Item 1. Financial Statements

US DATAWORKS, INC.

UNAUDITED CONDENSED BALANCE SHEETS

 

ASSETS		June 30, 2010 (Unaudited)				March 31, 2010 (See Note)
Current assets:
Cash and cash equivalents		$	507,247			$	444,542
Accounts receivable, trade			749,684				1,059,825
Prepaid expenses and other current assets			168,441				307,653
Total current assets			1,425,372				1,812,020
Property and equipment, net			139,999				169,796
Goodwill, net			4,020,698				4,020,698
Other assets			85,654				90,835
Total assets		$	5,671,723			$	6,093,349

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long term debt		$	897,709			$	350,972
Accounts payable			316,471				235,077
Accrued interest – related party			29,189				30,162
Accrued expenses			217,293				246,558
Deferred revenue			393,073				181,330
Total current liabilities			1,853,735				1,044,099
Long term liabilities:
Notes payable			0				638,889
Note payable – related party, net of unamortized discount of $510,870 and $543,736 respectively			2,581,375				2,548,509
Total long term liabilities			2,581,375				3,187,398
Total liabilities			4,435,110				4,231,497
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 $386,369 and $345,124 in arrears as of June 30, 2010 and March 31, 2010, respectively			11				11
Common stock, $0.0001 par value 90,000,000 shares authorized,  33,145,576 and 32,780,870 shares issued and outstanding as of June 30, 2010 and March 31, 2010, respectively			3,314				3,310
Additional paid-in-capital			66,418,470				66,369,315
Accumulated deficit			(65,185,182	)			(64,510,784	)
Total shareholders’ equity			1,236,613				1,861,852
Total liabilities and stockholders’ equity		$	5,671,723			$	6,093,349

 

Note: The balance sheet at March 31, 2010 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

 

The accompanying notes are an integral part of these unaudited condensed financial statements.

 

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US DATAWORKS, INC.

UNAUDITED CONDENSED STATEMENTS OF OPERATIONS

 

For the Three Months Ended June 30,

 

		2010				2009
Revenues:
Software transactional and subscription revenues		$	499,217			$	521,243
Software maintenance revenues			144,322				212,371
Professional services revenues			722,799				1,274,847
Total revenues			1,366,338				2,008,461
Cost of revenues			606,257				676,371
Gross profit			760,081				1,332,090
Operating expenses:
Research and development			242,507				212,937
Sales and marketing			271,787				262,300
General and administrative			746,107				571,642
Depreciation and amortization			29,797				43,645
Total operating expense			1,290,198				1,090,524
(Loss)/Income from operations			(530,117	)			241,566
Other expense:
Financing expense – related party			(5,181	)			(108,165	)
Interest expense			(17,696	)			(1,436	)
Interest expense – related party			(121,404	)			(155,875	)
Total other expense			(144,281	)			(265,477	)
Net loss		$	(674,398	)		$	(23,911	)
Basic and diluted loss per share		$	(0.02	)		$	(0.00	)
Basic and diluted weighted-average shares outstanding			33,145,576				32,780,321

 

The accompanying notes are an integral part of these unaudited condensed financial statements.

 

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US DATAWORKS, INC.

UNAUDITED CONDENSED STATEMENTS OF CASH FLOW

For the Three Months Ended June 30,

		2010				2009
Cash flows from operating activities:
Net loss		$	(674,398	)		$	(23,911	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization of property and equipment			29,797				43,645
Amortization of note discount on note payable – related party			32,866				4,751
Amortization of deferred financing costs – related party			5,181				108,165
Stock based compensation			49,155				41,328
Changes in operating assets and liabilities:
Accounts receivable			310,141				(95,325	)
Prepaid expenses and other current assets			139,212				(112,095	)
Deferred revenue			211,743				233,680
Accounts payable			81,394				(51,205	)
Accrued interest – related party			(973	)			(18,275	)
Accrued expenses			(29,261	)			(25,752	)
Net cash provided by operating activities			154,857				105,006
Cash flows from financing activities:
Payments on note payables			(92,152	)			(8,819	)
Net cash used by financing activities			(92,152	)			(8,819	)
Net increase  in cash and cash equivalents			62,705				96,187
Cash and cash equivalents, beginning of period			444,542				403,863
Cash and cash equivalents, end of period		$	507,247			$	500,050
Supplemental disclosures of cash flow information
Interest paid		$	106,234			$	152,320
Federal income taxes paid		$	¾			$	¾
Significant non-cash financing activities:
Accrued liability for note payable – related party extension fee, included in debt discount		$	¾			$	(50,000	)
Debt discount on extension of note payable – related party, related to the warrants issued		$	¾			$	320,157

 

The accompanying notes are an integral part of these unaudited condensed financial statements.

