![US DATAWORKS, INC.
STATEMENTS OF STOCKHOLDERS’ EQUITY
for the years ended March 31, 2009 and 2008
Preferred Stock
Convertible Series B Common Stock
Shares Amount Shares Amount
Balance, March 31, 2007 549,667 $ 55 37,400,462 $ 3,740
Warrants issued in exchange for note extension
Warrants issued in exchange for services
Common stock issued for cash 762,500 76
Common stock returned from escrow — — (6,100,000) (610)
Stock based compensation — — — —
Net (loss) — — — —
Balance at March 31, 2008 549,667 $ 55 32,062,962 $ 3,206
[additional columns below]
[continued from above table, first column(s) repeated]
Additional
Paid-In Accumulated
Capital Deficit Total
Balance, March 31, 2007 $ 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 304,924 305,000
Common stock returned from escrow 610 — —
Stock based compensation 337,720 — 337,720
Net (loss) — (11,674,891) (11,674,891)
Balance at March 31, 2008 $ 64,778,977 $ (62,091,238) $ 2,691,000
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![US DATAWORKS, INC.
STATEMENTS OF STOCKHOLDERS’ EQUITY
for the years ended March 31, 2009 and 2008
Preferred Stock
Convertible Series B Common Stock
Shares Amount Shares Amount
Balance, March 31, 2008 549,667 $ 55 32,062,962 $ 3,206
Stock based compensation — — 667,908 67
Net (loss) — — — —
Balance at March 31, 2009 549,667 $ 55 32,730,870 $ 3,273
[additional columns below]
[continued from above table, first column(s) repeated]
Additional
Paid-In Accumulated
Capital Deficit Total
Balance, March 31, 2008 $ 64,778,977 $ (62,091,238) $ 2,691,000
Stock based compensation 284,760 — 284,827
Net (loss) — (1,984,313) (1,984,313)
Balance at March 31, 2009 $ 65,063,737 $ (64,075,551) $ 991,514
The accompanying notes are an integral part of these financial statements.
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![ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLSOSURE
None.
ITEM 9A(T). CONTROLS AND PROCEDURES
Disclosure controls and procedures . We maintain “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) under
the Securities Exchange Act of 1934, or the Exchange Act, that are designed to ensure that information required to be disclosed by us in reports
that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities
and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our
Chief Executive Officer and Chief Financial Officer, or persons performing similar functions, as appropriate, to allow timely decisions regarding
required disclosure. In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and
procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the
disclosure controls and procedures are met. Our disclosure controls and procedures have been designed to meet reasonable assurance standards.
Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the
cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in
part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its
stated goals under all potential future conditions.
Based on their evaluation as of the end of the period covered by this Annual Report on Form 10-K, 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 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, 2009. 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, 2009, our internal control over financial
reporting was effective.
This Annual Report on Form 10-K 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-K.
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 9B. OTHER INFORMATION
None.
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![B. The reference to “December 31, 2009” in Section 1 of the Note is hereby replaced with “July 1, 2010.”
2. In consideration of the Holder’s agreements to the modifications set forth in Section 1 of this Agreement, the Company shall
pay an amendment fee to the Holder in the amount of $9,550.00, such amount to be payable on July 1, 2009. In addition, as additional
consideration for the Holder’s agreements to the modifications set forth in Section 1 of this Agreement, the Company will, effective as of the
date hereof, issue to the Holder warrants to acquire 354,141 shares of the Company’s common stock at an exercise price of $0.43 per share, with
such warrants to be subject to the terms outlined in Exhibit A attached hereto.
3. The Note, as modified by this Agreement, and all of the other loan documents and other agreements and instruments executed
and delivered in connection with the Note shall remain in full force and effect.
4. The Company and the Holder represent and warrant to each other that, as of the date hereof: (a) each such party has full power
and authority to execute this Agreement; (b) this Agreement constitutes the legal, valid and binding obligation of such party, enforceable in
accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, or other
similar laws affecting the enforcement of creditors' rights generally; and (c) no authorization, approval, consent or other action by, notice to, or
filing with, any governmental authority or other person is required for the execution, delivery or performance by such party of this Agreement.
5. The parties hereto shall from time to time execute and deliver all such other documents, instruments and assurances with
respect to the matters described herein, and take all such other actions as may be necessary or required to carry into force and effect the purposes
and intent of this Agreement.
6. This Agreement, when executed by the parties hereto, shall be binding upon and inure to the benefit of the parties hereto, and
their respective heirs, executors, administrators, personal representatives, successors and assigns.
7. This Agreement may be executed simultaneously in a number of identical counterparts, each of which shall be an original and
all of which together shall constitute but one and the same instrument.
[Signature Page Follows]
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![2. In consideration of the Holder’s agreements to the modifications set forth in Section 1 of this Agreement, the Company shall
pay an amendment fee to the Holder in the amount of $40,450.00, such amount to be payable on July 1, 2009. In addition, as additional
consideration for the Holder’s agreements to the modifications set forth in Section 1 of this Agreement, the Company will, effective as of the
date hereof, issue to the Holder warrants to acquire 1,500,000 shares of the Company’s common stock at an exercise price of $0.43 per share,
with such warrants to be subject to the terms outlined in Exhibit A attached hereto.
3. The Note, as modified by this Agreement, and all of the other loan documents and other agreements and instruments executed
and delivered in connection with the Note shall remain in full force and effect.
4. The Company and the Holder represent and warrant to each other that, as of the date hereof: (a) each such party has full power
and authority to execute this Agreement; (b) this Agreement constitutes the legal, valid and binding obligation of such party, enforceable in
accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, or other
similar laws affecting the enforcement of creditors' rights generally; and (c) no authorization, approval, consent or other action by, notice to, or
filing with, any governmental authority or other person is required for the execution, delivery or performance by such party of this Agreement.
5. The parties hereto shall from time to time execute and deliver all such other documents, instruments and assurances with
respect to the matters described herein, and take all such other actions as may be necessary or required to carry into force and effect the purposes
and intent of this Agreement.
6. This Agreement, when executed by the parties hereto, shall be binding upon and inure to the benefit of the parties hereto, and
their respective heirs, executors, administrators, personal representatives, successors and assigns.
7. This Agreement may be executed simultaneously in a number of identical counterparts, each of which shall be an original and
all of which together shall constitute but one and the same instrument.
[Signature Page Follows]](https://image.slidesharecdn.com/usdataworksinc-090719225621-phpapp01/85/Q2-2009-Earning-Report-of-Us-Dataworks-Inc-78-320.jpg)
![“The non-payment of any principal or Interest when such payment becomes due and payable, which payment may be
demanded (and thereby become due and payable) at any time on or after July 1, 2010, and UDW’s failure to make such
payment for a period of ten (10) days thereafter;”
2. In consideration of the Holder’s agreements to the modifications set forth in Section 1 of this Agreement, the Company shall
pay an amendment fee to the Holder in the amount of $6.666.67, such amount to be payable on July 1, 2009.
3. The Note, as modified by this Agreement, and all of the other loan documents and other agreements and instruments executed
and delivered between the Company and the Holder in connection with the Note shall remain in full force and effect.
4. The Company and the Holder represent and warrant to each other that, as of the date hereof: (a) each such party has full power
and authority to execute this Agreement; (b) this Agreement constitutes the legal, valid and binding obligation of such party, enforceable in
accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, or other
similar laws affecting the enforcement of creditors' rights generally; and (c) no authorization, approval, consent or other action by, notice to, or
filing with, any governmental authority or other person is required for the execution, delivery or performance by such party of this Agreement.
5. The parties hereto shall from time to time execute and deliver all such other documents, instruments and assurances with
respect to the matters described herein, and take all such other actions as may be necessary or required to carry into force and effect the purposes
and intent of this Agreement.
6. This Agreement, when executed by the parties hereto and subject to the execution and delivery of the Refinance Note
Modification Agreements, shall be binding upon and inure to the benefit of the parties hereto, and their respective heirs, executors,
administrators, personal representatives, successors and assigns.
7. This Agreement may be executed simultaneously in a number of identical counterparts, each of which shall be an original and
all of which together shall constitute but one and the same instrument.
[Signature Page Follows]
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Q2 2009 Earning Report of Us Dataworks, Inc.
- 1. US DATAWORKS INC FORMReport) 10-K (Annual Filed 06/29/09 for the Period Ending 03/31/09 Address 5301 HOLLISTER ROAD SUITE 250 HOUSTON, TX 77040 Telephone 713-934-3856 CIK 0001049505 Symbol UDW SIC Code 7372 - Prepackaged Software Industry Software & Programming Sector Technology Fiscal Year 03/31 http://www.edgar-online.com © Copyright 2009, EDGAR Online, Inc. All Rights Reserved. Distribution and use of this document restricted under EDGAR Online, Inc. Terms of Use.
- 2. UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended March 31, 2009 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 001-15385 US DATAWORKS, INC. (Exact name of registrant as specified in its charter) Nevada 84-1290152 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1 Sugar Creek Center Blvd. 5 th Floor Sugar Land, Texas 77478 (Address of principal executive offices, including ZIP Code) (281) 504-8000 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Name of Exchange on Which Registered Common Stock, $0.0001 par value American Stock Exchange Securities registered pursuant to Section 12(g) of the Act: Title of Each Class: None Indicate by check mark if the Registrant is a well-known seasoned issuer (as defined in Rule 405 of the Securities Act). Yes No Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes No
- 3. Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes El No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statement incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer Accelerated filer Non-accelerated filer Smaller reporting company (Do not check if a smaller reporting company) Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No As of June 24, 2009, the aggregate market value of the common stock of the Registrant held by non-affiliates of the Registrant, based on the $0.37 per share price for the Registrant's common stock as quoted by the American Stock Exchange on June 24, 2009 was $10,228,640 (for purposes of calculating these amounts, only directors, officers and beneficial owners of 10% or more of the outstanding capital stock of the Registrant have been deemed affiliates). As of June 24, 2009, the number of outstanding shares of common stock of the Registrant was 32,780,870. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant’s definitive proxy statement to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934 with respect to the 2009 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K.
- 4. US DATAWORKS, INC. TABLE OF CONTENTS 2009 FORM 10-K Page PART I Item 1. Business 2 Item 1A. Risk Factors 4 Item 1B. Unresolved Staff Comments 8 Item 2. Properties 8 Item 3. Legal Proceedings 8 Item 4. Submission of Matters to a Vote of Security Holders 8 PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 8 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 9 Item 8. Financial Statements and Supplementary Data 15 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 37 Item 9A. Controls and Procedures 37 Item 9B. Other Information 37 PART III Item 10. Directors, Executive Officers and Corporate Governance 38 Item 11. Executive Compensation 38 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 38 Item 13. Certain Relationships and Related Transactions, and Director Independence 38 Item 14. Principal Accounting Fees and Services 38 PART IV Item 15. Exhibits, Financial Statement Schedules 38
- 5. NOTE REGARDING FORWARD LOOKING STATEMENTS AND CERTAIN TERMS When used in this Report, the words “expects,” “anticipates,” “believes,” “plans,” “will” and similar expressions are intended to identify forward-looking statements. These are statements that relate to future periods and include, but are not limited to, statements regarding our critical accounting policies, our operating expenses, our strategic opportunities, adequacy of capital resources, our potential professional services contracts and the related benefits, demand for software and professional services, demand for our solutions, expectations regarding net losses, expectations regarding cash flow and sources of revenue, benefits of our relationship with an MSP, statements regarding our growth and profitability, investments in marketing and promotion, fluctuations in our operating results, our need for future financing, effects of accounting standards on our financial statements, our investment in strategic partnerships, development of our customer base and our infrastructure, our dependence on our strategic partners, our dependence on personnel, our employee relations, anticipated benefits of our restructuring, our disclosure controls and procedures, our ability to respond to rapid technological change, expansion of our technologies and products, benefits of our products, our competitive position, statements regarding future acquisitions or investments, our legal proceedings, and our dividend policy. Forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected. These risks and uncertainties include, but are not limited to, those discussed herein, as well as risks related to our ability to develop and timely introduce products that address market demand, the impact of alternative technological advances and competitive products, market fluctuations, our ability to obtain future financing, and the risks set forth below under “Item 1A. Risk Factors.” These forward-looking statements speak only as of the date hereof. We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based. All references to “US Dataworks,” the “Company,” “we,” “us,” or “our” means US Dataworks, Inc. MICRworks™, Clearingworks , Returnworks™, and Remitworks™ are trademarks of US Dataworks. Other trademarks referenced herein are the property of their respective owners. PART I ITEM 1. BUSINESS General US Dataworks is a developer of payment processing software, serving banking institutions, 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 We were incorporated under the laws of 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. In October 1999, we changed our name to Sonicport.com, Inc. and in February 2000, we re- incorporated under the laws of the state of Nevada. In February 2001, we changed our name again to Sonicport, Inc. In April 2001, we acquired a Delaware corporation known as US Dataworks, Inc., following which we focused our business on developing electronic check processing software. In March 2002, we changed our name to US Dataworks, Inc. and in May 2002, we merged the Delaware corporation known as US Dataworks, Inc. into the Company. 2
- 6. 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 a single consolidated platform with highly-scalable features to grow in tandem with the customer’s business operation. Clearingworks’ shared services and data management features eliminate the need to adopt multiple payment processing systems in order to process and accommodate different payment types. Clearingworks” Least Cost Routing/Best Fit Clearing SM solution uses the latest industry-leading technology coupled with the customer’s banking relationships to determine the most efficient method for payment settlement. Customers US Dataworks’ sells its products into several vertical markets within the market segments of Corporate Payments, Retail Payments, and Government. Customers include credit card issuers, major retailers and the United States Government. Three of our customers, American Express, the Federal Reserve Bank of Cleveland and Regulus accounted for 47%, 22%, and 9%, respectively, of our net revenue for the year ended March 31, 2009. Four of our customers, American Express, the Federal Reserve Bank of Cleveland, Regulus and Citibank, accounted for 31%, 24%, 11%, and 10%, respectively, of our net revenue for the year ended March 31, 2008. Strategic Business Relationships We have enhanced our distribution channel by 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, eGistics and CDS Global. Competition Our competitors in the financial services market include Wausau Financial Systems, J&B Software, Fiserv and Metavante. The services offered by these and other 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 influencing our success in these markets include: • reputation for reliability and service; • serving multiple market segments; • supporting multiple payment types; • breadth and quality of services; • technological innovation and understanding client strategies and needs; • creative design and systems engineering expertise; • easy-to-use software; • effective customer support; • processing speed and accuracy; and • pricing. 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. 3
- 7. 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. We also have applied for a patent on ImageKey and Scan-N-Go Process. Our efforts to protect our intellectual property rights may not prevent the misappropriation of our intellectual property. Government Regulation As a processor of ACH payments, we must comply with federal laws governing the processing of electronic transactions. We are in compliance with all such federal laws and work closely with NACHA to ensure our systems remain compliant with applicable laws and regulations, as well as NACHA guidelines. Employees As of June 24, 2009, we have 35 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 200 9 and 200 8 we spent approximately $ 911,754 and $ 623,312 , respectively , on research and development activities. ITEM 1A. RISK FACTORS In addition to the other information in this Report, the following factors should be considered in evaluating us and our business. We have a significant amount of debt coming due in fiscal 2011 that we may not be able to repay. We have approximately $4.2 million of debt that we owe certain company insiders that is due and payable on July 1, 2010, approximately $3.7 million of which is secured by a first lien on all of our properties and assets, including all of our accounts receivable. We may not generate enough cash flow by July 1, 2010 to pay off these obligations. While we currently expect to be able to refinance this debt or reach an agreement to extend the maturity date of this debt, there can be no assurances that this will in fact occur. Failure to refinance or extend the maturity date of this debt will give the secured holders of such debt the right to foreclose on our properties and assets, including our accounts receivables. If these foreclosure rights are exercised, we will be forced to file for protection available under federal bankruptcy laws, which will likely render our equity, including our issued and outstanding common stock, valueless. 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. While we achieved positive operating cash flow in fiscal 2009, our net losses continued and may continue in the future. As of March 31, 2009, our accumulated deficit was $64,075,551. 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. 4
