Attached files
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| EX-32.2 - US DATAWORKS INC | v211488_ex32-2.htm |
| EX-23.1 - US DATAWORKS INC | v211488_ex23-1.htm |
| EX-31.2 - US DATAWORKS INC | v211488_ex31-2.htm |
| EX-31.1 - US DATAWORKS INC | v211488_ex31-1.htm |
| EX-32.1 - US DATAWORKS INC | v211488_ex32-1.htm |
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K/A
(Amendment
No. 2)
(Mark
One)
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x
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ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the fiscal year ended March 31, 2010
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¨
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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Commission
file number 001-15385
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
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(I.R.S. Employer
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incorporation
or organization)
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Identification
No.)
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1
Sugar Creek Center Blvd.
5
th
Floor
Sugar
Land, Texas 77478
(Address
of principal executive offices, including ZIP Code)
(281)
504-8000
(Registrant's
telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act:
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Title of Each Class
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Name of Exchange on Which Registered
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None
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None
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Securities registered pursuant to Section 12(g) of the Act:
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Title
of Each Class:
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Common
Stock, $0.0001 par
value
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Indicate
by check mark if the Registrant is a well-known seasoned issuer (as defined in
Rule 405 of the Securities Act). Yes ¨ No x
Indicate
by check mark if the Registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Exchange Act. Yes ¨
No x
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 x No ¨
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of Registrant's knowledge, in definitive proxy or information statement
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ¨
Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
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Large
accelerated filer ¨
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Accelerated
filer ¨
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Non-accelerated
filer ¨
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Smaller
reporting company x
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(Do
not check if a smaller
reporting
company)
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Indicate
by check mark whether the Registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes ¨ No x
As of
June 23, 2010, the aggregate market value of the common stock of the Registrant
held by non-affiliates of the Registrant, based on the $0.20 per share price for
the Registrant's common stock as quoted by the OTC Bulletin Board on June 23,
2010 was $5,501,934 (for purposes of calculating these amounts, only directors,
officers and beneficial owners of 10% or more of the outstanding capital stock
of the Registrant have been deemed affiliates).
As of
June 23, 2010, the number of outstanding shares of common stock of the
Registrant was 33,145,576.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the Registrant’s definitive proxy statement to be filed pursuant to
Regulation 14A under the Securities Exchange Act of 1934 with respect to the
2010 Annual Meeting of Stockholders are incorporated by reference into Part III
of this Form 10-K.
EXPLANATORY
NOTE
US
Dataworks, Inc. (the “Company”) is filing this Amendment No. 2 on Form 10-K/A
(this “Amended Report”) to amend its Annual Report on Form 10-K for the fiscal
year ended March 31, 2010 filed with the Commission on June 29, 2010 (the
“Original Report”). The purpose of this Amended Report is to provide
the Company's amended and restated financial statements for the fiscal year
ended March 31, 2010 and the comparative period ended March 31, 2009 (the
"Restated March 2010 Financial Statements").
On
January 21, 2011, the Company's Audit Committee concluded that the Company's
previously filed financial statements for the Company's fiscal year ended March
31, 2010 could no longer be relied upon because of an error in such financial
statements related to the Company's accounting for a software license sold
during the quarter ended March 31, 2010 (the "License").
The
Company recognized all of the license fee revenue associated with the License in
March 2010 when the license agreement was executed and the software was provided
to the customer. In November 2010, the Company entered into a separate service
agreement with the customer. However, the original accounting did not consider
the impact of essential services which are common for such software to meet the
customer's intended use. Therefore, the Company has determined that the software
license fee revenue should have been recognized over the period the professional
services are rendered.
The
Restated March 2010 Financial Statements and other financial information
included in this Amended Report have been restated accordingly. For more
information concerning the restatement, see Note 11 to Financial Statements
included in this Amended Report.
Except
for the Restated March 2010 Financial Statements, this Amended Report does not
amend the Original Report in any way and does not modify or update any
disclosures contained in the Original Report, including disclosures
contained in the Restated March 2010 Financial
Statements that were not affected by the error addressed by the
restatement. This Amended Report speaks only as of June 29, 2010 and
does not reflect events occurring after such date. In addition, this
Amended Report does not include any items that were not affected by the
restatement. Accordingly, this Amended Report should be read in
conjunction with the Original Report.
2
US
DATAWORKS, INC.
TABLE
OF CONTENTS
2010
FORM 10-K/A
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Page
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PART
I
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Item
1A.
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Risk
Factors
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4
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PART
II
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Item
7.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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8
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Item
8.
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Financial
Statements and Supplementary Data
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13
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Item
9A.
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Controls
and Procedures
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38
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Part
IV
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Item
15.
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Exhibits,
Financial Statement Schedules
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39
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3
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 a Merchant Services Provider (“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 set forth below under “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,” “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
ITEM
1A. RISK FACTORS
In
addition to the other information in this Report, the following factors should
be considered in evaluating us and our business.
We
have a significant amount of debt coming due in fiscal 2014 that we may not be
able to repay.
We have
approximately $3.1 million of debt that we owe certain company insiders that is
due and payable on January 1, 2014, all of which is secured by a lien on all of
our properties and assets, including all of our accounts
receivable. While we expect to build enough cash by January 1, 2014
to pay off these obligations, such may not be the case. If we are not
able to make this ballon payment, we will need to refinance this debt or arrange
to have the maturity date extended. While we expect to be able to refinance this
debt or reach an agreement to extend the maturity date of this debt if
necessary, there can be no assurances that this will in fact
occur. In such case, failure to refinance or extend the maturity date
of this debt will give the secured holders of such debt the right to foreclose
on our properties and assets, including our accounts receivables. If
these foreclosure rights are exercised, we will be forced to file for protection
available under federal bankruptcy laws, which will likely render our equity,
including our issued and outstanding common stock, valueless.
We have a general history of losses
and may not operate profitably in the future.
We have
incurred losses for the last three fiscal years ended March 31, 2009. While we
achieved positive cash flow and net income in fiscal 2010, that may not
continue in the future. As of March 31, 2010, our accumulated deficit was
$65,110,784. We believe that our planned growth and profitability will depend in
large part on our ability to promote our brand name and gain clients and expand
our relationships with clients for whom we would 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.
4
Our ability to continue as a going
concern may be contingent upon our ability to secure capital from prospective
investors or lenders.
The
accompanying 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 March 31,
2011. 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. In addition, there may
be limited access to capital due to being listed on OTC Bulletin Board. 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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•
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curtail our operations
significantly;
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•
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sell significant
assets;
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•
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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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•
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explore other strategic
alternatives including a merger or sale of US
Dataworks.
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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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·
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market acceptance of and changes
in demand for our products and
services;
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·
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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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·
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our ability to build brand
recognition;
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·
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timing of sales to
customers;
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price
competition;
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·
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our ability to upgrade and
develop systems and infrastructure to accommodate
growth;
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·
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our ability to attract and
integrate new personnel in a timely and effective
manner;
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·
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our ability to introduce and
market products and services in accordance with market
demand;
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·
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changes in governmental
regulation;
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·
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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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·
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general economic conditions,
including economic conditions specific to the financial services
industry.
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In
addition, from time to time we derive a portion of our revenue from agreements
signed at the end of the reporting period. 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 reporting period in which they are signed. These factors could negatively
affect demand for our products and services, and our future operating
results.
5
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 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.
We may not be able to develop or
maintain our relationships with distribution partners, which may cause our cash flow to
decline.
We may
not be able to maintain or develop new relationships with distribution channel
partners. These strategic relationships are a core component of our sales and
distribution strategy and are a part of our growth strategy. The loss of a
distribution channel partner could harm our operating results.
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. We may not obtain
additional customers. The failure to obtain additional customers and 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 financial services 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.
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 operating results.
We operate in markets that are
intensely and increasingly competitive, and if we are unable to compete
successfully, our revenue could decline and we may be unable to gain and may lose market
share.
The
market for financial services software is 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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·
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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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·
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the breadth and quality of
services;
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6
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·
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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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·
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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 client’s 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 which would have a negative impact on our operating
results.
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, 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. These infringement claims or any future 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 management’s 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 equity based
instruments, 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.
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.
The market for our common stock is
subject to the penny stock regulations and restrictions, which could impair
liquidity and make trading difficult .
Because
our common stock is no longer listed on the NYSE Alternext US (formerly the
AMEX) and because it continues to trade at a market price of less than $5.00 per
share, it is deemed to be a “penny stock” under SEC rules and
regulations. This classification adversely affects the market
liquidity for the Company’s common stock by placing a number of restrictions and
requirements on brokers and dealers in purchasing, or effecting the purchase of,
penny stocks. Because of these regulations, broker-dealers may not
wish to process the additional paperwork, make the additional disclosures and/or
take the other additional actions required under the regulations in connection
with purchasing our common stock. This in turn will have the effect
of reducing the level of trading activity in our common stock and make it more
difficult for a holder of our common stock to sell his or her shares at the
desired price.
7
PART
II
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ITEM 7.
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MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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The
following discussion and analysis of our financial condition and results of
operations should be read with the consolidated financial statements and related
notes included elsewhere in this Report.
Prior
Release of Preliminary Unaudited Financial Results
In the
Company’s Current Report on Form 8-K filed with the Commission on April 23, 2010
(the “Prior 8-K”), the Company released certain preliminary unaudited financial
results for the quarter and year ended March 31, 2010 (the “Preliminary
Results”). One of the transactions contributing to these previously reported
results involved entering into a Strategic Alliance Agreement with C$ cMoney,
Inc. (“C$Money”) on March 27, 2010 pursuant to which the Company sold a license
to C$Money to use the Company’s Clearingworks software and agreed to issue to
C$Money five-year warrants with an exercise price of $0.45 per share.
The total consideration for these transactions (the “C$Money Transactions”) was
$1,000,000 and was payabale on or before April 12, 2010. The warrants were
valued at approximately $187,002. As a result, we planned to record the effect
of the C$Money Transactions in the quarter ended March 31, 2010 by recording a
$1,000,000 receivable and recognizing $812,998 of license fee revenue and
$187,002 as additional paid in capital. However as of the date of this Report,
the $1,000,000 payment has not been received. Subsequent to the issuance of the
Prior 8-K, the Company determined that it is not able to record the effects of
the C$Money Transactions in the quarter ended March 31, 2010 and
expects to record the effects of the C$Money Transactions in fiscal 2011. As a
result, the audited financial results for the quarter and year ended March 31,
2010 reported herein differ from the Preliminary Results. Specifically, the
Company’s revenue, operating income and net income for the quarter and year
ended March 31, 2010 is $812,998 less than previously reported and the Company’s
stockholders’ equity at March 31, 2010, is $1,000,000 less than previously
reported.
Restatement
As more
fully discussed in Note 10 of our financial statements, we have restated our
previously issued financial statements for fiscal years 2007, 2008 and 2009 and
the related quarters within those fiscal years. The discussion and
analysis (MD&A) reflect these adjustments and should be read in conjunction
with the financial statements and footnotes in Item 8 of this Report. See also “
Item 9B. Other
Information .”
As more
fully discussed in Note 11 of our financial statements, on January 21, 2011, our
management determined that the Company’s recognition of license fee revenue
associated with the License sold in March 2010 when the license agreement
was executed and the software was provided to the customer was done in
error. In November 2010, the Company entered into a separate service
agreement with the customer. However, the original accounting did not
consider the impact of essential services from that agreement which are common
for such software to meet the customer’s intended use. Therefore, the
Company has determined that the software license fee revenue should have been
recognized over the period the professional services are rendered. As a result,
the license fee was fully deferred and will be
recognized over the period the professional services are rendered, which
commenced in the third quarter of fiscal 2011.
To
reflect this correction, we restated the financial statements as of March 31,
2010. The restatement had no impact on prior periods.
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 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 the valuation of our intangible assets, 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.
