UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington
D.C., 20549
FORM
10-Q
(Mark
One)
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R
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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 September 30, 2009
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¨
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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
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Commission
file number: 001-15835
US
Dataworks, Inc.
(Exact
name of registrant as specified in its charter)
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Nevada
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84-1290152
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. employer identification number)
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One Sugar Creek Center Boulevard
Sugar Land, Texas
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77478
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(Address of principal executive offices)
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(Zip Code)
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Registrant’s
telephone number: (281) 504-8000
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. YES
R
NO
£
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the
preceding 12 months (or for such shorter period that the registrant was
required to submit and post such files). Yes o No
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of “large accelerated filer,” “accelerated filer,” “non-accelerated
filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.
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Large accelerated filer
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£
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Accelerated filer
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£
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Non-accelerated filer
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£
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Smaller reporting company
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R
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(Do not check if smaller reporting company)
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). YES
£
NO
R
Indicated
the number of shares outstanding of the issuer’s classes of common stock as of
November 12, 2009: 32,969,263
US
DATAWORKS, INC.
TABLE OF
CONTENTS
FORM
10-Q
QUARTERLY
PERIOD ENDED SEPTEMBER 30, 2009
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Page
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PART I — FINANCIAL INFORMATION
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3
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Item 1. Financial Statements
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3
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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16
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Item 4T. Controls and Procedures
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PART II — OTHER INFORMATION
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Item 1. Legal Proceedings
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Item 1A. Risk Factors
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Item 2. Unregistered
Sales of Equity Securities and Use of Proceeds
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Item 3. Defaults
Upon Senior Securities
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20
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Item 4. Submission of Matters to a Vote of Security Holders
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21
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Item 5. Other
Information
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21
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Item 6. Exhibits
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21
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NOTE
REGARDING FORWARD LOOKING STATEMENTS AND CERTAIN TERMS
When used
in this Report, 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, our operating
expenses, our strategic opportunities, adequacy of capital resources, our
potential 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 and promotion, fluctuations in our
operating results, our need for future financing, effects of accounting
standards on our financial statements, our investment in strategic partnerships,
development of our customer base and our infrastructure, our dependence on our
strategic partners, our dependence on personnel, our employee relations,
anticipated benefits of our restructuring, our disclosure controls and
procedures, our ability to respond to rapid technological change, expansion of
our technologies and products, benefits of our products, our competitive
position, statements regarding future acquisitions or investments, our legal
proceedings, and our dividend policy. 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 herein, 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, and the risks referred to
in “Item 1A. Risk Factors.” 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.
All
references to “US Dataworks,” the “Company,” “we,” “us,” or “our” means US
Dataworks, Inc.
MICRworks™,
Clearingworks
â
,
Returnworks™, and Remitworks™ are trademarks of US Dataworks. Other trademarks
referenced herein are the property of their respective owners.
PART
I - FINANCIAL INFORMATION
Item
1. Financial Statements
US
DATAWORKS, INC.
UNAUDITED
CONDENSED BALANCE SHEETS
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September 30,
2009
(Unaudited)
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March 31,
2009
(See note)
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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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151,827
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$
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403,863
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Accounts
receivable, trade
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971,391
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845,747
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Prepaid
expenses and other current assets
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377,494
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186,578
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Total
current assets
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1,500,712
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1,436,188
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Property
and equipment, net
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223,119
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305,783
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Goodwill,
net
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4,020,698
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4,020,698
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Other
assets
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32,111
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194,359
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Total
assets
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$
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5,776,640
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$
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5,957,028
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Note: The
balance sheet at March 31, 2009 has been derived from the audited financial
statements at that date but does not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements.
The
accompanying notes are an integral part of these financial
statements.
US
DATAWORKS, INC.
UNAUDITED
CONDENSED BALANCE SHEETS
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September
30,
2009
(Unaudited)
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March
31,
2009
(See
note)
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LIABILITIES
AND STOCKHOLDERS’ EQUITY
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Current
liabilities:
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Accounts
payable
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$
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183,376
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$
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247,132
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Accrued
expenses
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181,794
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199,940
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Accrued
interest- related parties
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23,655
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38,336
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Deferred
revenue-current
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285,721
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223,688
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Note
payable, current
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35,279
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35,279
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Notes
payable-related party, net unamortized discount of $277,094 and $0 on Sept
30, 2009 and March 31, 2009, respectively
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3,815,301
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4,203,500
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Total
current liabilities
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4,525,126
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4,947,875
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Long-term
note payable
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—
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17,639
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Total
liabilities
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4,525,126
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4,965,514
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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;
109,333 shares issued and outstanding; $3.75 liquidation preference;
dividends of $355,520 and $334,481 in arrears as of September 30, 2009 and
March 31, 2009, respectively
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11
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55
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Common
stock, $0.0001 par value; 90,000,000 shares authorized; 32,850,082 and
32,730,870 issued and outstanding as of September 30, 2009 and March 31,
2009, respectively
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3,285
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3,273
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Additional
paid-in-capital
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65,502,420
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65,063,737
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Unissued
common shares
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9
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—
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Accumulated
deficit
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(64,254,211
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)
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(64,075,551
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)
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Total
stockholders’ equity
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1,251,514
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991,514
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Total
liabilities and stockholders’ equity
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$
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5,776,640
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$
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5,957,028
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Note: The
balance sheet at March 31, 2009 has been derived from the audited financial
statements at that date but does not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements.
The
accompanying notes are an integral part of these financial
statements.
US
DATAWORKS, INC.
UNAUDITED
CONDENSED STATEMENTS OF OPERATIONS
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For the Three Months Ended
September 30,
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For the Six Months Ended
September 30,
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2009
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2008
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2009
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2008
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REVENUES
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Software
transactions
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$
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518,725
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$
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522,755
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$
|
1,039,968
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$
|
1,060,504
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Software
maintenance
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208,488
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219,608
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420,859
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448,482
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Professional
services
|
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1,359,976
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1,288,374
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2,634,823
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|
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2,560,800
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Software
licenses
|
|
|
—
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|
|
—
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|
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|
—
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|
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30,000
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Total
revenues
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|
|
2,087,189
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2,030,737
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4,095,650
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|
4,099,786
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COST
OF REVENUES
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|
|
670,318
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|
651,401
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1,346,689
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1,397,580
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Gross
profit
|
|
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1,416,871
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1,379,336
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2,748,961
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|
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2,702,206
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OPERATING
EXPENSES
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|
|
|
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|
|
|
|
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|
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|
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|
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Research
and development
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|
217,254
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|
|
256,153
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|
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|
430,191
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|
517,643
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Sales
and marketing
|
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|
237,290
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|
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116,859
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499,590
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|
|
|
311,556
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|
|
General
and administrative
|
|
|
793,496
|
|
|
|
795,440
|
|
|
|
1,365,137
|
|
|
|
1,506,924
|
|
|
Depreciation
and amortization
|
|
|
39,018
|
|
|
|
48,182
|
|
|
|
82,664
|
|
|
|
96,233
|
|
|
Total
operating expenses
|
|
|
1,287,058
|
|
|
|
1,216,634
|
|
|
|
2,377,582
|
|
|
|
2,432,356
|
|
|
INCOME
FROM OPERATIONS
|
|
|
129,813
|
|
|
|
162,702
|
|
|
|
371,379
|
|
|
|
269,850
|
|
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OTHER
INCOME (EXPENSE)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(55,518
|
)
|
|
|
(2,219,703
|
)
|
|
|
(165,119
|
)
|
|
|
(2,493,419
|
)
|
|
Interest
expense — related party
|
|
|
(134,066
|
)
|
|
|
(67,922
|
)
|
|
|
(266,675
|
)
|
|
|
(78,829
|
)
|
|
Financing
costs
|
|
|
(94,979
|
)
|
|
|
(299,692
|
)
|
|
|
(118,248
|
)
|
|
|
(329,692
|
)
|
|
Gain
on derivatives
|
|
|
—
|
|
|
|
580,201
|
|
|
|
—
|
|
|
|
621,281
|
|
|
Other
income
|
|
|
—
|
|
|
|
2,719
|
|
|
|
—
|
|
|
|
59,633
|
|
|
Total
other income (expense)
|
|
|
(284,563
|
)
|
|
|
(2,004,397
|
)
|
|
|
(550,042
|
)
|
|
|
(2,221,026
|
)
|
|
NET
LOSS
|
|
$
|
(154,750
|
)
|
|
$
|
(1,841,695
|
)
|
|
$
|
(178,663
|
)
|
|
$
|
(1,951,176
|
)
|
|
Basic
and diluted loss per share
|
|
$
|
0.00
|
|
|
$
|
(0.06
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.06
|
)
|
|
Basic
and diluted weighted-average shares outstanding
|
|
|
32,849,330
|
|
|
|
32,349,012
|
|
|
|
32,815,014
|
|
|
|
32,243,947
|
|
The
accompanying notes are an integral part of these financial
statements.
