##### Table of Contents



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 September 30, 2005
 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
    
    84-1290152(State or other jurisdiction of
    
    (I.R.S. employer identification number)incorporation or organization)5301 Hollister Road, Suite 250Houston, Texas
    
    77040(Address of principal executive offices)
    
    (Zip Code)
  þ o
 o þ
  o þ




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US DATAWORKS, INC.
 TABLE OF CONTENTS
   PagePART I  FINANCIAL INFORMATION
    
    
    1Item 1. Financial Statements
    
    
    1Item 2. Managements Discussion and Analysis or Plan of Operation
    
    
    17Item 3. Controls and Procedures
    
    
    24PART II  OTHER INFORMATION
    
    
    25Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    25Item 4. Submission of Matters to a Vote of Security Holders
    
    
    25Item 6. Exhibits
    
    
    25SIGNATURE
    
    
    27Certification 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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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 US DATAWORKS, INC.
 BALANCE SHEET
 September 30, 2005
 (Unaudited)
 ASSETSCurrent assets:Cash and cash equivalents
    
    $
    1,253,853Accounts receivable, net of allowance for doubtful accounts of $0
    
    
    927,411Costs and estimated earnings in excess of billings on uncompleted contracts
    
    
    880,800Prepaid expenses and other current assets
    
    
    336,422Total current assets
    
    
    3,398,486Property and equipment, net
    
    
    571,116Goodwill, net
    
    
    14,133,629Other assets
    
    
    43,792Total assets
    
    $
    18,147,023
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US DATAWORKS, INC.
 BALANCE SHEET
 September 30, 2005
 (Unaudited)
 LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Note payable  related party
    
    $
    39,000Deferred revenue  current
    
    
    250,519Accounts payable
    
    
    163,732Accrued expenses
    
    
    263,230Interest payable
    
    
    3,262Current portion of convertible promissory notes, net of unamortized discount of $464,693
    
    
    201,440Total current liabilities
    
    
    921,183Convertible promissory notes, net of unamortized discount of $298,329
    
    
    573,737Deferred revenue
    
    
    16,690Total liabilities
    
    
    1,511,610Commitments and ContingenciesStockholders 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 $190,201 in arrears
    
    
    55Common stock, $0.0001 par value
90,000,000 shares authorized and 30,037,020 shares issued and outstanding
    
    
    3,004Additional paid-in capital
    
    
    63,102,445Accumulated deficit
    
    
    (46,470,091
    )Total shareholders equity
    
    
    16,635,413Total liabilities and stockholders equity
    
    $
    18,147,023
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US DATAWORKS, INC.
 For the Three Months Ended
    
    
    For the Six Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004REVENUESSoftware licensing revenues
    
    $
    1,451,800
    
    
    $
    153,016
    
    
    $
    1,750,920
    
    
    $
    500,732Software transactional revenues
    
    
    231,361
    
    
    
    158,052
    
    
    
    412,604
    
    
    
    287,704Software maintenance revenues
    
    
    134,566
    
    
    
    140,486
    
    
    
    226,892
    
    
    
    172,225Professional service revenues
    
    
    914,566
    
    
    
    158,280
    
    
    
    1,422,216
    
    
    
    552,305Total revenues
    
    
    2,732,293
    
    
    
    609,834
    
    
    
    3,812,632
    
    
    
    1,512,966COST OF SALES
    
    
    405,355
    
    
    
    202,512
    
    
    
    782,856
    
    
    
    518,648Gross profit
    
    
    2,326,938
    
    
    
    407,322
    
    
    
    3,029,776
    
    
    
    994,318OPERATING EXPENSESGeneral and administrative
    
    
    1,351,247
    
    
    
    1,493,420
    
    
    
    2,905,522
    
    
    
    2,963,323Depreciation and amortization
    
    
    89,957
    
    
    
    81,646
    
    
    
    178,482
    
    
    
    155,772Total operating expense
    
    
    1,441,204
    
    
    
    1,575,066
    
    
    
    3,084,004
    
    
    
    3,119,095INCOME (LOSS) FROM OPERATIONS
    
    
    885,734
    
    
    
    (1,167,744
    )
    
    
    (54,228
    )
    
    
    (2,124,777
    )OTHER INCOME (EXPENSE)Financing costs
    
    
    (76,658
    )
    
    
    (97,451
    )
    
    
    (88,362
    )
    
    
    (419,903
    )Interest expense
    
    
    (27,605
    )
    
    
    (48,435
    )
    
    
    (51,538
    )
    
    
    (164,956
    )Accrued cost of litigation settlement
    
    
    
    
    
    
    (1,000,000
    )
    
    
    
    
    
    
    (1,000,000
    )Other income
    
    
    9,419
    
    
    
    11,228
    
    
    
    16,218
    
    
    
    17,688Total other expense
    
    
    (94,844
    )
    
    
    (1,134,658
    )
    
    
    (123,682
    )
    
    
    (1,567,171
    )INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES
    
    
    790,890
    
    
    
    (2,302,402
    )
    
    
    (177,910
    )
    