8
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
The
Company recognizes revenues associated with its software products in accordance
with the provisions of the Financial Accounting Standard Board (“FASB”)
Accounting Standards Codification (“ASC”) Topic No. 985 – 605, “Software Revenue
Recognition”.
The
Company licenses its software on a transactional or a subscription fee basis. 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 that are
essential to the functionality of the software are provided in connection with
the installation of the software licensed, revenue is recognized when these
services have been provided on a percentage of completion basis.
In
certain instances, we license our software products under non-exclusive,
non-transferable license agreements that involve services essential to the
functionality of the software. License revenue is recognized when
services have been provided on the percentage of completion basis.
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.
In
certain instances, the Company enters into arrangements that include multiple
elements, where fees are allocated to the various elements based on vendor
specific objective evidence of fair value.
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 November 14, 2009, the Company 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
November 14, 2009, 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 November 14, 2009, the Company 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 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.
9
In order
to conform to the current application adopted in September of 2009, the Company
reclassified a net of $118,229 from operating expenses to cost of sales for the
quarter ended June 30, 2009 and the year ended March 31, 2010. 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, a net of $176,725 for the
quarter ended December 31, 2008, $194,759 for the quarter ended March 31, 2009
and a total net of $725,803 from operating expenses to cost of sales for the
year ended March 31, 2009.
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
receivables. We evaluate our accounts receivable on a regular basis for the
ability to collect and provide for an allowance for potential credit losses as
deemed necessary.
Two of
our customers, the Federal Reserve Bank of Cleveland and American Express,
accounted for 61% and 11% respectively, of our net revenue for the year ended
March 31, 2010. Three of our customers, American Express, the Federal Reserve
Bank of Cleveland, and Regulus, accounted for 47%, 22%, and 9%, respectively, of
our net revenue for the year ended March 31, 2009.
At March
31, 2010, amounts due from two of our customers, the Federal Reserve Bank of
Cleveland and Regulus, accounted for 71% and 14%, respectively, of accounts
receivable than outstanding.
At March
31, 2009, amounts due from four of our customers, the Federal Reserve Bank of
Cleveland, American Express, Inc., Fairfax Imaging, Inc., and Regulus, accounts
for 25%, 19%, 15% and 15%, respectively, of accounts receivable then
outstanding.
Results
of Operations
The
results of operations reflected in this discussion include the operations of US
Dataworks for the years ended March 31, 2010 and March 31, 2009.
Revenue
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.
|
For year
Ended
March 31,
|
||||||||||||
|
2010
|
2009
|
Change
|
||||||||||
|
(In
000’s)
|
||||||||||||
|
Software
licensing revenues
|
$
|
31
|
$
|
246
|
(87.3
|
)%
|
||||||
|
Software
transactional revenues
|
2,026
|
2,158
|
(6.1
|
)%
|
||||||||
|
Software
maintenance revenues
|
820
|
892
|
(8.1
|
)%
|
||||||||
|
Professional
service revenues
|
5,055
|
4,701
|
7.5
|
%
|
||||||||
|
Total
revenues
|
$
|
7,931
|
$
|
7,997
|
(.8)
|
%
|
||||||
The
decrease in transactional revenue was primarily attributable to the loss of two
customers one of whom chose to take the processing of their items in-house. The
decrease in licensing revenue was due to market conditions surrounding the
addition of new customers and the timing of when license fees and related
services are recognized. The increase in professional service revenue
was primarily attributable to the ongoing consulting agreement with the Federal
Reserve Bank of Cleveland.
Cost
of Sales
Cost of
sales principally include the costs of our personnel who perform the services
associated with our software maintenance, support, training and installation
activities, and the cost of third party software sold in conjunction with
licenses of our software to convert electronic data into acceptable formats
utilized by the Nation’s banking system. Total cost of sales decreased by
$62,704, or 2.2%, from $2,885,383, as adjusted for the change in application of
accounting policy in fiscal 2009 to $2,822,679 in fiscal 2010. The decrease in
cost of sales is due to a decrease in labor costs of $50,000, a decrease in
outside consultants’ labor costs of $72,000 offset by an increase of $59,000 in
third party software purchased for resale to our customers.
10
Operating
Expenses
Total
operating expenses increased by $354,426, or 8.0%, as adjusted for the change in
application of accounting policy, from $4,431,625 in
fiscal 2009 to $4,786,051 in fiscal 2010.
General
and administrative expenses increased $1,955 from $2,801,265, as adjusted for
the change in application of accounting policy, for the year ended March 31,
2009 to $2,803,220 for the year ended March 31, 2010. The increase was
attributable to a $47,000 increase in payroll expenses, a $36,000 increase in
computer hardware expense, a $21,000 increase in office expense, a $245,000
increase in outside consultants expense, a $44,000 increase in director fees,
and a $11,000 increase in telephone expense. These increases were offset by
decreases in legal expenses of $172,000, accounting fees of $19,000, stock-based
compensation of $68,000, salary expense of $90,000 and various other expenses
including dues and subscriptions, licenses, rent, and travel totaling
$53,000.
Sales and
Marketing expenses increased $345,861 from $601,340, as adjusted for the change
in application of accounting policy, for the year ended March 31, 2009 to
$947,201 for the year ended March 31, 2010. The increase is attributable to an
increase in personnel cost of $264,000, a $75,000 increase in travel and meal
expense, and a $7,000 increase in trade show expense and exhibits.
Research
and development expenses increased $44,979 from $841,577, as adjusted for the
change in application of accounting policy, for the year ended March 31, 2009 to
$886,556 for the year ended March 31, 2010. The increase is primarily associated
with an increase of $31,000 associated with salary expense, an increase of
$11,000 in outside consultants and a $3,000 increase in travel
expense.
Our
depreciation and amortization expense decreased $38,369 from $187,443 for the
year ended March 31, 2009 to $149,074 for the year ended March 31, 2010. This
decrease is attributable to a number of our property and equipment items
attaining a fully depreciated state during the past fiscal year.
Our
headcount at March 31, 2010 was 36 as compared to 35 at March 31,
2009.
Other
Income (Expense)
Total
other income (expense), including interest expense and financing costs,
decreased $1,759,243, from an expense of $2,701,432 in fiscal 2009 to an expense
of $942,189 in fiscal 2010. The decrease is principally due to the $2,534,210 in
interest expense related to the convertible promissory notes which were
refinanced in fiscal year 2009, and a $106,000 decrease in financing costs,
offset by an increase in interest expense of $189,000, an absence of derivative
income of $621,000 as compared to the prior year and a reduction in interest
earned of $71,000 as compared to the prior year.
Net
Loss
Net loss
decreased by $1,402,231, or 69.3%, from a net loss of $2,021,452 in fiscal 2009
to a net loss of $619,221 in fiscal 2010.
Liquidity
and Capital Resources
Because
of our ability to maintain revenue while at the same time reducing general
and administrative expenses, we experienced positive cash flow from operations
in fiscal years 2010 and in 2009. During the fourth quarter of fiscal year 2010,
we obtained a three-year term loan and restructured our notes payable-related
party such that $972,222 was due in 35 monthly installments
of $27,778 and $3,092,245 is due January 1, 2014.
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.
11
Cash and
cash equivalents increased by $40,679 from $403,863 at March 31, 2009 to
$444,542 at March 31, 2010. Cash provided by operating activities was
$290,252 in fiscal 2010 as compared to $279,446 in fiscal 2009.
Cash used
for investing activities for fiscal 2009 and 2010 consisted of the purchase of
property and equipment totaling $14,538 and $13,086, respectively.
Financing
activities used net cash of $236,487 in fiscal 2010 and included $1,000,000 in
proceeds from a note payable with Silicon Valley Bank, offset by $1,111,255 in
repayment of related party notes, $27,778 in repayment of the Silicon Valley
Bank note, and $35,276 in notes payable to a vendor.
Financing
activities used net cash of $764,438 in fiscal 2009, and included $3,703,500 in
proceeds from a related party loan, offset by $4,000,000 repayment of
convertible promissory notes, $432,659 in deferred financing costs and $35,279
in notes payable to a vendor.
We
believe we currently have adequate capital resources to fund our anticipated
cash needs through March 31, 2011. 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 raise 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.
Our
contractual obligations, which are described elsewhere in our financial
statements, have been summarized in the table below:
|
Payments
Due in fiscal year
|
||||||||||||||||||||
|
Contractual Obligations
|
Balance as of
March 31, 2010
|
2011
|
2012
|
2013
|
2014
|
|||||||||||||||
|
Office
Lease
|
$
|
825,194
|
$
|
350,747
|
$
|
355,444
|
$
|
119,003
|
||||||||||||
|
Notes
to Insiders
|
$
|
3,092,245
|
$
|
3,092,245
|
||||||||||||||||
|
Notes
Payable
|
$
|
972,222
|
$
|
333,333
|
$
|
333,333
|
$
|
305,556
|
||||||||||||
|
Total
|
$
|
4,889,661
|
$
|
684,080
|
$
|
688,777
|
$
|
424,559
|
$
|
3,092,245
|
||||||||||
Recently Issued Accounting
Pronouncements
In June
2009, the FASB issued Statement No. 168, The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles, a
replacement of FASB Statement No. 162 (“the Codification”). The
Codification, which was launched on July 1, 2009, became the single source
of authoritative non-governmental U.S. generally accepted accounting principles
(“GAAP”), superseding various existing authoritative accounting pronouncements.
The Codification is effective for financial statements issued for interim and
annual periods ending after September 15, 2009. The adoption of the
Codification had no significant impact on the Company’s financial
statements.
Fair Value Measurements: In
August 2009, the FASB issued Accounting Standards Update (“ASU”)
No. 2009-05, Measuring
Liabilities at Fair Value (“ASU 2009-05”). ASU 2009-05
provides clarification that in circumstances in which a quoted price in an
active market for the identical liability is not available, a reporting entity
is required to measure fair value of such liability using one or more of the
techniques prescribed by the update. ASU 2009-05 is effective for the first
reporting period beginning after issuance. There was no change to our financial
statements due to the implementation of this guidance.
Revenue Recognition: In
October 2009, the FASB issued ASU No. 2009-13, Revenue Recognition
(Topic 605)—Multiple Deliverable Revenue Arrangements
(“ASU 2009-13”). ASU 2009-13 eliminates the residual method of
allocation and requires the relative selling price method when allocating
deliverables of a multiple-deliverable revenue arrangement. The determination of
the selling price for each deliverable requires the use of a hierarchy designed
to maximize the use of available objective evidence, including VSOE, third party
evidence of selling price (“TPE”), or estimated selling price
(“ESP”).
12
In
October 2009, the FASB also issued ASU No. 2009-14, Software (Topic 985)—Certain Revenue
Arrangements That Include Software Elements (“ASU 2009-14”).
ASU 2009-14 excludes tangible products containing software and non-software
components that function together to deliver the product’s essential
functionality from the scope of ASC 605-985, Software-Revenue
Recognition .
ASU
2009-13 and ASU 2009-14 are effective prospectively for revenue arrangements
entered into or materially modified in fiscal years beginning on or after
June 15, 2010, and must be adopted in the same period using the same
transition method. If adoption is elected in a period other than the beginning
of a fiscal year, the amendments in these standards must be applied
retrospectively to the beginning of the fiscal year. Full retrospective
application of these amendments to prior fiscal years is optional. Early
adoption of these standards may be elected. We are currently evaluating the
impact of these new accounting standards on our financial
statements.
In
January 2010, the FASB issued ASU No. 2010-06, Fair Value Measurements and
Disclosures (Topic 820): Improving Disclosures about Fair Value
Measurements (“ASU 2010-06”). Reporting entities will have to
provide information about movements of assets among Levels 1 and 2; and a
reconciliation of purchases, sales, issuance, and settlements of activity valued
with a Level 3 method, of the three-tier fair value hierarchy established by
SFAS No. 157, Fair Value Measurements (ASC 820). The ASU 2010-06 also
clarifies the existing guidance to require fair value measurement disclosures
for each class of assets and liabilities. ASU 2010-06 is effective for interim
and annual reporting periods beginning after December 15, 2009 for Level 1
and 2 disclosure requirements and after December 15, 2010 for Level 3
disclosure requirements. Management does not expect this pronouncement to have a
material effect to the financial statements.
