UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington D.C.,
20549
Form 10-KSB
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
March 31, 2008
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition
period to
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Commission file number:
001-15385
US Dataworks, Inc.
(Name of small business issuer
in its charter)
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Nevada
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84-1290152
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. employer
identification number)
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1 Sugar Creek Center Blvd
5
th
Floor
Sugar Land, Texas
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77478
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(Address of principal executive offices)
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(Zip Code)
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Issuer’s
telephone number:
(281) 504-8000
SECURITIES
REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Common Stock, par value $0.0001 per share American Stock
Exchange
SECURITIES
REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
Check whether the issuer is not required to file reports
pursuant to Section 13 or 15(d) of the Exchange
Act
o
Check whether the issuer (1) filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act during
the past 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
þ
NO
o
Check if there is no disclosure of delinquent filers in response
to Item 405 of
Regulation S-B
contained in this form, and no disclosure will be contained, to
the best of the registrant’s knowledge, in definitive proxy
or information statements incorporated by reference in
Part III of this
Form 10-KSB
or any amendment to this
Form 10-KSB.
o
Indicate by check mark whether the registrant is a shell company
(as defined in
rule 12b-2
of the Exchange
Act). YES
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NO
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Issuer’s revenue for fiscal year ended March 31,
2008: $5,717,592
The aggregate market value of the voting and non-voting common
equity held by non-affiliates computed by reference to the price
at which the common equity was sold, or the price of such common
equity as of June 24, 2008 as reported on the American
Stock Exchange is $3,797,231. This calculation does not reflect
a determination that certain persons are affiliates of the
Registrant for any other purpose.
Number of shares of Common Stock outstanding as of June 24,
2008: 32,262,962.
DOCUMENTS
INCORPORATED BY REFERENCE
Items 9 (as to directors, audit committee, audit committee
financial expert and Section 16(a) Beneficial Ownership
Reporting Compliance), 10, 11 (as to Beneficial Ownership), 12
and 14 of Part III of this Annual Report on
Form 10-KSB
incorporate by reference information from the registrant’s
proxy statement to be filed with the Securities and Exchange
Commission within 120 days of the end of the fiscal year
ended March 31, 2008, in connection with the solicitation
of proxies for the registrant’s 2008 Annual Meeting of
Stockholders.
Transitional Small Business Disclosure
Format: Yes
o
No
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US
DATAWORKS, INC.
TABLE OF CONTENTS
2008
FORM 10-KSB
PART I
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 the benefits and features
of our products, competition and our competitive position, 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 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 below, 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 set forth below under “Factors That May Affect Our
Results.” 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,” “we,”
“us,” or “our” means US Dataworks, Inc.
MICRworks
tm
,
Clearingworks
®
,
Returnworks
tm
,
Remitworks
tm
,
and Clearinghouse Least Cost Routing/Best Fit
Clearing
sm
,
are trademarks of US Dataworks. Other trademarks referenced
herein are the property of their respective owners.
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Item 1.
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Description
of Business
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General
US Dataworks is a developer of payment processing software,
serving several of the top banking institutions, top credit card
issuers, major retailers and the United States Government. We
generate revenue from the licensing, professional services,
transaction processing and maintenance of our core product,
Clearingworks. Our software is designed to enable organizations
to process payments from a variety of sources; paper checks,
electronic payments via the Internet or telephone, and other
payment modalities. Our products are designed to provide
organizations with either an in-house solution complementing the
organizations’ existing technologies, systems and
operational workflow or by using Clearingworks via the Internet
on an Application Services Provider.
Background
US Dataworks was incorporated in the state of Colorado as JLQ,
Inc. in December 1994, and we changed our name to New World
Publishing in October 1997. In May 1999, we acquired
Communications Television, Inc., a California corporation, and
changed our business to an Internet marketing and technology
infrastructure company specializing in supporting cost effective
business-to-business and business-to-consumer revenue based
marketing initiatives. We changed our name to Sonicport.com,
Inc. in October 1999 and in February 2000, changed our state of
incorporation from Colorado to Nevada. In February 2001, we
changed our name to Sonicport, Inc.
2
We acquired US Dataworks, Inc., a Delaware corporation, in April
2001. Following the acquisition, we focused our business on
developing electronic check processing software. In March 2002,
we changed our name to US Dataworks, Inc.
Products
Clearingworks is an enterprise payment solution that puts the
power of payment processing in the hands of the customer. This
leading-edge solution combines remittance, retail, check,
payment, and return processing into single consolidated platform
with highly-scalable features designed to grow in tandem with a
customer’s business operation. Clearingworks shared
services and data management features are designed to eliminate
the need for adopting multiple payment processing systems to
process and accommodate different payment types. Clearingworks
Least Cost Routing/Best Fit
Clearing
SM
uses the latest industry-leading technology together with the
customer’s banking relationships to determine the most
efficient method for payment settlement.
Customers
US Dataworks’ customers include five of the top 25 banking
institutions in the United States, four of the top 10 credit
card issuers in the United States, major retailers and two
United States Government agencies. Four of our customers,
American Express, Federal Reserve Bank, Regulus and Citibank,
accounted for 31%, 24%, 11%, and 10%, respectively, of our
net revenue for the year ended March 31, 2008. Four of our
customers, American Express Federal Reserve Bank, Hyundai
Syscomm and Citibank accounted for 24%, 18%, 14%, and 11%,
respectively, of our net revenue for the year ended
March 31, 2007.
Strategic
Business Relationships
We believe that, in addition to growth from organic sales,
aligning ourselves with key strategic distribution partners to
sell and distribute our software products will accelerate our
revenue growth and capture of market share. We have aligned
ourselves with several strategic partners as a core component of
our sales and distribution strategy, including Computer Sciences
Corporation, Chase Paymentech Services, and eGistics.
We also have a key strategic alliance with Accuity, a unit of
Thomson Corporation, to incorporate its EPICWare database into
our products. We plan to continue pursuing additional strategic
alliances to help increase market share.
Competition
Our competitors in the financial services market include Wausau
Financial Systems, J&B Software, Fiserv and Telecheck. The
services offered by these competitors include electronic billing
and payment, electronic funds transfer, payment solutions,
reconciliation, checks by phone and recurring billing, as well
as value-added services such as strategy consulting, marketing
and technology infrastructure.
We believe that the principal competitive factors determining
success in these markets include:
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reputation for reliability and service;
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breadth and quality of services;
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technological innovation and understanding client strategies and
needs;
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creative design and systems engineering expertise;
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easy-to-use software;
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effective customer support;
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processing speed and accuracy; and
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pricing.
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3
We believe we compete favorably with respect to these factors.
However, the market for payment processing software is highly
competitive, rapidly evolving and subject to significant
technological change. As this market grows, we expect
competition to increase. Increased competition may result in
price reductions and reduced margins.
We may not have the financial resources, technical expertise or
marketing, distribution or support capabilities to compete
successfully. If we fail to compete successfully, we may fail to
gain market share or lose existing market share and our
financial condition, operating results and business could be
adversely affected.
Patents
and Trademarks
US Dataworks has obtained trademarks on the names of our premier
products and services, including Clearingworks, and a currently
unlicensed developed product, ZeroPass. We also have applied for
a patent on ImageKey, which is currently in development, and
this application is pending. Our efforts to protect our
intellectual property rights may not prevent the
misappropriation of our intellectual property.
Government
Regulation
As a processor of Automated Clearing House (ACH) payments, we
must comply with federal laws governing the processing of
electronic transactions. We are in compliance with all federal
laws and work closely with the National Automated Clearing House
NACHA to ensure our systems remain both compliant with the laws
and regulations, as well as NACHA guidelines.
Employees
As of June 24, 2008, we have 36 employees, all of whom
are full-time employees. We are not a party to any collective
bargaining agreement with our employees. We believe our employee
relations to be good.
Research
and Development
For fiscal 2008 and 2007 we spent approximately $623,312 and
$357,241, respectively, on research and development activities.
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Item 2.
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Description
of Property
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Our principal executive offices, currently consisting of
18,790 square feet of office space, are located
at 1 Sugar Creek Center Blvd.,
5
th
Floor,
Sugar Land, Texas 77478, which is leased through July 2012.
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Item 3.
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Legal
Proceedings
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From time to time, we are involved in various legal and other
proceedings that are incidental to the conduct of our business.
We believe that none of these proceedings, if adversely
determined, would have a material effect on our financial
condition, results of operations or cash flows.
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Item 4.
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Submission
of Matters to a Vote of Security Holders
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None.
Executive
Officers
As of June 24, 2008, the following persons were our
executive officers:
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Name
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Age
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Position
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Charles E. Ramey
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67
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Chief Executive Officer and Director
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John T. McLaughlin
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53
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Chief Accounting Officer
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Mario Villarreal
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37
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President and Chief Operating Officer
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4
Charles E. Ramey
has served as a director since July 2001
and became our Chief Executive Officer in December 2001. Prior
to joining US Dataworks, Mr. Ramey was a private investor
from December 1998 through July 2001 and was President and co-
founder of PaymentNet Inc., an outsourced
e-commerce
payment processing company, from April 1996 to December 1998.
John T. McLaughlin
has served as our Chief Accounting
Officer since March 2006, and as our Controller from February
2005 to March 2006. Prior to joining us, Mr. McLaughlin was
self employed as a financial consultant to companies involved in
wholesale and retail distribution. From 1995 through 2000, he
served in various accounting and finance roles with companies
involved in manufacturing and distribution of computer and
office equipment. Mr. McLaughlin’s earlier experience
included internal audit activities for a publicly traded oil and
gas services company
Mario Villarreal
was named President and Chief Operating
Officer in May 2008 and has previously served as our Vice
President and Chief Technology Officer since April 2001. In
April 2004, he was named Senior Vice President. In November
1997, Mr. Villarreal co-founded US Dataworks, Inc., a
Delaware corporation, and served as its Vice President from
November 1997 to April 2001. From June 1991 to May 1997,
Mr. Villarreal served as Manager of Systems Architecture
Group at TeleCheck Services, Inc.
5
PART II
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Item 5.
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Market
for Common Equity, Related Stockholder Matters and Small
Business Issuer Purchases of Equity Securities
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Our common stock is traded on the American Stock Exchange under
the symbol “UDW.” The following table indicates the
high and low sale prices as reported by the American Stock
Exchange for the periods presented.
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High
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Low
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Fiscal 2008
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First Quarter
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$
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0.67
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$
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0.44
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Second Quarter
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0.70
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0.35
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Third Quarter
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0.49
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0.17
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Fourth Quarter
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0.28
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0.09
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Fiscal 2007
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First Quarter
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$
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0.91
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$
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0.41
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Second Quarter
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0.83
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0.49
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Third Quarter
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0.71
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0.45
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Fourth Quarter
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0.64
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0. 39
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Holders
As of June 24, 2008, our common stock was held by 320
stockholders of record. Because many of the shares of our common
stock are held by brokers and other institutions on behalf of
stockholders, we are unable to estimate the total number of
beneficial owners represented by these stockholders of record.
Dividend
Policy
We have never paid any cash dividends on our common stock and do
not anticipate paying any cash dividends in the foreseeable
future. We currently intend to retain future earnings, if any,
to fund the development and growth of our business.
Securities
Authorized for Issuance under Equity Compensation
Plans
The information required by this Item is included under
Item 11 of Part III of this Annual Report on
Form 10-KSB.
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Item 6.
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Management’s
Discussion and Analysis or Plan of Operation
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The following discussion and analysis of our financial condition
and results of operations should be read with the consolidated
financial statements and related notes included elsewhere in
this Report.
Critical
Accounting Policies
The following discussion and analysis of our 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.
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.
6
We believe that of the significant accounting policies used in
the preparation of our financial statements (see Note 2 to
the Financial Statements), the following are critical accounting
policies, which may involve a higher degree of judgment,
complexity and estimates.
Revenue
Recognition
We recognize revenues associated with our software products in
accordance with the provisions of the American Institute of
Certified Public Accountants’ Statement of Position
97-2,
“Software Revenue Recognition.” We license our
software products under non-exclusive, non-transferable license
agreements. These arrangements do not require significant
production, modification or customization, therefore revenue is
recognized when the license agreement has been signed, delivery
of the software product has occurred, the related fee is fixed
or determinable and collectibility is probable.
In certain instances, we license our software on a transactional
fee basis in lieu of an up-front licensing fee. In these
arrangements, the customer is charged a fee based upon the
number of items processed by the software and we recognize
revenue as these transactions occur. The transaction fee also
includes the provision of standard maintenance and support
services as well as product upgrades should such upgrades become
available.
If professional services are provided in conjunction with the
installation of the software licensed, revenue is recognized
when those services have been provided.
For license agreements that include a separately identifiable
fee for contracted maintenance services, such revenues are
recognized on a straight-line basis over the life of the
maintenance agreement noted in the license agreement, but
following any installation period of the software.
We recognized revenues associated with the resale of ATMs in
accordance with the provisions of the Statement of Financial
Accounting Standards (SFAS) No. 48. Our sale price was
fixed and determinable at the date of sale and we had no
obligation to directly bring about the resale of the product. In
addition, the buyer’s obligation to pay us were not
contingent upon release of the product and our sale price was
not adjusted if the product was lost or damaged. The buyer had
economic substance apart from us and we could reasonably
estimate the amount of returns at the time of sale. Therefore
revenue was recognized at the time of sale. As a result of the
termination of our joint venture with Hyundai Syscomm in
December 2007, we no longer resell ATMs.
Concentrations
of Credit Risk
We extend credit to our customers and perform ongoing credit
evaluations of our customers. We do not obtain collateral from
our customers to secure our accounts receivables. We evaluate
our accounts receivable on a regular basis for collectibility
and provide for an allowance for potential credit losses as
deemed necessary.
Four of our customers, American Express, Federal Reserve Bank,
Regulus and Citibank, accounted for 31%, 24%, 11%, and 10%,
respectively, of our net revenue for the year ended
March 31, 2008. Four of our customers, American Express
Federal Reserve Bank, Hyundai Syscomm and Citibank accounted
for 24%, 18%, 14%, and 11%, respectively, of our
net revenue for the year ended March 31, 2007.
At March 31, 2008, amounts due from three customers,
accounted for 45%, 12%, and 11% of accounts receivable.
At March 31, 2007, amounts due from three customers,
accounted for 41%, 31% and 9% of accounts receivable.
Results
of Operations
The results of operations reflected in this discussion include
the operations of US Dataworks for the past two years.
7
Revenue
We generate revenues from (a) licensing software with fees
due at the initial term of the license, (b) licensing and
supporting software with fees due on a transactional basis and
(c) providing maintenance, enhancement and support for
previously licensed products, (d) providing professional
services. Prior to January 2008, we also generated revenue from
ATM equipment resales and leases.
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For Year
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Ended
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March 31,
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2008
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2007
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Change
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(In 000’s)
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Software licensing revenues
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$
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282
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$
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689
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−59.1
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%
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Software transactional revenues
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1,848
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1,495
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23.6
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%
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Software maintenance revenues
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896
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439
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104.3
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%
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Professional service revenues
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2,820
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3,446
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−18.1
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%
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ATM equipment revenues
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0
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1,000
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−100.0
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%
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Discounts on Sales
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(129
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0
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100.0
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%
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Total revenues
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$
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5,717
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$
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7,069
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−19.1
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%
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Revenues decreased by 19.1% in fiscal 2008, as compared to
fiscal 2007. Transactional revenue and maintenance revenues
increased 23.6% and 104.3%, respectively, in fiscal 2008, as
compared to fiscal 2007. The increase in transactional revenue
was primarily attributable to new customers added during the
year and a steady growth of transactions processed by our
existing customers. Maintenance revenue increased in large part
due to the annual maintenance fees generated under our license
agreement with American Express Company. We began to collect
revenue related to this maintenance fee in May 2007 and received
approximately $400,000 in fiscal 2008 under this agreement.
These increases were offset by a decrease in our licensing
revenues by 59.1% in fiscal 2008, as compared to fiscal 2007 and
by a decrease in professional services revenue of 18.1% in
fiscal 2008 as compared to 2007. This decrease in license
revenue was primarily due to a reduction in first time sales of
licenses for third-party party software add-ons as compared to
fiscal 2007. While these contracts were renewed in fiscal 2008,
the renewal fees were only a percent of the original license
fee. The decrease in professional service revenue was the result
of a reduction in required services as we completed projects for
two customers in the prior year as well as a decrease in
professional services as we completed certain portions of our
work associated with our consulting agreement with American
Express, which we signed in June 2005, and related purchase
orders.
Cost
of Sales
Cost of sales principally include the costs of our personnel who
perform the services associated with our software maintenance,
support, training and installation activities, and the cost of
third party software sold in conjunction with licenses of our
software to convert electronic data into acceptable formats
utilized by the Nation’s banking system. For fiscal 2007,
cost of sales also included equipment costs associated with the
sale of ATM equipment. Total cost of sales decreased by
$894,508, or 31.3%, from $2,859,063 in fiscal 2007 to $1,964,555
in fiscal 2008. Cost of sales as a percentage of combined
maintenance and services revenues for the current year was 53%,
as compared to 74% in the prior year. The decrease is primarily
attributable to a decrease in third-party software purchases for
resale and a decrease in the number of personnel required to
perform services as a result of the completion of projects for
two customers in the current year.
Operating
Expenses
Total operating expenses increased by $9,263,331, or 129.1%,
from $7,175,338 in fiscal 2007 to $16,438,669 in fiscal 2008.
The increase in operating expenses was principally attributable
to the goodwill impairment expense of $10,112,931 that we booked
in fiscal year 2008 due to the drop in the trading price of our
common stock, which was partially offset by a decrease in legal
expenses of $324,000, decrease in the use
8
of outside consultants and services of $350,000 and in a
decrease of $249,000 in bad debt expense related to the Hyundai
transaction that was taken in the prior year. With our recent
reduction in force, which took place after March 31, 2008,
we anticipate that our operating expenses will continue to
decrease going forward while we continue to maintain and expand
our customer base.
