010. The note accrues interest at the rate of 10% per
annum and is payable at maturity on June 30, 2010.
Effective
February 23, 2010, the Company entered into a consulting agreement (“Consulting
Agreement”) with Griffin Enterprises LLC, a Florida limited liability company
(“Griffin”). Under the terms of the Consulting Agreement, Griffin
will provide certain consulting and liaison services to the Company in
connection with the establishment and implementation of a corporate development
growth plan to enable the Company to develop and expand its business both in the
private sector as well as the government sector. The Consulting
Agreement has a term of three months ending on May 31, 2010 and
provides for monthly compensation payable to Griffin in the amount of $20,000
which first monthly payment is due and payable on or before February 26,
2010. The remaining payments will be due and payable on the first day
of each month beginning on April 1, 2010.
On
February 23, 2010, the Board of Directors of the Company approved the
termination of an investment banking agreement dated June 4, 2008 (“IB
Agreement”), as amended on February 13, 2009 and November 23, 2009, between the
Company and Cresta Capital Strategies, LLC (“Cresta”), a FINRA licensed
broker-dealer. The IB Agreement was terminated due to the fact that
Cresta’s services were no longer needed.
On
February 23, 2010, the Board of Directors of the Company agreed to amend the
employment agreement dated May 1, 2009 (the “Agreement”), between the Company
and Mr. David Coriaty, a member of the Company’s Board of Directors, effective
immediately. The Agreement previously provided for an annual salary of $780,000
or such other annual rate of compensation as the Board of Directors of the
Company may from time to time determine (“Base Salary”), payable in equal
monthly installments. The Board of Directors of the Company and
Mr. Coriaty agreed to reduce his Base Salary to $500,000 for the fiscal year
ended December 31, 2010. In addition, Mr. Coriaty agreed to further
amend the Agreement to provide for payment of his Base Salary in the following
manner: $250,000 per annum in the form of the Company’s common stock, par value
$.01, to be paid quarterly to Mr. Coriaty beginning June 30, 2010 and the
balance of the $250,000 to be deferred until such time as the Board of Directors
and Mr. Coriaty agree otherwise. The terms of the amendment will be subject
to compliance with all applicable law. The Company and Mr. Coriaty have not
yet entered into a formal written amendment to the Agreement reflecting these
new terms.
On
February 23, 2010, the Board of Directors agreed to terminate the agreement with
Mr. Hank Eckenrode and approved the issuance of 200,000 shares of Common Stock
(on a pre-Reverse Split basis) to be issued to Mr. Eckenrode in exchange for his
cancellation of the approximately $50,000 in past due compensation due to him,
subject to entering into a formal release and satisfaction
agreement.
On
February 23, 2010, the Board of Directors approved an extension of the
promissory note issued by Mr. Edward Sebastiano for an additional twelve months
so that the note is now due on December 31, 2010.
On March
18, 2010, the Company filed a Certificate of Amendment to its Certificate of
Incorporation with the State of Delaware which set the effective date of the
Reverse Split as April 7, 2010. The Reverse Split was subsequently
effected on April 7, 2010 and as a result, 587,347 shares of Series B Preferred
Stock automatically converted into 58,734,700 shares of Common
Stock. After giving effect to such conversion, there were 64,165
shares of our Series B Preferred Stock still outstanding. The balance
of 435,835 shares of Series B Preferred have been returned to authorized but
unissued shares of Series B Preferred Stock.
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