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
US
DATAWORKS, INC.
TABLE
OF CONTENTS
|
Page
|
||
|
Report
of Independent Registered Public Accounting Firm
|
14
|
|
|
Financial
Statements:
|
||
|
Balance
Sheets as of March 31, 2010 and 2009
|
15
|
|
|
Statements
of Operations for the years ended March 31, 2010 and 2009
|
16
|
|
|
Statements
of Stockholders’ Equity for the years ended March 31, 2010 and
2009
|
17
|
|
|
Statements
of Cash Flows for the years ended March 31, 2010 and 2009
|
18
|
|
|
Notes
to Financial Statements
|
19
|
13
Report
of Independent Registered Public Accounting Firm
Board
of Directors and Stockholders
US
Dataworks, Inc.
We have
audited the accompanying balance sheets of US Dataworks, Inc. (the “Company”) as
of March 31, 2010 and 2009, and the related statements of operations,
stockholders’ equity, and cash flows for each of the two years in the period
ended March 31, 2010. These financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of US Dataworks, Inc. as of March 31,
2010 and 2009, and the results of its operations and its cash flows for each of
the two years in the period ended March 31, 2010 in conformity with accounting
principles generally accepted in the United States of America.
As
discussed in Note 10 and Note 11 to the financial statements, the Company
restated its March 31, 2010, 2009, 2008, and 2007 financial
statements.
/s/ Ham,
Langston & Brezina, LLP
Houston,
Texas
June 29,
2010, including Note 10 to the financial statements and except for (i) the
“Revenue Recognition” and “Concentration of
Credit Risk” disclosure in Note 2, (ii) Note 7 and (iii) Note 11, as to which
the date is February 22, 2011.
14
US
DATAWORKS, INC.
BALANCE
SHEETS
|
March 31,
2010
(as
restated) (a)
|
March 31,
2009 (as
restated) (b)
|
|||||||
|
ASSETS
|
||||||||
|
Current
assets:
|
||||||||
|
Cash
and cash equivalents
|
$
|
444,542
|
$
|
403,863
|
||||
|
Accounts
receivable, trade
|
1,059,825
|
845,747
|
||||||
|
Prepaid
expenses and other current assets
|
307,653
|
186,578
|
||||||
|
Total
current assets
|
1,812,020
|
1,436,188
|
||||||
|
Property
and equipment, net
|
169,796
|
305,783
|
||||||
|
Goodwill,
net
|
4,020,698
|
4,020,698
|
||||||
|
Other
assets
|
90,835
|
194,359
|
||||||
|
Total
assets
|
$
|
6,093,349
|
$
|
5,957,028
|
||||
|
LIABILITIES AND STOCKHOLDERS’
EQUITY
|
||||||||
|
Current
liabilities:
|
||||||||
|
Current
portion of notes payable
|
$
|
350,972
|
$
|
35,279
|
||||
|
Deferred
revenue
|
781,330
|
223,688
|
||||||
|
Accounts
payable
|
235,077
|
247,132
|
||||||
|
Accrued
expenses
|
246,558
|
199,940
|
||||||
|
Interest
payable – related parties
|
30,162
|
38,336
|
||||||
|
Notes
payable – related parties
|
—
|
4,203,500
|
||||||
|
Total
current liabilities
|
1,644,099
|
4,947,875
|
||||||
|
Long
term Note Payable
|
638,889
|
17,639
|
||||||
|
Long
term Note Payable – Related Party, net unamortized discount of
$543,736
|
2,548,509
|
—
|
||||||
|
Total
long term liabilities
|
3,187,398
|
17,639
|
||||||
|
Total
liabilities
|
4,831,497
|
4,965,514
|
||||||
|
Commitments
and contingencies
|
||||||||
|
Stockholders’
equity:
|
||||||||
|
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 $376,312 and $334,841 in arrears as of March 31, 2010 and
2009, respectively
|
11
|
11
|
||||||
|
Common
stock, $0.0001 par value; 90,000,000 shares authorized; 33,103,951 and
32,730,870 shares issued and outstanding as of March 31, 2010 and 2009 ,
respectively
|
3,310
|
3,273
|
||||||
|
Additional
paid-in capital
|
66,369,315
|
65,479,793
|
||||||
|
Accumulated
deficit
|
(65,110,784
|
)
|
(64,491,563
|
)
|
||||
|
Total
stockholders’ equity
|
1,261,852
|
991,514
|
||||||
|
Total
liabilities and stockholders’ equity
|
$
|
6,093,349
|
$
|
5,957,028
|
||||
(a) Refer to Note 11 to the
financial statements.
(b) Refer to
Note 10 to the financial statements.
The
accompanying notes are an integral part of these financial
statements.
15
US
DATAWORKS, INC.
STATEMENTS
OF OPERATIONS
for
the years ended March 31, 2010 and 2009
|
2010
|
2009
|
|||||||
|
(as
restated) (a)
|
(as
restated) (b)
|
|||||||
|
Revenues:
|
||||||||
|
Software
licensing revenues
|
$
|
30,977
|
$
|
245,931
|
||||
|
Software
transactional revenues
|
2,025,794
|
2,158,409
|
||||||
|
Software
maintenance revenues
|
819,897
|
892,171
|
||||||
|
Professional
services revenues
|
5,055,030
|
4,700,476
|
||||||
|
Total
revenues
|
7,931,698
|
7,996,987
|
||||||
|
Cost
of Sales
|
2,822,679
|
2,885,383
|
||||||
|
Gross
Profit
|
5,109,019
|
5,111,604
|
||||||
|
Operating
expenses:
|
||||||||
|
Research
and development
|
886,556
|
841,577
|
||||||
|
Sales
and marketing
|
947,201
|
601,340
|
||||||
|
General
and administrative
|
2,803,220
|
2,801,265
|
||||||
|
Depreciation
and amortization
|
149,074
|
187,443
|
||||||
|
Total
operating expenses
|
4,786,051
|
4,431,625
|
||||||
|
Income
from operations
|
322,968
|
679,979
|
||||||
|
Other
income (expense):
|
||||||||
|
Financing
costs
|
(242,175
|
)
|
(348,210
|
)
|
||||
|
Interest
expense
|
(178,411
|
)
|
(2,712,621
|
)
|
||||
|
Interest
expense – related parties
|
(521,844
|
)
|
(333,137
|
)
|
||||
|
Other
income (expense)
|
241
|
71,255
|
||||||
|
Gain
on derivative liabilities
|
—
|
621,281
|
||||||
|
Total
other expense
|
(942,189
|
)
|
(2,701,432
|
)
|
||||
|
Income/loss
before provision for income taxes
|
(619,221
|
)
|
(2,021,453
|
)
|
||||
|
Provision
for income taxes
|
—
|
—
|
||||||
|
Net
loss
|
$
|
(619,221
|
)
|
$
|
(2,021,453
|
)
|
||
|
Basic
and diluted income (loss) per share
|
$
|
(0.02)
|
$
|
(0.06
|
)
|
|||
|
Basic
and diluted weighted-average shares outstanding
|
32,938,983
|
32,444,764
|
||||||
(a) Refer to Note 11 to the
financial statements.
(b) Refer to
Note 10 to the financial statements.
The
accompanying notes are an integral part of these financial
statements.
16
US
DATAWORKS, INC.
STATEMENTS
OF STOCKHOLDERS’ EQUITY
for
the years ended March 31, 2010 and 2009
|
Preferred Stock Convertible
Series B
|
Common Stock
|
Additional
Paid-In
Capital
|
Accumulated
Deficit
|
Total
|
||||||||||||||||||||||||
|
Shares
|
Amount
|
Shares
|
Amount
|
|||||||||||||||||||||||||
|
Balance,
March 31, 2008, as restated
|
109,933 | $ | 11 | 32,062,962 | $ | 3,206 | 65,157,893 | (62,470,110 | ) | 2,691,000 | ||||||||||||||||||
|
Stock
based compensation
|
— | — | 667,908 | 67 | 321,900 | — | 321,967 | |||||||||||||||||||||
|
Net
loss, as restated
|
— | — | — | — | — | (2,021,453 | ) | (2,021,453 | ) | |||||||||||||||||||
|
Balance
at March 31, 2009, as restated (b)
|
109,933 | $ | 11 | 32,730,870 | $ | 3,273 | 65,479,793 | (64,491,563 | ) | 991,514 | ||||||||||||||||||
|
Preferred Stock Convertible
Series B
|
Common Stock
|
Additional
Paid-In
Capital
|
Accumulated
Deficit
|
Total
|
||||||||||||||||||||||||
|
Shares
|
Amount
|
Shares
|
Amount
|
|||||||||||||||||||||||||
|
Balance,
March 31, 2009, as restated
|
109,933 | $ | 11 | 32,730,870 |
$
|
3,273 | 65,479,793 | (64,491,563 | ) | 991,514 | ||||||||||||||||||
|
Warrants
issued in exchange for note extension
|
— | — | — | — | 635,567 | — | 635,567 | |||||||||||||||||||||
|
Stock
based compensation
|
— | — | 373,081 | 37 | 253,955 | — | 253,992 | |||||||||||||||||||||
|
Net
loss, as restated
|
— | — | — | — | — | (619,221 | ) | (619,221 | ) | |||||||||||||||||||
|
Balance
at March 31, 2010, as restated (a)
|
109,933 | $ | 11 | 33,103,951 |
$
|
3,310 | 66,369,315 | (65,110,784 | ) | 1,261,852 | ||||||||||||||||||
(a) Refer to Note 11 to the financial statements.
(b) Refer to
Note 10 to the financial statements.
The
accompanying notes are an integral part of these financial
statements.
17
US
DATAWORKS, INC.
STATEMENTS
OF CASH FLOWS
for
the years ended March 31, 2010 and 2009
|
2010
|
2009
|
|||||||
|
(as restated) (a)
|
(as restated) (b)
|
|||||||
|
Cash
flows from operating activities:
|
||||||||
|
Net
loss from operating activities
|
$
|
(619,221
|
)
|
$
|
(2,021,453
|
)
|
||
|
Adjustments
to reconcile net income loss to net cash provided by operating
activities:
|
||||||||
|
Depreciation
and amortization of property and equipment
|
149,073
|
187,445
|
||||||
|
Amortization
of deferred financing costs
|
165,702
|
595,425
|
||||||
|
Amortization
of discount on notes payable
|
91,830
|
1,995,636
|
||||||
|
Stock
based compensation
|
253,991
|
321,967
|
||||||
|
Gain
on derivatives
|
—
|
(621,281
|
)
|
|||||
|
Changes
in operating assets and liabilities:
|
||||||||
|
Accounts
receivable
|
(214,078
|
)
|
10,514
|
|||||
|
Prepaid
expenses and other current assets
|
(121,075
|
)
|
(40,667
|
)
|
||||
|
Deferred
revenue
|
557,642
|
22,855
|
||||||
|
Accounts
payable
|
(12,055
|
)
|
(24,545
|
)
|
||||
|
Accrued
expenses
|
46,617
|
(166,598
|
)
|
|||||
|
Interest
payable – related party
|
(8,174
|
)
|
20,148
|
|||||
|
Net
cash provided by operating activities
|
290,252
|
279,446
|
||||||
|
Cash
flows used in investing activities:
|
||||||||
|
Purchase
of property and equipment
|
(13,086
|
)
|
(14,538
|
)
|
||||
|
Net
cash used in investing activities
|
(13,086
|
)
|
(14,538
|
)
|
||||
|
Cash
flows from financing activities:
|
||||||||
|
Proceeds
from related party note
|
—
|
3,703,500
|
||||||
|
Proceeds
from bank loan
|
1,000,000
|
—
|
||||||
|
Repayment
of note payable — related parties
|
(1,111,255
|
)
|
—
|
|||||
|
Repayment
of convertible promissory note
|
—
|
(4,000,000
|
)
|
|||||
|
Repayment
of note payable to bank
|
(27,778
|
)
|
—
|
|||||
|
Deferred
financing costs
|
(62,178
|
)
|
(432,659
|
)
|
||||
|
Payments
on equipment note payable
|
(35,276
|
)
|
(35,279
|
)
|
||||
|
Net
cash used in financing activities
|
(236,487
|
)
|
(764,438
|
)
|
||||
|
Net
(decrease) increase in cash and cash equivalents
|
40,679
|
(499,530
|
)
|
|||||
|
Cash
and cash equivalents, beginning of year
|
403,863
|
903,393
|
||||||
|
Cash
and cash equivalents, end of year
|
$
|
444,542
|
$
|
403,863
|
||||
|
Supplemental
disclosures of cash flow information
|
||||||||
|
Interest
paid
|
$
|
510,744
|
$
|
517,049
|
||||
|
Taxes
paid
|
$
|
—
|
$
|
—
|
||||
|
Non-cash
financing activities:
|
||||||||
|
Discount
upon restructuring of notes payable-related parties
|
$
|
635,567
|
$
|
—
|
||||
(a) Refer to Note 11 to the
financial statements.
