UNITED
STATES SECURITIES AND EXCHANGE COMMISSION


Washington
D.C., 20549





FORM
10-Q









(Mark
One)





x
            QUARTERLY REPORT UNDER SECTION
      13 OR 15(d) OF THE SECURITIES   EXCHANGE ACT OF
      1934For
      the quarterly period ended June 30, 2010o
            TRANSITION REPORT UNDER SECTION
      13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF
    1934For the transition
      period                       
      to




Commission
file number: 001-15835





US
Dataworks, Inc.


(Exact
name of registrant as specified in its charter)





Nevada
            
            84-1290152(State or other jurisdiction of
              incorporation or organization)
            
            (I.R.S. employer identification number)





One Sugar Creek Center Boulevard
              Sugar Land, Texas
            
            77478(Address of principal executive offices)
            
            (Zip Code)





Registrant’s
telephone number: (281) 504-8000





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. YES xNO o





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the
preceding 12 months (or for such shorter period that the registrant was
required to submit and post such files).


Yes oNo o





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of “large accelerated filer,” “accelerated filer,” “non-accelerated
filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.





Large accelerated filer o
            
            Accelerated filer oNon-accelerated filer
      o
            
            Smaller reporting company
      x(Do not check if smaller reporting company)





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).


YES oNO x





Number of
shares of the issuer’s common stock outstanding  as of August 12,
2010: 33,189,383.









US
DATAWORKS, INC.





TABLE OF
CONTENTS





FORM
10-Q





QUARTERLY
PERIOD ENDED JUNE 30, 2010




PagePART
      I - FINANCIAL INFORMATION
            
            
            4Item
      1.
            Financial
      Statements
            
            
            16Item
      2.
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
            
            
            20Item
      3.
            Quantitative
      and Qualitative Disclosures About Market Risk
            
            21Item
      4.
            Controls
      and Procedures
            
            21PART
      II - OTHER INFORMATION
            
            21Item 1.
            Legal
      Proceedings
            
            21Item
      1A.
            Risk
      Factors
            
            
            21Item
      2.
            Unregistered
      Sales of Equity Securitites and Use of Proceeds
            
            
            21Item
      3.
            Defaults
      Upon Senior Securities
            
            
            22Item
      5.
            Other
      Information
            
            
            22Item
      6.
            Exhibits
            
            
            22




2





NOTE
REGARDING FORWARD LOOKING STATEMENTS AND CERTAIN TERMS





When used
in this Report, the words “expects,” “anticipates,” “believes,” “plans,” “will”
and similar expressions are intended to identify forward-looking statements.
These are statements that relate to future periods and include, but are not
limited to, statements regarding our critical accounting policies, our operating
expenses, our strategic opportunities, adequacy of capital resources, our
potential professional services contracts and the related benefits, demand for
software and professional services, demand for our solutions, expectations
regarding net losses, expectations regarding cash flow and sources of revenue,
benefits of our relationship with an MSP, statements regarding our growth and
profitability, investments in marketing and promotion, fluctuations in our
operating results, our need for future financing, effects of accounting
standards on our financial statements, our investment in strategic partnerships,
development of our customer base and our infrastructure, our dependence on our
strategic partners, our dependence on personnel, our employee relations,
anticipated benefits of our restructuring, our disclosure controls and
procedures, our ability to respond to rapid technological change, expansion of
our technologies and products, benefits of our products, our competitive
position, statements regarding future acquisitions or investments, our legal
proceedings, and our dividend policy.  Forward-looking statements are
subject to certain risks and uncertainties that could cause actual results to
differ materially from those projected. These risks and uncertainties include,
but are not limited to, those discussed herein, as well as risks related to our
ability to develop and timely introduce products that address market demand, the
impact of alternative technological advances and competitive products, market
fluctuations, our ability to obtain future financing, and the risks referred to
in “Item 1A. Risk Factors.” These forward-looking statements speak only as of
the date hereof. We expressly disclaim any obligation or undertaking to release
publicly any updates or revisions to any forward-looking statements contained
herein to reflect any change in our expectations with regard thereto or any
change in events, conditions or circumstances on which any such statement is
based.




All
references to “US Dataworks,” the “Company,” “we,” “us,” or “our” means US
Dataworks, Inc.





MICRworksTM,
Clearingworksâ,
ReturnworksTM, and RemitworksTM are trademarks of US Dataworks. Other trademarks
referenced herein are the property of their respective owners.




3




PART
I - FINANCIAL INFORMATION




Item
1. Financial Statements


US
DATAWORKS, INC.
 UNAUDITED
CONDENSED BALANCE SHEETS


ASSETS
            
            June
      30, 2010
              (Unaudited)
            
            
            March
      31, 2010
              (See
      Note)Current
      assets:Cash
      and cash equivalents
            
            $
            507,247
            
            
            $
            444,542Accounts
      receivable, trade
            
            
            749,684
            
            
            
            1,059,825Prepaid
      expenses and other current assets
            
            
            168,441
            
            
            
            307,653Total
      current assets
            
            
            1,425,372
            
            
            
            1,812,020Property
      and equipment, net
            
            
            139,999
            
            
            
            169,796Goodwill,
      net
            
            
            4,020,698
            
            
            
            4,020,698Other
      assets
            
            
            85,654
            
            
            
            90,835Total
      assets
            
            $
            5,671,723
            
            
            $
            6,093,349


LIABILITIES AND
      STOCKHOLDERS' EQUITYCurrent
      liabilities:Current
      portion of long term debt
            
            $
            897,709
            
            
            $
            350,972Accounts
      payable
            
            
            316,471
            
            
            
            235,077Accrued
      interest – related party
            
            
            29,189
            
            
            
            30,162Accrued
      expenses
            
            
            217,293
            
            
            
            246,558Deferred
      revenue
            
            
            393,073
            
            
            
            181,330Total
      current liabilities
            
            
            1,853,735
            
            
            
            1,044,099Long
      term liabilities:Notes
      payable
            
            
            0
            
            
            
            638,889Note
      payable – related party, net of unamortized discount of $510,870 and
      $543,736 respectively
            
            
            2,581,375
            
            
            
            2,548,509Total
      long term liabilities
            
            
            2,581,375
            
            
            
            3,187,398Total
      liabilities
            
            
            4,435,110
            
            
            
            4,231,497Commitments
      and ContingenciesStockholders’
      Equity:Convertible
      Series B preferred stock, $0.0001 par value
              700,000
      shares authorized, 109,933 shares issued and outstanding $3.75 liquidation
      preference, dividends of $386,369 and $345,124 in arrears as of June 30,
      2010 and March 31, 2010, respectively
            
            
            11
            
            
            
            11Common
      stock, $0.0001 par value
              90,000,000
      shares authorized,  33,145,576 and 32,780,870 shares issued and
      outstanding as of June 30, 2010 and March 31, 2010,
      respectively
            
            
            3,314
            
            
            
            3,310Additional
      paid-in-capital
            
            
            66,418,470
            
            
            
            66,369,315Accumulated
      deficit
            
            
            (65,185,182
            )
            
            
            (64,510,784
            )Total
      shareholders’ equity
            
            
            1,236,613
            
            
            
            1,861,852Total
      liabilities and stockholders’ equity
            
            $
            5,671,723
            
            
            $
            6,093,349




Note: The
balance sheet at March 31, 2010 has been derived from the audited financial
statements at that date but does not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements.




The
accompanying notes are an integral part of these unaudited condensed financial
statements.




