Attached files
file | filename |
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EX-32.2 - US DATAWORKS INC | v211487_ex32-2.htm |
EX-32.1 - US DATAWORKS INC | v211487_ex32-1.htm |
EX-31.1 - US DATAWORKS INC | v211487_ex31-1.htm |
EX-31.2 - US DATAWORKS INC | v211487_ex31-2.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 September 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 November 15, 2010:
33,231,008.
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 September 30, 2010 filed with the Commission on November 15, 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 September 30, 2010 and the comparative period ended September 30, 2009
(the “Restated September 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 and September
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 September 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 September 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 September 2010 Financial Statements that were not
affected by the error addressed by the restatement. This Amended
Report speaks only as of November 15, 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
QUARTERLY
PERIOD ENDED SEPTEMBER 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
|
20
|
Item
4.
|
Controls
and Procedures
|
24
|
PART
II - OTHER INFORMATION.
|
25
|
|
Item
6.
|
Exhibits
|
25
|
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 a Managed Service Provider, 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
September 30,
|
March 31, 2010
|
|||||||
2010
|
(See Note)
|
|||||||
(Unaudited)
|
||||||||
ASSETS
|
||||||||
Current
assets:
|
||||||||
Cash
and cash equivalents
|
$ | 308,418 | $ | 444,542 | ||||
Accounts
receivable, trade
|
577,519 | 1,059,825 | ||||||
Prepaid
expenses and other current assets
|
108,466 | 307,653 | ||||||
Total
current assets
|
994,403 | 1,812,020 | ||||||
Property
and equipment, net
|
182,520 | 169,796 | ||||||
Goodwill
|
4,020,698 | 4,020,698 | ||||||
Other
assets
|
80,472 | 90,835 | ||||||
Total
assets
|
$ | 5,278,093 | $ | 6,093,349 | ||||
LIABILITIES AND STOCKHOLDERS'
EQUITY
|
||||||||
Current
liabilities:
|
||||||||
Current
portion of long term debt
|
$ | 569,444 | $ | 350,972 | ||||
Accounts
payable
|
267,488 | 235,077 | ||||||
Accrued
interest – related party
|
30,161 | 30,162 | ||||||
Accrued
expenses
|
67,603 | 246,558 | ||||||
Deferred
revenue (as restated)
|
1,022,531 | 781,330 | ||||||
Total
current liabilities (as restated)
|
1,957,227 | 1,644,099 | ||||||
Long
term liabilities:
|
||||||||
Notes
payable
|
236,112 | 638,889 | ||||||
Note
payable – related party, net of unamortized discount of $477,209 and
$543,736 respectively
|
2,615,036 | 2,548,509 | ||||||
Total
long term liabilities
|
2,851,148 | 3,187,398 | ||||||
Total
liabilities (as restated)
|
4,808,375 | 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 $396,652 and $376,312 in arrears as of September 30, 2010 and
March 31, 2010, respectively
|
11 | 11 | ||||||
Common
stock, $0.0001 par value 90,000,000 shares authorized, 33,189,383 and
33,103,951 shares issued and outstanding as of September 30, 2010 and
March 31, 2010, respectively
|
3,319 | 3,310 | ||||||
Additional
paid-in-capital
|
66,524,594 | 66,369,315 | ||||||
Accumulated
deficit (as restated)
|
(66,058,206 | ) | (65,110,784 | ) | ||||
Total
stockholders’ equity (as restated)
|
469,718 | 1,261,852 | ||||||
Total
liabilities and stockholders’ equity
|
$ | 5,278,093 | $ | 6,093,349 |
Note: The
balance sheet at March 31, 2010, as restated in the Company’s Annual Report
on 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
September 30,
|
For the Six Months Ended
September 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Revenues:
|
||||||||||||||||
Software
transactional and subscription revenue
|
$ | 586,765 | $ | 518,725 | $ | 1,085,982 | $ | 1,039,968 | ||||||||
Software
maintenance revenues
|
140,866 | 208,488 | 285,188 | 420,859 | ||||||||||||
Professional
services revenues
|
977,267 | 1,359,976 | 1,700,066 | 2,634,823 | ||||||||||||
Total
revenues
|
1,704,898 | 2,087,189 | 3,071,236 | 4,095,650 | ||||||||||||
Cost
of revenues
|
586,266 | 670,318 | 1,192,523 | 1,346,689 | ||||||||||||
Gross
profit
|
1,118,632 | 1,416,871 | 1,878,713 | 2,748,961 | ||||||||||||
Operating
expenses:
|
||||||||||||||||
Research
and development
|
252,766 | 217,254 | 495,273 | 430,191 | ||||||||||||
Sales
and marketing
|
210,865 | 237,290 | 482,652 | 499,590 | ||||||||||||
General
and administrative
|
797,685 | 793,496 | 1,542,548 | 1,365,137 | ||||||||||||
Depreciation
and amortization
|
46,322 | 39,018 | 76,119 | 82,664 | ||||||||||||
Total
operating expense
|
1,307,638 | 1,287,058 | 2,596,592 | 2,377,582 | ||||||||||||
(Loss)/Income
from operations
|
(189,006 | ) | 129,813 | (717,879 | ) | 371,379 | ||||||||||
Other
expense:
|
||||||||||||||||
Financing
expense – related party
|
(5,181 | ) | (55,518 | ) | (10,362 | ) | (165,119 | ) | ||||||||
Interest
expense
|