 

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US DATAWORKS, INC.

 

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

1.     Organization and Business

 

General

 

US Dataworks, Inc., a Nevada corporation, (the “Company”), develops, markets, and supports payment processing software for multiple market segments. Its customer base includes some of the largest financial institutions as well as credit card companies, government institutions, banker’s banks and high-volume merchants in the United States. The Company was formerly known as Sonicport, Inc.

 

2      Summary of Significant Accounting Policies

 

Interim Financial Statements

 

The accompanying interim unaudited condensed financial statements included herein have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”).  The financial statements reflect all adjustments that are, in the opinion of management, necessary to fairly present such information.  All such adjustments are of a normal recurring nature.  Although the Company believes that the disclosures are adequate to make the information presented not misleading, certain information and footnote disclosures, including a description of significant accounting policies normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”), have been condensed or omitted pursuant to such rules and regulations.

 

These financial statements should be read in connection with the audited financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2010.  The results of operations for interim periods are not necessarily indicative of the results for any subsequent quarter or the fiscal year ending March 31, 2011.

 

Revenue Recognition

The Company recognizes revenues associated with its software products in accordance with the provisions of the Financial Accounting Standard Board's (“FASB”) Accounting Standards Codification (“ASC”) Topic No. 985 – 605, “Software Revenue Recognition”.

The Company licenses its software on a transactional and 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 are provided in connection with the installation of the software licensed, revenue is recognized when these services have been provided. The Company also recognizes revenue on a percentage of completion basis for the portion of professional services related to customized customer projects that have been completed but are not yet deliverable to customer.

 

In certain instances, we license our software products under non-exclusive, non-transferable license agreements. Because these agreements do not require significant production, modification or customization, revenue is recognized when the license agreement has been signed, the software product has been delivered, the related fee is fixed or determinable and collection of such fee is probable

 

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.

 

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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.

In order to conform to the current application, the Company reclassified a net of $118,229 from operating expenses to cost of sales for the three months ended June 30, 2009.

 

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”), 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 record an impairment of goodwill for either the quarter ended June 30, 2010 or the year ended March 31, 2010.

Convertible Debt Financing – Derivative Liabilities

The Company reviews the terms of its 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.As of June 30, 2010 and March 31, 2010 the Company did not have any derivative instrument liabilities.

 

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Stock Options

 

The Company follows the guidance cited in ASC Topic No. 718, “Compensation – Stock Compensation”, to account for its stock options. ASC Topic No. 718 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. 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 three months ended June 30, 2010 and June 30, 2009 was $49,157, and $41,328 respectively, which consists of stock-based compensation expense related to employee and director stock options and restricted stock issuances.

ASC Topic No. 718 requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the Company’s statement of operations. Stock-based compensation expense recognized during the period is based on the value of the portion of share-based payment awards that is ultimately expected to vest during the period. Compensation expense recognized for all employee stock options awards granted is recognized over their respective vesting periods unless the vesting period is graded. As stock-based compensation expense recognized in the Statement of Operations for the three months ended June 30, 2010 and June 30, 2009 is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures as explained 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. There were no options granted during the period ended June 30, 2010. There were 400,000 options granted during the three months ended June 30, 2009. In determining the compensation cost of the options granted during the three months ended June 30, 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. The weighted average assumptions used in the calculations for the options granted in the three months ended June 30, 2009 included a risk-free interest rate of 2.93%, expected life of options granted  is ten years, expected volatility is 208%, expected dividend yield of zero, and expected forfeiture rate of 30%.

As of June 30, 2010, there was approximately $21,413 of total unrecognized compensation cost related to non-vested share-based compensation arrangements, which is expected to be recognized over a period of two years.

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”. 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.

 

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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). The weighted-average common stock equivalents for the periods ending June 30, 2010, and 2009 are as follows:

                                                                                                                          

		For the Three Months Ended June 30,
		2010				2009
Options outstanding under the Company’s stock option plans			6,846,832				7,361,720
Options outstanding outside the Company’s stock option plans			580,000				1,160,000
Warrants outstanding in conjunction with private placements			7,539,364				7,539,364
Warrants outstanding as a financing cost for notes payable and convertible notes payable			3,666,642				2,054,141
Warrants outstanding for services rendered and litigation settlement			200,000				200,000
Convertible Series B preferred stock outstanding (a)			109,933				109,933

 

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(a)	The Series B preferred stock is convertible into shares of common stock at a conversion ratio of one share of Series B preferred stock for one share of common stock.