US
DATAWORKS, INC.
UNAUDITED
CONDENSED STATEMENTS OF CASH FLOW
For
the Six Months Ended September 30,
|
|
|
2009
|
|
|
2008
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(178,663
|
)
|
|
$
|
(1,951,176
|
)
|
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization of property and equipment
|
|
|
82,663
|
|
|
|
96,233
|
|
|
Amortization
of note discount on convertible promissory note
|
|
|
93,063
|
|
|
|
1,995,636
|
|
|
Amortization
of deferred financing costs
|
|
|
162,248
|
|
|
|
379,095
|
|
|
Stock
based compensation
|
|
|
118,503
|
|
|
|
186,205
|
|
|
Change
in value of derivative financial instruments
|
|
|
—
|
|
|
|
(621,281
|
)
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts
receivable, trade
|
|
|
(125,645
|
)
|
|
|
(211,996
|
)
|
|
Prepaid
expenses and other current assets
|
|
|
(190,916
|
)
|
|
|
(48,140
|
)
|
|
Deferred
revenue
|
|
|
62,033
|
|
|
|
114,491
|
|
|
Accounts
payable
|
|
|
(63,756
|
)
|
|
|
385,480
|
|
|
Accrued
expenses
|
|
|
(68,144
|
)
|
|
|
(187,129
|
)
|
|
Interest
payable – related parties
|
|
|
(14,679
|
)
|
|
|
36,856
|
|
|
Net
cash (used in) provided by operating activities
|
|
|
(123,293
|
)
|
|
|
174,274
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
Purchase
of property and equipment
|
|
|
—
|
|
|
|
(7,890
|
)
|
|
Net
cash used in investing activities
|
|
|
—
|
|
|
|
(7,890
|
)
|
The
accompanying notes are an integral part of these financial
statements.
US
DATAWORKS, INC.
UNAUDITED
CONDENSED STATEMENTS OF CASH FLOW
For
the Six Months Ended September 30,
|
|
|
2009
|
|
|
2008
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Proceeds
from related party note payable
|
|
|
—
|
|
|
|
3,703,500
|
|
|
Repayment
of convertible promissory note
|
|
|
—
|
|
|
|
(4,000,000
|
)
|
|
Deferred
financing costs
|
|
|
—
|
|
|
|
(432,659
|
)
|
|
Payment
on note payable
|
|
|
(17,638
|
)
|
|
|
(17,640
|
)
|
|
Repayment
of note payable - related party
|
|
|
(111,105
|
)
|
|
|
—
|
|
|
Net
cash used in financing activities
|
|
|
(128,743
|
)
|
|
|
(746,799
|
)
|
|
Net
decrease in cash and cash equivalents
|
|
|
(252,036
|
)
|
|
|
(580,415
|
)
|
|
Cash
and cash equivalents, beginning of period
|
|
|
403,863
|
|
|
|
903,393
|
|
|
Cash
and cash equivalents, end of period
|
|
$
|
151,827
|
|
|
$
|
322,978
|
|
|
Supplemental
disclosures of cash flow information - Interest
paid
|
|
$
|
285,226
|
|
|
$
|
254,510
|
|
The
accompanying notes are an integral part of these financial
statements.
US
DATAWORKS, INC.
NOTES
TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
|
1.
|
Organization
and Business
|
General
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
accompanying interim 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 audited financial
statements and the notes thereto included in the Company’s Annual Report on Form
10-K for the fiscal year ended March 31, 2009. The results of operations for
interim periods are not necessarily indicative of the results for any subsequent
quarter or the fiscal year ending March 31, 2010.
Financial Accounting
Standards Board (“FASB”) Codification
In June
2009, the FASB
issued Statement of
Financial Accounting Standards (“SFAS”) No. 168,
“The FASB Accounting Standards
Codification TM and the Hierarchy of Generally Accepted Accounting Principles –
a replacement of FASB Statement No. 162
” (“SFAS 168”). The FASB
Accounting Standards Codification
TM
, (“Codification” or “ASC”) became the source of authoritative GAAP
recognized by the FASB to be applied by nongovernmental entities. Rules and
interpretive releases of the SEC under authority of federal securities laws are
also sources of authoritative GAAP for SEC registrants. On the effective date of
SFAS 168, the Codification superseded all then-existing non-SEC accounting and
reporting standards. All other non-grandfathered non-SEC accounting literature
not included in the Codification became non-authoritative.
Following
SFAS 168, the FASB will no longer issue new standards in the form of Statements,
FASB Staff Positions, or Emerging Issues Task Force Abstracts; instead, it will
issue Accounting Standards Updates (ASUs). The FASB will not consider ASUs as
authoritative in their own right; rather, these updates will serve only to
update the Codification, provide background information about the guidance, and
provide the bases for conclusions on the change(s) in the Codification. SFAS
No. 168 is incorporated in ASC Topic 105,
Generally Accepted Accounting
Principles.
The Company adopted SFAS No. 168 in the second quarter
of 2009, and the Company will provide reference to both the Codification topic
reference and the previously authoritative references related to Codification
topics and subtopics, as appropriate.
Revenue
Recognition
The
Company recognizes revenues associated with its software services in accordance
with the provisions of the FASB Accounting Standards Codification (“ASC”) Topic
No. 985 – 605, “
Software –
Revenue Recognition”
(formerly American Institute of Certified Public
Accountants’ Statement of Position 97-2,
“Software Revenue
Recognition”)
. 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.
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 contracts that are fixed bid or milestone driven, the Company will recognize
revenue on a percentage of completion basis for the portion of professional
services related to customized customer projects that have been completed but
are not yet deliverable to customer.
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.
