UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington D.C., 20549
FORM 10-QSB
(Mark One)
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þ
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QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended December 31, 2007
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o
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TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period to
Commission file number: 001-15835
US Dataworks, Inc.
(Exact name of small business issuer as specified in its charter)
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Nevada
(State or other jurisdiction of
incorporation or organization)
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84-1290152
(I.R.S. employer identification number)
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One Sugar Creek Center Boulevard
Sugar Land, Texas
(Address of principal executive offices)
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77478
(Zip Code)
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Issuers telephone number: (281) 504-8000
Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the
Exchange Act 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
þ
NO
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). YES
o
NO
þ
Number of shares of Common Stock outstanding as of February 5, 2008: 32,062,962
Transitional Small Business Disclosure Format (Check one): YES
o
NO
þ
US DATAWORKS, INC.
TABLE OF CONTENTS
FORM 10-QSB
QUARTERLY PERIOD ENDED DECEMBER 31, 2007
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
US DATAWORKS, INC.
BALANCE SHEET
December 31, 2007
(Unaudited)
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ASSETS
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Current assets:
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Cash and cash equivalents
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$
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1,333,039
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Accounts receivable, trade
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972,355
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Prepaid expenses and other current assets
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176,100
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Total current assets
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2,481,494
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Property and equipment, net
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518,659
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Goodwill, net
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8,201,445
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Other assets
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386,622
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Total assets
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$
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11,588,220
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The accompanying notes are an integral part of these financial statements.
1
US DATAWORKS, INC.
BALANCE SHEET
December 31, 2007
(Unaudited)
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LIABILITIES AND STOCKHOLDERS EQUITY
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Current liabilities:
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Note payable
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35,279
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Deferred revenue
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376,561
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Accounts payable
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166,361
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Accrued expenses
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396,124
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Derivative Compound embedded within note
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647,399
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Derivative warrants
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510,453
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Total current liabilities
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2,132,177
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Long Term Note Payable
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58,798
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Long Term Note Payable Related Party
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500,000
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Long Term Convertible Promissory Note, net unamortized discount of $2,156,606
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1,843,394
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Total liabilities
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4,534,369
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Commitments and Contingencies
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Stockholders Equity:
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Convertible Series B preferred stock, $0.0001 par value
700,000 shares authorized, 109,933 shares issued and outstanding $3.75
liquidation preference, dividends of $283,313 in arrears
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55
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Common stock, $0.0001 par value
90,000,000 shares authorized and 32,062,962 shares issued and outstanding
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3,206
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Additional paid-in capital
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64,733,161
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Accumulated deficit
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(57,682,571
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)
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Total shareholders equity
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7,053,851
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Total liabilities and stockholders equity
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$
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11,588,220
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The accompanying notes are an integral part of these financial statements.
2
US DATAWORKS, INC.
STATEMENTS OF OPERATIONS
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For the Three Months Ended
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For the Nine Months Ended
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December 31,
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December 31,
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2007
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2006
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2007
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2006
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REVENUES
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Software licensing revenues
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$
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182,911
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$
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94,175
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$
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289,833
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$
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609,158
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Software transactional revenues
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445,654
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532,868
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1,225,043
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1,138,588
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Software maintenance revenues
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233,010
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109,128
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658,019
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315,677
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Professional service revenues
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669,654
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983,716
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1,953,490
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2,693,226
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Total revenues
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1,531,229
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1,719,887
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4,126,385
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4,756,649
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COST OF SALES
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574,230
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540,127
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1,469,312
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1,559,854
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Gross profit
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956,999
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1,179,760
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2,657,073
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3,196,795
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OPERATING EXPENSES
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General and administrative
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1,375,756
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1,364,879
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4,659,534
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4,896,677
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Depreciation and amortization
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48,190
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37,605
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133,003
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105,246
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Goodwill Impairment
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5,932,184
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5,932,184
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Total operating expense
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7,356,130
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1,402,484
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10,724,721
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5,001,923
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LOSS FROM OPERATIONS
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(6,399,131
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(222,724
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(8,067,648
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(1,805,128
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OTHER INCOME (EXPENSE)
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Financing costs
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(86,704
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(112,680
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Interest expense
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(157,721
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(49,641
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(170,524
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(220,418
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Interest expense related party
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(14,714
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(10,938
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(36,589
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(10,938
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Loss on disposal of assets
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(44,231
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Gain/(Loss) on derivatives
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1,099,284
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(37,889
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1,157,666
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(193,960
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Contingent
liabilities gain
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222,600
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Other income
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7,783
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7,783
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10,491
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Total other income (expense)
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847,928
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(98,468
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801,425
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(192,225
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)
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LOSS BEFORE PROVISION FOR INCOME TAXES
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(5,551,203
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(321,192
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(7,266,223
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(1,997,353
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PROVISION FOR INCOME TAXES
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NET LOSS
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$
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(5,551,203
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)
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$
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(321,192
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$
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(7,266,223
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$
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(1,997,353
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NET LOSS ATTRIBUTABLE TO COMMON STOCK
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Basic and diluted loss per share
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$
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(0.17
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)
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$
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(0.01
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$
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(0.23
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)
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$
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(0.07
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Basic and diluted weighted-average shares outstanding
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32,062,962
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31,003,828
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31,638,735
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30,612,526
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The accompanying notes are an integral part of these financial statements.
3
US DATAWORKS, INC.
STATEMENTS OF CASH FLOW
For the Nine Months Ended December 31,
(Unaudited)
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2007
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2006
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Cash flows from operating activities:-
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Net (loss)/income from operations
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$
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(7,266,223
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$
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(1,997,953
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)
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Adjustments to reconcile net loss to net cash used in operating activities:
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Depreciation and amortization of property and equipment
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133,003
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105,247
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Amortization of note discount on convertible promissory note
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83,657
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176,058
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Amortization of deferred financing costs
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15,489
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Compensatory element of warrants associated with financing costs
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66,447
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Gain / (Loss) on disposition of assets
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44,231
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(3,394
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Stock based compensation
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291,904
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517,639
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(Gain) / Loss on derivatives
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(1,157,666
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)
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193,960
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Goodwill Impairment
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5,932,184
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Changes in operating assets and liabilities:
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Accounts receivable, net
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1,207,674
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(1,099,833
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)
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Costs and estimated earnings in excess of billings on uncompleted contracts
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238,000
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Prepaid expenses and other current assets
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(44,188
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)
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(941
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Other assets
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(1,777
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)
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12,890
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Deferred revenue
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(267,334
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)
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554,769
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Accounts payable
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(753,749
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)
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571,705
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Accrued expenses
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(603,771
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)
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(282,413
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)
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Interest payable
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(18,858
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)
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(32,434
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)
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Net cash used in operating activities
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(2,338,977
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)
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(1,046,700
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)
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Cash flows from investing activities:
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Purchase of property and equipment
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(107,280
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)
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(157,098
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)
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Proceeds from sales of fixed assets
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10,850
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8,000
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Net cash used in investing activities
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(96,430
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)
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(149,098
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)
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The accompanying notes are an integral part of these financial statements.
4
US DATAWORKS, INC.
STATEMENTS OF CASH FLOW
For the Nine Months Ended December 31,
(Unaudited)
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2007
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2006
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Cash flows from financing activities:
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Proceeds from related party note payable
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500,000
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Proceeds from convertible promissory note
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4,000,000
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Repayment of note payable related party
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(39,000
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)
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Repayment of convertible promissory note
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(256,066
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)
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(512,133
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)
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Proceeds from stock sale
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305,000
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Deferred financing costs
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(370,004
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)
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Payments on equipment note payable
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(11,760
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)
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Net cash (used in) /provided by financing activities
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3,628,170
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(12,133
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)
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Net
increase/(decrease) in cash and cash equivalents
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|
1,192,763
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(1,207,931
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)
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Cash and cash equivalents, beginning of period
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140,276
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|
|
1,290,438
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Cash and cash equivalents, end of period
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$
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1,333,039
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$
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82,507
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Supplemental disclosures of cash flow information
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Interest paid
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|
$
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48,918
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|
|
$
|
87,733
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|
The accompanying notes are an integral part of these financial statements.
5
US DATAWORKS, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
1.
|
|
Organization and Business
|
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|
|
General
|
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|
|
US Dataworks, Inc. (the Company), a Nevada corporation, develops, markets, and supports
payment processing software for the financial services industry. Its customer base includes many
of the largest financial institutions as well as credit card companies, government institutions,
and high-volume merchants in the United States. The Company was formerly known as Sonicport,
Inc.
|
|
2.
|
|
Summary of Significant Accounting Policies
|
|
|
|
INTERIM FINANCIAL STATEMENTS
|
|
|
|
The unaudited condensed financial statements included herein have been prepared by the Company
pursuant to the rules and regulations of the Securities and Exchange Commission. The financial
statements reflect all adjustments that are, in the opinion of management, necessary to fairly
present such information. All such adjustments are of a normal recurring nature. Although the
Company believes that the disclosures are adequate to make the information presented not
misleading, certain information and footnote disclosures, including a description of significant
accounting policies normally included in financial statements prepared in accordance with
accounting principles generally accepted in the United States of America (US GAAP), have been
condensed or omitted pursuant to such rules and regulations.
|
|
|
|
These financial statements should be read in conjunction with the financial statements and the
notes thereto included in the Companys 2007 Annual Report. The results of operations for
interim periods are not necessarily indicative of the results for any subsequent quarter or the
entire year ending March 31, 2008.
|
|
|
|
Revenue Recognition
|
|
|
|
The Company recognizes revenues associated with our software services in accordance with the
provisions of the American Institute of Certified Public Accountants Statement of Position
97-2, Software Revenue Recognition (SOP 97-2). The Company licenses its software products
under nonexclusive, nontransferable license agreements. These arrangements do not require
significant production, modification, or customization. Therefore, revenue is recognized when
such a license agreement has been signed, delivery of the software product has occurred, the
related fee is fixed or determinable, and collectibility is probable.
|
|
|
|
In certain instances, the Company licenses its software on a transactional fee basis in lieu of
an up-front licensing fee. In these arrangements, the customer is charged a fee based upon the
number of items processed by the software and the Company recognizes revenue as these
transactions occur. The transaction fee also includes the provision of standard maintenance and
support services as well as product upgrades should such upgrades become available.
|
|
|
|
If professional services were provided in conjunction with the installation of the software
licensed, revenue is recognized when these services have been provided.
|
|
|
|
For license agreements that include a separately identifiable fee for contracted maintenance
services, such maintenance revenues are recognized on a straight-line basis over the life of the
maintenance agreement noted in the agreement, but following any installation period of the
software.
|
|
|
|
The Company recognizes revenues associated with the resale of ATMs in accordance with the
provisions of the Statement of Financial Accounting Standards (SFAS) No. 48. The Companys
sale price is fixed and determinable at the date of sale and it has no obligation to directly
bring about the resale of the product. In addition, the buyers obligation to pay the Company is
not contingent upon release of the product and its sale
|
6
|
|
price is not adjusted if the product is lost or damaged. The buyer has economic substance apart
from the Company and it can reasonably estimate the amount of returns at the time of sale.
Therefore revenue is recognized at the time of sale.
|
|
|
|
Goodwill
|
|
|
|
Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards No.
