Quarterly Report
UNITED STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington
D.C., 20549
FORM
10-Q
(Mark
One)
|
R
|
QUARTERLY REPORT UNDER SECTION
13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF
1934
|
For
the quarterly period ended December 31, 2009
|
£
|
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.
(Exact
name of small business issuer as specified in its charter)
|
N
evada
|
84-1290152
|
|
(State
or other jurisdiction of
incorporation
or organization)
|
(I.R.S. employer
identification number)
|
|
O
ne Sugar Creek Center
Boulevard
S
ugar Land,
Texas
|
77478
|
|
(Address
of principal executive offices)
|
(Zip
Code)
|
Issuer’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
R
NO
£
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
|
£
|
Accelerated
filer
|
£
|
|
|
Non-accelerated
file
|
£
|
Smaller
reporting company
|
R
|
|
|
(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
£
NO
R
Number of
shares of Common Stock outstanding as of February 12, 2010:
33,003,951
US
DATAWORKS, INC.
TABLE OF
CONTENTS
FORM
10-Q
QUARTERLY
PERIOD ENDED DECEMBER 31, 2009
|
Page
|
|
|
PART
I — FINANCIAL INFORMATION
|
4
|
|
Item
1. Financial Statements
|
4
|
|
Item
2. Management’s Discussion and Analysis of Financial Condition and Results
of Operation
|
16
|
|
Item
4T. Controls and Procedures
|
22
|
|
PART
II — OTHER INFORMATION
|
22
|
|
Item
1. Legal Proceedings
|
22
|
|
Item
1A. Risk Factors
|
22
|
|
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
|
22
|
|
Item
3. Defaults Upon Senior Securities
|
22
|
|
Item
4. Submission of Matters to a Vote of Security Holders
|
22
|
|
Item
5. Other Information
|
23
|
|
Item
6. Exhibits
|
25
|
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 ofthe
date hereof. We expressly disclaim any obligation or undertaking to release
publicly any updates or revisions to any forward-looking statements contained
herein to reflect any change in our expectations with regard thereto or any
change in events, conditions or circumstances on which any such statement is
based.
All
references to “US Dataworks,” the “Company,” “we,” “us,” or “our” means US
Dataworks, Inc.
MICRworks™,
Clearingworks®, Returnworks™, and Remitworks™ are trademarks of US Dataworks.
Other trademarks referenced herein are the property of their respective
owners.
PART
I — FINANCIAL INFORMATION
Item
1. Financial Statements
US
DATAWORKS, INC.
UNAUDITED
CONDENSED BALANCE SHEETS
|
Dec
31,
2009
(Unaudited)
|
March
31,
2009
(See
note)
|
|||||||
|
ASSETS
|
||||||||
|
Current
assets:
|
||||||||
|
Cash
and cash equivalents
|
$ | 1,089,642 | $ | 403,863 | ||||
|
Accounts
receivable, trade
|
617,286 | 845,747 | ||||||
|
Prepaid
expenses and other current assets
|
260,281 | 186,578 | ||||||
|
Total
current assets
|
1,967,209 | 1,436,188 | ||||||
|
Property
and equipment, net
|
201,395 | 305,783 | ||||||
|
Goodwill,
net
|
4,020,698 | 4,020,698 | ||||||
|
Other
assets
|
32,111 | 194,359 | ||||||
|
Total
assets
|
$ | 6,221,413 | $ | 5,957,028 | ||||
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||||
|
Current
liabilities:
|
||||||||
|
Accounts
payable
|
$ | 268,482 | $ | 247,132 | ||||
|
Accrued
expenses
|
188,964 | 199,940 | ||||||
|
Accrued
interest — related parties
|
21,398 | 38,336 | ||||||
|
Deferred
revenue
|
423,634 | 223,688 | ||||||
|
Note
payable, current
|
26,459 | 35,279 | ||||||
|
Notes
payable — related party, net unamortized discount of $186,446 and $0,
respectively
|
3,905,949 | 4,203,500 | ||||||
|
Total
current liabilities
|
4,834,886 | 4,947,875 | ||||||
|
Long
term note payable
|
— | 17,639 | ||||||
|
Total
liabilities
|
4,834,886 | 4,965,514 | ||||||
|
Commitments
and Contingencies
|
||||||||
|
Stockholders’
Equity:
|
||||||||
|
Convertible
Series B preferred stock, $0.0001 par value 700,000 shares authorized,
109,333 shares issued and outstanding $3.75 liquidation preference,
dividends of $365,916 and $334,481 in arrears as of December 31, 2009 and
March 31, 2009, respectively
|
11 | 55 | ||||||
|
Common
stock, $0.0001 par value 90,000,000 shares authorized;
32,969,263 and 32,730,870 issued and outstanding as of December 31, 2009
and March 31, 2009, respectively
|
3,297 | 3,273 | ||||||
|
Additional
paid—in capital
|
65,563,370 | 65,063,737 | ||||||
|
Accumulated
deficit
|
(64,180,151 | ) | (64,075,551 | ) | ||||
|
Total
stockholders’ equity
|
1,386,527 | 991,514 | ||||||
|
Total
liabilities and stockholders’ equity
|
$ | 6,221,413 | $ | 5,957,028 | ||||
Note: The
balance sheet at March 31, 2009 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 condensed financial
statements.
US
DATAWORKS, INC.
UNAUDITED
CONDENSED STATEMENTS OF OPERATIONS
The
accompanying notes are an integral part of these condensed financial
statements.
US
DATAWORKS, INC.
UNAUDITED
CONDENSED STATEMENTS OF CASH FLOW
For
the Nine Months Ended December 31,
|
2009
|
2008
|
|||||||
|
Cash
flows from operating activities:-
|
||||||||
|
Net
loss
|
$ | (104,600 | ) | $ | (1,817,327 | ) | ||
|
Adjustments
to reconcile net loss to net cash provided by operating
activities:
|
||||||||
|
Depreciation
and amortization of property and equipment
|
117,473 | 142,978 | ||||||
|
Amortization
of note discount on convertible promissory note
|
183,711 | 1,995,636 | ||||||
|
Amortization
of deferred financing costs
|
162,248 | 487,260 | ||||||
|
Stock
based compensation
|
179,454 | 218,238 | ||||||
|
Gain
on derivatives
|
— | (621,281 | ) | |||||
|
Changes
in operating assets and liabilities:
|
||||||||
|
Accounts
receivable, net
|
228,461 | (83,492 | ) | |||||
|
Prepaid
expenses and other current assets
|
(73,702 | ) | 57,762 | |||||
|
Deferred
revenue
|
199,946 | 138,623 | ||||||
|
Accounts
payable
|
21,350 | (4,029 | ) | |||||
|
Accrued
expenses
|
(10,977 | ) | (194,492 | ) | ||||
|
Interest
payable
|
(16,938 | ) | 52,713 | |||||
|
Net
cash provided by operating activities
|
886,426 | 372,589 | ||||||
|
Cash
flows from investing activities:
|
||||||||
|
Purchase
of property and equipment
|
(13,085 | ) | (14,536 | ) | ||||
|
Net
cash used in investing activities
|
(13,085 | ) | (14,536 | ) | ||||
The
accompanying notes are an integral part of these condensed financial
statements.
US
DATAWORKS, INC.
NOTES
TO UNAUDITED FINANCIAL STATEMENTS
|
1.
|
Organization
and Business
|
General
US
Dataworks, Inc. (the “Company”), a Nevada corporation, develops, markets, and
supports payment processing software for the financial services industry. Its
customer base includes many of the largest financial institutions as well as
credit card companies, government institutions, and high-volume merchants in the
United States. The Company was formerly known as Sonicport, Inc.
|
2.
|
Summary
of Significant Accounting
Policies
|
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. 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 conjunction 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, 2009. 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,
2010.
Financial Accounting
Standards Board (“FASB”) Codification
In June
2009, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No.
168,
“The FASB Accounting
Standards Codification TM and the Hierarchy of Generally Accepted Accounting
Principles – a replacement of FASB Statement No. 162
” (“SFAS 168”). The
FASB
Accounting Standards
Codification TM
, (“Codification” or “ASC”) became the source of
authoritative GAAP recognized by the FASB to be applied by nongovernmental
entities. Rules and interpretive releases of the SEC under authority of federal
securities laws are also sources of authoritative GAAP for SEC registrants. On
the effective date of SFAS 168, the Codification superseded all then-existing
non-SEC accounting and reporting standards. All other non-grandfathered non- SEC
accounting literature not included in the Codification became non-authoritative.
Following SFAS 168, the FASB will no longer issue new standards in the form of
Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts;
instead, it will issue Accounting Standards Updates (“ASUs”). The FASB will not
consider ASUs as authoritative in their own right; rather, these updates will
serve only to update the Codification, provide background information about the
guidance, and provide the bases for conclusions on the change (s) in the
Codification. SFAS No. 168 is incorporated in ASC Topic 105,
Generally Accepted Accounting
Principles.
The Company adopted SFAS No. 168 in the second quarter of
2009, and the Company will provide reference to both the Codification topic
reference and the previously authoritative references related to Codification
topics and subtopics, as appropriate.
Revenue
Recognition
The
Company recognizes revenues associated with its software services in accordance
with the provisions of the FASB Accounting Standards Codification (“ASC”) Topic
No. 985 – 605, “
Software –
Revenue Recognition”
(formerly American Institute of Certified Public
Accountants’ Statement of Position 97- 2,
“Software Revenue
Recognition”)
. The Company licenses its software products under
nonexclusive, nontransferable license agreements. These arrangements do not
require significant production, modification, or customization. Therefore,
revenue is recognized when such a license agreement has been signed, delivery of
the software product has occurred, the related fee is fixed or determinable, and
collectibility is probable.
In most
cases, 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 contracts that are fixed bid or milestone driven, the Company will recognize
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.
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.
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 has 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 nine months ended
December 31, 2009. To conform to the current application, the Company
reclassified a net of $208,684 from operating expenses to cost of sales for the
three months ended June 30, 2008, a net of $145,635 for the quarter ended
September 30, 2008, a net of $176,725 for the quarter ended December 31, 2008
and a total net of $531,044 from operating expenses to cost of sales for the
nine months ended December 31, 2008.
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”
(formerly SFAS No. 142
“Goodwill and Other Intangible
Assets”
), 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 fiscal fourth
quarter.
FASB ASC
Topic No. 350 requires goodwill to be tested annually, typically performed
during the fiscal fourth quarter, 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 the year ended March 31, 2009.
Convertible
Debt Financing — Derivative Liabilities
The
Company reviews the terms of convertible debt and equity instruments issued to
determine whether there are embedded derivative instruments, including embedded
conversion options that are required to be bifurcated and accounted for
separately as a derivative financial instrument. In circumstances where the
convertible instrument contains more than one embedded derivative instrument,
including the conversion option, that is required to be bifurcated, the
bifurcated derivative instruments are accounted for as a single, compound
derivative instrument. Also, in connection with the sale of convertible debt and
equity instruments, the Company may issue freestanding options or warrants that
may, depending on their terms, be accounted for as derivative instrument
liabilities, rather than as equity.
In
accordance with FASB ASC Topic No. 815,
“Derivatives and Hedging”
(formerly SFAS No. 133,
“Accounting for Derivative
Instruments and Hedging Activities”),
as amended, the convertible debt
holder’s conversion right provision, interest rate adjustment provision,
liquidated damages clause, cash premium option, and the redemption option
(collectively, the debt features) contained in the terms governing the
convertible notes are not clearly and closely related to the characteristics of
the notes. Accordingly, the features qualify as embedded derivative instruments
at issuance and, because they do not qualify for any scope exception within FASB
ASC Topic No. 815, they are required to be accounted for separately from the
debt instrument and recorded as derivative instrument liabilities.
Stock
Options
Effective
April 1, 2006, the Company adopted SFAS No. 123 (revised 2004),
Share-Based Payment
(“SFAS
123R”), which is incorporated in FASB ASC Topic No. 718,
“Compensation – Stock Compensation”,
and 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. The Company adopted FASB
ASC Topic No. 718 using the modified prospective transition method, which
requires the application of the accounting standard as of April 1, 2006, the
first day of the Company’s fiscal year 2007. Stock-based compensation expense
recognized under FASB 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 and nine months ended December 31 2009
was $60,952 and $179,454, respectively, and $32,033 and $218,238, respectively,
for the three and nine months ended December 31, 2008.
FASB 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 and
nine months ended December 31, 2009 is based on awards ultimately expected to
vest, it has been reduced for estimated forfeitures as per the tables
below.
Upon
adoption of FASB ASC Topic No. 718, the Company continued to use the
Black-Scholes-Merton (“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 three months ended December 31, 2009. During the nine months ended
December 31, 2009 there were 800,000 options granted. There were 0 and 483,335
options granted during the three and nine months ended December 31, 2008,
respectively. In determining the compensation cost of the options granted during
the three and nine months ended Deember 31, 2009, as specified by FASB 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 and the weighted average assumptions
used in these calculations are summarized as follows:
|
For
the Three Months Ending
|
For
the Nine Months Ending
|
||||||
|
December
31,
|
December
31,
|
||||||
|
2009
|
2008
|
2009
|
2008
|
||||
|
Risk-free
Interest Rate
|
N/A
|
N/A
|
0.91%
|
2.43%
|
|||
|
Expected
Life of Options Granted
|
N/A
|
N/A
|
10
years
|
10
years
|
|||
|
Requisite
Service period
|
N/A
|
N/A
|
1-3
years
|
1-3
years
|
|||
|
Expected
Volatility
|
N/A
|
N/A
|
208%
|
189%
|
|||
|
Expected
Dividend Yield
|
N/A
|
N/A
|
0
|
0
|
|||
|
Expected
Forfeiture Rate
|
N/A
|
N/A
|
30%
|
30%
|
|||
As of
December 31, 2009, there was approximately $112,618 of total unrecognized
compensation cost related to nonvested share-based compensation arrangements,
which is expected to be recognized over a period of 3 years.
Earnings/(Loss) per
Share
The
Company calculates loss per share in accordance with FASB ASC Topic No. 260 –
10,
“Earnings Per Share”
(formerly SFAS No. 128,
“Earnings per Share
”). Basic
loss per share is computed by dividing the net loss by the weighted-average
number of common shares outstanding. Diluted loss per share is computed in a
similar manner to basic loss per share except that the denominator is increased
to include the number of additional common shares that would have been
outstanding if the potential common stock equivalents had been issued and if the
additional common shares were dilutive.