Classification of
labor-related expenses within the income statement - change in application of
accounting principle
The
Company categorizes its personnel into five separate functional departments:
Professional Services (“Services”), Software Maintenance (“Maintenance”),
Research and Development (
“
R&D
”
), Sales and
Marketing (“S&M”) and General and Administrative (“Administrative”).
Effective as of the date of this Report, the Company has implemented certain
changes in the way it applies the accounting principle regarding the
classification of labor-related expenses as either cost of sales or operating
expenses in the income statement.
Prior to
the date of this Report, the Company used the following approach to classify
such expenses. The Company’s costs incurred employing personnel working in its
Services, Maintenance and R&D functions were classified as either cost of
sales or operating expenses depending on whether the hours worked by such
personnel were billable as professional or maintenance services to the
customer. If the hours worked were billable to the customer, the costs
were classified as cost of sales while all non-billable hours worked and all
costs associated with vacation pay, holiday pay and training for such personnel
were classified as operating expenses.
Effective
as of the date of this Report, the Company has implemented the following new
approach to classify such expenses. All of the Company’s labor costs
including benefits incurred employing personnel working in its Services and
Maintenance functions are classified as cost of sales regardless of whether the
hours worked by such personnel are billable to the customer. All of the
Company’s costs incurred employing personnel working in its R&D, S&M and
Administrative functions are classified as operating
expenses.
The
Company believes that these changes in accounting policy will enable it to
better reflect the costs of its five functional departments and the overall
reporting of gross profit and margins, from period to period.
In order
to conform to the current application, the Company reclassified a net of
$118,229 from operating expenses to cost of sales for the three months ended
June 30, 2009 and a total net of $118,229 for the six months ended September 30,
2009. To conform to the current application, the Company reclassified a net
of $208,684 from operating expenses to cost of sales for the three months ended
June 30, 2008, a net of $145,635 for the quarter ended September 30, 2008, and a
total net of $354,319 from operating expenses to cost of sales for the six
months ended September 30, 2008.
Goodwill
The
goodwill recorded on the Company’s books is from the acquisition of US
Dataworks, Inc. in fiscal year 2001, which remains the Company’s single
reporting unit. FASB ASC Topic No. 350,
“Intangibles
– Goodwill and Other
Intangibles”
(formerly SFAS No. 142
“Goodwill and Other Intangible
Assets”
), requires goodwill for each reporting unit of an entity 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.
FASB ASC
Topic No. 350 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. The Company did not record an
impairment of goodwill for the year ended March 31, 2009.
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.
In
accordance with FASB ASC Topic No. 815,
“Derivatives and Hedging”
(formerly SFAS No. 133,
“Accounting for Derivative
Instruments and Hedging Activities”),
as amended, the convertible debt
holder’s 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 FASB
ASC Topic No. 815, they are required to be accounted for separately from the
debt instrument and recorded as derivative instrument liabilities
Stock
Options
Effective
April 1, 2006, the Company adopted SFAS No. 123 (revised 2004),
Share-Based Payment
(“SFAS
123R”), which is incorporated in FASB ASC Topic No. 718,
“Compensation – Stock
Compensation”,
and requires 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 FASB ASC Topic No. 718 using the modified prospective transition
method, which requires the application of the accounting standard as of April 1,
2006, the first day of the Company’s fiscal year 2007. Stock-based compensation
expense recognized under FASB ASC Topic No. 718, which consists of stock-based
compensation expense related to employee and director stock options and
restricted stock issuances, for the three and six months ended September 30,
2009 was $77,176 and $118,503, respectively, and $68,966 and $186,205,
respectively, for the three and six months ended September 30,
2008.
FASB ASC
Topic No. 718 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 Company’s statement of
operations.
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 six months ended September 30, 2009 is
based on awards ultimately expected to vest, it has been reduced for estimated
forfeitures as per the tables below.
Upon
adoption of FASB ASC Topic No. 718, the Company continued to use the
Black-Scholes-Merton (“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. There were 400,000 options
granted during the three months ended September 30, 2009. During the six months
ended September 30, 2009 there were 800,000 options granted. There were 483,335
options granted during the three and six months ended September 30, 2008. In
determining the compensation cost of the options granted during the three and
six months ended September 30, 2009, as specified by FASB ASC Topic No. 718, 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
September 30,
|
|
|
For the Six Months Ending
September 30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Risk-free
Interest Rate
|
|
|
0.46
|
%
|
|
|
2.46
|
%
|
|
|
.90
|
%
|
|
|
2.46
|
%
|
|
Expected
Life of Options Granted
|
|
3 years
|
|
3 years
|
|
3 years
|
|
3 years
|
|
Expected
Volatility
|
|
|
208
|
%
|
|
|
189
|
%
|
|
|
208
|
%
|
|
|
189
|
%
|
|
Expected
Dividend Yield
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Expected
Forfeiture Rate
|
|
|
30
|
%
|
|
|
30
|
%
|
|
|
30
|
%
|
|
|
30
|
%
|
As of
September 30, 2009, there was approximately $165,021 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 FASB ASC Topic No. 260 –
10,
“Earnings Per
Share”
(formerly 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. Diluted loss per share is computed in a
similar manner to basic loss per share except that the denominator is increased
to include the number of additional common shares that would have been
outstanding if the potential common stock equivalents had been issued and if the
additional common shares were dilutive.
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):
|
|
|
For the Six Months Ended
September 30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Options
outstanding under the Company’s stock option plans
|
|
|
7,745,720
|
|
|
|
7,102,588
|
|
|
Options
granted outside the Company’s stock option plans
|
|
|
1,160,000
|
|
|
|
1,160,000
|
|
|
Warrants
issued in conjunction with private placements
|
|
|
2,888,201
|
|
|
|
3,538,201
|
|
|
Warrants
issued as a financing cost for notes payable and convertible notes
payable
|
|
|
6,705,304
|
|
|
|
4,851,163
|
|
|
Warrants
issued for services rendered and litigation settlement
|
|
|
200,000
|
|
|
|
200,000
|
|
|
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 ratio of one share of Series B preferred stock into one share of
common stock.
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.
Two of
the Company’s customers accounted for 59% and 12%, respectively, of the
Company’s net revenues for the three months ended September 30, 2009. Two
customers accounted for 58% and 12%, respectively, of net revenue for the six
months ended September 30, 2009. Two of the Company’s customers accounted for
51% and 20%, respectively, of the Company’s net revenues for the three months
ended September 30, 2008. Two customers accounted for 51% and 20%, respectively,
of net revenue for the six months ended September 30, 2008.
At
September 30, 2009 and September 30, 2008, amounts due from significant
customers accounted for 82% and 71%, respectively, of accounts
receivable.
3.
Prepaid
expenses and other current assets
Prepaid
expenses and other current assets are comprised of
prepaid expenses, and
unbilled accounts receivables. Unbilled accounts receivables is defined as
professional services already performed under fixed bid or milestone contracts
that have not yet been invoiced.
As of
September 30, 2009 and March 31, 2009, prepaid expenses were $39,870 and
$29,297, respectively, and unbilled accounts receivable were $337,624 and
$157,281, respectively.
4.
