##### 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 December 31, 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
(State or other jurisdiction of
incorporation or organization)
    
    84-1290152
(I.R.S. employer identification number)5301 Hollister Road, Suite 250
Houston, Texas
(Address of principal executive offices)
    
    77040
(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
    
    
    16Item 3. Controls and Procedures
    
    
    23PART II  OTHER INFORMATION
    
    
    24Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
    
    
    24Item 6. Exhibits
    
    
    24SIGNATURE
    
    
    25Section 302 Certification of CEOSection 302 Certification of CFOSection 906 Certification of CEOSection 906 Certification of CFO




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 US DATAWORKS, INC.
 BALANCE SHEET
 December 31, 2005
(Unaudited)
 ASSETSCurrent assets:Cash and cash equivalents
    
    $
    1,114,002Accounts receivable, net of allowance for doubtful accounts of $0
    
    
    658,983Costs and estimated earnings in excess of billings on uncompleted contracts
    
    
    937,323Prepaid expenses and other current assets
    
    
    221,323Total current assets
    
    
    2,931,631Property and equipment, net
    
    
    517,120Goodwill, net
    
    
    14,133,629Other assets
    
    
    43,224Total assets
    
    $
    17,625,604
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US DATAWORKS, INC.
 BALANCE SHEET
 December 31, 2005
(Unaudited)
 LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Note payable  related party
    
    $
    39,000Deferred revenue  current
    
    
    309,904Accounts payable
    
    
    142,251Accrued expenses
    
    
    261,685Interest payable
    
    
    22,467Current portion of convertible promissory notes, net of unamortized discount of $426,067
    
    
    548,066Total current liabilities
    
    
    1,323,373Convertible promissory notes, net of unamortized discount of $219,708
    
    
    344,358Deferred revenue
    
    
    8,359Total liabilities
    
    
    1,676,090Commitments 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 $200,597 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
    
    
    63,292,016Accumulated deficit
    
    
    (47,345,561
    )Total shareholders equity
    
    
    15,949,514Total liabilities and stockholders equity
    
    $
    17,625,604
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US DATAWORKS, INC.
 For the Three Months Ended
    
    
    For the Nine Months EndedDecember 31,
    
    
    December 31,2005
    
    
    2004
    
    
    2005
    
    
    2004REVENUESSoftware licensing revenues
    
    $
    89,109
    
    
    $
    95,000
    
    
    $
    1,840,029
    
    
    $
    595,732Software transactional revenues
    
    
    236,848
    
    
    
    156,458
    
    
    
    649,452
    
    
    
    444,161Software maintenance revenues
    
    
    104,477
    
    
    
    89,997
    
    
    
    331,369
    
    
    
    262,222Professional service revenues
    
    
    656,119
    
    
    
    176,480
    
    
    
    2,078,335
    
    
    
    728,785Total revenues
    
    
    1,086,553
    
    
    
    517,935
    
    
    
    4,899,185
    
    
    
    2,030,900COST OF SALES
    
    
    321,100
    
    
    
    147,689
    
    
    
    1,103,956
    
    
    
    666,337Gross profit
    
    
    765,453
    
    
    
    370,246
    
    
    
    3,795,229
    
    
    
    1,364,563OPERATING EXPENSESGeneral and administrative
    
    
    1,261,557
    
    
    
    1,674,255
    
    
    
    4,167,079
    
    
    
    4,637,577Depreciation and amortization
    
    
    91,163
    
    
    
    81,727
    
    
    
    269,645
    
    
    
    237,499Total operating expense
    
    
    1,352,720
    
    
    
    1,755,982
    
    
    
    4,436,724
    
    
    
    4,875,076LOSS FROM OPERATIONS
    
    
    (587,267
    )
    
    
    (1,385,736
    )
    
    
    (641,495
    )
    
    
    (3,510,513
    )OTHER INCOME (EXPENSE)Financing costs
    
    
    (268,846
    )
    
    
    
    
    
    
    (357,208
    )
    
    
    (419,903
    )Interest expense
    
    
    (27,605
    )
    
    
    (22,730
    )
    