4


US
DATAWORKS, INC.
 UNAUDITED
CONDENSED STATEMENTS OF OPERATIONS
  For
the Three Months Ended June 30,


2010
            
            
            2009Revenues:Software
      transactional and subscription revenues
            
            $
            499,217
            
            
            $
            521,243Software
      maintenance revenues
            
            
            144,322
            
            
            
            212,371Professional
      services revenues
            
            
            722,799
            
            
            
            1,274,847Total
      revenues
            
            
            1,366,338
            
            
            
            2,008,461Cost
      of revenues
            
            
            606,257
            
            
            
            676,371Gross
      profit
            
            
            760,081
            
            
            
            1,332,090Operating
      expenses:Research
      and development
            
            
            242,507
            
            
            
            212,937Sales
      and marketing
            
            
            271,787
            
            
            
            262,300General
      and administrative
            
            
            746,107
            
            
            
            571,642Depreciation
      and amortization
            
            
            29,797
            
            
            
            43,645Total
      operating expense
            
            
            1,290,198
            
            
            
            1,090,524(Loss)/Income
      from operations
            
            
            (530,117
            )
            
            
            241,566Other
      expense:Financing
      expense – related party
            
            
            (5,181
            )
            
            
            (108,165
            )Interest
      expense
            
            
            (17,696
            )
            
            
            (1,436
            )Interest
      expense – related party
            
            
            (121,404
            )
            
            
            (155,875
            )Total
      other expense
            
            
            (144,281
            )
            
            
            (265,477
            )Net
      loss
            
            $
            (674,398
            )
            
            $
            (23,911
            )Basic
      and diluted loss per share
            
            $
            (0.02
            )
            
            $
            (0.00
            )Basic
      and diluted weighted-average shares outstanding
            
            
            33,145,576
            
            
            
            32,780,321




The
accompanying notes are an integral part of these unaudited condensed financial
statements.




5




US
DATAWORKS, INC.





UNAUDITED
CONDENSED STATEMENTS OF CASH FLOW





For
the Three Months Ended June 30,





2010
              
              
              2009Cash
      flows from operating activities:Net
      loss
              
              $
              (674,398
              )
              
              $
              (23,911
              )Adjustments
      to reconcile net loss to net cash provided by operating
      activities:Depreciation
      and amortization of property and equipment
              
              
              29,797
              
              
              
              43,645Amortization
      of note discount on note payable – related party
              
              
              32,866
              
              
              
              4,751Amortization
      of deferred financing costs – related party
              
              
              5,181
              
              
              
              108,165Stock
      based compensation
              
              
              49,155
              
              
              
              41,328Changes
      in operating assets and liabilities:Accounts
      receivable
              
              
              310,141
              
              
              
              (95,325
              )Prepaid
      expenses and other current assets
              
              
              139,212
              
              
              
              (112,095
              )Deferred
      revenue
              
              
              211,743
              
              
              
              233,680Accounts
      payable
              
              
              81,394
              
              
              
              (51,205
              )Accrued
      interest – related party
              
              
              (973
              )
              
              
              (18,275
              )Accrued
      expenses
              
              
              (29,261
              )
              
              
              (25,752
              )Net
      cash provided by operating activities
              
              
              154,857
              
              
              
              105,006Cash
      flows from financing activities:Payments
      on note payables
              
              
              (92,152
              )
              
              
              (8,819
              )Net
      cash used by financing
      activities
              
              
              (92,152
              )
              
              
              (8,819
              )Net
      increase  in cash and cash equivalents
              
              
              62,705
              
              
              
              96,187Cash
      and cash equivalents, beginning of period
              
              
              444,542
              
              
              
              403,863Cash
      and cash equivalents, end of period
              
              $
              507,247
              
              
              $
              500,050Supplemental
      disclosures of cash flow informationInterest
      paid
              
              $
              106,234
              
              
              $
              152,320Federal
      income taxes paid
              
              $
              3⁄4
              
              
              $
              3⁄4Significant
      non-cash financing activities:Accrued
      liability for note payable – related party extension fee, included in
      debt discount
              
              $
              3⁄4
              
              
              $
              (50,000
              )Debt
      discount on extension of note payable – related party, related to the
      warrants issued
              
              $
              3⁄4
              
              
              $
              320,157








6




US
DATAWORKS, INC.




NOTES
TO UNAUDITED CONDENSED FINANCIAL STATEMENTS





1.     Organization and
Business




General






US
Dataworks, Inc., a Nevada corporation, (the “Company”), develops, markets, and
supports payment processing software for multiple market segments. Its customer
base includes some of the largest financial institutions as well as credit card
companies, government institutions, banker’s banks and high-volume merchants in
the United States. The Company was formerly known as Sonicport,
Inc.




2      Summary of Significant
Accounting Policies




Interim Financial
Statements




The
accompanying interim unaudited condensed financial statements included herein
have been prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission (“SEC”).  The financial statements
reflect all adjustments that are, in the opinion of management, necessary to
fairly present such information.  All such adjustments are of a normal
recurring nature.  Although the Company believes that the disclosures
are adequate to make the information presented not misleading, certain
information and footnote disclosures, including a description of significant
accounting policies normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States of
America (“US GAAP”), have been condensed or omitted pursuant to such rules and
regulations.




These
financial statements should be read in connection with the audited financial
statements and the notes thereto included in the Company’s Annual Report on Form
10-K for the fiscal year ended March 31, 2010.  The results of
operations for interim periods are not necessarily indicative of the results for
any subsequent quarter or the fiscal year ending March 31, 2011.




Revenue
Recognition





The
Company recognizes revenues associated with its software products in accordance
with the provisions of the Financial Accounting Standard Board's (“FASB”)
Accounting Standards Codification (“ASC”) Topic No. 985 – 605, “Software Revenue
Recognition”.





The
Company licenses its software on a transactional and a subscription fee basis.
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 are provided in connection with the installation of the
software licensed, revenue is recognized when these services have been provided.
The Company also recognizes revenue on a percentage of completion basis for the
portion of professional services related to customized customer projects that
have been completed but are not yet deliverable to customer.




In
certain instances, we license our software products under non-exclusive,
non-transferable license agreements. Because these agreements do not require
significant production, modification or customization, revenue is recognized
when the license agreement has been signed, the software product has been
delivered, the related fee is fixed or determinable and collection of such fee
is probable




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.




7




In
certain instances, the Company enters into arrangements that include multiple
elements, where fees are allocated to the various elements based on vendor
specific objective evidence of fair value.





Classification of
labor-related expenses within the income statement - change in application of
accounting principle





The
Company categorizes its personnel into five separate functional departments:
Professional Services (“Services”), Software Maintenance (“Maintenance”),
Research and Development (“R&D”), Sales and Marketing (“S&M”) and
General and Administrative (“Administrative”). Effective as of November 14,
2009, the Company implemented certain changes in the way it applies the
accounting principle regarding the classification of labor-related expenses as
either cost of sales or operating expenses in the income statement.





Prior to
November 14, 2009, the Company used the following approach to classify such
expenses. The Company’s costs incurred employing personnel working in its
Services, Maintenance and R&D functions were classified as either cost of
sales or operating expenses depending on whether the hours worked by such
personnel were billable as professional or maintenance services to the customer.
If the hours worked were billable to the customer, the costs were classified as
cost of sales while all non-billable hours worked and all costs associated with
vacation pay, holiday pay and training for such personnel were classified as
operating expenses.





Effective
as of November 14, 2009, the Company implemented the following new approach to
classify such expenses. All of the Company’s labor costs including benefits
incurred employing personnel working in its Services and Maintenance functions
are classified as cost of sales regardless of whether the hours worked by such
personnel are billable to the customer. All of the Company’s costs incurred
employing personnel working in its R&D, S&M and Administrative functions
are classified as operating expenses.





The
Company believes that these changes in accounting policy enable it to better
reflect the costs of its five functional departments and the overall reporting
of gross profit and margins, from period to period.





In order
to conform to the current application, the Company reclassified a net of
$118,229 from operating expenses to cost of sales for the three months ended
June 30, 2009.