Property
and Equipment
Property
and equipment as of September 30, 2009 and March 31, 2009 consisted of the
following:
|
|
|
September 30,
2009
|
|
|
March 31,
2009
|
|
|
Furniture
and fixtures
|
|
$
|
99,535
|
|
|
$
|
99,535
|
|
|
Office
and telephone equipment
|
|
|
182,275
|
|
|
|
182,275
|
|
|
Computer
equipment
|
|
|
734,546
|
|
|
|
734,546
|
|
|
Computer
software
|
|
|
1,271,098
|
|
|
|
1,271,098
|
|
|
Leasehold
improvements
|
|
|
64,733
|
|
|
|
64,733
|
|
|
|
|
|
2,352,187
|
|
|
|
2,352,187
|
|
|
Less
accumulated depreciation and amortization
|
|
|
(2,129,068
|
)
|
|
|
(2,046,404
|
)
|
|
Total
|
|
$
|
223,119
|
|
|
$
|
305,783
|
|
The
Computer software recorded on the Company’s books is from the acquisition of US
Dataworks Inc. (a Delaware corporation) in fiscal year 2001.
Depreciation
and amortization expense for the three months ended September 30, 2009 and
September 30, 2008 was $39,018 and $48,182, respectively, and for the six months
ended September 30, 2009 and September 30, 2008 was $82,663 and $96,233,
respectively.
5.
Notes
Payable - Related Parties
On
November 13, 2007, the Company completed its financing with certain
institutional investors that included the issuance of $4,000,000 in aggregate
principal amount of senior secured convertible notes due November 13, 2010 (the
“Prior Notes”). Interest on the Prior Notes accrued at a per annum rate
equal to the 6-month LIBOR rate plus five hundred basis points. The Prior Notes
were convertible at any time into shares of the Company’s common stock at the
conversion price of $0.43 per share. The financing also included the
issuance of warrants to purchase a total of 4,651,162 shares of the Company’s
common stock at an exercise price of $0.43 per share (the “Warrants”). The
Warrants are exercisable until November 13, 2012 and include anti-dilution
provisions that will adjust the number of shares of common stock underlying the
Warrants as well as the exercise price of the Warrants in certain instances
involving the Company’s issuance of common stock below the exercise price of
$0.43 per share. From the date of issuance through the date that the Prior
Notes were paid in full, the conversion feature of the Prior Notes and the
Warrants were accounted for as an embedded derivative in accordance with FASB
ASC Topic No. 815. The Prior Notes were redeemed in full and retired on
August 13, 2008 using the proceeds from the Company’s issuance of the Refinance
Notes (discussed below).
In
connection with the redemption of the Prior Notes, the Company entered into a
Note Purchase Agreement and issued an aggregate of $3,703,500 Senior Secured
Notes due August 13, 2009 (“Refinance Notes”). The Refinance Notes were
purchased by the Company’s Chief Executive Officer and a member of its Board of
Directors (“Holders”). As originally issued, the Refinance Notes bore interest
at a rate of 12% per annum with interest payments due in arrears
monthly.
Pursuant
to the Refinance Notes as originally issued, if the Company fails to pay any
amount of principal, interest, or other amounts when and as due, then the
Refinance Notes will bear an interest rate of 18% until such time as the Company
cures this default. In addition, if the Company is subject to certain events of
bankruptcy or insolvency, the Refinance Notes provide that the Holders may
redeem all or a portion of the Refinance Notes. As of September 30, 2009 the
Company is in compliance with its debt covenants.
The
Refinance Notes are secured by a Security Agreement, dated August 13, 2008, by
and between the Company and the Holders, pursuant to which the Company granted
the Holders a security interest in all its personal property, whether now owned
or hereafter acquired, including but not limited to, all accounts
receivable, copyrights, trademarks, licenses, equipment and all
proceeds as from such collateral.
On
February 19, 2009, US Dataworks, Inc. (the "Company") entered into Note
Modification Agreements with the holders of the Refinance Notes due August 13,
2009. Effective as of February 19, 2009, the Note Modification Agreements
amended the Refinance Notes as follows: (1) the maturity date of the Refinance
Notes was extended from August 13, 2009 to December 31, 2009; (2) the annual
interest rate on the Refinance Notes increased from 12% to 13%; and (3) the
interest rate escalation clause related to an event of default was deleted. The
Note Modification Agreements also added a mandatory principal payment provision
that required the Company to reduce the principal balance of the Refinance Notes
by 3% of the original principal amount of the Refinance Notes after the end of
each calendar quarter starting with March 31, 2009 as long as such payment would
not reduce the Company's cash balance below $500,000 as of the last day of such
quarter. If making such principal payment would reduce the Company's cash
balance below $500,000 as of such date, the amount of the principal payment will
be reduced to the amount, if any, by which the Company's cash balance as of such
date exceeds $500,000. The amount to be paid is to be determined each quarter
and is not cumulative from quarter to quarter. These principal payments are to
be made within 10 business days after the end of each quarter. An amendment fee
of 1% of the outstanding principal balances of the Refinance Notes totaling
$37,035 was expensed and paid to the holders thereof.
On May
20, 2009, the Company again entered into Note Modification Agreements with the
holders of the Refinance Notes that amended the Refinance Notes as follows: (1)
the Other Note (defined below) was included in the definition of “Permitted
Indebtedness” and (2) the Company was allowed to make voluntary interest
payments on the Other Note notwithstanding the fact that the Refinance Notes are
otherwise senior to the Other Note.
On June
26, 2009, the Company again entered into Note Modification Agreements with the
holders of the Refinance Notes that amended the Refinance Notes as follows: (1)
the maturity date of the Refinance Notes was extended from December 31, 2009 to
July 1, 2010; and (2) the mandatory principal payment provision was revised to
provide that to the extent the Company’s cash balance at the end of each
calendar quarter exceeds $611,105, one-fourth of such excess amount must be used
by the Company to pay down the principal balance of the Refinance Notes and the
Company has the discretion to use an additional one-fourth of such excess amount
to further pay down the principal balance of the Refinance Notes. Other than
this additional principal payment requirement, the principal payment provision
remained unchanged. In consideration of these amendments, the Company (i) paid
to the holders of the Refinance Notes a fee of $50,000 in cash on July 1, 2009
and (ii) issued to the holders of the Refinance Notes warrants to purchase
1,854,141 shares of the Company’s common stock at an exercise price of $0.43 per
share, with these warrants being subject to the additional terms specified in
the Note Modification Agreements. The warrants were assigned an
initial fair value of $320,157 using a lattice model with the following primary
assumptions: 209% annual volatility, risk free rate of 2.58%, initial
target exercise price at 200% of exercise price, and exercise behavior limited
based on trading volume projections. In accordance with FASB ASC Topic No. 470 -
50,
“Debt – Modifications and
Extinguishments”
(formerly EITF 96-19
“Debtor’s Accounting for a
Modification or Exchange of Debt Instrument”),
the consideration paid to
the holders has been accounted for as an additional debt discount amortized over
the remaining term of the Refinance Notes. $93,063 has been amortized in the six
month period ending September 30, 2009 associated with the debt
discount.
On
September 26, 2006, the Company entered into a note payable with its Chief
Executive Officer for $500,000 (“Other Note”). 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, 2009 the outstanding
balance on this note payable was $500,000. As originally issued, 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.