    
    (3,691,948
    )PROVISION FOR INCOME TAXES
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    NET INCOME (LOSS)
    
    $
    790,890
    
    
    $
    (2,302,402
    )
    
    $
    (177,910
    )
    
    $
    (3,691,948
    )Accumulated dividends on Series B Preferred stock
    
    
    (10,396
    )
    
    
    (10,396
    )
    
    
    (20,679
    )
    
    
    (22,264
    )NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCK
    
    $
    780,494
    
    
    $
    (2,312,798
    )
    
    $
    (198,589
    )
    
    $
    (3,714,212
    )Basic earnings (loss) per share
    
    $
    0.03
    
    
    $
    (0.09
    )
    
    $
    (0.01
    )
    
    $
    (0.14
    )Diluted earnings (loss) per share
    
    $
    0.03
    
    
    $
    (0.09
    )
    
    $
    (0.01
    )
    
    $
    (0.14
    )
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US DATAWORKS, INC.
 STATEMENT OF STOCKHOLDERS EQUITY
 for the Six Months ended September 30, 2005
 (Unaudited)
 Preferred Stock
    
    
    
    
    
    
    
    
    
    
    AdditionalConvertible Series B
    
    
    Common Stock
    
    
    Paid-In
    
    
    Deferred
    
    
    AccumulatedShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Capital
    
    
    Compensation
    
    
    Deficit
    
    
    TotalBalance, March 31, 2005
    
    
    549,667
    
    
    $
    55
    
    
    
    28,778,366
    
    
    $
    2,878
    
    
    $
    61,676,629
    
    
    $
    (12,198
    )
    
    $
    (46,292,181
    )
    
    $
    15,375,183Warrants and beneficial conversion
feature issued in connection with
convertible debenture
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    791,183
    
    
    
    
    
    
    
    
    
    
    
    791,183Warrants and options issued to third
parties for services rendered
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    49,309
    
    
    
    
    
    
    
    
    
    
    
    49,309Amortization of deferred compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,198
    
    
    
    
    
    
    
    12,198Common stock issued forCash
    
    
    
    
    
    
    
    
    
    
    1,258,654
    
    
    
    126
    
    
    
    599,874
    
    
    
    
    
    
    
    
    
    
    
    600,000Less costs of offering
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (14,550
    )
    
    
    
    
    
    
    
    
    
    
    (14,550
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (177,910
    )
    
    
    (177,910
    )Balance, September 30, 2005
    
    
    549,667
    
    
    $
    55
    
    
    
    30,037,020
    
    
    $
    3,004
    
    
    $
    63,102,445
    
    
    $
    
    
    
    $
    (46,470,091
    )
    
    $
    16,635,413
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US DATAWORKS, INC.
 STATEMENTS OF CASH FLOW
 For the Six Months Ended September 30,
 (Unaudited)
 2005
    
    
    2004Cash flows from operating activities:-Net loss from operations
    
    $
    (177,910
    )
    
    $
    (3,691,948
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization of property and equipment
    
    
    178,482
    
    
    
    155,772Amortization of OID discount on convertible promissory note
    
    
    9,800
    
    
    
    Accrued cost of litigation settlement
    
    
    
    
    
    
    1,000,000Amortization of note discount and beneficial conversion feature on
convertible promissory notes
    
    
    88,362
    
    
    
    343,824Amortization of deferred compensation expense
    
    
    (9,302
    )
    
    
    24,187Issuance of stock for interest
    
    
    
    
    
    
    15,750Issuance of stock for extinguishment of equity credit line facility
    
    
    
    
    
    
    225,000Issuance of warrants for services
    
    
    26,456
    
    
    
    Issuance of options to third party for services
    
    
    22,853
    
    
    
    45,706Changes in operating assets and liabilities:Accounts receivable, net
    
    
    (88,121
    )
    
    
    (214,280
    )Costs and
estimated earnings in excess of billings on uncompleted contracts
    
    
    (880,800
    )
    
    
    Prepaid expenses and other current assets
    
    
    (240,694
    )
    
    
    (35,235
    )Other assets
    
    
    
    
    
    
    9,433Deferred revenue
    
    
    (236,827
    )
    
    
    162,681Accounts payable
    
    
    (71,926
    )
    
    
    (32,665
    )Accrued expenses
    
    
    (66,628
    )
    
    
    (282,108
    )Interest payable
    
    
    (38,410
    )
    
    
    (37,251
    )Net cash used in operating activities
    
    
    (1,484,665
    )
    
    
    (2,311,134
    )Cash flows from investing activities:Purchase of property and equipment
    
    
    (72,318
    )
    
    
    (161,139
    )Net cash used in investing activities
    
    
    (72,318
    )
    
    
    (161,139
    )
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US DATAWORKS, INC.
 STATEMENTS OF CASH FLOW
 For the Six Months Ended September 30,
 (Unaudited)
 2005
    
    
    2004Cash flows from financing activities:Proceeds from convertible promissory note
    
    
    700,000
    
    
    
    Repayment of convertible promissory note
    
    
    
    
    