The
following potential common stock equivalents have been excluded from the
computation of diluted net earnings/(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):
|
For
the Nine Months Ended
December
31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Options
outstanding under the Company’s stock option plans
|
7,260,720 | 6,904,220 | ||||||
|
Options
granted outside the Company’s stock option plans
|
1,160,000 | 1,160,000 | ||||||
|
Warrants
issued in conjunction with private placements
|
2,888,201 | 3,538,201 | ||||||
|
Warrants
issued as a financing cost for notes payable and convertible notes
payable
|
6,705,304 | 4,651,163 | ||||||
|
Warrants
issued for services rendered and litigation settlement
|
200,000 | 200,000 | ||||||
|
Warrants
issued as consideration for note extension
|
2,054,141 | 200,000 | ||||||
|
Convertible
Series B preferred stock (a)
|
109,933 | 109,933 | ||||||
____________
|
(a)
|
The
Series B preferred stock is convertible into shares of common stock at a
conversion ratio of one share of Series B preferred stock into 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.
Two
customers accounted for 65% and 11%, respectively, of the Company’s net revenues
for the three months ended December 31, 2009. Two customers accounted for 61%
and 12%, respectively, of the Company’s net revenues for the nine months ended
December 31, 2009. Two customers accounted for 50%, and 21%, respectively, of
the Company’s net revenues for the three months ended December 31, 2008. Two
customers accounted for 50% and 21%, respectively, of the Company’s net revenues
for the nine months ended December 31, 2008.
At
December 31, 2009 and 2008, amounts due from these significant customers
accounted for 44% and 50%, respectively, of the Company’s accounts
receivable.
Reclassifications
Certain
items in the 2008 statement of operations for the three and nine month periods
ending December 31, 2008, have been reclassified to conform to the 2009
presentation.
|
3.
|
Prepaid expenses and
other current assets
|
Prepaid
expenses and other current assets are comprised of prepaid expenses, and
unbilled accounts receivable. Unbilled accounts receivable is defined as
professional services already performed under fixed bid or milestone contracts
that have not yet been invoiced.
As of
December 31, 2009 and March 31, 2009, prepaid expenses were $18,750 and $29,297,
respectively, and unbilled accounts receivable were $241,530 and $157,281,
respectively.
|
4.
|
Property
and Equipment
|
Property
and equipment as of December 31, 2009 and March 31, 2009 consisted of the
following:
|
December
31, 2009
|
March
31, 2009
|
|||||||
|
Furniture
and fixtures
|
$ | 99,535 | $ | 99,535 | ||||
|
Office
and telephone equipment
|
182,275 | 182,275 | ||||||
|
Computer
equipment
|
747,631 | 734,546 | ||||||
|
Computer
software
|
1,271,098 | 1,271,098 | ||||||
|
Leasehold
improvements
|
64,733 | 64,733 | ||||||
| 2,365,272 | 2,352,187 | |||||||
|
Less
accumulated depreciation and amortization
|
(2,163,877 | ) | (2,046,404 | ) | ||||
|
Total
|
$ | 201,395 | $ | 305,783 | ||||
Depreciation
and amortization expense for the three months ended December 31, 2009 and 2008
was $34,811 and $117,473, respectively. Depreciation and amortization expense
for the nine months ended December 31, 2009 and 2008 was $46,745 and $142,978,
respectively.
|
5.
|
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”). Interest on the Prior Notes accrued at a per annum rate equal to
the 6-month LIBOR rate plus five hundred basis points. 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 FASB 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.
Pursuant
to the Redemption Refinance Notes as originally issued, if the Company fails to
pay any amount of principal, interest, or other amounts when and as due, then
the Redemption Refinance Notes will bear an interest rate of 18% until such time
as the Company cures this default. In addition, if the Company is subject to
certain events of bankruptcy or insolvency, the Redemption Refinance Notes
provide that the Holders may redeem all or a portion of the Redemption Refinance
Notes. As of December 31, 2009, the Company is in compliance with its debt
covenants.
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, US Dataworks, Inc. (the "Company") entered into Note
Modification Agreements with the holders of the Redemption Refinance Notes.
Effective as of February 19, 2009, the Note Modification Agreements amended the
Redemption Refinance Notes as follows: (1) the maturity date of the Redemption
Refinance Notes was extended from August 13, 2009 to December 31, 2009; (2) the
annual interest rate on the Redemption Refinance Notes increased from 12% to
13%; and (3) the interest rate escalation clause related to an event of default
was deleted. The Note Modification Agreements also added a mandatory principal
payment provision that required the Company to reduce the principal balance of
the Redemption Refinance Notes by 3% of the original principal amount of the
Redemption Refinance Notes after the end of each calendar quarter starting with
March 31, 2009 as long as such payment would not reduce the Company's cash
balance below $500,000 as of the last day of such quarter. If making such
principal payment would reduce the Company's cash balance below $500,000 as of
such date, the amount of the principal payment will be reduced to the amount, if
any, by which the Company's cash balance as of such date exceeds $500,000. The
amount to be paid is to be determined each quarter and is not cumulative from
quarter to quarter. These principal payments are to be made within 10 business
days after the end of each quarter. An amendment fee of 1% of the outstanding
principal balances of the Refinance Notes totaling $37,035 was expensed and paid
to the holders thereof.
On
May 20, 2009, the Company again entered into Note Modification Agreements with
the holders of the Redemption Refinance Notes that amended the Redemption
Refinance Notes as follows: (1) the Other Note (defined below) was included in
the definition of “Permitted Indebtedness” and (2) the Company was allowed to
make voluntary interest payments on the Other Note notwithstanding the fact that
the Redemption Refinance Notes are otherwise senior to the Other
Note.
On June
26, 2009, the Company again entered into Note Modification Agreements with the
holders of the Redemption Refinance Notes that amended the Redemption Refinance
Notes as follows: (1) the maturity date of the Redemption Refinance Notes was
extended from December 31, 2009 to July 1, 2010; and (2) the mandatory principal
payment provision was revised to provide that to the extent the Company’s cash
balance at the end of each calendar quarter exceeds $611,105, one-fourth of such
excess amount must be used by the Company to pay down the principal balance of
the Redemption Refinance Notes and the Company has the discretion to use an
additional one-fourth of such excess amount to further pay down the principal
balance of the Redemption Refinance Notes. Other than this additional principal
payment requirement, the principal payment provision remained unchanged. In
consideration of these 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 FASB ASC Topic No. 470 - 50,
“Debt – Modifications and
Extinguishments”
(formerly EITF 96-19
“Debtor’s Accounting for a
Modification or Exchange of Debt Instrument”),
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. The amount amortized
during the nine month period ended December 31, 2009, associated with the debt
discount is $133,711.
On
September 26, 2006, the Company entered into a note payable with its Chief
Executive Officer for $500,000. The note bore interest at the annual rate
of 8.75%, was unsecured and was due September 25, 2007. On September
25, 2007, the Company entered into a new note payable agreement that replaced
the September 2006 note. As of September 30, 2009, the outstanding balance on
this note payable was $500,000 with the same terms as the September 2006 note
(the “Other Note”). As originally issued, the principal, together with any
unpaid accrued interest on the Other Note, was due and payable in full on demand
on the earlier of: (i) the full and complete satisfaction of the Prior Notes and
(ii) ninety-one (91) days following the expiration of the term of the Prior
Notes, unless such date was extended by the mutual agreement of the
parties.
On May
20, 2009, the Company entered into a Note Modification Agreement with the holder
of the Other Note. Effective as of May 20, 2009, the Note Modification Agreement
amended the Other Note as follows: (1) it was clarified that the Note was a
demand note for which full payment can be required at any time on or after the
maturity date; (2) the maturity date of the Note was extended to December 31,
2009; and (3) the Company was allowed to make voluntary prepayments under the
Note without penalty.
On June
26, 2009, the Company again entered into a Note Modification Agreement with the
holder of the Other Note that extended the maturity date of the Other Note from
December 31, 2009 to July 1, 2010. In consideration of this amendment, the
Company paid to the holder of the Other Note a fee of $6,667 in cash on July 1,
2009.
On
February 9, 2010, the Company restructured the Redemption Refinance Notes and
the Other Note. (see footnote 9 – Subsequent Events)
|
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, and 109,933 shares issued and
outstanding, of $0.0001 par value convertible Series B preferred stock. The
Series B preferred stock has a liquidation preference of $3.75 per preferred
share and carries a 10% cumulative preferred dividend payable each March 1 and
September 1 if and when declared by the Board of Directors. 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 (109,933
common shares). The Company has the right to redeem the Series B preferred stock
at any time after issuance at a redemption price of $4.15 per share plus any
accrued but unpaid dividends.
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 amended and restated the 1999 Plan. In September
2006, shareholders approved an amendment to the Company’s amended and restated
2000 Stock Option Plan to increase the maximum aggregate number of shares
available for issuance there under from 6,000,000 to 7,500,000. Under the
evergreen provisions of the plan, the maximum aggregate number of shares
available for issuance is currently 9,000,000. 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 three months ended December 31, 2009, and 2008, the Company did not grant
any stock options.
During
the nine months ended December 31, 2009, the Company granted 800,000 stock
options to certain employees that may be exercised at prices ranging between
$0.20 and $0.28 per share. During the nine months ended December 31, 2008, the
Company granted 483,335 stock options to certain employees that may be exercised
at a price of $0.28 per share.
The
following table summarizes certain information relative to stock
options:
|
2000 Stock Option Plan
|
Outside of Plan
|
|||||||||||||||
|
Weighted-Average
|
Weighted-Average
|
|||||||||||||||
|
Shares
|
Exercise price
|
Shares
|
Exercise price
|
|||||||||||||
|
Outstanding,
March 31, 2009
|
6,964,220 | $ | 0.68 | 1,160,000 | $ | 1.02 | ||||||||||
|
Granted
|
800,000 | $ | 0.24 | 0 | 0 | |||||||||||
|
Exercised
|
0 | 0 | 0 | 0 | ||||||||||||
|
Forfeited/canceled
|
(18,500 | ) | $ | 0.56 | 0 | 0 | ||||||||||
|
Outstanding,
December 31, 2009
|
7,745,720 | $ | 0.64 | 1,160,000 | $ | 1.02 | ||||||||||
|
Exercisable,
December 31, 2009
|
6,704,893 | $ | 0.70 | 1,160,000 | $ | 1.02 | ||||||||||
The
weighted-average remaining life and the weighted-average exercise price of all
of the options outstanding at December 31, 2009 were 5.94 years and $0.69,
respectively. The exercise prices for the options outstanding at December 31,
2009 ranged from $0.15 to $6.25, and information relating to these options is as
follows:
|
Weighted-
|
|||||||||||||||||||
|
Weighted-
|
Average
|
||||||||||||||||||
|
Average
|
Weighted-
|
Exercise
|
|||||||||||||||||
|
Range
of
|
Stock
|
Stock
|
Remaining
|
Average
|
Price
of
|
||||||||||||||
|
Exercise
|
Options
|
Options
|
Contractual
|
Exercise
|
Options
|
||||||||||||||
|
Prices
|
Outstanding
|
Exercisable
|
Life
|
Price
|
Exercisable
|
||||||||||||||
|
$
|
0.15 — 0.80 | 6,460,384 | 5,419,557 |
6.49
years
|
$ | 0.49 | $ | 0.54 | |||||||||||
| $ | 0.81 — 1.35 | 1,734,836 | 1,734,836 |
4.62
years
|
$ | 0.93 | $ | 0.93 | |||||||||||
| $ | 1.36 — 6.25 | 710,500 | 710,500 |
4.13
years
|
$ | 1.88 | $ | 1.88 | |||||||||||
| 8,905,720 | 7,864,893 | ||||||||||||||||||
Restricted
Stock
During
the three months ended December 31, 2009, the Company granted 28,710 shares of
common stock (at $0.29 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 $8,550 related to these grants
during the three months ended December 31, 2009.
During
the nine months ended December 31, 2009, the Company granted 50,000 shares of
common stock (at $0.21 per share based on the closing price of the common stock
on the grant date) to the President and Chief Operating Officer pursuant to his
employment agreement and 90,476 shares of common stock (at $0.21 per share based
on the closing price of the common stock on the grant date) to a board member
for his work related to his prior service as Chairman of the Executive
Committee. The Company expensed $12,125 related to these grants during the nine
months ended December 31, 2009. The shares are granted under the 2000
Plan.
During
the nine months ended December 31, 2009, the Company granted 40,714 shares of
common stock (at $0.21 per share based on the closing price of the common stock
on the grant date), 28,498 shares of common stock (at $0.30 per share based on
the closing price of the stock on the grant date) and 28,710 shares of common
stock (at $0.29 per share based on the closing price of the stock on the grant
date) to its outside directors pursuant to the Company’s Outside Director
Compensation Plan. The Company expensed $25,650 related to these grants during
the nine months ended December 31, 2009.
During
the three months ended December 31. 2008, the Company granted 50,000 shares of
restricted common stock at $0.22 per share based on the closing price of the
common stock on the grant date, to the President and Chief Operating Officer
pursuant to his employment agreement, and 80,000 shares valued at $0.22 per
share based on the closing price of the common stock on the grant date, to an
independent member of the Board of Directors associated with his service as a
member of the Company’s Executive Committee.
The
company expensed $4,875 related to these grants during the three months ended
December 31, 2008. The shares are granted under the 2000 Plan.
During
the nine months ended December 31, 2008, the Company granted 50,000 shares of
restricted common stock at $0.12 per share and 50,000 shares of restricted
common stock at $0.22, based on the closing price of the common stock on the
respective grant dates, to the President and Chief Operating Officer pursuant to
his employment agreement, and 55,555 shares valued at $0.12 per share and 80,000
shares valued at $0.22, based on the closing price of the common stock on the
respective grant dates, to an independent member of the Board of Directors
associated with his service as a member of the Company’s Executive
Committee.
The
Company expensed $7,514 related to these grants during the nine months ended
December 31, 2008. The shares are granted under the 2000 Plan
|
7.
|
Fair Value
Measurements
|
On April
1, 2008, the Company adopted SFAS No. 157 “
Fair Value Measurements”
(“SFAS 157”), which is incorporated in FASB ASC Topic No. 820 - 10,
“Fair Value Measurements and
Disclosures”
. FASB 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. FASB 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, FASB 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
December 31, 2009, the Company had no assets or liabilities that were marked to
fair value under FASB ASC Topic No. 820 - 10.
|
8.
|
Liquidity
|
Due to
our history of experiencing negative cash flows from operations, except for the
recent fiscal year 2009 and the first three quarters of fiscal year 2010, we had
incurred $4.2 million of debt and at December 31, 2009 we had $4.1 million of
debt coming due on July 1, 2010. As noted in the following Subsequent
Event footnote 9, on February 9, 2010, we restructured this debt going forward
such that $1.0 million payable to Silicon Valley Bank will be due in monthly
payments of $27,777 over 36 months beginning March 1, 2010 and the balance of
$2,295,000 payable to John L. Nicholson and $787,245 payable to Charles E. Ramey
will become due January 1, 2014. While we currently expect to able to
fund the debt and interest payments as they come due from the Company’s
operating cash flow, there can be no assurances that that this will in fact
occur.