- 8. 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, 2010. 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: • curtail our operations significantly; • sell significant assets; • seek arrangements with strategic partners or other parties that may require us to relinquish significant rights to products, technologies or markets; or • 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: • market acceptance of and changes in demand for our products and services; • gain or loss of clients or strategic relationships; • announcement or introduction of new software, services and products by us or by our competitors; • our ability to build brand recognition; • timing of sales to customers; • price competition; • our ability to upgrade and develop systems and infrastructure to accommodate growth; • our ability to attract and integrate new personnel in a timely and effective manner; • our ability to introduce and market products and services in accordance with market demand; • changes in governmental regulation; • reduction in or delay of capital spending by our clients due to the effects of terrorism, war and political instability; and • general economic conditions, including economic conditions specific to the financial services industry. In addition, from time to time, we derive a 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. 5
- 10. We may not be able to develop or maintain our relationships with distribution partners, which may cause our cash flow to decline. We may not be able to maintain or develop new relationships with distribution channel partners. These strategic relationships are a core component of our sales and distribution strategy and are a part of our growth strategy. The loss of a distribution channel 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. 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 and may lose 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: • longer operating histories; • larger installed customer bases; • greater name recognition and longer relationships with clients; and • 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: • the breadth and quality of services; • creative design and systems engineering expertise; 6
- 11. • pricing; • technological innovation; and • understanding clients’ strategies and needs. 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. 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. 7
- 12. We have received notice from NYSE Alternext US, formerly the AMEX, notifying us of our failure to satisfy several continued listing rules or standards, which could result us being subject to delisting procedures Our common stock is listed on NYSE Alternext US, formerly the AMEX, under the symbol “UDW.” All companies listed on NYSE Alternext US are required to comply with certain continued listing standards, including maintaining stockholders’ equity at required levels, share price requirements and other rules and regulations of NYSE Alternext US . On July 23, 2008, we received notice from the staff of NYSE Alternext US indicating that we were not in compliance with certain continued listing standards of the AMEX Company Guide in that our stockholders’ equity is less than $4,000,000 and we had losses from continuing operations and net losses in three of our four most recent fiscal years (Section 1003(a)(ii)) and because our stockholders’ equity is less than $6,000,000 and we had losses from continuing operations and net losses in our five most recent fiscal years (Section 1003(a)(iii)). In addition, NYSE Alternext US advised us that, in accordance with Section 1003(f)(v) of the AMEX Company Guide, we must effect a reverse stock split to address its low stock price. Failure to effect a reverse split within a reasonable amount of time could result in suspension or delisting of our common stock. On August 27, 2008 we submitted to NYSE Alternext US a Plan advising NYSE Alternext US of action we have taken, or will take, to bring us in compliance with Sections 1003(a)(ii) and 1003(a)(iii) of the AMEX Company Guide within a maximum of 18 months from July 23, 2008. Our Plan was accepted by NYSE Alternext US on October 9, 2008 subject to periodic review by NYSE Alternext US. On March 24, 2009, we received a letter from NYSE Alternext US notifying us that we were no longer in compliance with an additional continued listing standard of the AMEX Company Guide as a result of our stockholders’ equity having fallen below $2,000,000 and our having experienced losses from continuing operations and/or net losses in two out of our most recent three fiscal years (Section 1003(a)(i)) . This additional deficiency did not require us to submit a new Plan or revise the original Plan. If we do not show sufficient progress consistent with the Plan, the Exchange Staff will review the circumstances and may immediately commence delisting proceedings. In the event that our common stock is delisted from NYSE Alternext US, our market value and liquidity could be materially adversely affected. ITEM 1B. UNRESOLVED STAFF COMMENTS None. ITEM 2. PROPERTIES Our principal executive offices, which is our only property, 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. ITEM 3. LEGAL PROCEEDINGS From time to time, we may become involved in various legal and other proceedings that are incidental to the conduct of our business. We are currently not involved in any such legal proceedings. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF SECURITIES Market and Share Prices During fiscal 2009 and 2008, our common stock is traded on the American Stock Exchange (now known as NYSE Alternext US) under the symbol “UDW.” The following table indicates the high and low per share sale prices as reported by the American Stock Exchange for the periods indicated. High Low Year Ended March 31, 2009 First Quarter $ 0.17 $ 0.11 Second Quarter 0.66 0.06 Third Quarter 0.30 0.11 Fourth Quarter 0.32 0.12 Year Ended March 31, 2008 First Quarter $ 0.67 $ 0.44
- 13. Second Quarter 0.70 0.35 Third Quarter 0.49 0.17 Fourth Quarter 0.28 0.09 8
- 14. Holders As of June 24, 2009, the 32,780,870 issued and outstanding shares of our common stock were held by 317 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 Equity Compensation Plan Information The following table sets forth certain information as to our equity compensation plans as of March 31, 2009. Number of securities remaining available for Number of securities future issuance under to be Weighted average equity compensation issued upon exercise exercise price of plans of outstanding outstanding options, (excluding securities options, warrants and reflected in column warrants and rights rights (a)) Plan Category (a) (b) (c) Equity compensation plans approved by the stockholders 6,964,220 $ 0.68 667,872 Equity compensation plans not approved by the stockholders 1,160,000 $ 1.02 — Total 8,124,220 $ 0.73 667,872 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. Some of 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 through a cashless exercise. ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of our financial condition and results of operations should be read with the consolidated financial statements and related notes included elsewhere in this Report. 9
- 15. 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. 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. Because these arrangements do not require significant production, modification or customization, revenue is recognized when the license agreement has been signed, the software product has been delivered, the related fee is fixed or determinable and collection of such fee 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 connection with the installation of the software licensed, revenue is recognized when those services have been provided. In certain instances, the Company will recognize revenue on a percent of completion basis for the portion of professional services related to customized customer projects that have been completed but are not yet deliverable to customer. 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. 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 the ability to collect and provide for an allowance for potential credit losses as deemed necessary. Three of our customers, American Express, the Federal Reserve Bank of Cleveland, and Regulus accounted for 47%, 22%, and 9% respectively, of our net revenue for the year ended March 31, 2009. Four of our customers, American Express, the Federal Reserve Bank of Cleveland, Regulus and Citibank accounted for 31% ,24%, 11%, and 10%, respectively, of our net revenue for the year ended March 31, 2008. At March 31, 2009, amounts due from these three customers accounted for 25%, 19%, and 15%, and one additional customer accounted for 15% of the accounts receivable then outstanding. At March 31, 2008, amounts due from these four customers accounted for 45%, 12%, 11% and 4% of the accounts receivable then outstanding. Results of Operations The results of operations reflected in this discussion include the operations of US Dataworks for the years ended March 31, 2009 and March 31, 2008. 10
- 16. 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. For year Ended March 31, 2009 2008 Change (In 000’s) Software licensing revenues $ 246 $ 282 (12.8)% Software transactional revenues 2,158 1,848 16.8% Software maintenance revenues 892 896 (0.5)% Professional service revenues 4,701 2,820 66.7% Discounts on Sales — (129) 100.0% Total revenues $ 7,997 $ 5,717 39.9% Revenues increased by 39.9% in fiscal 2009, as compared to fiscal 2008. Transactional revenue revenues increased 16.8%, in fiscal 2009, as compared to fiscal 2008. 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. Professional service revenues increased 66.7% in fiscal 2009 as compared to fiscal 2008. The increase in professional service revenue was primarily attributable to the consulting agreement that we signed with American Express February 2008 and related purchase orders. These increases were offset by a decrease in our licensing and maintenance revenues of 12.8% and 0.5% respectively in fiscal 2009, as compared to fiscal 2008, with the decrease in licensing revenues being primarily attributable to the loss of renewal of third party software licenses we resell to our customers. 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. Total cost of sales increased by $195,024, or 9.9%, from $1,964,555 in fiscal 2008 to $2,159,579 in fiscal 2009. The increase in cost of sales is due to the increased labor hours needed to fulfill the requirements of a professional services contract with a major credit card provider. However, cost of sales as a percentage of combined maintenance and services revenues declined from 52.8% in fiscal 2008 to 38.6% in fiscal 2009. This decrease is primarily due to the significant increase in professional service revenue in fiscal 2009 as compared to professional service revenue recorded in fiscal 2008. Operating Expenses Total operating expenses decreased by $11,318,381, or 68.9%, from $16,438,670 in fiscal 2008 to $5,120,289 in fiscal 2009. The decrease in operating expenses was principally attributable to the goodwill impairment expense of $10,112,931 that we recorded in fiscal 2008, as compared to no goodwill impairment charges in fiscal 2009, and to a $1,236,967 decrease in general and administrative expense in fiscal 2009, as compared to fiscal 2008. The decrease in general and administrative expense is primarily attributable to a $940,000 decrease in compensation expense, a $160,000 decrease in the use of outside services and $127,000 decrease in insurance, office, and marketing expenses. We anticipate that our operating expenses will increase slightly over the coming year as we continue to maintain and expand our customer base. Other Income (Expense) Total other income (expense), including interest expense and financing costs, decreased $3,712,173, from income of $1,010,741 in fiscal 2008 to an expense of $(2,701,432) in fiscal 2009. The decrease is principally due to the $2,539,827 in interest expense charge incurred when $4,000,000 in convertible notes were refinanced in August 2008 (due to the acceleration of the unamortized balance of the original issue discount on such notes and the acceleration of the unamortized portion of the financing costs for such notes); and a reduction in the gain on derivatives associated with the debt feature of such convertible notes of $1,072,956 recorded in fiscal 2009 as compared to fiscal 2008 . 11
- 17. Net Loss Net loss decreased by $9,690,578, or 83.0%, from a net loss of $11,674,891 in fiscal 2008 to a net loss of $1,984,313 in fiscal 2009. Liquidity and Capital Resources Because of our ability to increase revenue while at the same time reducing general and administrative expenses, we experienced positive operating cash flow from operations in fiscal 2009 and expect to continue to achieve enough positive operating cash flow from operations in the future to operate and grow our business. However, due to our history of experiencing negative cash flow from operations and the debt financing that we were forced to put in place to cover this historical negative cash flow, we find ourselves in the position of having approximately $4.2 million of debt coming due on July 1, 2010 that we may not be able to repay from our operating cash flow. While we currently expect to be able to refinance this debt or reach an agreement to extend the maturity date of this debt, there can be no assurances that this will in fact occur. Failure to refinance or extend the maturity date of this debt will have a material adverse effect on our financial condition and our ability to continue as a going concern (see “Item 1A. Risk Factors”). In addition, while we expect to be able to fund our operations from cash flow, if that is not the case, our long term viability will again depend on our ability to obtain adequate sources of debt or equity funding to fund the continuation of our business operations and to ultimately achieve adequate profitability and cash flows to sustain our operations. We will need to increase revenues from software licenses, transaction- based software license contracts and professional services agreements to become profitable. Cash and cash equivalents decreased by $499,530 from $903,393 at March 31, 2008 to $403,863 at March 31, 2009. Cash provided by/ (used in) operating activities was $279,445 in fiscal 2009 as compared to $(2,741,323). The increase in cash flow was attributable to the combination of a significant increase in revenue and a significant decrease in general and administrative expense. Cash used for investing activities for fiscal 2008 and 2009 consisted of the purchase and sale of property and equipment totaling $117,850 and $14,538, respectively. Financing activities used cash of $764,438 in fiscal 2009, and included $3,703,500 in proceeds from a related party loan, offset by $4,000,000 repayment of convertible promissory notes, $432,659 in deferred financing costs and $35,279 in notes payable to a vendor. Financing activities provided cash of $3,622,290 in fiscal 2008, which included $4,000,000 in proceeds from the issuance of senior secured convertible notes, $305,000 in proceeds from stock sales, that was 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 such senior secured convertible notes. Assuming that we are able to refinance or extend the maturity date of our debt as discussed above, as a result of our increased level of transactional revenues achieved in fiscal 2009, and the expected increase in revenues to be received from recently received contracts, we believe we currently have adequate capital resources to fund our anticipated cash needs through March 31, 2010 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. 12
- 18. Recently Issued Accounting Pronouncements Financial Accounting Standards Board (“FASB”) Staff Position (“FSP”) No. 157-2 . FSP 157-2 delays the effective date of Statement of Financial Accounting Standards (“SFAS 157”), Fair Value Measurements, for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The delay is intended to allow the FASB and constituents additional time to consider the effect of various implementation issues that have arisen, or that may arise, from the application of SFAS 157. This FSP defers the effective date of SFAS 157 to fiscal years beginning after November 15, 2008 . The Company does not expect FSP 157-2 to have a material impact on its financial statements. FASB Staff Position No. 157-3 . On October 10, 2008 , the FASB issued FASB Staff Position 157- 3 (“FSP 157-3”) Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active . FSP 157-3 applies to financial assets within the scope of SFAS 157. FSP 157-3 clarifies the application of SFAS 157 in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. In situations in which there is little, if any, market activity for an asset at the measurement date, the fair value measurement objective remains the same, that is, the price that would be received by the holder of the financial asset in an orderly transaction (an exit price notion) that is not a forced liquidation or distressed sale at the measurement date. Additionally, in determining fair value for a financial asset, the use of a reporting entity’s own assumptions about future cash flows and appropriately risk-adjusted discount rates is acceptable when relevant observable inputs are not available. Broker (or pricing service) quotes may be an appropriate input when measuring fair value, but they are not necessarily determinative if an active market does not exist for the financial asset. The Company does not expect FSP 157-3 to have a material impact on its financial statements. 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 Accounting Research Bulletin No. 51 (“ARB 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. 13
- 19. In April 2008, the FASB issued FSP SFAS 142-3, “ Determination of the Useful Life of Intangible Assets” (“SFAS 142-3”). This statement revises the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, Goodwill and Other Intangible Assets . The goal of SFAS 142-3 is to improve the consistency between the useful life of a recognized intangible asset under Statement 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS 141R, Business Combinations, and other U.S. GAAP. FSP SFAS 142-3 is effective for fiscal years beginning after December 15, 2008. The Company does not expect SFAS 142-3 to have a material impact on its financial statements. In July 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS 162”). This statement identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with U.S. GAAP. The levels of authority of the accounting principles available for the preparation of financial statements were previously issued by the American Institute of Certified Public Accountants. The FASB decided that accounting principles applicable to GAAP should be adopted as a FASB Statement. SFAS 162 does not set an effective date. It will become effective 60 days following approval by the Securities and Exchange Commission of amendments made by the Public Accounting Oversight Board to AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles.” Effects of applying the provisions of SFAS 162 must be reported as changes in accounting principle in accordance with SFAS No. 154, “Accounting Changes and Error Corrections” (“SFAS 154”). A company must follow the disclosure requirements of SFAS 154 and additionally disclose the accounting principles that were used before and after the application of the provisions of SFAS 162 and the reasons why applying this Statement resulted in a change in accounting principle. The Company does not expect SFAS 162 to have a material impact on its financial statements. 14
- 20. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA US DATAWORKS, INC. TABLE OF CONTENTS Page Report of Independent Registered Public Accounting Firm 16 Financial Statements: Balance Sheets as of March 31, 2009 and 2008 17 Statements of Operations for the years ended March 31, 2009 and 2008 18 Statements of Stockholders’ Equity for the years ended March 31, 2009 and 2008 19 Statements of Cash Flows for the years ended March 31, 2009 and 2008 21 Notes to Financial Statements 22 15