Other
Expenses
Total other expenses, including interest expense and financing
costs, decreased $1,351,926, or 396.2%, from $(341,183) in
fiscal 2007 to $1,010,743 in fiscal 2008. The decrease is
principally due to a gain on derivatives associated with the
debt feature of the senior secured convertible notes issued on
November 13, 2007 of $1,694,237, and offset by increases of
$152,680 in financing costs, $505,931 in interest expense, and
$44,231 on the disposition of assets.
Net
Loss
Net loss increased by $8,368,882, or 253%, from a net loss of
$3,306,009 in fiscal 2007 to a net loss of $11,674,891 in fiscal
2008.
Liquidity
and Capital Resources
We have incurred significant losses and negative cash flows from
operations for the last two fiscal years. We have obtained our
required cash resources through the sale of debt and equity
securities. We may not operate profitably in the future and may
be required to continue the sale of debt and equity securities
to finance our operations.
We have specific plans to address our financial situation as
follows:
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•
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We believe that the demand for our software and professional
services will continue to expand as the United States market
adopts the new payment processing opportunities available under
changing regulations such as the Check Clearing Act for the
21st Century, and NACHA’s back office conversion,
which allows the conversion of paper checks in the back offices
of retail merchants and government. Increased demand for our
solutions, including our recently introduced Clearingworks
product, has led to increased cash flows from up-front license
fees, transaction-based contract fees and increases in
professional services revenues. We expect demand for our product
and services to continue to increase in the coming year.
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•
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We have entered into a strategic alliance with one of the
largest merchant service providers (MSP), that will allow this
MSP to sell Clearingworks as part of its ARC and back office
conversion services. Though no exact dollar amounts have been
forecast at the time, we expect that this alliance will
positively affect our profitability.
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|
|
•
|
We have undertaken a staff restructuring that we expect will
significantly reduce our salary and benefit expense in the
coming year while still maintaining our customer service levels.
|
|
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|
|
•
|
We have renewed our professional service contract with a major
credit card company and with an arm of the federal government
for an additional year that, in aggregate, could provide up to
$4,000,000 in revenue in the coming fiscal year.
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|
|
|
|
•
|
We expect to enter into an agreement with a major business
process outsourcer (BPO), which will enable us to significantly
increase our transactional revenues in the coming fiscal year as
more billers outsource their work to BPO’s.
|
There can be no assurance that our planned activities will be
successful or that we will ultimately attain profitability. Our
long term viability depends 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 software licenses,
transaction-based software license contracts and professional
services agreements to become profitable.
9
Cash and cash equivalents increased by $763,117 from $140,276 at
March 31, 2007 to $903,393 at March 31, 2008. Cash
used for operating activities was $886,264 in fiscal 2007
compared to $2,741,323 in fiscal 2008.
Cash used for investing activities for fiscal 2007 and 2008
consisted of the purchase of property and equipment and
repayments to our affiliates totaling $149,098 and $117,850,
respectively.
Financing activities provided cash of $3,622,290 in fiscal 2008,
and included $4,000,000 in proceeds from the issuance of senior
secured convertible notes, $305,000 in proceeds from stock
sales, partially offset by $256,066 repayment of convertible
promissory notes, $56,640 in repayment of notes payable and
$370,004 in deferred financing cost associated with the senior
secured convertible notes.
Financing activities used cash of $114,800 in fiscal 2007, and
included $500,000 in proceeds from a related party loan, offset
by $614,800 repayment of convertible promissory notes.
As a result of our recent capital raising transactions, our
increased level of transactional revenues achieved in fiscal
2008, and the expected increase in revenues to be received from
recently received and contemplated contracts, we believe we
currently have adequate capital resources to fund our
anticipated cash needs through March 31, 2009 and beyond.
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 acquire 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.
Our contractual obligations, which are described elsewhere in
our financial statements, have been summarized in the table
below:
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|
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|
|
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|
|
Balance as of
|
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|
Payments
|
|
Due in
|
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|
|
|
|
Contractual Obligations
|
|
March 31, 2008
|
|
2009
|
|
2010
|
|
2011
|
|
2012
|
|
2013
|
|
|
|
Current Operating Lease
|
|
$
|
1,517,292
|
|
|
$
|
344,483
|
|
|
$
|
347,615
|
|
|
$
|
350,747
|
|
|
$
|
355,444
|
|
|
$
|
119,003
|
|
Recently
Issued Accounting Pronouncements
In February 2006, the Financial Accounting Standards Board
(FASB) issued SFAS No. 155, “Accounting for
Certain Hybrid Financial Instruments — an amendment of
FASB Statements No. 133 and 140”. This Statement
resolves issues addressed in Statement 133 Implementation Issue
No. D1, “Application of Statement 133 to Beneficial
Interests in Securitized Financial Assets”. This Statement
permits fair value re-measurement for any hybrid financial
instrument that contains an embedded derivative that otherwise
would require bifurcation, clarifies which interest-only strips
and principal-only strips are not subject to the requirements of
Statement 133, establishes a requirement to evaluate interests
in securitized financial assets to identify interests that are
freestanding derivatives or that are hybrid financial
instruments that contain an embedded derivative requiring
bifurcation, clarifies that concentrations of credit risk in the
form of subordination are not embedded derivatives, amends
Statement 140 to eliminate the prohibition on a qualifying
special-purpose entity from holding a derivative financial
instrument that pertains to a beneficial interest other than
another derivative financial instrument. This statement is
effective for fiscal years beginning after September 15,
2006. Its adoption did not have a material impact on our
financial condition or results of operations.
FASB Statement of Financial Accounting Standards (SFAS)
No. 157, “Fair Value Measurements”, issued in
September 2006, establishes a formal framework for measuring
fair value under GAAP. It defines and docifies the many
definitions of fair value included among various other
authoritative literature, clarifies and, in some instances,
expands on the guidance for implementing fair value
measurements, and increases the level of disclosure required for
fair value measurements. Although SFAS 157 applies to and
amends the provisions of existing FASB and AICPA pronouncements,
it does not, of itself, require any new fair value measurements,
nor does it establish valuation standards. SFAS 157 applies
to all other accounting pronouncements requiring or permitting
fair value measurements, except for SFAS No. 123 (F),
share-based payment and related pronouncements, the
practicability exceptions to fair value determinations allowed
by various other
10
authoritative pronouncements, and AICPA Statements of Position
97-2
and
98-9
that
deal with software revenue recognition. This statement is
effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods
within those fiscal years. We do not believe the adoption of
SFAS 157 will have a material impact on our financial
condition or results of operations.
In February 2007, the FASB issued SFAS 159, “The Fair
Value Option for Financial Assets and Financial
Liabilities”, which is an elective, irrevocable election to
measure eligible financial instruments and certain other assets
and liabilities at fair value on an
instrument-by-instrument
basis. The election may only be applied at specified election
dates and to instruments in their entirety rather than to
portions of instruments. Upon initial election, the entity
reports the difference between the instruments’ carrying
value and their fair value as a cumulative-effect adjustment to
the opening balance of retained earnings. At each subsequent
reporting date, an entity reports in earnings, unrealized gains
and losses on items for which the fair value option has been
elected. SFAS 159 is effective for financial statements
issued for fiscal years beginning after November 15, 2007,
and is applied on a prospective basis. Early adoption of
SFAS 159 is permitted provided the entity also elects to
adopt the provisions of SFAS 157 as of the early adoption
date selected for SFAS 159. We have elected not to adopt
the provisions of SFAS 159 at this time.
In June 2006, FASB issued FIN 48, “Accounting for
Uncertainty in Income Taxes an interpretation of FASB Statement
No. 109”, which clarifies the accounting for
uncertainty in income taxes recognized in financial statements
in accordance with FASB 109,
“Accounting for Income
Taxes”.
FIN 48 prescribes a recognition threshold
and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected
to be taken in a tax return. The provisions of FIN 48 are
effective for fiscal years beginning after December 15,
2006, with the cumulative effect of the change in accounting
principle recorded as an adjustment to opening retained
earnings. The adoptions of this pronouncement did not have a
material effect on our financial position or results of
operations of the Company.
In December 2007, the FASB issued a revision and replacement of
SFAS 141(“SFAS 141R”), “Business
Combinations,” to increase the relevance, representational
faithfulness, and comparability of the information a reporting
entity provides in its financial reports about a business
combination and its effects. SFAS 141R replaces
SFAS 141, “Business Combinations” but, retains
the fundamental requirements of SFAS 141 that the
acquisition method of accounting be used and an acquirer be
identified for all business combinations. SFAS 141R expands
the definition of a business and of a business combination and
establishes how the acquirer is to: (1) recognize and
measure in its financial statements the identifiable assets
acquired, the liabilities assumed, and any non-controlling
interest in the acquired company; (2) recognize and measure
the goodwill acquired in the business combination or a gain from
a bargain purchase; and (3) determine what information to
disclose to enable users of the financial statements to evaluate
the nature and financial effects of the business combination.
SFAS 141R is applicable to business combinations for which
the acquisition date is on or after the beginning of the first
annual reporting period beginning on or after December 15,
2008, and is to be applied prospectively. Early adoption is
prohibited. SFAS 141R will impact us only if it elects to
enter into a business combination subsequent to
December 31, 2008.
In December 2007, the FASB issued SFAS 160,
“Noncontrolling Interests in Consolidated Financial
Statements — an amendment of ARB No. 51,” to
improve the relevance, comparability, and transparency of the
financial information a reporting entity provides in its
consolidated financial statements. SFAS 160 amends ARB 51
to establish accounting and reporting standards for
noncontrolling interests in subsidiaries and to make certain
consolidation procedures consistent with the requirements of
SFAS 141R. It defines a noncontrolling interest in a
subsidiary as an ownership interest in the consolidated entity
that should be reported as equity in the consolidated financial
statements. SFAS 160 changes the way the consolidated
income statement is presented by requiring consolidated net
income to include amounts attributable to the parent and the
noncontrolling interest. SFAS 160 establishes a single
method of accounting for changes in a parent’s ownership
interest in a subsidiary which does not result in
deconsolidation. SFAS 160 also requires expanded
disclosures that clearly identify and distinguish between the
interests of the parent and the interests of the noncontrolling
owners of a subsidiary. SFAS 160 is effective for financial
statements issued for fiscal years beginning on or after
December 15, 2008, and interim periods within those fiscal
years. Early adoption is prohibited. SFAS 160 shall be
applied prospectively, with the exception of the presentation
and disclosure
11
requirements which shall be applied retrospectively for all
periods presented. We do not believe that the adoption of
SFAS 160 will have a material effect on our consolidated
financial position, results of operations or cash flows.
Factors
That May Affect Our Results
We
have a general history of losses and may not operate profitably
in the future.
We have incurred losses for the last three fiscal years. Our net
losses and negative cash flow may continue for the foreseeable
future. As of March 31, 2008, our accumulated deficit was
$62,091,238. We believe that our planned growth and
profitability will depend in large part on our ability to
promote our brand name and gain clients and expand our
relationships with clients for whom we would provide licensing
agreements and system integration. Accordingly, we intend to
invest heavily in marketing, strategic partnership, development
of our client base and development of our marketing technology
and operating infrastructure. If we are not successful in
promoting our brand name and expanding our client base, it will
have a material adverse effect on our financial condition and
our ability to continue to operate our business.
Our
ability to continue as a going concern may be contingent upon
our ability to secure capital from prospective investors or
lenders.
The accompanying consolidated financial statements have been
prepared assuming we will continue on a going concern basis,
which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. We
believe we currently have adequate cash to fund anticipated cash
needs through March 31, 2009. However, we may need to raise
additional capital in the future. Any equity financing may be
dilutive to shareholders, and debt financing, if available, will
increase expenses and may involve restrictive covenants. We may
be required to raise additional capital, at times and in amounts
that are uncertain, especially under the current capital market
conditions. These factors raise substantial doubt about our
ability to continue as a going concern. Under these
circumstances, if we are unable to obtain additional capital or
are required to raise it on undesirable terms, it may have a
material adverse effect on our financial condition, which could
require us to:
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•
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curtail our operations significantly;
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•
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sell significant assets;
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•
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seek arrangements with strategic partners or other parties that
may require us to relinquish significant rights to products,
technologies or markets; or
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•
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explore other strategic alternatives including a merger or sale
of US Dataworks.
|
Our financial statements do not include any adjustments relating
to the recoverability and classification of recorded assets or
liabilities that might be necessary should we be unable to
continue as a going concern.
Our
operating results are subject to fluctuations caused by many
factors that could cause us to fail to achieve our revenue or
profitability expectations, which in turn could cause our stock
price to decline.
Our operating results can vary significantly depending upon a
number of factors, many of which are outside our control.
Factors that may affect our quarterly operating results include:
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•
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market acceptance of and changes in demand for our products and
services;
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•
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gain or loss of clients or strategic relationships;
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•
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announcement or introduction of new software, services and
products by us or by our competitors;
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•
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our ability to build brand recognition;
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•
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timing of sales to customers;
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•
|
price competition;
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12
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•
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our ability to upgrade and develop systems and infrastructure to
accommodate growth;
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•
|
our ability to attract and integrate new personnel in a timely
and effective manner;
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•
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our ability to introduce and market products and services in
accordance with market demand;
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•
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changes in governmental regulation;
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•
|
reduction in or delay of capital spending by our clients due to
the effects of terrorism, war and political instability; and
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•
|
general economic conditions, including economic conditions
specific to the financial services industry.
|
In addition, each quarter we derive a significant portion of our
revenue from agreements signed at the end of the quarter. Our
operating results could suffer if the timing of these agreements
is delayed. Depending on the type of agreements we enter into,
we may not be able to recognize revenue under these agreements
in the quarter in which they are signed. Some of all of these
factors could negatively affect demand for our products and
services, and our future operating results.
Most of our operating expenses are relatively fixed in the
short-term. We may be unable to adjust spending rapidly to
compensate for any unexpected sales shortfall, which could harm
our quarterly operating results. Because of the emerging nature
of the markets in which we compete, we do not have the ability
to predict future operating results with any certainty. Because
of the above factors, you should not rely on
period-to-period
comparisons of results of operation as an indication of future
performances.
We may
not be able to maintain our relationships with strategic
partners, which may cause our cash flow to
decline.
We may not be able to maintain our relationships with strategic
partners, such as Computer Sciences Corporation. These strategic
relationships are a core component of our sales and distribution
strategy. The loss of a strategic partner could harm our
financial results.
Because
a small number of customers have historically accounted for and
may in future periods account for substantial portions of our
revenue, our revenue could decline because of delays of customer
orders or the failure to retain customers.
We have a small number of customers that account for a
significant portion of our revenue. Our revenue could decline
because of a delay in signing agreements with a single customer
or the failure to retain an existing customer. We may not obtain
additional customers. The failure to obtain additional customers
and the failure to retain existing customers will harm our
operating results.
If
general economic and business conditions do not improve, we may
experience decreased revenue or lower growth
rates.
The revenue growth and profitability of our business depends on
the overall demand for computer software and services in the
product segments in which we compete. Because our sales are
primarily to major banking and government customers, our
business also depends on general economic and business
conditions. A softening of demand caused by a weakening of the
economy may result in decreased revenue or lower growth rates.
As a result, we may not be able to effectively promote future
license revenue growth in our application business.
We may
not be able to attract, retain or integrate key personnel, which
may prevent us from successfully operating our
business.
We may not be able to retain our key personnel or attract other
qualified personnel in the future. Our success will depend upon
the continued service of key management personnel. The loss of
services of any of the key members of our management team or our
failure to attract and retain other key personnel could disrupt
operations and have a negative effect on employee productivity
and morale and harm our financial results.
13
We
operate in markets that are intensely and increasingly
competitive, and if we are unable to compete successfully, our
revenue could decline and we may be unable to gain market
share.
The market for financial services software is highly
competitive. Our future success will depend on our ability to
adapt to rapidly changing technologies, evolving industry
standards, product offerings and evolving demands of the
marketplace.
Some of our competitors have:
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•
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longer operating histories;
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•
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larger installed customer bases;
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•
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greater name recognition and longer relationships with
clients; and
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•
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significantly greater financial, technical, marketing and public
relations resources than US Dataworks.
|
Our competitors may also be better positioned to address
technological and market developments or may react more
favorably to technological changes. We compete on the basis of a
number of factors, including:
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•
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the breadth and quality of services;
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•
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creative design and systems engineering expertise;
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•
|
pricing;
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•
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technological innovation; and
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•
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understanding clients’ strategies and needs.
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Competitors may develop or offer strategic services that provide
significant technological, creative, performance, price or other
advantages over the services we offer. If we fail to gain market
share or lose existing market share, our financial condition,
operating results and business could be adversely affected and
the value of the investment in us could be reduced
significantly. We may not have the financial resources,
technical expertise or marketing, distribution or support
capabilities to compete successfully.
We may
be responsible for maintaining the confidentiality of our
client’s sensitive information, and any unauthorized use or
disclosure could result in substantial damages and harm our
reputation.
The services we provide for our clients may grant us access to
confidential or proprietary client information. Any unauthorized
disclosure or use could result in a claim against us for
substantial damages and could harm our reputation. Our
contractual provisions attempting to limit these damages may not
be enforceable in all instances or may otherwise fail to
adequately protect us from liability for damages.
If we
do not adequately protect our intellectual property, our
business may suffer, we may lose revenue or we may be required
to spend significant time and resources to defend our
intellectual property rights.
We rely on a combination of patent, trademark, trade secrets,
confidentiality procedures and contractual procedures to protect
our intellectual property rights. If we are unable to adequately
protect our intellectual property, our business may suffer from
the piracy of our technology and the associated loss in revenue.
Any patents that we may hold may not sufficiently protect our
intellectual property and may be challenged by third parties.
Our efforts to protect our intellectual property rights, may not
prevent the misappropriation of our intellectual property. These
infringement claims or any future claims could cause us to spend
significant time and money to defend our intellectual property
rights, redesign our products or develop or license a substitute
technology. We may be unsuccessful in acquiring or developing
substitute technology and any required license may be
unavailable on commercially reasonable terms, if at all. In the
event of litigation to determine the validity of any third party
claims or claims by us against such third party, such
litigation, whether or not determined in our favor, could result
in significant expense and divert the efforts of our technical
and management personnel, regardless of the outcome of such
litigation. Furthermore, other parties may also independently
develop similar or competing products that do not infringe upon
our intellectual property rights.