(b) Refer to
Note 10 to the financial statements.
The
accompanying notes are an integral part of these financial
statements.
18
US
DATAWORKS INC.
NOTES
TO 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
|
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 Generally Accepted Accounting Principles (‘GAAP”) recognized by
the FASB to be applied by nongovernmental entities. Rules and interpretive
releases of the SEC under authority of federal securities laws are also sources
of authoritative 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 products in accordance
with the provisions of the Financial Accounting Standard Board (“FASB”)
Accounting Standards Codification (“ASC”) Topic No. 985 – 605, “Software Revenue
Recognition”.
The
Company licenses its software on a transactional or a subscription fee basis. 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 that are
essential to the functionality of the software are provided in connection with
the installation of the software licensed, revenue is recognized when these
services have been provided on a percentage of completion basis.
In
certain instances, we license our software products under non-exclusive,
non-transferable license agreements that involve services essential to the
functionality of the software. License revenue is recognized when
services have been provided on the percentage of completion basis.
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.
In
certain instances, the Company enters into arrangements that include multiple
elements, where fees are allocated to the various elements based on vendor
specific objective evidence of fair value.
19
US
DATAWORKS INC.
NOTES
TO FINANCIAL STATEMENTS
Cash and Cash
Equivalents
For the
purpose of the statements of cash flows, the Company considers all highly liquid
investments purchased with original maturities of three months or less to be
cash equivalents.
The
Company maintains cash deposits with a major bank that, from time-to-time, may
exceed federally insured limits; however the Company has not experienced any
losses on deposits.
Property and
Equipment
Property
and equipment are recorded at cost, less accumulated depreciation and
amortization. Depreciation and amortization are provided using the straight-line
method over estimated useful lives as follows:
|
Furniture
and fixtures
|
5
years
|
|
Telephone
equipment
|
5
to 10 years
|
|
Computer
equipment
|
5
years
|
|
Computer
software
|
5
years
|
|
Leasehold
improvements
|
Shorter
of initial lease period or
|
|
useful
life of asset
|
Maintenance
and minor replacements are charged to expense as incurred. Gains and losses on
disposals are included in the results of operations.
Impairment of Long-Lived
Assets
The
Company reviews its long-lived assets for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of the assets to future net cash flows
expected to be generated by the assets. If the assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount exceeds the fair value of the assets.
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 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 year ended March 31, 2010
and March 31, 2009.
Fair Value of Financial
Instruments
The
Company includes fair value information in the notes to financial statements
when the fair value of its financial instruments is different from book value.
When the book value approximates fair value, no additional disclosure is made.
Fair value estimates of financial instruments are based on relevant market
information and may be subjective in nature and involve uncertainties and
matters of significant judgment. The Company believes that the carrying value of
its assets and liabilities approximate fair value of such items. The Company
does not hold or issue financial instruments for trading
purposes.
20
US
DATAWORKS INC.
NOTES
TO FINANCIAL STATEMENTS
On April
1, 2008, the Company adopted SFAS No. 157 “Fair Value Measurements”
(“SFAS 157”), which is incorporated in ASC Topic No. 820 - 10, “Fair Value Measurements and
Disclosures ” .
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. 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, 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
March 31, 2010 and 2009, the Company had no assets or liabilities that were
marked to fair value under ASC Topic No. 820 - 10.
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 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 ASC Topic No. 815, they are required to be accounted for separately from
the debt instrument and recorded as derivative instrument
liabilities.
Stock
Options
The
Company follows the guidance cited in ASC Topic No. 718, “Compensation – Stock Compensation”,
( formerly SFAS 123R, Share-Based Payment ) to
account for its stock options. ASC Topic No. 18 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 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 ASC Topic No. 718, which
consists of stock-based compensation expense related to employee and director
stock options and restricted stock issuances, for the years ended March 31, 2010
and March 31, 2009 was $253,992, and $321,967 respectively, which consists of
stock-based compensation expense related to employee and director stock options
and restricted stock issuances.
21
US
DATAWORKS INC.
NOTES
TO FINANCIAL STATEMENTS
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 years
ended March 31, 2010 and March 31, 2009 is based on awards ultimately expected
to vest, it has been reduced for estimated forfeitures as per the tables
below.
Upon
adoption of ASC Topic No. 718, 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 years ended March 31, 2010 and March 31, 2009, as specified by
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 Year Ending
|
||||||||
|
March 31,
|
||||||||
|
2010
|
2009
|
|||||||
|
Risk-free
Interest Rate
|
|
0.90
|
%
|
|
2.46
|
%
|
||
|
Expected
Life of Options Granted
|
10 years
|
10 years
|
||||||
|
Expected
Volatility
|
208
|
%
|
189
|
%
|
||||
|
Expected
Dividend Yield
|
0
|
0
|
||||||
|
Expected
Forfeiture Rate
|
30
|
%
|
30
|
%
|
||||
As of
March 31, 2010, there was approximately $62,943 of total unrecognized
compensation cost related to non-vested share-based compensation arrangements,
which is expected to be recognized over a period of 3 years .
Warrants
Warrants
are valued using the lattice model using assumptions of market price at the time
of grant, annual volatility and likelihood of exercise. In determining the cost
of the warrants granted during the year ended March 31, 2010, the value
of each such warrant has been estimated on the date of grant and the
assumptions used in these calculations are summarized as
follows: Market price of stock of $0.23, volatility of 134%, that the
holders would exercise the warrants at maturity if the stock price was above the
exercise price and the holders would exercise the warrants as they become
exercisable at the target price of $.90 and lowering such target as the warrants
approached maturity.
Advertising
Expense
Advertising
costs are charged to expense as incurred. For the years ended March 31, 2010 and
2009, the Company recorded advertising expense of $131,050 and $124,314
respectively.
Income
Taxes
The
Company accounts for income taxes under the asset and liability method, which
requires the recognition of deferred tax assets and liabilities for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Under this method, deferred income taxes are
recognized for the tax consequences in future years of differences between the
tax bases of assets and liabilities and their financial reporting amounts at
each period-end based on enacted tax laws and statutory tax rates applicable to
the periods in which the differences are expected to affect taxable income.
Valuation allowances are established, when necessary, to reduce deferred tax
assets to the amount expected to be realized. The provision for income taxes, if
applicable, represents the tax payable for the period and the change during the
period in deferred tax assets and liabilities.
22
US
DATAWORKS INC.
NOTES
TO FINANCIAL STATEMENTS
In June
2006, FASB issued FIN 48, “ Accounting for Uncertainty in Income
Taxes an interpretation of FASB Statement No. 109”, which is incorporated
in ASC Topic No. 740, “Income
Taxes”, which clarifies the
accounting for uncertainty in income taxes recognized in financial statements in
accordance with FASB 109, “Accounting for Income
Taxes”. ASC Topic No. 740 prescribes a recognition threshold
and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return. As
of the fiscal year ended March 31, 2010 and 2009, the Company does not have any
uncertain tax position meeting the threshold prescribed by ASC Topic No.
740.
Income and Loss per
Share
The
Company calculates income and 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 similar
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):
|
Year Ended March 31,
|
||||||||
|
2010
|
2009
|
|||||||
|
Options
outstanding under the Company’s stock option plans
|
7,745,720
|
6,964,220
|
||||||
|
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
|
8,317,805
|
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 to one.
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
our customers, the Federal Reserve Bank of Cleveland and American Express,
accounted for 61% and 11%, respectively, of our net revenue for
the year ended March 31, 2010. Three of our customers, American Express, the
Federal Reserve Bank of Cleveland and Regulus, accounted for 47%, 22%, and 9%,
respectively, of our net revenue for the year ended March 31, 2009.
23
US
DATAWORKS INC.
NOTES
TO FINANCIAL STATEMENTS
At
March 31, 2010, amounts due from two of our customers, the Federal Reserve Bank
of Cleveland and Regulus, accounted 71% and 14%, respectively, of accounts
receivable then outstanding.
At March
31, 2009, amounts due from four of our customers, the Federal Reserve Bank of
Cleveland, American Express, Inc., Fairfax Imaging Inc., and Regulus, accounted
for 25%, 19%, 15%, and 15%, respectively, of Accounts Receivable then
outstanding.
Recently Issued Accounting
Pronouncements
Fair Value Measurements: In
August 2009, the FASB issued ASU No. 2009-05, Measuring Liabilities at Fair
Value (“ASU 2009-05”). ASU 2009-05 provides clarification
that in circumstances in which a quoted price in an active market for the
identical liability is not available, a reporting entity is required to measure
fair value of such liability using one or more of the techniques prescribed by
the update. ASU 2009-05 is effective for the first reporting period beginning
after issuance. There was no change to our financial statements due to the
implementation of this guidance.
In
January 2010, the FASB issued ASU No. 2010-06, Fair Value Measurements and
Disclosures (Topic 820): Improving Disclosures about Fair Value
Measurements (“ASU 2010-06”). Reporting entities will have to
provide information about movements of assets among Levels 1 and 2; and a
reconciliation of purchases, sales, issuance, and settlements of activity valued
with a Level 3 method, of the three-tier fair value hierarchy established by
SFAS No. 157, Fair Value Measurements (ASC 820). The ASU 2010-06 also
clarifies the existing guidance to require fair value measurement disclosures
for each class of assets and liabilities. ASU 2010-06 is effective for interim
and annual reporting periods beginning after December 15, 2009 for Level 1
and 2 disclosure requirements and after December 15, 2010 for Level 3
disclosure requirements. Management does not expect this pronouncement to have a
material effect to the financial statements.
Revenue Recognition: In
October 2009, the FASB issued ASU No. 2009-13, Revenue Recognition
(Topic 605)—Multiple Deliverable Revenue Arrangements
(“ASU 2009-13”). ASU 2009-13 eliminates the residual method of
allocation and requires the relative selling price method when allocating
deliverables of a multiple-deliverable revenue arrangement. The determination of
the selling price for each deliverable requires the use of a hierarchy designed
to maximize the use of available objective evidence, including VSOE, third party
evidence of selling price (“TPE”), or estimated selling price
(“ESP”).
In
October 2009, the FASB also issued ASU No. 2009-14, Software (Topic 985)—Certain Revenue
Arrangements That Include Software Elements (“ASU 2009-14”).
ASU 2009-14 excludes tangible products containing software and non-software
components that function together to deliver the product’s essential
functionality from the scope of ASC 605-985, Software-Revenue
Recognition .
ASU
2009-13 and ASU 2009-14 are effective prospectively for revenue arrangements
entered into or materially modified in fiscal years beginning on or after
June 15, 2010, and must be adopted in the same period using the same
transition method. If adoption is elected in a period other than the beginning
of a fiscal year, the amendments in these standards must be applied
retrospectively to the beginning of the fiscal year. Full retrospective
application of these amendments to prior fiscal years is optional. Early
adoption of these standards may be elected. We are currently evaluating the
impact of these new accounting standards on our financial
statements.