    
    (79,143
    )
    
    
    (187,686
    )Investor litigation settlement expense
    
    
    
    
    
    
    75,800
    
    
    
    
    
    
    
    (924,200
    )Other income
    
    
    8,249
    
    
    
    12,761
    
    
    
    24,467
    
    
    
    30,449Total other income (expense)
    
    
    (288,202
    )
    
    
    65,831
    
    
    
    (411,884
    )
    
    
    (1,501,340
    )LOSS BEFORE PROVISION FOR INCOME TAXES
    
    
    (875,469
    )
    
    
    (1,319,905
    )
    
    
    (1,053,379
    )
    
    
    (5,011,853
    )PROVISION FOR INCOME TAXES
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    NET LOSS
    
    $
    (875,469
    )
    
    $
    (1,319,905
    )
    
    $
    (1,053,379
    )
    
    $
    (5,011,853
    )Accumulated dividends on Series B Preferred stock
    
    
    (10,396
    )
    
    
    (10,396
    )
    
    
    (31,075
    )
    
    
    (12,324
    )NET LOSS ATTRIBUTABLE TO COMMON STOCK
    
    $
    (885,865
    )
    
    $
    (1,330,301
    )
    
    $
    (1,084,454
    )
    
    $
    (5,024,177
    )Basic and
diluted loss per share
    
    $
    (0.03
    )
    
    $
    (0.05
    )
    
    $
    (0.04
    )
    
    $
    (0.18
    )Basic and
diluted weighted-average shares outstanding
    
    
    30,037,020
    
    
    
    27,800,238
    
    
    
    29,684,597
    
    
    
    26,725,216
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US DATAWORKS, INC.
 STATEMENT OF STOCKHOLDERS EQUITY
 for the Nine Months ended December 31, 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
    )
    
    $
    (46,292,182
    )
    
    $
    15,375,182Warrants and beneficial conversion
feature issued in connection
with convertible debenture
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    791,183
    
    
    
    
    
    
    
    
    
    
    
    791,183Warrants and options issued to third
parties for services rendered
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    53,880
    
    
    
    
    
    
    
    
    
    
    
    53,880Warrants issued in connection with
waiver of certain rights held by an
investor
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    185,000
    
    
    
    
    
    
    
    
    
    
    
    185,000Amortization 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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,053,379
    )
    
    
    (1,053,379
    )Balance, December 31, 2005
    
    
    549,667
    
    
    $
    55
    
    
    
    30,037,020
    
    
    $
    3,004
    
    
    $
    63,292,016
    
    
    $
    
    
    
    $
    (47,345,561
    )
    
    $
    15,949,514
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US DATAWORKS, INC.
 STATEMENTS OF CASH FLOW
 For the Nine Months Ended December 31,
 (Unaudited)
 2005
    
    
    2004Cash flows from operating activities:-Net loss from operations
    
    $
    (1,053,379
    )
    
    $
    (5,011,853
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization of property and equipment
    
    
    269,645
    
    
    
    237,499Amortization of OID discount on convertible promissory note
    
    
    18,200
    
    
    
    Amortization of note discount and beneficial conversion feature on
convertible promissory notes
    
    
    197,209
    
    
    
    343,824Amortization of deferred compensation expense
    
    
    (9,302
    )
    
    
    31,205Issuance 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
    
    
    27,423
    
    
    
    57,132Issuance of warrants to lender in exchange for waiver in excess
of cash received
    
    
    160,000
    
    
    
    Loss on disposition of furniture and equipment
    
    
    2,650
    
    
    
    Issuance of warrants for litigation settlement
    
    
    
    
    
    
    126,000Issuance of convertible promissory note for litigation settlement
    
    
    
    
    
    
    768,199Changes in operating assets and liabilities:Accounts receivable, net
    
    
    180,307
    
    
    
    589,021Costs and estimated earnings in excess of billings on uncompleted contracts
    
    
    (937,323
    )
    
    
    Prepaid expenses and other current assets
    
    
    (125,595
    )
    
    
    638Other assets
    
    
    569
    
    
    
