US DATAWORKS INC - FORM 10-Q - November 14, 2011

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EX-31.2 - EXHIBIT 31.2 - US DATAWORKS INC	v239379_ex31-2.htm
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington D.C., 20549

FORM 10-Q

(Mark One)

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

	For the quarterly period ended September 30, 2011

o	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 5th Floor 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 o

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 x No o

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	o	Accelerated filer	o
Non-accelerated filer	o	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 o NO x

Number of shares of the issuer’s common stock outstanding as of November 14, 2011: 33,426,148.

US DATAWORKS, INC.

TABLE OF CONTENTS

FORM 10-Q

QUARTERLY PERIOD ENDED SEPTEMBER 30, 2011

		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	16

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	19

Item 4.	Controls and Procedures	19

PART II - OTHER INFORMATION		20

Item 1.	Legal Proceedings	20

Item 1A.	Risk Factors	20

Item 2.	Unregistered Sales of Equity Securitites and Use of Proceeds	20

Item 3.	Defaults Upon Senior Securities	20

Item 4.	[Removed and Reserved]	20

Item 5.	Other Information	20

Item 6.	Exhibits	21

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, 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 “Part II - 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™, Clearingworks™, Returnworks™, Remitworks™, ClearPayments™, ClearDeposits™, ClearReturns™, and ClearInsights™ are trademarks of US Dataworks. Other trademarks referenced herein are the property of their respective owners.

PART I - FINANCIAL INFORMATION

Item 1.

Financial Statements

US DATAWORKS, INC.

UNAUDITED CONDENSED BALANCE SHEETS

	September 30, 2011			March 31, 2011
	(Unaudited)
ASSETS

Current assets:
Cash and cash equivalents	$	-		$	44,096
Accounts receivable, trade		836,569			1,019,579
Prepaid expenses and other current assets		225,608			387,548
Total current assets		1,062,177			1,451,223

Property and equipment, net		213,780			240,500
Goodwill		4,020,698			4,020,698
Other assets		62,840			70,109
Total assets	$	5,359,495		$	5,782,530

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Current portion of long term debt, net of unamortized discount at September 30, 2011 of $7,111	$	664,174		$	663,667
Accounts payable		632,535			582,304
Accrued expenses		274,017			79,557
Accrued interest – related parties		236,452			87,299
Deferred revenue		464,465			688,340
Total current liabilities		2,271,643			2,101,167

Long term liabilities:
Notes payable		10,728			165,157
Notes payable – related parties, net of unamortized discount at September 30, 2011 and March 31, 2011 of $339,223 and $409,302, respectively		2,745,909			2,682,943
Total long term liabilities		2,756,637			2,848,100
Total liabilities		5,028,280			4,949,267

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 $438,123 and $417,444 in arrears as of September 30, 2011 and March 31, 2011, respectively		11			11

Common stock, $0.0001 par value 90,000,000 shares authorized, 33,401,485 and 33,318,842 shares issued and outstanding as of September 30, 2011 and March 31, 2011, respectively		3,340			3,331
Additional paid-in-capital		66,575,476			66,548,488
Accumulated deficit		(66,247,612	)		(65,718,567	)
Total stockholders’ equity		331,215			833,263

Total liabilities and stockholders’ equity	$	5,359,495		$	5,782,530

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

US DATAWORKS, INC.

UNAUDITED CONDENSED STATEMENTS OF OPERATIONS

	For the Three Months Ended September 30,						For the Six Months Ended September 30,
	2011			2010			2011			2010

Revenues:
Software transactional and subscription revenues	$	684,908		$	586,765		$	1,368,226		$	1,085,982
Software licensing revenues		7,268			-			98,470			-
Software maintenance revenues		163,637			140,866			305,634			285,188
Professional services revenues		826,497			977,267			1,410,515			1,700,066
Software resale revenues		4,301			-			76,689			-

Total revenues		1,686,611			1,704,898			3,259,534			3,071,236

Cost of revenues		542,733			586,266			1,103,638			1,192,523

Gross profit		1,143,878			1,118,632			2,155,896			1,878,713

Operating expenses:
Research and development		206,366			252,766			459,607			495,273
Sales and marketing		385,405			210,865			688,856			482,652
General and administrative		638,129			797,685			1,196,338			1,542,548
Depreciation and amortization		22,849			46,322			47,478			76,119
Total operating expense		1,252,749			1,307,638			2,392,279			2,596,592

Loss from operations		(108,871	)		(189,006	)		(236,383	)		(717,879	)

Other expense:
Interest expense		(23,011	)		37,912			(43,535	)		15,035
Interest expense – related party		(124,970	)		(123,172	)		(249,127	)		(244,576	)
Total other expense		(147,981	)		(85,260	)		(292,662	)		(229,541	)
Net loss	$	(256,852	)	$	(274,266	)	$	(529,045	)	$	(947,420	)

Basic and diluted loss per share	$	(0.01	)	$	(0.01	)	$	(0.02	)	$	(0.03	)

Basic and diluted weighted-average shares outstanding		33,401,485			33,188,907			33,382,931			33,167,132

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

US DATAWORKS, INC.