142 Goodwill and Other Intangible Assets (SFAS No. 142), which establishes new accounting
and reporting requirements for goodwill and other intangible assets. Under SFAS No. 142, all
goodwill amortization ceased effective January 1, 2002.
|
|
|
|
The goodwill recorded on the Companys books is from the acquisition of US Dataworks, Inc. in
fiscal year 2001, which remains the Companys single reporting unit. SFAS No. 142 requires
goodwill for each reporting unit of an entity to be tested for impairment by comparing the fair
value of each reporting unit with its carrying value. Fair value is determined using a
combination of the discounted cash flow, market multiple and market capitalization valuation
approaches. Significant estimates used in the methodologies include estimates of future cash
flows, future short-term and long-term growth rates, weighted average cost of capital and
estimates of market multiples for each reportable unit. On an ongoing basis, absent any
impairment indicators, the Company performs impairment tests annually during the fourth quarter.
|
|
|
|
SFAS No. 142 requires goodwill to be tested annually and between annual tests if events occur or
circumstances change that would more likely than not reduce the fair value of the reportable
unit below its carrying amount. The Company did not have an impairment of goodwill to record for
the years ended March 31, 2007 or March 31, 2006.
|
|
|
|
Convertible Debt Financing Derivative Liabilities
|
|
|
|
The Company reviews the terms of convertible debt and equity instruments issued to determine
whether there are embedded derivative instruments, including embedded conversion options that
are required to be bifurcated and accounted for separately as a derivative financial instrument.
In circumstances where the convertible instrument contains more than one embedded derivative
instrument, including the conversion option, that is required to be bifurcated, the bifurcated
derivative instruments are accounted for as a single, compound derivative instrument. Also, in
connection with the sale of convertible debt and equity instruments, the Company may issue
freestanding options or warrants that may, depending on their terms, be accounted for as
derivative instrument liabilities, rather than as equity.
|
7
|
|
In accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities,
as amended, the convertible debt holders conversion right provision, interest rate adjustment
provision, liquidated damages clause, cash premium option, and the redemption option
(collectively, the debt features) contained in the terms governing the convertible notes are not
clearly and closely related to the characteristics of the notes. Accordingly, the features
qualify as embedded derivative instruments at issuance and, because they do not qualify for any
scope exception within SFAS 133, they are required by SFAS 133 to be accounted for separately
from the debt instrument and recorded as derivative instrument liabilities.
|
|
|
|
Stock Options
|
|
|
|
Effective April 1, 2006, the Company adopted the Statement of Financial Accounting Standards No.
123 (revised 2004), Share-Based Payment (SFAS 123R), which require the measurement and
recognition of compensation expense for all share-based payment awards made to employees and
directors, including employee stock options, based on estimated fair values. The Company adopted
SFAS 123R using the modified prospective transition method, which requires the application of
the accounting standard as of April 1, 2006, the first day of the Companys fiscal year 2007.
The Companys Financial Statements as of and for the three months ended December 31, 2006
reflect the impact of SFAS 123R. In accordance with the modified prospective transition method,
the Companys Financial Statements for prior periods have not been restated to reflect, and do
not include, the impact of SFAS 123R. Stock-based compensation expense recognized under SFAS
123R for the three months and nine months ended December 31, 2007 was $47,860 and $291,904
respectively, which consists of stock-based compensation expense related to employee and
director stock options and restricted stock issuances.
|
|
|
|
SFAS 123R requires companies to estimate the fair value of share-based payment awards on the
date of grant using an option-pricing model. The value of the portion of the award that is
ultimately expected to vest is recognized as expense over the requisite service periods in the
companys Statement of Operations. Prior to the adoption of SFAS 123R, the Company accounted for
stock-based awards to employees and directors using the intrinsic value method in accordance
with APB 25 as allowed under Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation, (SFAS 123). Under the intrinsic value method, no stock-based
compensation expense had been recognized in the Companys Statement of Operations prior to
January 1, 2006 because the exercise price of the Companys stock options granted to employees
and directors was equal to or greater than the fair market value of the underlying stock at the
date of grant.
|
|
|
|
For purposes of proforma disclosure, the estimated fair value of the options is included in
expense over the options vesting period or expected life. The Companys proforma information
for the three months and six months ended December 31, 2007 and 2006 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
|
|
For the Nine Months
|
|
|
Ending Dec 31,
|
|
Ending Dec 31,
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Net Loss as reported
|
|
$
|
(5,551,203
|
)
|
|
$
|
(321,192
|
)
|
|
$
|
(7,266,223
|
)
|
|
$
|
(1,997,353
|
)
|
Add stock-based
employee compensation
expense included in
net loss as reported,
net of related tax
effects
|
|
$
|
47,860
|
|
|
$
|
127,067
|
|
|
$
|
291,904
|
|
|
$
|
517,639
|
|
Net (loss);
pro forma
|
|
$
|
(5,503,343
|
)
|
|
$
|
(194,125
|
)
|
|
$
|
(6,974,319
|
)
|
|
$
|
(1,479,714
|
)
|
Basic and diluted
(loss) per
share, as reported
|
|
$
|
(0.17
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.23
|
)
|
|
$
|
(0.07
|
)
|
Basic and diluted
(loss) per
share, pro forma
|
|
$
|
(0.17
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.22
|
)
|
|
$
|
(0.05
|
)
|
8
Stock-based compensation expense recognized during the period is based on the value of the
portion of share-based payment awards that is ultimately expected to vest during the period.
Compensation expense recognized for all employee stock options awards granted is recognized over
their respective vesting periods unless the vesting period is graded. As stock-based
compensation expense recognized in the Statement of Operations for the three and nine months
ended December 31, 2007 is based on awards ultimately expected to vest, it has been reduced for
estimated forfeitures.
Upon adoption of SFAS 123R the Company continued to use the Black-Scholes option valuation
model, which requires management to make certain assumptions for estimating the fair value of
employee stock options granted at the date of the grant. In determining the compensation cost of
the options granted during the three and nine months ended December 31 2007, as specified by
SFAS 123R, the fair value of each option grant has been estimated on the date of grant using the
Black-Scholes pricing model and the weighted average assumptions used in these calculations are
summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ending
|
|
For the Nine Months Ending
|
|
|
December 31,
|
|
December 31,
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Risk-free Interest Rate
|
|
|
4.30
|
%
|
|
|
4.93
|
%
|
|
|
4.56
|
%
|
|
|
4.89
|
%
|
Expected Life of
Options Granted
|
|
3 years
|
|
|
3 years
|
|
|
3 years
|
|
|
3 years
|
|
Expected Volatility
|
|
|
67
|
%
|
|
|
84
|
%
|
|
|
72
|
%
|
|
|
82
|
%
|
Expected Dividend Yield
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Expected Forfeiture
Rate
|
|
|
30
|
%
|
|
|
30
|
%
|
|
|
30
|
%
|
|
|
30
|
%
|
As of December 31, 2007, there was approximately $98,258 of total unrecognized compensation cost
related to nonvested share-based compensation arrangements, which is expected to be recognized
over a period of 3 years
.
Loss per Share
The Company calculates loss per share in accordance with SFAS No. 128, Earnings per Share.
Basic loss per share is computed by dividing the net loss by the weighted-average number of
common shares outstanding. For periods in which there was a loss attributable to common stock
outstanding, (i) convertible securities, (ii) warrants and (iii) stock options to purchase shares of the Companys common stock were excluded from the calculations of diluted loss per
share, as inclusion of these securities would have reduced the net loss per share.
The following potential common stock equivalents have been excluded from the computation of
diluted net loss per share for the periods presented because the effect would have been
anti-dilutive (options and warrants typically convert on a one-for-one basis, see conversion
details of the preferred stock stated below for the common stock shares issuable upon
conversion):
9
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended
|
|
|
December 31,
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
Options outstanding under the Companys stock option plans
|
|
|
7,383,349
|
|
|
|
6,460,349
|
|
Options granted outside the Companys stock option plans
|
|
|
1,160,000
|
|
|
|
1,160,000
|
|
Warrants issued in conjunction with private placements
|
|
|
5,288,683
|
|
|
|
19,738,683
|
|
Warrants issued as a financing cost for notes payable
and convertible notes payable
|
|
|
6,342,413
|
|
|
|
1,783,650
|
|
Warrants issued for services rendered and litigation
settlement
|
|
|
380,769
|
|
|
|
200,769
|
|
Warrants issued as consideration for note extension
|
|
|
200,000
|
|
|
|
-0-
|
|
Convertible Series B preferred stock (a)
|
|
|
109,933
|
|
|
|
109,933
|
|
|
|
|
(a)
|
|
The Series B preferred stock is convertible into shares of common stock at a conversion
price of $3.75 per share.
|
|
|
Estimates
|
|
|
|
The preparation of financial statements requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those estimates.
|
|
|
|
Concentrations of Credit Risk
|
|
|
|
The Company sells its products throughout the United States and extends credit to its customers.
It also performs ongoing credit evaluations of such customers. The Company does not obtain
collateral to secure its accounts receivable. The Company evaluates its accounts receivable on a
regular basis for collectibility and provides for an allowance for potential credit losses as
deemed necessary.
|
|
|
|
Four of the Companys customers accounted for 30%, 23%, 15% and 10%, respectively, of the
Companys net revenues for the three months ended December 31, 2007. Four customers accounted
for 27%, 25%, 12% and 11%, respectively, of net revenues for the nine months ended December 31,
2007. Four of the Companys customers accounted for 20%, 17%, 17% and 12%, respectively, of the
Companys net revenues for the three months ended December 31, 2006. Three customers accounted
for 29%, 19% and 12%, respectively, of net revenues for the nine months ended December 31, 2006.
|
|
|
|
At December 31, 2007, amounts due from these significant customers accounted for 76% of accounts
receivable.
|
|
3.
|
|
Property and Equipment
|
|
|
|
Property and equipment as of December 31, 2007 consisted of the following:
|
|
|
|
|
|
Furniture and fixtures
|
|
$
|
99,535
|
|
Office and telephone equipment
|
|
|
182,275
|
|
Computer equipment
|
|
|
711,725
|
|
Computer software
|
|
|
1,271,098
|
|
Leasehold improvements
|
|
|
64,733
|
|
|
|
|
|
|
|
|
2,329,366
|
|
Less accumulated depreciation and amortization
|
|
|
(1,810,707
|
)
|
|
|
|
|
Total
|
|
$
|
518,659
|
|
|
|
|
|
10
|
|
Depreciation and amortization expense for the three and nine months ended December 31, 2007 and
2006 was $48,190, $133,003, $37,605 and $105,247, respectively.
|
|
4.
|
|
Goodwill Impairment
|
|
|
|
SFAS No. 142 states that if a significant event or circumstances change that would more likely
than not reduce the fair value of the reportable unit below its
carrying amount, then the fair value
of the reportable unit should be reviewed. The Company has determined that two significant
events occurred in the quarter ending December 31, 2007 that,
when taken together, placed enough
downward pressure on the market value of the Companys common stock to require a review of the fair value of
the reportable unit. First, in November, 2007 the Company issued convertible notes in the amount of
$4,000,000 which increased the Companys debt significantly and the market price of the
Companys common stock began to fall. Secondly, in December 2007, the Company announced the
termination of its Resale Agreement with Hyundai and entered into a Settlement and Release
Agreement terminating the Purchase Agreement. This announcement continued the downward pressure
on the market value of the Companys common stock.