In addition, while we expect to be able
to fund our operations from operating cash flow, if that is not the case, our
long term viability will again depend on our ability to obtain adequate sources
of debt or equity funding to fund the continuation of our business operations
and to ultimately achieve adequate profitability and cash flows to sustain our
operations. We will need to increase revenues from software licenses,
transaction-based software license contracts and professional services
agreements to become profitable.
|
9.
|
Subsequent
Events
|
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”). 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 and (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. The amount borrowed under the term loan (the “Term Loan”)
is $1,000,000. 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. The Company will use
approximately $770,000 from the proceeds of the Term Loan to pay down the
principal balances on the Refinance Notes (as discussed below) and the remainder
of such proceeds for general corporate purposes. As long as 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) EBITDA plus non-cash
stock based compensation minus cash 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. The foregoing description of the Loan Agreement and the Credit Facility is
qualified in its entirety by reference to the Loan Agreement, a copy of which is
attached to this Quarterly Report as an exhibit and incorporated herein by
reference.
On
February 9, 2010, concurrently with entering into the Loan Agreement, 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 certain notes held by Messrs. Nicholson and 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, 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, 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 “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, payable $36,000
immediately and $24,000 on or before June 30, 2010 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 issuable as follows: (i) warrants to
acquire 1,113,269 shares of the Company’s common stock to be issued immediately
and (ii) warrants to acquire 371,089 shares of the Company’s common stock to be
issued on April 1, 2010 provided that as of such date the Nicholson Refinance
Note has not been paid in full. In consideration of entering into the
Loan Restructuring Agreement, the Company agreed to (i) pay to Mr. Ramey a cash
fee of $30,843, payable $18,506 immediately and $12,337 on or before June 30,
2010 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, issuable as
follows: (i) warrants to acquire 499,232 shares of the Company’s common stock to
be issued immediately and (ii) warrants to acquire 166,410 shares of the
Company’s common stock to be issued on April 1, 2010 provided that as of such
date the Ramey Refinance Note has not been paid in full. The
foregoing description of the Loan Restructuring Agreement is qualified in its
entirety by reference to the Loan Restructuring Agreement, a copy of which is
attached to this Quarterly Report as an exhibit and incorporated herein by
reference.
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 consolidated financial
statements and related notes included elsewhere in this Quarterly Report on Form
10-Q and the audited consolidated financial statements and notes thereto
included in the Company’s Annual Report on Form 10-K for the fiscal year ended
March 31, 2010.
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. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. On an on-going basis, we evaluate these estimates, including those
related to revenue recognition and concentration of credit risk. We base our
estimates on historical experience and on various other assumptions that we
believe to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.
We
believe that of the significant accounting policies used in the preparation of
our unaudited condensed financial statements (see Note 2 to the Financial
Statements), the following are critical accounting policies, which may involve a
higher degree of judgment, complexity and estimates.
Revenue
Recognition
The
Company recognizes revenues associated with its software services in accordance
with the provisions of the FASB Accounting Standards Codification (“ASC”) Topic
No. 985 – 605, “
Software –
Revenue Recognition”
(formerly American Institute of Certified Public
Accountants’ Statement of Position 97-2,
“Software Revenue
Recognition”)
. The Company licenses its software products under
nonexclusive, nontransferable license agreements. These arrangements do not
require significant production, modification, or customization. Therefore,
revenue is recognized when such a license agreement has been signed, delivery of
the software product has occurred, the related fee is fixed or determinable, and
collectibility is probable.
In most
cases, 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 contracts that are fixed bid or milestone driven, the Company will recognize
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.
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.
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 has 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 nine months ended
December 31, 2009. To conform to the current application, the Company
reclassified a net of $208,684 from operating expenses to cost of sales for the
three months ended June 30, 2008, a net of $145,635 for the quarter ended
September 30, 2008, a net of $176,725 for the quarter ended December 31, 2008
and a total net of $531,044 from operating expenses to cost of sales for the
nine months ended December 31, 2008.
Goodwill
The
goodwill recorded on our books is from the acquisition of US Dataworks, Inc. in
fiscal year 2001, which remains our single reporting unit. FASB ASC Topic No.
350,
“Intangibles – Goodwill
and Other Intangibles”
(formerly SFAS No. 142,
“Goodwill and Other Intangible
Assets,”
) requires goodwill foreach 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, we perform
impairment tests annually during the fourth fiscal quarter.
FASB ASC
Topic No. 350 requires goodwill to be tested annually, typically performed
during the fourth fiscal quarter, 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 the year ended March 31, 2010.
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
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
receivable. We evaluate our accounts receivable on a regular basis for
collectibility and provide for an allowance for potential credit losses as
deemed necessary.
Two
customers accounted for 65% and 11%, respectively, of the Company’s net revenues
for the three months ended December 31, 2009. Two customers accounted for 61%
and 12%, respectively, of the Company’s net revenues for the nine months ended
December 31, 2009. Two customers accounted for 50%, and 21%, respectively, of
the Company’s net revenues for the three months ended December 31, 2008. Two
customers accounted for 50% and 21%, respectively, of the Company’s net revenues
for the nine months ended December 31, 2008.
At
December 31, 2009 and 2008, amounts due from these significant customers
accounted for 44% and 50%, respectively, of the Company’s accounts
receivable.
Results
of Operations
The
results of operations reflected in this discussion include our operations for
the three and nine month periods ended December 31, 2009 and 2008.
Revenues
We
generate revenues from (a) licensing and supporting software with fees due on a
transactional basis, (b) providing maintenance, enhancement and support for
previously licensed products, (c) providing professional services and (d)
licensing software with fees due at the initial term of the
license.
|
Three
Months
Ended
December
31,
|
Nine
Months
Ended
December
31,
|
|||||||||||||||||||||||
|
2009
|
2008
|
Change
|
2009
|
2008
|
Change
|
|||||||||||||||||||
|
(In
000’s)
|
(In 000’s)
|
|||||||||||||||||||||||
|
Software
licensing revenues
|
$ | 31 | $ | 37 | -15 | % | $ | 31 | $ | 67 | -53 | % | ||||||||||||
|
Software
transactional revenues
|
515 | 541 | -5 | % | 1,555 | 1,601 | -3 | % | ||||||||||||||||
|
Software
maintenance revenues
|
209 | 218 | -4 | % | 630 | 666 | -6 | % | ||||||||||||||||
|
Professional
service revenues
|
1,512 | 1,204 | 26 | % | 4,147 | 3,766 | 10 | % | ||||||||||||||||
|
Total
revenues
|
$ | 2,267 | $ | 2,000 | 13 | % | $ | 6,363 | $ | 6,100 | 4 | % | ||||||||||||
Revenues
increased in the three and nine months ended December 31, 2009 by 13% and 4%,
respectively, as compared to the same periods ended December 31, 2008. For the
three months ended December 31, 2009, professional services revenue increased by
26%, offset by a decrease in licensing, transactional, and maintenance revenue
of 15%, 5% and 4%, respectively, as compared to the same periods ended December
31, 2008. For the nine months ended December 31, 2008, professional services
revenue increased by 10%, offset by a 53% decrease in licensing revenue, a 3%
decrease in transactional revenue, and 6% decrease in maintenance revenue as
compared to the same periods ended December 31, 2008.
The
decrease in licensing revenues for the three and nine months ended December 31,
2009, compared to the same periods last year, is primarily due to the new
license sale recorded in the first quarter of fiscal 2008 associated with a new
customer as compared to no new license sale in the current periods.
The
decrease in transactional revenues for the three and nine months ended December
31, 2009, compared to the same periods last year, is principally due to the
economic environment in which we operate. As the spending of our clients’
customers has slowed down, fewer transactions are processed through our
software. We expect that transactional revenues will slowly increase in the
coming quarters as our clients’ customers increase their spending and as we
integrate our new customers into our system.
The
decrease in maintenance revenues for the three and nine months ended December
31, 2009, compared to the same periods last year, was primarily attributable to
fewer customers renewing their annual maintenance agreement in the current
periods. We do not anticipate significant ongoing growth in annual
maintenance fees.
The
increase in professional service revenues for the three and nine months ended
December 31, 2009, compared to the same periods last year, is primarily due to
activity under our professional services contract with a branch of the federal
government during the current periods.
Cost
of Sales
Costs of
sales include personnel costs associated with our professional services and
software maintenance departments as well as the cost of the Thomson Financial
EPICWare™ software and other third party software resold in connection with our
software. Cost of sales increased by $7,982, or 1%, as adjusted for the change
in application of accounting policy, to $748,964 for the three months ended
December 31, 2009 from $740,982 for the three months ended December 31, 2008.
This increase was due to an $13,000 increase in third party software costs, a
$6,000 increase in travel expenses for service personnel, offset by an $11,000
decrease in our labor costs for outside service labor, service, and maintenance
labor costs.
For the
nine months ended December 31, 2009, costs of sales decreased by $42,909, or 2%,
to $2,095,653 as adjusted for the change in application of accounting policy
from $2,138,562 for the nine months ended December 31, 2008. This decrease is
attributable to a $68,000 increase in third party software expense, a $398,000
increase in professional service labor costs offset by a $481,000 decrease in
maintenance labor costs and a $28,000 decrease in outside professional service
expense. The shift in labor costs was due primarily to the Company’s work on the
professional service contract with the United States government entity and the
change in the application of the accounting principle for costs of sales adopted
by the Company effective as of November 14, 2009. In order to conform to the
current application, the Company reclassified a net of$118,230 from operating
expenses to cost of sales for the nine months ended December 31,
2009.
Operating
Expenses
Comparative
analysis for the three months ended December 31, 2009 and 2008
Total
operating expenses for our three operating departments and our depreciation and
amortization expense increased by $309,815, or 34%, from $899,003, as adjusted
for the change in application of accounting policy, for the three months ended
December 31, 2008, to $1,208,818 for the three months ended December 31,
2009.
General
and administrative expenses increased $249,729 from $489,722, as adjusted for
the change in application of accounting policy, for the three months ended
December 31, 2008 to $739,451 for the three months ended December 31, 2009. The
increase was attributable to an $39,000 increase in outside consultant expense,
a $82,000 increase in professional fees, and a $34,000 increase in
personnel expense resulting from an additional resource, a $28,000 increase in
stock based compensation expense, a $27,000 increase in outside director fees, a
$10,000 increase in insurance expense and a total of $36,000 in expenses related
to various areas including computer hardware, accounting, investor relations,
phones, travel and rent expense. These increases were offset by reductions
totaling $7,000 in office expense, property taxes, computer leasing and dues and
subscriptions.
Sales and
Marketing expenses increased $75,017 from $145,545, as adjusted for the change
in application of accounting policy, for the three months ended December 31,
2008 to $220,562 for the three months ended December 31, 2009. The increase is
attributable to an increase in personnel cost of $72,000 and a $4,000 increase
in expense for attendance at trade shows and exhibits as compared to the same
period last year.
Research
and development expenses decreased $2,997 from $216,991, as adjusted for the
change in application of accounting policy, for the three months ended December
31, 2008 to $213,994 for the three months ended December 31, 2009. The decrease
is primarily associated with a reduction of personnel cost.
Our
depreciation and amortization expense decreased $11,934 from $46,745 for the
three months ended December 31, 2008 to $34,811 for the three months ended
December 31, 2009.This decrease is attributable to a number of our property and
equipment items attaining a fully depreciated state during the past year and
thus our amortization expense in the current quarter as compared to the same
quarter last year is less.
Comparative
analysis for the nine months ended December 31, 2009 and 2008
Total
operating expenses for our three operating departments and our depreciation and
amortization expense increased by $255,041, or 8%, from $3,331,358,
as adjusted for the change in application of accounting policy, for the nine
months ended December 31, 2008 to $3,586,399, as adjusted for the change in
application of accounting policy, for the nine months ended December 31,
2009.
General
and administrative expenses increased $1,901 from $2,102,686, as adjusted for
the change in application of accounting policy, for the nine months ended
December 31, 2008 to $2,104,588 for the nine months ended December 31, 2009. The
increase was attributable to a $64,000 increase in outside consultant expense, a
$50,000 increase in personnel expense resulting from an additional resource, a
$64,000 increase in outside director fees, a $48,000 increase in payroll fees
expense, and a $31,000 increase in computer lease and hardware expense. These
increases were offset by reductions in legal expense of $154,000, a $38,000
reduction in stock based compensation, a $13,000 reduction in investor relations
fees, a $38,000 reduction in travel fees, and a reduction in fees totaling
$13,000 for license, dues and taxes.
Sales and
Marketing expenses increased $263,052 from $457,100, as adjusted for the change
in application of accounting policy, for the nine months ended December 31, 2008
to $720,152 for the nine months ended December 31, 2009. The increase is
attributable to an increase in personnel cost of $199,000, a $50,000 increase in
travel and meal expense, and a $12,000 increase in trade show expense
and exhibits as compared to the same period last year.
Research
and development increased $15,592 from $628,594, as adjusted for the change in
application of accounting policy, for the nine months ended December 31, 2008 to
$644,186 for the three months ended December 31, 2009. The increase is primarily
associated with an increase of $11,000 in outside consultants and a $5,000
increase in travel expense.
Our
depreciation and amortization expense decreased $25,505 from $142,978 for the
nine months ended December 31, 2008 to $117,473 for the nine months ended
December 31, 2009. This decrease is attributable to a number of our property and
equipment items attaining a fully depreciated state in the during the past year
and thus our amortization expense in the current nine month period as compared
to the same period last year is less.
Our headcount at December 31, 2009 was
36, as compared to 35 at December 31, 2008
.
Other
Expenses (Income)
Other
expenses, including interest expense and financing costs, increased $8,840, or
4%, from an expense of $226,176 for the three months ended December 31, 2008 to
an expense of $235,016 for the three months ended December 31, 2009.
This increase in expenses was primarily related to a $100,000 increase in
financing costs, a $5,000 increase in interest expense to related parties, and
an increase in other expense of $11,000 offset by a $108,000 reduction in
interest expense related to the amortization of the note discount on the
refinance notes..
Other
expenses, including interest expense and financing costs, decreased $1,662,146,
or 68%, to $785,056 for the nine months ended December 31, 2009 from $2,447,202
for the nine months ended December 31, 2008. This decrease is primarily related
to the Prior Notes and the manner in which they are required to be reported
under FASB ASC Topic No. 815.