Goodwill




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. FASB ASC Topic No. 350, “Intangibles – Goodwill and Other
Intangibles”), requires goodwill for each reporting unit of an entity be
tested for impairment by comparing the fair value of each reporting unit with
its carrying value. Fair value is determined using a combination of the
discounted cash flow, market multiple and market capitalization valuation
approaches. Significant estimates used in the methodologies include estimates of
future cash flows, future short-term and long-term growth rates, weighted
average cost of capital and estimates of market multiples for each reportable
unit. On an ongoing basis, absent any impairment indicators, the Company
performs impairment tests annually during the fourth quarter.





FASB ASC
Topic No. 350 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 record an impairment of goodwill for either the quarter ended June 30, 2010
or the year ended March 31, 2010.





Convertible Debt Financing –
Derivative Liabilities





The
Company reviews the terms of its convertible debt and equity instruments issued
to determine whether there are embedded derivative instruments, including
embedded conversion options, that are required to be bifurcated and accounted
for separately as a derivative financial instrument.  In circumstances
where the convertible instrument contains more than one embedded derivative
instrument, including the conversion option, that is required to be bifurcated,
the bifurcated derivative instruments are accounted for as a single, compound
derivative instrument.  Also, in connection with the sale of
convertible debt and equity instruments, the Company may issue freestanding
options or warrants that may, depending on their terms, be accounted for as
derivative instrument liabilities, rather than as equity.As of June 30, 2010 and
March 31, 2010 the Company did not have any derivative instrument
liabilities.




8





Stock
Options




The
Company follows the guidance cited in ASC Topic No. 718, “Compensation – Stock
Compensation”, to account for its stock options. ASC Topic No. 718
requires the measurement and recognition of compensation expense for all
share-based payment awards made to employees and directors, including employee
stock options, based on estimated fair values. Stock-based compensation expense
recognized under ASC Topic No. 718, which consists of stock-based compensation
expense related to employee and director stock options and restricted stock
issuances, for the three months ended June 30, 2010 and June 30, 2009 was
$49,157, and $41,328 respectively, which consists of stock-based compensation
expense related to employee and director stock options and restricted stock
issuances.





ASC Topic
No. 718 requires companies to estimate the fair value of share-based payment
awards on the date of grant using an option-pricing model. The value of the
portion of the award that is ultimately expected to vest is recognized as
expense over the requisite service periods in the Company’s statement of
operations. Stock-based compensation expense recognized during the period is
based on the value of the portion of share-based payment awards that is
ultimately expected to vest during the period. Compensation expense recognized
for all employee stock options awards granted is recognized over their
respective vesting periods unless the vesting period is graded. As stock-based
compensation expense recognized in the Statement of Operations for the three
months ended June 30, 2010 and June 30, 2009 is based on awards ultimately
expected to vest, it has been reduced for estimated forfeitures as explained
below.





Upon
adoption of ASC Topic No. 718, the Company continued to use the Black-Scholes
option valuation model, which requires management to make certain assumptions
for estimating the fair value of employee stock options granted at the date of
the grant. There were no options granted during the period ended June 30, 2010.
There were 400,000 options granted during the three months ended June 30, 2009.
In determining the compensation cost of the options granted during the three
months ended June 30, 2009, as specified by ASC Topic No. 718, the fair
value of each option grant has been estimated on the date of grant using the
Black-Scholes pricing model. The weighted average assumptions used in the
calculations for the options granted in the three months ended June 30, 2009
included a risk-free interest rate of 2.93%, expected life of options
granted  is ten years, expected volatility is 208%, expected dividend
yield of zero, and expected forfeiture rate of 30%.





As of
June 30, 2010, there was approximately $21,413 of total unrecognized
compensation cost related to non-vested share-based compensation arrangements,
which is expected to be recognized over a period of two years.





Income and Loss per
Share





The
Company calculates income and loss per share in accordance with FASB ASC Topic
No. 260 – 10, “Earnings Per
Share”. Basic loss per share is computed by dividing the net loss by the
weighted-average number of common shares outstanding. Diluted loss per share is
computed similar to basic loss per share except that the denominator is
increased to include the number of additional common shares that would have been
outstanding if the potential common stock equivalents had been issued and if the
additional common shares were dilutive.




9





The
following potential common stock equivalents have been excluded from the
computation of diluted net loss per share for the periods presented because the
effect would have been anti-dilutive (options and warrants typically convert on
a one-for-one basis, see conversion details of the preferred stock stated below
for the common stock shares issuable upon conversion). The weighted-average
common stock equivalents for the periods ending June 30, 2010, and 2009 are as
follows:





For
      the Three Months
                EndedJune
      30,2010
              
              
              2009Options
      outstanding under the Company’s stock option plans
              
              
              6,846,832
              
              
              
              7,361,720Options
      outstanding outside the Company’s stock option plans
              
              
              580,000
              
              
              
              1,160,000Warrants
      outstanding in conjunction with private placements
              
              
              7,539,364
              
              
              
              7,539,364Warrants
      outstanding as a financing cost for notes payable and convertible notes
      payable
              
              
              3,666,642
              
              
              
              2,054,141Warrants
      outstanding for services rendered and litigation
settlement
              
              
              200,000
              
              
              
              200,000Convertible
      Series B preferred stock outstanding (a)
              
              
              109,933
              
              
              
              109,933







(a)
              The
      Series B preferred stock is convertible into shares of common stock at a
      conversion ratio of one share of Series B preferred stock for one share of
      common stock.




Estimates




The
preparation of financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.




Concentrations of Credit
Risk




The
Company sells its products throughout the United States and extends credit to
its customers. It also performs ongoing credit evaluations of such customers.
The Company does not obtain collateral to secure its accounts receivable. The
Company evaluates its accounts receivable on a regular basis for collectibility
and provides for an allowance for potential credit losses as deemed
necessary.




Three of
our customers accounted for 58%, 11% and 11% of our net revenues for the three
months ended June 30, 2010. Two of our customers accounted for 58% and 13% of
our net revenues for the three months ended June 30, 2009.




At June
30, 2010, amounts due from two of our customers accounted for 60% and 14% of
accounts receivable. At June 30, 2009, amounts due from four of our customers
accounted for 40%, 13%, 13% and 11% of accounts receivable.




3.     Property and
Equipment




Property
and equipment as of June 30, 2010 and March 31, 2010 consisted of the
following:





June
      30,
              2010
            
            
            March
      31,
              2010Furniture
      and fixtures
            
            $
            99,535
            
            
            $
            99,535Office
      and telephone equipment
            
            
            182,275
            
            
            
            182,275Computer
      equipment
            
            
            747,631
            
            
            
            747,631Computer
      software
            
            
            1,271,098
            
            
            
            1,271,098Leasehold
      improvements
            
            
            64,733
            
            
            
            64,7332,365,272
            
            
            
            2,365,272Less
      accumulated depreciation and amortization
            
            
            (2,225,273
            )
            
            
            (2,195,476
            )Total
            
            $
            139,999
            
            
            $
            169,796




10




Depreciation
and amortization expense for the three months ended June 30, 2010 and 2009 was
$29,797 and $43,645, respectively.