UNAUDITED CONDENSED STATEMENTS OF CASH FLOW

For the Six Months Ended September 30,

	2011			2010

Cash flows from operating activities:
Net loss	$	(529,045	)	$	(947,420	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization of property and equipment		47,478			76,120
Amortization of note discount on notes payable – related parties		70,075			66,527
Amortization of deferred financing costs		7,269			10,363
Stock based compensation		19,886			89,286
Changes in operating assets and liabilities:
Accounts receivable		183,010			482,306
Prepaid expenses and other current assets		161,940			199,187
Accounts payable		50,231			32,410
Accrued expenses		194,460			(112,955	)
Accrued interest – related parties		149,153			-
Deferred revenue		(223,875	)		241,201

Net cash provided by operating activities		130,582			137,025

Cash flows from investing activities:
Purchase of property and equipment		(20,758	)		(88,844	)

Net cash used by investing activities		(20,758	)		(88,844	)

Cash flows from financing activities:
Payments on notes payable to bank		(486,984	)		(559,305	)
Proceeds from line of credit		209,714			375,000
Proceeds from issuance of notes payable		125,000			-
Payment on equipment loan payable		(1,650	)		-

Net cash used by financing activities		(153,920	)		(184,305	)

Net decrease in cash and cash equivalents		(44,096	)		(136,124	)

Cash and cash equivalents, beginning of period		44,096			444,542
Cash and cash equivalents, end of period	$	-			308,418

Supplemental disclosures of cash flow information:
Interest paid	$	28,110		$	229,541
Income taxes paid		-			-

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

US DATAWORKS, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

1.	Organization and Business

General

US Dataworks, Inc., a Nevada corporation, (the “Company”), develops, markets, and supports payment processing software for on-premise customers and on-demand cloud-computing service customers within 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 conjunction with the audited financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2011. 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, 2012.

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.

Cash and Cash Equivalents

For the purpose of the statements of cash flows, the Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents.

The Company maintains cash deposits with a major bank that, from time-to-time, may exceed federally insured limits; however, the Company has not experienced any losses on deposits.

At September 30, 2011 the Company had a negative cash balance of $1,377 which is being reported in accounts payable on the balance sheet. Based on eligible accounts receivable at September 30, 2011, the Company had $236,113 borrowing availability under the A/R Line of Credit.

Accounts Receivable and Allowance for Doubtful Accounts

The Company’s receivables are recorded when revenue is earned and claims against third parties will be settled in cash. The carrying value of the Company’s receivables represents their estimated net realizable value. The Company extends credit to customers and other parties in the normal course of business. The Company regularly reviews outstanding receivables and provides for estimated losses through an allowance for doubtful accounts. In evaluating the level of established reserves, the Company makes judgments regarding its customers’ ability to make required payments, economic events, and other factors. As the financial condition of these parties change, circumstances develop or additional information becomes available, adjustments to the allowance for doubtful accounts may be required. Provisions for bad debts and recoveries of accounts previously charged off are adjusted to the allowance account.

Property and Equipment

Property and equipment are recorded at cost, less accumulated depreciation and amortization. Depreciation and amortization are provided using the straight-line method over estimated useful lives as follows:

Furniture and fixtures	5 years
Telephone equipment	5 to 10 years
Computer equipment	5 years
Computer software	5 years
Leasehold improvements	Shorter of lease period or
	useful life of asset

Maintenance and minor replacements are charged to expense as incurred. Gains and losses on disposals are included in the results of operations.

Impairment of Long-Lived Assets

The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the assets to future net cash flows expected to be generated by the assets. If the assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount exceeds the fair value of the assets.

Goodwill

The goodwill recorded on the Company’s books is from the acquisition of US Dataworks, Inc. in fiscal year 2002 which remains the Company’s single reporting unit. 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, 2011 or the year ended March 31, 2011.

Goodwill is classified as Level 3 within the fair value hierarchy.

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 and unrestricted stock issuances, for the six months ended September 30, 2011 and September 30, 2010 was $19,886 and $89,286, respectively.

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, 2011 and September 30, 2010 is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures.

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 50,000 and 25,000 employee stock options granted during the six months ended September 30, 2011 and September 30, 2010, respectively.

As of September 30, 2011, there was approximately $13,789 of total unrecognized compensation cost related to non-vested share-based compensation arrangements, which is expected to be recognized over a period of one year.

Income and Loss per Share

The Company calculates income and loss per share in accordance with 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.