|
|
|
|
The Company used the net book value, defined as total assets less total
liabilities, to compute the carrying value of the reportable unit. The carrying value was then
compared to the Companys market value as of December 31, 2007 based on the market
capitalization of its common stock. This analysis determined that an impairment of $5,932,184
occurred and the goodwill was written down as of December 31, 2007, accordingly. The Company
will continue to perform impairment testing annually during the fourth quarter unless any events
indicating the presence of impairment factors arise.
|
|
5.
|
|
Notes Payable Related Parties
|
|
|
|
On September 26, 2006, the Company entered into a note payable with its Chief Executive Officer
for $500,000. The note bears an 8.75% per annum interest rate, is unsecured and was due
September 25, 2007. On September 25, 2007, the Company entered into a new note payable agreement
that supersedes and supplants the September 2006 note. As of September 30, 2007 the outstanding
balance on this note payable is $500,000. The principal, together with any unpaid accrued
interest on the new note payable, shall be due and payable in full on demand on the earlier of:
(i) the full and complete satisfaction of certain senior secured convertible notes (the
November Notes) issued by the Company to certain investors on November 13, 2007 and (ii)
ninety-one (91) days following the expiration of the term of the November Notes (such date
described in (i) and (ii) hereinafter the Demand Date), unless such date is extended by the
mutual agreement of the parties.
|
|
|
|
Notes Payable
|
|
|
|
In August 2007 the Company entered into a note payable with an equipment vendor to purchase new
telephone equipment for $105,835. The note bears a 10.68% per annum interest rate, is secured by
the equipment and is due in 36 equal monthly installments.
|
|
6.
|
|
Convertible Promissory Notes
|
|
|
|
Convertible promissory notes at December 31, 2007 consisted of the following:
|
|
|
|
|
|
Senior Secured Convertible promissory notes, interest at 6-month Libor plus 500
Basis points, determined quarterly, (currently 9.7375%), $4,000,000, due November
13, 2010, net of unamortized discount of $2,156,606
|
|
$
|
1,843,394
|
|
Less current portion
|
|
|
(
|
)
|
|
|
|
|
Long-term portion
|
|
$
|
1,843,394
|
|
|
|
|
|
|
|
Convertible promissory note with interest at 10% per annum
|
|
|
|
This note is an amendment and restatement of a note in the same principal amount originally
dated September 15, 2004. The original note was issued effective September 15, 2004 in
connection with the November 2004 settlement of a lawsuit brought by an investor in December
2003. The amended note is convertible at anytime, at the holders election, into shares of the
Companys common stock at a per share conversion price of $1.10, subject to standard
antidilution provisions.
|
|
|
|
The amended note became effective September 15, 2005 and extended a principal payment of
$256,067, originally due September 15, 2005, for one year. In consideration of this amendment,
the Company issued the holder a common stock purchase warrant to purchase up to 650,000 shares
of the Companys common stock at an exercise price of $0.59 per share. The warrant will expire
on September 15, 2008.
|
|
|
|
The changes to this debt caused the accounting treatment to be an extinguishment of the old debt
and issuance of new debt instead of being treated as modification of debt. Therefore, the excess
of the fair value of the note and warrants over the carrying amount of the debt is $206,000 and
has been recorded as a loss on extinguishment for the year ended March 31, 2006.
|
11
|
|
In connection with the November 2004 settlement, the Company also issued a warrant to purchase
160,000 shares of the Companys common stock at a purchase price of $0.75 per share, which
expired on November 10, 2006.
|
|
|
|
Using the Black-Scholes pricing model the Company has determined the value of the warrants
issued in connection with the settlement to be $126,000. This amount, together with the value of
the convertible promissory note, the value of the plaintiffs legal expense reimbursement and
the Companys legal costs incurred in connection with the settlement totaled $924,200 and has
been recorded as Investor litigation settlement expense for the year ended March 31, 2005.
|
|
|
|
On September 14, 2007, the Company reached an agreement with the note holder to extend the terms
of the note for an additional 90 days in exchange for warrants to purchase up to 200,000 shares
of the Companys common stock dependent upon when the note is paid. On September 14, 2007, the
Company issued the holder a warrant to purchase 66,666 shares of the Companys common stock, on
October 15, 2007 the Company issued the holder a warrant to purchase 66,666 shares of the
Companys common stock, and on November 15, 2007 the Company issued the holder the final warrant
to purchase 66,667 shares of the Companys common stock.
|
|
|
|
Using the Black-Scholes pricing model the Company has determined the value of the warrants
issued on September 14, 2007 in connection with the note extension to be $13,141, the warrants
issued on October 15, 2007 in connection with the note extension to be $16,478 and the warrants
issued on November 15, 2007 in connection with the extension to be $14,918.
|
|
|
|
This convertible note was paid in full on December 3, 2007.
|
|
|
|
Convertible promissory note issued June 16, 2005 with $70,000 Original Issue Discount
|
|
|
|
On June 16, 2005, the Company entered into a Securities Purchase Agreement with an institutional
investor (the Debenture Agreement) for the sale of a convertible debenture with a principal
amount of $770,000 and an original issue discount of $70,000 for gross proceeds of $700,000. The
debenture is convertible at anytime at the discretion of the holder at a price per share of
$0.572 into 1,346,154 shares of the Companys common stock. The convertible debenture is to be
repaid in 15 monthly installments of $51,333.33 beginning April 15, 2006. The Company may also
elect, upon proper notice, to pay any monthly installment in shares of the Companys common
stock based on a conversion price equal to the lesser of (i) the then applicable conversion
price, or (ii) 90% of the volume weighted average price of the Companys common stock for the 10
trading days immediately preceding the payment; provided, that, such conversion price must be at
least equal to the conversion floor of $0.23, or such monthly installment must be paid in cash.
This convertible debenture was amended on March 9, 2006, pursuant to which the Company must,
within 25 calendar days prior to each monthly payment, deliver 89,744 shares of its common stock
to the holders, which represents the monthly installment amount divided by the then conversion
price with the first monthly payment becoming due on April 17, 2006. In connection with the
Debenture Agreement, the Company issued two groups of warrants, Short Term Warrants and Long
Term Warrants to the institutional investor. The Short Term Warrants allow the institutional
investor to purchase an aggregate of 407,926 shares of the Companys common stock with an
exercise price of $0.572 per share exercisable for a period of 180 days at any time after the
later of (i) the effective date of the registration statement (as described below) or (ii)
December 16, 2005. The Long Term Warrants allow the institutional investor to purchase an
aggregate of 471,154 shares of the Companys common stock with an exercise price of $0.572 per
share exercisable at anytime from December 16, 2005 through December 16, 2008; provided,
however, the institutional investor will not be permitted to exercise a warrant to the extent
that the number of shares of the Companys common stock beneficially owned by such institutional
investor taken together with the number of shares to be issued upon exercise of the warrant
equals or exceeds 4.999% of the Companys then issued and outstanding shares of common stock.
The warrants also contain trading market restrictions that preclude the Company from issuing shares of common stock upon exercise thereof if such issuance, when aggregated with other
issuances of the Companys common stock pursuant to the warrants, would exceed 19.999% of the
Companys then issued and outstanding shares of common stock, unless the Company has previously
obtained the required shareholder approval. Pursuant to a Registration Rights Agreement dated
June 16, 2005 between the Company and the institutional investor, The Company agreed to file a
registration statement for the resale of the shares of the Companys common stock that may be
issued to
|
12
|
|
the institutional investor upon the conversion of the convertible debenture and the exercise of
the Short Term Warrants and the Long Term Warrants. The registration statement covering these
securities was effective on September 1, 2005.
|
|
|
|
In accordance with SFAS No. 133 Accounting for Derivative Instruments and Hedging Activities,
the debt features contained in the terms governing the notes are not clearly and closely related
to the characteristics of the notes. Accordingly, the debt features qualify as embedded
derivative instruments at issuance and, because they did not qualify for any scope exception
within SFAS 133, they were required to be accounted for separately from the debt instrument and
recorded as derivative financial instruments.
|
|
|
|
At the date of issuance, the embedded debt feature had an estimated initial fair value of
$449,089, which was recorded as a discount to the convertible notes and derivative liability on
our balance sheet. In subsequent periods, if the price of the security changes, the embedded
derivative financial instrument related to the debt features will be adjusted to the fair value
with the corresponding charge or credit to other income/(expense). The estimated fair value of
the debt features was determined using the probability weighted averaged expected cash flows /
Lattice Model with a closing price of $0.65, a conversion price as defined in the respective
note agreement and a period of two years. Concerning the debt features, the model uses several
assumptions including: historical stock price volatility, approximate risk-free interest rate
(3.5%), remaining term to maturity, and the closing price of the companys common stock to
determine the estimated fair value of the derivative liability. This convertible note was paid
in full in March 2007 and as such has been removed from the Companys financial statements for
fiscal year 2008.
|
|
|
|
The warrants included with this note for purchase of the Companys common stock had an initial
value of $271,940. This amount has been classified as a derivative financial instrument and
recorded as a liability on our consolidated balance sheet in accordance with SFAS 133. The
estimated fair value of the warrants at the date of issuance was determined using the
Black-Scholes option-pricing model with a closing price of $1.14, the respective exercise price
of the warrants, a 2 year term, and a 90% volatility factor relative to the date of issuance.
The model uses several assumptions including: historical stock price volatility, approximate
risk-free interest rate (3.50%), remaining term to maturity, and the closing price of the
companys common stock to determine the estimated fair value of the derivative liability. In
accordance with the provisions of SFAS 133, the Company is required to adjust the carrying value
of the instrument to its fair value at each balance sheet date and recognize any change since
the prior balance sheet date as a component of other income/ (expense) on its statement of
operations. The warrant derivative liability at December 31, 2007, decreased to a fair value of
$469, due in part to a decrease in the market value of the companys common stock, which
resulted in an other income item of $16,404.
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|
|
|
The recorded value of the warrants can fluctuate significantly based on fluctuations in the
market value of the underlying securities of the issuer of the warrants, as well as in the
volatility of the stock price during the term used for observation and the term remaining for
the warrants.
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|
|
Senior Secured Convertible promissory notes due November 13, 2010
|
|
|
|
On November 13, 2007, the Company secured certain financing from certain institutional investors
(collectively, the Investors) in the form of senior secured convertible notes (the Notes)
for an aggregate of $4.0 million. The interest payable on the Notes is equal to the 6-month
LIBOR rate plus five hundred basis points (or 9.7375% at the time of subscription) and is
re-calculated as of the first day of each calendar quarter. The Notes may be converted at any
time into shares of the Companys common stock (Common Stock) at the conversion price of $0.43
per share, which is equal to 110% of the dollar volume-weighted average price for the Common
Stock on November 12, 2007, subject to anti-dilution provisions; provided, however, the Investor
may not beneficially own more than 4.99% (the Maximum Percentage) of outstanding shares of
Common Stock following such conversion. At any time, the Investor may decrease or increase this
Maximum Percentage to any percentage not to exceed 9.99%. In the event of a Fundamental
Transaction (as described in the Notes) where greater than 50% of the Companys assets or equity
is transferred, the Investors may redeem the note for either 125% of its principal balance or
the value of the Common Stock as converted (such Common Stock as converted under the Notes,
Conversion Shares).
|
13
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|
In addition, on each of the 9 month and 18 month anniversary of the closing, the Investors may
request that the Company redeem a portion of the Notes. The Notes have a maturity date of
November 13, 2010. The Notes are secured by the Security Agreement, dated November 13, 2007, by
and between the Company and the Investors (the Security Agreement), pursuant to which the
Company granted the Investors a security interest in all its personal property, whether now
owned or hereafter acquired, including but not limited to, all accounts, copyrights, trademarks,
licenses, equipment and all proceeds as from such collateral.