Reclassifications
Certain
prior year amounts were reclassified to conform to current year presentation.
Such reclassifications had no effect on the balance sheet, prior year net
income, or statement of cash flows .
24
US
DATAWORKS INC.
NOTES
TO FINANCIAL STATEMENTS
|
2010
|
2009
|
|||||||
|
Furniture
and fixtures
|
$
|
99,535
|
$
|
99,535
|
||||
|
Telephone
and office equipment
|
182,275
|
182,275
|
||||||
|
Computer
equipment
|
747,631
|
734,546
|
||||||
|
Computer
software
|
1,271,098
|
1,271,098
|
||||||
|
Leasehold
improvements
|
64,733
|
64,733
|
||||||
|
2,365,272
|
2,352,187
|
|||||||
|
Less
accumulated depreciation and amortization
|
(2,195,476
|
)
|
(2,046,404
|
)
|
||||
|
Total
|
$
|
169,796
|
$
|
305,783
|
||||
Depreciation
and amortization expense for the years ended March 31, 2010 and 2009 was
$149,074 and $187,443, respectively.
|
|
4.
|
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 was accounted
for as an embedded derivative in accordance with 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 (the “Redemption Refinance Notes”). The Redemption
Refinance Notes were purchased by the Company’s Chief Executive Officer and a
member of its Board of Directors (“Holders”). As originally issued, the
Redemption Refinance Notes bore interest at a rate of 12% per annum with
interest payments due in arrears monthly.
Pursuant
to the Redemption 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 Redemption 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 Redemption Refinance Notes
provide that the Holders may redeem all or a portion of the Redemption Refinance
Notes. As of December 31, 2009, the Company was in compliance with its debt
covenants.
The
Redemption 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 Redemption Refinance Notes.
Effective as of February 19, 2009, the Note Modification Agreements amended the
Redemption Refinance Notes as follows: (1) the maturity date of the Redemption
Refinance Notes was extended from August 13, 2009 to December 31, 2009; (2) the
annual interest rate on the Redemption 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 Redemption Refinance Notes by 3% of the original principal amount of the
Redemption 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.
25
US
DATAWORKS INC.
NOTES
TO FINANCIAL STATEMENTS
On May
20, 2009, the Company again entered into Note Modification Agreements with the
holders of the Redemption Refinance Notes that amended the Redemption 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
Redemption 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 Redemption Refinance Notes that amended the Redemption Refinance
Notes as follows: (1) the maturity date of the Redemption 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 Redemption 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 Redemption 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
Redemption Refinance Notes a fee of $50,000 in cash on July 1, 2009 and (ii)
issued to the holders of the Redemption 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 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 Redemption Refinance Notes. The amount amortized
during the year ended March 31, 2010, associated with the debt discount is
$232,674.
On
September 26, 2006, the Company entered into a note payable with its Chief
Executive Officer for $500,000. The note bore interest at the annual rate of
8.75%, was unsecured and was due September 25, 2007. On September 25, 2007, the
Company entered into a new note payable agreement that replaced the September
2006 note. As of September 30, 2009, the outstanding balance on this note
payable was $500,000 with the same terms as the September 2006 note (the “Other
Note”). As originally issued, the principal, together with any unpaid accrued
interest on the Other Note, was due and payable in full on demand on the earlier
of: (i) the full and complete satisfaction of the Prior Notes and (ii)
ninety-one (91) days following the expiration of the term of the Prior Notes,
unless such date was 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 Other 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 .
26
US
DATAWORKS INC.
NOTES
TO FINANCIAL STATEMENTS
On
February 9, 2010, concurrently with entering into a loan agreement with Silicon
Valley Bank (“SVB”) discussed below, the Company, John L. Nicholson, an outside
director of the Company, and Charles E. Ramey, the Chairman and CEO of the
Company, entered into a Loan Restructuring Agreement (the “Loan Restructuring
Agreement”) pursuant to which the debt represented by certain notes held by
Messrs. Nicholson and Ramey was reduced and restructured. Immediately prior to
entering into the Loan Restructuring Agreement, Mr. Nicholson held that certain
secured refinance note dated August 13, 2008 executed by the Company (one of the
Redemption Refinance Notes), as amended by those certain Note Modification
Agreements dated February 19, 2009, May 20, 2009, June 26, 2009 and December 18,
2009 (the “Nicholson Refinance Note”), which had an outstanding principal amount
of $2,718,401 immediately prior to entering into the Loan Restructuring
Agreement. As required by the Loan Restructuring Agreement, the Company made a
principal payment on the Nicholson Refinance Note of $423,401, thereby reducing
the outstanding principal balance on the Nicholson Refinance Note to $2,295,000.
In addition, the Loan Restructuring Agreement modified the Nicholson Refinance
Note as follows: (1) the maturity date of the Nicholson Refinance Note was
extended to January 1, 2014, (ii) the annual interest rate payable on the
Nicholson Refinance Note was reduced to twelve percent (12%) and will be reduced
further to ten percent (10%) in the event that the principal is reduced to
$1,905,000 or lower before the maturity date, (3) no principal payments are
required until the maturity date and (4) the Nicholson Refinance Note is
expressly subject to the terms and provisions of the Subordination Agreement
among SVB, Messrs. Nicholson and Ramey and the Company that was entered into on
February 9, 2010 (the “Subordination Agreement”), which agreement provides,
among other things, that no payments on the Nicholson Refinance Note other than
regular scheduled non-default interest payments are permitted without the
consent of SVB unless and until the Credit Facility is paid in full and
terminated.
Immediately
prior to entering into the Loan Restructuring Agreement, Mr. Ramey held that
certain secured refinance note dated August 13, 2008 executed by the Company
(one of the Redemption Refinance Notes), as amended by those certain Note
Modification Agreements dated February 19, 2009, May 20, 2009, June 26, 2009 and
December 18, 2009 (the “Ramey Refinance Note”), which had an outstanding
principal amount of $643,105 immediately prior to entering into the Loan
Restructuring Agreement. In addition, immediately prior to entering into the
Loan Restructuring Agreement, Mr. Ramey held that certain 8.75% Promissory Note
dated September 25, 2007 executed by the Company, as amended by those certain
Note Modification Agreements dated May 20, 2009 and June 26, 2009 (the “Second
Ramey Note”), which had an outstanding principal amount of $500,000 immediately
prior to entering into the Loan Restructuring Agreement. As required by the Loan
Restructuring Agreement, the Second Ramey Note was cancelled and the principal
owed thereunder was added to the principal balance owed under the Ramey
Refinance Note, resulting in the Ramey Refinance Note having an outstanding
principal amount of $1,143,105. As required by the Loan Restructuring Agreement,
the Company made a principal payment on the Ramey Refinance Note of $345,860,
thereby reducing the outstanding principal balance on the Ramey Refinance Note
to $792,245. In addition, the Loan Restructuring Agreement modified the Ramey
Refinance Note as follows: (1) the maturity date of the Ramey Refinance Note was
extended to January 1, 2014, (ii) the annual interest rate payable on the Ramey
Refinance Note was reduced to ten percent (10%) and (3) the Ramey Refinance Note
is expressly subject to the terms and provisions of the Subordination Agreement,
which agreement provides, among other things, that no payments on the Ramey
Refinance Note other than regular scheduled non-default interest payments are
permitted without the consent of SVB unless and until the Credit Facility is
paid in full and terminated.
In
consideration of entering into the Loan Restructuring Agreement, the Company
agreed to (i) pay to Mr. Nicholson a cash fee of $60,000, payable $36,000
immediately and $24,000 on or before June 30, 2010 and (ii) issue Mr. Nicholson
five-year warrants to purchase 1,484,358 shares of the Company’s common stock at
an exercise price of $0.43 per share issuable as follows: (i) warrants to
acquire 1,113,269 shares of the Company’s common stock to be issued immediately
and (ii) warrants to acquire 371,089 shares of the Company’s common stock to be
issued on April 1, 2010 provided that as of such date the Nicholson Refinance
Note has not been paid in full. The Company valued the warrants using a lattice
model based on a probability weighted discount cash flow model. Mr. Nicholson’s
warrants were valued at $217,759. In consideration of entering into the Loan
Restructuring Agreement, the Company agreed to (i) pay to Mr. Ramey a cash fee
of $30,843, payable $18,506 immediately and $12,337 on or before June 30, 2010
and (ii) issue Mr. Ramey five year warrants to purchase 665,642 shares of the
Company’s common stock at an exercise price of $0.43 per share, issuable as
follows: (i) warrants to acquire 499,232 shares of the Company’s common stock to
be issued immediately and (ii) warrants to acquire 166,410 shares of the
Company’s common stock to be issued on April 1, 2010 provided that as of such
date the Ramey Refinance Note has not been paid in full. The Company valued the
warrants using a lattice model based on a probability weighted discount cash
flow model. Mr. Ramey’s warrants were valued at $97,651.
|
|
5.
|
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 of $3,418. As of March 31, 2010 and 2009,
the outstanding balance on this note payable was $17,639 and $52,918
respectively.
27
US
DATAWORKS INC.
NOTES
TO FINANCIAL STATEMENTS
On
February 9, 2010, the Company entered into a Loan and Security Agreement (the
“Loan Agreement”) with Silicon Valley Bank (“SVB”) and related agreements and
documents providing for a senior credit facility comprised of a revolving line
of credit and a term loan (the “Credit Facility”). The initial maximum
availability under the revolving line of credit (the “Revolver”) is $250,000 and
increases to $1,000,000 on July 1, 2010. The maturity date of the Revolver is
February 8, 2011. The Revolver accrues interest at an annual rate equal to the
higher of (i) 1.25% above SVB’s prime rate and (ii) 5.25% and is payable
monthly. No principal payments are due on the Revolver until its maturity date.
Subject to the commitment limits described above, the Company can borrow up to
eighty percent (80%) of its eligible accounts receivable subject to a number of
exceptions. The Company will use the proceeds from the Revolver for general
corporate purposes. As of March 31, 2010, the Company had not borrowed any money
on the Revolver. The amount borrowed under the term loan (the “Term Loan”) is
$1,000,000. The maturity date of the Term Loan is February 9, 2013. The Term
Loan accrues interest at the fixed annual rate of 6.50% and is payable monthly.
Principal payments on the Term Loan will be made in thirty six equal monthly
installments. If an event of default occurs and is continuing, the interest
rates on the Revolver and the Term Loan will increase by 5.00% on an annualized
basis.
The
Credit Facility requires that the Company comply with two financial covenants.
The first such covenant requires that the Company maintain an “adjusted quick
ratio,” measured on the last day of each month, of not less than (i) 1.15 to
1.00 from the date of closing through March 31, 2010, (ii) 1.35 to 1.00 from
April 1, 2010 through June 30, 2010 and (iii) 1.50 to 1.00 after July 1, 2010,
with the “adjusted quick ratio” being defined as (i) cash and cash equivalents
plus the amount of eligible accounts receivable divided by (ii) current
liabilities minus deferred revenue minus the current portion of subordinated
debt. The second such covenant requires that the Company maintain a “fixed
charge coverage ratio,” measured on the last day of each month for the six (6)
months ended on such date, of not less than 1.40 to 1.00, with the “fixed charge
coverage ratio” being defined as (i) EBITDA plus non-cash stock based
compensation minus cash taxes minus non-financed capital expenditures for the
six months ended on the measurement date divided by (ii) the principal and
interest payments owed by the Company with respect to all of its indebtedness
over the six months ended on the measurement date; provided, however, that the
principal and interest payments owed by the Company during the first six months
following the closing date will be annualized and divided by two. As of March
31, 2010 the company was in compliance with all of its financial
covenants.
|
|
6.
|
Commitments
and Contingencies
|
Leases
The
Company leases an office in Sugar Land, Texas under an operating lease agreement
that expires in July 2012. Rent expense was $377,781 and $388,226 for the years
ended March 31, 2010 and 2009, respectively.
