US DATAWORKS INC - FORM 10-Q/A

Attached files

file	filename
EX-31.2 - US DATAWORKS INC	v211486_ex31-2.htm
EX-32.2 - US DATAWORKS INC	v211486_ex32-2.htm
EX-31.1 - US DATAWORKS INC	v211486_ex31-1.htm
EX-32.1 - US DATAWORKS INC	v211486_ex32-1.htm

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington D.C., 20549

FORM 10-Q/A

(Amendment No. 1)

(Mark One)

x	QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2010

¨	TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period to

Commission file number: 001-15835

US Dataworks, Inc.

(Exact name of registrant as specified in its charter)

Nevada		84-1290152
(State or other jurisdiction of incorporation or organization)		(I.R.S. employer identification number)

One Sugar Creek Center Boulevard Sugar Land, Texas		77478
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number: (281) 504-8000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES x NO ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ¨ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” “non-accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

	Large accelerated filer ¨	Accelerated filer ¨
	Non-accelerated filer ¨	Smaller reporting company x
	(Do not check if smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES ¨ NO x

Number of shares of the issuer’s common stock outstanding as of August 12, 2010: 33,189,383.

EXPLANATORY NOTE

US Dataworks, Inc. (the “Company”) is filing this Amendment No. 1 on Form 10-Q/A (this “Amended Report”) to amend its Quarterly Report on Form10-Q for the quarter ended June 30, 2010 filed with the Commission on August 16, 2010 (the “Original Report”). The purpose of this Amended Report is to provide the Company's amended and restated financial statements for the quarter ended June 30, 2010 and the comparative period ended June 30, 2009 (the ”Restated June 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 and for the Company's fiscal quarters ended June 30, 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 June 2010 Financial Statements and other financial information included in this Amended Report have been restated accordingly. For more information concerning the restatement, see Note 8 to Financial Statements included in this Amended Report.

Except for the Restated June 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 June 2010 Financial Statements that were not affected by the error addressed by the restatement. This Amended Report speaks only as of August 16, 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.

US DATAWORKS, INC.

TABLE OF CONTENTS

FORM 10-Q/A

QUARTERLY PERIOD ENDED JUNE 30, 2010

		Page
PART I - FINANCIAL INFORMATION		4
Item 1.	Financial Statements	4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
Item 4.	Controls and Procedures	23

PART II - OTHER INFORMATION		24
Item 6.	Exhibits	24

NOTE REGARDING FORWARD LOOKING STATEMENTS AND CERTAIN TERMS

When used in this Report, the words “expects,” “anticipates,” “believes,” “plans,” “will” and similar expressions are intended to identify forward-looking statements. These are statements that relate to future periods and include, but are not limited to, statements regarding our critical accounting policies, our operating expenses, our strategic opportunities, adequacy of capital resources, our potential professional services contracts and the related benefits, demand for software and professional services, demand for our solutions, expectations regarding net losses, expectations regarding cash flow and sources of revenue, benefits of our relationship with an MSP, statements regarding our growth and profitability, investments in marketing and promotion, fluctuations in our operating results, our need for future financing, effects of accounting standards on our financial statements, our investment in strategic partnerships, development of our customer base and our infrastructure, our dependence on our strategic partners, our dependence on personnel, our employee relations, anticipated benefits of our restructuring, our disclosure controls and procedures, our ability to respond to rapid technological change, expansion of our technologies and products, benefits of our products, our competitive position, statements regarding future acquisitions or investments, our legal proceedings, and our dividend policy. Forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected. These risks and uncertainties include, but are not limited to, those discussed herein, as well as risks related to our ability to develop and timely introduce products that address market demand, the impact of alternative technological advances and competitive products, market fluctuations, our ability to obtain future financing, and the risks referred to in “Item 1A. Risk Factors.” These forward-looking statements speak only as of the date hereof. We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.

All references to “US Dataworks,” the “Company,” “we,” “us,” or “our” means US Dataworks, Inc.

MICRworks™, Clearingworksâ, Returnworks™, and Remitworks™ are trademarks of US Dataworks. Other trademarks referenced herein are the property of their respective owners.

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

US DATAWORKS, INC.