- 21. Report of Independent Registered Public Accounting Firm Board of Directors and Stockholders US Dataworks, Inc. We have audited the accompanying balance sheets of US Dataworks, Inc. as of March 31, 2009 and 2008, and the related statements of operations, stockholders’ equity, and cash flows for each of the two years in the period ended March 31, 2009. 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. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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, 2009 and 2008, and the results of its operations and its cash flows for each of the two years in the period ended March 31, 2009 in conformity with U.S. generally accepted accounting principles. /s/ Ham, Langston & Brezina, LLP Houston, Texas June 29, 2009 16
- 22. US DATAWORKS, INC. BALANCE SHEETS March 31, 2009 March 31, 2008 ASSETS Current assets: Cash and cash equivalents $ 403,863 $ 903,393 Accounts receivable, trade 845,747 856,261 Prepaid expenses and other current assets 186,578 145,915 Total current assets 1,436,188 1,905,569 Property and equipment, net 305,783 478,687 Goodwill, net 4,020,698 4,020,698 Other assets 194,359 357,124 Total assets $ 5,957,028 $ 6,762,078 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Current Portion of Note Payable – Equipment $ 35,279 $ 35,279 Deferred revenue 223,688 200,833 Accounts payable 247,132 271,677 Accrued expenses 199,940 366,538 Interest payable – related parties 38,336 18,188 Notes payable – related parties 4,203,500 — Derivative – Compounded Embedded — 353,749 Derivative – Warrants — 267,532 Total current liabilities 4,947,875 1,513,796 Long-term Note Payable – Equipment 17,639 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 17,639 2,557,282 Total liabilities 4,965,514 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 $334,841 and $293,596 in arrears as of March 31, 2009 and 2008, respectively 55 55 Common stock, $0.0001 par value; 90,000,000 shares authorized; 32,730,870 and 32,062,962 shares issued and outstanding as of March 31, 2009 and 2008 , respectively 3,273 3,206 Additional paid-in capital 65,063,737 64,778,977 Accumulated deficit (64,075,551) (62,091,238) Total stockholders’ equity 991,514 2,691,000 Total liabilities and stockholders’ equity $ 5,957,028 $ 6,762,078 The accompanying notes are an integral part of these financial statements. 17
- 23. US DATAWORKS, INC. STATEMENTS OF OPERATIONS for the years ended March 31, 2009 and 2008 _____ 2009 2008 Revenues: Software licensing revenues $ 245,931 $ 282,045 Software transactional revenues 2,158,409 1,848,130 Software maintenance revenues 892,171 896,358 Professional services revenues 4,700,476 2,820,332 Total revenues, net sales discounts in 2009 and 2008 of $0 and $129,272, respectively 7,996,987 5,717,593 Cost of Sales 2,159,579 1,964,555 Gross Profit 5,837,408 3,753,038 Operating expenses: General and administrative 4,932,846 6,144,484 Depreciation and amortization 187,443 181,255 Goodwill impairment — 10,112,931 Total operating expenses 5,120,289 16,438,670 Income/(loss) from operations 717,119 (12,685,632) Other income (expense): Financing costs (348,210) (152,680) Interest expense (2,712,621) (458,675) Interest expense – related parties (333,137) (47,256) Loss on disposition of assets - (44,231) Other income (expense) 71,255 19,346 Gain on derivative liabilities 621,281 1,694,237 Total other income (expense) (2,701,432) 1,010,741 Loss before provision for income taxes (1,984,313) (11,674,891) Provision for income taxes — — Net loss $ (1,984,313) $ (11,674,891) Basic and diluted loss per share $ (0.06) $ (0.37) Basic and diluted weighted-average shares outstanding 32,444,764 31,744,212 The accompanying notes are an integral part of these financial statements. 18
- 24. US DATAWORKS, INC. STATEMENTS OF STOCKHOLDERS’ EQUITY for the years ended March 31, 2009 and 2008 Preferred Stock Convertible Series B Common Stock Shares Amount Shares Amount Balance, March 31, 2007 549,667 $ 55 37,400,462 $ 3,740 Warrants issued in exchange for note extension Warrants issued in exchange for services Common stock issued for cash 762,500 76 Common stock returned from escrow — — (6,100,000) (610) Stock based compensation — — — — Net (loss) — — — — Balance at March 31, 2008 549,667 $ 55 32,062,962 $ 3,206 [additional columns below] [continued from above table, first column(s) repeated] Additional Paid-In Accumulated Capital Deficit Total Balance, March 31, 2007 $ 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 304,924 305,000 Common stock returned from escrow 610 — — Stock based compensation 337,720 — 337,720 Net (loss) — (11,674,891) (11,674,891) Balance at March 31, 2008 $ 64,778,977 $ (62,091,238) $ 2,691,000 19
- 25. US DATAWORKS, INC. STATEMENTS OF STOCKHOLDERS’ EQUITY for the years ended March 31, 2009 and 2008 Preferred Stock Convertible Series B Common Stock Shares Amount Shares Amount Balance, March 31, 2008 549,667 $ 55 32,062,962 $ 3,206 Stock based compensation — — 667,908 67 Net (loss) — — — — Balance at March 31, 2009 549,667 $ 55 32,730,870 $ 3,273 [additional columns below] [continued from above table, first column(s) repeated] Additional Paid-In Accumulated Capital Deficit Total Balance, March 31, 2008 $ 64,778,977 $ (62,091,238) $ 2,691,000 Stock based compensation 284,760 — 284,827 Net (loss) — (1,984,313) (1,984,313) Balance at March 31, 2009 $ 65,063,737 $ (64,075,551) $ 991,514 The accompanying notes are an integral part of these financial statements. 20
- 26. US DATAWORKS, INC. STATEMENTS OF CASH FLOWS for the years ended March 31, 2009 and 2008 2009 2008 Cash flows from operating activities: Net loss from continuing operations $ (1,984,313) $ (11,674,891) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization of property and equipment 187,445 181,255 Amortization of deferred financing costs 595,425 44,987 Compensatory element of warrants associated with financing costs — 79,588 Gain on disposition of assets — 44,231 Amortization of note discount on convertible promissory note 1,995,636 244,627 Goodwill impairment — 10,112,931 Stock based compensation 284,827 337,720 Gain on derivatives (621,281) (1,694,237) Changes in operating assets and liabilities: Accounts receivable 10,514 1,323,768 Prepaid expenses and other current assets (40,667) (14,003) Other assets — (1,777) Deferred revenue 22,855 (443,062) Accounts payable (24,545) (648,433) Accrued expenses (166,598) (633,357) Interest payable 20,148 (670) Net cash provided by (used) in operating activities 279,446 (2,741,323) Cash flows from investing activities: Purchase of property and equipment (14,538) (128,700) Sales of fixed assets — 10,850 Net cash used in investing activities (14,538) (117,850) Cash flows from financing activities: Proceeds from related party note 3,703,500 — Proceeds from convertible promissory notes — 4,000,000 Repayment of note payable — related party — (39,000) Repayment of convertible promissory note (4,000,000) (256,066) Proceeds from stock sale — 305,000 Deferred financing costs (432,659) (370,004) Payments on equipment note payable (35,279) (17,640) Net cash (used) / provided by financing activities (764,438) 3,622,290 Net (decrease) increase in cash and cash equivalents (499,530) 763,117 Cash and cash equivalents, beginning of year 903,393 140,276 Cash and cash equivalents, end of year $ 403,863 $ 903,393 Supplemental disclosures of cash flow information Interest paid $ 517,049 $ 118,183 Taxes paid $ — $ — The accompanying notes are an integral part of these financial statements. 21
- 27. US DATAWORKS INC. NOTES TO FINANCIAL STATEMENTS ____ 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. 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. In certain instances, the Company will recognize revenue on a percent of completion basis for the portion of professional services related to customized customer projects that have been completed but are not yet deliverable to customer. 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. Cash and Cash Equivalents For the purpose of the statements of cash flows, the Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. The Company maintains cash deposits with a major bank that, from time-to-time, may exceed federally insured limits; however the Company has not experienced any losses on deposits . 22
- 28. US DATAWORKS INC. NOTES TO FINANCIAL STATEMENTS ____ Property and Equipment Property and equipment are recorded at cost, less accumulated depreciation and amortization. Depreciation and amortization are provided using the straight-line method over estimated useful lives as follows: Furniture and fixtures 5 years Telephone equipment 5 to 10 years Computer equipment 5 years Computer software 5 years Leasehold improvements Shorter of 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 No. 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 did not have an impairment of goodwill to record for the year ended March 31, 2009 and did record an impairment of goodwill for the year ended March 31, 2008. 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 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 approximate fair value of such items. The Company does not hold or issue financial instruments for trading purposes. 23
- 29. US DATAWORKS INC. NOTES TO FINANCIAL STATEMENTS ____ The Company adopted Statement of Financial Accounting Standards No. 157 “Fair Value Measurements” (“SFAS 157”) on April 1, 2008. SFAS 157, among other things, defines fair value, establishes a consistent framework for measuring fair value and expands disclosure for each major asset and liability category measured at fair value on either a recurring or nonrecurring basis. SFAS 157 clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, SFAS 157 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows: Level 1. Observable inputs such as quoted prices in active markets for identical assets or liabilities; Level 2. Inputs, other than quoted prices included within Level 1, that are observable either directly or indirectly; and Level 3. Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions. As of March 31, 2009 the Company had no assets or liabilities that were marked to fair value under SFAS 157. 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 ”, 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 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 the 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, 2009 and March 31, 2008 was $284,827, and $337,720 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 Principles 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. 24
- 30. US DATAWORKS INC. NOTES TO FINANCIAL STATEMENTS ____ 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 years ended March 31, 2009 and March 31, 2008 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, 2009 and March 31, 2008, 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, 2009 2008 Risk-free Interest Rate 2.46% 3.71% Expected Life of Options Granted 3 years 3 years Expected Volatility 189% 80% Expected Dividend Yield 0 0 Expected Forfeiture Rate 30% 30% As of March 31, 2009, there was approximately $80,573 of total unrecognized compensation cost related to nonvested share-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, 2009 and 2008, the Company recorded advertising expense of $124,314 and $40,401 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 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. 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. 25
- 31. US DATAWORKS INC. NOTES TO FINANCIAL STATEMENTS ____ 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, 2009 2008 Options outstanding under the Company’s stock option plans 6,964,220 7,521,349 Options granted outside the Company’s stock option plans 1,160,000 1,160,000 Warrants issued in conjunction with private placements 3,538,201 9,939,846 Warrants issued as a financing cost for notes payable and convertible notes payable 4,851,163 1,891,250 Warrants issued for services rendered and litigation settlement 200,000 380,769 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. Three of our customers, American Express, the Federal Reserve Bank, and Regulus accounted for 47%, 22%, and 9% respectively, of our net revenue for the year ended March 31, 2009. 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. At March 31, 2009, amounts due from these three customers accounted for 25%, 19% and 15%, and one additional customer accounted for 15% of the accounts receivable then outstanding. At March 31, 2008, amounts due from these four customers accounted for 45%, 12%, 11% and 6% of the accounts receivable then outstanding. 26
- 32. US DATAWORKS INC. NOTES TO FINANCIAL STATEMENTS ____ Recently Issued Accounting Pronouncements Financial Accounting Standards Board (“FASB”) Staff Position ( “ FSP”) No. 157-2 . FSP 157-2 delays the effective date of Statement of Financial Accounting Standards (“SFAS 157”), Fair Value Measurements, for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The delay is intended to allow the FASB and constituents additional time to consider the effect of various implementation issues that have arisen, or that may arise, from the application of SFAS 157. This FSP defers the effective date of SFAS 157 to fiscal years beginning after November 15, 2008 . The Company does not expect FSP 157-2 to have a material impact on its financial statements. FASB Staff Position No. 157-3 . On October 10, 2008 , the FASB issued FASB Staff Position 157- 3 (“FSP 157-3”) Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active . FSP 157-3 applies to financial assets within the scope of SFAS 157. FSP 157-3 clarifies the application of SFAS 157 in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. In situations in which there is little, if any, market activity for an asset at the measurement date, the fair value measurement objective remains the same, that is, the price that would be received by the holder of the financial asset in an orderly transaction (an exit price notion) that is not a forced liquidation or distressed sale at the measurement date. Additionally, in determining fair value for a financial asset, the use of a reporting entity’s own assumptions about future cash flows and appropriately risk-adjusted discount rates is acceptable when relevant observable inputs are not available. Broker (or pricing service) quotes may be an appropriate input when measuring fair value, but they are not necessarily determinative if an active market does not exist for the financial asset. The Company does not expect FSP 157-3 to have a material impact on its financial statements. 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 Accounting Research Bulletin No. 51 (“ARB 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. 27
- 33. In April 2008, the FASB issued FSP SFAS 142-3, “ Determination of the Useful Life of Intangible Assets” (“SFAS 142-3”). This statement revises the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, Goodwill and Other Intangible Assets . The goal of SFAS 142-3 is to improve the consistency between the useful life of a recognized intangible asset under Statement 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS 141R, Business Combinations, and other U.S. GAAP. FSP SFAS 142-3 is effective for fiscal years beginning after December 15, 2008. The Company does not expect SFAS 142-3 to have a material impact on its financial statements. In July 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS 162”). This statement identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with U.S. GAAP. The levels of authority of the accounting principles available for the preparation of financial statements were previously issued by the American Institute of Certified Public Accountants. The FASB decided that accounting principles applicable to GAAP should be adopted as a FASB Statement. SFAS 162 does not set an effective date. It will become effective 60 days following approval by the Securities and Exchange Commission of amendments made by the Public Accounting Oversight Board to AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles.” Effects of applying the provisions of SFAS 162 must be reported as changes in accounting principle in accordance with SFAS No. 154, “Accounting Changes and Error Corrections” (“SFAS 154”). A company must follow the disclosure requirements of SFAS 154 and additionally disclose the accounting principles that were used before and after the application of the provisions of SFAS 162 and the reasons why applying this Statement resulted in a change in accounting principle. The Company does not expect SFAS 162 to have a material impact on its financial statements. Reclassifications Certain items in the 2008 financial statements have been reclassified to conform to the 2009 financial statement presentation. 28
- 34. US DATAWORKS INC. NOTES TO FINANCIAL STATEMENTS ____ 3. Property and Equipment Property and equipment at March 31, 2009 and 2008 consisted of the following: 2009 2008 Furniture and fixtures $ 99,535 $ 99,535 Telephone and office equipment 182,275 182,275 Computer equipment 734,546 720,005 Computer Software 1,271,098 1,271,098 Leasehold improvements 64,733 64,733 2,352,187 2,337,646 Less accumulated depreciation and amortization (2,046,404) (1,858,959) Total $ 305,783 $ 478,687 Depreciation and amortization expense for the years ended March 31, 2009 and 2008 was $187,445 and $181,255, respectively. 4. Goodwill Impairment 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. Fair value is determined using a combination of the discounted cash flow, market multiple and market capitalization valuation approaches. The Company has determined that it did not have an impairment of goodwill to record in the year ended March 31, 2009. The Company did determine that two significant events occurred in the year ended March 31, 2008 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 in the quarter ending December 31, 2007. 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 quarter ending March 31, 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 a total impairment of $10,112,931 occurred during the year 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 In connection with the redemption of the Senior Secured Convertible Promissory Notes due November 13, 2010 discussed below, the Company entered into a Note Purchase Agreement and issued an aggregate of $3,703,500 Senior Secured Notes due August 13, 2009 (“Refinance Notes”). The Refinance Notes were purchased by the Company’s Chief Executive Officer and a member of its Board of Directors (“Holders”). As originally issued, the Refinance Notes bear interest at a rate of 12% per annum with interest payments due in arrears monthly. Pursuant to the Refinance Notes as originally issued, if the Company fails to pay any amount of principal, interest, or other amounts when and as due, then the Refinance Notes will bear an interest rate of 18% until such time as the Company cures this default. In addition, if the Company is subject to certain events of bankruptcy or insolvency, the Refinance Notes provide that the Holders may redeem all or a portion of the Refinance Notes. 29