For the six months ended September 30, 2011, 15,388,875 potential common stock equivalents have been excluded from the computation of diluted net loss per share because the effect would have been anti-dilutive. For the six months ended September 30, 2010, 18,601,105 potential common stock equivalents have been excluded from the computation of diluted net loss because the effect would have been anti-dilutive. Options and warrants typically convert on a one-for-one basis – see below for details of the conversion of the preferred stock into shares of common stock. The weighted-average common stock equivalents that were excluded from the computation of diluted net loss per share for the six months ended September 30, 2011 and 2010 are as follows:

	For the Six Months
	ended September 30,
	2011		2010

Options outstanding under the Company’s stock option plans		6,344,832		6,571,832
Options outstanding outside the Company’s stock option plans		580,000		580,000
Warrants outstanding in conjunction with private placements		4,687,468		7,539,364
Warrants outstanding for services rendered and litigation settlement		200,000		200,000
Warrants outstanding as consideration for note extensions		3,466,642		3,599,976
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 collectability and provides for an allowance for potential credit losses as deemed necessary.

Two of the Company’s customers accounted for 55% and 9%, respectively, of the total net revenues for the six months ended September 30, 2011. Three of the Company’s customers accounted for 61%, 10% and 9%, respectively, of the total net revenues for the six months ended September 30, 2010.

At September 30, 2011, amounts due from three of the Company’s customers accounted for 63%, 12% and 9%, respectively, of accounts receivable. At September 30, 2010, amounts due from four of the Company’s customers accounted for 38%, 19%, 13% and 10%, respectively, of accounts receivable.

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.

The Company recorded a net loss of $529,045 for the six months ended September 30,2011 and has computed the tax provision for the six months ended September 30, 2011 in accordance with the provisions of ASC Topic No. 740, Income Taxes and ASC Topic No. 270, Interim Reporting. The Company has estimated that its overall effective tax rate for US purposes to be 0% for the six months ended September 30, 2011. Consequently, the Company recorded zero income tax expense or benefit for the period ended September 30, 2011. The overall effective tax rate is different than statutory rates primarily due to a change in the valuation allowance. The Company’s income tax benefit on the loss before taxes was offset by an increase in the valuation allowance. At September 30, 2011 and March 31, 2011, a valuation allowance has been maintained to fully offset net deferred tax assets until it is evident that the deferred tax assets will be utilized in the future.

At September 30, 2011, the Company had approximately $30.7 million of net operating loss carryforwards for U.S. purposes. These loss carryforwards will expire beginning in 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, 2011 and March 31, 2011, respectively. The Company recognized no tax benefits for uncertain positions during the six months ended September 30, 2011.

Subsequent Events

The Company has evaluated subsequent events from the balance sheet date through the date the financials were issued, and has determined there are no events that would require disclosure herein.

Recently Issued Accounting Pronouncements

Fair Value Measurements: In August 2009, the FASB issued ASU No. 2009-05, Measuring Liabilities at Fair Value (“ASU 2009-05”). ASU 2009-05 provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value of such liability using one or more of the techniques prescribed by the update. ASU 2009-05 is effective for the first reporting period beginning after issuance. There was no change to our financial statements due to the implementation of this guidance.

In January 2010, the FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements (“ASU 2010-06”). Reporting entities will have to provide information about movements of assets among Levels 1 and 2; and a reconciliation of purchases, sales, issuance, and settlements of activity valued with a Level 3 method, of the three-tier fair value hierarchy established by ASC 820. The ASU 2010-06 also clarifies the existing guidance to require fair value measurement disclosures for each class of assets and liabilities. ASU 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009 for Level 1 and 2 disclosure requirements and after December 15, 2010 for Level 3 disclosure requirements. The implementation of this guidance did not have a material effect to the financial statements.

Revenue Recognition: In October 2009, the FASB issued ASU No. 2009-13, Revenue Recognition (Topic 605)—Multiple Deliverable Revenue Arrangements (“ASU 2009-13”). ASU 2009-13 eliminates the residual method of allocation and requires the relative selling price method when allocating deliverables of a multiple-deliverable revenue arrangement. The determination of the selling price for each deliverable requires the use of a hierarchy designed to maximize the use of available objective evidence, including VSOE, third party evidence of selling price (“TPE”), or estimated selling price (“ESP”).

In October 2009, the FASB also issued ASU No. 2009-14, Software (Topic 985)—Certain Revenue Arrangements That Include Software Elements (“ASU 2009-14”). ASU 2009-14 excludes tangible products containing software and non-software components that function together to deliver the product’s essential functionality from the scope of ASC 605-985, Software-Revenue Recognition.

ASU 2009-13 and ASU 2009-14 are effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, and must be adopted in the same period using the same transition method. If adoption is elected in a period other than the beginning of a fiscal year, the amendments in these standards must be applied retrospectively to the beginning of the fiscal year. Full retrospective application of these amendments to prior fiscal years is optional. Early adoption of these standards may be elected. The implementation of this guidance did not have a material effect to the financial statements.