43,093 | (134,066 | ) | 25,397 | (266,675 | ) | ||||||||||
Interest
expense – related party
|
(123,172 | ) | (94,979 | ) | (244,576 | ) | (118,248 | ) | ||||||||
Total
other expense
|
(85,260 | ) | (284,563 | ) | (229,541 | ) | (550,042 | ) | ||||||||
Net
loss
|
$ | (274,266 | ) | $ | (154,750 | ) | $ | (947,420 | ) | $ | (178,663 | ) | ||||
Basic
and diluted loss per share
|
$ | (0.01 | ) | $ | 0.00 | $ | (0.03 | ) | $ | (0.01 | ) | |||||
Basic
and diluted weighted-average shares outstanding
|
33,188,907 | 32,849,330 | 33,167,132 | 32,815,014 |
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 Six Months Ended September 30,
2010
|
2009
|
|||||||
Cash
flows from operating activities:
|
||||||||
Net
loss
|
$ | (947,420 | ) | $ | (178,663 | ) | ||
Adjustments
to reconcile net loss to net cash provided by operating
activities:
|
||||||||
Depreciation
and amortization of property and equipment
|
76,120 | 82,664 | ||||||
Amortization
of note discount on note payable – related party
|
66,527 | 93,063 | ||||||
Amortization
of deferred financing costs – related party
|
10,363 | 162,248 | ||||||
Stock
based compensation
|
89,286 | 118,503 | ||||||
Changes
in operating assets and liabilities:
|
||||||||
Accounts
receivable
|
482,306 | (125,645 | ) | |||||
Prepaid
expenses and other current assets
|
199,187 | (190,916 | ) | |||||
Accounts
payable
|
32,410 | (63,756 | ) | |||||
Accrued
expenses
|
(112,955 | ) | (68,144 | ) | ||||
Accrued
interest – related party
|
¾ | (14,679 | ) | |||||
Deferred
revenue
|
241,201 | 62,033 | ||||||
Net
cash provided (used) by operating activities
|
137,025 | (123,293 | ) | |||||
Cash
flows from investing activities:
|
||||||||
Purchase
of property and equipment
|
(88,844 | ) | ¾ | |||||
Net
cash used by investing activities
|
(88,844 | ) | ¾ | |||||
Cash
flows from financing activities:
|
||||||||
Payments
on note payables
|
(184,305 | ) | (17,638 | ) | ||||
Repayments
of note payable – related party
|
¾ | (111,105 | ) | |||||
Net
cash used by financing activities
|
(184,305 | ) | (128,743 | ) | ||||
Net
decrease in cash and cash equivalents
|
(136,124 | ) | (252,036 | ) | ||||
Cash
and cash equivalents, beginning of period
|
444,542 | 403,863 | ||||||
Cash
and cash equivalents, end of period
|
$ | 308,418 | $ | 151,827 | ||||
Supplemental
disclosures of cash flow information:
|
||||||||
Interest
paid
|
$ | 229,541 | $ | 285,226 | ||||
Federal
income taxes paid
|
¾ | ¾ |
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 quarters ended
June 30, 2010 and September 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
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 September 30,
2010 or the year ended March 31, 2010.
Goodwill
is classified as Level 3 within the fair value hierarchy.
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 September 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 six months ended September 30, 2010 was $72,638 and $101,403
for the six months ended September 30, 2009, 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 six
months ended September 30, 2010 and September 30, 2009 is based on awards
ultimately expected to vest, it has been reduced for estimated forfeitures as
explained below.
8
Upon
adoption of ASC Topic No. 718, the Company continued to use the Black-Scholes
option valuation model, which requires management to make certain assumptions
for estimating the fair value of employee stock options granted at the date of
the grant. In determining the compensation cost of the options granted, 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 six months ended September 30, 2009 included a risk-free interest rate of
.9%, expected life of options granted is ten years, expected volatility is
208%, expected dividend yield of zero, and expected forfeiture rate of 30%.
There were 25,000 options granted during the six months ended September 30,
2010. There were 800,000 options granted during the six months ended
September 30, 2009. The weighted average assumptions used in the calculations
for the options granted in the six months ended September 30, 2010 included a
risk-free interest rate of 2.35%, expected life of options granted is ten
years, expected volatility is 117%, expected dividend yield of zero, and
expected forfeiture rate of 30%.
As of
September 30, 2010, there was approximately $19,212 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 as of September 30, 2010 and 2009 are as
follows:
September
30,
|
||||||||
2010
|
2009
|
|||||||
Options
outstanding under the Company’s stock option plans
|
6,571,832
|
7,745,720
|
||||||
Options
outstanding outside the Company’s stock option plans
|
580,000
|
1,160,000
|
||||||
Warrants
outstanding in conjunction with private placements
|
7,539,364
|
2,888,201
|
||||||
Warrants
outstanding as a financing cost for notes payable
|
||||||||
and
convertible notes payable
|
3,599,976
|
2,888,201
|
||||||
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.