Future
minimum lease payments under operating leases at March 31, 2010 were as
follows:
|
Year Ended
March 31,
|
Amount
|
|||
|
2011
|
$
|
350,747
|
||
|
2012
|
355,444
|
|||
|
2013
|
119,003
|
|||
|
$
|
825,194
|
|||
Notes Payable and Notes
Payable- Related party
Future
minimum payments under our loan agreements at March 31, 2010 were as
follows:
|
Year Ended
March 31,
|
Amount
|
|||
|
2011
|
$
|
333,333
|
||
|
2012
|
333,333
|
|||
|
2013
|
305,556
|
|||
|
2014
|
3,092,245
|
|||
|
$
|
4,064,467
|
|||
28
US
DATAWORKS INC.
NOTES
TO FINANCIAL STATEMENTS
|
|
7.
|
Income
Taxes
|
The tax
effects of temporary differences that give rise to deferred taxes at March 31,
2010 and 2009 were as follows:
|
2010
|
2009
|
|||||||
|
Deferred
tax assets:
|
||||||||
|
United
States federal net operating loss carryforwards
|
$
|
10,064,456
|
$
|
10,297,779
|
||||
|
Effect
of state net operating loss carryforwards
|
40,497
|
41,014
|
||||||
|
Accrued
liabilities
|
51,129
|
26,660
|
||||||
|
Basis
of property & equipment
|
(5,448
|
)
|
29,772
|
|||||
|
Deferred
Revenue
|
265,652
|
76,054
|
||||||
|
Total
deferred tax assets
|
10,416,286
|
10,471,279
|
||||||
|
Valuation
allowance
|
(10,416,286
|
)
|
(10,471,279
|
)
|
||||
|
Net
deferred tax assets
|
$
|
—
|
$
|
—
|
||||
The
valuation allowance decreased by $ 54,993 during the year ended March 31, 2010
and increased by $98,924 during the year ended March 31, 2009. At March 31,
2010, the Company had approximately $29,601,340 of federal net operating loss
carryforwards attributable to losses incurred since the Company’s inception that
may be offset against future taxable income through 2028. Because United States
tax laws and the tax laws of most states limit the time during which NOL
carryforwards may be applied against future taxable income, the Company may be
unable to take full advantage of its NOL for federal income tax purposes should
the Company generate taxable income. Based on such limitations, the Company has
significant NOL carryforwards for which realization of tax benefits is
uncertain. Further, the benefit from utilization of NOL carryforwards could be
subject to limitations if material ownership changes occur in the Company. For
the years ended March 31, 2010 and 2009, the Company recognized revisions to
deferred tax assets with offsetting revisions to the valuation allowance that
resulted in an insignificant net change in the aggregate of total deferred tax
assets less the valuation allowance.
Income
tax expense differs from the amounts computed by applying the United States
federal income tax rate of 34% to loss before income taxes as
follows:
|
2010
|
2009
|
|||||||
|
Income
tax benefit at federal statutory rate
|
34.0
|
%
|
34.0
|
%
|
||||
|
Non-deductible
interest expense from beneficial conversion feature and issuance of common
stock and stock warrants
|
(455.5
|
)
|
(34.2
|
)
|
||||
|
Non-deductible
compensation and other expense arising from issuance of common stock and
stock warrants
|
(449.3
|
)
|
(4.9
|
)
|
||||
|
Utilization
of net operating loss
|
1056.2
|
—
|
||||||
|
Non-Taxable
gain on derivative liabilities
|
—
|
10.6
|
||||||
|
Revision
to net operating loss carryforward
|
(161.3
|
)
|
(3.5
|
)
|
||||
|
Change
in the beginning-of-the-year balance of the valuation allowance for
deferred tax assets allocated to income tax expense
|
(19.4
|
)
|
1.7
|
|||||
|
Other
|
(4.7
|
)
|
(3.7
|
)
|
||||
|
Total
|
—
|
%
|
—
|
%
|
||||
29
US
DATAWORKS INC.
NOTES
TO FINANCIAL STATEMENTS
|
|
8.
|
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 shares authorized, 109,933 shares issued and outstanding of
$0.0001 par value convertible Series B preferred 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, as and when declared by the Board of
Directors. The Series B is convertible upon issuance into common stock at $3.75
per share. 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.
At March
31, 2010 and March 31, 2009 there were accumulated, undeclared dividends in
arrears of $376,312 and $334,841, respectively.
Common Stock and
Warrants
During
the year ended March 31, 2010, the Company completed the following
:
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 (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
$29,500 related to these grants for the year ended March 31, 2010. The shares
were granted under the 2000 Plan.
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), 28,498 shares of common
stock (at $0.30 per share based on the closing price of the stock on the grant
date), 28,710 shares of common stock (at $0.29 per share based on the
closing price of the stock on the grant date) and 34,688 shares of common stock
(at $0.24 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 $33,975 related to these grants for the year ended
March 31, 2010. The shares were granted under the 2000 Plan.
30
US
DATAWORKS INC.
NOTES
TO FINANCIAL STATEMENTS
On June
26, 2009 the Company reached an agreement with the holders of certain notes
payable to, among other things, extend the due date of the notes payable.
In connection with this extension, the Company issued to John L Nicholson, an
independent director of the Company and a holder of one of the notes payable,
1,500,000 warrants to purchase the Company’s common stock at an exercise price
of $0.43 per share. At the same time, the Company issued to Charles E. Ramey,
the Chief Executive Officer and a holder of one of the notes payable, 354,141
warrants to purchase the Company’s common stock at an exercise price of
$0.43 per share. (See further discussion under Footnote 4, Notes Payable –
Related Parties)
On
February 9, 2010 the Company reached an agreement with the holders of these
notes payable to restructure their loans to, among other things, further extend
the due date on the notes payable. In connection with this extension, the
Company issued to John L Nicholson, an independent director of the Company and a
holder of one of the notes payable, 1,484,358 warrants to purchase the Company’s
common stock at an exercise price of $0.43 per share. At the same time, the
Company issued to Charles E. Ramey, the Chief Executive Officer and a holder of
one of the notes payable, 665,642 warrants to purchase the Company’s common
stock at an exercise price of $0.43 per share. (See further discussion under
Footnote 4, Notes Payable – Related Parties)
During
the year ended March 31, 2009, the Company completed the following:
The
Company granted 50,000 shares of restricted common stock at $0.12 per
share, 50,000 shares of restricted common stock at $0.22, and 50,000 shares
of restricted common stock at $0.15 based on the closing price of the common
stock on the respective grant dates, to the President and Chief Operating
Officer pursuant to his employment agreement, and 55,555 shares valued at $0.12
per share, 80,000 shares valued at $0.22, and 82,353 shares at $0.15 based on
the closing price of the common stock on the respective grant dates, to an
independent member of the Board of Directors associated with his service as a
member of the Company’s Executive Committee. The Company expensed $58,995
related to these grants for the year ended March 31, 2009. The shares were
granted under the 2000 Plan.
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 2000 Plan to increase the
maximum aggregate number of shares available for issuance thereunder from
6,000,000 to 7,500,000. The 2000 Plan has an evergreen provision which allows
the Company to increase the available shares under the 2000 Plan on April 1 of
every year by 500,000 shares. As of March 31, 2010, this total number of shares
issuable under the 2000 Plan was 9,000,000 shares. Under the 2000 Plan, 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 years ended March 31, 2010 and 2009, the Company granted 800,000 and 483,335
stock options, respectively, to certain employees that may be exercised at
prices ranging between $0.20 and $0.28, and between $0.26 and $0.26,
respectively.
31
US
DATAWORKS INC.
NOTES
TO FINANCIAL STATEMENTS
The
following table summarizes certain information relative to stock
options:
|
2000 Stock Option Plan
|
Outside of Plan
|
|||||||||||||||
|
Shares
|
Weighted
Average
Exercise
Price
|
Shares
|
Weighted
Average
Exercise
Price
|
|||||||||||||
|
Outstanding,
March 31, 2008
|
7,521,349
|
$
|
0.704
|
1,160,000
|
$
|
1.02
|
||||||||||
|
Granted
|
483,335
|
$
|
0.26
|
—
|
$
|
—
|
||||||||||
|
Forfeited/cancelled
|
(1,040,464
|
)
|
$
|
0.58
|
—
|
$
|
—
|
|||||||||
|
Outstanding,
March 31, 2009
|
6,964,220
|
$
|
0.72
|
1,160,000
|
$
|
1.02
|
||||||||||
|
Granted
|
800,000
|
$
|
0.24
|
—
|
$
|
—
|
||||||||||
|
Forfeited/cancelled
|
(18,500
|
)
|
$
|
0.56
|
—
|
$
|
—
|
|||||||||
|
Outstanding,
March 31, 2010
|
7,745,720
|
$
|
0.64
|
1,160,000
|
$
|
1.02
|
||||||||||
|
Exercisable,
March 31, 2010
|
6,765,724
|
$
|
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 March 31, 2010 were 5.69 years and $0.69,
respectively. The exercise prices for the options outstanding at March 31, 2010
ranged from $0.15 to $6.25, and information relating to these options is as
follows:
|
Range of
Exercise
Prices
|
Stock
Options
Outstanding
|
Stock
Options
Exercisable
|
Weighted-
Average
Remaining
Contractual
Life
|
Weighted
-Average
Exercise
Price
|
Weighted-
Average
Exercise
Price of
Options
Exercisable
|
||||||||||||
|
$0.15
- 0.80
|
6,460,384
|
5,480,388
|
6.24
years
|
$
|
0.49
|
$
|
0.53
|
||||||||||
|
$0.81
- 1.35
|
1,734,836
|
1,734,836
|
4.37
years
|
$
|
0.93
|
$
|
0.93
|
||||||||||
|
$1.36
- 6.25
|
710,500
|
710,500
|
3.89
years
|
$
|
1.88
|
$
|
1.88
|
||||||||||
|
8,905,720
|
7,925,724
|
||||||||||||||||
32
US
DATAWORKS INC.
NOTES
TO FINANCIAL STATEMENTS
|
9.
|
Liquidity
|
Because
of our increase in revenue, combined with a decrease in general and
administrative expenses, we experienced positive cash flow from operations in
fiscal years 2010 and 2009. During the fourth quarter of fiscal year 2010, we
restructured our notes payable-related party such that $972,222 was due in 35
monthly installments of $27,778 and $3,092,245 is due January 1,
2014.
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.
|
10.
|
Restatement
of Financial Statements
|
On June
25, 2010, the Company’s Audit Committee concluded that there were certain errors
in the Company’s previously filed financial statements for the Company’s fiscal
years ended March 31, 2007, 2008 and 2009. These errors related to the
Company’s accounting for stock option expense. Specifically, the error was
caused by using a three-year life rather than a ten-year life in the expense
calculations for options granted during those time periods. To correct
these errors, the Company has restated these financial statements.
As a
result of the restatement, originally reported net loss for fiscal years 2007,
2008 and 2009 was increased by $224,228, or $0.01 per share, $154,644, or $0.00
per share, and $37,140, or $0.00 per share, respectively. These increases
in net loss also correspondingly increased the additional paid in capital for
those time periods by the same amounts. The quarterly breakdown of net
loss (and additional paid in capital) increases for fiscal year 2007 are
$55,346, $56,192, $56,289 and $56,401 for the first, second, third and fourth
quarters, respectively. The quarterly breakdown of net loss (and
additional paid in capital) increases for fiscal year 2008 are $32,406, $78,627,
$21,995 and $21,616 for first, second, third and fourth quarters,
respectively. The quarterly breakdown of net loss (and additional
paid in capital) increases for fiscal year 2009 are $14,234, $12,189, $5,761 and
$4,957 for first, second, third and fourth quarters, respectively.
The
following tables reflect the balance sheet, income statement, and cash flow as
originally reported to amounts as restated for the applicable time
periods.