On May
20, 2009, the Company entered into a Note Modification Agreement with the holder
of the Other Note. Effective as of May 20, 2009, the Note Modification Agreement
amended the Note as follows: (1) it was clarified that the Note was a demand
note for which full payment can be required at any time on or after the maturity
date; (2) the maturity date of the Note was extended to December 31, 2009; and
(3) the Company was allowed to make voluntary prepayments under the Note without
penalty.
On June
26, 2009, the Company again entered into a Note Modification Agreement with the
holder of the Other Note that extended the maturity date of the Other Note from
December 31, 2009 to July 1, 2010. In consideration of this amendment, the
Company paid to the holder of the Other Note a fee of $6,667 in cash on July 1,
2009.
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 shares authorized, and 109,933 shares issued and
outstanding, of $0.0001 par value convertible Series B preferred stock. The
Series B preferred stock has a liquidation preference of $3.75 per preferred
share and carries a 10% cumulative preferred dividend payable each March 1 and
September 1 if and when declared by the Board of Directors. The Series B
preferred stock is convertible into shares of common stock at a conversion ratio
of one share of Series B preferred stock for one share of common stock (109,933
common shares). The Company has the right to redeem the Series B preferred stock
at any time after issuance at a redemption price of $4.15 per preferred plus any
accrued but unpaid dividends.
Stock
Options
In August
1999, the Company implemented its 1999 Stock Option Plan (the “1999 Plan”). In
August 2000, the Company’s 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 Company’s amended and restated
2000 Stock Option Plan to increase the maximum aggregate number of shares
available for issuance there under from 6,000,000 to 7,500,000. Under the
evergreen provisions of the plan the maximum aggregate number of shares
available for issuance is currently 9,000,000. 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.
During
the three months ended September 30, 2009, the Company granted 400,000 stock
options to certain employees that may be exercised at price of $0.28. During the
six months ended September 30, 2009, the Company granted 800,000 stock options
to certain employees that may be exercised at prices ranging from $0.20 to $0.28
per share.
During
the three months ended September 30, 2008 the Company granted 483,335 stock
options to certain employees that may be exercised at price of $0.26. During the
six months ended September 30, 2008, the Company granted 483,335 stock options
to certain employees that may be exercised at prices ranging from $0.26 per
share.
The
following table summarizes certain information relative to stock
options:
|
|
|
2000 Stock Option Plan
|
|
|
Outside of Plan
|
|
|
|
|
Shares
|
|
|
Weighted-Average
Exercise Price
(per share)
|
|
|
Shares
|
|
|
Weighted-Average
Exercise Price
(per share)
|
|
|
Outstanding,
March 31, 2009
|
|
|
6,964,220
|
|
|
$
|
0.68
|
|
|
|
1,160,000
|
|
|
$
|
1.02
|
|
|
Granted
|
|
|
800,000
|
|
|
$
|
0.24
|
|
|
|
—
|
|
|
|
—
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Forfeited/canceled
|
|
|
18,500
|
|
|
$
|
0.56
|
|
|
|
—
|
|
|
|
—
|
|
|
Outstanding,
September 30, 2009
|
|
|
7,745,720
|
|
|
$
|
0.64
|
|
|
|
1,160,000
|
|
|
$
|
1.02
|
|
|
Exercisable,
September 30, 2009
|
|
|
6,694,893
|
|
|
$
|
0.70
|
|
|
|
1,160,000
|
|
|
$
|
1.02
|
|
The
weighted-average remaining life and the weighted-average exercise price of all
of the options outstanding at September 30, 2009 were 6.74 years and $0.69 per
share, respectively. The exercise prices for the options outstanding at
September 30, 2009 ranged from $0.15 to $6.25 per share, and information
relating to these options is as follows:
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
Weighted-Average
|
|
|
|
Range of
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
|
|
|
Exercise
|
|
Stock Options
|
|
|
Stock Options
|
|
Remaining Contractual
|
|
|
|
|
|
|
|
|
Prices
|
|
Outstanding
|
|
|
Exercisable
|
|
Life
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.15
— 0.80
|
|
|
6,460,384
|
|
|
|
5,409,557
|
|
|
6.74
years
|
|
$
|
0.49
|
|
|
$
|
0.54
|
|
|
$
|
0.81
— 1.35
|
|
|
1,734,836
|
|
|
|
1,734,836
|
|
|
4.87
years
|
|
$
|
0.93
|
|
|
$
|
0.93
|
|
|
$
|
1.36
— 6.25
|
|
|
710,500
|
|
|
|
710,500
|
|
|
4.39
years
|
|
$
|
1.88
|
|
|
$
|
1.88
|
|
|
|
|
|
|
8,905,720
|
|
|
|
7,854,893
|
|
|
|
|
|
|
|
|
|
|
|
Restricted
Stock
During
the three and six months ended September 30, 2009, the Company completed the
following:
During
the three months ended September 30, 2009, the Company granted 90,476 shares of
common stock (at $0.21 per share based on the closing price of the common stock
on the grant date) to a board member for his work related to his prior service
as Chairman of the Executive Committee. The Company expensed $9,500 related to
these grants during the three months ended September 30, 2009. The shares are
granted under the 2000 Plan.
During
the three months ended September 30, 2009, the Company granted 28,498 shares of
common stock (at $0.30 per share based on the closing price of the common stock
on the grant date) to its outside directors pursuant to the Company’s Outside
Director Compensation Plan. The Company expensed $8,550 related to these grants
during the three months ended September 30, 2009.
During
the six months ended September 30, 2009, the Company granted 50,000 shares of
common stock (at $0.21 per share based on the closing price of the common stock
on the grant date) to the President and Chief Operating Officer pursuant to his
employment agreement and 90,476 shares of common stock to a board member for his
work related to his prior service as Chairman of the Executive Committee. The
Company expensed $12,125 related to these grants during the six months ended
September 30, 2009. The shares are granted under the 2000 Plan.
During
the six months ended September 30, 2009, the Company granted 40,714 shares of
common stock (at $0.21 per share based on the closing price of the common stock
on the grant date) and 28,498 shares of common stock (at $0.30 per share based
on the closing price of the stock on the grant date) to its outside directors
pursuant to the Company’s Outside Director Compensation Plan. The Company
expensed $17,100 related to these grants during the six months ended September
30, 2009.
7.
Fair Value
Measurements
On April
1, 2008, the Company adopted SFAS No. 157 “
Fair Value Measurements”
(“SFAS 157”), which is incorporated in FASB ASC Topic No. 820 - 10,
“Fair Value Measurements and
Disclosures”
. FASB ASC Topic No. 820 - 10, among other things, defines
fair value, establishes a consistent framework for measuring fair value and
expands disclosure for each major asset and liability category measured at fair
value on either a recurring or nonrecurring basis. FASB ASC Topic No.
820 – 10 clarifies that fair value is an exit price, representing the
amount that would be received to sell an asset or paid to transfer a liability
in an orderly transaction between market participants. As such, fair
value is a market-based measurement that should be determined based on
assumptions that market participants would use in pricing an asset or
liability. As a basis for considering such assumptions, FASB ASC
Topic No. 820 – 10 establishes a three-tier fair value hierarchy, which
prioritizes the inputs used in measuring fair value as follows:
|
|
Level 1.
|
Observable inputs such as quoted
prices in active markets for identical assets or
liabilities;
|
|
|
Level
2.
|
Inputs, other than quoted prices
included within Level 1, that are observable either directly or
indirectly; and
|
|
|
Level 3.
|
Unobservable inputs in which
there is little or no market data, which require the reporting entity to
develop its own
assumptions.
|
As of
September 30, 2009, the Company had no assets or liabilities that were marked to
fair value under FASB ASC Topic No. 820 - 10.