    
    (500,000
    )Proceeds from stock sale
    
    
    600,000
    
    
    
    4,650,000Stock issuance costs
    
    
    (14,550
    )
    
    
    (568,500
    )Proceeds from exercise of stock options
    
    
    
    
    
    
    69,575Proceeds from exercise of warrants
    
    
    
    
    
    
    30,000Net cash provided by financing activities
    
    
    1,285,450
    
    
    
    3,681,075Net increase (decrease) in cash and cash equivalents
    
    
    (271,533
    )
    
    
    1,208,802Cash and cash equivalents, beginning of period
    
    
    1,525,386
    
    
    
    1,203,389Cash and cash equivalents, end of period
    
    $
    1,253,853
    
    
    $
    2,412,191Supplemental disclosures of cash flow informationInterest paid
    
    $
    76,820
    
    
    $
    28,898
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US DATAWORKS, INC.
 NOTES TO UNAUDITED FINANCIAL STATEMENTS
 1.
    
    Organization and BusinessGeneralUS 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 PoliciesRevenue RecognitionThe Company recognizes revenues 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. Generally, these arrangements do not require significant production, modification,
or customization, and in these cases, revenue is recognized when such a license agreement has
been signed, delivery of the software product has occurred, the related fee is fixed or
determinable, and collectibility is probable.In one instance, the Company has entered into an integrated license, maintenance and services
agreement with a significant customer. In accordance with SOP 97-2, the Company recognizes
revenues from this agreement utilizing the percentage-of-completion contract accounting method.
Percentage-of-completion is measured principally by the percentage of costs incurred and accrued
to date for each contract to the estimated total costs for each contract at completion. The
Company generally considers contracts to be substantially complete upon acceptance by the
customer. Contract costs include all direct material and labor costs and those indirect costs
related to contract performance, such as non reimbursable travel costs. Changes in job
performance, job conditions, estimated contract costs and profitability and final contract
settlements may result in revisions to costs and income and the effects of these revisions are
recognized in the period in which the revisions are determined. Provisions for total estimated
losses on uncompleted contracts are made in the period in which such losses are determined.The current asset Costs and estimated earnings in excess of billings on uncompleted
contracts represents revenues recognized in excess of amounts billed which management believes
will be billed and collected within the subsequent year.In certain instances, the Company licenses its software on a transactional fee basis in lieu of
an up-front licensing fee. In these arrangements, the customer is charged a fee based upon the
number of items processed by the software and the Company recognizes revenue as these
transactions occur. The transaction fee also includes the provision of standard maintenance and
support services as well as product upgrades should such upgrades become available.If professional services were provided in conjunction with the installation of the software
licensed, revenue is recognized when these services have been provided.For license agreements that include a separately identifiable fee for contracted maintenance
services, such maintenance revenues are recognized on a straight-line basis over the life of the
maintenance agreement noted in the agreement, but following any installation period of the
software.
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GoodwillEffective January 1, 2002, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 142 Goodwill and Other Intangible Assets, 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 No. 142 requires
goodwill for each reporting unit of an entity to 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 No. 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 years ended March 31, 2005 or March 31, 2004.Stock OptionsSFAS No. 123, Accounting for Stock-Based Compensation, establishes and encourages the use of
the fair value based method of accounting for stock-based compensation arrangements under which
compensation cost is determined using the fair value of stock-based compensation determined as
of the date of grant and is recognized over the periods in which the related services are
rendered. The statement also permits companies to elect to continue using the current intrinsic
value accounting method specified in Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees (APB 25), to account for stock-based compensation. The Company has
elected to use the implicit value based method and has disclosed the pro forma effect of using
the fair value based method to account for its stock-based compensation.The Company has elected to follow APB 25 and related Interpretations in accounting for its
employee stock options because, as discussed below, the alternative fair value accounting
provided for under SFAS No. 123 requires the use of option valuation models that were not
developed for use in valuing employee stock options. Under APB 25, because the exercise price
of the Companys employee stock options is greater than or equals the market price of the
underlying stock on the date of grant, no compensation cost has been recognized during the three
and six month periods ended September 30, 2005 and September 30, 2004.Pro forma information regarding net income and earnings per share is required by SFAS No. 123
and has been determined as if the Company had accounted for its employee stock options under the
fair value method of that Statement. The fair value for these options was estimated at the date
of grant using a Black-Scholes option pricing model.The Black-Scholes option pricing model was developed for use in estimating the fair value of
traded options which have no vesting restrictions and are fully transferable. In addition,
option pricing models require the input of highly subjective assumptions including the expected
stock price volatility. Because the Companys employee stock options have characteristics
significantly different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in managements opinion, the
existing models do not necessarily provide a reliable single measure of the fair value of the
Companys employee stock options.For purposes of pro forma disclosure, the estimated fair value of the options is included in
expense over the options vesting period or expected life. The Companys pro forma information
for the three and six month periods ended September 30, 2005 and September 30, 2004 is as
follows:
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For the Three Months Ended
    
    
    For the Six Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Net income (loss) as reported
    