9
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 collectability
and provides for an allowance for potential credit losses as deemed
necessary.
Three of
our customers accounted for 61%, 10% and 9% of our net revenues for the six
months ended September 30, 2010. Two of our customers accounted for 59% and 12%
of our net revenues for the six months ended September 30, 2009.
At
September 30, 2010, amounts due from four of our customers accounted for 38%,
19%, 13% and 10% of accounts receivable. At September 30, 2009, amounts due from
five of our customers accounted for 36%, 12%, 12%, 12% and 10% of accounts
receivable.
Recent Accounting
Pronouncements
There
have been no additional accounting pronouncements or changes in accounting
pronouncements during the six months ended September 30, 2010, as compared to
the recent accounting pronouncements described in our Annual Report on Form 10-K
for the fiscal year ended March 31, 2010, that are material, or potentially
material, to the Company’s financial statements.
Income
Taxes
Deferred
income taxes are provided on a liability method whereby deferred tax assets and
liabilities are established for the difference between the financial reporting
and income tax basis of assets and liabilities as well as operating loss and tax
credit carryforwards. Deferred tax assets are reduced by a valuation
allowance when, in the opinion of management, it is more likely than not that
some portion or all of the deferred tax assets will not be realized. At
September 30, 2010 and March 31, 2010, a valuation allowance has been
established to fully offset deferred tax assets.
The
Company has computed the tax provision for the six months ended September 30,
2010 in accordance with the provisions of ASC 740-Income Taxes and ASC
270-Interim
Reporting. The Company has estimated that its effective tax rate
for US purposes will be 0% for 2010, and consequently, recorded zero income tax
benefit for the six months ended September 30, 2010.
At
September 30, 2010, the Company had approximately $28 million of net operating
loss carryforwards for U.S. purposes. These loss carryforwards will expire
from 2020 through 2030 if not utilized.
The
Company records expense and penalties related to unrecognized tax benefits as
income tax expense, and there is no liability accrued for the payment of
interest and penalties as of September 30, 2010 and March 31, 2010,
respectively. The Company recognized no benefits for uncertain positions during
the six months ended September 30, 2010, and there are no unrecognized tax
positions that may be recognized in the next twelve months as a result of a
lapse of statute of limitations and settlement of ongoing audits.
3.
|
Property
and Equipment
|
Property
and equipment as of September 30, 2010 and March 31, 2010 consisted of the
following:
September 30,
|
||||||||
2010
|
March 31, 2010
|
|||||||
Furniture
and fixtures
|
$ | 99,535 | $ | 99,535 | ||||
Office
and telephone equipment
|
182,275 | 182,275 | ||||||
Computer
equipment
|
808,037 | 747,631 | ||||||
Computer
software
|
1,299,536 | 1,271,098 | ||||||
Leasehold
improvements
|
64,733 | 64,733 | ||||||
2,454,116 | 2,365,272 | |||||||
Less
accumulated depreciation and amortization
|
(2,271,596 | ) | (2,195,476 | ) | ||||
Total
|
$ | 182,520 | $ | 169,796 |
10
Depreciation
and amortization expense for the three months ended September 30, 2010 and 2009
was $46,322 and $39,018, respectively. Depreciation and amortization for
the six months ended September 30, 2010 and 2009 was $76,119 and $82,663,
respectively.
4.
|
Bank
Credit Line and Long-Term
Debt
|
At
September 30, 2010 and March 31, 2010, the Company’s bank credit line and
long-term debt consisted of the following:
September 30,
|
March 31,
|
|||||||
2010
|
2010
|
|||||||
Bank
credit line
|
$ | - | $ | - | ||||
Bank
term loan
|
805,556 | 972,222 | ||||||
Notes
payable –related party
|
3,092,245 | 3,092,245 | ||||||
Notes
payable –equipment
|
¾ | 17,639 | ||||||
Unamortized
debt discount
|
(477,209 | ) | (543,736 | ) | ||||
Total
secured notes payable and bank debt
|
3,420,592 | 3,538,370 | ||||||
Total
long-term debt
|
3,420,592 | 3,538,370 | ||||||
Less:
Current portion of long-term debt
|
569,444 | 350,972 | ||||||
Bank
credit line and long-term debt, net of current portion
|
2,851,148 | 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 from such collateral. The initial maximum availability under
the revolving line of credit (the “Revolver”) was $250,000 and increased to
$1,000,000 on July 1, 2010. The maturity date of the Revolver was February 8,
2011. The Revolver accrued 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 could 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 September 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 was $805,556 at September 30, 2010 and
$972,222 at March 31, 2010. The maturity date of the Term Loan was February 9,
2013. The Term Loan accrued interest at the fixed annual rate of 6.50% and is
payable monthly. Principal payments on the Term Loan were scheduled to 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 required that the Company comply with financial
covenants for an adjusted quick ratio and a fixed charge coverage ratio, as
defined. As of September 30, 2010, the Company was not in compliance with
its financial covenants and certain other covenants under the Loan
Agreement. The Company entered into a series of forbearance agreements
with SVB addressing such non-compliance. Further, SVB has recently waived
the events of default arising out of such non-compliance in connection with
entering into an amended and restated loan agreement with the Company (See “Note
8-Subsequent Events”).