At the
initial recording of the Prior Notes on to our books, a value must be determined
for each portion of the Prior Notes, the compounded embedded derivatives and the
warrants. Once determined, this value is netted against the total value of the
Prior Notes and the remaining amount is identified as a Discount on Note
Payable, and is amortized over the life of the loan utilizing an effective
interest method calculation for determining the value of the units each quarter.
This discount is written off to interest expense after the effective method
calculation is performed each quarter. At inception of the Prior Notes in
November 2007 the Discount on Note Payable was $2,240,263. This discount would
have been $0 if the Prior Notes were held until November 2010, and all interest
expense would have been amortized over that time period.
The Prior
Notes were paid in full on August 13, 2008, resulting in an accounting treatment
consistent with FASB ASC Topic No. 815 guidelines. At the time the Prior Notes
are paid off, the derivatives no longer have value associated with the Prior
Notes, and the Discount on Note Payable must be immediately expensed. At the
time the Prior Notes were paid in August 2008, $1,747,791 remained on the
Discount on Note Payable. This amount was charged to interest expense in the
quarter ended September 30, 2008 and accounts for the bulk of the decrease in
other income for the three and nine months ended December 2009 as there were no
charges in the current year.
Net
Income /(Loss)
Net
income decreased $59,790, or 45%, from $133,850 for the three months ended
December 31, 2008 to a net gain of $74,060 for the three months ended December
31, 2009. For details related to this loss see the preceding discussions related
to our costs of sales, operating expenses and other expenses sections
above.
Net loss
decreased by $1,712,725, or 94%, from $1,817,325 for the nine months ended
December 31, 2008 to a net loss of $104,600 for the nine months ended December
31, 2009. For details related to this loss see the preceding discussions related
to our costs of sales, operating expenses and other expenses sections
above.
Liquidity
and Capital Resources
Due to
our history of experiencing negative cash flows from operations, except for the
recent fiscal year 2009 and the first three quarters of fiscal year 2010, we had
incurred $4.2 million of debt and at December 31, 2009 we had $4.1 million of
debt coming due on July 1, 2010. As noted in the above Subsequent
Event footnote 9, on February 9, 2010, we restructured this debt going forward
such that $1.0 million payable to Silicon Valley Bank will be due in monthly
payments of $27,777 over 36 months beginning March 1, 2010 and the balance of
$2,295,000 payable to John L. Nicholson and $787,245 payable to Charles E. Ramey
will become due January 1, 2014. While we currently expect to able to
fund the debt and interest payments as they come due from the Company’s
operating cash flow, there can be no assurances that that this will in fact
occur.
In
addition, while we expect to be able to fund our operations from cash flow, if
that is not the case, our long term viability will again depend on our ability
to obtain adequate sources of debt or equity funding to fund the continuation of
our business operations and to ultimately achieve adequate profitability and
cash flows to sustain our operations. We will need to increase revenues from
software licenses, transaction-based software license contracts and professional
services agreements to become profitable.
Cash and
cash equivalents increased by $685,779 from $403,863 at March 31, 2009 to
$1,089,642 at December 31, 2009. Cash provided by operating activities was
$886,427 in the nine months ended December 31, 2009 compared to cash used in
operating activities of $372,590 in the same nine month period in the prior
year.
Cash
used in investing activities of $13,086 and $14,538 in the nine months ended
December 31, 2009 and December 31, 2008, respectively, was due primarily to
equipment purchases.
Cash used
in financing activities for the nine months ended December 31, 2009, was
$187,562 compared to cash used of $755,619 in the nine months ended December 31,
2008. Financing activities in the current nine month period included payments of
$111,105 related to notes payable –related parties
a $50,000
payment for an extension of notes payable – related parties note,
and
$26,457 on repayment of equipment notes payable.
We believe we currently have adequate
capital resources to fund our anticipated cash needs through December 31, 2010.
However, an adverse business or legal development could require us to raise
additional financing sooner than anticipated. We recognize that we may be
required to raise such additional capital, at times and in amounts, which are
uncertain, especially under the current capital market conditions. If we are
unable to acquire additional capital or are required to raise it on terms that
are less satisfactory than we desire, it may have a material adverse effect on
our financial condition. In the event we raise additional equity, these
financings may result in dilution to existing shareholders
.
Item 4(T).
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.
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
. 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 are involved in various legal and other proceedings that are
incidental to the conduct of our business. We are currently not involved in any
such 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 end March 31, 2009 dated as of, and filed with
the SEC on, June 29, 2009 and in our Quarterly Report on Form 10-Q dated as of,
and filed with the SEC on, November 16, 2009 (the “SEC Reports”). For a
discussion of these risk factors, see “Item 1.A. Risk Factors” in the SEC
Reports.
Item
2. Unregistered Sales of Equity Securities and Use of Proceeds
None
Item
3. Defaults Upon Senior Securities
None.
Item
4. Submission of Matters to a Vote of Security Holders
None
Item
5. Other Information
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”). 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 and (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 that
include, but are not limited to, the following: (1) receivables that remain
unpaid more than 90 days from the invoice date, (2) receivables from an account
debtor to the extent such account debtor’s total unpaid receivables exceed
twenty-five percent (25%) of the Company’s total unpaid receivables, with such
level being thirty-five percent (35%) for two of the Company’s more significant
customers, (3) government receivables that have not been assigned under the
Federal Assignment Claims Act of 1940 and (4) receivables for work performed
that have not yet been invoiced. Under certain circumstances, SVB can
decrease the 80% cap and can adjust the eligibility criteria to be more
stringent. The Company will use the proceeds from the Revolver for
general corporate purposes. The amount borrowed under the term loan
(the “Term Loan”) is $1,000,000. 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. The Company
will use approximately $770,000 from the proceeds of the Term Loan to pay down
the principal balances on the Refinance Notes (as discussed below) and the
remainder of such proceeds for general corporate purposes.
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) EBITDA plus non-cash
stock based compensation minus cash 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. The indebtedness owed under the Credit Facility will be fully
secured by a perfected first priority security interest in favor of SVB in all
of the Company’s assets, including its cash, accounts receivable, inventory,
equipment, intellectual property rights and contract rights.
Borrowing
under the Revolver will be conditioned on (i) all representations and warranties
contained in the Loan Agreement being true as of the date of the borrowing
request and (ii) there being no “material adverse change” on the date of the
borrowing request, with “material adverse change” being defined as (i) the
material impairment of the bank’s lien on the collateral or in the value of the
collateral, (ii) the material impairment of the prospect of repayment of the
loans and (iii) a material adverse change in the business, operations or
condition (financial or otherwise) of the Company. In addition, the
Company is obligated to deliver a landlord’s consent and evidence of insurance
to SVB within thirty (30) days after the closing. The Loan Agreement
contains a number of representations and warranties, including, but not limited
to, those pertaining to due organization and existence, collateral, accounts
receivable, litigation, the Company’s financial statements, solvency, regulatory
compliance, investments, taxes and use of proceeds. The Loan
Agreement also contains a number of affirmative covenants, including, but not
limited to, those pertaining to due organization and existence, government
approvals, delivery of financial statements and other certificates, reports and
other information, insurance, bank accounts, intellectual property rights,
litigation and audit rights. The Loan Agreement also contains a
number of negative covenants, including, but not limited to, those pertaining to
disposition of assets, changes in business and senior management, mergers and
acquisitions, cash dividends, investments, transactions with affiliates,
subordinated debt and regulatory compliance.
The Loan
Agreement specifies a number of “events of default,” including, but not limited
to, payment defaults, the occurrence of a material adverse change, legal
attachment to collateral, insolvency, cross-defaults with other agreements,
judgments, misrepresentations, and the occurrence or assertion that the Credit
Facility is not senior to any subordinated debt. In addition, a
breach of any of the covenants, representations and warranties, or other
provisions of the Loan Agreement will constitute an event of default, with some
of such breaches having a 10-30 day cure period and other breaches (including
the financial covenants, the negative covenants and affirmative covenants
relating to taxes, insurance, bank accounts and financial statement and other
information delivery requirements) having no cure period. As long as
an event of default occurs and is continuing, the interest rates on the Revolver
and the Term Loan will increase by 5.00%.
In
consideration of the Credit Facility, the Company has agreed to pay the
following fees to SVB: (1) an upfront cash fee of $15,000 payable at the
closing, (2) an early termination fee of $10,000 if the Term Loan is paid off
within the first year of such loan and (3) an early termination fee of one
percent (1%) of the amount of the Revolver commitment if the Revolver is
terminated and paid off within the first year of such loan ($2,500 if before
July 1, 2010 and $10,000 thereafter). The foregoing description of
the Loan Agreement and the Credit Facility is qualified in its entirety by
reference to the Loan Agreement, a copy of which is attached to this Quarterly
Report as an exhibit and incorporated herein by reference.
On
February 9, 2010, concurrently with entering into the Loan Agreement, 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 certain notes held by Messrs. Nicholson and 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, 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, 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 “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.
The Loan
Restructuring Agreement also modified the terms of the security agreement and
the collateral agency agreement (collectively, the “Security Agreements”)
governing the Nicholson Refinance Notes and the Ramey Refinance Notes
(collectively, the “Refinance Notes”) by adding provisions stating that (i) the
Security Agreements are subject to the Subordination Agreement, (ii) the
security interest granted pursuant to the Security Agreements shall be
subordinate to the security interest of SVB and its successors as provided in
the Subordination Agreement and (iii) the liens granted to SVB and its
successors shall be deemed to be a permitted lien under the Security
Agreements. The Loan Restructuring Agreement also provides that (i)
the reimbursement and indemnity agreement between Messrs. Ramey and Nicholson
governing the Refinance Notes is terminated, (ii) all of the loan documents
governing the Refinance Notes shall remain subject to the Subordination
Agreement regardless of whether the Refinance Notes are subsequently
transferred, (iii) in the event that the Company makes any additional
payments of principal on the Refinance Notes prior to their maturity, such
principal payments shall be allocated as between the Nicholson Refinance Note
and the Ramey Refinance Note as follows: (1) for the first $525,479 of total
principal payments, the ratio will be 74.22% on the Nicholson Refinance Note and
25.78% on the Ramey Refinance Note, for a total of $390,000 on the Nicholson
Refinance Note and $135,479 on the Ramey Refinance Note and (2) absent written
instructions from Messrs. Nicholson and Ramey as to how such payments should be
applied, any additional principal payments will be applied to the Refinance
Notes pro rata based on the relative principal balances of the Refinance Notes,
and (iv) the Company will pay the costs and expenses of the note holders
(including reasonable attorneys’ fees and expenses) in connection with the Loan
Restructuring Agreement and the Refinance Notes.
In
consideration of entering into the Loan Restructuring Agreement, the Company
agreed to (i) pay to Mr. Nicholson a cash fee of $60,000, payable $36,000
immediately and $24,000 on or before June 30, 2010 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, with these warrants to be in the same form
and subject to the same terms and provisions as the warrant previously issued to
Mr. Nicholson in July 2009 in connection with a prior amendment, issuable as
follows: (i) warrants to acquire 1,113,269 shares of the Company’s common stock
to be issued immediately and (ii) warrants to acquire 371,089 shares of the
Company’s common stock to be issued on April 1, 2010 provided that as of such
date the Nicholson Refinance Note has not been paid in full. In
consideration of entering into the Loan Restructuring Agreement, the Company
agreed to (i) pay to Mr. Ramey a cash fee of $30,843, payable $18,506
immediately and $12,337 on or before June 30, 2010 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, with these warrants to be in the same form
and subject to the same terms and provisions as the warrant previously issued to
Mr. Ramey in July 2009 in connection with a prior amendment, issuable as
follows: (i) warrants to acquire 499,232 shares of the Company’s common stock to
be issued immediately and (ii) warrants to acquire 166,410 shares of the
Company’s common stock to be issued on April 1, 2010 provided that as of such
date the Ramey Refinance Note has not been paid in full. The
foregoing description of the Loan Restructuring Agreement is qualified in its
entirety by reference to the Loan Restructuring Agreement, a copy of which is
attached to this Quarterly Report as an exhibit and incorporated herein by
reference
The
warrants to be issued pursuant to the Loan Restructuring Agreement are and will
be issued under the exemption from registration provided by Section 4(2) of the
Securities Act of 1933, as amended, in that the issuance of such warrants is a
transaction by the Company not involving a public offering. Facts
supporting the applicability of this exemption include that (i) the lenders
receiving the warrants are Company insiders and are sophisticated, knowledgeable
and experienced investors, (ii) the warrants are being issued through direct
negotiations and did not involve general solicitation, (iii) the lenders
receiving the warrants will represent to the Company in writing that they are
acquiring the warrants and, upon exercise of the warrants, will acquire the
securities underlying the warrants, for their own account and not
with a view to the resale or distribution thereof and (iv) the lenders receiving
the warrants will agree in writing that the warrants are not transferrable
except in certain limited circumstances and that the warrants (and the
securities underlying the warrants) will be transferred only in strict
compliance with Rule 144.
Item
6. Exhibits
The
exhibits listed below are required by Item 601 of Regulation S-K.
|
Exhibit
|
|
|
Number
|
Description of
Document
|
|
10.1
|
Note
Modification Agreement by and between US Dataworks, Inc. and John L.
Nicholson, M.D. dated December 18, 2009 (incorporated by reference to
Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the
SEC on December 22, 2009).
|
|
10.2
|
Note
Modification Agreement by and between US Dataworks, Inc. and Charles E
Ramey dated December 18, 2009 (incorporated by reference to Exhibit 10.2
to the Registrant’s Current Report on Form 8-K filed with the SEC on
December 22, 2009).
|
|
10.3
|
Loan
and Security Agreement dated as of February 9, 2010 between Silicon Valley
Bank and US Dataworks, Inc.
|
|
10.4
|
Loan
and Restructuring Agreement dated as of February 9, 2010 among US
Dataworks, Inc., John L. Nicholson M.D., and Charles E.
Ramey.
|
|
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.
|
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.
Dated:
February 16, 2010
|
US
DATAWORKS, INC.
|
|||
|
|
By:
|
/s/ Charles E. Ramey | |
|
Charles
E. Ramey
|
|||
|
Chief
Executive Officer
|
|||
|
(Duly
Authorized Officer)
|
|||
|
|
By:
|
/s/ Randall J. Frapart | |
|
Randall
J. Frapart
|
|||
|
Chief
Financial Officer
|
|||
|
(Principal
Financial Officer)
|
EXHIBIT
INDEX
|
Exhibit
Number
|
Description of
Document
|
|
10.1
|
Note
Modification Agreement by and between US Dataworks, Inc. and John L.