    $
    790,890
    
    
    $
    (2,302,402
    )
    
    $
    (177,910
    )
    
    $
    (3,361,949
    )Add stock-based employee
compensation expense included in
net loss as reported, net of
related tax effects
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Deduct stock-based employee
compensation expense determined
under the fair value based method
for all awards, net of related
tax effects
    
    $
    (257,957
    )
    
    $
    (390,092
    )
    
    $
    (527,557
    )
    
    $
    (677,720
    )Net income (loss); pro forma
    
    $
    532,933
    
    
    $
    (2,692,494
    )
    
    $
    (705,467
    )
    
    $
    (4,039,669
    )Basic and diluted income (loss)
per share, as reported
    
    $
    0.03
    
    
    $
    (0.09
    )
    
    $
    (0.01
    )
    
    $
    (0.14
    )Basic and diluted income (loss)
per share, pro forma
    
    $
    0.02
    
    
    $
    (0.10
    )
    
    $
    (0.02
    )
    
    $
    (0.15
    )
  Earnings (Loss) per Share
   Income
    
    
    
    
    
    
    Per Share(Loss)
    
    
    Shares
    
    
    AmountThree months ended September 30, 2005Basic EPSIncome attributable to common stock
    
    $
    780,494
    
    
    
    30,037,020
    
    
    $
    0.03Effect of dilutive securitiesWarrants
    
    
    
    
    
    
    1,765
    
    
    
    Options
    
    
    
    
    
    
    36,551
    
    
    
    Convertible debt
    
    
    104,264
    
    
    
    2,044,517
    
    
    
    Convertible Series B preferred stock
    
    
    10,396
    
    
    
    109,933
    
    
    
    Diluted EPSAdjusted earnings attributable to common stock
    
    $
    895,154
    
    
    
    32,229,786
    
    
    $
    0.03
 9




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Income
    
    
    
    
    
    
    Per Share(Loss)
    
    
    Shares
    
    
    AmountThree months ended September 30, 2004Basic EPS(Loss) attributable to common stock
    
    $
    (2,312,798
    )
    
    
    26,852,288
    
    
    $
    (0.09
    )Effect of dilutive securitiesAssumed exercise of dilutive securities
    
    
    
    
    
    
    
    
    
    
    Diluted EPSAdjusted earnings attributable to common stock
    
    $
    (2,312,798
    )
    
    
    26,852,288
    
    
    $
    (0.09
    )Six months ended September 30, 2005Basic EPS(Loss) attributable to common stock
    
    $
    (198,589
    )
    
    
    29,369,865
    
    
    $
    (0.01
    )Effect of dilutive securitiesAssumed exercise of dilutive securities
    
    
    
    
    
    
    
    
    
    
    Diluted EPSAdjusted earnings attributable to common stock
    
    $
    (198,589
    )
    
    
    29,369,865
    
    
    $
    (0.01
    )Six months ended September 30, 2004Basic EPS(Loss) attributable to common stock
    
    $
    (3,714,212
    )
    
    
    26,184,768
    
    
    $
    (0.14
    )Effect of dilutive securitiesAssumed exercise of dilutive securities
    
    
    
    
    
    
    
    
    
    
    Diluted EPSAdjusted earnings attributable to common stock
    
    $
    (3,714,212
    )
    
    
    26,184,768
    
    
    $
    (0.14
    )
   For the Six Months EndedSeptember 30,2005
    
    
    2004Options outstanding under the Companys stock option plans
    
    
    4,088,683
    
    
    
    3,842,115Options granted outside the Companys stock option plans
    
    
    1,160,000
    
    
    
    1,206,100Warrants issued in conjunction with private placements
    
    
    5,597,859
    
    
    
    4,816,502Warrants issued as a financing cost for notes payable
and convertible notes payable
    
    
    2,122,283
    
    
    
    2,226,137Warrants issued for services rendered and litigation settlement
    
    
    360,769
    
    
    
    177,800Warrants issued as part of the US Dataworks, Inc. acquisition
    
    
    67,200
    
    
    
    67,200Convertible 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. 10




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EstimatesThe 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 RiskThe 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.Two of the Companys customers, American Express Company and the Federal Reserve Bank, accounted
for 75% and 12%, respectively, of the Companys net revenues for the three months ended
September 30, 2005. Three customers accounted for 54%, 18% and 11%, respectively, of net
revenue for the six months ended September 30, 2005. Three customers accounted for 25%, 22% and
16% of net revenues for the three months ended September 30, 2004. Four customers accounted for
31%, 18%, 17% and 16%, respectively, of net revenue for the six months ended September 30, 2004.At September 30, 2005, amounts due from three significant customers accounted for 63%, 17% and
13%, respectively of accounts receivable.3.
    
    Property and EquipmentProperty and equipment as of September 30, 2005 consisted of the following:
 Furniture and fixtures
    
    $
    84,745Automobile
    
    
    15,072Office and telephone equipment
    
    
    92,795Computer equipment
    
    
    463,790Computer software
    
    
    1,255,585Leasehold improvements
    
    
    62,9971,974,984Less accumulated depreciation and amortization
    
    
    (1,403,868
    )Total
    
    $
    571,116
 Depreciation and amortization expense for the three and six months ended September 30, 2005 and
2004 was $89,957, $178,482, $81,646 and $155,772, respectively.4.
    