11
Notes
Payable – Related Parties
Through a
series of negotiated agreements, the Company has executed and delivered, and is
currently indebted under, (i) a promissory note (the “Nicholson Refinance Note”)
payable to John L. Nicholson, an outside director of the Company, and (ii) a
promissory note (the “Ramey Refinance Note”) payable to Charles E. Ramey, the
Chairman and CEO of the Company. The original proceeds from the Nicholson
Refinance Note and the Ramey Refinance Note (collectively, the “Refinance
Notes”) were used to refinance certain debt of the Company and for other
corporate purposes.
The terms
of the Nicholson Refinance Note are as follows:
|
·
|
Current principal balance is
$2,295,000.
|
|
·
|
The maturity date is January 1,
2014.
|
|
·
|
Annual interest rate is twelve
percent (12%) but will reduce down to ten percent (10%) if the principal
balance is reduced below
$1,905,000.
|
|
·
|
Interest is payable
monthly.
|
|
·
|
No principal payments required
until the maturity date.
|
The terms
of the Ramey Refinance Note are as follows:
|
·
|
Current principal balance is
$792,245.
|
|
·
|
The maturity date is January 1,
2014.
|
|
·
|
Annual interest rate is ten
percent (10%).
|
|
·
|
Interest is payable
monthly.
|
|
·
|
No principal payments required
until the maturity date.
|
The
Refinance Notes are expressly subject to the terms and provisions of the Amended
and Restated Subordination Agreement among SVB, Messrs. Nicholson and Ramey, and
the Company that was entered into as of October 27, 2010 in connection with
closing the New Credit Facility (the “Subordination Agreement”). The
Subordination Agreement provides, among other things, that no payments on the
Refinance Notes other than regular scheduled non-default interest payments are
permitted without the consent of SVB unless and until the New Credit Facility is
paid in full and terminated.
The
Refinance Notes were originally issued pursuant to a Note Purchase Agreement
between the Company and Messrs. Nicholson and Ramey dated August 13, 2008 that
remain in effect. The Refinance Notes are secured by a Security Agreement,
dated August 13, 2008, by and between the Company and Messrs. Nicholson and
Ramey, pursuant to which the Company granted Messrs. Nicholson and Ramey 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.
Pursuant to the Subordination Agreement, this security interest will remain
junior to SVB’s security interest under the New Credit Facility as long as such
facility remains in place.
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 was due in 36 equal monthly
installments of $3,418. As of March 31, 2010, the outstanding balance on this
note payable was $17,639, and has been paid in full in FY2011.
12
Payment
Table
Future
minimum payments under our loan agreements affected for the subsequent
modifications of our loan agreement with SVB and notes payable at September
30, 2010 were as follows:
Fiscal Year Ended
|
||||
March 31,
|
Amount
|
|||
2011
|
$ | 486,111 | ||
2012
|
166,667 | |||
2013
|
152,778 | |||
2014
|
3,092,245 | |||
$ | 3,897,801 |
Expiration
of Private Placement Liability
During
the quarter ended September 30, 2010, the Company recorded a non-cash event when
it released a $66,000 accrual due to the expiration of a liability that arose in
connection with a prior private placement of securities.
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 for the three months ended September 30,
2010 and September 30, 2009 was $101,519 and $101,006, respectively. Rent
expense for the six months ended September 30, 2010 and September 30, 2009 was
$191,059 and $190,321, respectively.
Future
minimum lease payments under operating leases at September 30, 2010 were as
follows:
Fiscal Year Ended
|
||||
March 31,
|
Amount
|
|||
2011
|
$ | 176,156 | ||
2012
|
355,444 | |||
2013
|
119,003 | |||
$ | 650,603 |
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 preferred
stock 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 preferred stock is convertible upon
issuance into common stock at $3.75 per share. The Company has the right to
redeem the Series B preferred stock at any time after issuance at a redemption
price of $4.15 per share, plus any accrued but unpaid
dividends.
13
At
September 30, 2010, and March 31, 2010, there were accumulated, undeclared
dividends in arrears of $396,652 and $376,312, 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
September 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 six months ended September 30, 2010, the Company granted 25,000 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
|
7,845,720 | $ | 0.63 | 1,160,000 | $ | 1.02 | ||||||||||
Granted
|
25,000 | $ | 0.19 | |||||||||||||
Forfeited/canceled
|
(1,298,888 | ) | $ | 0.52 | (580,000 | ) | $ | 1.02 | ||||||||
Outstanding,
September 30, 2010
|
6,571,832 | $ | 0.65 | 580,000 | $ | 1.02 | ||||||||||
Exercisable,
September 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 September 30, 2010 were 5.50 years and $0.68,
respectively. The exercise prices for the options outstanding at September
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
|
5,023,998 | 4,588,999 |
6.19
years
|
$ | 0.49 | $ | 0.51 | ||||||||||
$ |
0.81
– 1.35
|
1,714,834 | 1,714,834 |
3.88
years
|
$ | 0.93 | $ | 0.93 | ||||||||||
$ |
1.36
– 6.25
|
413,000 | 413,000 |
3.25
years
|
$ | 2.13 | $ | 2.13 | ||||||||||
7,151,832 | 6,716,833 |
Common Stock
Grants
During
the three months ended September 30, 2010, the Company granted 43,807 shares of
common stock (at $0.19 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 $8,323 related to these grants