8.
Liquidity
Due to
our history of experiencing negative cash flow from operations, except for the
recent fiscal year 2009, and the debt financing that we put in place to cover
this historical negative cash flow, we find ourselves in the position of having
approximately $4.2 million of debt coming due on July 1, 2010 that we may not be
able to repay from our operating cash flow. While we currently expect to be able
to refinance this debt or reach an agreement to extend the maturity date of this
debt, there can be no assurances that this will in fact occur. Failure to
refinance or extend the maturity date of this debt will have a material adverse
effect on our financial condition and our ability to continue as a going concern
(see “Item 1A. Risk Factors”).
In
addition, while we expect to be able to fund our operations from operating cash
flow, if that is not the case, our long term viability will again depend 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
.
Item 2. Management’s Discussion and
Analysis of Financial Condition and Results of Operations
The
following discussion and analysis of our financial condition and results of
operations should be read with the unaudited condensed consolidated financial
statements and related notes included elsewhere in this Quarterly Report on Form
10-Q and the audited consolidated financial statements and notes thereto
included in the Company’s Annual Report on Form 10-K for the fiscal year ended
March 31, 2009
Critical Accounting Policies
The
following discussion and analysis of our unaudited condensed 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 of America. 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 unaudited condensed 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
The
Company recognizes revenues associated with its software services in accordance
with the provisions of the FASB Accounting Standards Codification (“ASC”) Topic
No. 985 – 605, “
Software –
Revenue Recognition”
(formerly American Institute of Certified Public
Accountants’ Statement of Position 97-2,
“Software Revenue
Recognition”)
. 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.
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 contracts that are fixed bid or milestone driven, the Company will recognize
revenue on a percentage of completion basis for the portion of professional
services related to customized customer projects that have been completed but
are not yet deliverable to customer.
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.
Classification
of labor-related expenses within the income statement - change in application of
accounting principle
The
Company categorizes its personnel into five separate functional departments:
Professional Services (“Services”), Software Maintenance (“Maintenance”),
Research and Development (“R&D”), Sales and Marketing (“S&M”) and
General and Administrative (“Administrative”). Effective as of the date of
this Report, the Company has implemented certain changes in the way it applies
the accounting principle regarding the classification of labor-related expenses
as either cost of sales or operating expenses in the income
statement.
Prior to
the date of this Report, the Company used the following approach to classify
such expenses. The Company’s costs incurred employing personnel working in its
Services, Maintenance and R&D functions were classified as either cost of
sales or operating expenses depending on whether the hours worked by such
personnel were billable as professional or maintenance services to the
customer. If the hours worked were billable to the customer, the costs
were classified as cost of sales while all non-billable hours worked and all
costs associated with vacation pay, holiday pay and training for such personnel
were classified as operating expenses.
Effective
as of the date of this Report, the Company has implemented the following new
approach to classify such expenses. All of the Company’s labor costs
including benefits incurred employing personnel working in its Services and
Maintenance functions are classified as cost of sales regardless of whether the
hours worked by such personnel are billable to the customer. All of the
Company’s costs incurred employing personnel working in its R&D, S&M and
Administrative functions are classified as operating
expenses.
The
Company believes that these changes in accounting policy will enable it to
better reflect the costs of its five functional departments and the
overall reporting of gross profit and margins, from period to
period.
In order
to conform to the current application, the Company reclassified a net of
$118,229 from operating expenses to cost of sales for the three months ended
June 30, 2009 and a total net of $118,229 for the six months ended September 30,
2009. To conform to the current application, the Company reclassified a net
of $208,684 from operating expenses to cost of sales for the three months ended
June 30, 2008, a net of $145,635 for the quarter ended September 30, 2008, and a
total net of $354,319 from operating expenses to cost of sales for the six
months ended September 30, 2008.
Goodwill
The goodwill recorded on our books is
from the acquisition of US Dataworks, Inc. in fiscal year 2001, which remains
our single reporting unit.
FASB ASC Topic No. 350,
“Intangibles
– Goodwill and
Other Intangibles”
(formerly
SFAS
No. 142,
“Goodwill and Other
Intangible Assets,”
)
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.
FASB ASC
Topic No. 350 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. The Company did not record an
impairment of goodwill for the year ended March 31, 2009.
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
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.
Two of
the Company’s customers accounted for 59% and 12%, respectively, of the
Company’s net revenues for the three months ended September 30, 2009. Two
customers accounted for 58% and 12%, respectively, of net revenue for the six
months ended September 30, 2009. Two of the Company’s customers accounted for
51% and 20%, respectively, of the Company’s net revenues for the three months
ended September 30, 2008. Two customers accounted for 51% and 20%, respectively,
of net revenue for the six months ended September 30, 2008.
At
September 30, 2009 and September 30, 2008, amounts due from significant
customers accounted for 82% and 71%, respectively, of accounts
receivable.
Results
of Operations
The
results of operations reflected in this discussion include our operations for
the three and six month periods ended September 30, 2009 and 2008.
Revenues
We
generate revenues from (a) licensing and supporting software with fees due on a
transactional basis, (b) providing maintenance, enhancement and support for
previously licensed products, (c) providing professional services and (d)
licensing software with fees due at the initial term of the
license.
|
|
|
Three Months Ended September 30,
(in thousands)
|
|
|
Six Months Ended September 30,
(in thousands)
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
|
Software
transactional revenues
|
|
$
|
519
|
|
|
$
|
523
|
|
|
|
(0.8
|
)%
|
|
$
|
1,040
|
|
|
$
|
1,060
|
|
|
|
(1.9
|
)%
|
|
Software
maintenance revenues
|
|
|
208
|
|
|
|
220
|
|
|
|
(5.1
|
)%
|
|
|
420
|
|
|
|
448
|
|
|
|
(6.2
|
)%
|
|
Professional
service revenues
|
|
|
1,360
|
|
|
|
1,288
|
|
|
|
5.6
|
%
|
|
|
2,635
|
|
|
|
2,561
|
|
|
|
2.9
|
%
|
|
Software
licensing revenues
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
%
|
|
|
—
|
|
|
|
30
|
|
|
|
(100.0
|
)%
|
|
Total
revenues
|
|
$
|
2,087
|
|
|
$
|
2,031
|
|
|
|
2.8
|
%
|
|
$
|
4,095
|
|
|
$
|
4,099
|
|
|
|
(0.1
|
)%
|
Revenues
increased for the three months ended September 30, 2009 by 2.8% and decreased
for the six months ended September 30, 2009 by 0.1% as compared to the same
periods ended September 30, 2008. For the three months ended September 30, 2009,
professional services revenues increased by 5.6%, offset by a less than 1%
decrease in transactional revenue and a 5.1% decrease in maintenance revenues as
compared to the same period ended September 30, 2008. For the six months ended
September 30, 2009, professional services revenue increased by 2.9%, offset by a
1.9% decrease in transactional revenue, a 6.2% decrease in maintenance revenues
and a 100% decrease in licensing revenues as compared to the same period ended
September 30, 2008.