Nicholson, M.D. dated December 18, 2009 (incorporated by reference to
Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the
SEC on December 22, 2009).
|
|
10.2
|
Note
Modification Agreement by and between US Dataworks, Inc. and Charles E
Ramey dated December 18, 2009 (incorporated by reference to Exhibit 10.2
to the Registrant’s Current Report on Form 8-K filed with the SEC on
December 22, 2009).
|
|
10.3
|
Loan
and Security Agreement dated as of February 9, 2010 between Silicon Valley
Bank and US Dataworks, Inc..
|
|
10.4
|
Loan
and Restructuring Agreement dated as of February 9, 2010 among US
Dataworks, Inc., John L. Nicholson M.D., and Charles E.
Ramey.
|
|
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
LOAN
AND SECURITY AGREEMENT
THIS LOAN AND SECURITY
AGREEMENT
(this “
Agreement
”) dated as of
February 9, 2010 (the “
Effective Date
”) between
SILICON VALLEY BANK
, a
California corporation (“
Bank
”), and US DATAWORKS,
INC., a Nevada corporation (“
Borrower
”), provides the terms
on which Bank shall lend to Borrower and Borrower shall repay
Bank. The parties agree as follows:
1
ACCOUNTING AND OTHER
TERMS
Accounting
terms not defined in this Agreement shall be construed following
GAAP. Except as otherwise provided herein, calculations and
determinations must be made following GAAP. Capitalized terms not
otherwise defined in this Agreement shall have the meanings set forth in
Section 13. All other terms contained in this Agreement, unless
otherwise indicated, shall have the meaning provided by the Code to the extent
such terms are defined therein.
2
LOAN AND TERMS OF
PAYMENT
2.1
Promise to
Pay
. Borrower hereby unconditionally promises to pay Bank the
outstanding principal amount of all Credit Extensions and accrued and unpaid
interest thereon as and when due in accordance with this Agreement.
2.1.1
Revolving
Advances
.
(a)
Availability
. Subject
to the terms and conditions of this Agreement, Bank shall make Advances not
exceeding the Availability Amount. Amounts borrowed hereunder may be
repaid and, prior to the Revolving Line Maturity Date, reborrowed, subject to
the applicable terms and conditions precedent herein.
(b)
Termination;
Repayment
. The Revolving Line terminates on the Revolving Line
Maturity Date, when the principal amount of all Advances, the unpaid interest
thereon, and all other Obligations, if any, relating to the Revolving Line shall
be immediately due and payable.
(c)
Permitted Early Termination
of Revolving Line
. So long as no Event of Default has
occurred and is continuing, Borrower shall be permitted to terminate the
Revolving Line provided Borrower (i) delivers written notice to Bank of its
election to terminate the Revolving Line at least thirty (30) days prior to such
termination, and (ii) pays, on the date of such termination (A) all outstanding
principal plus accrued and unpaid interest with respect to the Revolving Line,
(B) the Revolving Line Early Termination Fee, and (C) all other sums, if any,
that shall have become due and payable with respect to the Revolving Line,
including interest at the Default Rate with respect to any past due amounts owed
with respect to the Revolving Line; provided however that the Revolving Line
Early Termination Fee shall be waived if Borrower transfers to another division
of Bank.
2.1.2 Letters
of Credit Sublimit.
(a) As
part of the Revolving Line, Bank shall issue or have issued Letters of Credit
denominated in Dollars or a Foreign Currency for Borrower’s
account. The aggregate Dollar Equivalent amount utilized for the
issuance of Letters of Credit shall at all times reduce the amount otherwise
available for Advances under the Revolving Line. The aggregate Dollar
Equivalent of the face amount of outstanding Letters of Credit (including drawn
but unreimbursed Letters of Credit and any Letter of Credit Reserve) may not
exceed the lesser of (A) Two Hundred Thousand Dollars ($200,000), minus the sum
of all amounts used for Cash Management Services or (B) the lesser of
Revolving Line or the Borrowing Base, minus the sum of all outstanding principal
amounts of any Advances (including any amounts used for Cash Management
Services).
(b) If,
on the Revolving Line Maturity Date (or the effective date of any termination of
this Agreement or the Revolving Line), there are any outstanding Letters of
Credit, then on such date Borrower shall provide to Bank cash collateral in an
amount equal to one hundred five percent (105%) of the Dollar Equivalent of the
face amount of all such Letters of Credit plus all interest, fees, and costs due
or to become due in connection therewith (as estimated by Bank in its good faith
business judgment), to secure all of the Obligations relating to such Letters of
Credit. All Letters of Credit shall be in form and substance
acceptable to Bank in its sole discretion and shall be subject to the terms and
conditions of Bank’s standard Application and Letter of Credit Agreement (the
“
Letter of Credit
Application
”). Borrower agrees to execute any further
documentation in connection with the Letters of Credit as Bank may reasonably
request. Borrower further agrees to be bound by the regulations and
interpretations of the issuer of any Letters of Credit guarantied by Bank and
opened for Borrower’s account or by Bank’s interpretations of any Letter of
Credit issued by Bank for Borrower’s account, and Borrower understands and
agrees that Bank shall not be liable for any error, negligence, or mistake,
whether of omission or commission, in following Borrower’s instructions or those
contained in the Letters of Credit or any modifications, amendments, or
supplements thereto.
(c) The
obligation of Borrower to immediately reimburse Bank for drawings made under
Letters of Credit shall be absolute, unconditional, and irrevocable, and shall
be performed strictly in accordance with the terms of this Agreement, such
Letters of Credit, and the Letter of Credit Application.
2.1.3
Cash Management
Services Sublimit
. Borrower may use the Revolving Line for
Bank’s cash management services, which may include merchant services, direct
deposit of payroll, business credit card, and check cashing services identified
in Bank’s various cash management services agreements (collectively, the “
Cash Management Services
”), in
an aggregate amount not to exceed the lesser of (A) Two Hundred Thousand Dollars
($200,000), minus the Dollar Equivalent of the face amount of any outstanding
Letters of Credit (including drawn but unreimbursed Letters of Credit or (B) the
lesser of Revolving Line or the Borrowing Base, minus (i) the sum of all
outstanding principal amounts of any Advances, minus (ii) the Dollar Equivalent
of the face amount of any outstanding Letters of Credit. Any amounts
Bank pays on behalf of Borrower for any Cash Management Services will be treated
as Advances under the Revolving Line and will accrue interest at the interest
rate applicable to Advances.
2.1.4
Term
Loan
.
(a)
Availability
. Bank
shall make one (1) term loan available to Borrower in an amount equal to the
Term Loan Amount on the Effective Date subject to the satisfaction of the terms
and conditions of this Agreement. Borrower shall use a portion
of the Term Loan to repay Seven Hundred Seventy Thousand Dollars ($770,000)
of the outstanding principal amount of the Nicholson/Ramey
Subordinated Debt.
(b)
Repayment
. Borrower
shall repay the Term Loan in (i) thirty six (36) equal installments of
principal, plus (ii) monthly payments of accrued interest (each, a “
Term Loan
Payment
”). Beginning on the first day of the month following
the month in which the Funding Date occurs, each Term Loan Payment shall be
payable on the first day of each month. Borrower’s final Term Loan
Payment, due on the Term Loan Maturity Date, shall include all outstanding
principal and accrued and unpaid interest under the Term Loan. Once
repaid, the Term Loan may not be reborrowed.
(c)
Permitted Prepayment of Term
Loan
. So long as no Event of Default has occurred and is
continuing, Borrower shall have the option to prepay all, but not less than all,
of the Term Loan advanced by Bank under this Agreement, provided Borrower (i)
delivers written notice to Bank of its election to prepay the Term Loan at least
thirty (30) days prior to such prepayment, and (ii) pays, on the date of such
prepayment (A) all outstanding principal plus accrued and unpaid interest with
respect to the Term Loan, (B) if applicable, the Term Loan Prepayment Fee,
and (C) all other sums, if any, that shall have become due and payable with
respect to the Term Loan, including interest at the Default Rate with respect to
any past due amounts owed with respect to the Term Loan; provided however that
the Term Loan Prepayment Fee shall be waived if Borrower transfers to another
division of Bank.
2.2
Overadvances
. If,
at any time, the sum of (a) the outstanding principal amount of any Advances
(including any amounts used for Cash Management Services) plus (b) the face
amount of any outstanding Letters of Credit (including drawn but unreimbursed
Letters of Credit) exceeds the lesser of the Revolving Line or the Borrowing
Base, Borrower shall immediately pay to Bank in cash such excess
amount.
2.3
Payment of Interest on the Credit
Extensions.
(a)
Interest
Rate
.
(i)
Advances
. Subject
to Section 2.3(b), the principal amount outstanding under the Revolving Line
shall accrue interest at a floating per annum rate equal to the greater of (A)
one and one quarter percentage points (1.25%) above the Prime Rate or (B) five
and one quarter percentage points (5.25%), which interest shall be payable
monthly in accordance with Section 2.3(f).
(ii)
Term
Loan
. Subject to Section 2.3(b), the principal amount
outstanding under the Term Loan shall accrue interest at a fixed per annum rate
equal to six and one half percentage points (6.50%), which interest shall be
payable monthly.
(b)
Default
Rate
. Immediately upon the occurrence and during the
continuance of an Event of Default, Obligations shall bear interest at a rate
per annum which is five percentage points (5.00%) above the rate that is
otherwise applicable thereto (the “
Default Rate
”) unless Bank
otherwise elects from time to time in its sole discretion to impose a smaller
increase. Fees and expenses which are required to be paid by Borrower
pursuant to the Loan Documents (including, without limitation, Bank Expenses)
but are not paid when due shall bear interest until paid at a rate equal to the
highest rate applicable to the Obligations. Payment or acceptance of
the increased interest rate provided in this Section 2.3(b) is not a
permitted alternative to timely payment and shall not constitute a waiver of any
Event of Default or otherwise prejudice or limit any rights or remedies of
Bank.
(c)
Adjustment to Interest
Rate
. Changes to the interest rate of any Credit Extension
based on changes to the Prime Rate shall be effective on the effective date of
any change to the Prime Rate and to the extent of any such change.
(d)
Computation; 360-Day
Year
. In computing interest, the date of the making of any
Credit Extension shall be included and the date of payment shall be excluded;
provided, however,
that
if any Credit Extension is repaid on the same day on which it is made, such day
shall be included in computing interest on such Credit
Extension. Interest shall be computed on the basis of a 360-day year
for the actual number of days elapsed.
(e)
Debit of
Accounts
. Bank may debit any of Borrower’s deposit accounts
maintained with Bank, including the Designated Deposit Account, for principal
and interest payments or any other amounts Borrower owes Bank when
due. These debits shall not constitute a set-off.
(f)
Interest Payment
Date
. Unless otherwise provided, interest is payable monthly
on the first calendar day of each month.
2.4
Fees
. Borrower
shall pay to Bank:
(a)
Commitment
Fee
. A fully earned, non-refundable commitment fee of Fifteen
Thousand Dollars ($15,000) on the Effective Date and Bank hereby acknowledges
receipt of Nine Thousand Dollars ($9,000) prior to the Effective Date which
shall be applied to such commitment fee on the Effective Date;
(b)
Letter of Credit
Fee
. Bank’s customary fees and expenses for the issuance or
renewal of Letters of Credit, including, without limitation, a letter of credit
fee of two percent (2.00%) per annum of the Dollar Equivalent of the face amount
of each Letter of Credit issued, upon the issuance of such Letter of Credit,
each anniversary of the issuance during the term of such Letter of Credit, and
upon the renewal of such Letter of Credit by Bank;
(c)
Revolving Line Early
Termination Fee
. The Revolving Line Early Termination Fee if
and when due pursuant to the terms of Section 2.1.1(c);
(d)
Term Loan Prepayment
Fee
. The Term Loan Prepayment Fee if and when due pursuant to
the terms of Section 2.1.4(c); and
(e)
Bank
Expenses
. All Bank Expenses (including reasonable attorneys’
fees and expenses for documentation and negotiation of this Agreement) incurred
through and after the Effective Date, promptly upon request for payment
therefor.
2.5
Payments; Application of Payments.
(a) All
payments (including prepayments) to be made by Borrower under any Loan Document
shall be made in immediately available funds in U.S. Dollars, without setoff or
counterclaim, before 12:00 p.m. Pacific time on the date when
due. Payments of principal and/or interest received after 12:00 p.m.
Pacific time are considered received at the opening of business on the next
Business Day. When a payment is due on a day that is not a Business
Day, the payment shall be due the next Business Day, and additional fees or
interest, as applicable, shall continue to accrue until paid.
(b) Bank
shall apply the whole or any part of collected funds against the Revolving Line
or credit such collected funds to a depository account of Borrower with Bank (or
an account maintained by an Affiliate of Bank), the order and method of such
application to be in the sole discretion of Bank. Borrower shall have
no right to specify the order or the accounts to which Bank shall allocate or
apply any payments required to be made by Borrower to Bank or otherwise received
by Bank under this Agreement when any such allocation or application is not
specified elsewhere in this Agreement.
3
CONDITIONS OF
LOANS
3.1
Conditions Precedent to Initial
Credit Extension
. Bank’s obligation to make the initial Credit
Extension is subject to the condition precedent that Bank shall have received,
in form and substance satisfactory to Bank, such documents, and completion of
such other matters, as Bank may reasonably deem necessary or appropriate,
including, without limitation:
(a) duly
executed copies of signatures to the Loan Documents which are not specifically
listed below;
(b) Borrower’s
Operating Documents and a good standing certificate of Borrower certified by the
Secretary of State of the State of Nevada as of a date no earlier than thirty
(30) days prior to the Effective Date;
(c) duly
executed copies of signatures to the completed Borrowing Resolutions for
Borrower;
(d) the
Subordination Agreement, together with the duly executed copies of signatures
thereto;
(e) certified
copies, dated as of a recent date, of financing statement searches, as Bank
shall request, accompanied by written evidence (including any UCC termination
statements) that the Liens indicated in any such financing statements either
constitute Permitted Liens or have been or, in connection with the initial
Credit Extension, will be terminated or released;
(f)
the Perfection Certificate of Borrower, together with the duly
executed original signatures thereto;
(g) the
completion of the Initial Audit with results satisfactory to Bank in its sole
and absolute discretion (provided however such Initial Audit shall only be a
condition precedent to the first Advance and not to the making of the Term
Loan); and
(h) payment
of the commitment fee as specified in Section 2.4(a).