in the three months ended September 30, 2010 and $16,648 related to these grants
in the six months ended September 30, 2010. These grants were made under the
2000 Plan.
14
During
the six months ended September 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) and 43,807 shares of common stock (at $0.19 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
September 30, 2010 and $16,648 related to these grants in the six months ended
September 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.
|
Certain
nonfinancial assets and liabilities are measured at fair value on a nonrecurring
basis in accordance with applicable U.S. GAAP. This includes items such as
nonfinancial assets and liabilities initially measured at fair value in a
business combination and nonfinancial long-lived asset groups measured at fair
value for an impairment assessment. In general, nonfinancial assets
including goodwill and property and equipment are measured at fair value when
there is an indication of impairment and are recorded at fair value only when
any impairment is recognized.
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, as
of September 30, 2010, we have approximately $3.1 million of debt coming due
January 1, 2014 and another $0.8 million of debt callable at the end of the
forbearance period. In connection with entering into an amended and
restated loan agreement with SVB, the Company repaid $0.4 million of this debt
using its cash on hand and borrowings under a new accounts receivable line of
credit, leaving $0.4 million payable ratably through February 2013. (See “Note
8-Subsequent Events”). 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.
15
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 quarters ended June 30, 2010 and September
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, the Company's Quarterly Report on Form 10-Q/A for
the quarter ended June 30, 2010 and 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 September 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
|
Adjustment
|
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 |
September
30, 2010
|
||||||||||||
As
Originally
|
||||||||||||
Reported
|
Adjustment
|
Restated
|
||||||||||
Deferred revenue
|
$ | 422,531 | $ | 600,000 | $ | 1,022,531 | ||||||
Total current liabilities
|
1,357,227 | 600,000 | 1,957,227 | |||||||||
|
||||||||||||
Total liabilities
|
4,208,375 | 600,000 | 4,808,375 | |||||||||
|
- | |||||||||||
Accumulated deficit
|
(65,458,206 | ) | (600,000 | ) | (66,058,206 | ) | ||||||
|
- | |||||||||||
Total stockholders’ equity
|
1,069,718 | (600,000 | ) | 469,718 |
17
9. Subsequent
Event
Effective
as of October 27, 2010, the Company entered into an Amended and Restated Loan
and Security Agreement (the “New Loan Agreement”) with SVB and related
agreements and documents providing for a senior credit facility comprised of an
asset-based accounts receivable line of credit (the “A/R Line of Credit”) and a
term loan (the “New Credit Facility”). The New Loan Agreement amends and
restates the Loan Agreement (also referred to herein as the “Prior Loan
Agreement”) in its entirety.
In
connection with the closing of the New Loan Agreement, the Company repaid
$402,750 of the outstanding principal amount of the term loan provided by SVB
under the Prior Loan Agreement (the “Prior Term Loan”), leaving a principal
balance of $402,750 on such term loan that is provided under and governed by the
New Loan Agreement (the “Refinanced Term Loan”). The maturity date of the
Refinanced Term Loan is February 1, 2013. The Refinanced Term Loan accrues
interest at the fixed annual rate of 7.00% and is payable monthly.
Principal payments on the Refinanced Term Loan will be made in twenty eight (28)
equal monthly installments beginning on November 1, 2010. The Company used
its cash on hand and borrowings under the A/R Line of Credit to fund the partial
repayment of the Prior Term Loan.
The
maximum availability under the A/R Line of Credit is $1,000,000. The
maturity date of the A/R Line of Credit is February 8, 2011. The following
finance charges and handling fees apply to the A/R Line of Credit:
|
·
|
A finance charge equal to 1.25%
above SVB’s prime rate will be applied to the full face amount of the
financed receivables.
|
|
·
|
An additional collateral handling
fee equal to 0.25% per month will applied to the full face amount of the
financed receivables. This collateral handling fee will reduce to
0.10% per month if the Company’s “adjusted quick ratio” is greater than
1.30 at all times during an applicable testing month, with such reduction
being effective for the calendar month which is two months after such
testing month and where the “adjusted quick ratio” equals (A) cash on hand
plus the amount of all eligible accounts divided by (B) current
liabilities minus deferred revenue minus the portion of subordinated debt
that constitutes current
liabilities.
|
For
periods where the Company’s adjusted quick ratio is less than 1.30, it will be
subject to the higher collateral handling fee, yielding an indicative annual
interest rate on the A/R Line of Credit of approximately 10.31% based on the
current SVB prime rate. For periods where the collateral handling fee is
reduced as discussed above, the Company’s indicative annual interest rate on the
A/R Line of Credit would be approximately 8.06% based on the current SVB prime
rate. The finance charges and collateral handling fees for a particular
financed receivable are due when the advance made on such financed receivable
becomes due (as discussed below).