The
decrease in licensing revenues for the six months ended September 30, 2009, as
compared to the same period last year, was due to no new licensing customers
added in the first six months, as compared to the same period last year when one
new licensing customer was added.
The
slight decrease in transactional revenues for the three and six months ended
September 30, 2009, compared to the same periods last year, was primarily
related to the reduced economic activity experienced by some of our customers
during the current year as compared to the prior year.
The
decrease in maintenance revenues for the three and six months ended September
30, 2009, compared to the same period last year, was primarily attributable to
fewer customers renewing their annual maintenance agreement in the current
periods. We do not anticipate significant ongoing growth in annual maintenance
fees.
The increase in professional service revenues for the three and
six months ended September 30, 2009, compared to the same periods last year, was
primarily due to our professional services contract with a United States
government entity.
Cost
of Sales
Costs of
sales include personnel costs associated with our professional services and
software maintenance departments as well as the cost of the Thomson Financial
EPICWare™ software and other third party software resold in connection with our
software. Cost of sales increased by $18,917 or 2.9%, as adjusted for the change
in application of accounting policy, to $670,318 for the three months ended
September 30, 2009 from $651,401 for the three months ended September 30, 2008.
This increase was due to a $12,000 increase in third party software costs and
$12,000 increase in our professional service and maintenance labor costs offset
by a $6,000 decrease in our outside professional service labor costs. For the
six months ended September 30, 2009, costs of sales decreased by $50,891 or 3.6%
to $1,346,689 as adjusted for the change in application of accounting policy
from $1,397,850. This decrease is attributable to a $55,000 increase in third
party software expense, a $245,000 increase in professional service labor costs
offset by a $333,000 decrease in maintenance labor costs and a $17,000 decrease
in outside professional service expense. The shift in labor costs was due
primarily to the Company’s work on the professional service contract with the
United States government entity and the change in the application of the
accounting principle for costs of sales adopted by the Company effective as of
the date of this report. In order to conform to the current
application, the Company reclassified $118,230 from operating expenses for the
prior quarter.
Operating
Expenses
Total
operating expenses decreased by $70,424, or 5.8%, from $1,216,634, as adjusted
for the change in application of accounting policy, for the three months ended
September 30, 2008, to $1,287,058 for the three months ended September 30, 2009.
This decrease is principally attributable to a $34,000 decrease in advertising
and marketing expense, a decrease of $143,000 in legal and accounting expenses,
partially offset by an increase of $12,000 in office expense, $4,000 in director
fees and an $84,000 increase in outside consultant services.
Total
operating expenses decreased by $54,774, or 2.3%, from $2,432,356, as adjusted
for the change in application of accounting policy, for the six months ended
September 30, 2008 to $2,377,582, as adjusted for the change in application of
accounting policy, for the six months ended September 30, 2009. This decrease is
attributable to a decrease in investor relation expense of $21,000, a
$67,000 reduction in stock based compensation expense, a $237,000 decrease in
legal fees and a $11,000 reduction in insurance expense, partially
offset by an increase of $118,000 in outside consultants, a $42,000
increase in travel expense, a $37,000 increase in director fees, a $32,000
increase in payroll administration fees, a $22,000 increase in computer hardware
expense and a $28,000 increase in other areas of operations including,
marketing, office expense and rent
Our
headcount at September 30, 2009 was 36, as compared to 34 at September 30,
2008.
Other
Expenses
Other
expenses, including interest expense and financing costs, decreased $1,719,834,
or 85.8%, to $284,563 for the three months ended September 30, 2009 from
$2,004,397 for the three months ended September 30, 2008. This increase is
primarily related to the convertible promissory notes of November 13, 2007
(“Prior Notes”) and the manner in which they are required to be reported under
FASB ASC Topic No. 815.
At the
initial recording of the Prior Notes on our books, a value must be determined
for each portion of the Prior Notes, the compounded embedded derivatives and the
warrants. Once determined, this value is netted against the total value of the
Prior Notes and the remaining amount is identified as a Discount on Note
Payable, and is amortized over the life of the loan utilizing an effective
interest method calculation for determining the value of the units each quarter.
This discount is written off to interest expense after the effective interest
method calculation is performed each quarter. At inception of the Prior Notes in
November 2007, the Discount on Note Payable was $2,240,263. This discount would
have been $0.00 if the note was held until November 2010, and all interest
expense would have been amortized over that time period.
The Prior
Notes were paid in full on August 13, 2008, resulting in an accounting treatment
consistent with FASB ASC Topic No. 815 guidelines. At the time the Prior Notes
are paid off, the derivatives no longer have value associated with the Prior
Notes, and the Discount on Note Payable must be immediately expensed. At the
time the Prior Notes were paid in August 2008, $1,747,791 remained on the
Discount on Note Payable. This amount was charged to interest expense in the
quarter ended September 30, 2008 and accounts for the bulk of the decrease in
other income for the three months ended September 30, 2009 as there were no
charges in the current year.
For the
six month period ending September 30, 2009, the decrease in other expense of
$1,670,985, or 75.2%, to $(550,041) as compared to $(2,221,026) for the same
period last year, is primarily due to no interest expense related to the
financing of August 2008 in the current year period as compared to the interest
expense of $1,747,791 in the prior year.
Net
Loss
Net loss
decreased by $1,686,945, or 91%, to a net loss of $154,750 for three months
ended September 30, 2008 from a net loss of $1,841,695 for the three months
ended September 30, 2008. For details related to the increase in our net loss
see the preceding discussions related to revenues, cost of sales, operating
expenses and other income sections.
Net loss
decreased by $1,772,514, or 91%, to a net loss of $178,663 for the six months
ended September 30, 2009 from a net loss of $1,951,176 for the six months ended
September 30, 2008. For details related to the increase in our net loss see the
preceding discussions related to revenues cost of sales, operating expenses and
other income sections.
Liquidity
and Capital Resources
Due to
our history of experiencing negative cash flow from operations, except for the
recent fiscal year 2009, and the debt financing that we put in place to cover
this historical negative cash flow, we find ourselves in the position of having
approximately $4.2 million of debt coming due on July 1, 2010 that we may not be
able to repay from our operating cash flow. While we currently expect to be able
to refinance this debt or reach an agreement to extend the maturity date of this
debt, there can be no assurances that this will in fact occur. Failure to
refinance or extend the maturity date of this debt will have a material adverse
effect on our financial condition and our ability to continue as a going concern
(see “Item 1A. Risk Factors”).
In
addition, while we expect to be able to fund our operations from cash flow, if
that is not the case, our long term viability will again depend 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 decreased by $252,036 to $151,827 at September 30, 2009 from
$403,863 at March 31, 2009. Cash used by operating activities was
$123,293 in the three months ended September 30, 2009 compared to $174,273
provided in the same period in the prior fiscal year.
No cash
was used for investing activities in the six months ended September 30, 2009
while investing activities used $7,889 in the six months ended September 30,
2008.
Financing
activities used cash of $128,743 in the six months ended September 30, 2009
while financing activities used cash of $746,799 in the six months ended
September 30, 2008.
We
believe we currently have adequate capital resources to fund our anticipated
cash needs through March 31, 2010. 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.
Item 4(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-Q, 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 management’s evaluation
during our last fiscal quarter that has materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.
