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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington D.C., 20549
 
 FORM 10-QSB
 
  þ
    
    QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2007
 o
    
    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period                      to
 Commission file number: 001-15835
 US Dataworks, Inc.
  Nevada
(State or other jurisdiction of 
incorporation or organization)
    
    84-1290152
(I.R.S. employer identification number)One Sugar Creek Center Boulevard, 
Fifth Floor 
Sugar Land, Texas
(Address of principal executive offices)
    
    77478
(Zip Code)
  5301 Hollister Road, Suite 250
Houston, Texas 77040
  þ o
 o þ
  o þ




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US DATAWORKS, INC.
 TABLE OF CONTENTS
    
 PagePART I  FINANCIAL INFORMATION
    
    
    3Item 1.
    
    Financial Statements
    
    
    3NOTES TO UNAUDITED FINANCIAL STATEMENTS
    
    
    8Item 2.
    
    Managements Discussion and Analysis or Plan of Operation
    
    
    16Item 3.
    
    Controls and Procedures
    
    
    24PART II  OTHER INFORMATION
    
    
    25Item 1.
    
    Legal Proceedings
    
    
    25Item 6.
    
    Exhibits
    
    
    25SIGNATURE
    
    
    
    
    26Certification of CEO Pursuant to Section 302Certification of CFO Pursuant to Section 302Certification of CEO Pursuant to Section 906Certification of CFO Pursuant to Section 906




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PART I  FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 US DATAWORKS, INC.
 BALANCE SHEET
 June 30, 2007
 (Unaudited)
 ASSETS
 Current assets:Cash and cash equivalents
    
    $
    174,040Accounts receivable, net of allowance for doubtful accounts of $250,000
    
    
    1,279,108Prepaid expenses and other current assets
    
    
    193,141Total current assets
    
    
    1,646,289Property and equipment, net
    
    
    459,606Goodwill, net
    
    
    14,133,629Other assets
    
    
    60,085Total assets
    
    $
    16,299,609
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US DATAWORKS, INC.
 BALANCE SHEET
 June 30, 2007
 (Unaudited)
 LIABILITIES AND STOCKHOLDERS EQUITY
 Current liabilities:Note payable  related party
    
    $
    539,000Current portion of convertible promissory notes
    
    
    256,066Deferred revenue  current
    
    
    532,681Accounts payable
    
    
    1,053,625Accrued expenses
    
    
    959,494Interest payable
    
    
    20,333Interest payable  related party
    
    
    3,246Derivative  Warrants
    
    
    90,108Total current liabilities
    
    
    3,454,553Total liabilities
    
    
    3,454,553Commitments and ContingenciesStockholders Equity:Convertible Series B preferred stock, $0.0001 par value
700,000 shares authorized, 109,933 shares issued and outstanding $3.75 liquidation
preference, dividends of $262,521 in arrears
    
    
    55Common stock, $0.0001 par value
90,000,000 shares authorized and 37,400,462 shares issued and 31,300,462 outstanding
    
    
    3,740Additional paid-in capital
    
    
    64,126,873Accumulated deficit
    
    
    (51,285,612
    )Total stockholders equity
    
    
    12,845,056Total liabilities and stockholders equity
    
    $
    16,299,609
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US DATAWORKS, INC.
 STATEMENTS OF OPERATIONS
 For the Three Months Ended June 30,
 (Unaudited)
 2007
    
    
    2006Revenues:Software licensing revenues
    
    $
    70,000
    
    
    $
    379,255Software transactional revenues
    
    
    389,508
    
    
    
    313,996Software maintenance revenues
    
    
    191,213
    
    
    
    103,765Professional services revenues
    
    
    578,350
    
    
    
    418,072Total revenues
    
    
    1,229,071
    
    
    
    1,215,088Cost of Sales
    
    
    385,959
    
    
    
    522,299Gross Profit
    
    
    843,112
    
    
    
    692,789Operating expenses:General and administrative
    
    
    1,641,134
    
    
    
    1,762,948Depreciation and amortization
    
    
    39,050
    
    
    
    33,060Total operating expense
    
    
    1,680,184
    
    
    
    1,796,008Loss from operations
    
    
    (837,072
    )
    
    
    (1,103,219
    )Other income (expense)Interest expense
    
    
    (6,401
    )
    
    
    Interest expense  related party
    
    
    (10,938
    )
    
    
    (92,172
    )Other income
    
    
    
    
    
    
    8,475Loss on derivative liabilities
    
    
    (14,853
    )
    
    
    (413,454
    )Total other expense
    
    
    (32,192
    )
    
    
    (497,151
    )Loss before provision for income taxes
    
    
    (869,264
    )
    
    
    (1,600,370
    )Provision for income taxes
    
    
    
    
    
    
    Net loss
    
    $
    (869,264
    )
    
    $
    (1,600,370
    )Basic and diluted loss per share
    
    $
    (0.03
    )
    
    $
    (0.05
    )Basic and diluted weighted-average shares outstanding
    
    
    31,300,462
    
    
    