An
advance for a particular financed receivable under the A/R Line of Credit is
required to be repaid on the earlier to occur of (i) the date on which payment
is received on such financed receivable, (ii) the date on which such financed
receivable is no longer an eligible account, (iii) the date on which any
adjustment is asserted to such financed receivable (but only to the extent of
the adjustment if such financed receivable remains otherwise an eligible
account), (iv) the date on which there is a breach of certain warranties or
representations set forth in the New Loan Agreement related to such financed
receivable, or (v) the maturity date of the A/R Line of Credit.
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 that include, but are not limited to, receivables that remain unpaid
more than 90 days from the invoice date and receivables for work performed that
have not yet been invoiced. Under certain circumstances, SVB can, in its
discretion, decrease the 80% cap, adjust the eligibility criteria to be more
stringent and/or elect not to make an advance on a particular receivable.
The Company will use the proceeds from the A/R Line of Credit for general
corporate purposes.
The New
Credit Facility requires that the Company comply with one financial
covenant. That covenant requires that the Company meets the following
minimum EBITDA requirements (where “EBITDA” is defined as earnings before
expenses relating to interest, taxes, depreciation and amortization in
accordance with GAAP, plus equity-based compensation expense):
|
·
|
The Company’s EBITDA for the
month ending August 31, 2010 shall be at least one hundred twenty five
percent (125%) of the Company’s projected performance for such month as
outlined in the Company’s business plan submitted to SVB (the “Company
Plan”).
|
18
|
·
|
For the two months ended
September 30, 2010, the Company’s EBITDA shall be at least seventy five
percent (75%) of the Company’s projected performance for such two (2)
month period as outlined in the Company
Plan.
|
|
·
|
As of each subsequent month
beginning with the month ending October 31, 2010, the Company’s EBITDA for
the three (3) months ending on such measurement date shall be at least
seventy five percent (75%) of the Company’s projected performance for such
three (3) month period as outlined in the Company Plan. The
indebtedness owed under the New Credit Facility will be fully secured by a
perfected first priority security interest in favor of SVB in all of the
Company’s assets, including its cash, accounts receivable, inventory,
equipment, intellectual property rights and contract
rights.
|
Borrowing
under the A/R Line of Credit will be conditioned on (i) all representations and
warranties contained in the New Loan Agreement being true as of the date of the
borrowing request and (ii) no “event of default” having occurred and be
continuing or resulting from the requested advance. The New Loan Agreement
contains a number of representations and warranties, including, but not limited
to, those pertaining to due organization and existence, collateral, accounts
receivable, litigation, the Company’s financial statements, solvency, regulatory
compliance, investments, taxes and use of proceeds. The New Loan Agreement
also contains a number of affirmative covenants, including, but not limited to,
those pertaining to due organization and existence, government approvals,
delivery of financial statements and other certificates, reports and other
information, insurance, bank accounts, intellectual property rights, litigation
and audit rights. The New Loan Agreement also contains a number of
negative covenants, including, but not limited to, those pertaining to
disposition of assets, changes in business and senior management, mergers and
acquisitions, cash dividends, investments, transactions with affiliates,
subordinated debt and regulatory compliance.
The New
Loan Agreement specifies a number of “events of default,” including, but not
limited to, payment defaults, the occurrence of a material adverse change, legal
attachment to collateral, insolvency, cross-defaults with other agreements,
judgments, misrepresentations, and the occurrence or assertion that the New
Credit Facility is not senior to any subordinated debt. In addition, a
breach of any of the covenants, representations and warranties, or other
provisions of the New Loan Agreement will constitute an event of default, with
some of such breaches having a 10-30 day cure period and other breaches
(including the financial covenant, the negative covenants and affirmative
covenants relating to taxes, insurance, bank accounts and financial statement
and other information delivery requirements) having no cure period. As
long as an event of default occurs and is continuing, the interest rates on the
A/R Line of Credit and the Refinanced Term Loan will increase by
5.00%.
In
addition, pursuant to the New Loan Agreement, SVB waived the following events of
default under the Prior Loan Agreement: (i) the Company’s violation of Section
6.7(a) of the Prior Loan Agreement for the April 2010, May 2010, June 2010, July
2010 and August 2010 measuring periods, (ii) the Company’s violation of Section
6.7(b) of the Prior Loan Agreement for the May 2010, June 2010, July 2010 and
August 2010 measuring periods, and (iii) the Company’s violations of Section 7.9
and 8.9 of the Prior Loan Agreement and Section 3 of the subordination agreement
(entered into in connection with the Prior Loan Agreement), for making interest
payments to its subordinated creditors during the period in which the events of
default described in clauses (i) and (ii) of this Section 12.13 had occurred and
were continuing, through the effective date of the New Loan
Agreement.