In September 2011, the FASB issued ASU 2011-08, Intangibles – Goodwill and Other (Topic 350): Testing Goodwill for Impairment. This ASU is intended to simplify how entities, both public and nonpublic, test goodwill for impairment. ASU 2011-08 permits an entity to first assess qualitative factors to determine whether it is “more likely than not” that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in Topic 350, Intangibles – Goodwill and Other. ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal year beginning after December 15, 2011 with early adoption permitted. We expect to early adopt the provision of ADU 2011-08 during the fiscal third quarter 2012 and do not believe that the adoption of this standard will have a material impact on our financial position, results of operations, or cash flows.

3.	Property and Equipment

Property and equipment at September 30, 2011 and March 31, 2011 consisted of the following:

	September 30, 2011			March 31, 2011

Furniture and fixtures	$	102,630		$	99,535
Office and telephone equipment		198,781			198,781
Computer equipment		854,126			854,126
Computer software		1,361,259			1,343,596
Leasehold improvements		64,733			64,733
		2,581,529			2,560,771
Less: accumulated depreciation and amortization		(2,367,749	)		(2,320,271	)
Total	$	213,780		$	240,500

Depreciation and amortization expense for the three months ended September 30, 2011 and 2010 was $22,849 and $46,322, respectively. Depreciation and amortization expense for the six months ended September 30, 2011 and 2010 was $47,478 and $76,119, respectively.

4.	Bank Credit Line and Long-Term Debt

At September 30, 2011 and March 31, 2011, the Company’s bank credit line and long-term debt consisted of the following:

	September 30, 2011			March 31, 2011

Bank credit line	$	390,722		$	493,699
Bank term loan		145,151			319,444
Notes payable		125,000			-
Notes payable –related parties		3,092,245			3,092,245
Notes payable –equipment		14,031			15,681
Unamortized debt discount		(346,338	)		(409,302	)
Total secured notes payable and bank debt		3,420,811			3,511,767
Less: Current portion of long-term debt		(664,174	)		(663,667	)
Long-term debt, net of current portion	$	2,756,637		$	2,848,100

A/R Line of Credit and Term Loan

Effective as of October 27, 2010, the Company entered into an Amended and Restated Loan and Security Agreement (the “Loan Agreement”) with Silicon Valley Bank (“SVB”) providing for a senior credit facility (the “Credit Facility”) comprised of an asset-based accounts receivable line of credit (the “A/R Line of Credit”) and a term loan (“Term Loan”). The Loan Agreement amended and restated a previous loan agreement with SVB in its entirety. On February 8, 2011, May 9, 2011, June 7, 2011, July 7, 2011, September 12, 2011, and November 1, 2011 the Company entered into certain amendments to the Loan Agreement.

The Term Loan accrues interest at the fixed annual rate of 7.00% and is payable monthly. Principal payments on the Term Loan are being made in equal monthly installments of $13,666. Pursuant to the July 7, 2011 amendment, the Company is required to make additional principal payments as follows: $36,667 in July 2011, $30,000 by August 1, 2011 and, beginning in August 2011, additional principal payments equal to 3% of daily collections. Although the Term Loan has a maturity date of February 1, 2013, with the payment of the additional principal payments noted above, the Term Loan is expected to be fully repaid by February 2012.

The maximum availability under the A/R Line of Credit is $1,000,000. Subject to certain commitment limits, through June 30, 2011, the Company could borrow up to eighty percent (80%) of its eligible accounts receivable. Pursuant to the July 7, 2011 amendment, SVB increased the borrowing availability up to eighty-five percent (85%) of its eligible accounts receivables. Also, pursuant to the July 7, 2011 amendment, the maturity date of the A/R Line of Credit was extended to June 28, 2012. The finance charges and handling fees that applied to the A/R Line of Credit through June 30, 2011 consisted of (i) a finance charge of 1.25% above SVB’s prime rate and (ii) a collateral handling fee of either 0.10% per month or 0.25% per month depending on whether the Company’s adjusted quick ratio was above or below 1.30 (for the quarter ended June 30, 2011, the higher collateral handling fee applied). These charges apply to the full face amount of the financed receivables. The effective rate of these charges during the quarter ended June 30, 2011 was 10.31%. Pursuant to the July 7, 2011 amendment, (i) the finance charge applicable to the A/R Line of Credit was increased to 2.20% above SVB’s prime rate but will reduce back to 1.25% above SVB’s prime rate if the Company’s adjusted quick ratio exceeds 1.00 and (ii) the adjusted quick ratio trigger to reduce the collateral handling fee was reduced to 1.00. The effective interest rate of these changes for the quarter ended September 30, 2011 was 10.82%.