4.     Bank Credit Line andLong-Term
Debt




At June
30, 2010 and March 31, 2010, the Company’s bank credit line and long-term debt
consisted of the following:




June
      30,
                        2010
                      
                      
                      
                      March  31,
                        2010Bank
      credit line
                      
                      $
                      -
                      
                      
                      $
                      -Bank
      term loan
                      
                      
                      888,887
                      
                      
                      
                      972,222Notes
      payable –related party
                      
                      
                      3,092,245
                      
                      
                      
                      3,092,245Notes
      payable –equipment
                      
                      
                      8,822
                      
                      
                      
                      17,639Debt
      discount unamortized amount
                      
                      
                      (510,870)
                      
                      
                      
                      (543,736
                      )Total
      secured notes payable and bank debt
                      
                      
                      3,479,084
                      
                      
                      
                      3,538,370Total
      long-term debt
                      
                      
                      3,479,084
                      
                      
                      
                      3,538,370Less:
      Current portion of long-term debt
                      
                      
                      897,709
                      
                      
                      
                      350,972Bank
      credit line and long-term debt, net of current portion
                      
                      $
                      2,581,375
                      
                      
                      $
                      3,187,398





Revolving
Bank Credit Line and Term Loan





On
February 9, 2010, the Company entered into a Loan and Security Agreement (the
“Loan Agreement”) with Silicon Valley Bank (“SVB”) and related agreements and
documents providing for a senior credit facility comprised of a revolving line
of credit and a term loan (the “Credit Facility”). Pursuant
to the Loan Agreement the Company has granted SVB a security interest in all of
its assets, whether now owned or hereafter acquired, including but not limited
to, all accounts receivable, copyrights, trademarks, licenses, equipment and all
proceeds as from such collateral.The initial maximum availability under
the revolving line of credit (the “Revolver”) is $250,000 and increases to
$1,000,000 on July 1, 2010. The maturity date of the Revolver is February 8,
2011. The Revolver accrues interest at an annual rate equal to the higher of (i)
1.25% above SVB’s prime rate or (ii) 5.25% and is payable monthly. No principal
payments are due on the Revolver until its maturity date. Subject to the
commitment limits described above, the Company can borrow up to eighty percent
(80%) of its eligible accounts receivable subject to a number of exceptions. The
Company will use the proceeds from the Revolver for general corporate purposes.
As of June 30, 2010, the Company had zero borrowings on the revolving line of
credit. The amount originally borrowed under the term loan (the “Term Loan”) was
$1,000,000 and the amount outstanding at June 30, 2010 was $888,887 and $972,228
at March 31, 2010. The maturity date of the Term Loan is February 9, 2013. The
Term Loan accrues interest at the fixed annual rate of 6.50% and is payable
monthly. Principal payments on the Term Loan will be made in thirty six equal
monthly installments. If an event of default occurs and is continuing, the
interest rates on the Revolver and the Term Loan will increase by 5.00% on an
annualized basis.





The
Credit Facility requires that the Company comply with two financial covenants.
The first such covenant requires that the Company maintain an “adjusted quick
ratio,” measured on the last day of each month, of not less than (i) 1.15 to
1.00 from the date of closing through March 31, 2010, (ii) 1.35 to 1.00 from
April 1, 2010 through June 30, 2010 and (iii) 1.50 to 1.00 after July 1, 2010,
with the “adjusted quick ratio” being defined as (i) cash and cash equivalents
plus the amount of eligible accounts receivable divided by (ii) current
liabilities minus deferred revenue minus the current portion of subordinated
debt. The second such covenant requires that the Company maintain a “fixed
charge coverage ratio,” measured on the last day of each month for the six (6)
months ended on such date, of not less than 1.40 to 1.00, with the “fixed charge
coverage ratio” being defined as (i) earnings before interest, taxes,
depreciation and amortization (“EBITDA”) plus non-cash stock based compensation
minus cash income taxes minus non-financed capital expenditures for the six
months ended on the measurement date divided by (ii) the principal and interest
payments owed by the Company with respect to all of its indebtedness over the
six months ended on the measurement date; provided, however, that the principal
and interest payments owed by the Company during the first six months following
the closing date will be annualized and divided by two. As of
June 30, 2010, the Company was in default under the Credit Facility as a result
of failing to comply with the financial covenants set forth in Section 6.7 of
the Loan Agreement for the April 2010, May 2010 and June 2010 measuring periods
(the “Existing Defaults”).  SVB has agreed to forbear from filing any
legal action or instituting or enforcing any rights and remedies it may have
against the Company arising out of the Existing Defaults for the period
beginning on August 16, 2010 and ending on August 27, 2010 (the “Forbearance
Period”). The Company and SVB are currently in discussions concerning an
amendment to the Loan Agreement pursuant to which the Existing Defaults would be
waived and the Company would be back in compliance with its financial covenants
under the Loan Agreement.  The Company currently expects that such an
amendment would be in place by the end of the Forbearance Period. See “Part II,
Item 5. Other Information.”




11





Notes
Payable – Related Parties





On
November 13, 2007, the Company completed its financing with certain
institutional investors that included the issuance of $4,000,000 in aggregate
principal amount of senior secured convertible notes due November 13, 2010 (the
“Prior Notes”). The Prior Notes were convertible at any time into shares of the
Company’s common stock at the conversion price of $0.43 per share. The financing
also included the issuance of warrants to purchase a total of 4,651,162 shares
of the Company’s common stock at an exercise price of $0.43 per share (the
“Warrants”). The Warrants are exercisable until November 13, 2012 and include
anti-dilution provisions that will adjust the number of shares of common stock
underlying the Warrants as well as the exercise price of the Warrants in certain
instances involving the Company’s issuance of common stock below the exercise
price of $0.43 per share. From the date of issuance through the date that the
Prior Notes were paid in full, the conversion feature of the Prior Notes and the
Warrants was accounted for as an embedded derivative in accordance with ASC
Topic No. 815. The Prior Notes were redeemed in full and retired on August 13,
2008 using the proceeds from the Company’s issuance of the Refinance Notes
(discussed below).





In
connection with the redemption of the Prior Notes, the Company entered into a
Note Purchase Agreement and issued an aggregate of $3,703,500 Senior Secured
Notes due August 13, 2009 (the “Redemption Refinance Notes”). The Redemption
Refinance Notes were purchased by the Company’s Chief Executive Officer and a
member of its Board of Directors (“Holders”). As originally issued, the
Redemption Refinance Notes bore interest at a rate of 12% per annum with
interest payments due in arrears monthly which was increased to 13% in an
amendment dated February 19, 2009 (see discussion below).





The
Redemption Refinance Notes are secured by a Security Agreement, dated August 13,
2008, by and between the Company and the Holders, pursuant to which the Company
granted the Holders a security interest in all its personal property, whether
now owned or hereafter acquired, including but not limited to, all accounts
receivable, copyrights, trademarks, licenses, equipment and all proceeds as from
such collateral.





On
February 19, 2009, May 20, 2009, June 26, 2009, and December 18, 2009, the
Company entered into a series of Note Modification Agreements with the holders
of the Redemption Refinance Notes.  For the February 19, 2009 Note
Modification Agreement, an amendment fee of 1% of the outstanding principal
balances of the Redemption Refinance Notes totaling $37,035 was expensed and a
cash payment was paid to the holders thereof.





In
consideration of the June 26, 2009 amendments, the Company (i) paid to the
holders of the Redemption Refinance Notes a fee of $50,000 in cash on July 1,
2009 and (ii) issued to the holders of the Redemption Refinance Notes warrants
to purchase 1,854,141 shares of the Company’s common stock at an exercise price
of $0.43 per share, with these warrants being subject to the additional terms
specified in the Note Modification Agreements. The warrants were assigned an
initial fair value of $320,157 using a lattice model with the following primary
assumptions: 209% annual volatility, risk free rate of 2.58%, initial target
exercise price at 200% of exercise price, and exercise behavior limited based on
trading volume projections. In accordance with ASC Topic No. 470 - 50, “Debt – Modifications and
Extinguishments”, the consideration paid to the holders has been
accounted for as an additional debt discount amortized over the remaining term
of the Redemption Refinance Notes. As part of the February 9, 2010 Loan
Restructuring Agreement discussed below, the remaining unamortized debt discount
on the Redemption Refinance Notes of $155,366 was rolled into the debt discount
associated with the Loan Restructuring Agreement.





On
September 26, 2006, the Company entered into a note payable with its Chief
Executive Officer for $500,000 (the “Other Note”) and the note bore an interest
rate of 8.75%.  This note was renewed on September 25,
2007.





On May
20, 2009 and June 26, 2009, the Company entered into a series of Note
Modification Agreements with the holder of the Other Note. In consideration of
the June 26, 2009 amendment, the Company paid to the holder of the Other Note a
fee of $6,667 in cash on July 1, 2009.