 

Estimates

 

The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

 

Concentrations of Credit Risk

 

The Company sells its products throughout the United States and extends credit to its customers. It also performs ongoing credit evaluations of such customers. The Company does not obtain collateral to secure its accounts receivable. The Company evaluates its accounts receivable on a regular basis for collectibility and provides for an allowance for potential credit losses as deemed necessary.

 

Three of our customers accounted for 58%, 11% and 11% of our net revenues for the three months ended June 30, 2010. Two of our customers accounted for 58% and 13% of our net revenues for the three months ended June 30, 2009.

 

At June 30, 2010, amounts due from two of our customers accounted for 60% and 14% of accounts receivable. At June 30, 2009, amounts due from four of our customers accounted for 40%, 13%, 13% and 11% of accounts receivable.

 

3.     Property and Equipment

 

Property and equipment as of June 30, 2010 and March 31, 2010 consisted of the following:

		June 30, 2010				March 31, 2010
Furniture and fixtures		$	99,535			$	99,535
Office and telephone equipment			182,275				182,275
Computer equipment			747,631				747,631
Computer software			1,271,098				1,271,098
Leasehold improvements			64,733				64,733
			2,365,272				2,365,272
Less accumulated depreciation and amortization			(2,225,273	)			(2,195,476	)
Total		$	139,999			$	169,796

 

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Depreciation and amortization expense for the three months ended June 30, 2010 and 2009 was $29,797 and $43,645, respectively.

 

4.     Bank Credit Line and Long-Term Debt

 

At June 30, 2010 and March 31, 2010, the Company’s bank credit line and long-term debt consisted of the following:

 

			June 30, 2010				March  31, 2010
Bank credit line		$	-			$	-
Bank term loan			888,887				972,222
Notes payable –related party			3,092,245				3,092,245
Notes payable –equipment			8,822				17,639
Debt discount unamortized amount			(510,870)				(543,736	)
Total secured notes payable and bank debt			3,479,084				3,538,370
Total long-term debt			3,479,084				3,538,370
Less: Current portion of long-term debt			897,709				350,972
Bank credit line and long-term debt, net of current portion		$	2,581,375			$	3,187,398

Revolving Bank Credit Line and Term Loan

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”). Pursuant to the Loan Agreement the Company has granted SVB a security interest in all of its assets, 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. 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 or (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 June 30, 2010, the Company had zero borrowings on the revolving line of credit. The amount originally borrowed under the term loan (the “Term Loan”) was $1,000,000 and the amount outstanding at June 30, 2010 was $888,887 and $972,228 at March 31, 2010. 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) earnings before interest, taxes, depreciation and amortization (“EBITDA”) plus non-cash stock based compensation minus cash income 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 June 30, 2010, the Company was in default under the Credit Facility as a result of failing to comply with the financial covenants set forth in Section 6.7 of the Loan Agreement for the April 2010, May 2010 and June 2010 measuring periods (the “Existing Defaults”).  SVB has agreed to forbear from filing any legal action or instituting or enforcing any rights and remedies it may have against the Company arising out of the Existing Defaults for the period beginning on August 16, 2010 and ending on August 27, 2010 (the “Forbearance Period”). The Company and SVB are currently in discussions concerning an amendment to the Loan Agreement pursuant to which the Existing Defaults would be waived and the Company would be back in compliance with its financial covenants under the Loan Agreement.  The Company currently expects that such an amendment would be in place by the end of the Forbearance Period. See “Part II, Item 5. Other Information.”

 

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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”). 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 which was increased to 13% in an amendment dated February 19, 2009 (see discussion below).

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, May 20, 2009, June 26, 2009, and December 18, 2009, the Company entered into a series of Note Modification Agreements with the holders of the Redemption Refinance Notes.  For the February 19, 2009 Note Modification Agreement, an amendment fee of 1% of the outstanding principal balances of the Redemption Refinance Notes totaling $37,035 was expensed and a cash payment was paid to the holders thereof.

In consideration of the June 26, 2009 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”, 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. As part of the February 9, 2010 Loan Restructuring Agreement discussed below, the remaining unamortized debt discount on the Redemption Refinance Notes of $155,366 was rolled into the debt discount associated with the Loan Restructuring Agreement.

On September 26, 2006, the Company entered into a note payable with its Chief Executive Officer for $500,000 (the “Other Note”) and the note bore an interest rate of 8.75%.  This note was renewed on September 25, 2007.