UNAUDITED CONDENSED BALANCE SHEETS

	June 30, 2010			March 31, 2010
	(Unaudited)			(See Note)
ASSETS
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 (as restated)		993,073			781,330

Total current liabilities (as restated)		2,453,735			1,644,099

Long term liabilities:
Notes payable		—			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 (as restated)		5,035,110			4,831,497

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 (as restated)		(65,785,182	)		(65,110,784	)

Total shareholders’ equity (as restated)		636,613			1,261,852

Total liabilities and stockholders’ equity	$	5,671,723		$	6,093,349

Note: The balance sheet at March 31, 2010, as restated in the Company’s Annual Report of Form 10-K/A (Amendment No. 2), 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.

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.

US DATAWORKS, INC.

UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS

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	$	—		$	—

Significant non-cash financing activities:
Accrued liability for note payable – related party extension fee, included in debt discount	$	—		$	(50,000	)
Debt discount on extension of note payable – related party, related to the warrants issued	$	—		$	320,157

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

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/A (Amendment No. 2) for the fiscal year ended March 31, 2010 filed with the Commission on February 22, 2011. As discussed in Note 8, the financial statements for the year ended March 31, 2010 and the quarter ended June 30, 2010 have been restated. 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 (“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.

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.

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.

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
WWarrants 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

(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,		March 31,
	2010		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

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,			March 31,
	2010			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.”

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.

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.

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.

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

Leases

The Company leases an office in Sugar Land, Texas under an operating lease agreement that expires in July 2012. Rent expense was $90,612 and $95,241 for the three months ended June 30, 2010 and 2009, respectively.

Future minimum lease payments under operating leases at June 30, 2010 were as follows:

Year Ended
March 31,	Amount
2011	$	263,843
2012		355,444
2013		119,003

	$	738,290

6.	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 June 30, 2010, and March 31, 2010, there were accumulated, undeclared dividends in arrears of $386,369 and $345,124, respectively.

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. As of June 30, 2010, the maximum aggregate number of shares which may be granted under the 2000 Plan was 9,500,000. 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 grant. In the case of incentive stock options granted to any 10% owners of the Company, the exercise price must not be less than 100% of the fair market value on the date of grant. Such incentive stock options vest in varying increments and expire five years from the date of vesting.

During the three months ended June 30, 2010 the Company did not grant any stock options.

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, 2010		7,745,720		$	0.64		1,160,000		$	1.02
Forfeited/canceled		(898,888	)	$	0.52		(580,000	)	$	1.02
Outstanding, June 30, 2010		6,846,832		$	0.65		580,000		$	1.02
Exercisable, June 30, 2010		6,008,501		$	0.71		580,000		$	1.02

The weighted-average remaining life and the weighted-average exercise price of all of the options outstanding at June 30, 2010 were 5.69 years and $0.68, respectively. The exercise prices for the options outstanding at June 30, 2010 ranged from $0.15 to $6.25 per share, 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		5,298,998		4,460,667	6.37 years	$	0.49	$	0.53
$	0.81 – 1.35		1,714,834		1,714,834	4.14 years	$	0.93	$	0.93
$	1.36 – 6.25		413,000		413,000	3.51 years	$	2.13	$	2.13
			7,426,832		6,588,501

Common Stock Grants

During the three months ended June 30, 2010, the Company granted 41,625 shares of common stock (at $0.20 per share based on the closing price of the common stock on the grant date), to its outside directors pursuant to the Company’s Outside Director Compensation Plan. The Company expensed $8,325 related to these grants in the three months ended June 30, 2010. These grants were made under the 2000 Plan.

6.	Fair Value Measurements

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 June 30, 2010 and March 31, 2010, the Company had no assets or liabilities that were marked to fair value under ASC Topic No. 820 - 10.

Liquidity

While the Company incurred a moderate increase in its operating expenses to support the growth of the Company, the Company experienced a decrease in revenues caused by a timing difference on the start of a consulting agreement. Due to our prior history of experiencing negative cash flow from operations and the debt financing that we put in place to cover this historical negative cash flow, we find ourselves in the position of having approximately $3.1 million of debt coming due January 1, 2014 and another $0.9 million of debt payable ratably through February 2013.