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|
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The Investors also entered into a Put Agreement (the Put Agreement) with the Companys Chief
Executive Officer, and a member of the Companys Board of Directors (collectively, the
Guarantors). Pursuant to the Put Agreement, following August 13, 2008, under certain
circumstances the Investors may require one or more of the Guarantors to purchase all or a
portion of the Note, including any accrued interest or late charges.
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|
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In consideration for this guarantee, the Company is paying the Guarantors a fee (the
Guarantors Fee) equal to: (i) an initial installment of two percent (2%) of the outstanding
Note principal for initial six months of the Notes term; (ii) then, an additional fee equal to
two percent (2%) of the outstanding Note principal for the following twelve months; and, (iii) a
final installment equal to two percent (2%) of the outstanding Note principal for the remaining
18 months of the Notes term. The Guarantor Fee will be shared equally by the Guarantors and
will accrue immediately upon the start of each of the time periods described by subsection (i),
(ii) and (iii), above. The Guarantors Fee would not be payable until after the complete
satisfaction of the Note.
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In connection with the issuance of the Notes, the Company has also issued to the Investors
warrants (the Warrants) to purchase an aggregate of 4,651,162 shares of Common Stock (such
Common Stock exercisable from the Warrants, Warrant Shares) at the exercise price of $0.43 per
share, which is equal to 110% of the dollar volume-weighted average price for the Common Stock
on November 12, 2007, subject to anti-dilution provisions; provided, however, the Investor may
not beneficially own more than the Maximum Percentage following such exercise. The Warrant may
be exercised at any time until 11:59 p.m., New York time on November 13, 2012.
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|
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|
The Company is obligated to reserve for issuance upon conversion of the Notes and exercise of
the Warrants shares of Common Stock equal to at least 130% of the Conversion Shares and Warrant
Shares. The Company filed a registration statement in December 2007 to register the Conversion
Shares and Warrant Shares.
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|
|
|
In accordance with SFAS No. 133 Accounting for Derivative Instruments and Hedging
Activities, the debt features contained in the terms governing the notes are not clearly and
closely related to the characteristics of the notes. Accordingly, the debt features qualify as
embedded derivative instruments at issuance and, because they did not qualify for any scope
exception within SFAS 133, they were required to be accounted for separately from the debt
instrument and recorded as derivative financial instruments.
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|
|
|
At the date of issuance, the embedded debt feature had an estimated initial fair value of
$960,714 which was recorded as a discount to the convertible notes and derivative liability on
our balance sheet. In subsequent periods, if the price of the security changes, the embedded
derivative financial instrument related to the debt features will be adjusted to the fair value
with the corresponding charge or credit to other income/(expense). The estimated fair value of
the debt features was determined using the probability weighted averaged discounted cash flows /
Lattice Model with a closing price of $0.43, a conversion price as defined in the respective
note agreement and a period of three years. Concerning the debt features, the model uses several
assumptions including: projected stock price volatility, annual stock price growth rate,
interest rate projections, no registration default, alternative financing availability, default
status, holder redeeming under default, ownership limitation, warrant exercise reset, fixed
conversion reset and trading volume to determine the estimated fair value of the derivative
liability. The derivative liability at December 31, 2007, decreased to a fair value of $647,399,
due in part to a decrease in the market value of the companys common stock, which resulted in
an other income item of $313,315.
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|
|
|
The warrants included with this note for purchase of the Companys common stock had an initial
value of $1,279,549. This amount has been classified as a derivative financial instrument and
recorded as discount to the convertible notes and derivative liability on our balance sheet in
accordance with SFAS 133. The estimated fair value of the warrants at the date of issuance was
determined using the Black-Scholes option-pricing model with a closing price of $0.43, the
respective exercise price of the warrants, a 5 year term, and an 80% volatility factor
|
14
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|
relative to the date of issuance. The model uses several assumptions including: historical stock
price volatility, approximate risk-free interest rate (3.84%), remaining term to maturity, and
the closing price of the companys common stock to determine the estimated fair value of the
derivative liability. In accordance with the provisions of SFAS 133, the Company is required to
adjust the carrying value of the instrument to its fair value at each balance sheet date and
recognize any change since the prior balance sheet date as a component of other income/
(expense) on its statement of operations. The warrant derivative liability at December 31, 2007,
decreased to a fair value of $509,984, due in part to a decrease in the market value of the
companys common stock, which resulted in an other income item of $769,565.
|
|
|
|
|
The recorded value of the warrants can fluctuate significantly based on fluctuations in the
market value of the underlying securities of the issuer of the warrants, as well as in the
volatility of the stock price during the term used for observation and the term remaining for
the warrants.
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|
7.
|
|
Accounts Receivable Facility
|
|
|
|
On September 27, 2006, the Company entered into a Purchase and Sale Agreement with Catalyst
Finance, L.P. (Catalyst) for sale of certain of its accounts receivables. The Companys
borrowing costs under this Agreement range from 1.25% to 20% of the gross amount of the
receivables sold to Catalyst based on the timing of collection. The maximum funds available
under the agreement is all available accounts receivables as agreed to by Catalyst and the
Company. The agreement allows for Catalyst to request repurchase of an account receivable under
certain conditions. For the three and nine months period ended December 31, 2007, the financial
institution has not requested repurchase of an account receivable. For the three months ending
December 31, 2007, the Company did not sale any receivables under the agreement. For the nine
months ending December 31, 2007, the Company has sold $297,105 in receivables under the
agreement, which yielded a loss on the sale of these receivables of $9,674. The Agreement was
terminated by the Company on August 2, 2007.
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|
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|
On August 10, 2007, the Company entered into a Loan and Security Agreement (the Loan
Agreement) with Silicon Valley Bank (SVB), pursuant to which SVB will advance funds to the
Company for certain of its accounts receivables up to $2 million. Under the terms of the Loan
Agreement, the Company will receive an advance of up to 80% of the subject account receivable
(the Advance) and pay a finance charge to SVB equal to prime plus 1.5% to 3.0%, based on the
Companys assets to liabilities ratio, while the Advance is outstanding. The Company is
obligated to repay the Advance upon receipt of payment for the subject account receivable. For
the three and nine months ending December 31, 2007, the Company has sold $423,729 in receivables
under the agreement, which yielded a loss on the sale of these receivables of $5,144. The
Agreement was terminated on November 9, 2007.
|
|
8.
|
|
Commitments and Contingencies
|
|
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|
Employment Agreements
|
|
|
|
On April 3, 2006, the Company entered into an employment agreement with each of its President,
Payment Products Division and Vice Chairman, Sr. Vice President and Chief Technology Officer,
and Vice President of Business Development and General Counsel, for a term of three years with
automatic renewal for successive one-year terms unless either party gives timely notice of
non-renewal.
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|
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|
Annual base salary for the President, Payment Products Division and Vice Chairman of the Company
is $190,000 and pursuant to the terms of the agreement he is entitled to receive an option to
purchase 550,000 shares of the Companys common stock. This option vests over a 3 year period
with 150,000 shares vesting on April 3, 2006 and 200,000 shares vesting on each of April 3, 2007
and 2008. In addition the President, Payment Products Division and Vice Chairman is entitled to
receive a bonus of $48,125 for year end 2006.
|
|
|
|
Annual base salary for the Senior Vice President and Chief Technology Officer of the Company is
$185,000 and pursuant to the terms of the agreement he is entitled to receive 200,000 shares of
restricted common stock.
|
|
|
|
The restricted shares vest over a 3 year period with 25,000 shares vesting on April 3, 2006 and
87,500 shares vesting on each of April 3, 2007 and 2008. The Senior Vice President and Chief
Technology Officer is also
|
15
|
|
eligible to receive a quarterly bonus of equal to 3.5% of the increase in the Companys revenue
from fiscal year quarter to fiscal year quarter and to receive a bonus of $78,750 for fiscal
year 2006.
|
|
|
|
|
Annual base salary for the Vice President of Business Development and General Counsel of the
Company is $175,000, and pursuant to the terms of the agreement he is entitled to receive an
option to purchase 700,000 shares of the Companys common stock. This option vests over a 3 year
period with 300,000 shares vesting on April 3, 2006 and 200,000 shares vesting on each of April
3, 2007 and, 2008. The Vice President of Business Development and General Counsel is also
eligible to receive a quarterly bonus based upon the Companys future acquisitions or mergers.
|
|
|
|
On May 23, 2006, the Company entered into an employment agreement with its Chairman of the Board
and Chief Executive Officer. The agreement has a 2 year term with automatic renewal for
successive one year terms unless either party gives timely notice of non-renewal. His annual
base salary is $220,000 and he is entitled to receive 100,000 shares of restricted common stock
that vest immediately and is entitled to receive an option to purchase 600,000 shares of the
Companys common stock. This option vests as to 300,000 shares on each of May 22, 2007 and 2008.
|
|
9.
|
|
Stockholders Equity
|
|
|
|
Preferred Stock
|
|
|
|
The Company has 10,000,000 authorized shares of $0.0001 par value preferred stock. The preferred
stock may be issued in series, from time to time, with such designations, rights, preferences,
and limitations as the Board of Directors may determine by resolution.
|
|
|
|
Convertible Series B Preferred Stock
|
|
|
|
The Company has 700,000 authorized shares of $0.0001 par value convertible Series B preferred
stock.
|
|
|
|
In August and October 2000, the Company issued 101,867 and 26,733 units respectively, in a
private placement for gross proceeds of $382,000 and $100,250, respectively. Each unit consisted
of one share of the Companys voting convertible Series B preferred stock (the Series B) and a
warrant, exercisable through October 2003, to purchase one share of the Companys common stock.
The Series B has a liquidation preference of $3.75 per share and carries a 10% cumulative
dividend payable each March 1 and September 1. The Company has the right to redeem the Series B
at any time after issuance at a redemption price of $4.15 per share, plus any accrued but unpaid
dividends. The Series B is convertible upon issuance into shares of the Companys common stock
at $3.75 per share. The warrant entitles the holder to purchase one share of the Companys
common stock at $6.25 per share, which represents 115% of the market value of the Companys
common stock at the closing date.
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|
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|
In May 2001, an investor in the Series B rescinded its acquisition and returned to the
Company 2,667 shares of Series B and warrants for the purchase of 533 shares of common stock in
exchange for the return of its investment of $10,000.