12





On
February 9, 2010, concurrently with entering into a loan agreement with Silicon
Valley Bank (“SVB”) discussed above, the Company, John L. Nicholson, an outside
director of the Company, and Charles E. Ramey, the Chairman and CEO of the
Company, entered into a Loan Restructuring Agreement (the “Loan Restructuring
Agreement”) pursuant to which the debt represented by the Redemption Refinance
Notes held by Messrs. Nicholson and Ramey and the Other Note held by Mr. Ramey
was reduced and restructured. Immediately prior to entering into the Loan
Restructuring Agreement, Mr. Nicholson held that certain secured refinance note
dated August 13, 2008 executed by the Company (one of the two Redemption
Refinance Notes), as amended by those certain Note Modification Agreements dated
February 19, 2009, May 20, 2009, June 26, 2009 and December 18, 2009 (the
“Nicholson Refinance Note”), which had an outstanding principal amount of
$2,718,401 immediately prior to entering into the Loan Restructuring Agreement.
As required by the Loan Restructuring Agreement, the Company made a principal
payment on the Nicholson Refinance Note of $423,401, thereby reducing the
outstanding principal balance on the Nicholson Refinance Note to $2,295,000. In
addition, the Loan Restructuring Agreement modified the Nicholson Refinance Note
as follows: (1) the maturity date of the Nicholson Refinance Note was extended
to January 1, 2014, (ii) the annual interest rate payable on the Nicholson
Refinance Note was reduced to twelve percent (12%) and will be reduced further
to ten percent (10%) in the event that the principal is reduced to $1,905,000 or
lower before the maturity date, (3) no principal payments are required until the
maturity date and (4) the Nicholson Refinance Note is expressly subject to the
terms and provisions of the Subordination Agreement among SVB, Messrs. Nicholson
and Ramey and the Company that was entered into on February 9, 2010 (the
“Subordination Agreement”), which agreement provides, among other things, that
no payments on the Nicholson Refinance Note other than regular scheduled
non-default interest payments are permitted without the consent of SVB unless
and until the Credit Facility is paid in full and terminated.





Immediately
prior to entering into the Loan Restructuring Agreement, Mr. Ramey held that
certain secured refinance note dated August 13, 2008 executed by the Company
(one of the two Redemption Refinance Notes), as amended by those certain Note
Modification Agreements dated February 19, 2009, May 20, 2009, June 26, 2009 and
December 18, 2009 (the “Ramey Refinance Note”), which had an outstanding
principal amount of $643,105 immediately prior to entering into the Loan
Restructuring Agreement. In addition, immediately prior to entering into the
Loan Restructuring Agreement, Mr. Ramey held that certain 8.75% Promissory Note
dated September 25, 2007 executed by the Company, as amended by those certain
Note Modification Agreements dated May 20, 2009 and June 26, 2009 (the “Other
Note” or the “Second Ramey Note”), which had an outstanding principal amount of
$500,000 immediately prior to entering into the Loan Restructuring Agreement. As
required by the Loan Restructuring Agreement, the Second Ramey Note was
cancelled and the principal owed thereunder was added to the principal balance
owed under the Ramey Refinance Note, resulting in the Ramey Refinance Note
having an outstanding principal amount of $1,143,105. As required by the Loan
Restructuring Agreement, the Company made a principal payment on the Ramey
Refinance Note of $345,860, thereby reducing the outstanding principal balance
on the Ramey Refinance Note to $792,245. In addition, the Loan Restructuring
Agreement modified the Ramey Refinance Note as follows: (1) the maturity date of
the Ramey Refinance Note was extended to January 1, 2014, (ii) the annual
interest rate payable on the Ramey Refinance Note was reduced to ten percent
(10%) and (3) the Ramey Refinance Note is expressly subject to the terms and
provisions of the Subordination Agreement, which agreement provides, among other
things, that no payments on the Ramey Refinance Note other than regular
scheduled non-default interest payments are permitted without the consent of SVB
unless and until the Credit Facility is paid in full and
terminated.





In
consideration of entering into the Loan Restructuring Agreement, the Company
agreed to (i) pay to Mr. Nicholson a cash fee of $60,000, and (ii) issue Mr.
Nicholson five-year warrants to purchase 1,484,358 shares of the Company’s
common stock at an exercise price of $0.43 per share. The Company valued the
warrants using a lattice model based on a probability weighted discount cash
flow model. Mr. Nicholson’s warrants were valued at $217,759. In consideration
of entering into the Loan Restructuring Agreement, the Company agreed to (i) pay
to Mr. Ramey a cash fee of $30,843 and (ii) issue Mr. Ramey five year warrants
to purchase 665,642 shares of the Company’s common stock at an exercise price of
$0.43 per share The Company valued the warrants using a lattice model based on a
probability weighted discount cash flow model. Mr. Ramey’s warrants were valued
at $97,651. The consideration paid to the holders of the Loan Restructuring
Agreement has been accounted for as an additional debt discount amortized over
the remaining term of the Loan Restructuring Agreement. The amount amortized
during the three months ended June 30, 2010 associated with the debt discount
was $32,866 and the remaining unamortized debt discount is
$510,870.




13




Note Payable –
Equipment





In
August 2007, the Company entered into a note payable with an equipment vendor to
purchase new telephone equipment for $105,835. The note bears a 10.68% per
annum interest rate, is secured by the equipment and is due in 36 equal monthly
installments of $3,418. As of June 30, 2010 and March 31, 2010, the outstanding
balance on this note payable was $8,822 and $17,639 respectively.





Payment
Table





Future
minimum payments under our loan agreements and notes payable at June 30, 2010
were as follows:




Year
      Ended
                  March
      31,
                
                Amount2011
                
                $
                897,7092014
                
                
                3,092,245$
                3,989,954





5.     Commitments and
Contingencies




Leases





The
Company leases an office in Sugar Land, Texas under an operating lease agreement
that expires in July 2012. Rent expense was $90,612 and $95,241 for the three
months ended June 30, 2010 and 2009, respectively.





Future
minimum lease payments under operating leases at June 30, 2010 were as
follows:




Year Ended
              March 31,
            
            Amount2011
            
            $
            263,8432012
            
            
            355,4442013
            
            
            119,003$
            738,290




6.     Stockholders’
Equity




Preferred
Stock




The
Company has 10,000,000 authorized shares of $0.0001 par value preferred stock.
The preferred stock may be issued in series, from time to time, with such
designations, rights, preferences, and limitations as the Board of Directors may
determine by resolution.




Convertible Series B
Preferred Stock




The
Company has 700,000 shares authorized, 109,933 shares issued and outstanding of
$0.0001 par value convertible Series B preferred stock. The Series B has a
liquidation preference of $3.75 per share and carries a 10% cumulative dividend
payable each March 1 and September 1, as and when declared by the Board of
Directors. The Series B is convertible upon issuance into common stock at $3.75
per share. The Company has the right to redeem the Series B at any time after
issuance at a redemption price of $4.15 per share, plus any accrued but unpaid
dividends.




14




At June
30, 2010, and March 31, 2010, there were accumulated, undeclared dividends in
arrears of $386,369 and $345,124, respectively.




Stock
Options




In August
1999, the Company implemented its 1999 Stock Option Plan (the “1999 Plan”). In
August 2000, the Company’s Board of Directors approved the 2000 Stock Option
Plan (the “2000 Plan”), which amends and restates the 1999 Plan.  As
of June 30, 2010, the maximum aggregate number of shares which may be granted
under the 2000 Plan was 9,500,000. Under the 2000 Plan, the exercise price must
not be less than the fair market value on the date of grant of the option. The
options vest in varying increments over varying periods and expire 10 years from
the date of grant. 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 three months ended June 30, 2010 the Company did not grant any stock
options.