Although the full amount owed under the Term Loan is reflected as current liabilities on the Company's June 30, 2010 balance sheet, 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 Company's existing defaults caused by the Company's failure to comply with the financial covenents under the Loan Agreement until August 27, 2010. The Company is currently in discussions with SVB concerning an amendment to the Loan Agreement pursuant to which the Company's existing defaults would be waived and the Company would be back in compliance with its financial covenants. We currently expect that such amendment would be in place by the end of the forbearance period and believe that such amendment will not alter the current payment terms of the Term Loan.

While we expect to be able to fund our operations and build enough cash to pay off this debt from our 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 transaction and subscription based software license contracts and professional services agreements and software licenses to become profitable.

8.	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 and for the Company’s fiscal quarter ended June 30, 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 the Company’s Annual Report on Form 10-K/A (Amendment No. 2) for the year ended March 31, 2010 and 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.

For the quarter ended June 30, 2010, (i) accumulated deficit increased by $600,000 and (ii) deferred revenue increased by $600,000.

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

	June 30, 2010
	As Originally
	Reported			Adjustments			Restated
Deferred revenue	$	393,073		$	600,000		$	993,073
Total current liabilities		1,853,735			600,000			2,453,735

Total liabilities		4,435,110			600,000			5,035,110
					-
Accumulated deficit		(65,185,182	)		(600,000	)		(65,785,182	)
					-
Total stockholders’ equity	$	1,236,613		$	(600,000	)	$	636,613

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of our financial condition and results of operations should be read with the unaudited condensed financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q/A and the audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K/A (Amendment No. 2) for the fiscal year ended March 31, 2010.

C$Money Transaction

The Company was unable to record the effects of the transactions contemplated by the Strategic Alliance Agreement with C$ cMoney, Inc. discussed in Item 7 of the Company’s Annual Report on Form 10-K/A (Amendment No. 2) for the fiscal year ended March 31, 2010 (the “C$Money Transactions”) in the quarter ended June 30, 2010. The Company continues to evaluate whether it expects to record the effects of the C$Money Transactions in fiscal 2011.

Critical Accounting Policies

The following discussion and analysis of our unaudited condensed financial condition and results of operations is based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate these estimates, including those related to revenue recognition and concentration of credit risk. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We believe that of the significant accounting policies used in the preparation of our unaudited condensed financial statements (see Note 2 to the Financial Statements included in the Company’s Annual Report on Form 10-K/A (Amendment No. 2) for the fiscal year ended March 31, 2010), the following are critical accounting policies, which may involve a higher degree of judgment, complexity and estimates.

Revenue Recognition

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

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 three months ended June 30, 2010 or the year ended March 31, 2010.

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 collectibility and provide for an allowance for potential credit losses as deemed necessary.

Results of Operations

The results of operations reflected in this discussion include our operations for the three month periods ended June 30, 2010 and 2009.

Revenues

We generate revenues from (a) licensing and supporting software with fees due on a transactional or subscription basis (b) licensing software with fees due on the grant of the license and delivery of the software, (c) providing maintenance, enhancement and support for previously licensed products, and (d) providing professional services.

	For the Three Months Ended June 30,
	2010		2009		Change
Software transactional and subscription revenues	$	499,217	$	521,243	-4.2	%
Software maintenance revenues		144,322		212,371	-32	%
Professional service revenues		722,799		1,274,847	-43.3	%
Total revenues	$	1,366,338	$	2,008,461	-32	%

Revenues decreased by 32.0% for the three months ended June 30, 2010 compared to the three months ended June 30, 2009 due to the timing of the end of one consulting agreement and the start of the follow-on consulting agreement. We had no licensing revenue for the quarter ended June 30, 2010, and maintenance revenue declined 32.0% due to the non renewal of certain maintenance agreements. We believe that we will continue to see maintenance revenues decline slowly as we continue our transition to a transactional and subscription based revenue model. We expect our transactional revenue to grow as more of our current customers, along with new customers, begin to run more of their processing through our software products.

Cost of Revenues

Costs of revenues include the cost of other third party software resold in connection with our software and personnel costs associated with our software, maintenance, support, training and installation services. Cost of revenues decreased by $70,114, or 10.4%, to $606,257 for the three months ended June 30, 2010 from $676,371 for the three months ended June 30, 2009. This decrease was principally due to a decrease of $48,000 in the cost of third party software purchased for resale, a $61,000 decrease in outside consulting labor costs, offset by a $31,000 increase in travel expenses and a $8,000 net increase in labor cost associated with our professional services and maintenance personnel as compared to the same period in the prior fiscal year.