    (16,347
    )Deferred revenue
    
    
    (185,773
    )
    
    
    164,995Accounts payable
    
    
    (96,996
    )
    
    
    (108,401
    )Accrued expenses
    
    
    (64,585
    )
    
    
    (242,251
    )Interest payable
    
    
    (19,205
    )
    
    
    (14,521
    )Net cash used in operating activities
    
    
    (1,609,699
    )
    
    
    (2,834,110
    )Cash flows from investing activities:Purchase of property and equipment
    
    
    (114,817
    )
    
    
    (259,628
    )Net cash used in investing activities
    
    
    (114,817
    )
    
    
    (259,628
    )
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US DATAWORKS, INC.
 STATEMENTS OF CASH FLOW
 For the Nine Months Ended December 31,
 (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
    
    
    
    
    
    
    973,408Proceeds from issuance of warrants to lender in exchange for waiver
    
    
    25,000
    
    
    
    Proceeds from disposal of fixed assets
    
    
    2,682
    
    
    
    Net cash provided by financing activities
    
    
    1,313,132
    
    
    
    4,624,483Net increase (decrease) in cash and cash equivalents
    
    
    (411,384
    )
    
    
    1,530,745Cash and cash equivalents, beginning of period
    
    
    1,525,386
    
    
    
    1,203,389Cash and cash equivalents, end of period
    
    $
    1,114,002
    
    
    $
    2,734,134Supplemental disclosures of cash flow informationInterest paid
    
    $
    76,820
    
    
    $
    31,035
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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 American Express Company, 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 nine month periods ended December 31, 2005 and December 31, 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 nine month periods ended December 31, 2005 and December 31, 2004 is as
follows:
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For the Three Months Ended
    
    For the Nine Months EndedDecember 31,
    
    December 31,2005
    
    2004
    
    2005
    
    2004Net loss as reported
    
    $
    (875,469
    )
    
    $
    (1,319,905
    )
    
    $
    (1,053,379
    )
    
    $
    (5,011,853
    )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
    
    
    (154,630
    )
    
    
    (320,948
    )
    
    
    (343,212
    )
    
    
    (998,573
    )Net loss; pro forma
    
    $
    (1,030,099
    )
    
    $
    (1,640,853
    )
    
    $
    (1,396,591
    )
    
    $
    (6,010,426
    )Basic and diluted loss per share, as
reported
    
    $
    (0.03
    )
    
    $
    (0.05
    )
    
    $
    (0.04
    )
    
    $
    (0.19
    )Basic and diluted loss per share, pro forma
    
    $
    (0.03
    )
    
    $
    (0.06
    )
    
    $
    (0.05
    )
    
    $
    (0.22
    )
  Earnings (Loss) per Share
   For the Nine Months EndedDecember 31,2005
    
    2004Options outstanding under the Companys stock option plans
    
    
    3,730,183
    
    
    
    3,868,115Options granted outside the Companys stock option plans
    
    
    1,160,000
    
    
    
    1,163,000Warrants issued in conjunction with private placements
    
    
    6,247,859
    
    
    
    3,602,495Warrants issued as a financing cost for notes payable
and convertible notes payable
    
    
    2,122,283
    
    
    
    2,223,037Warrants 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
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Estimates
  Concentrations of Credit Risk
    3.
    
    Property and Equipment
  Furniture and fixtures
    
    $
    77,559Automobile
    
    
    15,072Office and telephone equipment
    
    
    92,795Computer equipment
    
    
    506,289Computer software
    
    
    1,255,585Leasehold improvements
    
    
    62,9972,010,297Less accumulated depreciation and amortization
    
    
    (1,493,177
    )Total
    
    $
    517,120
  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 December 31, 2005, the outstanding balance on the note payable was $39,000.
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5.
    