Through July 31, 2011, the Loan Agreement imposed one financial covenant that required the Company to meet certain minimum EBITDA requirements (where “EBITDA” is defined to include an add-back for equity-based compensation expense) for a trailing three-month period. Beginning in August 2011, the EBITDA covenant was replaced with a minimum liquidity ratio covenant that requires the Company to maintain a liquidity ratio of at least 1.20 at all times but measured at the end of each month. Beginning in September 2011, the Loan Agreement imposed an additional covenant requiring the Company to maintain a fixed charge coverage ratio (excluding the mandatory $36,667 July 2011 principal payment, the mandatory $30,000 August 2011 principal payment and the mandatory principal payments of 3% of daily collections) of at least 1.30 at all times but tested at the end of each month based on a trailing three-month total. The Company failed to comply with the EBITDA covenant for the three months ended June 30, 2011. On August 12, 2011 the Company received a waiver from SVB for the violation. The Company failed to comply with the EBITDA covenant for the three months ended July 31, 2011. On September 12, 2011 the Company received a conditional waiver from SVB which was subsequently met. The Company failed to comply with the fixed charge coverage ratio covenant originally imposed for the three months ended September 30, 2011. Pursuant to the November 1, 2011 amendment, the Company received a waiver from SVB for the violation and SVB agreed to move the initial compliance period for the covenant to the three months ended November 30, 2011. All financial covenants will be eliminated when the Term Loan is paid in full.

The July 7, 2011 amendment also (i) provides that no payments of any subordinated debt can be made without the prior written consent of SVB until the Term Loan is paid in full, (ii) eliminates all early termination fees and (iii) imposes certain additional reporting requirements.

The indebtedness owed under the Credit Facility is 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.

Notes Payable

In August 2011, the Company completed a private placement in which, investors received in the aggregate $125,000 in one-year notes (the “One-Year Notes”) and three-year warrants to purchase a total of 58,138 shares of the Company’s common stock at an exercise price of $0.43 per share. The One-Year Notes accrue interest at a rate of 12% per annum payable monthly in arrears. No principal payments are required to be made on the Notes until the maturity date, which is August 1, 2012. The One-Year Notes will rank junior to the SVB bank debt but senior to all other Company debt, including the affiliate debt. The One-Year Notes will be secured by a second lien on all of the assets of the Company which is junior only to the first lien securing the SVB bank debt. The warrants were valued at $7,111, which will be an original issue discount to the One-Year Notes.

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 Refinance Notes are as follows:

Refinance Notes
Nicholson		Ramey		Total
$	2,295,000	$	797,245	$	3,092,245

The maturity date on the Refinance Notes is January 1, 2014. Interest on the Refinance Notes is payable monthly (subject to certain conditions as discussed below) and no principal payments are required until maturity. The annual interest rate for the Nicholson Refinance Note is 12% but reduces to 10% if the principal balance drops below $1,905,000. The annual interest rate for the Ramey Refinance Note is 10%. As of September 30, 2011, we had $236,452 in accrued but unpaid interest on the Refinance Notes.

Pursuant to the July 7, 2011 amendment to the Loan Agreement, all payments on the Refinance Notes (including regular scheduled interest payments) are prohibited unless consented to in writing to by SVB until the Refinanced Term Loan is paid in full.

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 agreements with SVB and the holders of the One-year Notes, this security interest will remain junior to SVB’s security interest under the Credit Facility as long as such facility remains in place and will be junior to the security interest of the holders of the One-Year Notes until those notes are paid in full.

Note Payable Equipment

In December 2010, the Company entered into a capital lease agreement with CIT Technology Financing Services, Inc. to lease new telephone equipment for $16,505. The lease has a $1 purchase option at the end of 60 equal monthly installments of $379. As of September 30, 2011, the outstanding balance on this capital lease was $14,031.

Payment Table

Future minimum payments under our loan agreements and notes payable at September 30, 2011 were as follows:

Fiscal Year Ended March 31,	Amount

2012	$	475,782
2013		190,119
2014		3,095,546
2015		3,301
2016		2,401
	$	3,767,149

5.	Commitments and Contingencies

Leases

The Company leases an office in Sugar Land, Texas under an operating lease agreement that expires on January 31, 2018. Rent expense for the six months ended September 30, 2011 and 2010 was $191,254 and $191,059, respectively. This lease was amended on June 2, 2011 by extending the term through January 31, 2018. The amended lease provides for total rent abatements of approximately $188,000 and a refurbishment allowance of approximately $282,000. The Company expenses rent on a straight line basis over the lease term at 31,088 per month.

Future minimum lease payments under operating leases at September 30, 2011 were as follows:

Fiscal Year Ended March 31,	Amount

2012	$	156,583
2013		281,850
2014		378,932
2015		397,722
2016		416,512
2017 and beyond		801,707
	$	2,433,305

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. Each share of Series B preferred stock is convertible into one share of common stock, resulting in an effective conversion price of $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.