- 35. US DATAWORKS INC. NOTES TO FINANCIAL STATEMENTS ____ The Refinance Notes are secured by a Security Agreement, dated August 13, 2008, by and between the Company and the Holders, pursuant to which the Company granted the Holders a security interest in all its personal property, whether now owned or hereafter acquired, including but not limited to, all accounts receivable, accounts, copyrights, trademarks, licenses, equipment and all proceeds as from such collateral. On February 19, 2009, US Dataworks, Inc. (the "Company") entered into Note Modification Agreements with the holders of the Refinance Notes due August 13, 2009. Effective as of February 19, 2009, the Note Modification Agreements amended the Refinance Notes as follows: (1) the maturity date of the Refinance Notes was extended from August 13, 2009 to December 31, 2009; (2) the annual interest rate on the Refinance Notes increased from 12% to 13%; and (3) the interest rate escalation clause related to an event of default was deleted. The Note Modification Agreements also added a mandatory principal payment provision that required the Company to reduce the principal balance of the Refinance Notes by 3% of the original principal amount of the Refinance Notes after the end of each calendar quarter starting with March 31, 2009 as long as such payment would not reduce the Company's cash balance below $500,000 as of the last day of such quarter. If making such principal payment would reduce the Company's cash balance below $500,000 as of such date, the amount of the principal payment will be reduced to the amount, if any, by which the Company's cash balance as of such date exceeds $500,000. The amount to be paid is to be determined each quarter and is not cumulative from quarter to quarter. These principal payments are to be made within 10 business days after the end of each quarter. An amendment fee of 1% of the outstanding principal balances of the Refinance Notes will be paid to the holders thereof as follows: 50% upon execution of the Note Modification Agreement and 50% on the 90th day following the execution of the Note Modification Agreement. On May 20, 2009, the Company again entered into Note Modification Agreements with the holders of the Refinance Notes that amended the Refinance Notes as follows: (1) the Other Note (defined below) was included in the definition of “Permitted Indebtedness” and (2) the Company was allowed to make voluntary interest payments on the Other Note notwithstanding the fact that the Refinance Notes are otherwise senior to the Other Note. On June 26, 2009, the Company again entered into Note Modification Agreements with the holders of the Refinance Notes that amended the Refinance Notes as follows: (1) the maturity date of the Refinance Notes was extended from December 31, 2009 to July 1, 2009; and (2) the mandatory principal payment provision was revised to provide that to the extent the Company’s cash balance at the end of each calendar quarter exceeds $611,105, one-fourth of such excess amount must be used by the Company to pay down the principal balance of the Refinance Notes and the Company has the discretion to use an additional one-fourth of such excess amount to further pay down the principal balance of the Refinance Notes. Other than this additional principal payment requirement, the principal payment provision remained unchanged. In consideration of these amendments, the Company will (i) pay to the holders of the Refinance Notes a fee of $50,000 in cash on July 1, 2009 and (ii) will issue to the holders of the Refinance Notes warrants to purchase 1,854,141 shares of the Company’s common stock at an exercise price of $0.43 per share, these warrants will be subject to the additional terms specified in the Note Modification Agreements, copies of which are filed herewith as exhibits to this Report. On September 26, 2006, the Company entered into a note payable with its Chief Executive Officer for $500,000 (“Other Note”). 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, 2009 the outstanding balance on this note payable was $500,000. As originally issued, 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. On May 20, 2009, the Company entered into a Note Modification Agreement with the holder of the Other Note. Effective as of May 20, 2009, the Note Modification Agreement amended the Note as follows: (1) it was clarified that the Note was a demand note for which full payment can be required at any time on or after the maturity date; (2) the maturity date of the Note was extended to December 31, 2009; and (3) the Company was allowed to make voluntary prepayments under the Note without penalty. On June 26, 2009, the Company again entered into a Note Modification Agreement (a copy of which is filed herewith as an exhibit to this Report) with the holder of the Other Note that extended the maturity date of the Other Note from December 31, 2009 to July 1, 2010. In consideration of this amendment, the Company will pay to the holder of the Other Note a fee of $6,666.67 in cash on July 1, 2009. 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, 2009 and 2008, the outstanding balance on this Note Payable was $52,918 and $88,197 respectively. 6. Convertible Promissory Notes 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
- 36. 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”). 30
- 37. US DATAWORKS INC. NOTES TO FINANCIAL STATEMENTS ____ 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 “Put Grantors”). Pursuant to the Put Agreement, following August 13, 2008, under certain circumstances the Investors may require one or more of the Put Grantors to purchase all or a portion of the Note, including any accrued interest or late charges. In consideration for entering into the Put Agreement, the Company paid to the Put Grantors a fee (the “Put Grantor Fee”) equal to an initial installment of two percent (2%) of the outstanding Note principal for the initial six months of the Note’s term and an additional fee equal to .50% of the outstanding Note principal for the next three months, after which time the Put Agreement terminated. The Put Grantor Fee was shared equally by the Put Grantors and accrued immediately upon the start of each of the time periods described above. 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 Warrants may be exercised at any time until 11:59 p.m., New York time on November 13, 2012. The Company was obligated to reserve for issuance upon conversion of the Notes and is obligated to reserve for issuance upon exercise of the Warrants shares of Common Stock equal to at least 130% of the Conversion Shares and Warrant Shares. 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. Due to the retirement of the debt on August 13, 2008, the embedded derivative liability was terminated resulting in an other income item of $359,527. 31
- 38. US DATAWORKS INC. NOTES TO FINANCIAL STATEMENTS ____ 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 No. 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 No. 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. Due to the retirement of the debt on August 13, 2008, the embedded derivative liability associated with the warrants was terminated resulting in an other income item of $220,674. 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. On July 15, 2008, the Company gave notice to the Investors of their respective rights of optional redemption of the Notes on August 13, 2008. In respect thereto, the Company received optional redemption notices from each of the Investors. On August 13, 2008, using the proceeds from the issuance of the Refinance Notes (discussed in Note 5), the Company repaid principal of $4,000,000 and $38,808 of interest accrued on the principal from and including July 1, 2008 through August 12, 2008 and the notes were thereby retired. 7. 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 $388,226 and $380,118 for the years ended March 31, 2009 and 2008, respectively. Future minimum lease payments under operating leases at March 31, 2009 were as follows: Year Ended Operating March 31, Lease 2010 $ 347,615 2011 350,747 2012 355,444 2013 119,003 $ 1,172,809 Employment Agreements On May 1 and May 15, 2008, the Company accepted the resignation of Messrs. John Figone and Terry Stepanik, respectively, and as part of the Company’s restructuring, on June 12, 2008, it entered into a new Employment Agreement (the ‘Agreement”) with Mr. Mario Villarreal in connection with his promotion to President and Chief Operating Officer. Under the Agreement Mr. Villarreal will receive an annual base salary of $185,000 for a term of one year. If Mr. Villarreal is terminated, other than for cause, death or disability, or resigns within 60 days following a material reduction in duties or a material reduction in compensation within six months following a change of control, Mr. Villarreal is entitled to receive a lump sum payment equal to one-half (0.5) times his annual base salary and any unpaid base salary and bonus, subject to compliance with certain ongoing obligations and the delivery of a release to us. 32
- 39. US DATAWORKS INC. NOTES TO FINANCIAL STATEMENTS ____ 8. Income Taxes The tax effects of temporary differences that give rise to deferred taxes at March 31, 2009 and 2008 were as follows: 2009 2008 Deferred tax assets: United States federal net operating loss carryforwards $ 10,297,779 $ 10,267,648 Effect of state net operating loss carryforwards 41,014 41,014 Accrued liabilities 26,660 56,605 Basis of Property & Equipment 29,772 7,088 Deferred Revenue 76,054 — Total deferred tax assets 10,471,279 10,372,355 Valuation allowance (10,471,279) (10,372,355) Net deferred tax assets $ — $ — The valuation allowance increased by $98,924 during the year ended March 31, 2009 and increased by $86,791 during the year ended March 31, 2008. At March 31, 2009, the Company had approximately $30,288,000 of federal net operating loss carryforwards attributable to losses incurred since the Company’s inception that may be offset against future taxable income from 2021 through 2028. 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, 2009 and 2008, 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: 2009 2008 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 (34.2) (0.8) Non-deductible compensation and other expense arising from issuance of common stock and stock warrants (4.9) (1.1) Non-deductible goodwill impairment — (32.0) Non-Taxable gain on derivative liabilities 10.6 5.4 Revision to net operating loss carryforward (3.5) — Change in the beginning-of-the-year balance of the valuation allowance for deferred tax assets allocated to income tax expense 1.7 (7.9) Other (3.7) 2.4 Total —% —% 33
- 40. US DATAWORKS INC. NOTES TO FINANCIAL STATEMENTS ____ 9. Stockholders’ Equity Preferred Stock The Company has 10,000,000 authorized shares of $0.0001 par value preferred stock. The preferred stock may be issued in series, from time to time, with such designations, rights, preferences, and limitations as the Board of Directors may determine by resolution. Convertible Series B Preferred Stock The Company has 700,000 shares authorized, 109,933 shares issued and outstanding of $0.0001 par value convertible Series B preferred stock. The Series B has a liquidation preference of $3.75 per share and carries a 10% cumulative dividend payable each March 1 and September 1. The Series B is convertible upon issuance into common stock at $3.75 per share. The Company has the right to redeem the Series B at any time after issuance at a redemption price of $4.15 per share, plus any accrued but unpaid dividends. At March 31, 2009 and 2008, there were accumulated, undeclared dividends in arrears of $334,841 and $295,596, or $3.05 per share and $2.67 per share, respectively. Common Stock and Warrants During the year ended March 31, 2009, the Company completed the following: The Company granted 50,000 shares of restricted common stock at $0.12 per share, 50,000 shares of restricted common stock at $0.22, and 50,000 shares of restricted common stock at $0.15 based on the closing price of the common stock on the respective grant dates, to the President and Chief Operating Officer pursuant to his employment agreement, and 55,555 shares valued at $0.12 per share, 80,000 shares valued at $0.22, and 82,353 shares at $0.15 based on the closing price of the common stock on the respective grant dates, to an independent member of the Board of Directors associated with his service as a member of the Company’s Executive Committee. 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. 34
- 41. US DATAWORKS INC. NOTES TO FINANCIAL STATEMENTS ____ 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. During the years ended March 31, 2009 and 2008, the Company granted 483,335 and 1,060,500 stock options, respectively, to certain employees that may be exercised at prices ranging between $0.26 and $0.26, and between $0.61 and $0.15, 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, 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 Granted 483,335 $ 0.26 — $ — Forfeited/cancelled (1,040,464) $ 0.58 — $ — Outstanding, March 31, 2009 6,964,220 $ 0.68 1,160,000 $ 1.02 Exercisable, March 31, 2009 6,331,059 $ 0.72 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, 2009 were 6.35 years and $0.73, respectively. The exercise prices for the options outstanding at March 31, 2009 ranged from $0.15 to $6.25, and information relating to these options is as follows: Weighted- Weighted- Average Average Exercise Range of Stock Stock Remaining Weighted -Average Price of Exercise Options Options Contractual Exercise Options Prices Outstanding Exercisable Life Price Exercisable $ 0.15 - 0.80 5,678,884 5,045,723 6.83 years $ 0.53 $ 0.55 $ 0.81 - 1.35 1,734,836 1,734,836 5.37 years $ 0.93 $ 0.93 $ 1.36 - 6.25 710,500 710,500 4.89 years $ 1.88 $ 1.88 8,124,220 7,491,059 35
- 42. US DATAWORKS INC. NOTES TO FINANCIAL STATEMENTS ____ 10. Liquidity Because of our ability to increase revenue while at the same time reducing general and administrative expenses, we experienced positive cash flow from operations in fiscal 2009. However, due to our history of experiencing negative cash flow from operations and the debt financing that we were forced to put in place to cover this historical negative cash flow, we find ourselves in the position of having approximately $4.2 million of debt coming due on July 1, 2010, (See Note 11 herein) that we may not be able to repay from our operating cash flow. While we currently expect to be able to refinance this debt or reach an agreement to extend the maturity date of this debt, there can be no assurances that this will in fact occur. Failure to refinance or extend the maturity date of this debt may have a material adverse effect on our financial condition and our ability to continue as a going concern (see “Item 1A. Risk Factors”). In addition, while we expect to be able to fund our operations from cash flow, if that is not the case, our long term viability will again depend on our ability to obtain adequate sources of debt or equity funding to fund the continuation of our business operations and to ultimately achieve adequate profitability and cash flows to sustain our operations. We will need to increase revenues from software licenses, transaction-based software license contracts and professional services agreements to become profitable. 11. Subsequent Events Subsequent to March 31, 2009, the Company entered into certain amendments with the holders of an aggregate of $4,203,500 principal amount of debt that was scheduled to mature on December 31, 2009 to, among other things, extend the maturity date of such debt to July 1, 2009 (see Note 5 herein). These amendments will have the effect of requiring the Company to reclassify this debt as a long term liability (from a current liability) as of June 26, 2009. Assuming this transaction had taken place prior to March 31, 2009, the below Proforma Balance Sheet shows the impact this transaction would have had. PROFORMA AND AS REPORTED BALANCE SHEETS For the year ended March 31, 2009 As Reported Proforma Total Assets $ 5,957,028 $ 5,957,028 Total Current Liabilities including current portion of Long Term Notes Payable 4,947,875 1,279,006 Total Long Term Liabilities 17,639 3,686,508 Total liabilities 4,965,514 4,965,514 Stockholders Equity 991,514 991,514 In connection with the loan amendments discussed above, the Company agreed to issue to the note holders warrants to acquire 1,854,141 shares of the Company’s common stock at an exercise price of $0.43 per share (see Note 5 herein) and pay cash extension fees of approximately $57,000 payable on July 1, 2009. Based on a valuation performed as of June 26, 2009 the Company currently estimates that it will record a non-cash charge of $320,157 in connection with the issuance of the warrants, which will be amortized over the period beginning on June 26, 2009 and ending on July 1, 2010. The cash extension fee will be expensed at the time of payment. 36
- 43. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLSOSURE None. ITEM 9A(T). CONTROLS AND PROCEDURES Disclosure controls and procedures . We maintain “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, or the Exchange Act, that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Our disclosure controls and procedures have been designed to meet reasonable assurance standards. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Based on their evaluation as of the end of the period covered by this Annual Report on Form 10-K, 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 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, 2009. 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, 2009, our internal control over financial reporting was effective. This Annual Report on Form 10-K 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-K. 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 9B. OTHER INFORMATION None. 37
- 44. PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE Item 10 is incorporated by reference pursuant to Regulation 14A under Securities Exchange Act of 1934, as amended (the “Exchange Act”). We expect to file a definitive proxy statement with the Securities and Exchange Commission (the “SEC”) within 120 days after the close of our fiscal year ended March 31, 2009. ITEM 11. EXECUTIVE COMPENSATION Item 11 is incorporated by reference pursuant to Regulation 14A under the Exchange Act. We expect to file a definitive proxy statement with the SEC within 120 days after the close of our fiscal year ended March 31, 2009. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS Item 12 is incorporated by reference pursuant to Regulation 14A under the Exchange Act. We expect to file a definitive proxy statement with the SEC within 120 days after the close of our fiscal year ended March 31, 2009. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE Item 13 is incorporated by reference pursuant to Regulation 14A under the Exchange Act. We expect to file a definitive proxy statement with the SEC within 120 days after the close of our fiscal year ended March 31, 2009. ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES Item 14 is incorporated by reference pursuant to Regulation 14A under the Exchange Act. We expect to file a definitive proxy statement with the SEC within 120 days after the close of our fiscal year ended March 31, 2009. PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES 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 (reflecting an amendment to the Bylaws adopted on February 19, 2009 as reported in the Registrant’s Current Report on Form 8-K filed with the SEC on February 25, 2009). 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 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). 4.3 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).
- 45. 4.4 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). 38
- 46. Exhibit Number Description of Document 4.5 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). 4.6 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 10.1 to the Registrants' Quarterly Report on Form 10-Q for the quarter ended September 30, 2008. 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 Lease Agreement dated as of June 22, 2007, by and between Registrant and Parkway Properties LP. 39
- 47. Exhibit Number Description of Document 10.10 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). 10.11 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). 10.12* 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 10.13 Note Purchase Agreement dated August 13, 2008, by and between the Company and signatories thereto (incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2008). 10.14 Security Agreement dated August 13, 2008 made by the Company in favor of Charles E. Ramey, as collateral agent (incorporated by reference to Exhibit 10.4 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2008). 10.15 Form of US Dataworks, Inc. Refinancing Secured Note dated August 13, 2008 (incorporated by reference to Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2008). 10.16 Note Modification Agreement by and between US Dataworks, Inc. and Charles E. Ramey dated February 19, 2009 (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed with the SEC on February 25, 2009). 10.17 Note Modification Agreement by and between US Dataworks, Inc. and John L. Nicholson, M.D. dated February 19, 2009 (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on February 25, 2009). 10.18† Outside Director Compensation Plan dated April 20, 2009 but effective as of April 1, 2009 (incorporated by reference to Item 1.01 of the Registrant’s Current Report on Form 8-K filed with the SEC on April 23, 2009). 10.19 Note Modification Agreement by and between US Dataworks, Inc. and Charles E. Ramey dated May 20, 2009 (Refinance Note) (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed with the SEC on May 27, 2009). 10.20 Note Modification Agreement by and between US Dataworks, Inc. and John L. Nicholson, M.D. dated May 20, 2009 (Refinance Note) (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on May 27, 2009). 10.21 Note Modification Agreement by and between US Dataworks, Inc. and Charles E. Ramey dated May 20, 2009 (Other Note) (incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed with the SEC on May 27, 2009). 10.22** Note Modification Agreement by and between US Dataworks, Inc. and Charles E. Ramey dated June 26, 2009 (Refinance Note). 10.23** Note Modification Agreement by and between US Dataworks, Inc. and John L. Nicholson, M.D. dated June 26, 2009 (Refinance Note). 10.24** Note Modification Agreement by and between US Dataworks, Inc. and Charles E. Ramey dated June 26, 2009 (Other Note). 23** 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.