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|
|
|
In August 2004, an investor in the Series B elected to convert his 16,000 shares and
accordingly was issued 3,200 shares of the Companys common stock.
|
|
|
|
At December 31, 2007, there were accumulated, undeclared dividends in arrears of $283,313 or
$2.58 per share.
|
|
|
|
Common Stock and Warrants
|
|
|
|
During the three and nine months ended December 31, 2007, the Company completed the following:
|
|
|
|
On August 31, 2007, the Company entered into a stock purchase agreement ( the Purchase
Agreement), with certain employees and directors of the Company, pursuant to which the Company
agreed to issue to those certain employees and directors an aggregate of 762,500 shares of the
Companys common stock, $0.0001 par value (the Common Stock), for an aggregate purchase price
of $305,000.
|
16
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|
On September 14, 2007 the Company reached agreement with a current note holder to extend the
terms of the convertible promissory note dated September 15, 2005 for an additional 90 days in
exchange for the granting of up to 200,000 warrants dependent upon when the note is paid.
66,666 warrants were issued on the agreement date with another 66,666 to be issued if the note
is not paid by October 15, 2007 and the final 66,667 warrants issued if the note is note paid by
November 15, 2007. All 200,000 warrants were issued in the three and nine months ended December
31, 2007.
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|
|
|
On November 13, 2007, in connection with the $4,000,000 senior secured convertible note issued
to a group of institutional investors, the Company issued 4,651,162 warrants.
|
|
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|
Non-Cash Financing and Investing Activities
|
|
|
|
In August 2007 the Company entered into a note payable with an equipment vendor to purchase new
telephone equipment for $105,835.
|
|
|
|
During the three and nine months ended December 31, 2006, the Company completed the
following:
|
|
|
|
In the quarter ended June 30, 2006, the Company issued 303,116 shares of common stock with a
value of $154,000 to pay down debt associated with the convertible promissory note issued June
16, 2005.
|
|
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|
In the quarter ended September 30, 2006, the Company issued 287,173 shares of common stock with
a value of $154,000 to pay down debt associated with the convertible promissory note issued June
16, 2005.
|
|
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|
In the quarter ended December 31, 2006, the Company issued 314,253 shares of common stock with a
value of $154,000 to pay down debt associated with the convertible promissory note issued
June 16, 2005.
|
|
|
|
In the nine months ended December 31, 2006, the Company issued 904,542 shares of common stock
with a value of $462,000 to pay down debt associated with the convertible promissory note issued
June 16, 2005.
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|
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|
Sale of Common Stock and Warrants
|
|
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|
On December 29, 2006, the Company entered into a stock purchase agreement (the Purchase
Agreement), with Hyundai Syscomm Corp., a California corporation (Hyundai), pursuant to which
the Company agreed to issue to Hyundai an aggregate of 6,100,000 shares of the Companys common
stock, $0.0001 par value (the Common Stock), for an aggregate purchase price of $1,500,000
(Purchase Shares). In connection with the Purchase Agreement, and subject to shareholder
approval, the Company also agreed to issue to Hyundai a warrant (the Warrant) to purchase up
to an aggregate of 14,300,000 shares of Common Stock (the Warrant Shares); provided, however,
in no event shall the aggregate of Hyundais Warrant Shares and Purchased Shares exceed 39.9% of
the Companys total outstanding shares. Under no condition will Warrant Shares become issuable
hereunder unless and until the Company secures the necessary vote from its shareholders in favor
of the issuance of this Warrant. The Warrant will vest as to one million shares of Common Stock
for each $1 million in gross profits allocated to Hyundai under the Resale Agreement. At
Hyundais option, it may elect to apply its allocation of gross profits to the payment of the
exercise price of the exercise of any of the Warrant Shares. The exercise price will be $0.01
per share and it will have term of 10 years. The Purchase Shares and Warrant are being held in
escrow pending the Closing. The Closing, initially set for December 29, 2006, is expected to
occur in March 2007.
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|
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|
The Company and Hyundai have decided not to pursue the business venture set forth in the Resale
Agreement at this time and, on December 13, 2007, the Company and Hyundai entered into a
Settlement and Release Agreement terminating the Purchase Agreement (the Termination
Agreement). Pursuant to the Termination Agreement, the Purchased Shares, which were held in
escrow, will be returned to the Company and Hyundai is no longer obligated to pay the purchase
price of $1,500,000 and the Warrant Shares will not be issued to Hyundai. The parties also
agreed to a mutual release of all claims, known or unknown, with the exception of claims in
connection with confidentiality agreements, that each party may now or in the future have
against the other party, aside from claims in connection with certain confidentiality
agreements.
|
17
|
|
Stock Options
|
|
|
|
In August 1999, the Company implemented its 1999 Stock Option Plan (the 1999 Plan). In August
2000, the Companys Board of Directors approved the 2000 Stock Option Plan (the 2000 Plan),
which amends and restates the 1999 Plan. In September 2006, shareholders approved an amendment
to the Companys amended and restated 2000 Stock Option Plan to increase the maximum aggregate
number of shares available for issuance thereunder from 6,000,000 to 7,500,000. The exercise
price must not be less than the fair market value on the date of grant of the option. The
options vest in varying increments over varying periods and expire 10 years from the date of
vesting. In the case of incentive stock options granted to any 10% owners of the Company, the
exercise price must not be less than 100% of the fair market value on the date of grant. Such
incentive stock options vest in varying increments and expire five years from the date of
vesting.
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|
|
|
During the nine months ended December 31, 2007 the Company granted 907,000 stock options to
certain employees that may be exercised at prices ranging between $0.48 and $0.61 per share.
During the nine months ended December 31, 2006, the Company granted 3,114,500 stock options to
certain employees that may be exercised at prices ranging between $0.46 and $0.82 per share.
|
|
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|
The following table summarizes certain information relative to stock options:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2000 Stock Option Plan
|
|
Outside of Plan
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
Weighted-Average
|
|
|
Shares
|
|
Exercise Price
|
|
Shares
|
|
Exercise Price
|
|
Outstanding, March 31, 2007
|
|
|
6,565,349
|
|
|
$
|
0.74
|
|
|
|
1,160,000
|
|
|
$
|
1.02
|
|
Granted
|
|
|
907,000
|
|
|
$
|
0.50
|
|
|
|
0
|
|
|
|
0
|
|
Exercised
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Forfeited/canceled
|
|
|
89,000
|
|
|
$
|
0.82
|
|
|
|
0
|
|
|
|
0
|
|
Outstanding, December 31, 2007
|
|
|
7,383,349
|
|
|
$
|
0.71
|
|
|
|
1,160,000
|
|
|
$
|
1.02
|
|
Exercisable, December 31, 2007
|
|
|
5,803,686
|
|
|
$
|
0.69
|
|
|
|
1,160,000
|
|
|
$
|
1.02
|
|
The weighted-average remaining life and the weighted-average exercise price of all of the
options outstanding at December 31, 2007 were 7.44 years and $0.75, respectively. The exercise
prices for the options outstanding at December 31, 2007 ranged from $0.43 to $6.25, and
information relating to these options is as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
Weighted-
|
|
Exercise
|
Range of
|
|
Stock
|
|
Stock
|
|
Remaining
|
|
Average
|
|
Price of
|
Exercise
|
|
Options
|
|
Options
|
|
Contractual
|
|
Exercise
|
|
Options
|
Prices
|
|
Outstanding
|
|
Exercisable
|
|
Life
|
|
Price
|
|
Exercisable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.43 0.80
|
|
|
6,011,513
|
|
|
|
4,431,850
|
|
|
7.85 years
|
|
$
|
0.55
|
|
|
$
|
0.47
|
|
$0.81 1.35
|
|
|
1,787,836
|
|
|
|
1,787,836
|
|
|
6.60 years
|
|
$
|
0.93
|
|
|
$
|
0.93
|
|
$1.36 6.25
|
|
|
744,000
|
|
|
|
744,000
|
|
|
6.10 years
|
|
$
|
1.96
|
|
|
$
|
1.96
|
|
|
|
|
8,543,349
|
|
|
|
6,963,686
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock
During the three and six months ended September 30, 2006, the Company completed the following:
The Company granted 200,000 shares of restricted common stock to the Senior Vice President and
Chief Technology Officer and 100,000 shares of restricted common stock to the Chairman of the
Board and Chief Executive Officer associated with employment agreements reached with each. The shares are granted under the 1999 Plan, as amended and restated by the 2000 Plan.
Item 2. Managements Discussion and Analysis or Plan of Operation.
18
The following discussion and analysis of our financial condition and results of operations
should be read with the consolidated financial statements and related notes included elsewhere in
this Quarterly Report on Form 10-QSB.
When used in this Quarterly Report on Form 10-QSB, the words expects, anticipates,
believes, plans, will and similar expressions are intended to identify forward-looking
statements. These are statements that relate to future periods and include, but are not limited to,
statements regarding our critical accounting policies, including our goodwill impairment, our
operating expenses, our strategic opportunities, adequacy of capital resources, our ability to
increase our professional services contracts and the related benefits, demand for software and
professional services, demand for our solutions, expectations regarding net losses, expectations
regarding cash flow and sources of revenue, benefits of our relationship with an MSP, statements
regarding our growth and profitability, investments in marketing, promotion, strategic partnerships
and infrastructure, fluctuations in our operating results, our need for future financing, our
dependence on a small number of customers, our dependence on our strategic partners, our dependence
on personnel, our disclosure controls and procedures, our ability to respond to rapid technological
change, statements regarding future acquisitions or investments, our ability to expand the range of
our technologies and products, obtaining stockholder approval of our sale of convertible notes and
warrants, the registration of our common stock underlying these convertible notes and warrants, and
our legal proceedings. Forward-looking statements are subject to certain risks and uncertainties
that could cause actual results to differ materially from those projected. These risks and
uncertainties include, but are not limited to, those discussed below, as well as risks related to
our ability to develop and timely introduce products that address market demand, the impact of
alternative technological advances and competitive products, market fluctuations, our ability to
obtain future financing, our ability to execute on our strategic opportunities, and the risks set
forth below under Factors That May Affect Our Results. These forward-looking statements speak
only as of the date hereof. We expressly disclaim any obligation or undertaking to release publicly
any updates or revisions to any forward-looking statements contained herein to reflect any change
in our expectations with regard thereto or any change in events, conditions or circumstances on
which any such statement is based.
Critical Accounting Policies
The following discussion and analysis of our financial condition and results of operations is
based upon our financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States. The preparation of these financial statements
requires us to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On
an on-going basis, we evaluate these estimates, including those related to revenue recognition and
concentration of credit risk. We base our estimates on historical experience and on various other
assumptions that we believe to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from these estimates under different
assumptions or conditions.
We believe that of the significant accounting policies used in the preparation of our
financial statements (see Note 2 to the Financial Statements), the following are critical
accounting policies, which may involve a higher degree of judgment, complexity and estimates.
Revenue Recognition
We recognize revenues in accordance with the provisions of the American Institute of Certified
Public Accountants Statement of Position 97-2, Software Revenue Recognition. We license our
software products under non-exclusive, non-transferable license agreements. These arrangements do
not require significant production, modification or customization, therefore revenue is recognized
when the license agreement has been signed, delivery of the software product has occurred, the
related fee is fixed or determinable and collectibility is probable.