At September 30, 2011, and March 31, 2011, there were accumulated, undeclared dividends in arrears of $438,123 and $417,444, 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, 2011, the maximum aggregate number of shares which may be granted under the 2000 Plan was 10,000,000. 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, 2011, the Company granted 50,000 stock options.

The following table summarizes certain information relative to stock options:

	2000 Stock Option Plan					Outside of Plan
				Weighted-				Weighted-
				Average				Average
	Shares			Exercise Price		Shares		Exercise Price
Outstanding, March 31, 2011		6,445,132		$	0.67		580,000	$	1.02
Granted		50,000		$	0.10		—		—
Forfeited/canceled		(150,300	)	$	1.58		—		—
Outstanding, September 30, 2011		6,344,832		$	0.65		580,000	$	1.02
Exercisable, September 30, 2011		6,288,832		$	0.66		580,000	$	1.02

The weighted-average remaining lives of the options granted under and outside the plan at September 30, 2011 were 4.49 years and 2.07 years, respectively.

Common Stock Grants

During the three months ended September 30, 2011, the Company granted 36,403 shares of common stock (at $0.16 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 $5,821 related to these grants during the six months ended September 30, 2011. These grants were made under the 2000 Plan.

7.	Fair Value Measurements

On April 1, 2008, the Company adopted “Fair Value Measurements” in accordance with 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.

Liquidity

Due to our prior history of experiencing negative cash flow from operations and the debt financing that we put in place to fund this historical negative cash flow, as of September 30, 2011, we have approximately $3.1 million of affiliate debt coming due January 1, 2014, $125,000 of debt coming due on August 1, 2012 and another $145,151 of bank debt payable in various installments that we expect to fully repay by February 2012. We also have an A/R Line of Credit with SVB that was renewed through June 28, 2012. In addition, under certain circumstances, we are required to defer interest payments on our affiliate debt. However, this deferred interest will be payable when the conditions allowing us to make such payments are met. As of September 30, 2011, we had $236,452 in such accrued but unpaid interest on this debt. At September 30, 2011 the Company had a negative cash balance of $1,377 which is being reported in accounts payable on the balance sheet. Based on eligible accounts receivable at September 30, 2011, the Company had $236,113 borrowing availability under the A/R Line of Credit. While we expect to be able to fund our operations and build enough cash to pay off these obligations as they come due, if that is not the case, our viability as a going concern will be in jeopardy and will depend on our ability to obtain adequate sources of debt or equity funding to refinance this debt and to fund the continuation of our business operations and to ultimately achieve adequate profitability and cash flows to sustain our operations. In addition, we will need to increase revenues from transaction and subscription based software license contracts and professional services agreements and software licenses to become profitable.

We have taken a number of steps to address and improve this situation. These steps include implementing staff reductions, terminating third party consulting services, obtaining rent abatements in connection with the negotiation of a renewal of our office lease, deferring interest payments on the affiliate debt and raising $125,000 in debt financing. However, the effects of these steps will be offset by an increase in near-term principal payments on our term loan with SVB and near-term payments to OptimizedNow, LLC in consideration for providing sales and marketing services to the Company. Management believes these measures that have been put in place will effectively fund our operations for a reasonable period of time. If our liquidity does not improve in a meaningful way, we will be forced to take additional steps to address the issue, the primary one being raising additional equity and/or debt capital. However, there can be no assurance that we would be successful in attempting to raise such capital in which case our ability to remain as a going concern would be in jeopardy.

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 for the fiscal year ended March 31, 2011.

Critical Accounting Policies

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

We believe that of the significant accounting policies used in the preparation of our unaudited condensed financial statements (see Note 2 to the Financial Statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2011), the following are critical accounting policies, which may involve a higher degree of judgment, complexity and estimates.

Revenue Recognition

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.

Goodwill

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, 2011 or the year ended March 31, 2011.

Goodwill is classified as Level 3 within the fair value hierarchy.

Concentrations of Credit Risk

Two of our customers accounted for 55% and 9%, respectively, of Company’s net revenues for the six months ended September 30, 2011. Three of our customers accounted for 61%, 10% and 9%, respectively, of the Company’s net revenues for the six months ended September 30, 2010.

At September 30, 2011, amounts due from three of our customers accounted for 63%, 12% and 9%, respectively, of accounts receivable. At September 30, 2010, amounts due from four of our customers accounted for 38%, 19%, 13% and 10%, respectively, of accounts receivable.

Results of Operations

The results of operations reflected in this discussion include our operations for the three and six months ended September 30, 2011 and 2010.