    Notes Payable  Related PartiesOn January 22, 2001, the Company entered into a note payable with an advisory board member and
shareholder for $50,000. The note is non-interest-bearing, is unsecured, and is due on demand.
As of September 30, 2005, the outstanding balance on the note payable was $39,000.5.
    
    Convertible Promissory NotesConvertible promissory notes at September 30, 2005 consisted of the following:
 11




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Convertible promissory note, interest at 10% per
annum, unsecured, $512,133 due September 15, 2006, $256,066 due September 15, 2007, net of unamortized discount of
$199,563
    
    $
    568,636Convertible promissory note issued June 16, 2005 with $70,000 Original
Issue Discount, due in 15 equal monthly installments beginning April 15, 2006,
net of unamortized discount of $563,459
    
    
    206,541775,177Less current portion
    
    
    (201,440
    )Long-term portion
    
    $
    573,737
 Convertible promissory note with interest at 10% per annumThis note is an amendment and restatement of a note in the same principal amount originally
dated September 15, 2004. The original note was issued effective September 15, 2004 in
connection with the November 2004 settlement of a lawsuit brought by an investor in December
2003. The amended note is convertible at anytime, at the holders election, into shares of the
Companys common stock at a per share conversion price of $1.10, subject to standard
antidilution provisions.The amended note is effective September 15, 2005 and
extended for one year a principal payment of $256,067
originally due September 15, 2005. In consideration of this amendment, the Company
issued the holder a common stock purchase warrant to purchase up to 650,000 shares of the
Companys common stock at an exercise price of $0.59 per share. The warrant will expire on
September 15, 2008.The Company allocates the proceeds received from debt or convertible debt with detachable
warrants or shares of common stock using the relative fair value of the individual elements at
the time of issuance. Using the Black-Scholes valuation model, the Company has determined the
aggregate value of the warrant to purchase
650,000 shares of the Companys common stock issued in connection with this amended convertible
note to be $206,000. The amount allocated to the warrants as debt discount will be recognized as
additional interest expense over the period from the date of issuance of the note to the earlier
of the conversion date or the stated maturity date. During the six months ended September 30,
2005, the Company recognized $6,437 in financing costs related to the accretion of the debt
discount associated with the warrants issued in connection with this amended convertible
promissory note.In connection with the November 2004 settlement, the Company also issued a warrant to purchase
160,000 shares of the Companys common stock at a purchase price of $0.75 per share, which
warrant will expire on November 10, 2006.Using the Black-Scholes pricing model the Company has determined the value of the warrants
issued in connection with the settlement to be $126,000. This amount, together with the value of
the convertible promissory note, the value of the plaintiffs legal expense reimbursement and
the Companys legal costs incurred in connection with the settlement totaled $924,200 and has
been recorded as Investor litigation settlement expense for the year ended March 31, 2005.Convertible promissory note issued June 16, 2005 with $70,000 Original Issue DiscountOn June 16, 2005, the Company entered into a Securities Purchase Agreement with an institutional
investor (the Debenture Agreement) for the sale of a convertible debenture with a principal
amount of $770,000 and an original issue discount of $70,000 for gross proceeds of $700,000.
The debenture is convertible at anytime at the discretion of the holder at a price per share of
$0.572 into 1,346,154 shares of the Companys common stock. The convertible debenture is to be
repaid in 15 monthly installments of $51,333.33 beginning April 15, 2006. The Company may also
elect, upon proper notice, to pay any monthly installment in shares of the Companys common
stock based on a conversion price equal to the lesser of (i) the then applicable conversion
price, or (ii) 90% of the volume weighted average price of the Companys common stock for the 10
trading
 12