    30,269,429
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US DATAWORKS, INC.
 STATEMENTS OF CASH FLOW
 For the Three Months Ended June 30,
 (Unaudited)
 2007
    
    2006Cash flows from operating activities:-Net loss from continuing operations
    
    
    (869,265
    )
    
    
    (1,600,370
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization of property and equipment
    
    
    39,050
    
    
    
    33,060Amortization of note discount on convertible promissory
    
    
    
    
    
    
    72,967Stock based compensation
    
    
    70,738
    
    
    
    262,056Loss on derivatives
    
    
    14,853
    
    
    
    413,454Changes in operating assets and liabilities:Accounts receivable
    
    
    900,921
    
    
    
    (772,781
    )Cost and estimated earnings in excess of billings on uncompleted contracts
    
    
    
    
    
    
    238,000Prepaid expenses and other current assets
    
    
    (90,980
    )
    
    
    (63,874
    )Deferred revenue
    
    
    (111,214
    )
    
    
    522,985Accounts payable
    
    
    133,515
    
    
    
    265,268Accrued expenses
    
    
    (40,404
    )
    
    
    (10,414
    )Interest payable
    
    
    4,721
    
    
    
    19,205Net cash provided/(used) in operating activities
    
    
    51,935
    
    
    
    (620,444
    )Cash flows from investing activities:Purchase of property and equipment
    
    
    (18,172
    )
    
    
    (12,810
    )Net cash used in investing activities
    
    
    (18,172
    )
    
    
    (12,810
    )
  6




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US DATAWORKS, INC.
 STATEMENTS OF CASH FLOW
 For the Three Months Ended June 30,
 (Unaudited)
 2007
    
    2006Cash flows from financing activities:Net cash provided by financing activities
    
    
    
    
    
    
    Net increase (decrease) in cash and cash equivalents
    
    
    33,764
    
    
    
    (633,254
    )Cash and cash equivalents, beginning of period
    
    
    140,276
    
    
    
    1,290,438Cash and cash equivalents, end of period
    
    
    174,040
    
    
    
    657,184Supplemental disclosures of cash flow information
Interest paid
    
    
    12,618
    
    
    
    
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US DATAWORKS, INC.
 NOTES TO UNAUDITED FINANCIAL STATEMENTS
 1. Organization and Business
 General
  2. Summary of Significant Accounting Policies
    Revenue Recognition
      8




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Goodwill
    Convertible Debt Financing  Derivative Liabilities
   Stock Options
  9




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For the Three Months EndedJune 30,2007
    
    2006Net loss as reported
    
    $
    (869,284
    )
    
    $
    (1,600,370
    )Add stock-based employee compensation
expense included in net loss as reported,
net of related tax effects
    
    $
    70,738
    
    
    $
    256,056Deduct stock-based employee compensation
expense determined under the fair value
based method for all awards, net of related
tax effectsNet loss; pro forma
    
    $
    (798,526
    )
    
    $
    (1,344,314
    )Basic and diluted loss per share, as reported
    
    $
    (0.03
    )
    
    $
    (0.05
    )Basic and diluted loss per share, pro forma
    
    $
    (0.03
    )
    
    $
    (0.04
    )
   For the Three Months EndedJune 30,2007
    
    2006Risk-free Interest Rate
    
    
    4.67
    %
    
    
    4.95
    %Expected Life of Options Granted
    
    3 years
    
    3 yearsExpected Volatility
    
    
    74
    %
    
    
    87
    %Expected Dividend Yield
    
    
    0
    
    
    
    0Expected forfeiture rate
    
    
    30
    %
    
    
    30
    %
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Loss per Share
   For the Three Months EndedJune 30,2007
    
    2006Options outstanding under the Companys stock option plans
    
    
    6,627,349
    
    
    
    6,809,449Options granted outside the Companys stock option plans
    
    
    1,160,000
    
    
    
    1,160,000Warrants issued in conjunction with private placements
    
    
    5,438,683
    
    
    
    5,689,933Warrants issued as a financing cost for notes payable
and convertible notes payable
    
    
    1,691,250
    
    
    
    2,083,783Warrants issued for services rendered and litigation settlement
    
    
    180,769
    
    
    
    100,769Convertible 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
  Concentrations of Credit Risk
    11




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3. Property and Equipment
  Furniture and fixtures
    
    $
    77,559Office and telephone equipment
    
    
    92,795Computer equipment
    
    
    711,724Computer software
    
    
    1,271,098Leasehold improvements
    
    
    62,9972,216,173Less accumulated depreciation and amortization
    
    
    (1,756,567
    )Total
    
    $
    459,606
  4. Convertible Promissory Notes
  Convertible promissory note, interest at 10% per
annum, unsecured, $256,066 due September 15, 2007
    
    $
    256,066Less current portion
    
    
    (256,066
    )Long-term portion
    
    $
    0
 Convertible promissory note with interest at 10% per annum
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Convertible promissory note issued June 16, 2005 with $70,000 Original Issue Discount
    13




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5.
    