14
We may
be unable to consummate future potential acquisitions or
investments or successfully integrate acquired businesses or
investments or foreign operations with our business, which may
disrupt our business, divert management’s attention and
slow our ability to expand the range of our technologies and
products.
We intend to continue to expand the range of our technologies
and products, and we may acquire or make investments in
additional complementary businesses, technologies or products,
if appropriate opportunities arise. We may be unable to identify
suitable acquisition or investment candidates at reasonable
prices or on reasonable terms, or consummate future acquisitions
or investments, each of which could slow our growth strategy. We
have no prior history or experience in investing in or acquiring
and integrating complementary businesses and therefore may have
difficulties completing such transactions or realizing the
benefits of such transactions, or they may have a negative
effect on our business. Such investments or acquisitions could
require us to devote a substantial amount of time and resources
and could place a significant strain on our management and
personnel. To finance any acquisitions, we may choose to issue
shares of our common stock, which would dilute your interest in
us. Any future acquisitions by us also could result in
significant write-offs or the incurrence of debt and contingent
liabilities, any of which could harm our operating results.
Our
Senior Secured Convertible Notes Contains Operating and
Financial Covenants That May Restrict our Business and Financing
Activities
We issued $4,000,000 in senior secured convertible notes on
November 13, 2007. The notes are secured by a pledge of all
of our assets, including our intellectual property, and contains
a variety of operational covenants, including limitations on our
ability to incur liens or additional debt, make dispositions,
pay dividends, redeem our stock, make certain investments and
engage in certain merger, consolidation or asset sale
transactions, among other restrictions. Any future debt
financing we enter into may involve similar or more onerous
covenants that restrict our operations. Our borrowings under the
notes or any future debt financing we do will need to be repaid,
which creates additional financial risk for our company,
particularly if our business, or prevailing financial market
conditions, are not conducive to paying-off or refinancing our
outstanding debt obligations. Furthermore, any breach of the
covenants in the notes could cause a default under the notes. If
there were an event of default under the notes that is not
waived, the noteholders could cause all amounts outstanding with
respect to the notes to be due and payable immediately. Neither
our assets and cash flow nor those of our guarantors may be
sufficient to fully repay borrowings under the notes if
accelerated upon an event of default. If, as or when required,
we are unable to repay, refinance or restructure the notes, and
if our guarantors are unable to repay the notes, the noteholders
could institute foreclosure proceedings against the assets
securing borrowings under the notes.
15
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Item 7.
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Financial
Statements
|
US
DATAWORKS, INC.
TABLE OF
CONTENTS
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Page
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17
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Financial Statements:
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18
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19
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20
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22
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23
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16
Report of
Independent Registered Public Accounting Firm
To The Board of Directors and Stockholders
US Dataworks, Inc.
We have audited the accompanying balance sheet of US Dataworks,
Inc. as of March 31, 2008, and the related statements of
operations, stockholders’ equity, and cash flows for each
of the two years in the period ended March 31, 2008. These
financial statements are the responsibility of the
Company’s management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of US Dataworks, Inc. as of March 31, 2008, and the results
of its operations and its cash flows for each of the two years
in the period ended March 31, 2008 in conformity with
accounting principles generally accepted in the United States of
America.
/s/ Ham,
Langston & Brezina, LLP
Houston, Texas
June 30, 2008
17
US
DATAWORKS, INC.
BALANCE
SHEET
March 31, 2008
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ASSETS
|
|
Current assets:
|
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|
Cash and cash equivalents
|
|
$
|
903,393
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|
|
Accounts receivable, trade
|
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856,261
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Prepaid expenses and other current assets
|
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|
145,915
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Total current assets
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1,905,569
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Property and equipment, net
|
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478,687
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Goodwill
|
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4,020,698
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Other assets
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357,124
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Total assets
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$
|
6,762,078
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LIABILITIES AND STOCKHOLDERS’ EQUITY
|
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Current liabilities:
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Current Portion of Note payable
|
|
$
|
35,279
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Deferred revenue
|
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200,833
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|
|
Accounts payable
|
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271,677
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|
Accrued expenses
|
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366,538
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|
Interest payable — related parties
|
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18,188
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|
|
Derivative — Compounded Embedded
|
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|
353,749
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|
|
Derivative — Warrants
|
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267,532
|
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|
|
Total current liabilities
|
|
|
1,513,796
|
|
|
Long term Note Payable
|
|
|
52,918
|
|
|
Long term Note Payable — Related Party
|
|
|
500,000
|
|
|
Long term convertible promissory note, net unamortized discount
of $1,995,636
|
|
|
2,004,364
|
|
|
|
|
|
|
|
|
Total long term liabilities
|
|
|
2,557,282
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
4,071,078
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
Stockholders’ Equity:
|
|
|
|
|
|
Convertible Series B preferred stock, $0.0001 par
value; 700,000 shares authorized; 549,667 shares
issued and outstanding; $0.75 liquidation preference, dividends
of $293,596 in arrears
|
|
|
55
|
|
|
Common stock, $0.0001 par value; 90,000,000 shares
authorized; 32,062,962 shares issued and outstanding
|
|
|
3,206
|
|
|
Additional paid-in capital
|
|
|
64,778,977
|
|
|
Accumulated deficit
|
|
|
(62,091,238
|
)
|
|
|
|
|
|
|
|
Total stockholders’ equity
|
|
|
2,691,000
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity
|
|
$
|
6,762,078
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial
statements.
18
US
DATAWORKS, INC.
STATEMENTS
OF OPERATIONS
for the years ended March 31, 2008 and 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
Software licensing revenues
|
|
$
|
282,045
|
|
|
$
|
689,425
|
|
|
Software transactional revenues
|
|
|
1,848,130
|
|
|
|
1,495,617
|
|
|
Software maintenance revenues
|
|
|
896,358
|
|
|
|
438,803
|
|
|
Professional services revenues
|
|
|
2,820,332
|
|
|
|
3,445,730
|
|
|
ATM equipment revenue
|
|
|
—
|
|
|
|
1,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues, net sales discounts of $129,272
|
|
|
5,717,593
|
|
|
|
7,069,575
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Sales
|
|
|
1,964,555
|
|
|
|
2,859,063
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
3,753,038
|
|
|
|
4,210,512
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
6,144,484
|
|
|
|
7,031,224
|
|
|
Depreciation and amortization
|
|
|
181,255
|
|
|
|
144,114
|
|
|
Goodwill impairment
|
|
|
10,112,931
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
16,438,670
|
|
|
|
7,175,338
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(12,685,632
|
)
|
|
|
(2,964,826
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
Financing costs
|
|
|
(152,680
|
)
|
|
|
(46,200
|
)
|
|
Interest expense
|
|
|
(458,675
|
)
|
|
|
(226,820
|
)
|
|
Interest expense — related parties
|
|
|
(47,256
|
)
|
|
|
(21,875
|
)
|
|
Loss on disposition of assets
|
|
|
(44,231
|
)
|
|
|
—
|
|
|
Litigation settlements
|
|
|
—
|
|
|
|
222,600
|
|
|
Other income (expense), net
|
|
|
19,346
|
|
|
|
10,490
|
|
|
Gain/(loss) on derivative liabilities
|
|
|
1,694,237
|
|
|
|
(279,378
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
1,010,741
|
|
|
|
(341,183
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Loss before provision for income taxes
|
|
|
(11,674,891
|
)
|
|
|
(3,306,009
|
)
|
|
Provision for income taxes
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(11,674,891
|
)
|
|
$
|
(3,306,009
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share
|
|
$
|
(0.37
|
)
|
|
$
|
(0.11
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted weighted-average shares outstanding
|
|
|
31,744,212
|
|
|
|
30,717,707
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial
statements.
19
US
DATAWORKS, INC.
for
the years ended March 31, 2008 and 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
|
Series B
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
Accumulated
|
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Total
|
|
|
|
|
Balance, March 31, 2006
|
|
|
549,667
|
|
|
$
|
55
|
|
|
|
30,126,764
|
|
|
$
|
3,013
|
|
|
$
|
62,762,727
|
|
|
$
|
(47,110,338
|
)
|
|
$
|
15,655,457
|
|
|
Common stock issued for conversion of convertible debenture
|
|
|
—
|
|
|
|
—
|
|
|
|
1,173,698
|
|
|
|
117
|
|
|
|
646,631
|
|
|
|
—
|
|
|
|
646,748
|
|
|
Common stock issued to escrow
|
|
|
—
|
|
|
|
—
|
|
|
|
6,100,000
|
|
|
|
610
|
|
|
|
(610
|
)
|
|
|
—
|
|
|
|
—
|
|
|
Stock based compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
647,387
|
|
|
|
—
|
|
|
|
647,387
|
|
|
Current period loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(3,306,009
|
)
|
|
|
(3,306,009
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2007
|
|
|
549,667
|
|
|
$
|
55
|
|
|
|
37,400,462
|
|
|
$
|
3,740
|
|
|
$
|
64,056,135
|
|
|
$
|
(50,416,347
|
)
|
|
$
|
13,643,583
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial
statements.
20
US
DATAWORKS, INC.
for
the years ended March 31, 2008 and 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
|
Series B
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
Accumulated
|
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Total
|
|
|
|
|
Balance, March 31, 2007
|
|
|
549,667
|
|
|
$
|
55
|
|
|
|
37,400,462
|
|
|
$
|
3,740
|
|
|
$
|
64,056,135
|
|
|
$
|
(50,416,347
|
)
|
|
$
|
13,643,583
|
|
|
Warrants issued in exchange for note extension
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
41,588
|
|
|
|
—
|
|
|
|
41,588
|
|
|
Warrants issued in exchange for services
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
38,000
|
|
|
|
—
|
|
|
|
38,000
|
|
|
Common stock issued for cash
|
|
|
—
|
|
|
|
—
|
|
|
|
762,500
|
|
|
|
76
|
|
|
|
304,924
|
|
|
|
—
|
|
|
|
305,000
|
|
|
Common stock returned from escrow
|
|
|
—
|
|
|
|
—
|
|
|
|
(6,100,000
|
)
|
|
|
(610
|
)
|
|
|
610
|
|
|
|
—
|
|
|
|
—
|
|
|
Stock based compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
337,720
|
|
|
|
—
|
|
|
|
337,720
|
|
|
Current Period loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(11,674,891
|
)
|
|
|
(11,674,891
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2008
|
|
|
549,667
|
|
|
$
|
55
|
|
|
|
32,062,962
|
|
|
$
|
3,206
|
|
|
$
|
64,778,977
|
|
|
$
|
(62,091,238
|
)
|
|
$
|
2,691,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial
statements.
21
US
DATAWORKS, INC.
for the years ended March 31, 2008 and 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(11,674,891
|
)
|
|
$
|
(3,306,009
|
)
|
|
Adjustments to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization of property and equipment
|
|
|
181,255
|
|
|
|
144,115
|
|
|
Allowance for doubtful accounts,
|
|
|
—
|
|
|
|
250,000
|
|
|
Amortization of deferred financing costs
|
|
|
44,987
|
|
|
|
—
|
|
|
Compensatory element of warrants associated with financing costs
|
|
|
79,588
|
|
|
|
—
|
|
|
Loss/(Gain) on disposition of assets
|
|
|
44,231
|
|
|
|
(3,394
|
)
|
|
Amortization of note discount on convertible promissory note
|
|
|
244,627
|
|
|
|
176,059
|
|
|
Goodwill impairment
|
|
|
10,112,931
|
|
|
|
—
|
|
|
Stock based compensation
|
|
|
337,720
|
|
|
|
647,386
|
|
|
(Gain)/loss on derivative liabilities
|
|
|
(1,694,237
|
)
|
|
|
228,045
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
1,323,768
|
|
|
|
(938,341
|
)
|
|
Costs and estimated earnings in excess of billings on
uncompleted contracts
|
|
|
—
|
|
|
|
238,000
|
|
|
Prepaid expenses and other current assets
|
|
|
(14,003
|
)
|
|
|
34,601
|
|
|
Other assets
|
|
|
(1,777
|
)
|
|
|
12,890
|
|
|
Deferred revenue
|
|
|
(443,062
|
)
|
|
|
427,141
|
|
|
Accounts payable
|
|
|
(648,433
|
)
|
|
|
688,698
|
|
|
Accrued expenses
|
|
|
(633,357
|
)
|
|
|
537,359
|
|
|
Interest payable
|
|
|
(670
|
)
|
|
|
(22,814
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(2,741,323
|
)
|
|
|
(886,264
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
Purchases of equipment
|
|
|
(128,700
|
)
|
|
|
(157,098
|
)
|
|
Proceeds from sales of fixed assets
|
|
|
10,850
|
|
|
|
8,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(117,850
|
)
|
|
|
(149,098
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
Proceeds from related party note
|
|
|
—
|
|
|
|
500,000
|
|
|
Proceeds from convertible promissory notes
|
|
|
4,000,000
|
|
|
|
—
|
|
|
Repayment of note payable — related party
|
|
|
(39,000
|
)
|
|
|
—
|
|
|
Repayment of convertible promissory note
|
|
|
(256,066
|
)
|
|
|
(614,800
|
)
|
|
Proceeds from stock sale
|
|
|
305,000
|
|
|
|
—
|
|
|
Deferred financing costs
|
|
|
(370,004
|
)
|
|
|
—
|
|
|
Payments on equipment note payable
|
|
|
(17,640
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided /(used by) financing activities
|
|
|
3,622,290
|
|
|
|
(114,800
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
763,117
|
|
|
|
(1,150,162
|
)
|
|
Cash and cash equivalents, beginning of year
|
|
|
140,276
|
|
|
|
1,290,438
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year
|
|
$
|
903,393
|
|
|
$
|
140,276
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
118,183
|
|
|
$
|
95,451
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxes paid
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial
statements.
22
US
DATAWORKS, INC.
|
|
|
|
1.
|
Organization
and Business
|
General
US Dataworks, Inc. (the “Company”), a Nevada
corporation, develops, markets, and supports payment processing
software for the financial services industry. Its customer base
includes many of the largest financial institutions as well as
credit card companies, government institutions, and high-volume
merchants in the United States. The Company was formerly known
as Sonicport, Inc.
|
|
|
|
2.
|
Summary
of Significant Accounting Policies
|
Revenue
Recognition
The Company recognizes revenues associated with our software
services in accordance with the provisions of the American
Institute of Certified Public Accountants’ Statement of
Position
97-2,
“Software Revenue Recognition”
(“SOP 97-2”).
The Company licenses its software products under nonexclusive,
nontransferable license agreements. These arrangements do not
require significant production, modification, or customization.
Therefore, revenue is recognized when such a license agreement
has been signed, delivery of the software product has occurred,
the related fee is fixed or determinable, and collectibility is
probable.
In certain instances, the Company licenses its software on a
transactional fee basis in lieu of an up-front licensing fee. 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 were provided in conjunction with the
installation of the software licensed, revenue is recognized
when these services have been provided.
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.
The Company recognized revenues associated with the resale of
ATMs in accordance with the provisions of the Statement of
Financial Accounting Standards (“SFAS”) No. 48.
The Company’s sale price was fixed and determinable at the
date of sale and it had no obligation to directly bring about
the resale of the product. In addition, the buyer’s
obligation to pay the Company was not contingent upon release of
the product and its sale price was not adjusted if the product
was lost or damaged. The buyer had economic substance apart from
the Company and it could reasonably estimate the amount of
returns at the time of sale. Therefore revenue was recognized at
the time of sale. As a result of the termination of the
Company’s joint venture with Hyundai Syscomm in December
2007, it no longer resells ATMs.
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.
23
US
DATAWORKS, INC.
NOTES TO
FINANCIAL STATEMENTS — (Continued)
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:
|
|
|
|
|
Automobiles
|
|
3 years
|
|
Furniture and fixtures
|
|
5 years
|
|
Telephone equipment
|
|
5 to 10 years
|
|
Computer equipment
|
|
5 years
|
|
Computer software
|
|
5 years
|
|
Leasehold improvements
|
|
Shorter of initial 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
Effective January 1, 2002, the Company adopted
SFAS No. 142 “Goodwill and Other Intangible
Assets,” (“SFAS 142”) which establishes new
accounting and reporting requirements for goodwill and other
intangible assets. Under SFAS 142, all goodwill
amortization ceased effective January 1, 2002.
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. SFAS 142
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.
SFAS 142 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 recorded
an impairment of goodwill during the year ended March 31,
2008 and did not have an impairment of goodwill to record for
the year ended March 31, 2007. See the discussion of the
impairment in note 4 to these financial statements.
Fair
Value of Financial Instruments
The Company includes fair value information in the notes to
financial statements when the fair value of its financial
instruments is different from the book value. When the book
value approximates fair value, no additional disclosure is made.
Fair value estimates of financial instruments are based on
relevant market information and may be subjective in nature and
involve uncertainties and matters of significant judgment. The
Company believes that the carrying value of its assets and
liabilities approximates the fair value of such items. The
Company does not hold or issue financial instruments for trading
purposes.
24
US
DATAWORKS, INC.
NOTES TO
FINANCIAL STATEMENTS — (Continued)
Convertible
Debt Financing — Derivative
Liabilities
The Company reviews the terms of 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.
In accordance with SFAS No. 133, “Accounting for
Derivative Instruments and Hedging Activities”, (“SFAS
133”) as amended, the convertible debt holder’s
conversion right provision, interest rate adjustment provision,
liquidated damages clause, cash premium option, and the
redemption option (collectively, the debt features) contained in
the terms governing the convertible notes are not clearly and
closely related to the characteristics of the notes.
Accordingly, the debt features qualify as embedded derivative
instruments at issuance and, because they do not qualify for any
scope exception within SFAS 133, they are required by
SFAS 133 to be accounted for separately from the debt
instrument and recorded as derivative instrument liabilities.