In certain instances, we license our software on a transactional fee basis in lieu of an
up-front licensing fee. In these arrangements, the customer is charged a fee based upon the number
of items processed by the software and we recognize revenue as these transactions occur. The
transaction fee also includes the provision of standard maintenance and support services as well as
product upgrades should such upgrades become available.
19
If professional services are provided in conjunction with the installation of the software
licensed, revenue is recognized when those services have been provided.
For license agreements that include a separately identifiable fee for contracted maintenance
services, such revenues are recognized on a straight-line basis over the life of the maintenance
agreement noted in the license agreement, but following any installation period of the software.
We recognize revenues associated with the resale of ATMs in accordance with the provisions of
the Statement of Financial Accounting Standards (SFAS) No. 48. Our sale price is fixed and
determinable at the date of sale and we have no obligation to directly bring about the resale of
the product. In addition, the buyers obligation to pay us is not contingent upon release of the
product and our sale price is not adjusted if the product is lost or damaged. The buyer has
economic substance apart from us and we can reasonably estimate the amount of returns at the time
of sale. Therefore revenue is recognized at the time of sale.
Goodwill
Effective January 1, 2002, we adopted SFAS No. 142 Goodwill and Other Intangible Assets,
which establishes new accounting and reporting requirements for goodwill and other intangible
assets. Under SFAS No. 142, all goodwill amortization ceased effective January 1, 2002.
The goodwill recorded on our books is from the acquisition of US Dataworks, Inc. in fiscal
year 2001, which remains our single reporting unit. SFAS No. 142 requires goodwill for each
reporting unit of an entity to be tested for impairment by comparing the fair value of each
reporting unit with its carrying value. Fair value is determined using a combination of the
discounted cash flow, market multiple and market capitalization valuation approaches. Significant
estimates used in the methodologies include estimates of future cash flows, future short-term and
long-term growth rates, weighted average cost of capital and estimates of market multiples for each
reportable unit. On an ongoing basis, absent any impairment indicators, we perform impairment tests
annually during the fourth quarter.
SFAS No. 142 requires goodwill to be tested annually, typically performed during the fourth
quarter, and between annual tests if events occur or circumstances change that would more likely
than not reduce the fair value of the reportable unit below its carrying amount. We did not have an
impairment of goodwill to record for the years ended March 31, 2007 or March 31, 2006.
Goodwill Impairment
SFAS No. 142 states that if a significant event or circumstances change that would more likely
than not reduce the fair value of the reportable unit below its
carrying amount, then the fair value of
the reportable unit should be reviewed. We have determined that two significant events
occurred in the quarter ending December 31, 2007 that, when taken together, placed enough downward
pressure on the market value of our common stock to require a review of the fair value of the reportable
unit. First, in November 2007, we issued convertible notes in the amount of $4,000,000 which
increased our debt significantly, and the market price of our common stock began
to fall. Secondly, in December 2007, the Company announced the
termination of the our Resale Agreement with
Hyundai and entered into a Settlement and Release Agreement terminating the Purchase Agreement.
This announcement continued the downward pressure on the market value
of our common stock.
We
used the net book value, defined as total assets less total
liabilities, to compute the carrying value of the reportable unit. The carrying value was then
compared to our market value as of December 31, 2007 based on the market
capitalization of our common stock. This analysis determined that an impairment of $5,932,184
occurred and the goodwill was written down as of December 31,
2007, accordingly. We will
continue to perform impairment testing annually during the fourth quarter unless any events
indicating the presence of impairment factors arise.
Estimates
20
The preparation of financial statements requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those estimates.
Concentrations of Credit Risk
We extend credit to our customers and perform ongoing credit evaluations of our customers. We
do not obtain collateral from our customers to secure our accounts receivable. We evaluate our
accounts receivable on a regular basis for collectibility and provide for an allowance for
potential credit losses as deemed necessary.
Four of our customers accounted for 30%, 23%, 15% and 10%, respectively, of our net revenues
for the three months ended December 31, 2007. Four customers accounted for 27%, 25%, 12% and 11%,
respectively, of net revenues for the nine months ended December 31, 2007. Four customers accounted
for 20%, 17%, 17% and 12%, respectively, of our net revenues for the three months ended December
31, 2006. Three customers accounted for 29%, 19% and 12%, respectively, of net revenues for the
nine months ended December 31, 2006.
At December 31, 2007, amounts due from these significant customers accounted for 76% of accounts
receivable.
Results of Operations
The results of operations reflected in this discussion include our operations for the three
and nine month periods ended December 31, 2007 and 2006.
Revenues
We generate revenues from (a) licensing software with fees due at the initial term of the
license, (b) licensing and supporting software with fees due on a transactional basis, (c)
providing maintenance, enhancement and support for previously licensed products and (d) providing
professional services.
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Three Months
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Nine Months
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Ended
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Ended
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December 31,
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December 31,
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2007
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2006
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Change
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2007
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2006
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Change
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(In 000s)
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(In 000s)
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Software licensing revenues
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$
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183
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$
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94
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94
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%
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$
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290
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$
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609
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-52
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%
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Software transactional revenues
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445
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533
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-16
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%
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1,225
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1,139
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8
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%
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Software maintenance revenues
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233
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109
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113
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%
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658
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316
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108
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%
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Professional service revenues
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670
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984
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-32
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%
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1,953
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2,693
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-27
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%
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Total revenues
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$
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1,531
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$
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1,720
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-11
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%
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$
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4,126
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$
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4,757
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-13
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%
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The increase in licensing revenue for the three months ended December 31, 2007, as compared to
the same period in the prior year, was primarily related to the renewal of license sales of
third-party software add-ons by our customers. The decrease in nine-month period, as compared to
the prior year, was due to first time sales of licenses for third-party party software add-ons in
2006 that required only a percent of the original license fee for renewal in 2007.
The decrease in transactional revenue for the three months ended December 31, 2007, as
compared to the same period in the prior year, was related to a one-time transactional fee we
collected in 2006 under our agreement with a merchant service provided (MSP). The increase for the
nine-month period, as compare to the prior year, was principally a result of an increase in the number of customers utilizing our software
solutions on a transaction fee basis and an increase in utilization of our software solutions by
our current customers.
21
The increase in maintenance revenues for both the three and nine months ended December 31,
2007, as compared to the same periods in the prior year, was primarily related to the annual
maintenance fees generated under our license agreement with American
Express Company. We began to collect revenue related to this
maintenance fee in May 2007 and we expect to receive approximately $400,000 in fiscal 2008 under
this agreement.
The decrease in professional service revenues for the three months ended December 31, 2007, as
compared to the same period in the prior year, was the result of a
reduction in services required as we
completed projects for two customers in the prior year. The decrease in the nine-month period, as
compared to 2006, was primarily due to the completion of these projects, as well as a decrease in
professional services associated with our consulting agreement with American Express, which we
signed in June 2005, and related purchase orders.
Cost of Sales
Costs of sales principally include the costs of our personnel who perform the services
associated with our software maintenance, support, training and installation activities as well as
the cost of the Accuity EPICWare software frequently resold in conjunction with licenses of our
software. Cost of sales increased by $34,103, or 6%, from $540,127 for the three months ended
December 31, 2006 to $574,230 for the three months ended December 31, 2007. This slight increase
was due primarily to third-party software resale costs, partially offset by a reduction of labor
costs associated with our professional and maintenance services due to a decreased number of
personnel required to perform the maintenance services. Cost of sales decreased by $90,542, or 6%,
from $1,559,854 for the nine months ended December 31, 2006 to $1,469,312 for the nine months ended
December 31, 2007. This decrease was principally the result of decreased labor costs associated
with the service activities that resulted in a 27% decrease in professional service revenues for
the nine months ended December 31, 2007, compared to the same period last year.
Operating Expenses
Total operating expenses increased by $5,953,184, or 424%, from $1,402,484 for the three
months ended December 31, 2006 to $7,356,130 for the three months ended December 31, 2007. This
increase was related to the one-time charge to goodwill impairment
that we booked in
December 2007.
Total operating expenses increased by $5,722,797, or 114%, from $5,001,923 for the nine months
ended December 31, 2006 to $10,724,720 for the nine months ended December 31, 2007. This increase
was related to the one-time charge to goodwill impairment that we booked in December 2007.
Our headcount at December 31, 2007 was 44 compared to 41 at December 31, 2006.
Other Expenses/(Income)
Other expenses, including interest expense and financing costs, decreased $946,395, or 961%,
from $98,467 for the three months ended December 31, 2006 to
$(847,928) for the three months ended
December 31, 2007. Other expenses, including interest expense and financing costs, decreased
$993,650, or 517%, from $192,225 for the nine months ended December 31, 2006 to $(801,425) for the
nine months ended December 31, 2007. These increases, for both the three month and nine months
period ending December 31, 2007 were primarily related to a gain on derivatives associated with the
warrants issued in conjunction with the senior secured convertible notes of November 2007.
Net Loss
Net loss increased $5,230,012, or 1628%, from $321,192 for the three months ended December 31,
2006 to a net loss of $5,551,203 for the three months ended December 31, 2007. For details related
to this loss see the preceding discussions related to our costs of sales, operating expenses and
other expenses sections above.
22
Net loss increased by $5,268,869, or 264%, from $1,997,353 for the nine months ended December
31, 2006 to a net loss of $7,266,223 for the nine months ended December 31, 2007. For details
related to this loss see the preceding discussions related to our costs of sales, operating
expenses and other expenses sections above.
Liquidity and Capital Resources
We have incurred significant losses and negative cash flows from operations for the last three
fiscal years. We have obtained our required cash resources through the sale of debt and equity
securities. We may not operate profitably in the future and may be required to continue the sale of
debt and equity securities to finance our operations.
We have specific plans to address our financial situation as follows:
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We expect to receive additional purchase orders under our professional services
contracts with our existing customers and renew our contract with the federal
government, which is anticipated to generate revenue sufficient to significantly reduce
the negative cash flows from our operations.
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We believe that the demand for our software and professional services will continue
to expand as the United States market adopts the new payment processing opportunities
available under changing regulations, such as the Check Clearing Act for the
21
st
Century and NACHAs back office conversion, which allows the conversion
of paper checks in the back offices of retail merchants and government. We believe that
increased demand for our solutions, including our recently introduced Clearingworks
product, will lead to increased cash flows from up-front license fees, transaction based
contract fees and increases in professional services revenues.
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We have entered into a strategic alliance with one of the largest MSPs, which will
allow this MSP to sell Clearingworks as part of its ARC and back office conversion
services. We expect this alliance to positively affect our profitability.
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Our recent capital raise of $4,000,000, along with our current customer base and
potential new customers in the coming year, should provide us with sufficient liquidity
and capital to maintain effective operations until December 31, 2008.
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There can be no assurance that our planned activities will be successful or that we will
ultimately attain profitability. Our long term viability depends on our ability to obtain adequate
sources of debt or equity funding to fund the continuation of our business operations and to
ultimately achieve adequate profitability and cash flows to sustain our operations. We will need to
increase revenues from software licenses, transaction based software license contracts and
professional services agreements to become profitable.