- 48. † Indicates management contract or compensatory plan or arrangement. * Confidential treatment requested. ** Filed herewith 40
- 49. 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. By: /s/ Charles E. Ramey Charles E. Ramey Chief Executive Officer Date: June 29, 2009 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- K 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 Chief Executive Officer June 29, 2009 Charles E. Ramey (Principal Executive Officer) and Director Chief Accounting Officer /s/ John T. McLaughlin (Principal Accounting Officer and Principal June 29, 2009 John T. McLaughlin Financial Officer) /s/ Joe Abrell Director June 29, 2009 Joe Abrell /s/ Anna C. Catalano Director June 29, 2009 Anna C. Catalano /s/ G. Richard Hicks Director June 29, 2009 G. Richard Hicks /s/ J. Patrick Millinor Director June 29, 2009 J. Patrick Millinor /s/ John L. Nicholson, M.D. Director June 29, 2009 John L. Nicholson, M.D. /s/ Mario Villarreal Director June 29, 2009 Mario Villarreal /s/ Hayden D. Watson Director June 29, 2009 Hayden D. Watson /s/ Thomas L. West, Jr. Director June 29, 2009 Thomas L. West, Jr. 41
- 50. 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 (reflecting an amendment to the Bylaws adopted on February 19, 2009 as reported in the Registrant’s Current Report on Form 8-K filed with SEC on February 25, 2009). 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 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). 4.3 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). 42
- 51. Exhibit Number Description of Document 4.4 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). 4.5 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). 4.6 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 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2008. 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). 43
- 52. Exhibit Number Description of Document 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 Lease Agreement dated as of June 22, 2007, by and between Registrant and Parkway Properties LP. 10.10 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). 10.11 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). 10.12* 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 10.13 Note Purchase Agreement dated August 13, 2008, by and between the Company and signatories thereto (incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2008). 10.14 Security Agreement dated August 13, 2008 made by the Company in favor of Charles E. Ramey, as collateral agent (incorporated by reference to Exhibit 10.4 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2008). 10.15 Form of US Dataworks, Inc. Refinancing Secured Note dated August 13, 2008 (incorporated by reference to Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2008). 10.16 Note Modification Agreement by and between US Dataworks, Inc. and Charles E. Ramey dated February 19, 2009 (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed with the SEC on February 25, 2009). 10.17 Note Modification Agreement by and between US Dataworks, Inc. and John L. Nicholson, M.D. dated February 19, 2009 (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on February 25, 2009). 10.18† Outside Director Compensation Plan dated April 20, 2009 but effective as of April 1, 2009 (incorporated by reference to Item 1.01 of the Registrant’s Current Report on Form 8-K filed with the SEC on April 23, 2009). 10.19 Note Modification Agreement by and between US Dataworks, Inc. and Charles E. Ramey dated May 20, 2009 (Refinance Note) (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed with the SEC on May 27, 2009). 10.20 Note Modification Agreement by and between US Dataworks, Inc. and John L. Nicholson, M.D. dated May 20, 2009 (Refinance Note) (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on May 27, 2009). 10.21 Note Modification Agreement by and between US Dataworks, Inc. and Charles E. Ramey dated May 20, 2009 (Other Note) (incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed with the SEC on May 27, 2009). 10.22** Note Modification Agreement by and between US Dataworks, Inc. and Charles E. Ramey dated June 26, 2009 (Refinance Note). 10.23** Note Modification Agreement by and between US Dataworks, Inc. and John L. Nicholson, M.D. dated June 26, 2009 (Refinance Note). 10.24** Note Modification Agreement by and between US Dataworks, Inc. and Charles E. Ramey dated June 26, 2009 (Other Note). 23** 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.
- 53. 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. ** Filed herewith. 44
- 54. EXHIBIT 3.ii AMENDED AND RESTATED BYLAWS OF US DATAWORKS, INC. A NEVADA CORPORATION ARTICLE I OFFICES Section 1. PRINCIPAL OFFICES. The principal office shall be 5301 Hollister Road, Suite 250, Houston, Texas 77040. Section 2. OTHER OFFICES. The Board of Directors may at any time establish branch or subordinate offices at any place or places where the corporation is qualified to do business. ARTICLE II MEETINGS OF STOCKHOLDERS Section 1. PLACE OF MEETINGS. Meetings of stockholders shall be held at any place within or without the State of Nevada designated by the Board of Directors. In the absence of any such designation, stockholders' meetings shall be held at the principal executive office of the corporation. Section 2. ANNUAL MEETINGS. The annual meetings of stockholders shall be held at a date and time designated by the Board of Directors. (At such meetings, directors shall be elected and any other proper business may be transacted by a plurality vote of stockholders.) Section 3. SPECIAL MEETINGS. A special meeting of the stockholders, for any purpose or purposes whatsoever, unless prescribed by statute or by the articles of incorporation, may be called at any tune by the president and shall be called by the president or secretary at the request in writing of a majority of the Board of Directors, or at the request in writing of stockholders holding shares in the aggregate entitled to cast not less than a majority of the votes at any such meeting. The request shall be in writing, specifying the time of such meeting, the place where it is to be held and the general nature of the business proposed to be transacted, and shall be delivered personally or sent by registered mail or by telegraphic or other facsimile transmission to the chairman of the board, the president, any vice president or the secretary of the corporation. The officer receiving such request forthwith shall cause notice to be given to the stockholders entitled to vote, in accordance with the provisions of Sections 4 and 5 of this Article II, that a meeting will be held at the time requested by the person or persons calling the meeting, not less than thirty-five (35) nor more than sixty (60) days after the receipt of the request. Nothing contained in this paragraph of this Section 3 shall be construed as limiting, fixing or affecting the time when a meeting of stockholders called by action of the Board of Directors may be held. -1-
- 55. Section 4. NOTICE OF STOCKHOLDERS' MEETINGS. All notices of meetings of stockholders shall be sent or otherwise given in accordance with Section 5 of this Article II not less than ten (10) nor more than sixty (60) days before the date of the meeting being noticed. The notice shall specify the place, date and hour of the meeting and (i) in the case of a special meeting the general nature of the business to be transacted, or (ii) in the case of the annual meeting those matters which the Board of Directors, at the time of giving the notice, intends to present for action by the stockholders. The notice of any meeting at which directors are to be elected shall include the name of any nominee or nominees which, at the time of the notice, management intends to present for election. Section 5. MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE. Notice of any meeting of stockholders shall be given either personally or by first-class mail or telegraphic or other written communication, charges prepaid, addressed to the stockholder at the address of such stockholder appearing on the books of the corporation or given by the stockholder to the corporation for the purpose of notice. If no such address appears on the corporation's books or is given, notice shall be deemed to have been given if sent by mail or telegram to the corporation's principal executive office, or if published at least once in a newspaper of general circulation in the county where this office is located. Personal delivery of any such notice to any officer of a corporation or association or to any member of a partnership shall constitute delivery of such notice to such corporation, association or partnership. Notice shall be deemed to have been given at the time when delivered personally or deposited in the mail or sent by telegram or other means of written communication. In the event of the transfer of stock after delivery or mailing of the notice of and prior to the holding of the meeting, it shall not be necessary to deliver or mail notice of the meeting to the transferee. If, (1) notice of two consecutive annual meetings and all notices of meetings during the period between two consecutive annual meetings, or (2) all, and at least two, payments sent by first-class mail of dividends or interest on securities during a 12-month period, have been mailed addressed to a stockholder at the address of such stockholder appearing on the books of the corporation, and are returned to the corporation by the United States Postal Service marked to indicate that the United States Postal Service is unable to deliver the notices to the stockholder at such address, the giving of further notice is not required. Any action or meeting taken or held without notice to such a stockholder has the same effect as if the notice had been given. If any such stockholder delivers to the corporation written notice setting forth the stockholder's current address, the requirement that notice be given to the stockholder is reinstated. An affidavit of the mailing or other means of giving any notice of any stockholders' meeting shall be executed by the secretary, assistant secretary or any transfer agent of the corporation giving such notice, and shall be filed and maintained in the minute book of the corporation. -2-
- 56. Business transacted at any special meeting of stockholders shall be limited to the purposes stated in the notice. Section 6. QUORUM. The presence in person or by proxy of the holders of a majority of the shares entitled to vote at any meeting of stockholders shall constitute a quorum for the transaction of business, except as otherwise provided by statute or the articles of incorporation. The stockholders present at a duly called or held meeting at which a quorum is present may continue to do business until adjournment, notwithstanding the withdrawal of enough stockholders to leave less than a quorum, if any action taken (other than adjournment) is approved by at least a majority of the shares required to constitute a quorum. Section 7. ADJOURNED MEETING AND NOTICE THEREOF. Any stockholders' meeting, annual or special, whether or not a quorum is present, may be adjourned from time to time by the vote of the majority of the shares represented at such meeting, either in person or by proxy, but in the absence of a quorum, no other business may be transacted at such meeting. When any meeting of stockholders, either annual or special, is adjourned to another time or place, notice need not be given of the adjourned meeting if the time and place thereof are announced at a meeting at which the adjournment is taken; provided, however, that if a new record date is fixed for the adjourned meeting, notice of the adjourned meeting must be given to each stockholder of record as of the new record date. At any adjourned meeting the corporation may transact any business which might have been transacted at the original meeting. Section 8. VOTING. Unless a record date set for voting purposes be fixed as provided in Section 1 of Article VII of these bylaws, only persons in whose names shares entitled to vote stand on the stock records of the corporation at the close of business on the business day next preceding the day on which notice is given (or, if notice is waived, at the close of business on the business day next preceding the day on which the meeting is held) shall be entitled to vote at such meeting. Any stockholder entitled to vote on any matter other than elections of directors or officers, may vote part of the shares in favor of the proposal and refrain from voting the remaining shares or vote them against the proposal, but, if the stockholder fails to specify the number of shares such stockholder is voting affirmatively, it will be conclusively presumed that the stockholder's approving vote is with respect to all shares such stockholder is entitled to vote. Such vote may be by voice vote or by ballot; provided, however, that all elections for directors must be by ballot upon demand by a stockholder at any election and before the voting begins. When a quorum is present or represented at any meeting, the vote of the holders of a majority of the stock having voting power present in person or represented by proxy shall decide any question brought before such meeting, unless the question is one upon which by express provision of the statutes or of the articles of incorporation a different vote is required in which case such express provision shall govern and control the decision of such question. Every stockholder of record of the corporation shall be entitled at each meeting of stockholders to one vote for each share of stock standing in his name on the books of the corporation. -3-
- 57. Section 9. WAIVER OF NOTICE OR CONSENT BY ABSENT STOCKHOLDERS. The transactions at any meeting of stockholders, either annual or special, however called and noticed, and wherever held, shall be as valid as though had at a meeting duly held after regular call and notice, if a quorum be present either in person or by proxy, and if, either before or after the meeting, each person entitled to vote, not present in person or by proxy, signs a written waiver of notice or a consent to a holding of the meeting, or an approval of the minutes thereof. The waiver of notice or consent need not specify either the business to be transacted or the purpose of any regular or special meeting of stockholders, except that if action is taken or proposed to be taken for approval of any of those matters specified in the second paragraph of Section 4 of this Article II, the waiver of notice or consent shall state the general nature of such proposal. All such waivers, consents or approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Attendance of a person at a meeting shall also constitute a waiver of notice of such meeting, except when the person objects, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened, and except that attendance at a meeting is not a waiver of any right to object to the consideration of matters not included in the notice if such objection is expressly made at the meeting, Section 10. STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING. No action required or permitted to be taken at any annual or special meeting of the stockholders of the corporation may be taken without a meeting and the power of the stockholders to consent in writing, without a meeting, to the taking of any action is specifically denied. Section 11. PROXIES. Every person entitled to vote for directors or on any other matter shall have the right to do so either in person or by one or more agents authorized by a written proxy signed by the person and filed with the secretary of the corporation. A proxy shall be deemed signed if the stockholder's name is placed on the proxy (whether by manual signature, typewriting, telegraphic transmission or otherwise) by the stockholder or the stockholder's attorney in fact. A validly executed proxy which does not state that it is irrevocable shall continue in full force and effect unless revoked by the person executing it, prior to the vote pursuant thereto, by a writing delivered to the corporation stating that the proxy is revoked or by a subsequent proxy executed by, or attendance at the meeting and voting in person by the person executing the proxy; provided, however, that no such proxy shall be valid after the expiration of six (6) months from the date of such proxy, unless coupled with an interest, or unless the person executing it specifies therein the length of time for which it is to continue in force, which in no case shall exceed seven (7) years from the date of its execution. Subject to the above and the provisions of Section 78.355 of the Nevada General Corporation Law, any proxy duly executed is not revoked and continues in full force and effect until an instrument revoking it or a duly executed proxy bearing a later date is filed with the secretary of the corporation. -4-
- 58. Section 12. INSPECTORS OF ELECTION. Before any meeting of stockholders, the Board of Directors may appoint any persons other than nominees for office to act as inspectors of election at the meeting or its adjournment. If no inspectors of election are appointed, the chairman of the meeting may, and on the request of any stockholder or his proxy shall, appoint inspectors of election at the meeting. The number of inspectors shall be either one (1) or three (3). If inspectors are appointed at a meeting on the request of one or more stockholders or proxies, the holders of a majority of shares or their proxies present at the meeting shall determine whether one (1) or three (3) inspectors are to be appointed. If any person appointed as inspector fails to appear or fails or refuses to act, the vacancy may be filled by appointment by the Board of Directors before the meeting, or by the chairman at the meeting. The duties of these inspectors shall be as follows: (a) Determine the number of shares outstanding and the voting power of each, the shares represented at the meeting, the existence of a quorum, and the authenticity, validity, and effect of proxies; (b) Receive votes, ballots, or consents; (c) Hear and determine all challenges and questions in any way arising in connection with the right to vote; (d) Count and tabulate all votes or consents; (e) Determine the election result; and (f) Do any other acts that may be proper to conduct the election or vote with fairness to all stockholders. ARTICLE III DIRECTORS Section 1. POWERS. Subject to the provisions of the Nevada General Corporation Law and any limitations in the articles of incorporation and these bylaws relating to action required to be approved by the stockholders or by the outstanding shares, the business and affairs of the corporation shall be managed and all corporate powers shall be exercised by or under the direction of the Board of Directors. Without prejudice to such general powers, but subject to the same limitations, it is hereby expressly declared that the directors shall have the power and authority to: (a) Select and remove all officers, agents, and employees of the corporation, prescribe such powers and duties for them as may not be inconsistent with law, with the articles of incorporation or these bylaws, fix their compensation, and require from them security for faithful service. (b) Change the principal executive office or the principal business office from one location to another; cause the corporation to be qualified to do business in any other state, territory, dependency, or foreign country and conduct business within or without the State; designate any place within or without the State for the holding of any stockholders' meeting, or meetings, including annual meetings; adopt, make and use a corporate seal, and prescribe the forms of certificates of stock, and alter the form of such seal and of such certificates from time to time as in their judgment they may deem best, provided that such forms shall at all times comply with the provisions of law. -5-
- 59. (c) Authorize the issuance of shares of stock of the corporation from time to time, upon such terms as may be lawful, in consideration of money paid, labor done or services actually rendered, debts or securities canceled, tangible or intangible property actually received. (d) Borrow money and incur indebtedness for the purpose of the corporation, and cause to be executed and delivered therefor, in the corporate name, promissory notes, bonds, debentures, deeds of trust, mortgages, pledges, hypothecations, or other evidences of debt and securities therefor. Section 2. NUMBER OF DIRECTORS. The number of directors which shall constitute the whole Board shall not be less than one (1) nor more than eleven (11), except in cases where all the shares of the corporation are owned beneficially and of record by one (1) or two (2) stockholders, the number of directors may be less than three (3) but not less than the number of stockholders. The maximum or minimum number of directors cannot be changed, nor can a fixed number be substituted for the maximum and minimum numbers, except by a duly adopted amendment to the articles of incorporation or by an amendment to this bylaw. The number of directors that shall constitute the whole Board shall be determined by the Board of Directors provided that such number shall be within the range established by this Section 2 of Article III. Section 3. QUALIFICATION, ELECTION AND TERM OF OFFICE OF DIRECTORS. The Board of Directors shall be divided into three classes, each class to serve for a term of three (3) years and to be as nearly equal in number as possible. Class I shall be comprised of directors who shall serve until the annual meeting of stockholders in 2003 and until their successors shall have been elected and qualified. Class II shall be comprised of directors who shall serve until the annual meeting of stockholders in 2004 and until their successors shall have been elected and qualified. Class III shall be comprised of directors who shall serve until the annual meeting of stockholders in 2005 and until their successors shall have been elected and qualified. Directors shall be elected at each annual meeting of the stockholders to hold office until the next annual meeting, but if any such annual meeting is not held or the directors are not elected at any annual meeting, the directors may be elected at any special meeting of stockholders held for that purpose, or at the next annual meeting of stockholders held thereafter. Each director, including a director elected to fill a vacancy, shall hold office until the expiration of the term for which elected and until a successor has been elected and qualified or until his earlier resignation or removal or his office has been declared vacant in the manner provided in these bylaws. Directors need not be stockholders. Section 4. RESIGNATION AND REMOVAL OF DIRECTORS. Any director may resign effective upon giving written notice to the chairman of the board, the president, the secretary or the Board of Directors of the corporation, unless the notice specifies a later time for the effectiveness of such resignation, in which case such resignation shall be effective at the time specified. Unless such resignation specifies otherwise, its acceptance by the corporation shall not be necessary to make it effective. The Board of Directors may declare vacant the office of a director who has been declared of unsound mind by an order of a court or convicted of a felony. Any director or an entire class of directors, may be removed without cause, by the holders of not less than two thirds of the shares entitled to vote at an election of directors for the director or class of directors being removed. No reduction of the authorized number of directors shall have the effect of removing any director before his term of office expires. -6-