Operating Expenses

Total operating expenses increased by $199,674, or 18.3%, to $1,290,198 for the three months ended June 30, 2010 from $1,090,524 for the three months ended June 30, 2009.

General and administrative expenses increased $174,465 or 30.5% and was attributable to a $21,000 increase in general and administrative personnel expenses, a $80,000 increase in legal and accounting expense associated with delisting issues, $58,000 in outside consultant expense, $9,000 increase in stock based compensation expense, $8,000 increase in insurance expenses, $7,000 increase in phone expenses, a $13,000 increase in various other areas including bank fees, dues and subscriptions, entertainment, and computer lease expenses. These increases were offset by a $20,000 decrease in investor relations expense, rent, and travel expenses as compared to the same period in the prior fiscal year.

A slight increase in research and development expenses of $29,570 as compared to the prior year period, was primarily related to increased personnel expenses of the R & D staff, while the increase in sales and marketing of $9,487 is related to an increase in personnel expenses.

In our effort to promote our brand name, increase our client base and expand our relationship with existing clients, we expect our operating expenses in both research and development and sales and marketing to increase.

Our depreciation and amortization expense decreased $13,848 from $43,645 for the three months ended June 30, 2009 to $29,797 for the three months ended June 30, 2010. This decrease is attributable to a number of our property and equipment items attaining a fully depreciated state during the past fiscal year.

Other Expenses

Other expenses, including interest expense and financing costs, decreased $121,196, or 45.7%, to $144,281 for the three months ended June 30, 2010 from $265,478 for the three months ended June 30, 2009. The decrease was primarily due to the effects of the restructuring of the related party notes on interest expense.

Net Loss

Net loss increased by $650,487, to a net loss of $674,398 for the three months ended June 30, 2010 from a net loss of $23,911 for the three months ended June 30, 2009. For details related to this loss see the preceding discussions related to revenues, cost of revenues, operating expenses and other income sections above.

Liquidity and Capital Resources

Cash and cash equivalents increased by $62,705 to $507,247 at June 30, 2010 from $444,542 at March 31, 2010. Cash provided by operating activities was $154,857 for the three months ended June 30, 2010 compared to $105,006 for the same period in the prior fiscal year.

No cash was used for investing activities in the three months ended June 30, 2010 or in the three month period ended June 30, 2009.

Financing activities used cash of $92,152 in the three months ended June 30, 2010 and financing activities used cash of $8,819 in the three months ended June 30, 2009.

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.

Item 4. Controls and Procedures

Evaluation of disclosure controls and procedures. We maintain “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, or the Exchange Act, that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Our disclosure controls and procedures have been designed to meet reasonable assurance standards. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

Based on their evaluation as of the end of the period covered by this Quarterly Report on Form 10-Q/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 June 30, 2010.

As previously disclosed in our Annual Report on Form 10-K/A (Amendment No. 2) for the fiscal year ended March 31, 2010, management identified a material weakness in our internal control over financial reporting, which is an integral component of our disclosure controls and procedures. 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. Specifically our management concluded that at March 31, 2010, 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 have since developed and implemented new procedures to remediate this material weakness.

As stated in our Annual Report on Form 10-K/A (Amendment No. 2) for the fiscal year ended March 31, 2010, management 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. 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 are rendered. 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, and for the quarter ended June 30, 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.

(b) Changes in internal control over financial reporting. As a result of the material weakness as previously disclosed in our Annual Report on Form 10-K/A (Amendment No. 2), we have created a new procedure to perform a quarterly review of accounting estimates for all equity transactions. These procedures will be documented internal controls and will be reviewed annually. Although there were no new stock option grants made during the three months ended June 30, 2010 for which these new procedures would have been utilized, we nevertheless believe that as of June 30, 2010, this material weakness no longer exists. There was no other change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) identified in connection with management’s evaluation during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

Item 6. Exhibits

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

Exhibit Number		Description of Document

31.1*		Section 302 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

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: February 22, 2011	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)

EXHIBIT INDEX

Exhibit Number		Description of Document

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

Attached files

Stock widget

Investing forum

US DATAWORKS INC Reports

Also read