Cash
and cash equivalents increased by $1,192,763 from $140,276 at March 31, 2007 to
$1,333,039 at December 31, 2007. Cash used for operating activities was $2,338,977 in the nine
months ended December 31, 2007 compared to $1,046,700 in the same nine month period in the prior
year.
Cash used for investing activities of $96,430 and $149,098 in the nine months ended December
31, 2007 and December 31, 2006, respectively, was due to equipment purchases.
Cash provided in financing activities for the nine months ended December 31, 2007, was
$3,628,170 compared to cash used of $12,133 in the nine months ended December 31, 2006. Financing
activities in the current nine month period included: proceeds of $4,000,000 from the issuance of
convertible promissory notes, $305,000 from proceeds from sale of common stock, and the payment of
$256,066 on the amended and restated convertible promissory note dated September 15, 2005, payment
of $50,760 in related party and equipment notes payable, and payment of $370,004 in deferred
financing costs.
23
As a result of our recent capital raising transactions, our increased level of transactional
revenues achieved in fiscal 2008, and the expected increase in revenues from recently received
purchase orders and contemplated contracts, we believe we currently have adequate capital resources
to fund our anticipated cash needs through December 31, 2008. However, an adverse business or legal
development could require us to raise additional financing sooner than anticipated. We recognize
that we may be required to raise such additional capital, at times and in amounts, which are
uncertain, especially under the current capital market conditions. If we are unable to acquire
additional capital or are required to raise it on terms that are less satisfactory than we desire,
it may have a material adverse effect on our financial condition. In the event we raise additional
equity, these financings may result in dilution to existing shareholders.
Factors That May Affect Our Results
We have a history of losses and may not operate profitably in the future.
We have a history of losses and our net losses and negative cash flow may continue for the
foreseeable future. As of December 31, 2007, our accumulated deficit was $(57,682,571). We believe
that our planned growth and profitability will depend in large part on our ability to promote our
brand name, gain clients and expand our relationships with clients for whom we could provide
licensing agreements and system integration. Accordingly, we intend to invest heavily in marketing,
strategic partnership, development of our client base and development of our marketing technology
and operating infrastructure. If we are not successful in promoting our brand name and expanding
our client base, it will have a material adverse effect on our financial condition and our ability
to continue to operate our business.
Our ability to continue as a going concern may be contingent upon our ability to secure capital
from prospective investors or lenders.
The accompanying consolidated financial statements have been prepared assuming we will
continue on a going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. We believe we currently have adequate
cash to fund anticipated cash needs through December 31, 2008. However, we may need to raise
additional capital in the future. Any equity financing may be dilutive to shareholders, and debt
financing, if available, will increase expenses and may involve restrictive covenants. We may be
required to raise additional capital, at times and in amounts that are uncertain, especially under
the current capital market conditions. These factors raise substantial doubt about our ability to
continue as a going concern. Under these circumstances, if we are unable to obtain additional
capital or are required to raise it on undesirable terms, it may have a material adverse effect on
our financial condition, which could require us to:
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curtail our operations significantly;
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sell significant assets;
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|
seek arrangements with strategic partners or other parties that may require us to
relinquish significant rights to products, technologies or markets; or
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explore other strategic alternatives including a merger or sale of US Dataworks.
|
Our financial statements do not include any adjustments relating to the recoverability and
classification of recorded assets or liabilities that might be necessary should we be unable to
continue as a going concern.
Our operating results are subject to fluctuations caused by many factors that could cause us to
fail to achieve our revenue or profitability expectations, which in turn could cause our stock
price to decline.
Our operating results can vary significantly depending upon a number of factors, many of which
are outside our control. Factors that may affect our quarterly operating results include:
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market acceptance of and changes in demand for our products and services;
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24
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gain or loss of clients or strategic relationships;
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announcement or introduction of new software, services and products by us or by our
competitors;
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our ability to build brand recognition;
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timing of sales to customers;
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price competition;
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our ability to upgrade and develop systems and infrastructure to accommodate growth;
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our ability to attract and integrate new personnel in a timely and effective manner;
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our ability to introduce and market products and services in accordance with market
demand;
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changes in governmental regulation;
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reduction in or delay of capital spending by our clients due to the effects of
terrorism, war and political instability; and
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general economic conditions, including economic conditions specific to the financial
services industry.
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In addition, each quarter we derive a significant portion of our revenue from agreements
signed at the end of the quarter. Our operating results could suffer if the timing of these
agreements is delayed. Depending on the type of agreements we enter into, we may not be able to
recognize revenue under these agreements in the quarter in which they are signed. Some of all of
these factors could negatively affect demand for our products and services, and our future
operating results.
Most of our operating expenses are relatively fixed in the short-term. We may be unable to
adjust spending rapidly to compensate for any unexpected sales shortfall, which could harm our
quarterly operating results. Because of the emerging nature of the markets in which we compete, we
do not have the ability to predict future operating results with any certainty. Because of the
above factors, you should not rely on period-to-period comparisons of results of operation as an
indication of future performances.
Because a small number of customers have historically accounted for and may in future periods
account for substantial portions of our revenue, our revenue could decline because of delays of
customer orders or the failure to retain customers.
We have a small number of customers that account for a significant portion of our revenue. Our
revenue could decline because of a delay in signing agreements with a single customer or the
failure to retain an existing customer. In addition, we may not obtain additional customers. The
failure to obtain additional customers or the failure to retain existing customers will harm our
operating results.
If general economic and business conditions do not improve, we may experience decreased revenue or
lower growth rates.
The revenue growth and profitability of our business depends on the overall demand for
computer software and services in the product segments in which we compete. Because our sales are
primarily to major banking and government customers, our business also depends on general economic
and business conditions. A softening of demand caused by a weakening of the economy may result in
decreased revenue or lower growth rates. As a result, we may not be able to effectively promote
future license revenue growth in our application business.
25
We may not be able to attract, retain or integrate key personnel, which may prevent us from
successfully operating our business.
We may not be able to retain our key personnel or attract other qualified personnel in the
future. Our success will depend upon the continued service of key management personnel. The loss of
services of any of the key members of our management team or our failure to attract and retain
other key personnel could disrupt operations and have a negative effect on employee productivity
and morale and harm our financial results.
We operate in a market that is intensely and increasingly competitive, and if we are unable to
compete successfully, our revenue could decline and we may be unable to gain market share.
The market for financial services software is relatively new and highly competitive. Our
future success will depend on our ability to adapt to rapidly changing technologies, evolving
industry standards, product offerings and evolving demands of the marketplace.
Some of our competitors have:
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longer operating histories;
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larger installed customer bases;
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greater name recognition and longer relationships with clients; and
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significantly greater financial, technical, marketing and public relations resources
than US Dataworks.
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Our competitors may also be better positioned to address technological and market developments
or may react more favorably to technological changes. We compete on the basis of a number of
factors, including:
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the breadth and quality of services;
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creative design and systems engineering expertise;
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pricing;
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technological innovation; and
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understanding clients strategies and needs.
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Competitors may develop or offer strategic services that provide significant technological,
creative, performance, price or other advantages over the services we offer. If we fail to gain
market share or lose existing market share, our financial condition, operating results and business
could be adversely affected and the value of the investment in us could be reduced significantly.
We may not have the financial resources, technical expertise or marketing, distribution or support
capabilities to compete successfully.
We may be responsible for maintaining the confidentiality of our clients sensitive information,
and any unauthorized use or disclosure could result in substantial damages and harm our reputation.
The services we provide for our clients may grant us access to confidential or proprietary
client information. Any unauthorized disclosure or use could result in a claim against us for
substantial damages and could harm our reputation. Our contractual provisions attempting to limit
these damages may not be enforceable in all instances or may otherwise fail to adequately protect
us from liability for damages.
If we do not adequately protect our intellectual property, our business may suffer, we may lose
revenue or we may be required to spend significant time and resources to defend our intellectual
property rights.
We rely on a combination of patent, trademark, trade secrets, confidentiality procedures and
contractual procedures to protect our intellectual property rights. If we are unable to adequately
protect our intellectual property,
26
our business may suffer from the piracy of our technology and the associated loss in revenue.
Any patents that we may hold may not sufficiently protect our intellectual property and may be
challenged by third parties. Our efforts to protect our intellectual property rights, may not
prevent the misappropriation of our intellectual property. Any future infringement claims could
cause us to spend significant time and money to defend our intellectual property rights, redesign
our products or develop or license a substitute technology. We may be unsuccessful in acquiring or
developing substitute technology and any required license may be unavailable on commercially
reasonable terms, if at all. In the event of litigation to determine the validity of any third
party claims or claims by us against such third party, such litigation, whether or not determined
in our favor, could result in significant expense and divert the efforts of our technical and
management personnel, regardless of the outcome of such litigation. Furthermore, other parties may
also independently develop similar or competing products that do not infringe upon our intellectual
property rights.
We may be unable to consummate future potential acquisitions or investments or successfully
integrate acquired businesses or investments or foreign operations with our business, which may
disrupt our business, divert managements attention and slow our ability to expand the range of our
technologies and products.
We intend to continue to expand the range of our technologies and products, and we may acquire
or make investments in additional complementary businesses, technologies or products, if
appropriate opportunities arise. We may be unable to identify suitable acquisition or investment
candidates at reasonable prices or on reasonable terms, or consummate future acquisitions or
investments, each of which could slow our growth strategy. We have no prior history or experience
in investing in or acquiring and integrating complementary businesses and therefore may have
difficulties completing such transactions or realizing the benefits of such transactions, or they
may have a negative effect on our business. Such investments or acquisitions could require us to
devote a substantial amount of time and resources and could place a significant strain on our
management and personnel. To finance any acquisitions, we may choose to issue shares of our common
stock, which would dilute your interest in us. Any future acquisitions by us also could result in
significant write-offs or the incurrence of debt and contingent liabilities, any of which could
harm our operating results.
Item 3A(T). Controls and Procedures
(a)
Evaluation of disclosure controls and procedures
. We maintain disclosure controls and
procedures, as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934,
or the Exchange Act, that are designed to ensure that information required to be disclosed by us in
reports that we file or submit under the Exchange Act is recorded, processed, summarized, and
reported within the time periods specified in Securities and Exchange Commission rules and forms,
and that such information is accumulated and communicated to our management, including our Chief
Executive Officer and Chief Financial Officer, or persons performing similar functions, as
appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating
our disclosure controls and procedures, management recognized that disclosure controls and
procedures, no matter how well conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the disclosure controls and procedures are met. Our disclosure
controls and procedures have been designed to meet reasonable assurance standards. Additionally, in
designing disclosure controls and procedures, our management necessarily was 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 on their evaluation as of the end of the period covered by this Quarterly Report on Form
10-QSB, our Chief Executive Officer and Chief Financial Officer, or persons performing similar
functions, have concluded that, as of that date, our disclosure controls and procedures were
effective at the reasonable assurance level.
(b)
Changes in internal control over financial reporting
. There was no change in our internal
control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) identified
in connection with managements evaluation during our last fiscal quarter that has materially
affected, or is reasonably likely to materially affect, our internal control over financial
reporting.