The
following table summarizes certain information relative to stock
options:




2000
      Stock Option Plan
            
            
            Outside
      of PlanShares
            
            
            Weighted-Average
      Exercise Price
            
            
            Shares
            
            
            Weighted-Average
      Exercise PriceOutstanding,
      March 31, 2010
            
            
            7,745,720
            
            
            $
            0.64
            
            
            
            1,160,000
            
            
            $
            1.02Forfeited/canceled
            
            
            (898,888
            )
            
            $
            0.52
            
            
            
            (580,000
            )
            
            $
            1.02Outstanding,
      June 30, 2010
            
            
            6,846,832
            
            
            $
            0.65
            
            
            
            580,000
            
            
            $
            1.02Exercisable,
      June 30, 2010
            
            
            6,008,501
            
            
            $
            0.71
            
            
            
            580,000
            
            
            $
            1.02




The
weighted-average remaining life and the weighted-average exercise price of all
of the options outstanding at June 30, 2010 were 5.69 years and $0.68,
respectively. The exercise prices for the options outstanding at June 30, 2010
ranged from $0.15 to $6.25 per share, and information relating to these options
is as follows:




Range
      of
              ExercisePrices
            
            
            Stock
      Options
              Outstanding
            
            
            Stock
      Options
              Exercisable
            
            Weighted-Average
              Remaining
              Contractual
      Life
            
            Weighted-Average
      ExercisePrice
            
            
            Weighted-Average
      Exercise Price
              of
      Options
              Exercisable$
            0.15
      – 0.80
            
            
            
            5,298,998
            
            
            
            4,460,667
            
            6.37
      years
            
            $
            0.49
            
            
            $
            0.53$
            0.81
      – 1.35
            
            
            
            1,714,834
            
            
            
            1,714,834
            
            4.14
      years
            
            $
            0.93
            
            
            $
            0.93$
            1.36
      – 6.25
            
            
            
            413,000
            
            
            
            413,000
            
            3.51
      years
            
            $
            2.13
            
            
            $
            2.137,426,832
            
            
            
            6,588,501




Common Stock
Grants





During
the three months ended June 30, 2010, the Company granted 41,625 shares of
common stock (at $0.20 per share based on the closing price of the common stock
on the grant date), to its outside directors pursuant to the Company’s Outside
Director Compensation Plan. The Company expensed $8,325 related to these grants
in the three months ended June 30, 2010. These grants were made under the 2000
Plan.




15




6.    
Fair
Value Measurements




On April
1, 2008, the Company adopted SFAS No. 157 “Fair Value Measurements”(“SFAS 157”), which is incorporated in ASC Topic No. 820 - 10, “Fair Value Measurements and
Disclosures”. ASC Topic No. 820 - 10, among other things, defines
fair value, establishes a consistent framework for measuring fair value and
expands disclosure for each major asset and liability category measured at fair
value on either a recurring or nonrecurring basis. ASC Topic No. 820 – 10
clarifies that fair value is an exit price, representing the amount that would
be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants.  As such, fair value is a
market-based measurement that should be determined based on assumptions that
market participants would use in pricing an asset or liability.  As a
basis for considering such assumptions, ASC Topic No. 820 – 10 establishes a
three-tier fair value hierarchy, which prioritizes the inputs used in measuring
fair value as follows:





Level
      1.
            Observable
      inputs such as quoted prices in active markets for identical assets or
      liabilities;




Level
      2.
            Inputs,
      other than quoted prices included within Level 1, that are observable
      either directly or indirectly; and




Level
      3.
            Unobservable
      inputs in which there is little or no market data, which require the
      reporting entity to develop its own
assumptions.





As of
June 30, 2010 and March 31, 2010, the Company had no assets or liabilities that
were marked to fair value under ASC Topic No. 820 - 10.




7.      Liquidity




While the
Company incurred a moderate increase in its operating expenses to support the
growth of the Company, the Company experienced a decrease in revenues caused by
a timing difference on the start of a consulting agreement. Due to our prior
history of experiencing negative cash flow from operations and the debt
financing that we put in place to cover this historical negative cash flow, we
find ourselves in the position of having approximately $3.1 million of debt
coming due January 1, 2014 and another $0.9 million of debt payable ratably
through February 2013.




Although
the full amount owed under the Term Loan is reflected as current liabilities on
the Company's June 30, 2010 balance sheet, SVB has agreed to forbear from filing
any legal action or instituting or enforcing any rights and remedies it may have
against the Company arising out of the Company's existing defaults caused by the
Company's failure to comply with the financial covenents under the Loan
Agreement until August 27, 2010. The Company is currently in discussions with
SVB concerning an amendment to the Loan Agreement pursuant to which the
Company's existing defaults would be waived and the Company would be back
in compliance with its financial covenants. We currently expect that such
amendment would be in place by the end of the forbearance period and believe
that such amendment will not alter the current payment terms of the Term
Loan.




While we
expect to be able to fund our operations and build enough cash to pay off this
debt from our cash flow, if that is not the case, our long term viability will
again depend on our ability to obtain adequate sources of debt or equity funding
to fund the continuation of our business operations and to ultimately achieve
adequate profitability and cash flows to sustain our operations. We will need to
increase revenues from transaction and subscription based software license
contracts and professional services agreements and software licenses to become
profitable.




Item
2.  Management’s Discussion and Analysis of Financial Condition and Results
of Operations.




The
following discussion and analysis of our financial condition and results of
operations should be read with the unaudited condensed financial statements and
related notes included elsewhere in this Quarterly Report on Form 10-Q and the
audited financial statements and notes thereto included in the Company’s Annual
Report on Form 10-K for the fiscal year ended March 31, 2010.




C$Money
Transaction





The
Company was unable to record the effects of the transactions contemplated by the
Strategic Alliance Agreement with C$ cMoney, Inc. discussed in Item 7 of the
Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2010
(the “C$Money Transactions”) in the quarter ended June 30, 2010.  The
Company continues to evaluate whether it expects to record the effects of the
C$Money Transactions in fiscal 2011.




Critical
Accounting Policies




The
following discussion and analysis of our unaudited condensed financial condition
and results of operations is based upon our financial statements, which have
been prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
us to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On an on-going basis, we evaluate these estimates, including
those related to revenue recognition and concentration of credit risk. We base
our estimates on historical experience and on various other assumptions that we
believe to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.




16




We
believe that of the significant accounting policies used in the preparation of
our unaudited condensed financial statements (see Note 2 to the Financial
Statements included in the Company’s Annual Report on Form 10-K for the fiscal
year ended March 31, 2010), the following are critical accounting policies,
which may involve a higher degree of judgment, complexity and
estimates.




Revenue
Recognition




The
Company recognizes revenues associated with its software products in accordance
with the provisions of the Financial Accounting Standard Board Accounting
Standards Codification (“ASC”) Topic No. 985 – 605, “Software Revenue
Recognition”.





The
Company licenses its software on a transactional and a subscription fee basis.
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 are provided in connection with the installation of the
software licensed, revenue is recognized when these services have been provided.
The Company also recognizes revenue on a percent of completion basis for the
portion of professional services related to customized customer projects that
have been completed but are not yet deliverable to customer.




In
certain instances, we license our software products under non-exclusive,
non-transferable license agreements. Because these agreements do not require
significant production, modification or customization, revenue is recognized
when the license agreement has been signed, the software product has been
delivered, the related fee is fixed or determinable and collection of such fee
is probable




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.




In
certain instances, the Company enters into arrangements that include multiple
elements, where fees are allocated to the various elements based on vendor
specific objective evidence of fair value.





Classification
of labor-related expenses within the income statement - change in application of
accounting principle





The
Company categorizes its personnel into five separate functional departments:
Professional Services (“Services”), Software Maintenance (“Maintenance”),
Research and Development (“R&D”), Sales and Marketing (“S&M”) and
General and Administrative (“Administrative”). Effective as of November 14,
2009, the Company implemented certain changes in the way it applies the
accounting principle regarding the classification of labor-related expenses as
either cost of sales or operating expenses in the income statement.