In
consideration of the New Credit Facility, the Company has paid or agreed to pay
the following fees to SVB: (1) an upfront cash fee of $2,500 payable at the
closing plus (2) an early termination fee of $14,027.50 if the New Loan
Agreement is terminated by the Company prior to February 8, 2011 (or if SVB
terminates the New Loan Agreement before such date after the occurrence of an
event of default).
19
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations.
The
following discussion and analysis of our financial condition and results of
operations should be read in conjunction with the unaudited condensed financial
statements and related notes included elsewhere in this Quarterly Report on Form
10-Q and the audited financial statements and notes thereto included in the
Company’s Annual Report on Form 10-K/A (Amendment No. 2) for the fiscal
year ended March 31, 2010.
C$Money
Transaction
During
the quarter ended September 30, 2010, the Company concluded that it would not be
able to record the effects of the transactions contemplated by the Strategic
Alliance Agreement with C$ cMoney, Inc. (“C$Money”) discussed in Item 7 of the
Company’s Annual Report on Form 10-K/A (Amendment No. 2) for the fiscal
year ended March 31, 2010 in fiscal 2011 or at any time thereafter. The
Company and C$ Money have since rescinded the Strategic Alliance Agreement and
other agreements entered into in connection therewith.
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
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.
20
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 six months ended September
30, 2010 or the year ended March 31, 2010.
Goodwill
is classified as Level 3 within the fair value hierarchy.
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
collectability and provide for an allowance for potential credit losses as
deemed necessary.
Three of
our customers accounted for 61%, 10% and 9% of our net revenues for the six
months ended September 30, 2010. Two of our customers accounted for 59% and 12%
of our net revenues for the six months ended September 30, 2009.
At
September 30, 2010, amounts due from four of our customers accounted for 38%,
19%, 13% and 10% of accounts receivable. At September 30, 2009, amounts due from
five of our customers accounted for 36%, 12%, 12%, 12% and 10% of accounts
receivable
Results
of Operations
The
results of operations reflected in this discussion include our operations for
the three and six month periods ended September 30, 2010 and 2009.
Revenues
For the Three Months Ended
|
For the Six Months Ended
|
|||||||||||||||||||||||
September 30,
|
September 30,
|
|||||||||||||||||||||||
2010
|
2009
|
Change
|
2010
|
2009
|
Change
|
|||||||||||||||||||
Software
transactional and subscription revenues
|
$ | 586,765 | $ | 518,725 | 13 | $ | 1,085,982 | $ | 1,039,968 | 4 | % | |||||||||||||
Software
maintenance revenues
|
140,866 | 208,488 | -32 | 285,188 | 420,859 | -32 | % | |||||||||||||||||
Professional
service revenues
|
977,267 | 1,359,976 | -28 | 1,700,066 | 2,634,823 | -35 | % | |||||||||||||||||
Total
revenues
|
$ | 1,704,898 | $ | 2,087,189 | -18 | $ | 3,071,236 | $ | 4,095,650 | -25 | % |
21
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.
Revenues
decreased for the three and six months ended September 30, 2010, by 18% and 25%,
respectively, as compared to the same periods ended September 30, 2009.
For the three and six months ended September 30, 2010, (i) professional services
revenue decreased by 28% and 35%, respectively, primarily due to the timing
of the completion of certain professional services contracts and the start of
new contracts, (ii) software maintenance revenues decreased 32% and 32%,
respectively, due to the non-renewal of certain maintenance agreements,
(iii) software transactional and subscription revenue increased by 13% and
4%, respectively, due to the addition three new customers and increased
transactions of larger customer, all as compared to the same periods ended
September 30, 2009. We expect our transactional revenue to grow as more of
our current customers, along with new customers, begin to run more of their
business 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 for the three
months ended September 30, 2010 decreased by $84,052, or 13%, to $586,266 as
compared to $670,318 for the prior period. Cost of revenues for the six
month ended September 30, 2010 decreased by $154,166, or 11.4%, to $1,192,523 as
compared to $1,346,689 for the prior year period. This decrease was primarily
due to a decrease of $22,000 and $70,000 in the cost of third party software
purchased for resale for the three and six months ended September 30, 2010,
respectively, and a decrease of $40,000 and $102,000 in outside consulting labor
costs for the three and six months ended September 30, 2010, respectively, due
to reduction in professional services performed.
Operating
Expenses
Total
operating expenses for the three months ended September 30, 2010, increased by
$20,580, or 2%, to $1,307,638 as compared to $1,287,058 for the prior year
period. Total operating expenses for the six months ended September 30, 2010
increased by $219,010, or 9%, to $2,596,592 as compared to $2,377,582 for the
prior year period.
General
and administrative expenses for the three months ended September 30, 2010
increased by $4,189, or 1%, as compared to prior year period due to an $80,000
increase in payroll due to salary increase, overlap of positions and a severance
payment, partially offset by a $38,000 decrease in bonus and accounting accruals
and a $34,000 decrease in stock-based compensation. General and
administrative expenses for the six months ended September 30, 2010 increased by
$177,411, or 13%, as compared to the prior year period
primarily attributable to a $101,000 increase in general and administrative
personnel expenses, a $93,000 increase in legal expense associated with the
Company’s delisting issues, a $40,000 increase in outside consultant expense,
partially offset by a $29,000 decrease in stock-based compensation
expense.