33
US
DATAWORKS INC.
NOTES
TO FINANCIAL STATEMENTS
|
March 31, 2007
|
||||||||||||
|
As Originally
Reported
|
Adjustments
|
Restated
|
||||||||||
|
Balance
sheet
|
||||||||||||
|
Additional
paid in capital
|
$
|
64,056,135
|
$
|
224,228
|
$
|
64,280,363
|
||||||
|
Accumulated
deficit
|
(50,416,347
|
)
|
(224,228
|
)
|
(50,640,575
|
)
|
||||||
|
Stockholders
equity
|
13,643,583
|
-
|
13,643,583
|
|||||||||
|
Income
Statement
|
||||||||||||
|
Total
operating expenses
|
7,175,338
|
224,228
|
7,399,566
|
|||||||||
|
Loss
from operations
|
(2,964,827
|
)
|
(224,228
|
)
|
(3,189,055
|
)
|
||||||
|
Net
loss
|
(3,306,010
|
)
|
(224,228
|
)
|
(3,530,238
|
)
|
||||||
|
Net
loss per common share; basic and diluted
|
(0.11
|
)
|
(0.01
|
)
|
(0.12
|
)
|
||||||
|
Cash
flow
|
||||||||||||
|
Net
loss from continuing operations
|
(3,306,009
|
)
|
(224,228
|
)
|
(3,530,237
|
)
|
||||||
|
Stock
based compensation
|
647,386
|
224,228
|
871,614
|
|||||||||
|
Net
cash flows used in operating activities
|
(886,264
|
)
|
(886,264
|
)
|
||||||||
|
March 31, 2008
|
||||||||||||
|
As Originally
Reported
|
Adjustments
|
Restated
|
||||||||||
|
Balance
sheet
|
||||||||||||
|
Additional
paid in capital
|
64,778,977
|
378,872
|
65,157,849
|
|||||||||
|
Accumulated
deficit
|
(62,091,238
|
)
|
(378,872
|
)
|
(62,470,110
|
)
|
||||||
|
Stockholders
equity
|
2,691,000
|
-
|
2,691,000
|
|||||||||
|
Income
Statement
|
||||||||||||
|
Total
operating expenses
|
16,438,670
|
154,644
|
16,593,314
|
|||||||||
|
Loss
from operations
|
(12,685,633
|
)
|
(154,644
|
)
|
(12,840,277
|
)
|
||||||
|
Net
loss
|
(11,674,892
|
)
|
(154,644
|
)
|
(11,829,536
|
)
|
||||||
|
Net
loss per common share; basic and diluted
|
(0.37
|
)
|
-
|
(0.37
|
)
|
|||||||
|
Cash
flow
|
||||||||||||
|
Net
loss from continuing operations
|
(11,674,891
|
)
|
(154,644
|
)
|
(11,829,535
|
)
|
||||||
|
Stock
based compensation
|
337,720
|
154,644
|
492,364
|
|||||||||
|
Net
cash flows used in operating activities
|
(2,741,323
|
)
|
(2,741,323
|
)
|
||||||||
34
US
DATAWORKS INC.
NOTES
TO FINANCIAL STATEMENTS
|
March 31, 2009
|
||||||||||||
|
As Originally
Reported
|
Adjustments
|
Restated
|
||||||||||
|
Balance sheet
|
||||||||||||
|
Additional
paid in capital
|
$
|
65,063,781
|
$
|
416,013
|
$
|
65,479,793
|
||||||
|
Accumulated
deficit
|
(64,075,551
|
)
|
(416,012
|
)
|
(64,491,563
|
)
|
||||||
|
Stockholders
equity
|
991,514
|
-
|
991,514
|
|||||||||
|
Income
Statement
|
||||||||||||
|
Total
operating expenses
|
4,394,485
|
37,140
|
4,431,625
|
|||||||||
|
Income/loss
from operations
|
717,119
|
(37,140
|
)
|
679,979
|
||||||||
|
Net
loss
|
(1,984,313
|
)
|
(37,140
|
)
|
(2,021,453
|
)
|
||||||
|
Net
loss per common share; basic and diluted
|
(0.06
|
)
|
(0.06
|
)
|
||||||||
|
Cash
flow
|
||||||||||||
|
Net
loss from continuing operations
|
(1,984,313
|
)
|
(37,140
|
)
|
(2,021,453
|
)
|
||||||
|
Stock
based compensation
|
284,827
|
37,140
|
321,967
|
|||||||||
|
Net
cash flows provided by operating activities
|
279,446
|
279,446
|
||||||||||
35
|
Fiscal Year March 31, 2007
|
||||||||||||||||||||||||||||||||
|
|
As previously reported
|
As restated
|
||||||||||||||||||||||||||||||
|
First Quarter
|
Second Quarter
|
Third Quarter
|
Fourth Quarter
|
First Quarter
|
Second Quarter
|
Third Quarter
|
Fourth Quarter
|
|||||||||||||||||||||||||
|
Balance
sheet
|
||||||||||||||||||||||||||||||||
|
Additional
paid in capital
|
$
|
63,202,788
|
$
|
63,509,143
|
$
|
65,295,838
|
$
|
64,056,135
|
$
|
63,258,134
|
$
|
63,620,681
|
$
|
65,463,665
|
$
|
64,280,363
|
||||||||||||||||
|
Accumulated
deficit
|
(48,710,708
|
)
|
(48,786,501
|
)
|
(49,108,291
|
)
|
(50,416,347
|
)
|
(48,766,054
|
)
|
(48,898,039
|
)
|
(49,276,118
|
)
|
(50,640,575
|
)
|
||||||||||||||||
|
Stockholders
equity
|
14,495,179
|
14,725,770
|
14,691,316
|
13,643,583
|
14,495,179
|
14,725,770
|
14,691,316
|
13,643,583
|
||||||||||||||||||||||||
|
Income
Statement
|
||||||||||||||||||||||||||||||||
|
Total
operating expenses
|
1,796,008
|
1,803,431
|
1,402,484
|
2,173,415
|
1,851,354
|
1,859,623
|
1,458,773
|
2,229,816
|
||||||||||||||||||||||||
|
Loss
from operations
|
(1,103,219
|
)
|
(479,186
|
)
|
(222,724
|
)
|
(1,159,698
|
)
|
(1,158,565
|
)
|
(535,378
|
)
|
(279,013
|
)
|
(1,216,099
|
)
|
||||||||||||||||
|
Net
loss
|
(1,600,370
|
)
|
(75,793
|
)
|
(321,192
|
)
|
(1,308,655
|
)
|
(1,655,716
|
)
|
(131,985
|
)
|
(377,481
|
)
|
(1,365,056
|
)
|
||||||||||||||||
|
Net
loss per common share; basic and diluted
|
(0.05
|
)
|
(0.00
|
)
|
(0.01
|
)
|
(0.04
|
)
|
(0.05
|
)
|
(0.00
|
)
|
(0.01
|
)
|
(0.05
|
)
|
||||||||||||||||
|
Cash
flow
|
||||||||||||||||||||||||||||||||
|
Net
loss from continuing operations
|
(1,600,370
|
)
|
(1,676,163
|
)
|
(1,997,953
|
)
|
(3,306,009
|
)
|
(1,655,716
|
)
|
(1,787,701
|
)
|
(2,165,780
|
)
|
(3,530,237
|
)
|
||||||||||||||||
|
Stock
based compensation
|
262,056
|
390,572
|
517,639
|
647,386
|
317,402
|
502,110
|
685,466
|
871,614
|
||||||||||||||||||||||||
|
Net
cash flows used in operating activities
|
(620,444
|
)
|
(1,094,413
|
)
|
(1,046,700
|
)
|
(886,264
|
)
|
(620,444
|
)
|
(1,094,413
|
)
|
(1,046,700
|
)
|
(886,264
|
)
|
||||||||||||||||
|
Fiscal Year March 31, 2008
|
||||||||||||||||||||||||||||||||
|
|
As previously reported
|
As restated
|
||||||||||||||||||||||||||||||
|
|
First Quarter
|
Second Quarter
|
Third Quarter
|
Fourth Quarter
|
First Quarter
|
Second Quarter
|
Third Quarter
|
Fourth Quarter
|
||||||||||||||||||||||||
|
Balance
sheet
|
||||||||||||||||||||||||||||||||
|
Additional
paid in capital
|
$
|
64,126,873
|
$
|
64,618,244
|
$
|
64,733,161
|
$
|
64,778,977
|
$
|
64,383,507
|
$
|
64,953,505
|
$
|
65,090,417
|
$
|
65,157,849
|
||||||||||||||||
|
Accumulated
deficit
|
(51,285,612
|
)
|
(52,131,368
|
)
|
(57,682,571
|
)
|
(62,091,238
|
)
|
(51,542,246
|
)
|
(52,466,629
|
)
|
(58,039,827
|
)
|
(62,470,110
|
)
|
||||||||||||||||
|
Stockholders
equity
|
12,845,056
|
12,490,747
|
7,053,851
|
2,691,000
|
12,845,056
|
12,490,747
|
7,053,851
|
2,691,000
|
||||||||||||||||||||||||
|
Income
Statement
|
||||||||||||||||||||||||||||||||
|
Total
operating expenses
|
1,680,184
|
1,688,407
|
7,356,130
|
5,713,949
|
1,712,590
|
1,767,034
|
7,378,125
|
5,735,565
|
||||||||||||||||||||||||
|
Loss
from operations
|
(837,072
|
)
|
(831,446
|
)
|
(6,399,131
|
)
|
(4,617,984
|
)
|
(869,478
|
)
|
(910,073
|
)
|
(6,421,126
|
)
|
(4,639,600
|
)
|
||||||||||||||||
|
Net
loss
|
(869,264
|
)
|
(845,758
|
)
|
(5,551,203
|
)
|
(4,408,667
|
)
|
(901,670
|
)
|
(924,385
|
)
|
(5,573,198
|
)
|
(4,430,283
|
)
|
||||||||||||||||
|
Net
loss per common share; basic and diluted
|
(0.03
|
)
|
(0.03
|
)
|
(0.17
|
)
|
(0.14
|
)
|
(0.03
|
)
|
(0.03
|
)
|
(0.17
|
)
|
(0.14
|
)
|
||||||||||||||||
|
Cash
flow
|
||||||||||||||||||||||||||||||||
|
Net
loss from continuing operations
|
(869,265
|
)
|
(1,715,021
|
)
|
(7,266,223
|
)
|
(11,674,891
|
)
|
(901,671
|
)
|
(1,826,054
|
)
|
(7,399,251
|
)
|
(11,829,535
|
)
|
||||||||||||||||
|
Stock
based compensation
|
70,738
|
244,044
|
291,904
|
337,720
|
103,144
|
355,077
|
424,932
|
492,364
|
||||||||||||||||||||||||
|
Net
cash flows provided by (used in) operating activities
|
51,935
|
(191,799
|
)
|
(2,338,977
|
)
|
(2,741,323
|
)
|
51,935
|
(191,799
|
)
|
(2,338,977
|
)
|
(2,741,323
|
)
|
||||||||||||||||||
|
Fiscal Year March 31, 2009
|
||||||||||||||||||||||||||||||||
|
|
As previously reported
|
As restated
|
||||||||||||||||||||||||||||||
|
|
First Quarter
|
Second Quarter
|
Third Quarter
|
Fourth Quarter
|
First Quarter
|
Second Quarter
|
Third Quarter
|
Fourth Quarter
|
||||||||||||||||||||||||
|
Balance
sheet
|
||||||||||||||||||||||||||||||||
|
Additional
paid in capital
|
$
|
64,864,830
|
$
|
64,933,785
|
$
|
64,997,162
|
$
|
65,063,781
|
$
|
65,257,936
|
$
|
65,339,080
|
$
|
65,408,218
|
$
|
65,479,794
|
||||||||||||||||
|
Accumulated
deficit
|
(62,200,720
|
)
|
(64,042,414
|
)
|
(63,908,566
|
)
|
(64,075,550
|
)
|
(62,593,826
|
)
|
(64,447,709
|
)
|
(64,319,622
|
)
|
(64,491,563
|
)
|
||||||||||||||||
|
Stockholders
equity
|
2,698,758
|
926,029
|
1,091,911
|
991,515
|
2,698,758
|
926,029
|
1,091,911
|
991,515
|
||||||||||||||||||||||||
|
Income
Statement
|
||||||||||||||||||||||||||||||||
|
Total
operating expenses
|
1,215,722
|
1,216,634
|
899,003
|
1,063,126
|
1,229,956
|
1,228,823
|
904,764
|
1,068,083
|
||||||||||||||||||||||||
|
Loss
from operations
|
107,148
|
162,702
|
360,026
|
87,243
|
92,914
|
150,513
|
354,265
|
82,286
|
||||||||||||||||||||||||
|
Net
loss
|
(109,481
|
)
|
(1,841,695
|
)
|
133,850
|
(166,987
|
)
|
(123,715
|
)
|
(1,853,884
|
)
|
128,089
|
(171,944
|
)
|
||||||||||||||||||
|
Net
loss per common share; basic and diluted
|
(0.00
|
)
|
(0.06
|
)
|
0.00
|
(0.01
|
)
|
(0.00
|
)
|
(0.06
|
)
|
0.00
|
(0.01
|
)
|
||||||||||||||||||
|
Cash
flow
|
||||||||||||||||||||||||||||||||
|
Net
loss from continuing operations
|
(109,481
|
)
|
(1,951,176
|
)
|
(1,817,327
|
)
|
(1,984,312
|
)
|
(123,715
|
)
|
(1,977,599
|
)
|
(1,849,511
|
)
|
(2,021,453
|
)
|
||||||||||||||||
|
Stock
based compensation
|
117,239
|
186,205
|
218,238
|
284,827
|
131,473
|
212,628
|
250,422
|
321,968
|
||||||||||||||||||||||||
|
Net
cash flows provided by operating activities
|
172,745
|
174,274
|
372,589
|
279,446
|
172,745
|
174,274
|
372,589
|
279,446
|
||||||||||||||||||||||||
36
|
11.