Revenue

We generate revenues from (i) licensing and supporting software with fees due on a transactional or subscription basis, (ii) licensing software with fees due on the grant of the license and delivery of the software recognizing revenue as percentage of completion over the term of professional services associated with the license, (iii) providing maintenance, enhancement and support for previously licensed products, (iv) providing professional services, and (v) reselling third party software in connection with our software.

	For the Three Months Ended September 30,							For the Six Months Ended September 30,
	2011		2010		Change			2011		2010		Change

Software transactional and subscription revenues	$	684,908	$	586,765		17	%	$	1,368,216	$	1,085,982		26	%
Software licensing revenues		7,268		-		100	%		98,470		-		100	%
Software maintenance revenues		163,637		140,866		17	%		305,634		285,188		8	%
Professional services revenues		826,497		977,267		-16	%		1,410,515		1,700,066		-17	%
Software resale revenues		4,301		-		100	%		76,689		-		100	%

Total revenue	$	1,686,611	$	1,704,898		-1	%	$	3,259,534	$	3,071,236		7	%

Total revenue decreased by 1% and increased by 7% for the three and six months, ended September 30, 2011, respectively, as compared to the prior year periods ended September 30, 2010. Software transactional and subscription revenue increased by 26% and 17% for the six and three months ended September 30, 2011, respectively, as compared to the prior year periods due to increased transactions under management from a significant customer and from the addition of new customers. License revenue is recognized ratably over the period that related services are rendered. The increase in license revenue for the three and six months ended September 30, 2011, respectively, as compared to the prior year periods relates to licenses for upgrades of the Clearingworks product by two of our customers. Professional services revenue decreased by 17% and 16% for the six and three months ended September 30, 2011 as compared to the prior year periods due to a decrease in consulting revenue from a large customer as we were between the end of one consulting engagement and the start of a follow-on consulting engagement, offset by the professional services earned from upgrades by two of our customers. The increase in software resale revenues for the six and three months ended September 30, 2011 as compared to the prior years period related to hardware as part of a professional services engagement.

Cost of Revenues

Cost of revenues includes personnel costs associated with our software, maintenance, support, training and installation services of our on premise and on-demand cloud-computing offerings. Cost of revenues also includes the cost of other third party software resold in connection with our software. Cost of revenues for the three months ended September 30, 2011 decreased by $45,533, or 8%, to $542,733 as compared to $586,266 for the prior year period ended September 30, 2010. Cost of revenues for the six months ended September 30, 2011 decreased by $88,885, or 8%, to $1,103,638 as compared to $1,192,523 for the prior year period. This decrease was primarily due to decreases of $102,114 in personnel costs and $132,357 in outside consulting associated with management’s cost reduction actions, partially offset by an increase of $139,202 in hardware and software resale expenses.

Operating Expenses

Total operating expenses for the three months ended September 30, 2011 decreased by $122,889, or 10%, to $1,184,749 as compared to $1,307,638 for the prior year period. Total operating expenses for the six months ended September 30, 2011 decreased by $272,313, or 11%, to $2,324,279 as compared to $2,596,592 for the prior year period.

General and administrative expenses for the three and six months ended September 30, 2011 as compared to prior year periods decreased by $159,556 and $346,210, or 20% and 22%, respectively. The decrease for the three months ended September 30, 2011 was due to a $115,054 decrease in legal expense, and a $72,025 decrease in stock-based compensation. The decrease for the six months ended September 30, 2011 was due to a $121,088 decrease in outside services fee, a $27,970 decrease in outside data services, and a $39,379 decrease in other miscellaneous expenses, in addition to the decreases noted for the three month variance.

Research and development expenses for the three and six months ended September 30, 2011 decreased by $46,400 and $35,666, respectively, as compared to the prior year periods. The decrease for the three and six months ended is due to the allocation of workforce to various consulting projects.

Sales and marketing expenses for the three and six months ended September 30, 2011 increased by $174,540 and $206,204, respectively, compared to the prior year periods due to an increase of $242,818 relating to the engagement of Full Quota in May 2011 for inside sales services, partially offset by decreases of $33,520 in travel and entertainment expenses.

Depreciation and amortization expenses for the three and six months ended September 30, 2011 decreased by $23,473 and $28,641, or 51% and 38%, respectively, compared to the prior year periods. These decreases are primarily due to a number of our property and equipment items attaining a fully depreciated state during the current fiscal.

Other Expenses

Other expenses, including interest expense and financing costs, for the three months ended September 30, 2011 increased by $62,721, or 74%, to $147,981 as compared to $85,260 for the prior year period. Other expenses, including interest expense and financing costs, for the six months ended September 30, 2011 increased by $63,121, or 28%, to $292,662 as compared to $229,541 for the prior year period. These increases are primarily due a $60,000 accrual reversal for which the obligation expired.