Research
and development expenses for the three and six months ended September 30, 2010
increased by $35,512 and $65,082, respectively, as compared to the prior year
periods due to increases in personnel and outside services. Sales and
marketing expenses for the three and six months ending September 30, 2010
decreased by $26,425 and $16,398, respectively, as compared to prior year
periods due to a decrease in salary expenses.
22
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 for the three months ended September 30,
2010 increased by $7,304, or 18.7%, as compared to the prior year period due to
the purchase of additional equipment and from the correction of lives of
leasehold improvements. Depreciation and amortization for the six months
ended September 30, 2010 decreased by $6,545, or 7.9%, due to a number of our
property and equipment items attaining a fully depreciated state during the
fiscal year.
Other
Expenses
Other
expenses, including interest expense and financing costs, for the three months
ended September 30, 2010 decreased by $199,303, or 70%, to $85,260 as compared
to $284,563 for the prior year period. Other expenses, including interest
expense and financing costs, for the six months ended September 30, 2010
decreased by $320,501, or 58.3%, to $229,541 as compared to $550,042 for the
prior year period. The decrease was primarily due to the effects of the
restructuring of the related party notes on interest expense and the release of
a $60,000 accrual of interest associated with debt.
Net
Loss
Net loss
for the months ended September 30, 2010 increased by $119,516 to a net loss of
$274,266 as compared $154,750 for the prior year period. Net loss for the
six months ended September 30, 2010 increased by $768,757, to a net loss of
$947,420 as compared to a net loss of $178,663. 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, as
of September 30, 2010, we have approximately $3.1 million of debt coming due
January 1, 2014 and another $0.8 million of debt callable at the end of the
forbearance period. In connection with entering into an amended and
restated loan agreement with SVB, the Company repaid $0.4 million of this debt
using its cash on hand and borrowings under a new accounts receivable line of
credit, leaving $0.4 million payable ratably through February 2013. (See “Note
8-Subsequent Events”).
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 decreased by $198,829 to $308,418 at September 30, 2010 from
$507,247 at June 30, 2010. Cash provided by operating activities was
$137,025 for the six months ended September 30, 2010 compared to $123,293 used
by operating activities for the same period in the prior fiscal
year.
Investing
activities used $88,844 in the six months ended September 30, 2010 compared to
no cash used by investing activities for the same period in the prior fiscal
year.
Financing
activities used cash of $184,305 in the six months ended September 30, 2010 as
compared to $128,743 of cash used by financing activities in the six months
ended September 30, 2009.
23
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
(a)
Evaluation
of disclosure controls and procedures. We maintain “disclosure controls
and procedures,” as such term is defined in Rule 13a-15(e) under the
Securities Exchange Act of 1934, or the Exchange Act, that are designed to
ensure that information required to be disclosed by us in reports that we file
or submit under the Exchange Act is recorded, processed, summarized, and
reported within the time periods specified in Securities and Exchange Commission
rules and forms, and that such information is accumulated and communicated to
our management, including our Chief Executive Officer and Chief Financial
Officer, or persons performing similar functions, as appropriate, to allow
timely decisions regarding required disclosure. In designing and evaluating our
disclosure controls and procedures, management recognized that disclosure
controls and procedures, no matter how well conceived and operated, can provide
only reasonable, not absolute, assurance that the objectives of the disclosure
controls and procedures are met. Our disclosure controls and procedures have
been designed to meet reasonable assurance standards. Additionally, in designing
disclosure controls and procedures, our management necessarily was required to
apply its judgment in evaluating the cost-benefit relationship of possible
disclosure controls and procedures. The design of any disclosure controls and
procedures also is based in part upon certain assumptions about the likelihood
of future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions.
Based on
their evaluation as of the end of the period covered by this Quarterly Report on
Form 10-Q/A, management has identified a material weakness in our internal
control over financial reporting, which is an integral component of our
disclosure controls and procedures. As a result of this material
weakness, our Chief Executive Officer and Chief Financial Officer have concluded
that our disclosure controls and procedures were not effective as of September
30, 2010.
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 September 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 will be reviewed to ensure appropriate
consideration of undelivered services on the accounting treatment. These
procedures will be documented internal controls and will be reviewed
annually.
(b)
Changes in
internal control over financial reporting. There was no change in our
internal control over financial reporting (as defined in Rule 13a-15(f)
under the Exchange Act) identified in connection with management’s evaluation
during our last fiscal quarter that has materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.
24
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
|
25
SIGNATURE
In
accordance with the requirements of the Exchange Act, the registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated:
February 22, 2011
US
DATAWORKS, INC.
|
|
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)
|
26
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 or person performing similar
functions.
|
|
32.1*
|
Section
906 Certification of Chief Executive Officer.
|
|
32.2*
|
Section
906 Certification of Chief Financial Officer or person performing similar
functions.
|
*
|
Filed
herewith
|
27