- 60. Section 5. VACANCIES. Vacancies in the Board of Directors, may be filled by a majority of the remaining directors, though less than a quorum, or by a sole remaining director. Each director so elected shall hold office until the next annual meeting of the stockholders and until a successor has been elected and qualified. A vacancy in the Board of Directors exists as to any authorized position of directors which is not then filled by a duly elected director, whether caused by death, resignation, removal, increase in the authorized number of directors or otherwise. The stockholders may elect a director or directors at any, time to fill any vacancy or vacancies not filled by the directors. If the resignation of a director is effective at a future time, the Board of Directors may elect a successor to take office when the resignation becomes effective. Section 6. PLACE OF MEETINGS. Regular meetings of the Board of Directors shall be held at any place within or without the State of Nevada that has been designated from time to time by resolution of the board. In the absence of such designation, regular meetings shall be held at the principal executive office of the corporation. Special meetings of the board shall be held at any place within or without the State of Nevada that has been designated in the notice of the meeting or, if not stated in the notice or there is not notice, at the principal executive office of the corporation. Any meeting, regular or special, may be held by conference telephone or similar communication equipment, so long as all directors participating in such meeting can hear one another, and all such directors shall be deemed to be present in person at such meeting. Section 7. ANNUAL MEETINGS. Immediately following each annual meeting of stockholders, the Board of Directors shall hold a regular meeting for the purpose of transaction of other business. Notice of this meeting shall not be required. Section 8. OTHER REGULAR MEETINGS. Other regular meetings of the Board of Directors shall be held without call at such time as shall from time to time be fixed by the Board of Directors. Such regular meetings may be held without notice, provided the notice of any change in the time of any such meetings shall be given to all of the directors. Notice of a change in the determination of the time shall be given to each director in the same manner as notice for special meetings of the Board of Directors. Section 9. SPECIAL MEETINGS. Special meetings of the Board of Directors for any purpose or purposes may be called at any time by the chairman of the board or the president or any vice president or the secretary or any two directors. 7
- 61. Notice of the time and place of special meetings shall be delivered personally or by telephone to each director or sent by first class mail or telegram, charges prepaid, addressed to each director at his or her address as it is shown upon the records of the corporation. In case such notice is mailed, it shall be deposited in the United States mail at least four (4) days prior to the time of the holding of the meeting. In case such notice is delivered personally, or by telephone or telegram, it shall be delivered personally or by telephone or to the telegraph company at least forty-eight (48) hours prior to the time of the holding of the meeting. Any oral notice given personally or by telephone may be communicated to either the director or to a person at the office of the director who the person giving the notice has reason to believe will promptly communicate it to the director. The notice need not specify the purpose of the meeting nor the place if the meeting is to be held at the principal executive office of the corporation. Section 10. QUORUM. A majority of the authorized number of directors shall constitute a quorum for the transaction of business, except to adjourn as hereinafter provided. Every act or decision done or made by a majority of the directors present at a meeting duly held at which a quorum is present shall be regarded as the act of the Board of Directors, subject to the provisions of Section 78.140 of the Nevada General Corporation Law (approval of contracts or transactions in which a director has a direct or indirect material financial interest), Section 78.125 (appointment of committees), and Section 78.751 (indemnification of directors). A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, if any action taken is approved by at least a majority of the required quorum for such meeting. Section 11. WAIVER OF NOTICE. The transactions of any meeting of the Board of Directors, however called and noticed or wherever held, shall be as valid as though had at a meeting duly held after regular call and notice if a quorum be present and if, either before or after the meeting, each of the directors not present signs a written waiver of notice, a consent to holding the meeting or an approval of the minutes thereof. The waiver of notice of consent need not specify the purpose of the meeting. All such waivers, consents and approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Notice of a meeting shall also be deemed given to any director who attends the meeting without protesting, prior thereto or at its commencement, the lack of notice to such director. Section 12. ADJOURNMENT. A majority of the directors present, whether or not constituting a quorum, may adjourn any meeting to another time and place. Section 13. NOTICE OF ADJOURNMENT. Notice of the time and place of holding an adjourned meeting need not be given, unless the meeting is adjourned for more than twenty-four (24) hours, in which case notice of such time and place shall be given prior to the time of the adjourned meeting, in the manner specified in Section 8 of this Article III, to the directors who were not present at the time of the adjournment. Section 14. ACTION WITHOUT MEETING. Any action required or permitted to be taken by the Board of Directors may be taken without a meeting, if all members of the board shall individually or collectively consent in writing to such action. Such action by written consent shall have the sane force and effect as a unanimous vote of the Board of Directors. Such written consent or consents shall be filed with the minutes of the proceedings of the board. 8
- 62. Section 15. FEES AND COMPENSATION OF DIRECTORS. Directors and members of committees may receive such compensation, if any, for their services, and such reimbursement of expenses, as may be fixed or determined by resolution of the Board of Directors. Nothing herein contained shall be construed to preclude any director from serving the corporation in any other capacity as an officer, agent, employee, or otherwise, and receiving compensation for such services. Members of special or standing committees nay be allowed like compensation for attending committee meetings. ARTICLE IV COMMITTEES Section 1. COMMITTEES OF DIRECTORS. The Board of Directors may, by resolution adopted by a majority of the authorized number of directors, designate one or more committees, each consisting of one or more directors, to serve at the pleasure of the board, The board may designate one or more directors as alternate members of any committees, who may replace any absent member at any meeting of the committee. Any such committee, to the extent provided in the resolution of the board, shall have all the authority of the board, except with regard to: (a) the approval of any action which, under the Nevada General Corporation Law, also requires stockholders' approval or approval of the outstanding shares; (b) the filing of vacancies on the Board of Directors or in any committees; (c) the fixing of compensation of the directors for serving on the board or on any committee; (d) the amendment or repeal of bylaws or the adoption of new bylaws; (e) the amendment or repeal of any resolution of the Board of Directors which by its express terms is not so amendable or repealable; (f) a distribution to the stockholders of the corporation, except at a rate or in a periodic amount or within a price range determined by the Board of Directors; or (g) the appointment of any other committees of the Board of Directors or the members thereof. Section 2. MEETINGS AND ACTION BY COMMITTEES. Meetings and action of committees shall be governed by, and held and taken in accordance with, the provisions of Article III, Sections 6 (place of meetings), 8 (regular meetings), 9 (special meetings and notice), 10 (quorum), 11 (waiver of notice), 12 (adjournment), 13 (notice of adjournment) and 14 (action without meeting), with such changes in the context of those bylaws as are necessary to substitute the committee and its members for the Board of Directors and its members, except that the time or regular meetings of committees may be determined by resolutions of the Board of Directors and notice of special meetings of committees shall also be given to all alternate members, who shall have the right to attend all meetings of the committee. The Board of Directors may adopt rules for the government of any committee not inconsistent with the provisions of these bylaws. The committees shall keep regular minutes of their proceedings and report the same to the board when required. 9
- 63. ARTICLE V OFFICERS Section 1. OFFICERS. The officers of the corporation shall be a president, a secretary and a treasurer. The corporation may also have, at the discretion of the Board of Directors, a chairman of the board, one or more vice presidents, one or more assistant secretaries, one or more assistant treasurers, and such other officers as may be appointed in accordance with the provisions of Section 3 of this Article V. Any two or more offices may be held by the same person. Section 2. ELECTION OF OFFICERS. The officers of the corporation, except such officers as may be appointed in accordance with the provisions of Section 3 or Section 5 of this Article V, shall be chosen by the Board of Directors, and each shall serve at the pleasure of the board, subject to the rights, if any, of an officer under any contract of employment. The Board of Directors at its first meeting after each annual meeting of stockholders shall choose a president, a vice president, a secretary and a treasurer, none of whom need be a member of the board. The salaries of all officers and agents of the corporation shall be fixed by the Board of Directors. Section 3. SUBORDINATE OFFICERS, ETC. The Board of Directors may appoint, and may empower the president to appoint, such other officers as the business of the corporation may require, each of whom shall hold office for such period, have such authority and perform such duties as are provided in the bylaws or as the Board of Directors may from time to time determine. Section 4. REMOVAL AND RESIGNATION OF OFFICERS. The officers of the corporation shall hold office until their successors are chosen and qualify. Subject to the rights, if any, of an officer under any contract of employment, any officer may be removed, either with or without cause, by the Board of Directors, at any regular or special meeting thereof, or, except in case of an officer chosen by the Board of Directors, by any officer upon whom such power or removal may be conferred by the Board of Directors. Any officer may resign at any time by giving written notice to the corporation. Any such resignation shall take effect at the date of the receipt of such notice or at any later time specified therein; and unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. Any such resignation is without prejudice to the rights, if any, of the corporation under any contract to which the officer is a party. Section 5. VACANCIES IN OFFICES. A vacancy in any office because of death, resignation, removal, disqualification or any other cause shall be filled in the manner prescribed in these bylaws for regular appointments to such office. 10
- 64. Section 6. CHAIRMAN OF THE BOARD. The chairman of the board, if such an officer be elected, shall, if present, preside at all meetings of the Board of Directors and exercise and perform such other powers and duties as may be from time to time assigned to him by the Board of Directors or prescribed by the bylaws. If there is no president, the chairman of the board shall in addition be the chief executive officer of the corporation and shall have the powers and duties prescribed in Section 7 of this Article V. Section 7. PRESIDENT. Subject to such supervisory powers, if any, as may be given by the Board of Directors to the chairman of the board, if there be such an officer, the president shall be the chief executive officer of the corporation and shall, subject to the control of the Board of Directors, have general supervision, direction and control of the business and the officers of the corporation. He shall preside at all meetings of the stockholders and, in the absence of the chairman of the board, of if there be none, at all meetings of the Board of Directors. He shall have the general powers and duties of management usually vested in the office of president of a corporation, and shall have such other powers and duties as may be prescribed by the Board of Directors or the bylaws. He shall execute bonds, mortgages and other contracts requiring a seal, under the seal of the corporation, except where required or permitted by law to be otherwise signed and executed anal except where the signing and execution thereof shall be expressly delegated by the Board of Directors to some other officer or agent of the corporation. Section 8. VICE PRESIDENTS. In the absence or disability of the president, the vice presidents, if any, in order of their rank as fixed by the Board of Directors or, if not ranked, a vice president designated by the Board of Directors, shall perform all the duties of the president, and when so acting shall have all the powers of, and be subject to all the restrictions upon, the president The vice presidents shall have such other powers and perform such other duties as from time to time may be prescribed for them respectively by the Board of Directors or the bylaws, the president or the chairman of the board. Section 9. SECRETARY. The secretary shall attend all meetings of the Board of Directors and all meetings of the stockholders and shall record, keep or cause to be kept, at the principal executive office or such other place as the Board o f Directors may order, a book of minutes of all meetings of directors, committees of directors and stockholders, with the time and place of holding, whether regular or special, and, if special, how authorized, the notice thereof given, the names of those present at directors' and committee meetings, the number of shares present or represented at stockholders' meetings, and the proceedings thereof. The secretary shall keep, or cause to be kept, at the principal executive office or at the office of the corporation's transfer agent or registrar, as determined by resolution of the Board of Directors, a share register, or a duplicate share register, showing the names of all stockholders and their addresses, the number and classes of shares held by each, the number and date of certificates issued for the same, and the number and date of cancellation of every certificate surrendered for cancellation. The secretary shall give, or cause to be given, notice of all meetings of stockholders and of the Board of Directors required by the bylaws or by law to be given, and he shall keep the seal of the corporation in safe custody, as may be prescribed by the Board of Directors or by the bylaws. 11
- 65. Section 10. TREASURER. The treasurer shall keep and maintain, or cause to be kept and maintained, adequate and correct books and records of accounts of the properties and business transactions of the corporation, including accounts of its assets, liabilities, receipts, disbursements, gains, losses, capital, retained earnings and shares. The books of account shall at all reasonable times be open to inspection by any director. The treasurer shall deposit all moneys and other valuables in the name and to the credit of the corporation with such depositaries as may be designated by the Board of Directors. He shall disburse the funds of the corporation as may be ordered by the Board of Directors, shall render to the president and directors, whenever they request it an account of all of his transactions as treasurer and of the financial condition of the corporation, and shall have other powers and perform such other duties as may be prescribed by the Board of Director, or the bylaws. If required by the Board of Directors, the treasurer shall give the corporation a bond in such sum and with such surety or sureties as shall be satisfactory to the Board of Directors for the faithful performance of the duties of his office and for the restoration to the corporation, in case of his death, resignation, retirement or removal from office, of all books, papers, vouchers, money and other property of whatever kind in his possession or under his control belonging to the corporation. ARTICLE VI INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES, AND OTHER AGENTS Section 1. ACTIONS OTHER THAN BY THE CORPORATION. The corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, except an action by or in the right of the corporation, by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses, including attorneys' fees, judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with the action, suit or proceeding if he acted in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, has no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, does not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the corporation, and that, with respect to any criminal action or proceeding, he had reasonable cause to believe that his conduct was unlawful. 12
- 66. Section 2. ACTIONS BY THE CORPORATION. The corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses, including amounts paid in settlement and attorneys' fees, actually and reasonably incurred by him in connection with the defense or settlement of the action or suit if he acted in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the corporation. Indemnification may not be made for any claim, issue or matter as to which such a person has been adjudged by a court of competent jurisdiction, after exhaustion of all appeals therefrom, to be liable to the corporation or for amounts paid in settlement to the corporation, unless and only to the extent that the court in which the action or suit was brought or other court of competent jurisdiction determines upon application that in view of all the circumstances of the case, the person is fairly and reasonably entitled to indemnity for such expenses as the court deems proper. Section 3. SUCCESSFUL DEFENSE. To the extent that a director, officer, employee or agent of the corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in Sections 1 and 2, or in defense of any claim, issue or matter therein, he must be indemnified by the corporation against expenses, including attorneys' fees, actually and reasonably incurred by him in connection with the defense. Section 4. REQUIRED APPROVAL. Any indemnification under Sections 1 and 2, unless ordered by a court or advanced pursuant to Section 5, must be made by the corporation only as authorized in the specific case upon a determination that indemnification of the director, officer, employee or agent is proper in the circumstances. The determination must be made: (a) By the stockholders; (b) By the Board of Directors by majority vote of a quorum consisting of directors who were not parties to the act, suit or proceeding; (c) If a majority vote of a quorum consisting of directors who were not parties to the act, suit or proceeding so orders, by independent legal counsel in a written opinion; or (d) If a quorum consisting of directors who were not parties to the act, suit or proceeding cannot be obtained, by independent legal counsel in a written opinion. Section 5. ADVANCE OF EXPENSES. The articles of incorporation, the bylaws or an agreement made by the corporation may provide that the expenses of officers and directors incurred in defending a civil or criminal action, suit or proceeding must be paid by the corporation as they are incurred and in advance of the final disposition of the action, suit or proceeding upon receipt of an undertaking by or on behalf of the director or officer to repay the amount if it is ultimately determined by a court of competent jurisdiction that he is not entitled to be indemnified by the corporation. The provisions of this section do not affect any rights to advancement of expenses to which corporate personnel other than directors or officers may be entitled under any contract or otherwise by law. 13