Net Loss

Net loss for the three months ended September 30, 2011 decreased by $17,414 to a net loss of $256,852 compared to net loss of $274,266 for the prior year period. Net loss for the six months ended September 30, 2011 decreased by $418,375 to a net loss of $529,045 compared to net loss of $947,420 for the prior year period. For details related to these losses, see the preceding discussions related to revenues, cost of revenues, operating expenses and other income sections above.

Liquidity and Capital Resources

Due to our prior history of experiencing negative cash flow from operations and the debt financing that we put in place to fund this historical negative cash flow, as of September 30, 2011, we have approximately $3.1 million of affiliate debt coming due January 1, 2014, $125,000 of debt coming due on August 1, 2012 and another $145,151 of bank debt payable in various installments that we expect to fully repay by February 2012. The balance of such bank debt as of November 14, 2011 is $75,000. We also have an A/R Line of Credit with SVB that was renewed through June 28, 2012. In addition, under certain circumstances, we are required to defer interest payments on our affiliate debt. However, this deferred interest will be payable when the conditions allowing us to make such payments is met. As of September 30, 2011, we had $236,452 in such accrued but unpaid interest on this debt. At September 30, 2011 the Company had a negative cash balance of $1,377 which is being reported in accounts payable on the balance sheet. Based on eligible accounts receivable at September 30, 2011, the Company had $236,113 borrowing availability under the A/R Line of Credit. While we expect to be able to fund our operations and build enough cash to pay off these obligations as they come due, if that is not the case, our viability as a going concern will be in jeopardy and will depend on our ability to obtain adequate sources of debt or equity funding to refinance this debt and to fund the continuation of our business operations and to ultimately achieve adequate profitability and cash flows to sustain our operations. In addition, 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 at September 30, 2011 decreased by $44,096 to zero, as compared to $44,096 at March 31, 2011. Cash provided by operating activities for the six months ended September 30, 2011 was $130,582 as compared to cash provided by operating activities of $137,025 for the six months ended September 30, 2010. Cash used by investing activities for the six months ended September 30, 2011 was $20,758 as compared to $88,844 for the prior year period. The decrease in net cash used by investing activities resulted from less work performed on our product website. Cash used by financing activities for the six months ended September 30, 2011 was $153,920 as compared to $184,305 for the prior year period. The decrease for the six months ended September 30, 2011 resulted from the continued pay down of the Term Loan.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

Item 4.

Controls and Procedures

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

Based on their evaluation as of the end of the period covered by this Quarterly Report on Form 10-Q, our Chief Executive Officer and Chief Financial Officer, or persons performing similar functions, have concluded that, as of that date, our disclosure controls were effective at the reasonable assurance level.

Changes in internal control over financial reporting. There was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) identified in connection with management’s evaluation during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

From time to time, we may become involved in various legal and other proceedings that are incidental to the conduct of our business. We are currently not involved in any such legal proceedings.

Item 1A. Risk Factors

There have been no material changes in our risk factors disclosed in our Annual report on Form 10-K for the year ended March 31, 2011 filed with the SEC on July 13, 2011 under “Item 1A. Risk Factors.”

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

None.

Item 3. Defaults Upon Senior Securities

During the quarter ended September 30, 2011, the Company was in default under its Loan Agreement with SVB as a result of failing to comply with (i) with the minimum EBITDA covenant for the three months ended June 30, 2011 and (ii) the minimum EBIDTA covenant for the three months ended July 31, 2011. The Company has since received waivers from SVB for those covenant violations. The Company also failed to comply with the fixed charge coverage ratio covenant for the three months ended September 30, 2011. The Company has also since received a waiver from SVB for this covenant violation.

Item 4. Removed and Reserved

Item 5. Other Information

On November 10, 2011, the Board of Directors (the “Board”) of the Company accepted the resignation of Reed Overfelt from his position as a Class II Director and from all of his other positions with the Company, including his committee memberships. At that time, the Board chose to leave the Class II Director vacancy unfilled. Also, on November 10, 2011, the Board elected Joseph Saporito to fill the Class I Director vacancy created by the death of former director Joe Abrell in August 2011. There are no arrangements or understandings between Mr. Saporito and any other person pursuant to which he was selected as a director. At that time, Mr. Saporito was also elected to serve as the Chair of the Company’s Nominating/Corporate Governance Committee and as a member of the Audit Committee. Mr. Saporito will be entitled to receive compensation payable to the outside directors of the Company pursuant to the Company’s Outside Director Compensation Plan, which plan is described in the Company’s amended definitive Proxy Statement for its 2011 Annual Meeting of Stockholders filed with the Commission on August 17, 2011 under the caption “Narrative to Director Compensation.” There are no transactions in which Mr. Saporito has an interest requiring disclosure under Item 404(a) of Regulation S-K.

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 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.

101*		Interactive Data File

*Filed herewith

SIGNATURE

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

Dated: November 14, 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)

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.

101*		Interactive Data File

*Filed herewith

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