    Convertible Promissory NotesConvertible promissory notes at December 31, 2005 consisted of the following:
 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 $160,937
    
    $
    607,262Convertible 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 $484,838
    
    
    285,162892,424Less current portion
    
    
    (548,066
    )Long-term portion
    
    $
    344,358
 Convertible promissory note with interest at 10% per annum
      Convertible promissory note issued June 16, 2005 with $70,000 Original Issue Discount
  11




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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
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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.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 nine months ended December 31, 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 December 31, 2005, there were accumulated, undeclared dividends in arrears of $200,597 or
$0.36 per share.
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Common Stock and WarrantsDuring the three and nine months ended December 31, 2005, the Company completed the following:Sale of Common Stock and WarrantsEffective 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.Amendment of Convertible Promissory Note and Issuance of WarrantOn October 13, 2005, the Company amended and restated its 10% convertible debenture effective
September 15, 2005 in the principal amount of $768,199.24, issued by the Company for the benefit
of an accredited individual investor. This convertible debenture, originally dated September 15,
2004, was amended to extend the payment of the principal due and payable on September 15, 2005
until September 15, 2006. In consideration of this amendment, the Company issued to the
individual investor a common stock purchase warrant to purchase up to 650,000 shares of its
common stock at an exercise price of $0.59 per share. The warrant will expire on September 15,
2008.Sale of WarrantsOn November 22, 2005, the Company entered into an agreement with the institutional investor
owning the $770,000 convertible debenture issued June 16, 2005 whereby the investor agreed to
(i) pay the Company $25,000 and (ii) waive all rights the institutional investor may have
related to the Companys September 15, 2005 amended note agreement with an individual investor
(see Note 5) in exchange for 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, which warrant will expire on
November 22, 2008. Using the Black-Scholes pricing model the Company has determined the value of
the warrants issued in connection with this November 22, 2005 agreement to be $185,000. This
amount, less the $25,000 proceeds received, has been recorded as Financing costs expense for the
three and nine months ended December 31, 2005.During the three and nine months ended December 31, 2004, the Company completed the following:Sale of Common Stock and WarrantsIn April 2004, the Company completed a private placement of $4.65 million, less direct issuance
expenses of $568,500, with certain major institutional investment funds. Under terms of the
agreement, the Company issued 2.89 million shares of common stock. In addition, the Company
issued warrants to purchase up to 3.61 million shares of common stock at an exercise price of
$1.61 per share.Exercise of Warrants and OptionsOn December 14, 2004, the Company entered into an Amended Warrants Agreement wherein certain
investors accelerated the exercise of previously issued common stock warrants at a reduced
exercise price of $0.90 per share. A total of 1,214,007 warrants were exercised for cash
proceeds of $963,232 and a subscription receivable of $129,375. Direct issuance expenses were
$20,124.The proceeds from one of the investors exercising his Amended Warrants Agreement for 143,750
warrants with an exercise amount of $129,375 was not received until January 5, 2005 and
accordingly is shown as common stock subscription receivable at December 31, 2004.
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In accordance with the terms of existing agreements, other previously issued warrants and stock
options totaling 434,787 shares were exercised during the nine months ended December 31, 2004
for proceeds of $99,875.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 common stock in accordance with the terms of the notes.In 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 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.During the nine months ended December 31, 2005 the Company granted 1,161,900 stock options to
certain employees that may be exercised at prices ranging between $0.44 and $0.65 per share.
During the nine months ended December 31, 2004, the Company granted 1,994,502 stock options to
certain employees that may be exercised at prices ranging between $0.90 and $1.49 per share.The following table summarizes certain information relative to stock options:
 2000 Stock Option Plan
    
    Outside of PlanShares
    
    Weighted-Average
    
    Shares
    
    Weighted-AverageExercise Price
    
    
    
    
    
    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
    
    
    1,358,500
    
    
    $
    2.54
    
    
    
    (3,000
    )
    
    $
    21.72Outstanding, December 31, 2005
    
    
    3,730,183
    
    
    $
    0.94
    
    
    
    1,160,000
    
    
    $
    1.02Exercisable, December 31, 2005
    
    
    2,105,284
    
    
    $
    1.05
    
    
    
    580,000
    
    
    $
    1.02
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Weighted-Range of
    
    
    
    
    