- 67. Section 6. OTHER RIGHTS. The indemnification and advancement of expenses authorized in or ordered by a court pursuant to this Article VI: (a) Does not exclude any other rights to which a person seeking indemnification or advancement of expenses may be entitled under the articles of incorporation or any bylaw, agreement, vote of stockholders or disinterested directors or otherwise, for either an action in his official capacity or an action in another capacity while holding his office, except that indemnification, unless ordered by a court pursuant to Section 2 or for the advancement of expenses made pursuant to Section 5, may not be made to or on behalf of any director or officer if a final adjudication establishes that his acts or omissions involved intentional misconduct, fraud or a knowing violation of the law and was material to the cause of action. (b) Continues for a person who has ceased to be a director, officer, employee or agent and inures to the benefit of the heirs, executors and administrators of such a person. Section 7. INSURANCE. The corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise for any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the corporation would have the power to indemnify him against such liability under the provisions of this Article VI. Section 8. RELIANCE ON PROVISIONS. Each person who shall act as an authorized representative of the corporation shall be deemed to be doing so in reliance upon the rights of indemnification provided by this Article. Section 9. SEVERABILITY. If any of the provisions of this Article are held to be invalid or unenforceable, this Article shall be construed as if it did riot contain such invalid or unenforceable provision and the remaining provisions of this Article shall remain in full force and effect. Section 10. RETROACTIVE EFFECT. To the extent permitted by applicable law, the rights and powers granted pursuant to this Article VI shall apply to acts and actions occurring or in progress prior to its adoption by the Board of Directors. ARTICLE VII RECORDS AND BOOKS Section 1. MAINTENANCE OF SHARE REGISTER. The corporation shall keep at its registered office, a stock ledger or duplicate stock ledger, containing, in alphabetical order, the names and addresses of all stockholders and the number and class of shares held by each stockholder. In lieu of the stock ledger or duplicate stock ledger, the corporation may keep a statement setting out the name of the custodian of the stock ledger or duplicate stock ledger, and the present and complete post office address, including street and number, if any, where the stock ledger or duplicate stock ledger is kept. 14
- 68. Section 2. MAINTENANCE OF BYLAWS AND ARTICLES OF INCORPORATION. The corporation shall keep at its principal registered office a copy, certified by the an officer of the corporation, of the bylaws as amended to date, and a copy, certified by the secretary of state, of the articles of incorporation as amended to date, which shall be open to inspection by the stockholders at all reasonable times during office hours. Section 3. MAINTENANCE OF OTHER CORPORATE RECORDS. The accounting books and records and minutes of proceedings of the stockholders and the Board of Directors and any committee or committees of the Board of Directors shall be kept at such place or places designated by the Board of Directors, or, in the absence of such designation, at the principal executive office of the corporation. The minutes shall be kept in written form and the accounting books and records shall be kept either in written form or in any other form capable of being converted into written form. Every director shall have the absolute right at any reasonable time to inspect and copy all books, records and documents of every kind and to inspect the physical properties of this corporation and any subsidiary of this corporation, Such inspection by a director may be made in person or by agent or attorney and the right of inspection includes the right to copy and make extracts. The foregoing rights of inspection shall extend to the records of each subsidiary of the corporation. Section 4. ANNUAL REPORT TO STOCKHOLDERS. Nothing herein shall be interpreted as prohibiting the Board of Directors from issuing annual or other periodic reports to the stockholders of the corporation as they deem appropriate. Section 5. FINANCIAL STATEMENTS. A copy of any annual financial statement and any income statement of the corporation for each quarterly period of each fiscal year, and any accompanying balance sheet of the corporation as of the end of each such period, that has been prepared by the corporation shall be kept on file in the principal executive office of the corporation for twelve (12) months. Section 6. ANNUAL LIST OF DIRECTORS, OFFICERS AND RESIDENT AGENTS. The corporation shall, on or before July 31st of each year, file with the Secretary of State of the State of Nevada, on the prescribed form, a list of its officers and directors and a designation of its resident agent in Nevada. ARTICLE VIII GENERAL CORPORATE MATTERS Section 1. RECORD DATE. For purposes of determining the stockholders entitled to notice of any meeting or to vote or entitled to receive payment of any dividend or other distribution or allotment of any rights or entitled to exercise any rights in respect of any other lawful action, the Board of Directors may fix, in advance, a record date, which shall not be more than sixty (60) days nor less than ten (10) days prior to the date of any such meeting nor more than sixty (60) days prior to any other action, and in such case only stockholders of record on the date so fixed are entitled to notice and to vote or to receive the dividend, distribution or allotment of rights or to exercise the rights, as the case may be, notwithstanding any transfer of any shares on the books of the corporation after the record date fixed as aforesaid, except as otherwise provided in the Nevada General Corporation Law. 15
- 69. If the Board of Directors does not so fix a record date: (a) The record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given or, if notice is waived, at the close of business on the business day next preceding the day on which the meeting is held. (b) The record date for determining stockholders entitled to give consent to corporate action in writing without a meeting, when no prior action by the board has been taken, shall be the day on which the first written consent is given. (c) The record date for determining stockholders for any other purpose shall be at the close of business on the day on which the board adopts the resolution relating thereto, or the sixtieth (60th) day prior to the date of such other action, whichever is later. Section 2. REGISTERED STOCKHOLDERS. The corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and to hold liable for calls and assessments a person registered on its books as the owner of shares, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Nevada. Section 3. CHECKS, DRAFTS. EVIDENCES OF INDEBTEDNESS. All checks, drafts or other orders for payment of money, notes or other evidences of indebtedness, issued in the name of or payable to the corporation, shall be signed or endorsed by such person or persons and in such manner as, from time to time, shall be determined by resolution of the Board of Directors. Section 4. CORPORATE CONTRACTS AND INSTRUMENTS; HOW EXECUTED. The Board of Directors, except as in the bylaws otherwise provided, may authorize any officer or officers, agent or agents, to enter into any contract or execute any instrument in the name of and on behalf of the corporation, and such authority may be general or confined to specific instances; and, unless so authorized or ratified by the Board of Directors or within the agency power or authority to bind the corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or to any amount. Section 5. STOCK CERTIFICATES. A certificate or certificates for shares of the capital stock of the corporation shall be issued to each stockholder when any such shares are fully paid, and the Board of Directors may authorize the issuance of certificates or shares as partly paid provided that such certificates shall state the amount of the consideration to be paid therefor and the amount paid thereon. All certificates shall be signed in the name of the corporation by the president or vice president and by the treasurer or an assistant treasurer or the secretary or any assistant secretary, certifying the number of shares and the class or series of shares owned by the stockholder. When the corporation is authorized to issue shares of more than one class or more than one series of any class, there shall be set forth upon the face or back of the certificate, or the certificate shall have a statement that the corporation will furnish to any stockholders upon request and without charge, a full or summary statement of the designations, preferences and relatives, participating, optional or other special rights of the various classes of stock or series thereof and the qualifications, limitations or restrictions of such rights, and, if the corporation shall be authorized to issue only special stock, such certificate must set forth in full or summarize the rights of the holders of such stock. Any or all of the signatures on the certificate may be facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if such person were an officer, transfer agent or registrar at the date of issue. 16
- 70. No new certificate for shares shall be issued in place of any certificate theretofore issued unless the latter is surrendered and canceled at the same time; provided, however, that a new certificate may be issued without the surrender and cancellation of the old certificate if the certificate thereto fore issued is alleged to have been lost, stolen or destroyed. In case of any such allegedly lost, stolen or destroyed certificate, the corporation may require the owner thereof or the legal representative of such owner to give the corporation a bond (or other adequate security) sufficient to indemnify it against any claim that may be made against it (including any expense or liability) on account of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate. Section 6. DIVIDENDS. Dividends upon the capital stock of the corporation, subject to the provisions of the articles of incorporation, if any, may be declared by the Board of Directors at any regular or special meeting pursuant to law. Dividends may be paid in cash, in property, or in shares of the capital stock, subject to the provisions of the articles of incorporation. Before payment of any dividend, there may be set aside out of any funds of the corporation available for dividends such sum or sums as the directors from time to time, in their absolute discretion, think proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the corporation, or for such other purpose as the directors shall think conducive to the interest of the corporation, and the directors may modify or abolish any such reserves in the manner in which it was created. Section 7. FISCAL YEAR. The fiscal year of the corporation shall be fixed by resolution of the Board of Directors. Section 8. SEAL. The corporate seal shall have inscribed thereon the name of the corporation, the year of its incorporation and the words "Corporate Seal, Nevada." 17
- 71. Section 9. REPRESENTATION OF SHARES OF OTHER CORPORATIONS. The chairman of the board, the president, or any vice president, or any other person authorized by resolution of the Board of Directors by any of the foregoing designated officers, is authorized to vote on behalf of the corporation any and all shares of any other corporation or corporations, foreign or domestic, standing in the name of the corporation. The authority herein granted to said officers to vote or represent on behalf of the corporation any and all shares held by the corporation in any other corporation or corporations may be exercised by any such officer in person or by any person authorized to do so by proxy duly executed by said officer. Section 10. CONSTRUCTION AND DEFINITIONS. Unless the context requires otherwise, the general provisions, rules of construction, and definitions in the Nevada General Corporation Law shall govern the construction of the bylaws Without Limiting the generality of the foregoing, the singular number includes the plural, the plural number includes the singular, and the term. "person" includes both a corporation and a natural person. ARTICLE IX AMENDMENTS Section 1. AMENDMENT BY STOCKHOLDERS. New bylaws may be adopted or these bylaws may be amended or repealed by the affirmative vote of a majority of the outstanding shares entitled to vote, or by the written assent of stockholders entitled to vote such shares, except as otherwise provided by law or by the articles of incorporation. Section 2. AMENDMENT BY DIRECTORS. Subject to the rights of the stockholders as provided in Section 1 of this Article, bylaws may be adopted, amended or repealed by the Board of Directors. ARTICLE X CERTAIN TRANSACTIONS Section 1. TRANSACTIONS WITH INTERESTED PARTIES. No contract or transaction between the corporation and one or more of its directors or officers, or between the corporation and any other corporation, partnership, association or other organization in which one or more of its directors or officers are directors or have a financial interest, shall be void or voidable solely for this reason, or solely because the director of officer is present, participates in the meeting, or the vote or votes of a common or interested director are counted for the purpose of authorizing or approving the contract or transaction, if: (a) The fact of the common directorship, office or financial interest is known to the board of directors or committee, and the board or committee authorized, approves or ratifies the contract or transaction in good faith by a vote sufficient for the purpose without counting the vote or votes of the common or interested director or directors; or (b) The fact of the common directorship office or financial interest is known to the stockholders, and they approve or ratify the contract or transaction in good faith by a majority vote of the stockholders holding a majority of the voting power. The votes of the common or interested directors or officers must be counted in any such vote of stockholders; or 18
- 72. (c) The fact of the common directorship office or financial interest is known to the director or officer at the time the transaction is brought before the Board of Directors of the corporation for action; or (d) The contract or transaction is fair as to the corporation at the time it is authorized or approved. Section 2. QUORUM. Common or interested directors may be counted in determining the presence of a quorum at a meeting of the Board of Directors or a committee which authorized the contract or transaction. 19
- 73. NOTE MODIFICATION AGREEMENT THIS NOTE MODIFICATION AGREEMENT (this “Agreement”) is entered into this 26th day of June, 2009 by and between US Dataworks, Inc., a Nevada corporation (the “Company”) and Charles E. Ramey , an individual residing in the State of Texas and the Chairman and Chief Executive Officer of the Company (the “Holder”). All capitalized terms not specifically defined herein shall have those meanings set forth in that certain US Dataworks, Inc. Refinancing Secured Note dated August 13, 2008 executed by the Company and payable to the order of the Holder in the original principal amount of Seven Hundred Eight Thousand Five Hundred Dollars ($708,500), as amended by that certain Note Modification Agreement dated February 19, 2009 and that certain Note Modification Agreement dated May 20, 2009 (as modified, renewed and extended to date, the “Note”). WITNESSETH: WHEREAS, the Company and the Holder wish to revise certain provisions of the Note; NOW, THEREFORE, for and in consideration of the premises, the mutual covenants and agreements contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and the Holder hereby agree as follows: 1. The following modifications to the Note are made and agreed to effective as of June 26, 2009: A. Section 1 of the Note is hereby amended by adding the following sentence to the beginning of the Section: “Within ten (10) days after the end of each calendar quarter beginning with June 30, 2009, the Company (A) shall make mandatory principal payments to the Holder in an amount equal to (i) $21,255.00, or three percent (3%) of the original principal amount of this Note, plus (ii) 19.1% of one-fourth of the Company’s cash balance in excess of $611,105 as of the end of such calendar quarter and (B) may, in the sole and absolute discretion of the Board of Directors of the Company, make an additional principal payment of up to 19.1% of one-fourth of the Company’s cash balance in excess of $611,105 as of the end of such calendar quarter; provided, however, that if the mandatory principal payment referred to in clause (i) of clause (A) above (together with the other like mandatory quarterly principal payment due to the other holder of the Notes) would reduce the Company’s cash balance as of the last day of such calendar quarter below $500,000, then the amount of the mandatory principal payment referred to in such clause shall be reduced to 19.1% of the amount, if any, by which the Company’s cash balance as of the last day of such quarter exceeds $500,000 (with any such shortfall in such scheduled principal payment not rolling into the next scheduled principal payment).” 1
- 74. B. The reference to “December 31, 2009” in Section 1 of the Note is hereby replaced with “July 1, 2010.” 2. In consideration of the Holder’s agreements to the modifications set forth in Section 1 of this Agreement, the Company shall pay an amendment fee to the Holder in the amount of $9,550.00, such amount to be payable on July 1, 2009. In addition, as additional consideration for the Holder’s agreements to the modifications set forth in Section 1 of this Agreement, the Company will, effective as of the date hereof, issue to the Holder warrants to acquire 354,141 shares of the Company’s common stock at an exercise price of $0.43 per share, with such warrants to be subject to the terms outlined in Exhibit A attached hereto. 3. The Note, as modified by this Agreement, and all of the other loan documents and other agreements and instruments executed and delivered in connection with the Note shall remain in full force and effect. 4. The Company and the Holder represent and warrant to each other that, as of the date hereof: (a) each such party has full power and authority to execute this Agreement; (b) this Agreement constitutes the legal, valid and binding obligation of such party, enforceable in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, or other similar laws affecting the enforcement of creditors' rights generally; and (c) no authorization, approval, consent or other action by, notice to, or filing with, any governmental authority or other person is required for the execution, delivery or performance by such party of this Agreement. 5. The parties hereto shall from time to time execute and deliver all such other documents, instruments and assurances with respect to the matters described herein, and take all such other actions as may be necessary or required to carry into force and effect the purposes and intent of this Agreement. 6. This Agreement, when executed by the parties hereto, shall be binding upon and inure to the benefit of the parties hereto, and their respective heirs, executors, administrators, personal representatives, successors and assigns. 7. This Agreement may be executed simultaneously in a number of identical counterparts, each of which shall be an original and all of which together shall constitute but one and the same instrument. [Signature Page Follows] 2
- 75. IN WITNESS WHEREOF, this Agreement has been executed and delivered by the parties hereto on the date first set forth above. THE COMPANY: US DATAWORKS, INC . By: /s/ J. Patrick Millinor Jr. Name: J. Patrick Millinor, Jr. Title: Director THE HOLDER: /s/ Charles E. Ramey Charles E. Ramey WRITTEN CONSENT OF THE REQUIRED HOLDERS : In accordance with Section 8 of the Note, the undersigned Required Holders hereby execute this written consent to the Agreement, thereby indicating their consent to the changes and amendments to the Note contained in this Agreement. /s/ Charles E. Ramey Charles E. Ramey /s/ John L. Nicholson, M.D. John L. Nicholson, M.D. 3
- 76. EXHIBIT A TERMS OF WARRANTS 1. Number of shares of common stock underlying the warrants will be 354,141. 2. Exercise price of the warrants will be $0.43 per share. 3. Term of the warrants will be five years from the date hereof. 4. Warrants may be exercised in a “cashless exercise” at the Company’s option. 5. No adjustments to the exercise price or the number of shares underlying the warrants except for the typical “corporate events” adjustments for stock splits, reverse splits, stock dividends, recapitalizations and the like. 6. In the event of a fundamental transaction (such as a merger, sale of substantially all assets, tender offer or other business combination) in which the stockholders of the Company become entitled to receive securities, cash or other assets with respect to their common stock, the warrants will convert into the right to receive such securities, cash and other assets upon exercise of the warrants. 7. Warrant holders will not be deemed to be stockholders of the Company for any purpose unless and until the warrants are exercised. 8. The warrants will not be transferable until the earlier of (i) Note being paid in full or (ii) an event of default occurring under the Note. 9. The warrants and the shares of common stock underlying the warrants will be issued under a private offering exemption available under applicable federal and state securities laws. The warrant holders will have no registration rights related thereto and the warrants and the shares of common stock underlying the warrants will be subject to resale and transfer restrictions as imposed by applicable state and federal securities laws. 10. Governing law shall be Texas. 11. Dispute resolution shall be by binding arbitration. 12. The warrants will be subject to the additional provisions of a written agreement governing the warrants to be negotiated in good faith between the Company and the Holder promptly following execution and delivery of this Agreement.