27
PART II OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, we are involved in various legal and other proceedings that are incidental
to the conduct of our business. We believe that none of these proceedings, if adversely determined,
would have a material effect on our financial condition, results of operations or cash flows.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On November 13, 2007, we entered into a Securities Purchase Agreement (Purchase Agreement)
with certain investors (Buyer or Buyers), pursuant to which we issued senior secured convertible
notes for an aggregate of $4,000,000 (Notes) and warrants to purchase an aggregate of 4,651,162
shares of our common stock, $0.0001 par value per share (Common Stock) (Private Placement). The
Notes bear an interest rate of 9.81% per annum, which is equal to LIBOR plus 5% re-calculated as of
the first day of each calendar quarter. The interest is payable in arrears each quarter, with the
first payment due January 15, 2008. At any time, at the option of the Buyer, any outstanding
principal amounts and accrued interest may be converted into shares of Common Stock at a conversion
price of $0.43 per share (Conversion Price), which is equal to 110% of the dollar volume-weighted
average price for the Common Stock on November 12, 2007, subject to anti-dilution provisions, for
an aggregate of 9,302,325 shares of Common Stock;
provided, however,
the Buyer may not beneficially
own more than 4.99% (Maximum Percentage) of outstanding shares of Common Stock following such
conversion. At any time, the Buyer may decrease or increase this Maximum Percentage to any
percentage not to exceed 9.99%. The Buyers also have certain redemption rights in the event of
default or a change of control of US Dataworks. In addition, on each of the 9 month and 18 month
anniversary of the closing, the Buyers may request that we redeem a portion of the Notes. The Notes
have a maturity date of November 13, 2010. The Notes are secured by the Security Agreement,
dated November 13, 2007, by and between US Dataworks and the Buyers (Security Agreement), pursuant
to which we granted the Buyers a security interest in all its personal property, whether now owned
or hereafter acquired, including but not limited to, all accounts, copyrights, trademarks,
licenses, equipment and all proceeds as from such collateral.
The Buyers also entered into a Put Agreement (Put Agreement) with our Chief
Executive Officer, and a member of our Board of Directors (Guarantors).
Pursuant to the Put Agreement, following August 13, 2008, under certain circumstances the Investors
may require one or more of the Guarantors to purchase all or a portion of the Note, including any
accrued interest or late charges. In exchange for entering into the Put Agreement, we have agreed
to pay the Guarantors a fee equal to (i) two percent (2%) of the Note principal balance for the
first six months of the Notes term; (ii) two percent (2%) of the Note principal balance for the
next twelve months of the Notes term; and, (iii) two percent (2%) of the Note principal balance
for the remaining eighteen months of the Notes term, pursuant to that certain Put Fee Agreement,
dated November 13, 2007. Our Audit Committee of the Board of Directors reviewed the Put Fee
Agreement and engaged in a discussion regarding this agreement, and approved the Put Fee Agreement.
The Warrants may be exercised for an aggregate of 4,651,162 shares of Common Stock at exercise
price of $0.43 per share (Exercise Price), which is equal to 110% of the dollar volume-weighted
average price for the Common Stock on November 12, 2007, subject to anti-dilution provisions;
provided, however, the Investor may not beneficially own more than the Maximum Percentage following
such exercise. The Warrant may be exercised at any time until 11:59 p.m., New York time on
November 13, 2012. We have reserved for issuance upon conversion of the Notes and exercise of the
Warrants shares of Common Stock equal to at least 130% of the Conversion Shares and Warrant Shares.
In connection with the Private Placement, we entered into a Registration Rights Agreement,
dated November 13, 2007, between US Dataworks and the Buyers, pursuant to which we filed a
registration statement to register for resale the Conversion Shares and Warrant Shares. In the
event we are unable to register all of the Conversion Shares and Warrant Shares, we are obligated
to file additional registration statements in order to register all Conversion Shares and Warrant
Shares. We are obligated to maintain these registration statements until earlier of (1) all the
Conversion Shares and Warrant Shares are saleable under Rule 144 with out restrictions or (2) all
the Conversion Shares and Warrant Shares have been sold under the registration statements.
28
We intend to seek stockholder approval of the Private Placement and the related agreements.
In connection therewith, certain of our stockholders have agreed to vote their respective shares in
favor of the transaction, including Charles E. Ramey. These stockholders currently represent
approximately 7% of the outstanding shares of Common Stock.
In connection with the Private Placement, on November 13, 2007, US Dataworks and American
Stock Transfer & Trust, as Rights Agent, executed Amendment No. 2 to Rights Agreement, which
amended the definition of an Acquiring Person as defined in that certain Rights Agreement dated
July 24, 2003 (as amended from time to time, the Rights Agreement). The Rights Agreement, and
Amendment No. 2 thereto, are attached hereto as Exhibits 4.1 and 4.2, and are incorporated herein
by reference. The definition of Acquiring Person was amended to permit the issuance of the
Conversion Shares and Warrant Shares to the Investors without triggering the occurrence of a
Distribution Date (as defined in the Rights Agreement).
These securities were issued to two accredited investors and in reliance upon the exemption
from registration afforded by Section 4(2) of the Securities Act of 1933 and Regulation D as
promulgated under thereunder.
Item 6. Exhibits
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Exhibit
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Number
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Description of Document
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4.1
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Rights Agreement, dated July 24, 2003, by and between the
Registrant and Corporate Stock Transfer (incorporated by
reference to Exhibit 4.1 to the Registrants Current Report on
Form 8-K, filed with the Securities and Exchange Commission on
January 5, 2007).
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4.2
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Amendment No. 2 to Rights Agreement, dated November 13, 2007, by
and between the Registrant and American Stock Transfer & Trust.
(incorporated by reference to Exhibit 4.2 to the Registrants on
Form 8-K filed with the Securities and Exchange Commission on
November 14, 2007).
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4.3
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Securities Purchase Agreement, dated November 13, 2007, by and
among the Registrant and the signatories thereto. (incorporated
by reference to Exhibit 99.1 to the Registrants Registration
Statement on Form S-3 filed with the Securities and Exchange
Commission on December 13, 2007).
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4.4
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Registration Rights Agreement, dated as of November 13, 2007, by
and among the Registrant and Highbridge International LLC,
Castlerigg Master Investments Ltd., and Cranshire Capital, L.P.
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4.5
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Form of Senior Secured Convertible Promissory Note (incorporated
by reference to Exhibit 99.2 to the Registrants Registration
Statement on Form S-3 as filed with the Securities and Exchange
Commission on December 13, 2007).
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4.6
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Form of Common Stock Purchase Warrant (incorporated by reference
to Exhibit 99.3 to the Registrants Registration Statement on
Form S-3 as filed with the Securities and Exchange Commission on
December 13, 2007).
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10.1
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Amendment Agreement, dated as of December 28, 2006, by and
between the Registrant and Crescent International Ltd.
(incorporated by reference to Exhibit 10.1 to the Registrants
Current Report on Form 8-K filed with the Securities and
Exchange Commission on December 29, 2006).
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10.2
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Settlement and Release Agreement, dated December 13, 2007, by
and among the Registrant, Hyundai Syscomm Corp. and John J.
Figone. (incorporated by reference to Exhibit 10.1 to the
Registrants Current Report on Form 8-K filed with the
Securities and Exchange Commission on December 19, 2007).
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29
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Exhibit
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Number
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Description of Document
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10.3
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Security Agreement, dated as of November 13, 2007, by and
between the Registrant and the Bank of New York.
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10.4
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Put Agreement, dated as of November 13, 2007, by and among the
Registrant and Charles E. Ramey, John L. Nicholson, Highbridge
International LLC, Castlerigg Master Investments Ltd., and
Cranshire Capital, L.P.
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10.5
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Put Grantor Fee Agreement, dated as of November 13, 2007, by and
between the Registrant and Charles E. Ramey and John Nicholson.
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31.1
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Section 302 Certification of Chief Executive Officer.
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31.2
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Section 302 Certification of Chief Accounting Officer.
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32.1
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Section 906 Certification of Chief Executive Officer.
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32.2
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Section 906 Certification of Chief Accounting Officer.
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30
SIGNATURE
In accordance with the requirements of the Exchange Act, the registrant caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: February 14, 2008
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US DATAWORKS, INC.
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By
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/s/ John T. McLaughlin
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John T. McLaughlin
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Chief Accounting Officer
(Principal Financial and Accounting Officer
and Duly Authorized Officer)
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31
EXHIBIT INDEX
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Exhibit
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Number
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Description of Document
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4.1
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Rights Agreement, dated July 24, 2003, by and between
the Registrant and Corporate Stock Transfer.
(incorporated by reference to Exhibit 4.1 to the
Registants Current Report on Form 8-K filed with the
Securities and Exchange Commission on January 5,
2007).
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|
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|
|
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4.2
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Amendment No. 2 to Rights Agreement, dated November
13, 2007, by and between the Registrant and American
Stock Transfer & Trust. (incorporated by reference to
Exhibit 4.2 to the Registrants Current Report on
Form 8-K filed with the Securities and Exchange
Commission on November 14, 2007).
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4.3
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Securities Purchase Agreement, dated November 13,
2007, by and among the Registrant and the signatories
thereto. (incorporated by reference to Exhibit 99.1
to the Registrants Registration Statement on Form
S-3 filed with the Securities and Exchange Commission
on December 13, 2007).
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4.4
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Registration Rights Agreement, dated as of November 13, 2007, by and
among the Registrant and Highbridge International LLC, Castlerigg
Master Investments Ltd., and Cranshire Capital, L.P.
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4.5
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Form of Senior Secured Convertible Promissory Note
(incorporated by reference to Exhibit 99.2 to the
Registrants Registration Statement on Form S-3 as
filed with the Securities and Exchange Commission on
December 13, 2007).
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4.6
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Form of Common Stock Purchase Warrant (incorporated by reference to
Exhibit 99.3 to the Registrants Registration Statement on Form S-3
as filed with the Securities and Exchange Commission on December 13,
2007).
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|
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10.1
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|
|
Amendment Agreement, dated as of December 28, 2006,
by and between the Registrant and Crescent
International Ltd. (incorporated by reference to
Exhibit 10.1 to the Registrants Current Report on
Form 8-K filed with the Securities and Exchange
Commission on December 29, 2006).
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|
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10.2
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Settlement and Release Agreement, dated December 13,
2007, by and among the Registrant, Hyundai Syscomm
Corp. and John J. Figone. (incorporated by reference
to Exhibit 10.1 to the Registrants Current Report on
Form 8-K filed with the Securities and Exchange
Commission on December 19, 2007).
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10.3
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Security Agreement, dated as of November 13, 2007, by
and between the Registrant and the Bank of New York.
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|
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10.4
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Put Agreement, dated as of November 13, 2007, by and
among the Registrant and Charles E. Ramey, John L.
Nicholson, Highbridge International LLC, Castlerigg
Master Investments Ltd., and Cranshire Capital, L.P.
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10.5
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Put Grantor Fee Agreement, dated as of November 13,
2007, by and between the Registrant and Charles E.
Ramey and John Nicholson.
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31.1
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Section 302 Certification of Chief Executive Officer.
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31.2
|
|
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Section 302 Certification of Chief Accounting Officer.
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|
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32.1
|
|
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Section 906 Certification of Chief Executive Officer.
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|
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32.2
|
|
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Section 906 Certification of Chief Accounting Officer.
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32
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