    Stock
    
    Weighted-Average
    
    Weighted-
    
    Average ExerciseExercise
    
    Stock Options
    
    Options
    
    Remaining
    
    Average
    
    Price of OptionsPrices
    
    Outstanding
    
    Exercisable
    
    Contractual Life
    
    Exercise Price
    
    Exercisable$0.44-0.80
    
    
    2,368,013
    
    
    
    933,613
    
    
    8.46 years
    
    $
    0.57
    
    
    $
    0.55$0.81-1.35
    
    
    1,524,836
    
    
    
    1,238,334
    
    
    8.11 years
    
    $
    0.96
    
    
    $
    0.96$1.36-6.25
    
    
    997,334
    
    
    
    513,337
    
    
    8.13 years
    
    $
    1.88
    
    
    $
    2.134,890,183
    
    
    
    2,685,284
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##### Table of Contents



Item 2. Managements Discussion and Analysis or Plan of Operation.
  Critical Accounting Policies
   Revenue Recognition
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Concentrations of Credit Risk
    Results of Operations
  Revenues
  Three Months
    
    
    
    
    
    
    Nine MonthsEnded
    
    
    
    
    
    
    EndedDecember 31,
    
    
    
    
    
    
    December 31,2005
    
    
    2004
    
    
    Change
    
    
    2005
    
    
    2004
    
    
    Change(In 000s)
    
    
    
    
    
    
    (In 000s)Software licensing revenues
    
    $
    89
    
    
    $
    95
    
    
    
    -6
    %
    
    $
    1,840
    
    
    $
    596
    
    
    
    209
    %Software transactional revenues
    
    
    237
    
    
    
    156
    
    
    
    51
    %
    
    
    650
    
    
    
    444
    
    
    
    46
    %Software maintenance revenues
    
    
    105
    
    
    
    90
    
    
    
    16
    %
    
    
    331
    
    
    
    262
    
    
    
    26
    %Professional service revenues
    
    
    656
    
    
    
    177
    
    
    
    272
    %
    
    
    2,078
    
    
    
    729
    
    
    
    185
    %Total revenues
    
    $
    1,087
    
    
    $
    518
    
    
    
    110
    %
    
    $
    4,899
    
    
    $
    2,031
    
    
    
    141
    %
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Cost of Sales
  Operating Expenses
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##### Table of Contents



Other Expenses
   Net Loss
   Liquidity and Capital Resources
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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 our merger or sale.
 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;
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##### Table of Contents




    
    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.
   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.
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##### Table of Contents




    
    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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##### Table of Contents



Future sales of our common stock may cause the market price of our common stock to decline.
  
 Item 3. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
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PART II  OTHER INFORMATION
 
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
   
 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 on Form 8-K filed
with the Securities and Exchange Commission on October 17,
2005).4.4
    
    Common Stock Purchase Warrant issued as of November 22, 2005 by
the Company for the benefit of Crescent International, Ltd
(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 November 29, 2005).4.5
    
    Registration Agreement by and between the Company and Crescent
International, Ltd. effective November 22, 2005 (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
November 29, 2005).10.1
    
    Letter Agreement dated November 22, 2005 between the Company and
Crescent International, Ltd. (incorporated by reference to
Exhibit 10.1 to the Companys Current Report on Form 8-K filed
with the Securities and Exchange Commission on November 29,
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.
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SIGNATURE
  Dated: February 14, 2006US DATAWORKS, INC.By
    
    / s/ John S. ReilandJohn S. ReilandChief Financial Officer(Principal Financial and Accounting Officerand Duly Authorized Officer)
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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).4.4
    
    Common Stock Purchase Warrant issued as of November 22, 2005
by the Company for the benefit of Crescent International, Ltd
(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 November 29, 2005).4.5
    
    Registration Agreement by and between the Company and
Crescent International, Ltd. effective November 22, 2005
(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 November 29, 2005).10.1
    
    Letter Agreement dated November 22, 2005 between the Company
and Crescent International, Ltd. (incorporated by reference
to Exhibit 10.1 to the Companys Current Report on Form 8-K
filed with the Securities and Exchange Commission on November
29, 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.
 27