On May 20, 2009 and June 26, 2009, the Company entered into a series of Note Modification Agreements with the holder of the Other Note. In consideration of the June 26, 2009 amendment, the Company paid to the holder of the Other Note a fee of $6,667 in cash on July 1, 2009.

 

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On February 9, 2010, concurrently with entering into a loan agreement with Silicon Valley Bank (“SVB”) discussed above, 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 the Redemption Refinance Notes held by Messrs. Nicholson and Ramey and the Other Note held by Mr. 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 two 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 two 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 “Other Note” or 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, 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. 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 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 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. The consideration paid to the holders of the Loan Restructuring Agreement has been accounted for as an additional debt discount amortized over the remaining term of the Loan Restructuring Agreement. The amount amortized during the three months ended June 30, 2010 associated with the debt discount was $32,866 and the remaining unamortized debt discount is $510,870.

 

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       Note Payable – Equipment

 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 June 30, 2010 and March 31, 2010, the outstanding balance on this note payable was $8,822 and $17,639 respectively.

Payment Table

Future minimum payments under our loan agreements and notes payable at June 30, 2010 were as follows:

 

Year Ended March 31,		Amount
2011		$	897,709
2014			3,092,245
		$	3,989,954

5.     Commitments and Contingencies

 

 

Item 1A.  Risk Factors

There have been no material changes in our risk factors disclosed in our Annual Report on Form 10-K for the fiscal year ended March 31, 2010 dated as of, and filed with the SEC on, June 29, 2010 (the “Annual Report”).  For a discussion of these risk factors, see “Item 1A. Risk Factors” in the Annual Report.

 

 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

 

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Item 3. Defaults Upon Senior Securities

The Company is currently in default under its Credit Facility with Silicon Valley Bank as a result of failing to comply with the financial covenants set forth in Section 6.7 of the Loan Agreement for the April 2010, May 2010 and June 2010 measuring periods (the “Existing Defaults”).

Item 5. Other Information

 

On August 16, 2010, the Company and Silicon Valley Bank (“SVB”) entered into that certain Forbearance to Loan and Security Agreement (the “Forbearance”) pursuant to which SVB has agreed to forbear from filing any legal action or instituting or enforcing any rights and remedies it may have against the Company arising out of the Existing Defaults for the period beginning on August 16, 2010 and ending on August 27, 2010 (the “Forbearance Period”).  The foregoing description of the Forbearance is qualified in its entirety by reference to the Forbearance, a copy of which is attached to this Quarterly Report as an exhibit and incorporated herein by reference. In consideration for the Forbearance, the Company paid a forbearance fee of $1,000.

The Company and SVB are currently in discussions concerning an amendment to the Loan Agreement pursuant to which the Existing Defaults would be waived and the Company would be back in compliance with its financial covenants under the Loan Agreement.  The Company currently expects that such an amendment would be in place by the end of the Forbearance Period.

Item 6. Exhibits

 

Listed below are the exhibits required by Item 601 of Regulation S-K.

 

Exhibit Number		Description of Document
10.1		Second Amendment to Loan and Security Agreement by and between US Dataworks, Inc. and Silicon Valley Bank dated April 23, 2010 (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on May 5, 2010).
10.2*		Forbearance to Loan and Security Agreement by and between US Dataworks, Inc. and Silicon Valley Bank dated August 16, 2010.
31.1		Section 302 Certification of Chief Executive Officer.
31.2		Section 302 Certification of Chief Financial Officer or person performing similar functions.
32.1		Section 906 Certification of Chief Executive Officer.
32.2		Section 906 Certification of Chief Financial Officer or person performing similar functions.

 

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* Filed herewith

 

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SIGNATURE

 

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

	US DATAWORKS, INC.
Dated:  August 16, 2010	By:	/s/ Charles E. Ramey
		Charles E. Ramey
		Chief Executive Officer
		(Duly Authorized Officer)

 

	By:	/s/ Randall J. Frapart
		Randall J. Frapart
		Chief Financial Officer (Principal Financial Officer)

 

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EXHIBIT INDEX

 

Exhibit Number		Description of Document
10.1		Amendment to Loan and Security Agreement by and between US Dataworks, Inc. and Silicon Valley Bank dated April 23, 2010 (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on May 5, 2010).
10.2*		Forbearance to Loan and Security Agreement by and between US Dataworks, Inc. and Silicon Valley Bank dated August 16, 2010.
31.1		Section 302 Certification of Chief Executive Officer.
31.2		Section 302 Certification of Chief Financial Officer or person performing similar functions.
32.1		Section 906 Certification of Chief Executive Officer.
32.2		Section 906 Certification of Chief Financial Officer or person performing similar functions.

 

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*	Filed herewith

 

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