Attached files
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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
|
2
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.
3
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.
4
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.
5
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.
6
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.
7
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.
8
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.
9
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 |
10
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.”
11
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.
12
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.
13
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
|
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 |
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.
14
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.
15
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.
7.
|
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.
16
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 |
17
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.
18
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
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.
19
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 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.
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.
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.
20
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.
21
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
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.
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.
22
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.
23
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
|
24
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)
|
25
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
|
26