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##### Table of Contents



days immediately preceding the payment; provided, that, such conversion price must be at
least equal to the conversion floor of $0.23, or such monthly installment must be paid in cash.
In connection with the Debenture Agreement, the Company issued two groups of warrants, Short
Term Warrants and Long Term Warrants to the institutional investor. The Short Term Warrants
allow the institutional investor to purchase an aggregate of 407,926 shares of the Companys
common stock with an exercise price of $0.572 per share exercisable for a period of 180 days at
any time after the later of (i) the effective date of the registration statement (as described
below) or (ii) December 16, 2005. The Long Term Warrants allow the institutional investor to
purchase an aggregate of 471,154 shares of the Companys common stock with an exercise price of
$0.572 per share exercisable at anytime from December 16, 2005 through December 16, 2008;
provided, however, the institutional investor will not be permitted to exercise a warrant to the
extent that the number of shares of the Companys common stock beneficially owned by such
institutional investor taken together with the number of shares to be issued upon exercise of
the warrant equals or exceeds 4.999% of the Companys then issued and outstanding shares of
common stock. The warrants also contain trading market restrictions that preclude the Company
from issuing shares of common stock upon exercise thereof if such issuance, when aggregated with
other issuances of the Companys common stock pursuant to the warrants, would exceed 19.999% of
the Companys then issued and outstanding shares of common stock, unless the Company has
previously obtained the required shareholder approval. The Company, pursuant to a Registration
Rights Agreement dated June 16, 2005 between the Company and the institutional investor, agreed
to file a registration statement for the resale of the shares of the Companys common stock that
may be issued to the institutional investor upon the conversion of the convertible debenture and
the exercise of the Short Term Warrants and the Long Term Warrants. The registration statement
covering these securities was effective on September 1, 2005.The Company allocates the proceeds received from debt or convertible debt with detachable
warrants or shares of common stock using the relative fair value of the individual elements at
the time of issuance. Using the Black-Scholes valuation model, the Company has determined the
aggregate value of the warrants issued in connection with this convertible note to be $221,722.
The amount allocated to the warrants as debt discount will be recognized as additional interest
expense over the period from the date of issuance of the debenture to the earlier of the
conversion date or the stated maturity date. During the six months ended September 30, 2005, the
Company recognized $31,042 in financing costs related to the accretion of the debt discount
associated with the warrants issued in connection with this convertible debenture.In accordance with generally accepted accounting principles, in the event the conversion price
is less than the Companys stock price on the date of issuance, the difference is considered to
be a beneficial conversion feature and is amortized as financing expense over the period from
the date of issuance to the earlier of the conversion date or the stated redemption date. The
Company has calculated the aggregate beneficial conversion feature of this convertible debenture
to be $363,462. During the six months ended September 30, 2005, the Company recognized $50,883
in financing costs related to the amortization of the beneficial conversion feature recorded on
this convertible debenture.6.
    
    Commitments and ContingenciesEmployment AgreementsOn April 2, April 2, May 13 and September 26, 2003, the Company entered into employment
agreements with its President and Chief Operating Officer, Senior Vice President and Chief
Technology Officer, Chief Executive Officer and Chairman of the Board, and Vice President of
Business Development and General Counsel, respectively. Each employment agreement is for a term
of three years. Annual base salaries for these four members of senior management are $175,000,
$165, 000, $200,000 and $150,000, respectively.On August 2, 2004, the Company entered into an employment agreement with its Vice President
Sales  Remittance Processing Division. The employment agreement is for a term of three years
with an annual base salary of $150,000 and, during the first twelve months of the agreement, an
advance of future commissions of $75,000, payable in semi-monthly installments. The advance is
non-recoverable; however, any commissions earned during the first twenty-four months of the
agreement will be reduced by the amount of the advance.
 13




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##### Table of Contents



Deferred compensationOn April 12, 2004, the Company granted a deferred compensation award to its Chief Financial
Officer. The award provides for a payment equal to the product of 200,000 multiplied by an
amount equal to (a) the Companys average 20 day trailing stock price on the third anniversary
date of his employment (March 17, 2006) less (b) $0.55 (the Companys stock price on the date of
his employment). In no event may the payment amount exceed $430,000. The payment amount, if any,
is cancelable in the event of the Chief Financial Officers voluntary termination or termination
by the Company for cause (as defined).Upon the granting of the deferred compensation award, an unamortized compensation expense equal
to the value on the date of grant is accrued as a liability and charged to stockholders equity.
This amount is then amortized over the service period of the award. As the amount of the award
is not yet determined because it can be adjusted as stated in the terms above, the award is
revalued at the end of each reporting period using the stock price at that time. This variable
accounting will be in place until March 17, 2006, the date upon which the amount of the payments
on these awards will be fixed. Total compensation expense recognized with respect to this
deferred compensation award during the six months ended September 30, 2005 was a reduction in
previously booked expenses of $9,302.7.
    
    Stockholders EquityPreferred StockThe 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 StockThe Company has 700,000 authorized shares of $0.0001 par value convertible Series B preferred
stock.In August and October 2000, the Company issued 509,333 and 133,666 units respectively, in a
private placement for gross proceeds of $382,000 and $100,250, respectively. Each unit consisted
of one share of the Companys voting convertible Series B preferred stock (the Series B) and a
warrant, exercisable through October 2003, to purchase one share of the Companys common stock.
The Series B has a liquidation preference of $0.75 per share and carries a 10% cumulative
dividend payable each March 1 and September 1. The Company has the right to redeem the Series B
at any time after issuance at a redemption price of $0.83 per share, plus any accrued but unpaid
dividends. The Series B is convertible upon issuance into shares of the Companys common stock
at $3.75 per share. The warrant entitles the holder to purchase one share of the Companys
common stock at $6.25 per share, which represents 115% of the market value of the Companys
common stock at the closing date.In May 2001, an investor in the Series B rescinded its acquisition and returned to the Company
13,333 shares of Series B and warrants for the purchase of 2,667 shares of common stock in
exchange for the return of its investment of $10,000.In August 2004, an investor in the Series B elected to convert his 79,999 shares and accordingly
was issued 15,998 shares of the Companys common stock.At September 30, 2005, there were accumulated, undeclared dividends in arrears of $190,201 or
$0.35 per share.Common Stock and WarrantsDuring the three and six months ended September 30, 2005, the Company completed the following:Sale of Common Stock and Warrants
 14