Stock
Options
Effective April 1, 2006, the Company adopted
SFAS No. 123 (revised 2004), “Share-Based
Payment” (“SFAS 123R”), which require 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. The Company adopted SFAS 123R using the modified
prospective transition method, which requires the application of
the accounting standard as of April 1, 2006, the first day
of the Company’s fiscal year 2007. The Company’s
financial statements as of and for the year ended March 31,
2007 reflect the impact of SFAS 123R. In accordance with
the modified prospective transition method, the Company’s
financial statements for prior periods have not been restated to
reflect, and do not include, the impact of SFAS 123R.
Stock-based compensation expense recognized under SFAS 123R
for the years ended March 31, 2008 and March 31, 2007
was $337,720, and $647,387 respectively, which consists of
stock-based compensation expense related to employee and
director stock options and restricted stock issuances.
SFAS 123R 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. Prior to the adoption of SFAS 123R, the Company
accounted for stock-based awards to employees and directors
using the intrinsic value method in accordance with Accounting
Prinicles Bulletin Opinion No. 25, “Accounting for
Stock Issued to Employees,” as allowed under
SFAS No. 123, Accounting for Stock-Based
Compensation,. Under the intrinsic value method, no share-based
compensation expense had been recognized in the Company’s
Statement of Operations prior to April 1, 2006 because the
exercise price of the Company’s stock options granted to
employees and directors was equal to or greater than the fair
market value of the underlying stock at the date of grant.
25
US
DATAWORKS, INC.
NOTES TO
FINANCIAL STATEMENTS — (Continued)
For purposes of proforma disclosure, the estimated fair value of
the options is included in expense over the option’s
vesting period or expected life. The Company’s proforma
information for the years ended March 31, 2008 and 2007 is
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Net loss as reported
|
|
$
|
(11,674,891
|
)
|
|
$
|
(3,306,009
|
)
|
|
Add stock— based employee compensation expense
included in net earnings (loss) as reported, net of related tax
effects
|
|
|
337,720
|
|
|
|
647,387
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss, pro forma
|
|
$
|
(11,337,171
|
)
|
|
$
|
(2,658,622
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share, as reported
|
|
$
|
(0.37
|
)
|
|
$
|
(0.11
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share, pro forma
|
|
$
|
(0.36
|
)
|
|
$
|
(0.08
|
)
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense recognized during the period is
based on the value of the portion of share-based payment awards
that is ultimately expected to vest during the period.
Compensation expense recognized for all employee stock options
awards granted is recognized over their respective vesting
periods unless the vesting period is graded. As stock-based
compensation expense recognized in the Statement of Operations
for the three and nine months ended December 31, 2007 is
based on awards ultimately expected to vest, it has been reduced
for estimated forfeitures.
Upon adoption of SFAS 123R 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 during
the years ended March 31, 2008 and March 31, 2007, as
specified by SFAS 123R, the fair value of each option grant
has been estimated on the date of grant using the Black-Scholes
pricing model and the weighted average assumptions used in these
calculations are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ending
|
|
|
|
|
March 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Risk-free Interest Rate
|
|
|
3.71
|
%
|
|
|
4.85
|
%
|
|
Expected Life of Options Granted
|
|
|
3 years
|
|
|
|
3 years
|
|
|
Expected Volatility
|
|
|
80
|
%
|
|
|
79
|
%
|
|
Expected Dividend Yield
|
|
|
0
|
|
|
|
0
|
|
|
Expected Forfeiture Rate
|
|
|
30
|
%
|
|
|
30
|
%
|
As of March 31, 2008, there was approximately $65,153 of
total unrecognized compensation cost related to nonvested
stock-based compensation arrangements, which is expected to be
recognized over a period of 3 years.
Advertising
Expense
Advertising costs are charged to expense as incurred. For the
years ended March 31, 2008 and 2007, the Company recorded
advertising expense of $40,401 and $55,861 respectively.
Income
Taxes
The Company accounts for income taxes under the asset and
liability method, which requires the recognition of deferred tax
assets and liabilities for the expected future tax consequences
of events that have been included in the financial statements or
tax returns. Under this method, deferred income taxes are
recognized for the tax consequences in future years of
differences between the tax bases of assets and liabilities and
their financial reporting amounts at each period-end based on
enacted tax laws and statutory tax rates applicable to the
periods in which the differences are expected to affect taxable
income. Valuation
26
US
DATAWORKS, INC.
NOTES TO
FINANCIAL STATEMENTS — (Continued)
allowances are established, when necessary, to reduce deferred
tax assets to the amount expected to be realized. The provision
for income taxes, if applicable, represents the tax payable for
the period and the change during the period in deferred tax
assets and liabilities.
Loss
per Share
The Company calculates loss per share in accordance with
SFAS No. 128, “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):
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Options outstanding under the Company’s stock option plans
|
|
|
7,521,349
|
|
|
|
6,565,349
|
|
|
Options granted outside the Company’s stock option plans
|
|
|
1,160,000
|
|
|
|
1,160,000
|
|
|
Warrants issued in conjunction with private placements
|
|
|
9,939,846
|
|
|
|
5,483,683
|
|
|
Warrants issued as a financing cost for notes payable and
convertible notes payable
|
|
|
1,891,250
|
|
|
|
1,691,250
|
|
|
Warrants issued for services rendered and litigation settlement
|
|
|
380,769
|
|
|
|
180,769
|
|
|
Convertible Series B preferred stock(a)
|
|
|
109,933
|
|
|
|
109,933
|
|
|
|
|
|
|
(a)
|
|
The Series B preferred stock is convertible into shares of
common stock at a conversion price of $3.75 per share.
|
Estimates
The preparation of financial statements requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
Concentrations
of Credit Risk
The Company sells its products throughout the United States and
extends credit to its customers. It also performs ongoing credit
evaluations of such customers. The Company does not obtain
collateral to secure its accounts receivable. The Company
evaluates its accounts receivable on a regular basis for
collectibility and provides for an allowance for potential
credit losses as deemed necessary.
Four of our customers, American Express, Federal Reserve Bank,
Regulus and Citibank, accounted for 31%, 24%, 11%, and 10%,
respectively, of our net revenue for the year ended
March 31, 2008. Four of our customers, American Express
Federal Reserve Bank, Hyundai Sysycomm and Citibank accounted
for 24% ,18%, 14%, and 11%, respectively, of our net revenue for
the year ended March 31, 2007.
At March 31, 2008, amounts due from three customers,
accounted for 45%, 12%, and 11% of accounts receivable.
27
US
DATAWORKS, INC.
NOTES TO
FINANCIAL STATEMENTS — (Continued)
At March 31, 2007, amounts due from three customers ,
accounted for 41%, 31%, and 9% of accounts receivable.
Recently
Issued Accounting Pronouncements
In February 2006, the Financial Accounting Standards Board
(FASB) issued SFAS No. 155, “Accounting for
Certain Hybrid Financial Instruments — an amendment of
FASB Statements No. 133 and 140”. This Statement
resolves issues addressed in Statement 133 Implementation Issue
No. D1, “Application of Statement 133 to Beneficial
Interests in Securitized Financial Assets”. This Statement
permits fair value re-measurement for any hybrid financial
instrument that contains an embedded derivative that otherwise
would require bifurcation, clarifies which interest-only strips
and principal-only strips are not subject to the requirements of
Statement 133, establishes a requirement to evaluate interests
in securitized financial assets to identify interests that are
freestanding derivatives or that are hybrid financial
instruments that contain an embedded derivative requiring
bifurcation, clarifies that concentrations of credit risk in the
form of subordination are not embedded derivatives, amends
Statement 140 to eliminate the prohibition on a qualifying
special-purpose entity from holding a derivative financial
instrument that pertains to a beneficial interest other than
another derivative financial instrument. This statement is
effective for fiscal years beginning after September 15,
2006. Its adoption did not have a material impact on the
Company’s financial condition or results of operations.
In September 2006 the FASB issued Statement of Financial
Accounting Standards No. 157, “Fair Value
Measurements” (“SFAS 157”), issued, which
establishes a formal framework for measuring fair value under
GAAP. It defines and docifies the many definitions of fair value
included among various other authoritative literature, clarifies
and, in some instances, expands on the guidance for implementing
fair value measurements, and increases the level of disclosure
required for fair value measurements. Although SFAS 157
applies to and amends the provisions of existing FASB and AICPA
pronouncements, it does not, of itself, require any new fair
value measurements, nor does it establish valuation standards.
SFAS 157 applies to all other accounting pronouncements
requiring or permitting fair value measurements, except for
SFAS No. 123 (F), share-based payment and related
pronouncements, the practicability exceptions to fair value
determinations allowed by various other authoritative
pronouncements, and AICPA Statements of Position
97-2
and
98-9
that
deal with software revenue recognition. This statement is
effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods
within those fiscal years. Management does not believe the
adoption of SFAS 157 will have a material impact on the
Company’s financial condition or results of operations.
In June 2006, FASB issued FIN 48, “Accounting for
Uncertainty in Income Taxes an interpretation of FASB Statement
No. 109”, which clarifies the accounting for
uncertainty in income taxes recognized in financial statements
in accordance with FASB 109,
“Accounting for Income
Taxes”.
FIN 48 prescribes a recognition threshold
and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected
to be taken in a tax return. The provisions of FIN 48 are
effective for fiscal years beginning after December 15,
2006, with the cumulative effect of the change in accounting
principle recorded as an adjustment to opening retained
earnings. The adoptions of this pronouncement did not have a
material effect on the financial position or results of
operations of the Company.
In February 2007, the FASB issued SFAS 159, “The Fair
Value Option for Financial Assets and Financial
Liabilities”, (“SFAS 159”) which is an
elective, irrevocable election to measure eligible financial
instruments and certain other assets and liabilities at fair
value on an
instrument-by-instrument
basis. The election may only be applied at specified election
dates and to instruments in their entirety rather than to
portions of instruments. Upon initial election, the entity
reports the difference between the instruments’ carrying
value and their fair value as a cumulative-effect adjustment to
the opening balance of retained earnings. At each subsequent
reporting date, an entity reports in earnings, unrealized gains
and losses on items for which the fair value option has been
elected. SFAS 159 is effective for financial statements
issued for fiscal years beginning
28
US
DATAWORKS, INC.
NOTES TO
FINANCIAL STATEMENTS — (Continued)
after November 15, 2007, and is applied on a prospective
basis. Early adoption of SFAS 159 is permitted provided the
entity also elects to adopt the provisions of SFAS 157 as
of the early adoption date selected for SFAS 159. The
Company has elected not to adopt the provisions of SFAS 159
at this time.
In December 2007, the FASB issued a revision and replacement of
SFAS 141(“SFAS 141R”), “Business
Combinations,” to increase the relevance, representational
faithfulness, and comparability of the information a reporting
entity provides in its financial reports about a business
combination and its effects. SFAS 141R replaces
SFAS 141, “
Business Combinations
” but,
retains the fundamental requirements of SFAS 141 that the
acquisition method of accounting be used and an acquirer be
identified for all business combinations. SFAS 141R expands
the definition of a business and of a business combination and
establishes how the acquirer is to: (1) recognize and
measure in its financial statements the identifiable assets
acquired, the liabilities assumed, and any non-controlling
interest in the acquired company; (2) recognize and measure
the goodwill acquired in the business combination or a gain from
a bargain purchase; and (3) determine what information to
disclose to enable users of the financial statements to evaluate
the nature and financial effects of the business combination.
SFAS 141R is applicable to business combinations for which
the acquisition date is on or after the beginning of the first
annual reporting period beginning on or after December 15,
2008, and is to be applied prospectively. Early adoption is
prohibited. SFAS 141R will impact the Company only if it
elects to enter into a business combination subsequent to
March 31, 2009.
In December 2007, the FASB issued SFAS 160,
“Noncontrolling Interests in Consolidated Financial
Statements — an amendment of ARB No. 51,” to
improve the relevance, comparability, and transparency of the
financial information a reporting entity provides in its
consolidated financial statements. SFAS 160 amends ARB 51
to establish accounting and reporting standards for
noncontrolling interests in subsidiaries and to make certain
consolidation procedures consistent with the requirements of
SFAS 141R. It defines a noncontrolling interest in a
subsidiary as an ownership interest in the consolidated entity
that should be reported as equity in the consolidated financial
statements. SFAS 160 changes the way the consolidated
income statement is presented by requiring consolidated net
income to include amounts attributable to the parent and the
noncontrolling interest. SFAS 160 establishes a single
method of accounting for changes in a parent’s ownership
interest in a subsidiary which does not result in
deconsolidation. SFAS 160 also requires expanded
disclosures that clearly identify and distinguish between the
interests of the parent and the interests of the noncontrolling
owners of a subsidiary. SFAS 160 is effective for financial
statements issued for fiscal years beginning on or after
December 15, 2008, and interim periods within those fiscal
years. Early adoption is prohibited. SFAS 160 shall be
applied prospectively, with the exception of the presentation
and disclosure requirements which shall be applied
retrospectively for all periods presented. The Company does not
believe that the adoption of SFAS 160 would have a material
effect on its financial position, results of operations or cash
flows.
|
|
|
|
3.
|
Property
and Equipment
|
Property and equipment at March 31, 2008 consisted of the
following:
|
|
|
|
|
|
|
Furniture and fixtures
|
|
|
99,535
|
|
|
Telephone and office equipment
|
|
|
182,275
|
|
|
Computer equipment
|
|
|
720,005
|
|
|
Computer Software
|
|
|
1,271,098
|
|
|
Leasehold improvements
|
|
|
64,733
|
|
|
|
|
|
|
|
|
|
|
|
2,337,646
|
|
|
Less accumulated depreciation and amortization
|
|
|
(1,858,959
|
)
|
|
|
|
|
|
|
|
Total
|
|
$
|
478,687
|
|
|
|
|
|
|
|
29
US
DATAWORKS, INC.
NOTES TO
FINANCIAL STATEMENTS — (Continued)
Depreciation and amortization expense for the years ended
March 31, 2008 and 2007 was $181,255 and $144,115,
respectively.
Under SFAS No. 142, the Company should review the fair
value of a reportable unit if a significant event or if
circumstances change that would more likely than not reduce the
fair value of the reportable unit below its carrying amount. The
Company has determined that two significant events occurred in
the quarter ending December 31, 2007 that, when taken
together, placed enough downward pressure on the market value of
the Company’s common stock to require a review of the fair
value of the reportable unit. First, in November 2007, the
Company issued senior secured convertible notes in the amount of
$4,000,000, which increased the Company’s debt
significantly and the market price of the Company’s common
stock began to fall. Secondly, in December 2007, the Company
announced the termination of its Resale Agreement with Hyundai
and entered into a Settlement and Release Agreement terminating
the Purchase Agreement. This announcement continued the downward
pressure on the market value of the Company’s common stock.
In the fourth quarter of fiscal 2008, the Company performed its
annual impairment testing and used a memo purchase price
allocation to determine the carrying value of the reportable
unit. All assets including certain identified intangible assets
were used in the valuation. The carrying value was then compared
to the Company’s market value as of March 31,2008
based on the market capitalization of its common stock. This
analysis determined that an impairment of $10,112,931 occurred
and the goodwill was written down as of March 31, 2008
accordingly.
The Company will continue to perform impairment testing annually
during the fourth quarter unless any events indicating the
presence of impairment factors arise
|
|
|
|
5.
|
Notes
Payable — Related Parties
|
On September 26, 2006, the Company entered into a note
payable with its Chief Executive Officer for $500,000. The note
bears an 8.75% per annum interest rate, is unsecured and was due
September 25, 2007. On September 25, 2007, the Company
entered into a new note payable agreement that supersedes and
supplants the September 2006 note. As of March 31, 2008,
the outstanding balance on this note payable is $500,000. The
principal, together with any unpaid accrued interest on the new
note payable, shall be due and payable in full on demand on the
earlier of: (i) the full and complete satisfaction of
certain senior secured convertible notes (the “November
Notes”) issued by the Company to certain investors on
November 13, 2007 and (ii) ninety-one (91) days
following the expiration of the term of the November Notes (such
date described in (i) and (ii) hereinafter the
“Demand Date”), unless such date is extended by the
mutual agreement of the parties.
Notes
Payable
In August 2007, the Company entered into a note payable with an
equipment vendor to purchase new telephone equipment for
$105,835. The note bears a 10.68% per annum interest rate, is
secured by the equipment and is due in 36 equal monthly
installments of $3,418. As of March 31, 2008 the
outstanding balance on this Note Payable is $85,196.
30
US
DATAWORKS, INC.
NOTES TO
FINANCIAL STATEMENTS — (Continued)
|
|
|
|
6.
|
Convertible
Promissory Notes
|
Convertible promissory notes at March 31, 2008 consisted of
the following:
|
|
|
|
|
|
|
Senior Secured Convertible Notes, interest at 6-month Libor plus
500 Basis points, determined quarterly, (currently @ 3/31/08,
9.5662%), $4,000,000, principal due November 13, 2010, net of
unamortized discount of $1,995,636
|
|
$
|
2,004,364
|
|
|
Less current portion
|
|
|
(—
|
)
|
|
|
|
|
|
|
|
Long-term portion
|
|
$
|
2,004,364
|
|
|
|
|
|
|
|
Convertible
promissory note with interest at 10% per annum
This note is an amendment and restatement of a note in the same
principal amount originally dated September 15, 2004. The
original note was issued effective September 15, 2004 in
connection with the November 2004 settlement of a lawsuit
brought by an investor in December 2003. The amended note is
convertible at any time, at the holder’s election, into
shares of the Company’s common stock at a per share
conversion price of $1.10, subject to standard anti dilution
provisions.
The amended note was effective September 15, 2005 and
extended the principal payment of $256,067 originally due
September 15, 2005 for one year. The final principal
payment of $256,066 was due on September 15, 2007. In
consideration of this amendment, the Company issued the holder a
common stock purchase warrant to purchase up to
650,000 shares of the Company’s common stock at an
exercise price of $0.59 per share. The warrant will expire on
September 15, 2008.
The changes to this debt caused the accounting treatment to be
an extinguishment of the old debt and issuance of new debt
instead of being treated as modification of debt. Therefore, the
excess of the fair value of the note and warrants over the
carrying amount of the debt is $206,000 and has been recorded as
a loss on extinguishment for the year ended March 31, 2006.