3.2
Conditions
Precedent to all Credit Extensions
. Bank’s obligations to make
each Credit Extension, including the initial Credit Extension, is subject to the
following conditions precedent:
(a) except
as otherwise provided in Section 3.5(a), timely receipt of an executed
Payment/Advance Form;
(b) (A)
the representations and warranties in this Agreement shall be true, accurate,
and complete in all material respects on the date of the Payment/Advance Form
and on the Funding Date of each Credit Extension; provided, however, that such
materiality qualifier shall not be applicable to any representations and
warranties that already are qualified or modified by materiality in the text
thereof (but only to the extent of such qualification or modification); and
provided, further that those representations and warranties expressly referring
to a specific date shall be true, accurate and complete in all material respects
as of such date, and (B) no Event of Default shall have occurred and be
continuing or result from the Credit Extension. Each Credit Extension
is Borrower’s representation and warranty on that date that the representations
and warranties in this Agreement remain true, accurate, and complete in all
material respects; provided, however, that such materiality qualifier shall not
be applicable to any representations and warranties that already are qualified
or modified by materiality in the text thereof (but only to the extent of such
qualification or modification); and provided, further that those representations
and warranties expressly referring to a specific date shall be true, accurate
and complete in all material respects as of such date; and
(c) in
Bank’s sole discretion, there has not been a Material Adverse
Change.
3.3
Post-Closing
Conditions
. Within thirty (30) days after the Effective Date,
Bank shall have received, in form and substance satisfactory to
Bank:
(a) duly
executed original signatures to the Loan Documents which are not specifically
listed below;
(b) duly
executed original signatures to the completed Borrowing Resolutions for
Borrower;
(c) the
Subordination Agreement, together with the duly executed original signatures
thereto;
(d) payment
of the Bank Expenses then due as specified in Section 2.4 hereof;
(e) a
landlord’s consent in favor of Bank for each of Borrower’s leased locations by
the respective landlord thereof, together with the duly executed original
signatures thereto; and
(f) evidence
satisfactory to Bank that the insurance policies required by Section 6.5 hereof
are in full force and effect, together with appropriate evidence showing lender
loss payable and/or additional insured clauses or endorsements in favor of
Bank.
3.4
Covenant to
Deliver
. Except as otherwise provided in Section 3.3, in
connection with each Credit Extension, Borrower agrees to deliver to Bank each
item required to be delivered to Bank under this Agreement as a condition
precedent to such Credit Extension. Borrower expressly agrees that a
Credit Extension made prior to the receipt by Bank of any such item shall not
constitute a waiver by Bank of Borrower’s obligation to deliver such item, and
the making of any Credit Extension in the absence of a required item shall be in
Bank’s sole discretion.
3.5
Procedures
for Borrowing
.
(a)
Advances
. Subject
to the prior satisfaction of all other applicable conditions to the making of an
Advance set forth in this Agreement, to obtain an Advance (other than Advances
under Sections 2.1.2 or 2.1.3), Borrower shall notify Bank (which notice shall
be irrevocable) by electronic mail, facsimile, or telephone by 12:00 p.m.
Pacific time on the Funding Date of the Advance. Together with any
such electronic or facsimile notification, Borrower shall deliver to Bank by
electronic mail or facsimile a completed Payment/Advance Form executed by a
Responsible Officer or his or her designee. Bank may rely on any
telephone notice given by a person whom Bank believes is a Responsible Officer
or designee. Bank shall credit Advances to the Designated Deposit
Account. Bank may make Advances under this Agreement based on
instructions from a Responsible Officer or his or her designee or without
instructions if the Advances are necessary to meet Obligations which have become
due.
(b)
Term
Loan
. Subject to the prior satisfaction of all other
applicable conditions to the making of the Term Loan set forth in this
Agreement, if any portion of the proceeds of the Term Loan shall be used to
purchase or finance Equipment, Borrower shall deliver to Bank by electronic mail
or facsimile a copy of the invoice for the Equipment to be purchased or
refinanced and the request for the Term Loan.
4
CREATION OF SECURITY
INTEREST
4.1
Grant of
Security Interest
. Borrower hereby grants Bank, to secure the
payment and performance in full of all of the Obligations, a continuing security
interest in, and pledges to Bank, the Collateral, wherever located, whether now
owned or hereafter acquired or arising, and all proceeds and products
thereof.
4.2
Priority of Security
Interest
. Borrower represents, warrants, and covenants that
the security interest granted herein is and shall at all times continue to be a
first priority perfected security interest in the Collateral (subject only to
Permitted Liens that may have superior priority to Bank’s Lien under this
Agreement). If Borrower shall acquire a commercial tort claim,
Borrower shall promptly notify Bank in a writing signed by Borrower of the
general details thereof and grant to Bank in such writing a security interest
therein and in the proceeds thereof, all upon the terms of this Agreement, with
such writing to be in form and substance reasonably satisfactory to
Bank.
If this
Agreement is terminated, Bank’s Lien in the Collateral shall continue until the
Obligations (other than inchoate indemnity obligations) are repaid in full in
cash. Upon payment in full in cash of the Obligations and at such
time as Bank’s obligation to make Credit Extensions has terminated, Bank shall,
at Borrower’s sole cost and expense, take the steps necessary to release its
Liens in the Collateral and all rights therein shall revert to
Borrower.
4.3
Authorization to File Financing
Statements; Power of Attorney
. Borrower hereby authorizes Bank
to file financing statements, without notice to Borrower, with all appropriate
jurisdictions to perfect or protect Bank’s interest or rights in the Collateral
hereunder, including a notice that any disposition of the Collateral, by either
Borrower or any other Person in violation of this Agreement shall be deemed to
violate the rights of Bank under the Code. Such financing statements
may indicate the Collateral as “all assets of the Debtor” or words of similar
effect, or as being of an equal or lesser scope, or with greater detail, all in
Bank’s discretion. Borrower hereby appoints Bank as its lawful
attorney-in-fact to sign Borrower’s name on any documents necessary to perfect
or continue the perfection of Bank’s security interest in the Collateral
regardless of whether an Event of Default has occurred. Bank’s
foregoing appointment as Borrower’s attorney in fact, and all of Bank’s rights
and powers, coupled with an interest, are irrevocable until all Obligations have
been fully repaid and performed and Bank’s obligation to provide Credit
Extensions terminates.
5
REPRESENTATIONS AND
WARRANTIES
Borrower
represents and warrants to Bank as follows:
5.1
Due Organization, Authorization;
Power and Authority
. Borrower
is duly existing and in
good standing as a Registered Organization in its jurisdiction of formation and
is qualified and licensed to do business and is in good standing in each
jurisdiction in which the conduct of its business or its ownership of property
requires that it be qualified except where the failure to do so could not
reasonably be expected to have a material adverse effect on Borrower’s
business. In connection with this Agreement, Borrower has delivered
to Bank a completed certificate
signed by Borrower
entitled “Perfection Certificate”. Borrower represents and warrants
to Bank that (a) Borrower’s exact legal name is that indicated on the
Perfection Certificate and on the signature page hereof; (b) Borrower is an
organization of the type and is organized in the jurisdiction set forth in the
Perfection Certificate; (c) the Perfection Certificate accurately sets forth
Borrower’s organizational identification number or accurately states that
Borrower has none; (d) the Perfection Certificate accurately sets forth
Borrower’s place of business, or, if more than one, its chief executive office
as well as Borrower’s mailing address (if different than its chief executive
office); (e) Borrower (and each of its predecessors) has not, in the past
five (5) years, changed its jurisdiction of formation, organizational structure
or type, or any organizational number assigned by its jurisdiction; and (f) all
other information set forth on the Perfection Certificate pertaining to Borrower
and each of its Subsidiaries is accurate and complete (it being understood and
agreed that Borrower may from time to time update certain information in the
Perfection Certificate after the Effective Date with the written consent of Bank
and/or to the extent explicitly permitted by one or more specific provisions in
this Agreement). If Borrower is not now a Registered Organization but
later becomes one, Borrower shall promptly notify Bank of such occurrence and
provide Bank with Borrower’s organizational identification number, which
notification shall constitute a permitted update to the Perfection
Certificate.
The
execution, delivery and performance by Borrower of the Loan Documents to which
it is a party have been duly authorized, and do not (i) conflict with any of
Borrower’s organizational documents, (ii) contravene, conflict with,
constitute a default under or violate any material Requirement of Law,
(iii) contravene, conflict or violate any applicable order, writ, judgment,
injunction, decree, determination or award of any Governmental Authority by
which Borrower or any of its Subsidiaries or any of their property or assets may
be bound or affected, (iv) require any action by, filing, registration, or
qualification with, or Governmental Approval from, any Governmental Authority
(except such Governmental Approvals which have already been obtained and are in
full force and effect
or (v) constitute
an event of default under any material agreement by which Borrower is
bound. Borrower is not in default under any agreement to which it is
a party or by which it is bound in which the default could reasonably be
expected to have a material adverse effect on Borrower’s business.
5.2
Collateral
. Borrower
has good title to, has rights in, and the power to transfer each item of the
Collateral upon which it purports to grant a Lien hereunder, free and clear of
any and all Liens except Permitted Liens. Borrower has no deposit
accounts other than the deposit accounts with Bank, the deposit accounts, if
any, described in the Perfection Certificate delivered to Bank in connection
herewith, or of which Borrower has given Bank notice and taken such actions as
are necessary to give Bank a perfected security interest therein. The
Accounts are bona fide, existing obligations of the Account
Debtors.
The
Collateral is not in the possession of any third party bailee (such as a
warehouse) except as otherwise provided in the Perfection
Certificate. None of the components of the Collateral shall be
maintained at locations other than as provided in the Perfection Certificate or
as permitted pursuant to Section 7.2; provided, however, that Bank consents to
Borrower, from time to time, (i) depositing copies of its source code in escrow
in the ordinary course of business and (ii) providing copies of confidential
information concerning Borrower to third parties subject to standard
non-disclosure agreements.
Borrower
is the sole owner of the Intellectual Property which it owns or purports to own
except for (a) non-exclusive licenses granted to its customers in the ordinary
course of business, (b) over-the-counter software that is commercially available
to the public, and (c) material Intellectual Property licensed to Borrower and
noted on the Perfection Certificate. Each Patent which it owns or
purports to own and which is material to Borrower’s business is valid and
enforceable, and no part of the Intellectual Property which Borrower owns or
purports to own and which is material to Borrower’s business has been judged
invalid or unenforceable, in whole or in part. To the best of
Borrower’s knowledge, no claim has been made that any part of the Intellectual
Property violates the rights of any third party except to the extent such claim
would not reasonably be expected to have a material adverse effect on Borrower’s
business.
Except as
noted on the Perfection Certificate, Borrower is not a party to, nor is it bound
by, any Restricted License.
5.3
Accounts
Receivable
. For any Eligible Account listed in any Borrowing
Base Certificate, all statements made and all unpaid balances appearing in all
invoices, instruments and other documents evidencing such Eligible Accounts are
and shall be true and correct and all such invoices, instruments and other
documents evidencing such Eligible Accounts, and all of Borrower’s Books with
respect to such Eligible Accounts are genuine and in all respects what they
purport to be. Whether or not an Event of Default has occurred and is
continuing, Bank may notify any Account Debtor owing Borrower money of Bank’s
security interest in such funds and verify the amount of such Eligible
Account. All sales and other transactions underlying or giving rise
to each Eligible Account shall comply in all material respects with all
applicable laws and governmental rules and regulations. Borrower has
no knowledge of any actual or imminent Insolvency Proceeding of any Account
Debtor whose accounts are Eligible Accounts listed in any Borrowing Base
Certificate. To the best of Borrower’s knowledge, all signatures and
endorsements on all documents, instruments, and agreements relating to all
Eligible Accounts listed in any Borrowing Base Certificate are genuine, and all
such documents, instruments and agreements are legally enforceable in accordance
with their terms.
5.4
Litigation
. Except
as otherwise disclosed to Bank in writing, there are no actions or proceedings
pending or, to the knowledge of the Responsible Officers, threatened in writing
by or against Borrower or any of its Subsidiaries involving more than,
individually or in the aggregate, One Hundred Thousand Dollars
($100,000).
5.5
Financial
Statements; Financial Condition
. All consolidated financial
statements for Borrower and any of its Subsidiaries delivered to Bank fairly
present in all material respects Borrower’s consolidated financial condition and
Borrower’s consolidated results of operations (subject to normal year-end
adjustments). There has not been any material deterioration in
Borrower’s consolidated financial condition since the date of the most recent
financial statements submitted to Bank.
5.6
Solvency
. The fair
salable value of Borrower’s assets (including goodwill minus disposition costs)
exceeds the fair value of its liabilities; Borrower is not left with
unreasonably small capital after the transactions in this Agreement; and
Borrower is able to pay its debts (including trade debts) as they
mature.
5.7
Regulatory
Compliance
. Borrower is not an “investment company” or a
company “controlled” by an “investment company” under the Investment Company Act
of 1940, as amended. Borrower is not engaged as one of its important
activities in extending credit for margin stock (under Regulations X, T and U of
the Federal Reserve Board of Governors). Borrower has complied in all
material respects with the Federal Fair Labor Standards Act. Neither
Borrower nor any of its Subsidiaries is a “holding company” or an “affiliate” of
a “holding company” or a “subsidiary company” of a “holding company” as each
term is defined and used in the Public Utility Holding Company Act of
2005. Borrower has not violated any laws, ordinances or rules, the
violation of which could reasonably be expected to have a material adverse
effect on its business. None of Borrower’s or any of its
Subsidiaries’ properties or assets has been used by Borrower or any Subsidiary
or, to the best of Borrower’s knowledge, by previous Persons, in disposing,
producing, storing, treating, or transporting any hazardous substance other than
legally. Borrower and each of its Subsidiaries have obtained all
consents, approvals and authorizations of, made all declarations or filings
with, and given all notices to, all Government Authorities that are necessary to
continue their respective businesses as currently conducted except for such
failures to perform the foregoing that would not reasonably be expected to
result in a Material Adverse Change.
5.8
Subsidiaries;
Investments
. Borrower does not own any stock, partnership
interest or other equity securities except for Permitted
Investments.
5.9
Tax
Returns and Payments; Pension Contributions
. Borrower has
timely filed all required tax returns and reports, and Borrower has timely paid
all foreign, federal, state and local taxes, assessments, deposits and
contributions owed by Borrower except for such failures to perform the foregoing
that would not reasonably be expected to result in a Material Adverse Change on
its business. Borrower may defer payment of any contested taxes,
provided that Borrower (a) in good faith contests its obligation to pay the
taxes by appropriate proceedings promptly and diligently instituted and
conducted, (b) notifies Bank in writing of the commencement of, and any material
development in, the proceedings, (c) posts bonds or takes any other steps
required to prevent the governmental authority levying such contested taxes from
obtaining a Lien upon any of the Collateral that is other than a “Permitted
Lien.” Borrower is unaware of any claims or adjustments proposed for
any of Borrower’s prior tax years which could result in additional taxes
becoming due and payable by Borrower other than as disclosed to Bank in
writing. Borrower has paid all amounts necessary to fund all present
pension, profit sharing and deferred compensation plans in accordance with their
terms (except for such failures to perform the foregoing that would not
reasonably be expected to result in a Material Adverse Change), and Borrower has
not withdrawn from participation in, and has not permitted partial or complete
termination of, or permitted the occurrence of any other event with respect to,
any such plan which could reasonably be expected to result in any material
liability of Borrower, including any material liability to the Pension Benefit
Guaranty Corporation or its successors or any other governmental
agency.