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##### Table of Contents



Effective June 16, 2005, the Company entered into definitive agreements with nine accredited
investors for the sale of 1,258,654 shares of the Companys common stock for gross proceeds of
$600,000. The agreements also provide that the Company will issue warrants, exercisable over a
three year period, to purchase up to 314,664 shares of the Companys common stock at an exercise
price of $0.715 per share and an additional 314,664 shares of the Companys common stock at an
exercise price of $0.812 per share. In July 2005, upon receipt of approval of the American
Stock Exchange for issuance of the shares of the Companys common stock, the agreements were
completed and the investors were issued the shares of the Companys common stock and warrants.During the three and six months ended September 30, 2004, the Company completed the following:Financing AgreementOn June 30, 2003, the Company entered into an agreement with an institutional investor for an
equity line financing of up to $4,000,000. The Company may sell up to $4,000,000 of its common
stock, with a minimum commitment of $1,500,000, to the institutional investor under the equity
line on trading days on which the Companys common stock closing price per share is $0.50 or
more.In May 2004, the Company and the institutional investor agreed to terminate the equity line
financing in consideration of the Company issuing to the investor $225,000 of unregistered shares of common stock. Based upon the closing market price of the Companys common stock on the
date of the termination agreement, the Company issued 136,861 shares of common stock to the
investor in May 2004.Sale of Common Stock and WarrantsIn April 2004, the Company completed a private placement of $4.65 million, less direct issuance
expenses of $641,500, with certain major institutional investment funds. Under terms of the
agreement, the Company issued 2.89 million shares of its common stock. In addition, the Company
issued warrants to purchase up to 3.61 million shares of its common stock at an exercise price
of $1.61 per share.Conversions of Convertible Promissory NotesIn June 2004, two accredited investors elected to convert their notes totaling $100,000 in
aggregate principal amount of convertible notes and $10,000 of aggregate accrued interest and
were issued 244,446 shares of common stock in accordance with the terms of the notes.In August 2004, four accredited investors elected to convert their notes totaling $250,000 and
were issued 555,556 shares of the Companys common stock in accordance with the terms of the
notesIn September 2004, the Company exercised its option to convert $575,000 in aggregate principal
amount of convertible notes and $5,750 of accrued interest at 1% per annum due October 2, 2004
into shares of its common stock at a conversion price of $2.00 per share. Accordingly, as of
September 30, 2004, the Company issued the note holder 290,375 shares of common stock.Stock OptionsIn 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. Under the 2000 Plan, the maximum aggregate number of shares which may be granted is 6,000,000. 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.
 15




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##### Table of Contents



2000 Stock Option Plan
    
    Outside of PlanWeighted-Average Exercise
    
    
    
    
    
    Weighted-AverageShares
    
    Price
    
    Shares
    
    Exercise PriceOutstanding, March 31, 2005
    
    
    3,926,783
    
    
    $
    1.60
    
    
    
    1,163,000
    
    
    $
    1.07Granted
    
    
    1,161,900
    
    
    $
    0.58
    
    
    
    0Exercised
    
    
    0
    
    
    
    0
    
    
    
    0Forfeited/canceled
    
    
    1,000,000
    
    
    $
    3.08
    
    
    
    (3,000
    )
    
    $
    21.72Outstanding, September 30, 2005
    
    
    4,088,683
    
    
    $
    0.95
    
    
    
    1,160,000
    
    
    $
    1.02Exercisable, September 30, 2005
    
    
    2,208,286
    
    
    $
    1.05
    
    
    
    580,000
    
    
    $
    1.02
  Weighted-Range of
    
    
    
    
    
    
    
    
    
    Weighted-Average
    
    Weighted-
    
    Average ExerciseExercise
    
    Stock Options
    
    Stock Options
    
    Remaining
    
    Average
    
    Price of OptionsPrices
    
    Outstanding
    
    Exercisable
    
    Contractual Life
    
    Exercise Price
    
    Exercisable$0.44 - 0.80
    
    
    2,409,013
    
    
    
    933,613
    
    
    8.73 years
    
    $
    0.57
    
    
    $
    0.55$0.81 - 1.35
    
    
    1,834,836
    
    
    
    1,338,001
    
    
    8.44 years
    
    $
    0.99
    
    
    $
    0.97$1.36- 6.25
    
    
    1,004,834
    
    
    
    516,672
    
    
    8.39 years
    
    $
    1.89
    
    
    $
    2.145,248,683
    
    
    
    2,788,286
 16




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##### Table of Contents



Item 2. Managements Discussion and Analysis or Plan of Operation.
   Critical Accounting Policies
   Revenue Recognition
   17




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##### Table of Contents



Concentrations of Credit Risk
    Results of Operations
  Revenues
  18




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##### Table of Contents



Three Months
    
    
    
    
    
    
    Six MonthsEnded
    
    
    