In connection with the November 2004 settlement, the Company
also issued a warrant to purchase 160,000 shares of the
Company’s common stock at a purchase price of $0.75 per
share, which expired on November 10, 2006.
Using the Black-Scholes pricing model the Company has determined
the value of the warrants issued in connection with the
settlement to be $126,000. This amount, together with the value
of the convertible promissory note, the value of the
plaintiff’s legal expense reimbursement and the
Company’s legal costs incurred in connection with the
settlement totaled $924,200 and has been recorded as Investor
litigation settlement expense for the year ended March 31,
2005.
On September 14, 2007, the Company reached an agreement
with the note holder to extend the terms of the note for an
additional 90 days in exchange for warrants to purchase up
to 200,000 shares of the Company’s common stock
dependent upon when the note is paid. On September 14,
October 15, and November 15, 2007, the Company issued
the holder a warrant to purchase 66,666 shares,
66,666 shares and 66,667 shares of the Company’s
common stock, respectively.
Using the Black-Scholes pricing model the Company has determined
the value of the warrants issued on September 14,
October 15, and November 15, 2007 in connection with
the note extension to be $13,141, $16,478 and $14,918,
respectively.
This convertible note was paid in full on December 3, 2007.
Convertible
promissory note issued June 16, 2005 with $70,000 Original
Issue Discount
On June 16, 2005, the Company entered into a Securities
Purchase Agreement with an institutional investor (the
“Debenture Agreement”) for the sale of a convertible
debenture with a principal amount of
31
US
DATAWORKS, INC.
NOTES TO
FINANCIAL STATEMENTS — (Continued)
$770,000 and an original issue discount of $70,000 for gross
proceeds of $700,000. The debenture is convertible at anytime at
the discretion of the holder at a price per share of $0.572 into
1,346,154 shares of the Company’s common stock. The
convertible debenture is to be repaid in 15 monthly
installments of $51,333.33 beginning April 15, 2006. The
Company may also elect, upon proper notice, to pay any monthly
installment in shares of the Company’s common stock based
on a conversion price equal to the lesser of (i) the then
applicable conversion price, or (ii) 90% of the volume
weighted average price of the Company’s common stock for
the 10 trading days immediately preceding the payment; provided,
that, such conversion price must be at least equal to the
conversion floor of $0.23, or such monthly installment must be
paid in cash. This convertible debenture was amended on
March 9, 2006, pursuant to which the Company must, within
25 calendar days prior to each monthly payment, deliver
89,744 shares of its common stock to the holders, which
represents the monthly installment amount divided by the then
conversion price with the first monthly payment becoming due on
April 17, 2006. In connection with the Debenture Agreement,
the Company issued two groups of warrants, Short Term Warrants
and Long Term Warrants to the institutional investor. The Short
Term Warrants allow the institutional investor to purchase an
aggregate of 407,926 shares of the Company’s common
stock with an exercise price of $0.572 per share exercisable for
a period of 180 days at any time after the later of
(i) the effective date of the registration statement (as
described below) or (ii) December 16, 2005. The Long
Term Warrants allow the institutional investor to purchase an
aggregate of 471,154 shares of the Company’s common
stock with an exercise price of $0.572 per share exercisable at
anytime from December 16, 2005 through December 16,
2008; provided, however, the institutional investor will not be
permitted to exercise a warrant to the extent that the number of
shares of the Company’s common stock beneficially owned by
such institutional investor taken together with the number of
shares to be issued upon exercise of the warrant equals or
exceeds 4.999% of the Company’s then issued and outstanding
shares of common stock. The warrants also contain trading market
restrictions that preclude the Company from issuing shares of
common stock upon exercise thereof if such issuance, when
aggregated with other issuances of the Company’s common
stock pursuant to the warrants, would exceed 19.999% of the
Company’s then issued and outstanding shares of common
stock, unless the Company has previously obtained the required
shareholder approval. Pursuant to a Registration Rights
Agreement dated June 16, 2005 between the Company and the
institutional investor, the Company agreed to file a
registration statement for the resale of the shares of the
Company’s common stock that may be issued to the
institutional investor upon the conversion of the convertible
debenture and the exercise of the Short Term Warrants and the
Long Term Warrants. The registration statement covering these
securities was effective on September 1, 2005.
In accordance with SFAS No. 133 “Accounting for
Derivative Instruments and Hedging Activities”, the debt
features contained in the terms governing the notes are not
clearly and closely related to the characteristics of the notes.
Accordingly, the debt features qualify as embedded derivative
instruments at issuance and, because they did not qualify for
any scope exception within SFAS 133, they were required to
be accounted for separately from the debt instrument and
recorded as derivative financial instruments.
At the date of issuance, the embedded debt feature had an
estimated initial fair value of $449,089, which was recorded as
a discount to the convertible notes and derivative liability on
our balance sheet. In subsequent periods, if the price of the
security changes, the embedded derivative financial instrument
related to the debt features will be adjusted to the fair value
with the corresponding charge or credit to other
income/(expense). The estimated fair value of the debt features
was determined using the probability weighted averaged expected
cash flows / Lattice Model with a closing price of
$0.65, a conversion price as defined in the respective note
agreement and a period of two years. Concerning the debt
features, the model uses several assumptions including:
historical stock price volatility, approximate risk-free
interest rate (3.5%), remaining term to maturity, and the
closing price of the company’s common stock to determine
the estimated fair value of the derivative liability. This
convertible note was paid in full in March 2007 and as such has
been removed from the Company’s financial statements for
fiscal year 2008.
32
US
DATAWORKS, INC.
NOTES TO
FINANCIAL STATEMENTS — (Continued)
The warrants included with this note for purchase of the
Company’s common stock had an initial value of $271,940.
This amount has been classified as a derivative financial
instrument and recorded as a liability on our consolidated
balance sheet in accordance with SFAS 133. The estimated
fair value of the warrants at the date of issuance was
determined using the Black-Scholes option-pricing model with a
closing price of $1.14, the respective exercise price of the
warrants, a 2 year term, and a 90% volatility factor
relative to the date of issuance. The model uses several
assumptions including: historical stock price volatility,
approximate risk-free interest rate (3.50%), remaining term to
maturity, and the closing price of the company’s common
stock to determine the estimated fair value of the derivative
liability. In accordance with the provisions of SFAS 133,
the Company is required to adjust the carrying value of the
instrument to its fair value at each balance sheet date and
recognize any change since the prior balance sheet date as a
component of other income/ (expense) on its statement of
operations. The warrant derivative liability at March 31,
2008, decreased to a fair value of $2, due in part to a decrease
in the market value of the company’s common stock, which
resulted in an other income item of $75,253.
The recorded value of the warrants can fluctuate significantly
based on fluctuations in the market value of the underlying
securities of the issuer of the warrants, as well as in the
volatility of the stock price during the term used for
observation and the term remaining for the warrants.
Senior
Secured Convertible promissory notes due November 13,
2010
On November 13, 2007, the Company secured certain financing
from certain institutional investors (collectively, the
“Investors”) in the form of senior secured convertible
notes (the “Notes”) for an aggregate of $4,000,000.
The interest payable on the Notes is equal to the
6-month
LIBOR rate plus five hundred basis points (or 9.7375% at the
time of subscription) and is recalculated as of the first day of
each calendar quarter. The Notes may be converted at any time
into shares of the Company’s common stock (“Common
Stock”) at the conversion price of $0.43 per share, which
is equal to 110% of the dollar volume-weighted average price for
the Common Stock on November 12, 2007, subject to
anti-dilution provisions; provided, however, the Investor may
not beneficially own more than 4.99% (the “Maximum
Percentage”) of outstanding shares of Common Stock
following such conversion. At any time, the Investor may
decrease or increase this Maximum Percentage to any percentage
not to exceed 9.99%. In the event of a Fundamental Transaction
(as described in the Notes) where greater than 50% of the
Company’s assets or equity is transferred, the Investors
may redeem the note for either 125% of its principal balance or
the value of the Common Stock as converted (such Common Stock as
converted under the Notes, “Conversion Shares”).
In addition, on each of the 9 month and 18 month
anniversary of the closing, the Investors may request that the
Company redeem a portion of the Notes. The Notes have a maturity
date of November 13, 2010. The Notes are secured by the
Security Agreement, dated November 13, 2007, by and between
the Company and the Investors (the “Security
Agreement”), pursuant to which the Company granted the
Investors a security interest in all its personal property,
whether now owned or hereafter acquired, including but not
limited to, all accounts, copyrights, trademarks, licenses,
equipment and all proceeds as from such collateral.
The Investors also entered into a Put Agreement (the “Put
Agreement”) with the Company’s Chief Executive
Officer, and a member of the Company’s Board of Directors
(collectively, the “Guarantors”). Pursuant to the Put
Agreement, following August 13, 2008, under certain
circumstances the Investors may require one or more of the
Guarantors to purchase all or a portion of the Note, including
any accrued interest or late charges.
In consideration for this guarantee, the Company is paying the
Guarantors a fee (the “Guarantors’ Fee”) equal
to: (i) an initial installment of two percent (2%) of the
outstanding Note principal for initial six months of the
Note’s term; (ii) then, an additional fee equal to two
percent (2%) of the outstanding Note principal for the following
twelve months; and, (iii) a final installment equal to two
percent (2%) of the outstanding Note principal for the remaining
18 months of the Note’s term. The Guarantor Fee will
be shared equally by the
33
US
DATAWORKS, INC.
NOTES TO
FINANCIAL STATEMENTS — (Continued)
Guarantors and will accrue immediately upon the start of each of
the time periods described by subsection (i), (ii) and
(iii), above. The Guarantors’ Fee would not be payable
until after the complete satisfaction of the Note. As of March
31, 2008, the Company had accrued $60,000 related to the
payment of this guarantee.
In connection with the issuance of the Notes, the Company has
also issued to the Investors warrants (the “Warrants”)
to purchase an aggregate of 4,651,162 shares of Common
Stock (such Common Stock exercisable from the Warrants,
“Warrant Shares”) at the exercise price of $0.43 per
share, which is equal to 110% of the dollar volume-weighted
average price for the Common Stock on November 12, 2007,
subject to anti-dilution provisions; provided, however, the
Investor may not beneficially own more than the Maximum
Percentage following such exercise. The Warrant may be exercised
at any time until 11:59 p.m., New York time on
November 13, 2012.
The Company is obligated to reserve for issuance upon conversion
of the Notes and exercise of the Warrants shares of Common Stock
equal to at least 130% of the Conversion Shares and Warrant
Shares. The Company filed a registration statement in December
2007 to register the Conversion Shares and Warrant Shares. As of
March 31, 2008 this statement has not yet been declared
effective.
In accordance with SFAS No. 133 “Accounting for
Derivative Instruments and Hedging Activities,” the debt
features contained in the terms governing the notes are not
clearly and closely related to the characteristics of the notes.
Accordingly, the debt features qualify as embedded derivative
instruments at issuance and, because they did not qualify for
any scope exception within SFAS 133, they were required to
be accounted for separately from the debt instrument and
recorded as derivative financial instruments.
At the date of issuance, the embedded debt feature had an
estimated initial fair value of $960,714 which was recorded as a
discount to the convertible notes and derivative liability on
our balance sheet. In subsequent periods, if the price of the
security changes, the embedded derivative financial instrument
related to the debt features will be adjusted to the fair value
with the corresponding charge or credit to other
income/(expense). The estimated fair value of the debt features
was determined using the probability weighted averaged
discounted cash flows / Lattice Model with a closing
price of $0.43, a conversion price as defined in the respective
note agreement and a period of three years. Concerning the debt
features, the model uses several assumptions including:
projected stock price volatility, annual stock price growth
rate, interest rate projections, no registration default,
alternative financing availability, default status, holder
redeeming under default, ownership limitation, warrant exercise
reset, fixed conversion reset and trading volume to determine
the estimated fair value of the derivative liability. The
derivative liability at March 31, 2008, decreased to a fair
value of $353,749, due in part to a decrease in the market value
of the company’s common stock, which resulted in an other
income item of $606,965.
The warrants included with this note for purchase of the
Company’s common stock had an initial value of $1,279,549.
This amount has been classified as a derivative financial
instrument and recorded as discount to the convertible notes and
derivative liability on our balance sheet in accordance with
SFAS 133. The estimated fair value of the warrants at the date
of issuance was determined using the Black-Scholes
option-pricing model with a closing price of $0.43, the
respective exercise price of the warrants, a 5 year term,
and an 80% volatility factor relative to the date of issuance.
The model uses several assumptions including: historical stock
price volatility, approximate risk-free interest rate (3.84%),
remaining term to maturity, and the closing price of the
company’s common stock to determine the estimated fair
value of the derivative liability. In accordance with the
provisions of SFAS 133, the Company is required to adjust
the carrying value of the instrument to its fair value at each
balance sheet date and recognize any change since the prior
balance sheet date as a component of other income/ (expense) on
its statement of operations. The warrant derivative liability at
March 31, 2008, decreased to a fair value of $267,530, due
in part to a decrease in the market value of the company’s
common stock, which resulted in an other income item of
$1,012,019.
34
US
DATAWORKS, INC.
NOTES TO
FINANCIAL STATEMENTS — (Continued)
The recorded value of the debt features and warrants can
fluctuate significantly based on fluctuations in the market
value of the underlying securities of the issuer of the
warrants, as well as in the volatility of the stock price during
the term used for observation and the term remaining for the
debt features and warrants.
|
|
|
|
7.
|
Accounts
Receivable Facility
|
On September 27, 2006, the Company entered into a Purchase
and Sale Agreement with Catalyst Finance, L.P.
(“Catalyst”) for sale of certain of its accounts
receivables. The Company’s borrowing costs under this
Agreement range from 1.25% to 20% of the gross amount of the
receivables sold to Catalyst based on the timing of collection.
The maximum funds available under the agreement are all
available accounts receivables as agreed to by Catalyst and the
Company. The agreement allows for Catalyst to request repurchase
of an account receivable under certain conditions. For the years
ended March 31, 2008 and March 31, 2007, Catalyst has
not requested repurchase of an account receivable. For the year
ended March 31, 2008 and 2007, the Company has sold
$297,105 and $444,150 in receivables under the agreement, which
yielded a loss on the sale of these receivables of $9,684 and
$8,353. The Agreement was terminated by the company on
August 2, 2007.
On August 10, 2007, the Company entered into a Loan and
Security Agreement (the “Loan Agreement”) with Silicon
Valley Bank (“SVB”), pursuant to which SVB will
advance funds to the Company for certain of its accounts
receivables up to $2,000,000. Under the terms of the Loan
Agreement, the Company will receive an advance of up to 80% of
the subject account receivable (the “Advance”) and pay
a finance charge to SVB equal to prime plus 1.5% to 3.0%, based
on the Company’s assets to liabilities ratio, while the
Advance is outstanding. The Company is obligated to repay the
Advance upon receipt of payment for the subject account
receivable. For year ending March 31, 2008, the Company
sold $423,729 in receivables under the agreement, which yielded
a loss on the sale of these receivables of $6,022. The Agreement
was terminated on November 9, 2007.
|
|
|
|
8.
|
Commitments
and Contingencies
|
Leases
The Company leases an office in Sugar Land, Texas under an
operating lease agreement that expires in July 2012. Rent
expense was $380,118 and $353,350 for the years ended
March 31, 2008 and 2007, respectively.
The Company ended its lease at 5301 Holliston Rd Ste 250,
Houston, TX 77040 on July 31, 2007. Of the $380,118 paid in
2008, $96,688 was associated with that lease.
Future minimum lease payments under operating leases at
March 31, 2008 were as follows:
|
|
|
|
|
|
Year Ended
|
|
Operating
|
|
|
March 31,
|
|
Lease
|
|
|
|
|
2009
|
|
|
344,483
|
|
|
2010
|
|
|
347,615
|
|
|
2011
|
|
|
350,747
|
|
|
2012
|
|
|
355,444
|
|
|
2013
|
|
|
119,003
|
|
|
|
|
|
|
|
|
|
|
$
|
1,517,292
|
|
|
|
|
|
|
|
35
US
DATAWORKS, INC.
NOTES TO
FINANCIAL STATEMENTS — (Continued)
Employment
Agreements
On April 3, 2006, the Company entered into an employment
agreement with each of its President, Payment Products Division
and Vice Chairman, Sr. Vice President and Chief Technology
Officer, and Vice President of Business Development and General
Counsel, for a term of three years with automatic renewal for
successive one-year terms unless either party gives timely
notice of non-renewal.
Annual base salary for the President, Payment Products Division
and Vice Chairman of the Company is $190,000 and pursuant to the
terms of the agreement he is entitled to receive an option to
purchase 550,000 shares of the Company’s common stock.
This option vests over a 3 year period with
150,000 shares vesting on April 3, 2006 and
200,000 shares vesting on each of April 3, 2007 and
2008. In addition the President, Payment Products Division and
Vice Chairman is entitled to receive a bonus of $48,125 for year
end 2006.
Annual base salary for the Senior Vice President and Chief
Technology Officer of the Company is $185,000 and pursuant to
the terms of the agreement he is entitled to receive
200,000 shares of restricted common stock. The restricted
shares vest over a 3 year period with 25,000 shares
vesting on April 3, 2006 and 87,500 shares vesting on
each of April 3, 2007 and 2008. The Senior Vice President
and Chief Technology Officer is also eligible to receive a
quarterly bonus of equal to 3.5% of the increase in the
Company’s revenue from fiscal year quarter to fiscal year
quarter and to receive a bonus of $78,750 for fiscal year 2006.
Annual base salary for the Vice President of Business
Development and General Counsel of the Company is $175,000, and
pursuant to the terms of the agreement he is entitled to receive
an option to purchase 700,000 shares of the Company’s
common stock. This option vests over a 3 year period with
300,000 shares vesting on April 3, 2006 and
200,000 shares vesting on each of April 3, 2007 and
2008. The Vice President of Business Development and General
Counsel is also eligible to receive a quarterly bonus based upon
the Company’s future acquisitions or mergers.