Prior to
November 14, 2009, the Company used the following approach to classify such
expenses. The Company’s costs incurred employing personnel working in its
Services, Maintenance and R&D functions were classified as either cost of
sales or operating expenses depending on whether the hours worked by such
personnel were billable as professional or maintenance services to the customer.
If the hours worked were billable to the customer, the costs were classified as
cost of sales while all non-billable hours worked and all costs associated with
vacation pay, holiday pay and training for such personnel were classified as
operating expenses.




17





Effective
as of November 14, 2009, the Company implemented the following new approach to
classify such expenses. All of the Company’s labor costs including benefits
incurred employing personnel working in its Services and Maintenance functions
are classified as cost of sales regardless of whether the hours worked by such
personnel are billable to the customer. All of the Company’s costs incurred
employing personnel working in its R&D, S&M and Administrative functions
are classified as operating expenses.





The
Company believes that these changes in accounting policy enable it to better
reflect the costs of its five functional departments and the overall reporting
of gross profit and margins, from period to period.





In
order to conform to the current application, the Company reclassified a net of
$118,229 from operating expenses to cost of sales for the three months ended
June 30, 2009.





Goodwill




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. FASB ASC Topic No. 350, “Intangibles – Goodwill and Other
Intangibles”, requires goodwill for each reporting unit of an entity be
tested for impairment by comparing the fair value of each reporting unit with
its carrying value. Fair value is determined using a combination of the
discounted cash flow, market multiple and market capitalization valuation
approaches. Significant estimates used in the methodologies include estimates of
future cash flows, future short-term and long-term growth rates, weighted
average cost of capital and estimates of market multiples for each reportable
unit. On an ongoing basis, absent any impairment indicators, the Company
performs impairment tests annually during the fourth quarter.





FASB ASC
Topic No. 350 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 record an impairment of goodwill for either the three months ended June 30,
2010 or the year ended March 31, 2010.




Concentrations
of Credit Risk




We extend
credit to our customers and perform ongoing credit evaluations of our customers.
We do not obtain collateral from our customers to secure our accounts
receivables. We evaluate our accounts receivable on a regular basis for
collectibility and provide for an allowance for potential credit losses as
deemed necessary.




Three of
our customers accounted for 58%, 11% and 11% of our net revenues for the three
months ended June 30, 2010. Two of our customers accounted for 58% and 13% of
our net revenues for the three months ended June 30, 2009.




At June
30, 2010, amounts due from two of our customers accounted for 60% and 14% of
accounts receivable. At June 30, 2009, amounts due from four of our customers
accounted for 40%, 13%, 13% and 11% of accounts receivable.




Results
of Operations




The
results of operations reflected in this discussion include our operations for
the three month periods ended June 30, 2010 and 2009.




18




Revenues




We
generate revenues from (a) licensing and supporting software with fees due on a
transactional or subscription basis (b) licensing software with fees due on the
grant of the license and delivery of the software, (c) providing maintenance,
enhancement and support for previously licensed products, and (d) providing
professional services.




For
      the Three MonthsEnded
      June 30,2010
              
              
              2009
              
              
              ChangeSoftware
      transactional and subscription revenues
              
              $
              499,217
              
              
              $
              521,243
              
              
              
              -4.2
              %Software
      maintenance revenues
              
              
              144,322
              
              
              
              212,371
              
              
              
              -32.0
              %Professional
      service revenues
              
              
              722,799
              
              
              
              1,274,847
              
              
              
              -43.3
              %Total
      revenues
              
              $
              1,366,338
              
              
              $
              2,008,461
              
              
              
              -32.0
              %




Revenues
decreased by 32.0% for the three months ended June 30, 2010 compared to the
three months ended June 30, 2009 due to the timing of the end of one consulting
agreement and the start of the follow-on consulting agreement. We had no
licensing revenue for the quarter ended June 30, 2010, and maintenance revenue
declined 32.0% due to the non renewal of certain maintenance
agreements.  We believe that we will continue to see maintenance
revenues decline slowly as we continue our transition to a transactional and
subscription based revenue model. We expect our transactional revenue to grow as
more of our current customers, along with new customers, begin to run more of
their processing through our software products.




Cost
of Revenues




Costs of
revenues include the cost of other third party software resold in connection
with our software and personnel costs associated with our software, maintenance,
support, training and installation services. Cost of revenues decreased by
$70,114, or 10.4%, to $606,257 for the three months ended June 30, 2010 from
$676,371 for the three months ended June 30, 2009. This decrease was principally
due to a decrease of $48,000 in the cost of third party software purchased for
resale, a $61,000 decrease in outside consulting labor costs, offset by a
$31,000 increase in travel expenses and a $8,000 net increase in labor cost
associated with our professional services and maintenance personnel as compared
to the same period in the prior fiscal year.




Operating
Expenses




Total
operating expenses increased by $199,674, or 18.3%, to $1,290,198 for the three
months ended June 30, 2010 from $1,090,524 for the three months ended June 30,
2009.




General
and administrative expenses increased $174,465 or 30.5% and was attributable to
a $21,000 increase in general and administrative personnel expenses, a $80,000
increase in legal and accounting expense associated with delisting issues,
$58,000 in outside consultant expense, $9,000 increase in stock based
compensation expense, $8,000 increase in insurance expenses, $7,000 increase in
phone expenses, a $13,000 increase in various other areas including bank fees,
dues and subscriptions, entertainment, and computer lease expenses. These
increases were offset by a $20,000 decrease in investor relations expense, rent,
and travel expenses as compared to the same period in the prior fiscal
year.




A slight
increase in research and development expenses of $29,570 as compared to the
prior year period, was primarily related to increased personnel expenses of the
R & D staff, while the increase in sales and marketing of $9,487 is related
to an increase in personnel expenses.




In our
effort to promote our brand name, increase our client base and expand our
relationship with existing clients, we expect our operating expenses in both
research and development and sales and marketing to increase.




Our
depreciation and amortization expense decreased $13,848 from $43,645 for the
three months ended June 30, 2009 to $29,797 for the three months ended June 30,
2010. This decrease is attributable to a number of our property and equipment
items attaining a fully depreciated state during the past fiscal
year.




19




Other
Expenses




Other
expenses, including interest expense and financing costs, decreased $121,196, or
45.7%, to $144,281 for the three months ended June 30, 2010 from $265,478 for
the three months ended June 30, 2009. The decrease was primarily due to the
effects of the restructuring of the related party notes on interest
expense.




Net
Loss




Net loss
increased by $650,487, to a net loss of $674,398 for the three months ended June
30, 2010 from a net loss of $23,911 for the three months ended June 30, 2009.
For details related to this loss see the preceding discussions related to
revenues, cost of revenues, operating expenses and other income sections
above.




Liquidity
and Capital Resources




While the
Company incurred a moderate increase in its operating expenses to support the
growth of the Company, the Company experienced a decrease in revenues caused by
a timing difference on the start of a consulting agreement. Due to our prior
history of experiencing negative cash flow from operations and the debt
financing that we put in place to cover this historical negative cash flow, we
find ourselves in the position of having approximately $3.1 million of debt
coming due January 1, 2014 and another $0.9 million of debt payable ratably
through February 2013.








While we
expect to be able to fund our operations and build enough cash to pay off this
debt from our cash flow, if that is not the case, our long term viability will
again depend on our ability to obtain adequate sources of debt or equity funding
to fund the continuation of our business operations and to ultimately achieve
adequate profitability and cash flows to sustain our operations. We will need to
increase revenues from transaction and subscription based software license
contracts and professional services agreements and software licenses to become
profitable.