    
    
    
    EndedSeptember 30,
    
    
    
    
    
    
    September 30,2005
    
    
    2004
    
    
    Change
    
    
    2005
    
    
    2004
    
    
    Change(In 000s)
    
    
    
    
    
    
    (In 000s)Software licensing revenues
    
    $
    1,452
    
    
    $
    153
    
    
    
    849
    %
    
    $
    1,751
    
    
    $
    501
    
    
    
    250
    %Software transactional revenues
    
    
    231
    
    
    
    158
    
    
    
    46
    %
    
    
    413
    
    
    
    288
    
    
    
    43
    %Software maintenance revenues
    
    
    135
    
    
    
    141
    
    
    
    -4
    %
    
    
    227
    
    
    
    172
    
    
    
    32
    %Professional service revenues
    
    
    914
    
    
    
    158
    
    
    
    478
    %
    
    
    1,422
    
    
    
    552
    
    
    
    158
    %Total revenues
    
    $
    2,732
    
    
    $
    610
    
    
    
    348
    %
    
    $
    3,813
    
    
    $
    1,513
    
    
    
    152
    %
     Cost of Sales
  Operating Expenses
  19




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##### Table of Contents



Other Expenses
  Net Income (Loss)
   Liquidity and Capital Resources
     20




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##### Table of Contents



Factors That May Affect Our Results
 We have a general history of losses and may not operate profitably in the future.
  If we are unsuccessful in raising additional capital in the future, we may be unable to continue to
operate.
  
    
    significantly curtail our operations;
    
    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;
 21




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##### Table of Contents




    
    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.
   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.
  We operate in a market that is 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;
 22




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##### Table of Contents




    
    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.
  23




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##### Table of Contents



Item 3. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
   24




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##### Table of Contents



PART II  OTHER INFORMATION
 
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
   
 Item 4. Submission of Matters to a Vote of Security Holders
   For
    
    Withheld
    
    AbstainJ. Patrick Millinor, Jr.
    
    
    24,047,441
    
    
    
    170,411
    
    
    
    0Charles E. Ramey
    
    
    24,050,441
    
    
    
    167,411
    
    
    
    0Terry Stepanik
    
    
    24,050,641
    
    
    
    167,211
    
    
    
    0
 For
    
    Against
    
    AbstainRatification of Ham, Langston &
Brezina
    
    
    24,125,060
    
    
    
    40,456
    
    
    
    52,336
  
 Item 6. Exhibits
  ExhibitNumber
    
    Description of Document4.1
    
    Amended and Restated 10% Convertible Debenture effective
September 15, 2005 issued by the Company for the benefit of
Peter Simons (incorporated by reference to Exhibit 4.1 to the
Companys Current Report on Form 8-K filed with the Securities
and Exchange Commission on October 17, 2005).4.2
    
    Common Stock Purchase Warrant issued as of September 15, 2005 by
the Company for the benefit of Peter Simons (incorporated by
reference to Exhibit 4.2 to the Companys Current Report on Form
8-K filed with the Securities and Exchange Commission on October
17, 2005).4.3
    
    Registration Agreement by and between the Company and Peter
Simons effective September 15, 2005 (incorporated by reference
to Exhibit 4.3 to the Companys Current Report
 25




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##### Table of Contents



ExhibitNumber
    
    Description of Documenton Form 8-K filed with the Securities and Exchange Commission on October 17, 2005).31.1
    
    Section 302 Certification of Chief Executive Officer.31.2
    
    Section 302 Certification of Chief Financial Officer.32.1
    
    Section 906 Certification of Chief Executive Officer.32.2
    
    Section 906 Certification of Chief Financial Officer.
 26




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##### Table of Contents



SIGNATURE
   US DATAWORKS, INC.By
    
    /s/ John S. ReilandJohn S. ReilandChief Financial Officer
(Principal Financial and Accounting Officer
and Duly Authorized Officer) 27




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##### Table of Contents



ExhibitNumber
    
    Description of Document4.1
    
    Amended and Restated 10% Convertible Debenture effective
September 15, 2005 issued by the Company for the benefit of
Peter Simons (incorporated by reference to Exhibit 4.1 to the
Companys Current Report on Form 8-K filed with the
Securities and Exchange Commission on October 17, 2005).4.2
    
    Common Stock Purchase Warrant issued as of September 15, 2005
by the Company for the benefit of Peter Simons (incorporated
by reference to Exhibit 4.2 to the Companys Current Report
on Form 8-K filed with the Securities and Exchange Commission
on October 17, 2005).4.3
    
    Registration Agreement by and between the Company and Peter
Simons effective September 15, 2005 (incorporated by
reference to Exhibit 4.3 to the Companys Current Report on
Form 8-K filed with the Securities and Exchange Commission on
October 17, 2005).31.1
    
    Section 302 Certification of Chief Executive Officer.31.2
    
    Section 302 Certification of Chief Financial Officer.32.1
    
    Section 906 Certification of Chief Executive Officer.32.2
    
    Section 906 Certification of Chief Financial Officer.
 28