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 are currently not involved in
any such proceedings.
Item
1A. Risk Factors
Investors
should consider the following risk factors in addition to those risk factors set
forth in our Annual Report on Form 10-K for the fiscal year ended March 31, 2009
dated as of, and filed with the SEC on, June 29, 2009 under Item “
Item 1.A Risk
Factors
”:
We
have warrants outstanding with anti-dilution provisions that may affect our
ability to raise capital without adding additional dilution.
The
Company currently has warrants outstanding pursuant to which the holders thereof
could purchase a total of 4,651,162 shares of Common Stock at an exercise price
of $0.43 per share (the “Investor Warrants”). Except in certain
limited circumstances, if the Company issues or sells shares of Common Stock (or
securities convertible into or exchangeable for shares of Common Stock) at a
price (or a conversion or exchange price) below $0.43 per share, (i) the
exercise price of the Investor Warrants would be reduced to that lower sale (or
conversion or exchange) price and (ii) the number of shares underlying the
Investor Warrants would be increased by the ratio of the current per share
warrant exercise price ($0.43) to the lower adjusted exercise
price. While the Company has not issued or sold shares of Common
Stock or other securities that triggered these anti-dilution provisions, there
can be no assurance that it will not do so in the future. If the
Company does issue or sell shares of Common Stock or other securities that
trigger these anti-dilution provisions, the dilutive effect of such an issuance
will be exacerbated by the additional dilutive effect of the adjustments to the
exercise price of, and the number of shares of Common Stock underlying, the
Investor Warrants.
The
existence of the Investor Warrants could make investments in the Company less
attractive.
Our
recent sales efforts may not produce the desired results.
The
Company has recently supplemented its sales infrastructure to focus on
generating business from new customers. The Company’s future success,
particularly its ability to grow revenue, will depend largely upon the success
of this effort. While these new sales efforts have introduced a
number of new customers into the Company’s sales pipeline, there can be no
assurance that this sales pipeline will ultimately result in new
customers. Failure of this new sales effort to produce new and
profitable revenue sources will have a material adverse effect on the Company’s
future operating results.
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
None,
except as previously reported in the Company’s Current Reports on Form 8-K filed
during the three months ended September 30, 2009.
Item
3. Defaults Upon Senior Securities
None.
Item
4. Submission of Matters to a Vote of Security Holders
We held
our annual meeting of stockholders (the “Annual Meeting”) on September 15, 2009
at our principle executive offices at One Sugar Creek Center Boulevard, Sugar
Land, TX 77478. The purpose of the Annual Meeting was to (i) elect three Class I
Director
s
to hold office
until the 2012 Annual Meeting of Stockholders and (ii) to ratify the appointment
of Ham, Langston & Brezina, LLP as the Company’s independent auditors for
the fiscal year ending March 31, 2010.
The
following table provides the number of votes cast related to each
proposal:
|
|
|
For
|
|
|
Withheld
|
|
|
Abstain
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Joe
Abrell
|
|
|
18,090,287
|
|
|
|
6,176,299
|
|
|
|
0
|
|
|
John
L Nicholson, MD
|
|
|
16,352,713
|
|
|
|
7,913,873
|
|
|
|
0
|
|
|
G.
Richard Hicks
|
|
|
19,553,814
|
|
|
|
4,712,772
|
|
|
|
0
|
|
|
|
|
For
|
|
|
Against
|
|
|
Abstain
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratification
of Ham, Langston & Brezina
|
|
|
19,792,461
|
|
|
|
4,467,479
|
|
|
|
6,644
|
|
The
following directors’ terms of office as a director continued after the Annual
Meeting: Hayden D. Watson, J. Patrick Millinor, Charles E. Ramey, Mario
Villarreal, Anna C. Catalano, and Thomas L. West, Jr.
Item
5. Other Information
None.
The
exhibits listed below are required by Item 601 of Regulation S-K.
|
Exhibit
Number
|
Description
of Document
|
|
|
|
|
10.1
|
US
Dataworks, Inc. Common Stock Purchase Warrant issued on July 29, 2009 but
effective as of June 26, 2009 by and between U.S. Dataworks, Inc. and
Charles E. Ramey (incorporated by reference to Exhibit 10.1 to the
Registrant’s Current Report on Form 8-K filed with the SEC on August 4,
2009).
|
|
10.2
|
US
Dataworks, Inc. Common Stock Purchase Warrant issued on July 29, 2009 but
effective as of June 26, 2009 by and between U.S. Dataworks, Inc. and John
L. Nicholson (incorporated by reference to Exhibit 10.2 to the
Registrant’s Current Report on Form 8-K filed with the SEC on August 4,
2009).
|
|
10.3
|
Engagement
Agreement dated as of August 7, 2009 by and among US Dataworks, Inc.,
Albeck Financial Services, Inc. and Randall J. Frapart (incorporated by
reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K
filed with the SEC on August 13, 2009).
|
|
18
|
Concurrence
of Independent Registered Public Accounting firm regarding change in
accounting principle.
|
|
31.1
|
Section
302 Certification of Chief Executive Officer.
|
|
31.2
|
Section
302 Certification of Chief Accounting Officer.
|
|
32.1
|
Section
906 Certification of Chief Executive Officer.
|
|
32.2
|
Section
906 Certification of Chief Accounting
Officer.
|
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:
November 16, 2009
|
|
US
DATAWORKS, INC.
|
|
|
|
|
|
By
|
/s/ Charles E. Ramey
|
|
|
Charles
E. Ramey
|
|
|
Chief
Executivel Officer
|
|
|
(Duly
Authorized Officer)
|
|
|
|
|
|
By
|
/s/ Randall J. Frapart
|
|
|
Randall
J. Frapart
|
|
|
Chief
Financial Officer
|
|
|
(Principal
Financial Officer)
|
|
|
|
EXHIBIT
INDEX
|
Exhibit
Number
|
|
Description of Document
|
|
|
|
|
|
10.1
|
|
US
Dataworks, Inc. Common Stock Purchase Warrant issued on July 29, 2009 but
effective as of June 26, 2009 by and between U.S. Dataworks, Inc. and
Charles E. Ramey (incorporated by reference to Exhibit 10.1 to the
Registrant’s Current Report on Form 8-K filed with the SEC on August 4,
2009).
|
|
10.2
|
|
US
Dataworks, Inc. Common Stock Purchase Warrant issued on July 29, 2009 but
effective as of June 26, 2009 by and between U.S. Dataworks, Inc. and John
L. Nicholson (incorporated by reference to Exhibit 10.2 to the
Registrant’s Current Report on Form 8-K filed with the SEC on August 4,
2009).
|
|
10.3
|
|
Engagement
Agreement dated as of August 7, 2009 by and among US Dataworks, Inc.,
Albeck Financial Services, Inc. and Randall J. Frapart (incorporated by
reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K
filed with the SEC on August 13, 2009).
|
|
18
|
|
Concurrence
of Independent Registered Public Accounting firm regarding change in
accounting principle.
|
|
31.1
|
|
Section
302 Certification of Chief Executive Officer.
|
|
31.2
|
|
Section
302 Certification of Chief Accounting Officer.
|
|
32.1
|
|
Section
906 Certification of Chief Executive Officer.
|
|
32.2
|
|
Section
906 Certification of Chief Accounting
Officer.
|
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