5.10
Use of
Proceeds
. Borrower shall use the proceeds of the Credit
Extensions solely as working capital and to fund its general business
requirements and not for personal, family, household or agricultural purposes;
provided, however, that a portion of the Term Loan proceeds will be used to pay
down the Nicholson/Ramey Subordinated Debt.
5.11
Full
Disclosure
. No written representation, warranty or other
statement of Borrower in any certificate or written statement given to Bank, as
of the date such representation, warranty, or other statement was made, taken
together with all such written certificates and written statements given to
Bank, contains any untrue statement of a material fact or omits to state a
material fact necessary to make the statements contained in the certificates or
statements not misleading (it being recognized by Bank that (i) the projections
and forecasts provided by Borrower in good faith and based upon reasonable
assumptions are not viewed as facts and that actual results during the period or
periods covered by such projections and forecasts may differ from the projected
or forecasted results, and (ii) in the case of a Compliance Certificate, any
minor inaccuracies in the calculation of the financial covenants will not be
deemed to he material unless such inaccuracies cause the calculations to
indicate compliance with a financial covenant when, in fact, the Company was not
in compliance with such financial covenant).
5.12
Definition of “Knowledge
.
”
For purposes of
the Loan Documents, whenever a representation or warranty is made to Borrower’s
knowledge or awareness, to the “best of” Borrower’s knowledge, or with a similar
qualification, knowledge or awareness means the actual knowledge, after
reasonable investigation, of the Responsible Officers.
6
AFFIRMATIVE
COVENANTS
Borrower
shall do all of the following:
6.1
Government Compliance.
(a) Maintain
its and all its Subsidiaries’ legal existence and good standing in their
respective jurisdictions of formation and maintain qualification in each
jurisdiction in which the failure to so qualify would reasonably be expected to
have a material adverse effect on Borrower’s business or
operations. Borrower shall comply, and have each Subsidiary comply,
with all laws, ordinances and regulations to which it is subject, noncompliance
with which could have a material adverse effect on Borrower’s
business.
(b) Obtain
all of the Governmental Approvals necessary for the performance by Borrower of
its obligations under the Loan Documents to which it is a party and the grant of
a security interest to Bank in all of its property except for such failures to
perform the foregoing that would not reasonably be expected to result in a
Material Adverse Change. Borrower shall promptly provide copies of
any such obtained Governmental Approvals to Bank.
6.2
Financial Statements, Reports,
Certificates. Deliver to Bank:
(a)
Borrowing Base
Reports
. Within thirty (30) days after the last day of each
month, aged listings of accounts receivable and accounts payable (by invoice
date) and a report of Deferred Revenue as of the last day of such month (the
“
Borrowing Base
Reports
”);
(b)
Borrowing Base
Certificate
. Within thirty (30) days after the last day of
each month and together with the Borrowing Base Reports, a duly completed
Borrowing Base Certificate signed by a Responsible Officer;
(c)
Monthly Financial
Statements
. As soon as available, but no later than thirty
(30) days after the last day of each month, a company prepared consolidated
balance sheet and income statement covering Borrower’s consolidated operations
for such month certified by a Responsible Officer and in a form acceptable to
Bank (the “
Monthly Financial
Statements
”);
(d)
Monthly Compliance
Certificate
. Within thirty (30) days after the last day of
each month and together with the Monthly Financial Statements, a duly completed
Compliance Certificate signed by a Responsible Officer, certifying that as of
the end of such month, Borrower was in full compliance with all of the terms and
conditions of this Agreement (except as noted therein), and setting forth
calculations showing compliance with the financial covenants set forth in this
Agreement (except as noted therein) and such other information as Bank shall
reasonably request;
(e)
Annual Audited Financial
Statements
. As soon as available, but no later than one
hundred five (105) days after the last day of Borrower’s fiscal year (beginning
with the 2010 fiscal year), audited consolidated financial statements prepared
under GAAP, consistently applied, together with an unqualified opinion on the
financial statements from an independent certified public accounting firm
acceptable to Bank in its reasonable discretion;
(f)
Annual Financial
Projections
. As soon as available, but no later than the
earlier of (i) fifteen (15) days after presentation by Borrower’s management to
Borrower’s board of directors or (ii) April 30 of each year, Borrower’s annual
budget for its fiscal year ending on March 31 of the following
year;
(g)
Other
Statements
. Within five (5) Business Days of delivery, copies
of all statements, reports and notices made available to Borrower’s common stock
holders as a group;
(h)
SEC
Filings
. Within five (5) Business Days of filing, copies of
all periodic and other reports, proxy statements and other materials filed by
Borrower with the SEC, any Governmental Authority succeeding to any or all of
the functions of the SEC or with any national securities exchange, or
distributed to its shareholders (as a group), as the case may
be. Documents required to be delivered pursuant to the terms hereof
(to the extent any such documents are included in materials otherwise filed with
the SEC) may be delivered electronically and if so delivered, shall be deemed to
have been delivered on the date on which Borrower posts such documents, or
provides a link thereto, on Borrower’s website on the Internet at Borrower’s
website address;
(i)
Legal Action
Notice
. A prompt report of any legal actions pending or
threatened in writing against Borrower or any of its Subsidiaries that could
result in damages or costs to Borrower or any of its Subsidiaries of,
individually or in the aggregate, One Hundred Thousand Dollars ($100,000) or
more;
(j)
Intellectual Property
Notice
. Prompt written notice of (i) any material change in the
composition of the Intellectual Property, (ii) the registration of any
copyright, including any subsequent ownership right of Borrower in or to any
copyright, patent or trademark not previously disclosed in writing to Bank, and
(iii) Borrower’s knowledge of an event that could reasonably be expected to
materially and adversely affect the value of the Intellectual Property;
and
(k)
Other Financial
Information
. Such other budgets, sales projections, operating
plans and other financial information reasonably requested by Bank.
6.3
Intentionally Omitted.
6.4
Taxes;
Pensions
. Timely file, and require each of its Subsidiaries to
timely file, all required material tax returns and reports and timely pay, and
require each of its Subsidiaries to timely pay, all material foreign, federal,
state and local taxes, assessments, deposits and contributions owed by Borrower
and each of its Subsidiaries, except for deferred payment of any taxes contested
pursuant to the terms of Section 5.9, and shall deliver to Bank, promptly on
demand, appropriate certificates attesting to such payments, and pay all amounts
necessary to fund all present pension, profit sharing and deferred compensation
plans in accordance with their terms.
In the
event any payments are received by Bank from Borrower pursuant to this
Agreement, such payments will be made subject to applicable withholding for any
taxes, levies, fees, deductions, withholding, restrictions or conditions of any
nature whatsoever. Notwithstanding the foregoing, if at any time any
Governmental Authority, applicable law, regulation or international agreement
requires Borrower to make any such deduction or withholding from any such
payment or other sum payment hereunder to Bank, the amount due from Borrower
with respect to such payment or other sum payable hereunder will be increased to
the extent necessary to ensure that, after the making of such required deduction
or withholding, Bank receives a net sum equal to the sum which it would have
received had no deductions or withholding been required, and Borrower shall pay
the full amount deducted or withheld to the relevant Governmental Authority.
Borrower will, upon request, furnish Bank with proof satisfactory to Bank
indicating that Borrower has made such withholding payment; provided, however,
that Borrower need not make any withholding payment if the amount or validity of
such withholding payment is contested in good faith by appropriate proceedings
and as to which payment in full is bonded or reserved against by Borrower. The
agreements and obligations of Borrower contained in this provision shall survive
the termination of this Agreement.
6.5
Insurance
. Keep its
business and the Collateral insured for risks and in amounts standard for
companies in Borrower’s industry and location and as Bank may reasonably
request. Insurance policies shall be in a form, with insurance
providers, and in amounts that are satisfactory to Bank. All property
policies shall have a lender’s loss payable endorsement showing Bank as lender
loss payee and waive subrogation against Bank. All liability policies
shall show, or have endorsements showing, Bank as an additional
insured. All policies (or the loss payable and additional insured
endorsements) shall provide that the insurer shall give Bank at least twenty
(20) days notice before canceling, amending, or declining to renew its
policy. At Bank’s request, Borrower shall deliver certified copies of
policies and evidence of all premium payments. Proceeds payable under
any policy shall, at Bank’s option, be payable to Bank on account of any
Obligations due and owing at the time of such payment. If Borrower
fails to obtain insurance as required under this Section 6.5 or to pay any
amount or furnish any required proof of payment to third persons and Bank, Bank
may make all or part of such payment or obtain such insurance policies required
in this Section 6.5, and take any action under the policies Bank deems
prudent.
6.6
Operating Accounts
. Maintain
all of its operating and other deposit accounts and securities accounts with
Bank; provided however that Bank may maintain account number 3260410 at Amegy
Bank until the date thirty (30) days after the Effective Date;
6.7
Financial
Covenants
. Maintain as of the last day of each month, on a
consolidated basis with respect to Borrower:
(a)
Adjusted Quick
Ratio
. A ratio of Quick Assets to Current Liabilities minus
Deferred Revenue and minus the current portion of Subordinated Debt of at least
(i) 1.15 to 1.0 for measurement dates occurring from the Effective Date through
March 31, 2010, (ii) 1.35 to 1.0 for measurement dates occurring from April 1,
2010 through June 30, 2010 and (iii) 1.50 to 1.0 for measurement dates occurring
after June 30, 2010.
(b)
Fixed Charge Coverage
Ratio
. A Fixed Charge Coverage Ratio of at least 1.40 to
1.0.
6.8
Protection and Registration of Intellectual Property
Rights.
(a) (i)
Protect, defend and maintain the validity and enforceability of its Intellectual
Property; (ii) promptly advise Bank in writing of material infringements of its
Intellectual Property; and (iii) not allow any Intellectual Property material to
Borrower’s business to be abandoned, forfeited or dedicated to the public
without Bank’s written consent.
(b) If,
after the Effective Date, Borrower (i) obtains any Patent, registered Trademark,
registered Copyright, registered mask work, or any pending application for any
of the foregoing, whether as owner, licensee or otherwise, or (ii) applies for
any Patent or the registration of any Trademark, then Borrower shall immediately
provide written notice thereof to Bank and shall execute such intellectual
property security agreements and other documents and take such other actions as
Bank shall request in its good faith business judgment to perfect and maintain a
first priority perfected security interest in favor of Bank in such
property. If Borrower decides to register any Copyrights or mask
works in the United States Copyright Office, Borrower shall: (x) provide
Bank with at least fifteen (15) days prior written notice of Borrower’s intent
to register such Copyrights or mask works together with a copy of the
application it intends to file with the United States Copyright Office
(excluding exhibits thereto); (y) execute an intellectual property security
agreement and such other documents and take such other actions as Bank may
request in its good faith business judgment to perfect and maintain a first
priority perfected security interest in favor of Bank in the Copyrights or mask
works intended to be registered with the United States Copyright Office; and
(z) record such intellectual property security agreement with the United
States Copyright Office contemporaneously with filing the Copyright or mask work
application(s) with the United States Copyright Office. Borrower
shall promptly provide to Bank copies of all applications that it files for
Patents or for the registration of Trademarks, Copyrights or mask works,
together with evidence of the recording of the intellectual property security
agreement necessary for Bank to perfect and maintain a first priority perfected
security interest in such property.
(c) Provide
written notice to Bank within ten (10) days of entering or becoming bound by any
Restricted License (other than over-the-counter software that is commercially
available to the public). Borrower shall take such steps as Bank
requests to obtain the consent of, or waiver by, any person whose consent or
waiver is necessary for (i) any Restricted License to be deemed
“Collateral” and for Bank to have a security interest in it that might otherwise
be restricted or prohibited by law or by the terms of any such Restricted
License, whether now existing or entered into in the future, and (ii) Bank
to have the ability in the event of a liquidation of any Collateral to dispose
of such Collateral in accordance with Bank’s rights and remedies under this
Agreement and the other Loan Documents.
6.9
Litigation
Cooperation
. From the Effective Date and continuing through
the termination of this Agreement, make available to Bank, without expense to
Bank, Borrower and its officers, employees and agents and Borrower’s books and
records, to the extent that Bank may deem them reasonably necessary to prosecute
or defend any third-party suit or proceeding instituted by or against Bank with
respect to any Collateral or relating to Borrower.
6.10
Access
to Collateral; Books and Records
. Allow Bank, or its agents,
at reasonable times, on one (1) Business Day’s notice (provided no notice is
required if an Event of Default has occurred and is continuing), to inspect the
Collateral and audit and copy Borrower’s Books; provided, however, that if no
Event of Default has occurred and is continuing, the foregoing inspection right
shall be limited to once per calendar year. The foregoing inspections
and audits shall be at Borrower’s expense, and the charge therefor shall be
Eight Hundred Fifty Dollars ($850) per person per day (or such higher amount as
shall represent Bank’s then-current standard charge for the same), plus
reasonable out-of-pocket expenses. In the event Borrower and Bank
schedule an audit more than ten (10) days in advance, and Borrower cancels or
seeks to reschedule the audit with less than ten (10) days written notice to
Bank, then (without limiting any of Bank’s rights or remedies), Borrower shall
pay Bank a fee of One Thousand Dollars ($1,000) plus any out-of-pocket expenses
incurred by Bank to compensate Bank for the anticipated costs and expenses of
the cancellation or rescheduling.
6.11
Further
Assurances
. Execute any further instruments and take further
action as Bank reasonably requests to perfect or continue Bank’s Lien in the
Collateral or to effect the purposes of this Agreement. Deliver to
Bank,
within five
(5) Business Days after the same are sent or received, copies of all
correspondence, reports, documents and other filings with any Governmental
Authority regarding compliance with or maintenance of Governmental Approvals or
Requirements of Law or that could reasonably be expected to have a material
effect on any of the Governmental Approvals or otherwise on the operations of
Borrower or any of its Subsidiaries.
7
NEGATIVE
COVENANTS
Borrower
shall not do any of the following without Bank’s prior written
consent:
7.1
Dispositions
. Convey,
sell, lease, transfer, assign, or otherwise dispose of (collectively, “
Transfer
”), or permit any of
its Subsidiaries to Transfer, all or any part of its business or property,
except for Transfers (a) of Inventory in the ordinary course of business;
(b) of worn-out or obsolete Equipment; (c) in connection with Permitted Liens
and Permitted Investments; (d)
involving the grant of a
non-exclusive license to its customers in the ordinary course of business; and
(e) other assets with a value not to exceed Twenty Five Thousand Dollars
($25,000).