The employment agreements with each of its President, Payment
Products Division and Vice Chairman,
Sr. Vice President and Chief Technology Officer, and
Vice President of Business Development and General Counsel, have
expired and were not renewed.
On May 23, 2006, the Company entered into an employment
agreement with its Chairman of the Board and Chief Executive
Officer. The agreement has a 2 year term with automatic
renewal for successive one year terms unless either party gives
timely notice of non-renewal. His annual base salary is $220,000
and he is entitled to receive 100,000 shares of restricted
common stock that vest immediately and is entitled to receive an
option to purchase 600,000 shares of the Company’s
common stock. This option vests as to 300,000 shares on
each of May 22, 2007 and 2008.
On February 21, 2008 the Chairman of the Board and Chief
Executive Officer was given notice by the Company of non renewal
of this Agreement.
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 authorized shares of $0.0001 par
value convertible Series B preferred stock.
36
US
DATAWORKS, INC.
NOTES TO
FINANCIAL STATEMENTS — (Continued)
In August and October 2000, the Company issued 101,867 and
26,733 units respectively, in a private placement for gross
proceeds of $382,000 and $100,250, respectively. Each unit
consisted of one share of its voting convertible Series B
preferred stock (the “Series B”) and a warrant to
purchase one share of the Company’s common stock. The
Series B has a liquidation preference of $3.75 per share
and carries a 10% cumulative dividend payable on each March 1
and September 1. The Company has the right to redeem the
Series B at any time after issuance at a redemption price
of $4.15 per share, plus any accrued but unpaid dividends. The
Series B is convertible upon issuance into common stock at
$3.75 per share. The warrant entitles the holder to purchase one
share of the Company’s common stock at $6.25 per share,
which represents 115% of the market value of the Company’s
stock at the closing date.
In May 2001, an investor in the Company’s convertible
Series B preferred stock rescinded its acquisition and
returned 2,667 shares and warrants for the purchase of
533 shares of common stock to the Company in exchange for
the return of its investment of $10,000.
In August 2004, an investor in the Series B elected to
convert his 16,000 shares and accordingly was issued
3,200 shares of the Company’s common stock.
At March 31, 2008, there were accumulated, undeclared
dividends in arrears of $293,596 or $2.67 per share.
Common
Stock and Warrants
During the year ended March 31, 2008, the Company completed
the following:
On August 31, 2007, the Company entered into a stock
purchase agreement ( the “Purchase Agreement”), with
certain employees and directors of the Company, pursuant to
which the Company agreed to issue to those certain employees and
directors an aggregate of 762,500 shares of the
Company’s common stock, $0.0001 par value (the
“Common Stock”), for an aggregate purchase price of
$305,000.
On September 14, 2007, the Company reached an agreement
with a current note holder to extend the terms of the
convertible promissory note dated September 15, 2005 for an
additional 90 days in exchange for the granting of up to
200,000 warrants dependent upon when the note is paid. Warrants
valued at $41,588; utilizing the black-scholes valuation method,
to purchase all 200,000 shares were issued during the year ended
March 31, 2008.
On November 13, 2007, in connection with the $4,000,000
senior secured convertible notes issued to a group of
institutional investors, the Company issued warrant to purchase
an aggregate of 4,651,162 shares.
non-cash
Financing and Investing Activities
In August 2007, the Company entered into a note payable with an
equipment vendor to purchase new telephone equipment for
$105,835.
During the year ended March 31, 2007, the Company completed
the following:
Non-Cash
Financing and Investing Activities
In the quarter ended June 30, 2006, the Company issued
303,116 shares of common stock with a value of $154,000 to
pay down debt associated with the convertible promissory note
issued June 16, 2005.
In the quarter ended September 30, 2006, the Company issued
287,173 shares of common stock with a value of $154,000 to
pay down debt associated with the convertible promissory note
issued June 16, 2005.
In the quarter ended December 31, 2006, the Company issued
314,253 shares of common stock with a value of $154,000 to
pay down debt associated with the convertible promissory note
issued June 16, 2005.
37
US
DATAWORKS, INC.
NOTES TO
FINANCIAL STATEMENTS — (Continued)
In the quarter ended March 31, 2007, the Company issued
261,159 shares of common stock with a value of $154,000 to
pay down debt associated with the convertible promissory note
issued June 16, 2005.
Sale
of Common Stock and Warrants
On December 29, 2006, the Company entered into a stock
purchase agreement (the “Purchase Agreement”), with
Hyundai Syscomm Corp., a California corporation
(“Hyundai”), pursuant to which the Company agreed to
issue to Hyundai an aggregate of 6,100,000 shares of the
Company’s common stock, $0.0001 par value (the
“Common Stock”), for an aggregate purchase price of
$1,500,000 (“Purchase Shares”). In connection with the
Purchase Agreement, and subject to shareholder approval, the
Company also agreed to issue to Hyundai a warrant (the
“Warrant”) to purchase up to an aggregate of
14,300,000 shares of Common Stock (the “Warrant
Shares”); provided, however, in no event shall the
aggregate of Hyundai’s Warrant Shares and Purchased Shares
exceed 39.9% of the Company’s total outstanding shares.
Under no condition will Warrant Shares become issuable hereunder
unless and until the Company secures the necessary vote from its
shareholders in favor of the issuance of this Warrant. The
Warrant will vest as to one million shares of Common Stock for
each $1 million in gross profits allocated to Hyundai under
the Resale Agreement. At Hyundai’s option, it may elect to
apply its allocation of gross profits to the payment of the
exercise price of the exercise of any of the Warrant Shares. The
exercise price will be $0.01 per share and it will have term of
10 years. The Purchase Shares and Warrant are being held in
escrow pending the Closing.
On February 13, 2007, the Company and Hyundai amended the
Purchase Agreement and related escrow agreement, pursuant to
which the parties agreed to postpone the closing until March
2007, at which time the Company would issue the Purchased Shares
and the Warrant, subject to shareholder approval.
On March 22, 2007, the Company and Hyundai further amended
the Purchase Agreement, pursuant to which the parties agreed
that the Company will retain all of the Gross Profits, as
defined in the Purchase Agreement, until an aggregate amount of
$1,500,000 is received, which will constitute payment in full
for the Purchased Shares. Following receipt of the $1,500,000
the Purchased Shares and Warrant, subject to shareholder
approval, will be issued to Hyundai.
The Company and Hyundai have decided not to pursue the business
venture set forth in the Resale Agreement at this time and, on
December 13, 2007, the Company and Hyundai entered into a
Settlement and Release Agreement terminating the Purchase
Agreement (the “Termination Agreement”). Pursuant to
the Termination Agreement, the Purchased Shares, which were held
in escrow, were returned to the Company and Hyundai is no longer
obligated to pay the purchase price of $1,500,000 and the
Warrant Shares were not issued to Hyundai. The parties also
agreed to a mutual release of all claims, known or unknown, with
the exception of claims in connection with confidentiality
agreements, that each party may now or in the future have
against the other party.
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. In September 2006, shareholders approved an amendment
to the 2000 Plan to increase the maximum aggregate number of
shares available for issuance thereunder from 6,000,000 to
7,500,000. 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 vesting. 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.
38
US
DATAWORKS, INC.
NOTES TO
FINANCIAL STATEMENTS — (Continued)
During the years ended March 31, 2008 and 2006, the Company
granted 1,060,500 and 3,219,500 stock options, respectively, to
certain employees that may be exercised at prices ranging
between $0.61 and $0.15, and between $.82 and $0. 45,
respectively.
The following table summarizes certain information relative to
stock options:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2000 Stock Option Plan
|
|
|
Outside of Plan
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
|
|
|
Shares
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
|
|
|
Outstanding, March 31, 2006
|
|
|
3,499,115
|
|
|
$
|
0.94
|
|
|
|
1,160,000
|
|
|
$
|
1.02
|
|
|
Granted
|
|
|
3,219,500
|
|
|
$
|
0.58
|
|
|
|
—
|
|
|
$
|
—
|
|
|
Forfeited/cancelled
|
|
|
(153,266
|
)
|
|
$
|
1.40
|
|
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, March 31, 2007
|
|
|
6,565,349
|
|
|
$
|
0.74
|
|
|
|
1,160,000
|
|
|
$
|
1.02
|
|
|
Granted
|
|
|
1,060,500
|
|
|
$
|
0.45
|
|
|
|
—
|
|
|
$
|
—
|
|
|
Forfeited/cancelled
|
|
|
104,500
|
|
|
$
|
0.81
|
|
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, March 31, 2008
|
|
|
7,521,349
|
|
|
$
|
0.70
|
|
|
|
1,160,000
|
|
|
$
|
1.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, March 31, 2008
|
|
|
5,851,522
|
|
|
$
|
0.69
|
|
|
|
1,160,000
|
|
|
$
|
1.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted-average remaining life and the weighted-average
exercise price of all of the options outstanding at
March 31, 2008 were 7.24 years and $0.74,
respectively. The exercise prices for the options outstanding at
March 31, 2008 ranged from $0.15 to $6.25, and information
relating to these options is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
Weighted-
|
|
|
Exercise
|
|
|
|
|
Stock
|
|
|
Stock
|
|
|
Remaining
|
|
Average
|
|
|
Price of
|
|
|
|
|
Options
|
|
|
Options
|
|
|
Contractual
|
|
Exercise
|
|
|
Options
|
|
|
Range of Exercise Prices
|
|
Outstanding
|
|
|
Exercisable
|
|
|
Life
|
|
Price
|
|
|
Exercisable
|
|
|
|
|
$0.15 - 0.80
|
|
|
6,154,513
|
|
|
|
4,484,686
|
|
|
7.66 years
|
|
$
|
0.54
|
|
|
$
|
0.47
|
|
|
$0.81 - 1.35
|
|
|
1,787,836
|
|
|
|
1,787,836
|
|
|
6.35 years
|
|
$
|
0.93
|
|
|
$
|
0.93
|
|
|
$1.36 - 6.25
|
|
|
739,000
|
|
|
|
739,000
|
|
|
5.85 years
|
|
$
|
1.96
|
|
|
$
|
1.96
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,681,349
|
|
|
|
7,011,522
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39
US
DATAWORKS, INC.
NOTES TO
FINANCIAL STATEMENTS — (Continued)
The tax effects of temporary differences that give rise to
deferred taxes at March 31, 2008 were as follows:
|
|
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
United States federal net operating loss carryforwards
|
|
$
|
10,267,648
|
|
|
Effect of state net operating loss carryforwards
|
|
|
905,969
|
|
|
Accrued liabilities
|
|
|
56,605
|
|
|
Basis of Property & Equipment
|
|
|
7,088
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
11,237,310
|
|
|
Valuation allowance
|
|
|
(11,237,310
|
)
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
—
|
|
|
|
|
|
|
|
The valuation allowance increased by $1,050,504 during the year
ended March 31, 2008 and increased by $277,070 during the
year ended March 31, 2007. At March 31, 2008, the
Company had approximately $30,200,000 of federal net operating
loss carryforwards attributable to losses incurred since the
Company’s inception that may be offset against future
taxable income through 2027. Because United States tax laws and
the tax laws of most states limit the time during which NOL
carryforwards may be applied against future taxable income, the
Company may be unable to take full advantage of its NOL for
federal income tax purposes should the Company generate taxable
income. Based on such limitations, the Company has significant
NOL carryforwards for which realization of tax benefits is
uncertain. Further, the benefit from utilization of NOL
carryforwards could be subject to limitations if material
ownership changes occur in the Company. For the years ended
March 31, 2008 and 2007, the Company recognized revisions
to deferred tax assets with offsetting revisions to the
valuation allowance that resulted in an insignificant net change
in the aggregate of total deferred tax assets less the valuation
allowance.
Income tax expense differs from the amounts computed by applying
the United States federal income tax rate of 34% to loss before
income taxes as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Income tax benefit at federal statutory rate
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
|
Non-deductible interest expense from beneficial conversion
feature and issuance of common stock and stock warrants
|
|
|
(0.8
|
)
|
|
|
(2.2
|
)
|
|
Non-deductible compensation and other expense arising from
issuance of common stock and stock warrants
|
|
|
(1.1
|
)
|
|
|
(7.8
|
)
|
|
Non-Deductible goodwill impairment
|
|
|
(32.0
|
)
|
|
|
—
|
|
|
Non-Taxable gain on derivative liabilities
|
|
|
5.4
|
|
|
|
—
|
|
|
Change in the beginning-of-the-year balance of the valuation
allowance for deferred tax assets allocated to income tax expense
|
|
|
(7.9
|
)
|
|
|
(26.7
|
)
|
|
State income taxes
|
|
|
3.0
|
|
|
|
3.0
|
|
|
Other
|
|
|
(0.6
|
)
|
|
|
(0.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
—
|
%
|
|
|
—
|
%
|
|
|
|
|
|
|
|
|
|
|
The Company has incurred significant losses and negative cash
flows from operations for the last two fiscal years. We have
obtained our required cash resources through the sale of debt
and equity securities. We
40
US
DATAWORKS, INC.
NOTES TO
FINANCIAL STATEMENTS — (Continued)
may not operate profitably in the future and may be required to
continue the sale of debt and equity securities to finance our
operations.
We have specific plans to address our financial situation as
follows:
|
|
|
|
|
|
•
|
We believe that the demand for our software and professional
services will continue to expand as the United States market
adopts the new payment processing opportunities available under
changing regulations such as the Check Clearing Act for the
21st Century, and NACHA’s back office conversion,
which allows the conversion of paper checks in the back offices
of retail merchants and government. Increased demand for our
solutions, including our recently introduced Clearingworks
product, has led to increased cash flows from up-front license
fees, transaction-based contract fees and increases in
professional services revenues.
|
|
|
|
|
•
|
We have entered into a strategic alliance with one of the
largest merchant service providers (“MSP”), that will
allow this MSP to sell Clearingworks as part of its ARC and back
office conversion services.
|
|
|
|
|
•
|
We have undertaken a staff restructuring in an effort to reduce
our salary and benefit expense in the coming year.
|
|
|
|
|
•
|
We have renewed our professional service contract with a major
credit card company and with an arm of the federal government
for an additional year.
|
There can be no assurance that our planned activities will be
successful or that we will ultimately attain profitability. Our
long term viability depends 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 software licenses,
transaction-based software license contracts and professional
services agreements to become profitable.
Subsequent to the fiscal year end 2008, the Company accepted the
resignation of Messrs. John Figone and Terry Stepanik, and
as part of the Company’s restructuring, it entered into a
new employment agreement with Mr. Mario Villarreal in
connection with his promotion to President and Chief Operating
Officer.
Subsequent to the fiscal year end 2008, the warrant liability
related to the convertible note of June 16, 2005 has
expired.
On June 13, June 17, and June 23, 2008, the
Company received a letter from Highbridge International LLC
(“Highbridge”), Cranshire Capital, LP
(“Cranshire”), and Castlerigg Master Investments Ltd.,
(“Castlerigg”) respectively, each purporting to be an
Event of Default Redemption Notice (the
“Notices”) pursuant to the senior secured convertible
note due November 13, 2010 issued to certain Investors,
including Highbridge, Cranshire, and Castlerigg (the
“Notes”). According to the Notices, the purported
Event of Default was the Company’s failure to have a
registration statement for the resale of the shares of the
Company’s common stock issuable upon conversion of the
Notes and upon exercise of the Warrants issued in connection
with the Notes declared effective by May 12, 2008.
On June 19, 2008, the Company informed both Highbridge and
Cranshire that, for the reasons set forth below, the Notices
were defective because there is no Event of Default pursuant to
Section 4(a)(i) of the Note, and requested that Highbridge
and Cranshire each immediately withdraw their respective Notice.
On June 26, 2008, the Company informed Castlerigg that, for
the reasons set forth below, its Notice was defective because
there is no Event of Default pursuant to Section 4(a)(i) of
the Note, and requested that Castlerigg immediately withdraw its
Notice.
41
Section 4(a)(i) of the Notes assumes that the absence of a
Registration Statement required pursuant to the Registration
Rights Agreement, dated as of November 13, 2007 (the
“Registration Rights Agreement”), by and among the
Company and the buyers signatory thereto, including Highbridge
and Cranshire, prevents the sale of Registrable Securities. As
Section 3(a) of the Registration Rights Agreement makes
clear, however, a Registration Statement is not necessary if the
Registrable Securities can be sold pursuant to Rule 144. Since
the Investors are able to sell the Registrable Securities
pursuant to Rule 144, there is no need for such a
Registration Statement under the Registration Rights Agreement.
Accordingly, there is no Event of Default pursuant to
Section 4(a)(i) of the Note.
|
|
|
|
Item 8.
|
Changes
in and Disagreements With Accountants on Accounting and
Financial Disclosure.
|
None.
|
|
|
|
Item 8A(T).
|
Controls
and Procedures
|
Evaluation of disclosure controls and
procedures.
We maintain “disclosure controls
and procedures,” as such term is defined in
Rule 13a-15(e)
under the Securities Exchange Act of 1934, or the Exchange Act,
that are designed to ensure that information required to be
disclosed by us in reports that we file or submit under the
Exchange Act is recorded, processed, summarized, and reported
within the time periods specified in Securities and Exchange
Commission rules and forms, and that such information is
accumulated and communicated to our management, including our
Chief Executive Officer and Chief Financial Officer, or persons
performing similar functions, as appropriate, to allow timely
decisions regarding required disclosure. In designing and
evaluating our disclosure controls and procedures, management
recognized that disclosure controls and procedures, no matter
how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the disclosure
controls and procedures are met. Our disclosure controls and
procedures have been designed to meet reasonable assurance
standards. Additionally, in designing disclosure controls and
procedures, our management necessarily was required to apply its
judgment in evaluating the cost-benefit relationship of possible
disclosure controls and procedures. The design of any disclosure
controls and procedures also is based in part upon certain
assumptions about the likelihood of future events, and there can
be no assurance that any design will succeed in achieving its
stated goals under all potential future conditions.