    Accounts Receivable Facility
  6.
    
    Commitments and Contingencies
 Employment Agreements
     14




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7.
    
    Stockholders Equity
 Preferred Stock
  Convertible Series B Preferred Stock
      Common Stock
 Common Stock and Warrants
  Non Cash financing
  15




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Stock Options
    2000 Stock Option Plan
    
    Outside of PlanWeighted-Average
    
    
    
    Weighted-AverageShares
    
    Exercise Price
    
    Shares
    
    Exercise PriceOutstanding, March 31, 2007
    
    
    6,565,349
    
    
    $
    0.74
    
    
    
    1,160,000
    
    
    $
    1.02Granted
    
    
    127,000
    
    
    $
    0.60
    
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Forfeited/canceled
    
    
    65,000
    
    
    $
    0.90
    
    
    
    
    
    
    $
    0.00Outstanding, June 30, 2007
    
    
    6,627,349
    
    
    $
    0.73
    
    
    
    1,160,000
    
    
    $
    1.02Exercisable, June 30, 2007
    
    
    4,825,683
    
    
    $
    0.80
    
    
    
    1,160,000
    
    
    $
    1.02
  Weighted-Range of
    
    
    
    
    
    Stock
    
    Weighted-Average
    
    Weighted-
    
    Average ExerciseExercise
    
    Stock Options
    
    Options
    
    Remaining
    
    Average
    
    Price of OptionsPrices
    
    Outstanding
    
    Exercisable
    
    Contractual Life
    
    Exercise Price
    
    Exercisable$0.43  0.80
    
    
    5,255,513
    
    
    
    3,453,847
    
    
    8.09 years
    
    $
    0.56
    
    
    $
    0.56$0.81  1.35
    
    
    1,787,836
    
    
    
    1,787,836
    
    
    7.11 years
    
    $
    0.93
    
    
    $
    0.96$1.36  6.25
    
    
    744,000
    
    
    
    744,000
    
    
    6.66 years
    
    $
    1.96
    
    
    $
    1.967,787,349
    
    
    
    5,985,683
 Restricted Stock
   
 Item 2. Managements Discussion and Analysis or Plan of Operation.
  16




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Critical Accounting Policies
   Revenue Recognition
     17




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Goodwill
    Estimates
  Concentrations of Credit Risk
    Results of Operations
  Revenues
  18




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Cost of Sales
  Operating Expenses
  Other Expenses
  Net Loss
  Liquidity and Capital Resources
   19




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
    
    We plan to increase the number of month-to-month professional services contract with
our existing customers, which is anticipated to generate revenue sufficient to reduce
the negative cash flows from our operations.
    
    We believe that the demand for our software and professional services will continue
to expand as the United States market adopts the new payment processing opportunities
available under changing regulations, such as the Check Clearing Act for the
21st Century and NACHAs back office conversion, which allows the conversion
of paper checks in the back offices of retail merchants and the government. We believe
that increased demand for our solutions, including our recently introduced Clearingworks
product, will lead to increased cash flows from license fees, transaction based contract
fees and increases in professional services revenues
    
    We entered into a strategic alliance with one of the largest merchant service
providers (MSP), which allows this MSP to sell Clearingworks as part of its ARC and back
office conversion services. This alliance has positively affected our profitability and
we expect this trend to continue.
    
    Our alliance with Hyundai allows us to resell ATMs enhanced with our software. We
plan to begin reselling the ATMs in the second half of 2008, which is expected to
positively affect our profitability.
      Factors That May Affect Our Results
 We have a general history of losses and may not operate profitably in the future.
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Our ability to continue as a going concern may be contingent upon our ability to secure
capital from prospective investors or lenders.
  
    
    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 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.
  
    
    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.
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We are entering into a new market that is highly competitive with well established competitors.
  We may not be able to maintain our relationships with strategic partners, which may cause our cash
flow to decline.
  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.
  If general economic and business conditions do not improve, we may experience decreased revenue or
lower growth rates.
  We may not be able to attract, retain or integrate key personnel, which may prevent us from
successfully operating our business.
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We operate in markets that are intensely and increasingly competitive, and if we are unable to
compete successfully, our revenue could decline and we may be unable to gain market share.
   
    
    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.
  
    
    the breadth and quality of services;
    
    creative design and systems engineering expertise;
    
    pricing;
    
    technological innovation; and
    
    understanding clients strategies and needs.
  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.
  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.
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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.
  
 Item 3. Controls and Procedures
 Evaluation of disclosure controls and procedures
  Changes in internal control over financial reporting
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PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
   ExhibitNumber
    
    Description of Document31.1
    
    
    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.
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SIGNATURE
   US DATAWORKS, INC.By
    /s/ John T. McLaughlinJohn T. McLaughlinChief Accounting Officer
(Accounting Officer
and Duly Authorized Officer) 26




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ExhibitNumber
    
    Description of Document31.1
    
    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.
 27