- 77. NOTE MODIFICATION AGREEMENT THIS NOTE MODIFICATION AGREEMENT (this “Agreement”) is entered into this 26th day of June, 2009 by and between US Dataworks, Inc., a Nevada corporation (the “Company”) and John L. Nicholson, M.D. , a Director of the Company (the “Holder”). All capitalized terms not specifically defined herein shall have those meanings set forth in that certain US Dataworks, Inc. Refinancing Secured Note dated August 13, 2008 executed by the Company and payable to the order of the Holder in the original principal amount of Two Million Nine Hundred Ninety Five Thousand Dollars ($2,995,000), as amended by that certain Note Modification Agreement dated February 19, 2009 and that certain Note Modification Agreement dated May 20, 2009 (as modified, renewed and extended to date, the “Note”). WITNESSETH: WHEREAS, the Company and the Holder wish to revise certain provisions of the Note; NOW, THEREFORE, for and in consideration of the premises, the mutual covenants and agreements contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and the Holder hereby agree as follows: 1. The following modifications to the Note are made and agreed to effective as of June 26, 2009: A. Section 1 of the Note is hereby amended by adding the following sentence to the beginning of the Section: “Within ten (10) days after the end of each calendar quarter beginning with June 30, 2009, the Company (A) shall make mandatory principal payments to the Holder in an amount equal to (i) $89,850.00, or three percent (3%) of the original principal amount of this Note, plus (ii) 80.9% of one-fourth of the Company’s cash balance in excess of $611,105 as of the end of such calendar quarter and (B) may, in the sole and absolute discretion of the Board of Directors of the Company, make an additional principal payment of up to 80.9% of one-fourth of the Company’s cash balance in excess of $611,105 as of the end of such calendar quarter; provided, however, that if the mandatory principal payment referred to in clause (i) of clause (A) above (together with the other like mandatory quarterly principal payment due to the other holder of the Notes) would reduce the Company’s cash balance as of the last day of such calendar quarter below $500,000, then the amount of the mandatory principal payment referred to in such clause shall be reduced to 80.9% of the amount, if any, by which the Company’s cash balance as of the last day of such quarter exceeds $500,000 (with any such shortfall in such scheduled principal payment not rolling into the next scheduled principal payment).” B. The reference to “December 31, 2009” in Section 1 of the Note is hereby replaced with “July 1, 2010.”
- 78. 2. In consideration of the Holder’s agreements to the modifications set forth in Section 1 of this Agreement, the Company shall pay an amendment fee to the Holder in the amount of $40,450.00, such amount to be payable on July 1, 2009. In addition, as additional consideration for the Holder’s agreements to the modifications set forth in Section 1 of this Agreement, the Company will, effective as of the date hereof, issue to the Holder warrants to acquire 1,500,000 shares of the Company’s common stock at an exercise price of $0.43 per share, with such warrants to be subject to the terms outlined in Exhibit A attached hereto. 3. The Note, as modified by this Agreement, and all of the other loan documents and other agreements and instruments executed and delivered in connection with the Note shall remain in full force and effect. 4. The Company and the Holder represent and warrant to each other that, as of the date hereof: (a) each such party has full power and authority to execute this Agreement; (b) this Agreement constitutes the legal, valid and binding obligation of such party, enforceable in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, or other similar laws affecting the enforcement of creditors' rights generally; and (c) no authorization, approval, consent or other action by, notice to, or filing with, any governmental authority or other person is required for the execution, delivery or performance by such party of this Agreement. 5. The parties hereto shall from time to time execute and deliver all such other documents, instruments and assurances with respect to the matters described herein, and take all such other actions as may be necessary or required to carry into force and effect the purposes and intent of this Agreement. 6. This Agreement, when executed by the parties hereto, shall be binding upon and inure to the benefit of the parties hereto, and their respective heirs, executors, administrators, personal representatives, successors and assigns. 7. This Agreement may be executed simultaneously in a number of identical counterparts, each of which shall be an original and all of which together shall constitute but one and the same instrument. [Signature Page Follows]
- 79. IN WITNESS WHEREOF, this Agreement has been executed and delivered by the parties hereto on the date first set forth above. THE COMPANY: US DATAWORKS, INC. By: /s/ J. Patrick Millinor, Jr. Name: J. Patrick Millinor, Jr. Title: Director THE HOLDER: /s/ John L. Nicholson, M.D. John L. Nicholson, M.D . WRITTEN CONSENT OF THE REQUIRED HOLDERS : In accordance with Section 8 of the Note, the undersigned Required Holders hereby execute this written consent to the Agreement, thereby indicating their consent to the changes and amendments to the Note contained in this Agreement. /s/ John L. Nicholson, M.D. John L. Nicholson, M.D. /s/ Charles E. Ramey Charles E. Ramey 3
- 80. EXHIBIT A TERMS OF WARRANTS 1. Number of shares of common stock underlying the warrants will be 1,500,000. 2. Exercise price of the warrants will be $0.43 per share. 3. Term of the warrants will be five years from the date hereof. 4. Warrants may be exercised in a “cashless exercise” at the Company’s option. 5. No adjustments to the exercise price or the number of shares underlying the warrants except for the typical “corporate events” adjustments for stock splits, reverse splits, stock dividends, recapitalizations and the like. 6. In the event of a fundamental transaction (such as a merger, sale of substantially all assets, tender offer or other business combination) in which the stockholders of the Company become entitled to receive securities, cash or other assets with respect to their common stock, the warrants will convert into the right to receive such securities, cash and other assets upon exercise of the warrants. 7. Warrant holders will not be deemed to be stockholders of the Company for any purpose unless and until the warrants are exercised. 8. The warrants will not be transferable until the earlier of (i) Note being paid in full or (ii) an event of default occurring under the Note. 9. The warrants and the shares of common stock underlying the warrants will be issued under a private offering exemption available under applicable federal and state securities laws. The warrant holders will have no registration rights related thereto and the warrants and the shares of common stock underlying the warrants will be subject to resale and transfer restrictions as imposed by applicable state and federal securities laws. 10. Governing law shall be Texas. 11. Dispute resolution shall be by binding arbitration. 12. The warrants will be subject to the additional provisions of a written agreement governing the warrants to be negotiated in good faith between the Company and the Holder promptly following execution and delivery of this Agreement.
- 81. NOTE MODIFICATION AGREEMENT THIS NOTE MODIFICATION AGREEMENT (this “Agreement”) is entered into this 26th day of June, 2009 by and between US Dataworks, Inc., a Nevada corporation (the “Company”), and Charles E. Ramey , an individual residing in the State of Texas and the Chairman and Chief Executive Officer of the Company (the “Holder”). All capitalized terms not specifically defined herein shall have those meanings set forth in that certain 8.75% Promissory Note dated September 25, 2007 executed by the Company and payable to the order of the Holder in the original principal amount of Five Hundred Thousand Dollars ($500,000.00), as amended by that certain Note Modification Agreement dated May 20, 2009 (as modified, renewed and extended to date, the “Note”). WITNESSETH: WHEREAS, the Company and the Holder wish to revise certain provisions of the Note; and WHEREAS, concurrent with the execution and delivery of this Agreement, the Company is entering into Note Modification Agreements (the “Refinance Note Modification Agreements”) with the holders of those certain US Dataworks, Inc. Refinancing Secured Notes dated August 13, 2008 executed by the Company and payable to the order of the holders thereof in the aggregate original principal amount of Three Million Seven Hundred Three Thousand Five Hundred Dollars ($3,703,500.00), as amended by those certain Note Modification Agreements dated February 19, 2009 and those certain Note Modification Agreements dated May 20, 2009; NOW, THEREFORE, for and in consideration of the premises, the mutual covenants and agreements contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and the Holder hereby agree as follows: 1. The following modifications to the Note are made and agreed to effective as of June 26, 2009: A. The opening paragraph of the Note shall be deleted in its entirety and replaced withthe following: “FOR VALUE RECEIVED, the undersigned, US Dataworks, Inc ., a Nevadacorporation (“ UDW ”), hereby promises to pay, ON DEMAND made any time on or after July 1, 2010 , and if demand is not so made, then on July 1, 2011, to the order of Charles E. Ramey (“ Ramey ”), the holder, or his assigns, in lawful money of the United States of America, and in immediately payable funds, the principal sum of Five Hundred Thousand Dollars ($500,000) plus interest thereon to accrue at the rate of eight and three quarters percent (8.75%) per annum (“ Interest ”). Payment of all amounts due hereunder shall be at the address of UDW provided herein. For the purposes hereof, the term “Buyer Notes” shall mean those certain senior secured convertible notes issued by UDW pursuant to that certain Securities Purchase Agreement, dated as of November 13, 2007, by and among UDW and the Buyers listed on the Schedule of Buyers, hereto attached as Exhibit A (the “ Buyer Notes ”).” B. Section 3(a) of the Note shall be deleted in its entirety and replaced with the following: 1
- 82. “The non-payment of any principal or Interest when such payment becomes due and payable, which payment may be demanded (and thereby become due and payable) at any time on or after July 1, 2010, and UDW’s failure to make such payment for a period of ten (10) days thereafter;” 2. In consideration of the Holder’s agreements to the modifications set forth in Section 1 of this Agreement, the Company shall pay an amendment fee to the Holder in the amount of $6.666.67, such amount to be payable on July 1, 2009. 3. The Note, as modified by this Agreement, and all of the other loan documents and other agreements and instruments executed and delivered between the Company and the Holder in connection with the Note shall remain in full force and effect. 4. The Company and the Holder represent and warrant to each other that, as of the date hereof: (a) each such party has full power and authority to execute this Agreement; (b) this Agreement constitutes the legal, valid and binding obligation of such party, enforceable in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, or other similar laws affecting the enforcement of creditors' rights generally; and (c) no authorization, approval, consent or other action by, notice to, or filing with, any governmental authority or other person is required for the execution, delivery or performance by such party of this Agreement. 5. The parties hereto shall from time to time execute and deliver all such other documents, instruments and assurances with respect to the matters described herein, and take all such other actions as may be necessary or required to carry into force and effect the purposes and intent of this Agreement. 6. This Agreement, when executed by the parties hereto and subject to the execution and delivery of the Refinance Note Modification Agreements, shall be binding upon and inure to the benefit of the parties hereto, and their respective heirs, executors, administrators, personal representatives, successors and assigns. 7. This Agreement may be executed simultaneously in a number of identical counterparts, each of which shall be an original and all of which together shall constitute but one and the same instrument. [Signature Page Follows] 2
- 83. IN WITNESS WHEREOF, this Agreement has been executed and delivered by the parties hereto on the date first set forth above. THE COMPANY: US DATAWORKS, INC. By: /s/ J. Patrick Millinor, Jr. Name: J. Patrick Millinor, Jr. Title: Director THE HOLDER: /s/ Charles E. Ramey Charles E. Ramey 3
- 84. Consent of Independent Registered Public Accounting Firm We have issued our reports dated June 29, 2009 with respect to the financial statements included in the Annual Report of US Dataworks, Inc. on Form 10-K for the year ended March 31, 2009. We hereby consent to the incorporation by reference of said reports in all currently effective Registration Statements of US Dataworks, Inc. on Forms S-3, S-4 and S-8, including without limitation, the US Dataworks, Inc. Registration Statements on Form S-8 (File Nos. 333-117740, 117731, 102840, 102842 and 130986) and the US Dataworks, Inc. Registration Statements on Form S-3 (File Nos. 333-126984, 333-121951,333-116134, 333-114307 and 333-132379). /s/ Ham, Langston & Brezina, LLP Ham, Langston & Brezina, LLP Houston, Texas
- 85. Exhibit 31.1 SECTION 302 CERTIFICATION OF CHIEF EXECUTIVE OFFICER I, Charles E. Ramey, certify that: 1. I have reviewed this annual report on Form 10- K of US Dataworks, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; (b) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this annual report based on such evaluation; (c) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; and (d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; 5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions): (a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. Date: June 29, 2009 /s/ Charles E. Ramey Charles E. Ramey, Chief Executive Officer (Principal Executive Officer)
- 86. Exhibit 31.2 SECTION 302 CERTIFICATION OF CHIEF FINANCIAL OFFICER I, John T. McLaughlin, certify that: 1. I have reviewed this annual report on Form 10- K of US Dataworks, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; (b) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this annual report based on such evaluation; (c) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; and (d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; 5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions): (a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. Date: June 29, 2009 /s/ John T. McLaughlin John T. McLaughlin, Chief Accounting Officer (Principal Financial Officer)
- 87. EXHIBIT 32.1 CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. § 1350) I, Charles E. Ramey, of US Dataworks, Inc. certify pursuant to section 906 of the Sarbanes-Oxley Act of 2002 that: (i) the Annual Report on Form 10-K for the fiscal year ended March 31, 2009 (the “Report”), which this statement accompanies fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934, and (ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of US Dataworks, Inc. as of the dates and for the periods expressed in the Report. Dated: June 29, 2009 /s/ Charles E. Ramey Charles E. Ramey Chief Executive Officer (Principal Executive Officer)
- 88. EXHIBIT 32.2 CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. § 1350) I, John T. McLaughlin, of US Dataworks, Inc. certify pursuant to section 906 of the Sarbanes-Oxley Act of 2002 that: (i) the Annual Report on Form 10-K for the fiscal year ended March 31, 2009 (the “Report”), which this statement accompanies fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934, and (ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of US Dataworks, Inc. as of the dates and for the periods expressed in the Report. Dated: June 29, 2009 /s/ John T. McLaughlin John T. McLaughlin Chief Accounting Officer (Principal Financial Officer)