Based on their evaluation as of the end of the period covered by
this Annual Report on
Form 10-KSB,
our Chief Executive Officer and Chief Financial Officer, or
persons performing similar functions, have concluded that, as of
that date, our disclosure controls and procedures were effective
at the reasonable assurance level.
Management’s Annual Report on Internal Control over
Financial Reporting.
Our management is
responsible for establishing and maintaining internal control
over our financial reporting. Because of its inherent
limitations, internal control over financial reporting may not
prevent or detect misstatements. Projections of any evaluation
of the effectiveness of internal control to future periods are
subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with
policies or procedures may deteriorate. Our management, with the
participation of our Chief Executive Officer and Chief Financial
Officer, or persons performing similar functions, assessed the
effectiveness of our internal control over financial reporting
as of March 31, 2008. In making this assessment, management
used the criteria set forth by the [Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal
Control-Integrated Framework]. Based on the assessment using
those criteria, management concluded that, as of March 31,
2008, our internal control over financial reporting was
effective.
This Annual Report on
Form 10-KSB
does not include an attestation report of our independent
registered public accounting firm regarding our internal control
over financial reporting. Management’s report was not
subject to attestation by our independent registered public
accounting firm pursuant to temporary rules of the Securities
and Exchange Commission that permit us to provide only
management’s report in this Annual Report on
Form 10-KSB.
42
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.
|
|
|
|
Item 8B.
|
Other
Information
|
None.
PART III
|
|
|
|
Item 9.
|
Directors,
Executive Officers, Promoters and Control Persons; Compliance
With
Section 16
(a)
of the Exchange Act.
|
The information required by this Item 9 regarding our
directors is incorporated by reference to the information
contained in the section captioned “Election of
Directors” in the Company’s definitive proxy statement
for its 2008 annual meeting of stockholders that will be filed
within 120 days of its year ended March 31, 2008, or
the Proxy Statement.
The information required by this Item 9 regarding executive
officers is incorporated by reference from the information
contained in the section captioned “Executive
Officers” included in Part I of this Annual Report on
Form 10-KSB.
The information required by this Item 9 regarding our audit
committee and audit committee financial expert is incorporated
by reference from the information contained in the Proxy
Statement.
The information required by this Item 9 regarding
Section 16(a) Beneficial Ownership Reporting Compliance is
incorporated by reference from the information contained in the
section captioned “Section 16(a) Beneficial Ownership
Reporting Compliance” in the Proxy Statement.
Code of
Ethics
In April 2003, our Board of Directors adopted a Code of Business
Conduct and Ethics governing all our officers, directors and
employees. Our Code of Business Conduct and Ethics is available
on our corporate website at
http://www.usdataworks.com
on the “Investor Relations” page under “Code of
Business Conduct and Ethics.” We intend to disclose on our
website any waivers or amendments to our Code of Business
Conduct and Ethics within five business days of such action.
|
|
|
|
Item 10.
|
Executive
Compensation
|
The information required by this Item 10 is incorporated by
reference from the sections captioned “Executive
Compensation” in the Proxy Statement. The information
required by this Item 10 regarding compensation of
directors is incorporated by reference from the information
contained in the section captioned “Director
Compensation” in the Proxy Statement.
|
|
|
|
Item 11.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
The information required by this Item 11 is incorporated by
reference from the information contained in the section
captioned “Security Ownership of Certain Beneficial Owners
and Management” in the Proxy Statement.
43
Equity
Compensation Plan Information
The following table sets forth certain information as to our
equity compensation plans for fiscal 2008. All share amounts
have been adjusted to reflect the one-for- five reverse stock
split effective on September 29, 2003.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Securities
|
|
|
|
|
|
|
|
|
|
|
Remaining Available for
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
Future Issuance Under
|
|
|
|
|
Number of Securities to
|
|
|
Exercise Price of
|
|
|
Equity Compensation
|
|
|
|
|
Be Issued Upon Exercise
|
|
|
Outstanding
|
|
|
Plans (Excluding
|
|
|
|
|
of Outstanding Options,
|
|
|
Options, Warrants
|
|
|
Securities Reflected in
|
|
|
|
|
Warrants and Rights
|
|
|
and Rights
|
|
|
Column (a))
|
|
|
Plan Category
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
|
|
|
Equity compensation plans approved by the stockholders
|
|
|
7,521,349
|
|
|
$
|
0.70
|
|
|
|
478,651
|
|
|
Equity compensation plans not approved by the stockholders
|
|
|
1,160,000
|
|
|
$
|
1.02
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
8,681,349
|
|
|
$
|
0.74
|
|
|
|
478,651
|
|
The Amended and Restated 2000 Stock Option Plan is our only
equity compensation plan that has been approved by the
stockholders. We have also granted non-statutory stock options
to purchase shares of our common stock pursuant to stock option
agreements. These grants were made outside of our 2000 Stock
Option Plan. The exercise prices of these options were equal to
the fair market value of our common stock on the date of grant.
These options vest over periods up to three years from the date
of grant and have a duration of ten years (1,160,000). The
exercise price may be paid in cash or by a net issuance.
|
|
|
|
Item 12.
|
Certain
Relationships and Related Transactions
|
The information required by this Item 12 is incorporated by
reference from the information contained in the sections
captioned “Certain Relationships and Related
Transactions” and “Election of Directors” in the
Proxy Statement.
The exhibits listed below are required by Item 601 of
Regulation S-B.
Each management contract or compensatory plan or arrangement
required to be filed as an exhibit to this
Form 10-KSB
has been identified.
|
|
|
|
|
|
Exhibit
|
|
|
|
Number
|
|
Description of Document
|
|
|
|
|
3(i)
|
.1
|
|
Articles of Incorporation of Sonicport.com, Inc. (incorporated
by reference to Exhibit 3(i).1 to the Registrant’s
Annual Report on Form 10-KSB for the year ended
March 31, 2002).
|
|
|
3(i)
|
.2
|
|
Certificate of Designation of Series A Convertible
Preferred Stock of Sonicport.com, Inc. (incorporated by
reference to Exhibit 3.1(g) to the Registrant’s Annual
Report on Form 10-KSB for the year ended March 31,
2000).
|
|
|
3(i)
|
.3
|
|
Certificate of Designation of Series B Convertible
Preferred Stock of Sonicport.com, Inc. (incorporated by
reference to Exhibit 3(1).3 to the Registrant’s Annual
Report on Form 10-KSB for the year ended March 31,
2002).
|
|
|
3(i)
|
.4
|
|
Certificate of Amendment to Articles of Incorporation of
Sonicport.com, Inc. (incorporated by reference to
Exhibit 3.1(h) to the Registrant’s Annual Report on
Form 10-KSB for the year ended March 31, 2001).
|
|
|
3(i)
|
.5
|
|
Certificate of Amendment to Articles of Incorporation of
Sonicport, Inc. (incorporated by reference to Exhibit 3.1
to the Registrant’s registration statement on Form S-3
filed May 14, 2002).
|
|
|
3(ii)
|
|
|
Amended and Restated Bylaws. (incorporated by reference to
Exhibit 3(ii) to the Registrant’s Quarterly Report on
Form 10-QSB for the quarter ended December 31, 2002).
|
|
|
4
|
.1
|
|
Specimen common stock certificate. (incorporated by reference to
Exhibit 4.1 to the Registrant’s Annual Report on
Form 10-KSB for the year ended March 31, 2002).
|
44
|
|
|
|
|
|
Exhibit
|
|
|
|
Number
|
|
Description of Document
|
|
|
|
|
4
|
.2
|
|
Registration Agreement dated September 30, 2003 between the
Registrant and ACI Communications Holdings, Inc. (incorporated
by reference to Exhibit 4.1 to the Registrant’s
Quarterly Report on Form 10-QSB for the quarter ended
September 30, 2003).
|
|
|
4
|
.3
|
|
Registration Rights Agreement, dated as of October 2, 2003,
by and among the Registrant and the signatories thereto
(incorporated by reference to Exhibit 4.3 to the
Registrant’s Current Report on Form 8-K, filed with
the SEC on October 9, 2003).
|
|
|
4
|
.4
|
|
Registration Rights Agreement, dated as of April 16, 2004,
by and among the Registrant and the signatories thereto
(incorporated by reference to Exhibit 4.1 to the
Registrant’s Current Report on
Form 8-K,
filed with the SEC on May 20, 2004).
|
|
|
4
|
.5
|
|
Registration Rights Agreement, dated June 16, 2005, by and
among the Registrant and the signatories thereto (incorporated
by reference to Exhibit 4.4 to the Registrant’s
Current Report on
Form 8-K
filed with the SEC on July 21, 2005).
|
|
|
4
|
.6
|
|
Registration Rights Agreement, dated as of June 17, 2005,
by and between the Registrant and Crescent International Ltd.
(incorporated by reference to Exhibit 4.5 to the
Registrant’s Current Report on
Form 8-K
filed with the SEC on June 22, 2005).
|
|
|
4
|
.7
|
|
Registration Agreement, dated as of September 15, 2005,
between the Registrant and Peter Simons (incorporated by
reference to Exhibit 4.3 the Registrant’s Current
Report on
Form 8-K
filed with the SEC on October 17, 2005).
|
|
|
4
|
.8
|
|
Registration Rights Agreement, dated as of November 13,
2007, by and between the Registrant and the signatories thereto
(incorporated by reference to Exhibit 4.4 to the
Registrant’s Quarter Report on
Form 10-QSB
for the quarter ended December 31, 2007).
|
|
|
4
|
.9
|
|
Form of Series A Common Stock Purchase Warrant
(incorporated by reference to Exhibit 99.2 to the
Registrant’s Current Report on
Form 8-K,
filed with the SEC on May 20, 2004).
|
|
|
4
|
.10
|
|
Long-Term Common Stock Purchase Warrant to purchase up to
471,154 shares of the Registrant’s Common Stock issued
to Crescent International Ltd. (incorporated by reference to
Exhibit 4.4 to the Registrant’s Current Report on
Form 8-K
filed with the SEC on June 22, 2005).
|
|
|
4
|
.11
|
|
Common Stock Purchase Warrant to purchase up to
650,000 shares of the Registrant’s Common Stock issued
to Peter Simons (incorporated by reference to Exhibit 4.2
to the Registrant’s Current Report on
Form 8-K
filed with the SEC on October 17, 2005).
|
|
|
4
|
.12
|
|
Form of Common Stock Purchase Warrant (incorporated by reference
to Exhibit 4.2 to the Registrant’s Current Report on
Form 8-K
filed with the SEC on June 21, 2005).
|
|
|
4
|
.13
|
|
Form of Common Stock Purchase Warrant (incorporated by reference
to Exhibit 4.3 to the Registrant’s Current Report on
Form 8-K
filed with the SEC on June 21, 2005).
|
|
|
4
|
.14
|
|
Form of Senior Secured Convertible Promissory Note (incorporated
by reference to Exhibit 99.2 to the Registrant’s
Amendment No. 1 to Registration Statement on
Form S-3
(File
No. 333-148039)
filed with the SEC on February 12, 2008).
|
|
|
4
|
.15
|
|
Form of Common Stock Purchase Warrant (incorporated by reference
to Exhibit 99.3 to the Registrant’s Registration
Statement on
Form S-3
(File
No. 333-148039)
filed with the SEC on December 13, 2007).
|
|
|
4
|
.16
|
|
Rights Agreement, dated July 24, 2003, by and between the
Registrant and Corporate Stock Transfer (incorporated by
reference to Exhibit 4.1 to the Registrant’s Current
Report on
Form 8-K,
filed with the SEC on July 25, 2003).
|
|
|
4
|
.17
|
|
Amendment No. 2 to Rights Agreement, dated
November 13, 2007, by and between the Registrant and
American Stock Transfer & Trust (incorporated by
reference to Exhibit 4.2 to the Registrant’s Current
Report on
Form 8-K,
filed with the SEC on November 14, 2007).
|
|
|
10
|
.1†
|
|
Amended and Restated 2000 Stock Option Plan (incorporated by
reference to Exhibit 99.1 to the Registrant’s
Registration Statement on Form S-8 (File
No. 333-102840)).
|
|
|
10
|
.2†
|
|
Form of Incentive Stock Option Agreement (incorporated by
reference to Exhibit 10.2 to the Registrant’s Annual
Report on Form 10-KSB for the year ended March 31,
2003).
|
|
|
10
|
.3†
|
|
Form of Stock Option Agreement (incorporated by reference to
Exhibit 99.1 to the Registrant’s Registration
Statement on Form S-8 (File No. 333-102842)).
|
45
|
|
|
|
|
|
Exhibit
|
|
|
|
Number
|
|
Description of Document
|
|
|
|
|
10
|
.4†
|
|
Form of Director Stock Option Agreement (incorporated by
reference to Exhibit 10.13 to the Registrant’s Annual
Report on Form 10-KSB for the year ended March 31,
2003).
|
|
|
10
|
.5†
|
|
Form of Nonstatutory Stock Option Agreement (incorporated by
reference to Exhibit 10.6 to the Registrant’s
Quarterly Report on Form 10-QSB for the quarter ended
September 30, 2003).
|
|
|
10
|
.6†
|
|
Nonstatutory Stock Option Agreement dated May 21, 2003
between the Registrant and Mario Villarreal. (incorporated by
reference to Exhibit 10.18 to the Registrant’s
Quarterly Report on Form 10-QSB for the quarter ended
June 30, 2003).
|
|
|
10
|
.7†
|
|
Nonstatutory Stock Option Agreement dated May 21, 2003
between the Registrant and Terry E. Stepanik.
(incorporated by reference to Exhibit 10.19 to the
Registrant’s Quarterly Report on Form 10-QSB for the
quarter ended June 30, 2003).
|
|
|
10
|
.8†
|
|
Employment Agreement dated June 12, 2008 between the
Registrant and Mario Villarreal (incorporated by reference to
Exhibit 10.1 to the Registrant’s Current Report on
Form 8-K filed June 18, 2008).
|
|
|
10
|
.9†
|
|
Employment Agreement dated May 13, 2003 between the
Registrant and Charles E. Ramey (incorporated by reference to
Exhibit 10.3 to the Registrant’s Quarterly report on
Form 10-QSB for the quarter ended September 30, 2003).
|
|
|
10
|
.10†
|
|
Employment Agreement dated April 2, 2003 between the
Registrant and Terry Stepanik (incorporated by reference to
Exhibit 10.1 to the Registrant’s Quarterly report on
Form 10-QSB for the quarter ended September 30, 2003).
|
|
|
10
|
.11†
|
|
Employment Agreement dated April 2, 2003 between the
Registrant and John J. Figone (incorporated by reference to
Exhibit 10.4 to the Registrant’s Quarterly report on
Form 10-QSB for the quarter ended September 30, 2003).
|
|
|
10
|
.12
|
|
Lease Agreement dated as of June 22, 2007, by and between
Registrant and Parkway Properties LP.
|
|
|
10
|
.13
|
|
Warrant Agreement dated July 10, 2003 between the
Registrant and Charles E. Ramey (incorporated by reference to
Exhibit 10.5 to the Registrant’s Quarterly Report on
Form 10-QSB for the quarter ended June 30, 2003).
|
|
|
10
|
.14
|
|
Subordinated Convertible Note and Warrant Agreement dated
July 10, 2003 between the Registrant and Charles E. Ramey
(incorporated by reference to Exhibit 10.6 to the
Registrant’s Quarterly Report on Form 10-QSB for the
quarter ended June 30, 2003).
|
|
|
10
|
.15
|
|
Convertible Subordinated Promissory Note dated July 10,
2003 between the Registrant and Charles Ramey. (incorporated by
reference to Exhibit 10.11 to the Registrant’s
Quarterly Report on
Form 10-QSB
for the quarter ended June 30, 2003).
|
|
|
10
|
.16
|
|
Securities Purchase Agreement, dated as of April 16, 2004,
by and among the Registrant and the signatories thereto
(incorporated by reference to Exhibit 99.1 to the
Registrant’s Current Report on
Form 8-K,
filed with the SEC on May 20, 2004).
|
|
|
10
|
.17
|
|
Settlement Agreement and Mutual Release dated November 12,
2004, by and between the Registrant and Peter Simons
(incorporated by reference to Exhibit 99.1 to Registration
Statement on
Form S-3 (File No. 333-121951)
filed by the Registrant on January 11, 2005).
|
|
|
10
|
.18
|
|
Master License Agreement, effective as of October 15, 1999,
by and between the Registrant and American Express Travel
Related Services Company (incorporated by reference to
Exhibit 10.5 to the Registrant’s Quarterly Report on
Form 10-QSB
for the quarter ended September 30, 2007).
|
|
|
10
|
.19
|
|
Schedule Number 1 to Master License Agreement, dated
July 22, 2005, by and between the Registrant and American
Express Travel Related Services Company (incorporated by
reference to Exhibit 10.4 to the Registrant’s
Quarterly Report on
Form 10-QSB
for the quarter ended September 30, 2007).
|
|
|
10
|
.20*
|
|
Formal Purchase Order from American Express Travel Related
Services Company, Inc. pursuant to the Master Agreement for
Consulting Services dated June 16, 2005, as amended
|
|
|
10
|
.21
|
|
Securities Purchase Agreement, dated as of August 31, 2007,
by and between the Registrant and certain officers and directors.
|
|
|
10
|
.22
|
|
Amendment Agreement, dated as of December 28, 2006, by and
between the Registrant and Crescent International Ltd.
(incorporated by reference to Exhibit 10.1 to the
Company’s Current Report on
Form 8-K
filed with the Securities and Exchange Commission on
December 29, 2006).
|
46
|
|
|
|
|
|
Exhibit
|
|
|
|
Number
|
|
Description of Document
|
|
|
|
|
10
|
.23
|
|
Settlement and Release Agreement, dated December 13, 2007,
by and among the Registrant, Hyundai Syscomm Corp. and John J.