Cash and
cash equivalents increased by $62,705 to $507,247 at June 30, 2010 from $444,542
at March 31, 2010.  Cash provided by operating activities was $154,857
for the three months ended June 30, 2010 compared to $105,006 for the same
period in the prior fiscal year.




No cash
was used for investing activities in the three months ended June 30, 2010 or in
the three month period ended June 30, 2009.




Financing
activities used cash of $92,152 in the three months ended June 30, 2010 and
financing activities used cash of $8,819 in the three months ended June 30,
2009.




We
believe we currently have adequate capital resources to fund our anticipated
cash needs through March 31, 2011. However, an adverse business or legal
development could require us to raise additional financing sooner than
anticipated. We recognize that we may be required to raise such additional
capital, at times and in amounts, which are uncertain, especially under the
current capital market conditions. If we are unable to raise additional capital
or are required to raise it on terms that are less satisfactory than we desire,
it may have a material adverse effect on our financial condition. In the event
we raise additional equity, these financings may result in dilution to existing
shareholders.




Item 3.Quantitative and Qualitative
Disclosures About Market Risk




Not
applicable.




20




Item 4.Controls and
Procedures




(a)  Evaluation of
disclosure controls and procedures. We maintain “disclosure controls and
procedures,” as such term is defined in Rule 13a-15(e) under the Securities
Exchange Act of 1934, or the Exchange Act, that are designed to ensure that
information required to be disclosed by us in reports that we file or submit
under the Exchange Act is recorded, processed, summarized, and reported within
the time periods specified in Securities and Exchange Commission rules and
forms, and that such information is accumulated and communicated to our
management, including our Chief Executive Officer and Chief Financial Officer,
or persons performing similar functions, as appropriate, to allow timely
decisions regarding required disclosure. In designing and evaluating our
disclosure controls and procedures, management recognized that disclosure
controls and procedures, no matter how well conceived and operated, can provide
only reasonable, not absolute, assurance that the objectives of the disclosure
controls and procedures are met. Our disclosure controls and procedures have
been designed to meet reasonable assurance standards. Additionally, in designing
disclosure controls and procedures, our management necessarily was required to
apply its judgment in evaluating the cost-benefit relationship of possible
disclosure controls and procedures. The design of any disclosure controls and
procedures also is based in part upon certain assumptions about the likelihood
of future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions.




As
previously disclosed in our Annual Report on Form 10-K for the fiscal year ended
March 31, 2010, management identified a material weakness in our internal
control over financial reporting, which is an integrated component of our
disclosure controls and procedures.  A material weakness is a
deficiency, or a combination of deficiencies, in internal control over financial
reporting such that there is a reasonable possibility that a material
misstatement of the annual or interim will not be prevented or detected on a
timely basis.   Specifically our management concluded that at
March 31, 2010, there was a material weakness regarding the calculation of stock
option values based on terms other than those listed.  This material
weakness resulted in errors in the Company’s accounting and disclosures for
shareholders’ equity and share-based compensation expense and resulted in the
restatement of the financial statements for the fiscal years ended March 31,
2007, 2008 and 2009. We have since developed and implemented new procedures to
remediate this material weakness.  Specifically, we have created a new
procedure to perform a quarterly review of accounting estimates for all equity
transactions.  These procedures will be documented internal controls
and will be reviewed annually.  Although there were no new stock
option grants made during the three months ended June 30, 2010 for which these
new procedures would have been utilized, we nevertheless believe that as of June
30, 2010, this material weakness no longer exists.




Based on
their evaluation as of the end of the period covered by this Quarterly Report on
Form 10-Q, our Chief Executive Officer and Chief Financial Officer, or persons
performing similar functions, have concluded that, as of that date, our
disclosure controls and procedures were effective at the reasonable assurance
level.




(b) 
Changes in
internal control over financial reporting. Except for remedial measures
discussed above, there was no change in our internal control over financial
reporting (as defined in Rule 13a-15(f) under the Exchange Act) identified
in connection with management’s evaluation during our last fiscal quarter that
has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.





PART II - OTHER INFORMATION




Item 1.   Legal Proceedings




From time
to time, we may become involved in various legal and other proceedings that are
incidental to the conduct of our business. We are currently not involved in any
such legal proceedings.




Item
1A.  Risk Factors





There
have been no material changes in our risk factors disclosed in our Annual Report
on Form 10-K for the fiscal year ended March 31, 2010 dated as of, and
filed with the SEC on, June 29, 2010 (the “Annual Report”).  For
a discussion of these risk factors, see “Item 1A. Risk Factors”
in the Annual Report.




Item
2. Unregistered Sales of Equity Securities and Use of Proceeds





None.




21





Item
3. Defaults Upon Senior Securities





The
Company is currently in default under its Credit Facility with Silicon Valley
Bank as a result of failing to comply with the financial covenants set forth in
Section 6.7 of the Loan Agreement for the April 2010, May 2010 and June 2010
measuring periods (the “Existing Defaults”).





Item
5. Other Information




On August
16, 2010, the Company and Silicon Valley Bank (“SVB”) entered into that certain
Forbearance to Loan and Security Agreement (the “Forbearance”) pursuant to which
SVB has agreed to forbear from filing any legal action or instituting or
enforcing any rights and remedies it may have against the Company arising out of
the Existing Defaults for the period beginning on August 16, 2010 and ending on
August 27, 2010 (the “Forbearance Period”).  The foregoing description
of the Forbearance is qualified in its entirety by reference to the Forbearance,
a copy of which is attached to this Quarterly Report as an exhibit and
incorporated herein by reference. In consideration for the Forbearance, the
Company paid a forbearance fee of $1,000.
 
 The
Company and SVB are currently in discussions concerning an amendment to the Loan
Agreement pursuant to which the Existing Defaults would be waived and the
Company would be back in compliance with its financial covenants under the Loan
Agreement.  The Company currently expects that such an amendment would
be in place by the end of the Forbearance Period.
  Item
6. Exhibits




Listed
below are the exhibits required by Item 601 of Regulation S-K.




Exhibit
              Number
            
            Description of Document10.1
            
            Second
      Amendment to Loan and Security Agreement by and between US Dataworks, Inc.
      and Silicon Valley Bank dated April 23, 2010 (incorporated by reference to
      Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the
      SEC on May 5, 2010).10.2*
            
            Forbearance
      to Loan and Security Agreement by and between US Dataworks, Inc. and
      Silicon Valley Bank dated August 16, 2010.31.1
            
            Section
      302 Certification of Chief Executive Officer.31.2
            
            Section
      302 Certification of Chief Financial Officer or person performing similar
      functions.32.1
            
            Section
      906 Certification of Chief Executive Officer.32.2
            
            Section
      906 Certification of Chief Financial Officer or person performing similar
      functions.











22




SIGNATURE




In
accordance with the requirements of the Exchange Act, the registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.




US
      DATAWORKS, INC.Dated:  August
      16, 2010
              By:
              /s/
      Charles E. RameyCharles
      E. RameyChief Executive
      Officer(Duly
      Authorized Officer)




By:
              /s/
      Randall J. FrapartRandall
      J. FrapartChief Financial
      Officer
                (Principal
      Financial Officer)




23




EXHIBIT
INDEX


Exhibit
                Number
              
              Description of Document10.1
              
              Amendment
      to Loan and Security Agreement by and between US Dataworks, Inc. and
      Silicon Valley Bank dated April 23, 2010 (incorporated by reference to
      Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the
      SEC on May 5, 2010).10.2*
              
              Forbearance
      to Loan and Security Agreement by and between US Dataworks, Inc. and
      Silicon Valley Bank dated August 16, 2010.31.1
              
              Section
      302 Certification of Chief Executive Officer.31.2
              
              Section
      302 Certification of Chief Financial Officer or person performing similar
      functions.32.1
              
              Section
      906 Certification of Chief Executive Officer.32.2
              
              Section
      906 Certification of Chief Financial Officer or person performing similar
      functions.
  
 *
              Filed
      herewith
  24