|
Restatement
of Financial Statements for Revenue
Recognition
|
On
January 21, 2011, the Company’s Audit Committee concluded that the Company’s
previously filed financial statements for the Company’s fiscal year ended March
31, 2010 could no longer be relied upon because of an error in such financial
statements related to the Company’s accounting for a software license sold
during the quarter ended March 31, 2010 (the “License”).
The
Company recognized all of the license fee revenue associated with the License in
March 2010 when the license agreement was executed and the software was provided
to the customer. In November 2010, the Company entered into a
separate service agreement with the customer. However, the original
accounting did not consider the impact of essential services from that agreement
which are common for such software to meet the customer’s intended
use. Therefore, the Company has determined that the software license
fee revenue should have been recognized over the period the professional
services are rendered. As a result, the license fee was fully deferred and will
be recognized over the period the professional services are rendered, which
commenced in the third quarter of fiscal 2011.
To
correct this error, the Company has restated the affected financial statements
as contained in this Amended Report. The Company’s restated financial
statements are comprised of the following adjustments:
For the
year ended March 31, 2010, (i) revenue decreased by $600,000 (the amount of the
license fee), (ii) net loss and accumulated deficit increased by $600,000, (iii)
net loss per share increased by $0.02 per share and (iv) deferred revenue
increased by $600,000.
STATEMENTS OF OPERATIONS
for the years ended March 31, 2010
|
March 31, 2010
|
||||||||||||
|
As Originally
Reported
|
Adjustments
|
Restated
|
||||||||||
|
Revenues:
|
||||||||||||
|
Software
licensing revenues
|
$
|
630,977
|
$
|
(600,000
|
)
|
$
|
30,977
|
|||||
|
Total
revenues
|
8,531,698
|
(600,000
|
)
|
7,931,698
|
||||||||
|
-
|
||||||||||||
|
Gross
Profit
|
5,709,019
|
(600,000
|
)
|
5,109,019
|
||||||||
|
-
|
||||||||||||
|
Income
from operations
|
922,968
|
(600,000
|
)
|
322,968
|
||||||||
|
-
|
||||||||||||
|
-
|
||||||||||||
|
Income/loss
before provision for income taxes
|
(19,221
|
)
|
(600,000
|
)
|
(619,221
|
)
|
||||||
|
-
|
||||||||||||
|
Net
loss
|
(19,221
|
)
|
(600,000
|
)
|
(619,221
|
)
|
||||||
US
DATAWORKS, INC.
BALANCE
SHEETS
|
March 31, 2010
|
||||||||||||
|
As Originally
Reported |
Adjustments
|
Restated
|
||||||||||
|
Deferred
revenue
|
$
|
181,330
|
$
|
600,000
|
$
|
781,330
|
||||||
|
Total
current liabilities
|
1,044,099
|
600,000
|
1,644,099
|
|||||||||
|
Total
liabilities
|
4,231,497
|
600,000
|
4,831,497
|
|||||||||
|
-
|
||||||||||||
|
Accumulated
deficit
|
(64,510,784
|
)
|
(600,000
|
)
|
(65,110,784
|
)
|
||||||
|
-
|
||||||||||||
|
Total
stockholders’ equity
|
1,861,852
|
(600,000
|
)
|
1,261,852
|
||||||||
37
ITEM
9A(T). CONTROLS AND PROCEDURES
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 Annual Report on
Form 10-K/A, management has identified material weaknesses in our internal
control over financial reporting, which is an integral component of our
disclosure controls and procedures. As a result of these material
weaknesses, our Chief Executive Officer and Chief Financial Officer have
concluded that our disclosure controls and procedures were not effective as of
March 31, 2010.
Management’s
Report on Internal Control over Financial Reporting.
Our management is responsible for establishing and maintaining
internal control over our financial reporting. Because of its inherent
limitations, internal control over financial reporting may not prevent or detect
misstatements. Projections of any evaluation of the effectiveness of internal
control to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with policies or procedures may deteriorate. Our management, with the
participation of our Chief Executive Officer and Chief Financial Officer, or
persons performing similar functions, assessed the effectiveness of our internal
control over financial reporting as of March 31, 2010. In making this
assessment, management used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) in Internal
Control-Integrated Framework. Based on the assessment using those criteria,
management concluded that, as of March 31, 2010, our internal control over
financial reporting was ineffective. Management reviewed the results of its
assessment with the Audit Committee of our Board of Directors.
Material Weakness
in Internal Control Over Financial Reporting. A material
weakness is a deficiency, or a combination of deficiencies, in internal control
over financial reporting such that there is a reasonable possibility that a
material misstatement of the annual or interim will not be prevented or detected
on a timely basis. Our management concluded that there was a material weakness
regarding the calculation of stock option values based on terms other than those
listed. This material weakness resulted in errors in the Company’s
accounting and disclosures for shareholders’ equity and share-based compensation
expense and resulted in the restatement of the financial statements for the
fiscal years ended March 31, 2007, 2008 and 2009. We are developing and
implementing new procedures to remediate the material weakness that existed in
our internal control over financial reporting as of March 31,
2010. Specifically, we will be creating a new procedure to quarterly
review accounting estimates for all equity transactions. These
procedures will be documented internal controls and will be reviewed
annually.
Our
management also identified a material weakness in our internal control over
revenue recognition of license fee revenue, which is an integral component of
our disclosure controls and procedures and internal control over financial
reporting. Specifically our management concluded that at March 31, 2010, there
was an error regarding the recognition of license revenue at time of
delivery as opposed to percentage of completion over the term of professional
services. Our management concluded that there was a material weakness in the
application of the accounting treatment regarding the determination of revenue
recognition for software provided to customers where professional services are
essential to the functionality of the software. This material weakness resulted
in an error in the Company’s accounting and disclosures for revenue, net loss,
and shareholders’ equity and resulted in the restatement of the financial
statements for the fiscal year ended March 31, 2010. As of the date of filing of
this Amended Report we have since developed and implemented new procedures to
remediate this material weakness. Specifically, all future licenses sold will be
reviewed to ensure appropriate consideration of undelivered services on the
accounting treatment. These procedures will be documented internal controls and
will be reviewed.
This
Annual Report on Form 10-K/A (Amendment No. 2) does not include an
attestation report of our independent registered public accounting firm
regarding our internal control over financial reporting. Management's report was
not subject to attestation by our independent registered public accounting firm
pursuant to rules of the Securities and Exchange Commission that permit us to
provide only management's report in this Annual Report on Form 10-K/A (Amendment
No. 2).
38
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
IV
ITEM
15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
The
exhibits listed below are required by Item 601 of Regulation S-K. Each
management contract or compensatory plan or arrangement required to be filed as
an exhibit to this Form 10-K/A (Amendment No. 2) has been identified.
39
|
Exhibit
Number
|
Description of Document
|
|
|
23.1
|
*
|
Consent
of Independent Public Registered Accounting Firm.
|
|
31.1
|
*
|
Section
302 Certification of Chief Executive Officer.
|
|
31.2
|
*
|
Section
302 Certification of Chief Financial Officer.
|
|
32.1
|
*
|
Section
906 Certification of Chief Executive Officer.
|
|
32.2
|
*
|
Section
906 Certification of Chief Financial
Officer.
|
|
|
*
|
Filed
herewith.
|
40
SIGNATURES
In
accordance with Section 13 or 15 (d) of the Exchange Act, the Registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
US
DATAWORKS, INC.
|
||
|
By:
|
/s/ Charles E. Ramey
|
|
|
Charles
E. Ramey
|
||
|
Chief
Executive Officer
|
||
|
Date: February
22, 2011
|
||
41
KNOW ALL
MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Charles E. Ramey and John McLaughlin, and each of them,
his true and lawful attorneys-in- act, each with full power of substitution, for
him or her in any and all capacities, to sign any amendments to this report on
Form 10-K and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that each of said attorneys-in-fact or their
substitute or substitutes may do or cause to be done by virtue
hereof.
In
accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
|
Name
|
Title
|
Date
|
||
|
/s/
Charles E. Ramey
|
Chief
Executive Officer
|
February
22, 2011
|
||
|
Charles
E. Ramey
|
(Principal
Executive Officer)
|
|||
|
and
Director
|
||||
|
/s/
Randall J. Frapart
|
Chief
Financial Officer
|
February
22, 2011
|
||
|
Randall
J. Frapart
|
(Principal
Financial Officer)
|
|||
|
*
|
Director
|
February
22, 2011
|
||
|
Joe
Abrell
|
||||
|
*
|
Director
|
February
22, 2011
|
||
|
Anna
C. Catalano
|
||||
|
*
|
Director
|
February
22, 2011
|
||
|
G.
Richard Hicks
|
||||
|
*
|
Director
|
February
22, 2011
|
||
|
J.
Patrick Millinor
|
||||
|
*
|
Director
|
February
22, 2011
|
||
|
John
L. Nicholson, M.D.
|
||||
|
*
|
Director
|
February
22, 2011
|
||
|
Mario
Villarreal
|
||||
|
*
|
Director
|
February
22, 2011
|
||
|
Hayden
D. Watson.
|
||||
|
*
|
Director
|
February
22, 2011
|
||
|
Thomas
L. West, Jr.
|
|
*By:
/s/ Charles E. Ramey
|
||||
|
Attorney-In-Fact
|
42
|
Exhibit
Number
|
Description
of Document
|
|
|
23.1
|
*
|
Consent
of Independent Public Registered Accounting Firm.
|
|
31.1
|
*
|
Section
302 Certification of Chief Executive Officer.
|
|
31.2
|
*
|
Section
302 Certification of Chief Financial Officer.
|
|
32.1
|
*
|
Section
906 Certification of Chief Executive Officer.
|
|
32.2
|
*
|
Section
906 Certification of Chief Financial
Officer.
|
|
|
*
|
Filed
herewith
|
43