Figone. (incorporated by reference to Exhibit 10.1 to the
Registrant’s Current Report on
Form 8-K
filed with the Securities and Exchange Commission on
December 19, 2007).
|
|
|
10
|
.24
|
|
Security Agreement, dated as of November 13, 2007, by and
between the Registrant and the Bank of New York (incorporated by
reference to Exhibit 10.3 to the Registrant’s
Quarterly Report on
Form 10-QSB
for the quarter ended December 31, 2007).
|
|
|
10
|
.25
|
|
Put Agreement, dated as of November 13, 2007, by and among
the Registrant and Charles E. Ramey, John L. Nicholson,
Highbridge International LLC, Castlerigg Master Investments
Ltd., and Cranshire Capital, L.P. (incorporated by reference to
Exhibit 10.4 to the Regitrant’s Quarterly Report on
Form 10-QSB
for the quarter ended December 31, 2007).
|
|
|
10
|
.26
|
|
Put Grantor Fee Agreement, dated as of November 13, 2007,
by and between the Registrant and Charles E. Ramey and John
Nicholson (incorporated by reference to Exhibit 10.5 to the
Registrant’s Quarterly Report on
Form 10-QSB
for the quarter ended December 31, 2007).
|
|
|
10
|
.27
|
|
Securities Purchase Agreement, dated as of November 13,
2007, by and among the Registrant and the signatories thereto
(incorporated by reference to Exhibit 99.1 to the
Registrant’s Registration Statement on
Form S-3
(File
No. 333-148039)
filed with the SEC on December 13, 2007).
|
|
|
23
|
.1
|
|
Consent of Independent Registered Public Accounting Firm.
|
|
|
24
|
.1
|
|
Power of Attorney (included on signature page).
|
|
|
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.
|
|
|
|
|
|
†
|
|
Indicates management contract or compensatory plan or
arrangement.
|
|
|
|
*
|
|
Confidential treatment requested.
|
|
|
|
|
Item 14.
|
Principal
Accountant Fees and Services
|
The information required by this Item 14 is incorporated by
reference from the information contained in the section
captioned “Principal Accounting Fees and Services” and
“Audit Committee Pre-Approval Policies” in the Proxy
Statement.
47
SIGNATURES
In accordance with Section 13 or 15 (d) of the
Exchange Act, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly
authorized.
US DATAWORKS, INC.
Charles E. Ramey
Chief Executive Officer
Date: June 30, 2008
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Charles E. Ramey and John
McLaughlin, and each of them, his true and lawful
attorneys-in-fact, each with full power of substitution, for him
or her in any and all capacities, to sign any amendments to this
report on
Form 10-
KSB and to file the same, with exhibits thereto and other
documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that
each of said attorneys-in-fact or their substitute or
substitutes may do or cause to be done by virtue hereof.
In accordance with the Exchange Act, this report has been signed
below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
|
|
|
|
|
|
|
|
|
Name
|
|
Title
|
|
Date
|
|
|
|
|
|
|
|
|
|
/s/
Charles
E. Ramey
Charles
E. Ramey
|
|
Chief Executive Officer
(Principal Executive Officer)
and Director
|
|
June 30, 2008
|
|
|
|
|
|
|
|
/s/
John
T. McLaughlin
John
T. McLaughlin
|
|
Chief Accounting Officer
(Principal Financial and Accounting Officer)
|
|
June 30, 2008
|
|
|
|
|
|
|
|
/s/
Joe
Abrell
Joe
Abrell
|
|
Director
|
|
June 30, 2008
|
|
|
|
|
|
|
|
/s/
J.
Patrick Millinor
J.
Patrick Millinor
|
|
Director
|
|
June 30, 2008
|
|
|
|
|
|
|
|
/s/
John
L. Nicholson, M.D.
John
L. Nicholson, M.D.
|
|
Director
|
|
June 30, 2008
|
|
|
|
|
|
|
|
/s/
Mario
Villarreal
Mario
Villarreal
|
|
Director
|
|
June 30, 2008
|
|
|
|
|
|
|
|
/s/
Hayden
D. Watson.
Hayden
D. Watson.
|
|
Director
|
|
June 30, 2008
|
|
|
|
|
|
|
|
/s/
Thomas
L. West, Jr.
Thomas
L. West, Jr.
|
|
Director
|
|
June 30, 2008
|
48
EXHIBIT INDEX
|
|
|
|
|
|
Exhibit
|
|
|
|
Number
|
|
Description of Document
|
|
|
|
|
3(i)
|
.1
|
|
Articles of Incorporation of Sonicport.com, Inc. (incorporated
by reference to Exhibit 3(i).1 to the Registrant’s
Annual Report on Form 10-KSB for the year ended
March 31, 2002).
|
|
|
3(i)
|
.2
|
|
Certificate of Designation of Series A Convertible
Preferred Stock of Sonicport.com, Inc. (incorporated by
reference to Exhibit 3.1(g) to the Registrant’s Annual
Report on Form 10-KSB for the year ended March 31,
2000).
|
|
|
3(i)
|
.3
|
|
Certificate of Designation of Series B Convertible
Preferred Stock of Sonicport.com, Inc. (incorporated by
reference to Exhibit 3(1).3 to the Registrant’s Annual
Report on Form 10-KSB for the year ended March 31,
2002).
|
|
|
3(i)
|
.4
|
|
Certificate of Amendment to Articles of Incorporation of
Sonicport.com, Inc. (incorporated by reference to
Exhibit 3.1(h) to the Registrant’s Annual Report on
Form 10-KSB for the year ended March 31, 2001).
|
|
|
3(i)
|
.5
|
|
Certificate of Amendment to Articles of Incorporation of
Sonicport, Inc. (incorporated by reference to Exhibit 3.1
to the Registrant’s registration statement on
Form S— 3 filed May 14, 2002).
|
|
|
3(ii)
|
|
|
Amended and Restated Bylaws. (incorporated by reference to
Exhibit 3(ii) to the Registrant’s Quarterly Report on
Form 10-QSB for the quarter ended December 31, 2002).
|
|
|
4
|
.1
|
|
Specimen common stock certificate. (incorporated by reference to
Exhibit 4.1 to the Registrant’s Annual Report on
Form 10-KSB for the year ended March 31, 2002).
|
|
|
4
|
.2
|
|
Registration Agreement dated September 30, 2003 between the
Registrant and ACI Communications Holdings, Inc. (incorporated
by reference to Exhibit 4.1 to the Registrant’s
Quarterly Report on Form 10-QSB for the quarter ended
September 30, 2003).
|
|
|
4
|
.3
|
|
Registration Rights Agreement, dated as of October 2, 2003,
by and among the Registrant and the signatories thereto
(incorporated by reference to Exhibit 4.3 to the
Registrant’s Current Report on Form 8— K,
filed with the SEC on October 9, 2003).
|
|
|
4
|
.4
|
|
Registration Rights Agreement, dated as of April 16, 2004,
by and among the Registrant and the signatories thereto
(incorporated by reference to Exhibit 4.1 to the
Registrant’s Current Report on
Form 8-K,
filed with the SEC on May 20, 2004).
|
|
|
4
|
.5
|
|
Registration Rights Agreement, dated June 16, 2005, by and
among the Registrant and the signatories thereto (incorporated
by reference to Exhibit 4.4 to the Registrant’s
Current Report on
Form 8-K
filed with the SEC on July 21, 2005).
|
|
|
4
|
.6
|
|
Registration Rights Agreement, dated as of June 17, 2005,
by and between the Registrant and Crescent International Ltd.
(incorporated by reference to Exhibit 4.5 to the
Registrant’s Current Report on
Form 8-K
filed with the SEC on June 22, 2005).
|
|
|
4
|
.7
|
|
Registration Agreement, dated as of September 15, 2005,
between the Registrant and Peter Simons (incorporated by
reference to Exhibit 4.3 the Registrant’s Current
Report on
Form 8-K
filed with the SEC on October 17, 2005).
|
|
|
4
|
.8
|
|
Registration Rights Agreement, dated as of November 13,
2007, by and between the Registrant and the signatories thereto
(incorporated by reference to Exhibit 4.4 to the
Registrant’s Quarter Report on
Form 10-QSB
for the quarter ended December 31, 2007).
|
|
|
4
|
.9
|
|
Form of Series A Common Stock Purchase Warrant
(incorporated by reference to Exhibit 99.2 to the
Registrant’s Current Report on
Form 8-K,
filed with the SEC on May 20, 2004).
|
|
|
4
|
.10
|
|
Long-Term Common Stock Purchase Warrant to purchase up to
471,154 shares of the Registrant’s Common Stock issued
to Crescent International Ltd. (incorporated by reference to
Exhibit 4.4 to the Registrant’s Current Report on
Form 8-K
filed with the SEC on June 22, 2005).
|
|
|
4
|
.11
|
|
Common Stock Purchase Warrant to purchase up to
650,000 shares of the Registrant’s Common Stock issued
to Peter Simons (incorporated by reference to Exhibit 4.2
to the Registrant’s Current Report on
Form 8-K
filed with the SEC on October 17, 2005).
|
|
|
4
|
.12
|
|
Form of Common Stock Purchase Warrant (incorporated by reference
to Exhibit 4.2 to the Registrant’s Current Report on
Form 8-K
filed with the SEC on June 21, 2005).
|
|
|
4
|
.13
|
|
Form of Common Stock Purchase Warrant (incorporated by reference
to Exhibit 4.3 to the Registrant’s Current Report on
Form 8-K
filed with the SEC on June 21, 2005).
|
|
|
|
|
|
|
Exhibit
|
|
|
|
Number
|
|
Description of Document
|
|
|
|
|
4
|
.14
|
|
Form of Senior Secured Convertible Promissory Note (incorporated
by reference to Exhibit 99.2 to the Registrant’s
Amendment No. 1 to Registration Statement on
Form S-3
(File
No. 333-148039)
filed with the SEC on February 12, 2008).
|
|
|
4
|
.15
|
|
Form of Common Stock Purchase Warrant (incorporated by reference
to Exhibit 99.3 to the Registrant’s Registration
Statement on
Form S-3
(File
No. 333-148039)
filed with the SEC on December 13, 2007).
|
|
|
4
|
.16
|
|
Rights Agreement, dated July 24, 2003, by and between the
Registrant and Corporate Stock Transfer (incorporated by
reference to Exhibit 4.1 to the Registrant’s Current
Report on
Form 8-K,
filed with the SEC on July 25, 2003).
|
|
|
4
|
.17
|
|
Amendment No. 2 to Rights Agreement, dated
November 13, 2007, by and between the Registrant and
American Stock Transfer & Trust (incorporated by
reference to Exhibit 4.2 to the Registrant’s Current
Report on
Form 8-K,
filed with the SEC on November 14, 2007).
|
|
|
10
|
.1†
|
|
Amended and Restated 2000 Stock Option Plan (incorporated by
reference to Exhibit 99.1 to the Registrant’s
Registration Statement on Form S-8 (File
No. 333-102840)).
|
|
|
10
|
.2†
|
|
Form of Incentive Stock Option Agreement (incorporated by
reference to Exhibit 10.2 to the Registrant’s Annual
Report on Form 10-KSB for the year ended March 31,
2003).
|
|
|
10
|
.3†
|
|
Form of Stock Option Agreement (incorporated by reference to
Exhibit 99.1 to the Registrant’s Registration
Statement on Form S-8 (File No. 333-102842)).
|
|
|
10
|
.4†
|
|
Form of Director Stock Option Agreement (incorporated by
reference to Exhibit 10.13 to the Registrant’s Annual
Report on Form 10-KSB for the year ended March 31,
2003).
|
|
|
10
|
.5†
|
|
Form of Nonstatutory Stock Option Agreement (incorporated by
reference to Exhibit 10.6 to the Registrant’s
Quarterly Report on Form 10-QSB for the quarter ended
September 30, 2003).
|
|
|
10
|
.6†
|
|
Nonstatutory Stock Option Agreement dated May 21, 2003
between the Registrant and Mario Villarreal. (incorporated by
reference to Exhibit 10.18 to the Registrant’s
Quarterly Report on Form 10-QSB for the quarter ended
June 30, 2003).
|
|
|
10
|
.7†
|
|
Nonstatutory Stock Option Agreement dated May 21, 2003
between the Registrant and Terry E. Stepanik.
(incorporated by reference to Exhibit 10.19 to the
Registrant’s Quarterly Report on
Form 10-QSB
for the quarter ended June 30, 2003).
|
|
|
10
|
.8†
|
|
Employment Agreement dated June 12, 2008 between the
Registrant and Mario Villarreal (incorporated by reference to
Exhibit 10.1 to the Registrant’s Current Report on
Form 8-K filed June 18, 2008).
|
|
|
10
|
.9†
|
|
Employment Agreement dated May 13, 2003 between the
Registrant and Charles E. Ramey (incorporated by reference to
Exhibit 10.3 to the Registrant’s Quarterly report on
Form 10-QSB for the quarter ended September 30, 2003).
|
|
|
10
|
.10†
|
|
Employment Agreement dated April 2, 2003 between the
Registrant and Terry Stepanik (incorporated by reference to
Exhibit 10.1 to the Registrant’s Quarterly report on
Form 10-QSB for the quarter ended September 30, 2003).
|
|
|
10
|
.11†
|
|
Employment Agreement dated April 2, 2003 between the
Registrant and John J. Figone (incorporated by reference to
Exhibit 10.4 to the Registrant’s Quarterly report on
Form 10-QSB for the quarter ended September 30, 2003).
|
|
|
10
|
.12
|
|
Lease Agreement dated as of June 22, 2007, by and between
Registrant and Parkway Properties LP.
|
|
|
10
|
.13
|
|
Warrant Agreement dated July 10, 2003 between the
Registrant and Charles E. Ramey (incorporated by reference to
Exhibit 10.5 to the Registrant’s Quarterly Report on
Form 10-QSB for the quarter ended June 30, 2003).
|
|
|
10
|
.14
|
|
Subordinated Convertible Note and Warrant Agreement dated
July 10, 2003 between the Registrant and Charles E. Ramey
(incorporated by reference to Exhibit 10.6 to the
Registrant’s Quarterly Report on Form 10-QSB for the
quarter ended June 30, 2003).
|
|
|
10
|
.15
|
|
Convertible Subordinated Promissory Note dated July 10,
2003 between the Registrant and Charles Ramey. (incorporated by
reference to Exhibit 10.11 to the Registrant’s
Quarterly Report on
Form 10-QSB
for the quarter ended June 30, 2003).
|
|
|
10
|
.16
|
|
Securities Purchase Agreement, dated as of April 16, 2004,
by and among the Registrant and the signatories thereto
(incorporated by reference to Exhibit 99.1 to the
Registrant’s Current Report on
Form 8-K,
filed with the SEC on May 20, 2004).
|
|
|
|
|
|
|
Exhibit
|
|
|
|
Number
|
|
Description of Document
|
|
|
|
|
10
|
.17
|
|
Settlement Agreement and Mutual Release dated November 12,
2004, by and between the Registrant and Peter Simons
(incorporated by reference to Exhibit 99.1 to Registration
Statement on
Form S-3
(File
No. 333-121951)
filed by the Registrant on January 11, 2005).
|
|
|
10
|
.18
|
|
Master License Agreement, effective as of October 15, 1999,
by and between the Registrant and American Express Travel
Related Services Company (incorporated by reference to
Exhibit 10.5 to the Registrant’s Quarterly Report on
Form 10-QSB
for the quarter ended September 30, 2007).
|
|
|
10
|
.19
|
|
Schedule Number 1 to Master License Agreement, dated
July 22, 2005, by and between the Registrant and American
Express Travel Related Services Company (incorporated by
reference to Exhibit 10.4 to the Registrant’s
Quarterly Report on
Form 10-QSB
for the quarter ended September 30, 2007).
|
|
|
10
|
.20*
|
|
Formal Purchase Order from American Express Travel Related
Services Company, Inc. pursuant to the Master Agreement for
Consulting Services dated June 16, 2005, as amended
|
|
|
10
|
.21
|
|
Securities Purchase Agreement, dated as of August 31, 2007,
by and between the Registrant and certain officers and directors.
|
|
|
10
|
.22
|
|
Amendment Agreement, dated as of December 28, 2006, by and
between the Registrant and Crescent International Ltd.
(incorporated by reference to Exhibit 10.1 to the
Company’s Current Report on
Form 8-K
filed with the Securities and Exchange Commission on
December 29, 2006).
|
|
|
10
|
.23
|
|
Settlement and Release Agreement, dated December 13, 2007,
by and among the Registrant, Hyundai Syscomm Corp. and John J.
Figone. (incorporated by reference to Exhibit 10.1 to the
Registrant’s Current Report on
Form 8-K
filed with the Securities and Exchange Commission on
December 19, 2007).
|
|
|
10
|
.24
|
|
Security Agreement, dated as of November 13, 2007, by and
between the Registrant and the Bank of New York (incorporated by
reference to Exhibit 10.3 to the Regitrant’s Quarterly
Report on
Form 10-QSB
for the quarter ended December 31, 2007).
|
|
|
10
|
.25
|
|
Put Agreement, dated as of November 13, 2007, by and among
the Registrant and Charles E. Ramey, John L. Nicholson,
Highbridge International LLC, Castlerigg Master Investments
Ltd., and Cranshire Capital, L.P. (incorporated by reference to
Exhibit 10.4 to the Regitrant’s Quarterly Report on
Form 10-QSB
for the quarter ended December 31, 2007).
|
|
|
10
|
.26
|
|
Put Grantor Fee Agreement, dated as of November 13, 2007,
by and between the Registrant and Charles E. Ramey and John
Nicholson (incorporated by reference to Exhibit 10.5 to the
Registrant’s Quarterly Report on
Form 10-QSB
for the quarter ended December 31, 2007).
|
|
|
10
|
.27
|
|
Securities Purchase Agreement, dated as of November 13,
2007, by and among the Registrant and the signatories thereto
(incorporated by reference to Exhibit 99.1 to the
Registrant’s Registration Statement on
Form S-3
(File
No. 333-148039)
filed with the SEC on December 13, 2007).
|
|
|
23
|
.1
|
|
Consent of Independent Registered Public Accounting Firm.
|
|
|
24
|
.1
|
|
Power of Attorney (included on signature page).
|
|
|
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.
|
|
|
|
|
|
†
|
|
Indicates management contract or compensatory plan or
arrangement.
|
|
|
|
*
|
|
Confidential treatment requested.
|
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