7.2
Changes
in Business, Management or Business Locations
. (a) Engage
in or permit any of its Subsidiaries to engage in any business other than the
businesses currently engaged in by Borrower and such Subsidiary, as applicable,
or reasonably related thereto; or reasonable extensions thereof; or (b)
liquidate or dissolve; or (c) have a change in CEO
.
Borrower
shall not, without at least thirty (30) days prior written notice to Bank: (1)
add any new offices or business locations, including warehouses (unless such new
offices or business locations contain less than Ten Thousand Dollars ($10,000)
in the Collateral) or deliver any portion of the Collateral valued, individually
or in the aggregate, in excess of Ten Thousand Dollars ($10,000) to a bailee at
a location other than to a bailee and at a location already disclosed in the
Perfection Certificate, (2) change its jurisdiction of organization, (3) change
its organizational structure or type, (4) change its legal name, or (5) change
any organizational number (if any) assigned by its jurisdiction of
organization. If Borrower intends to deliver any portion of the
Collateral valued, individually or in the aggregate, in excess of Ten Thousand
Dollars ($10,000) to a bailee, and Bank and such bailee are not already parties
to a bailee agreement governing both the Collateral and the location to which
Borrower intends to deliver the Collateral, then Borrower will first receive the
written consent of Bank, and such bailee shall execute and deliver a bailee
agreement in form and substance satisfactory to Bank in its sole
discretion.
7.3
Mergers
or Acquisitions
. Merge or consolidate, or permit any of its
Subsidiaries to merge or consolidate, with any other Person, or acquire, or
permit any of its Subsidiaries to acquire, all or substantially all of the
capital stock or property of another Person. A Subsidiary may merge
or consolidate into another Subsidiary or into Borrower.
7.4
Indebtedness
. Create,
incur, assume, or be liable for any Indebtedness, or permit any Subsidiary to do
so, other than Permitted Indebtedness.
7.5
Encumbrance
. Create,
incur, allow, or suffer any Lien on any of the Collateral or assign or convey
any right to receive income, including the sale of any Accounts, or permit any
of its Subsidiaries to do so, except for Permitted Liens, permit any Collateral
not to be subject to the first priority security interest granted herein, or
enter into any agreement, document, instrument or other arrangement (except with
or in favor of Bank) with any Person which directly or indirectly prohibits or
has the effect of prohibiting Borrower or any Subsidiary
from assigning,
mortgaging, pledging, granting a security interest in or upon, or encumbering
any of Borrower’s or any Subsidiary’s Intellectual Property, except as is
otherwise permitted in Section 7.1 hereof and the definition of “Permitted
Liens” herein.
7.6
Maintenance of
Collateral Accounts
. Maintain any Collateral Account except
pursuant to the terms of Section 6.6.
7.7
Distributions;
Investments
. (a) Pay any cash dividends or make any cash
distribution or payment or redeem, retire or purchase for cash any capital
stock
; or
(b) directly or indirectly make
any Investment other than Permitted Investments, or permit any of its
Subsidiaries to do so.
7.8
Transactions
with Affiliates
. Directly or indirectly enter into or permit
to exist any material transaction with any Affiliate of Borrower, except for (i)
transactions that are in the ordinary course of Borrower’s business, upon fair
and reasonable terms that are no less favorable to Borrower than would be
obtained in an arm’s length transaction with a non-affiliated Person and
transactions permitted pursuant to the terms of Section 7.3; (ii) employment and
similar agreements and other compensation arrangements with members of
Borrower’s management and members of Borrower’s board of directors; and (iii)
the Nicholson/Ramey Subordinated Debt.
7.9
Subordinated
Debt
. (a) Make or permit any payment on any Subordinated Debt,
except under the terms of the Subordination Agreement and any other
subordination, intercreditor, or other similar agreement to which such
Subordinated Debt is subject, or (b) amend any provision in any document
relating to the Subordinated Debt which would increase the amount thereof or
adversely affect the subordination thereof to Obligations owed to
Bank.
7.10
Compliance
. Become
an “investment company” or a company controlled by an “investment company”,
under the Investment Company Act of 1940, as amended, or undertake as one of its
important activities extending credit to purchase or carry margin stock (as
defined in Regulation U of the Board of Governors of the Federal Reserve
System), or use the proceeds of any Credit Extension for that purpose; fail to
meet the minimum funding requirements of ERISA, permit a Reportable Event or
Prohibited Transaction, as defined in ERISA, to occur; fail to comply with the
Federal Fair Labor Standards Act or violate any other law or regulation, if the
failure to comply or violation could reasonably be expected to have a material
adverse effect on Borrower’s business, or permit any of its Subsidiaries to do
so; withdraw or permit any Subsidiary to withdraw from participation in, permit
partial or complete termination of, or permit the occurrence of any other event
with respect to, any present pension, profit sharing and deferred compensation
plan which could reasonably be expected to result in any liability of Borrower,
including any liability to the Pension Benefit Guaranty Corporation or its
successors or any other governmental agency.
8
EVENTS OF
DEFAULT
Any one
of the following shall constitute an event of default (an “
Event of Default
”) under this
Agreement:
8.1
Payment
Default
. Borrower fails to (a) make any payment of
principal or interest on any Credit Extension on its due date, or (b) pay
any other Obligations, in each case within three (3) Business Days after such
payment of principal or interest or such Obligations are due and payable (which
three (3) Business Day cure period shall not apply to payments due on the
Revolving Line Maturity Date or the Term Loan Maturity Date). During
the cure period, the failure to make or pay any payment specified under clause
(a) or (b) hereunder is not an Event of Default (but no Credit Extension will be
made during the cure period);
8.2
Covenant Default
.
(a) Borrower
fails or neglects to perform any obligation in Sections 6.2, 6.4, 6.5, 6.6, 6.7,
or 6.10 or violates any covenant in Section 7; or
(b) Borrower
fails or neglects to perform, keep, or observe any other term, provision,
condition, covenant or agreement contained in this Agreement or any Loan
Documents, and as to any default (other than those specified in this Section 8)
under such other term, provision, condition, covenant or agreement that can be
cured, has failed to cure the default within ten (10) days after the occurrence
thereof; provided, however, that if the default cannot by its nature be cured
within the ten (10) day period or cannot after diligent attempts by Borrower be
cured within such ten (10) day period, and such default is likely to be cured
within a reasonable time, then Borrower shall have an additional period (which
shall not in any case exceed thirty (30) days) to attempt to cure such default,
and within such reasonable time period the failure to cure the default shall not
be deemed an Event of Default (but no Credit Extensions shall be made during
such cure period). Cure periods provided under this section shall not
apply, among other things, to financial covenants or any other covenants set
forth in clause (a) above;
8.3
Material Adverse
Change
. A Material Adverse Change occurs;
8.4
Attachment; Levy; Restraint on Business.
(a) (i)
The service of process seeking to attach, by trustee or similar process, any
funds in excess of Ten Thousand Dollars ($10,000) of Borrower or of any entity
under the control of Borrower (including a Subsidiary) on deposit or otherwise
maintained with Bank or any Bank Affiliate, or (ii) a notice of lien or levy is
filed against any of Borrower’s assets by any government agency, and the same
under subclauses (i) and (ii) hereof are not, within ten (10) days after the
occurrence thereof, discharged or stayed (whether through the posting of a bond
or otherwise); provided, however, no Credit Extensions shall be made during any
ten (10) day cure period; or
(b) (i)
any material portion of Borrower’s assets is attached, seized, levied on, or
comes into possession of a trustee or receiver, or (ii) any court order
enjoins, restrains, or prevents Borrower from conducting any material part of
its business;
8.5
Insolvency
(a)
Borrower is unable to pay its debts (including trade debts) as they become due
or otherwise becomes insolvent; (b) Borrower initiates an Insolvency Proceeding;
or (c) an Insolvency Proceeding is initiated against Borrower and not dismissed
or stayed within thirty (30) days (but no Credit Extensions shall be made while
of any of the conditions described in clause (a) exist and/or until any
Insolvency Proceeding is dismissed);
8.6
Other
Agreements
. There is, under any agreement to which Borrower or
any Guarantor is a party with a third party or parties, (a) any default
resulting in a right by such third party or parties, whether or not exercised,
to accelerate the maturity of any Indebtedness in an amount individually or in
the aggregate in excess of One Hundred Thousand Dollars ($100,000); or (b) any
default by Borrower, the result of which could have a material adverse effect on
Borrower’s business.
8.7
Judgments
. One or
more final judgments, orders, or decrees for the payment of money in an amount,
individually or in the aggregate, of at least One Hundred Thousand Dollars
($100,000) (not covered by independent third-party insurance as to which
liability has been accepted by such insurance carrier) shall be rendered against
Borrower and the same are not, within ten (10) days after the entry thereof,
discharged or execution thereof stayed or bonded pending appeal, or such
judgments are not discharged prior to the expiration of any such stay (provided
that no Credit Extensions will be made prior to the discharge, stay, or bonding
of such judgment, order, or decree);
8.8
Misrepresentations
. Borrower
or any Person acting for Borrower makes any written representation, warranty, or
other written statement now or later in this Agreement, any Loan Document or in
any writing delivered to Bank or to induce Bank to enter this Agreement or any
Loan Document, and such written representation, warranty, or other statement is
incorrect in any material respect when made; or
8.9
Subordinated
Debt
. Any document, instrument, or agreement evidencing any
Subordinated Debt shall for any reason be revoked or invalidated or otherwise
cease to be in full force and effect, any Person shall be in breach thereof or
contest in any manner the validity or enforceability thereof or deny that it has
any further liability or obligation thereunder, or the Obligations shall for any
reason be subordinated or shall not have the priority contemplated by this
Agreement.
9
BANK’S RIGHTS AND
REMEDIES
9.1
Rights
and Remedies
. While an Event of Default occurs and is
continuing, Bank may, without notice or demand, do any or all of the
following:
(a) declare
all Obligations immediately due and payable (but if an Event of Default
described in Section 8.5 occurs, all Obligations are immediately due and payable
without any action by Bank);
(b) stop
advancing money or extending credit for Borrower’s benefit under this Agreement
or under any other agreement between Borrower and Bank;
(c) demand
that Borrower (i) deposit cash with Bank in an amount equal to one hundred five
percent (105%) of the Dollar Equivalent of the aggregate face amount of all
Letters of Credit remaining undrawn (plus all interest, fees, and costs due or
to become due in connection therewith (as estimated by Bank in its good faith
business judgment)), to secure all of the Obligations relating to such Letters
of Credit, as collateral security for the repayment of any future drawings under
such Letters of Credit, and Borrower shall forthwith deposit and pay such
amounts, and (ii) pay in advance all letter of credit fees scheduled to be paid
or payable over the remaining term of any Letters of Credit;
(d) settle
or adjust disputes and claims directly with Account Debtors for amounts on terms
and in any order that Bank considers advisable, notify any Person owing Borrower
money of Bank’s security interest in such funds, and verify the amount of such
account;
(e) make
any payments and do any acts it considers necessary or reasonable to protect the
Collateral and/or its security interest in the Collateral. Borrower
shall assemble the Collateral if Bank requests and make it available as Bank
designates. Bank may enter premises where the Collateral is located,
take and maintain possession of any part of the Collateral, and pay, purchase,
contest, or compromise any Lien which appears to be prior or superior to its
security interest and pay all expenses incurred. Borrower grants Bank a license
to enter and occupy any of its premises, without charge, to exercise any of
Bank’s rights or remedies;
(f) apply
to the Obligations any (i) balances and deposits of Borrower it holds, or (ii)
any amount held by Bank owing to or for the credit or the account of
Borrower;
(g) ship,
reclaim, recover, store, finish, maintain, repair, prepare for sale, advertise
for sale, and sell the Collateral. Bank is hereby granted a
non-exclusive, royalty-free license or other right to use, without charge,
Borrower’s labels, Patents, Copyrights, mask works, rights of use of any name,
trade secrets, trade names, Trademarks, and advertising matter, or any similar
property as it pertains to the Collateral, in completing production of,
advertising for sale, and selling any Collateral and, in connection with Bank’s
exercise of its rights under this Section, Borrower’s rights under all licenses
and all franchise agreements inure to Bank’s benefit;
(h) place
a “hold” on any account maintained with Bank and/or deliver a notice of
exclusive control, any entitlement order, or other directions or instructions
pursuant to any Control Agreement or similar agreements providing control of any
Collateral;
(i)
demand and receive possession of Borrower’s
Books; and
(j)
exercise all rights and remedies
available to Bank under the Loan Documents or at law or equity, including all
remedies provided under the Code (including disposal of the Collateral pursuant
to the terms thereof).
9.2
Power
of Attorney
. Borrower hereby irrevocably appoints Bank as its
lawful attorney-in-fact, exercisable upon the occurrence and during the
continuance of an Event of Default, to: (a) endorse Borrower’s name
on any checks or other forms of payment or security; (b) sign Borrower’s name on
any invoice or bill of lading for any Account or drafts against Account Debtors;
(c) settle and adjust disputes and claims about the Accounts directly with
Account Debtors, for amounts and on terms Bank determines are reasonable; (d)
make, settle, and adjust all claims under Borrower’s insurance policies; (e)
pay, contest or settle any Lien, charge, encumbrance, security interest, and
adverse claim in or to the Collateral, or any judgment based thereon, or
otherwise take any action to terminate or discharge the same; and (f) transfer
the Collateral into the name of Bank or a third party as the Code
permits. Bank’s foregoing appointment as Borrower’s attorney in fact,
and all of Bank’s rights and powers, coupled with an interest, are irrevocable
until all Obligations have been fully repaid and performed and Bank’s obligation
to provide Credit Extensions terminates.
9.3
Protective
Payments
. If Borrower fails to obtain the insurance called for
by Section 6.5 or fails to pay any premium thereon or fails to pay any other
amount which Borrower is obligated to pay under this Agreement or any other Loan
Document, Bank may obtain such insurance or make such payment, and all amounts
so paid by Bank are Bank Expenses and immediately due and payable upon
presentment to Borrower, bearing interest at the then highest rate applicable to
the Obligations, and secured by the Collateral. Bank will make
reasonable efforts to provide Borrower with notice of Bank obtaining such
insurance at the time it is obtained or within a reasonable time
thereafter. No payments by Bank are deemed an agreement to make
similar payments in the future or Bank’s waiver of any Event of
Default.
9.4
Application of Payments and Proceeds
Upon Default
. If an Event of Default has occurred and is
continuing, Bank may apply any funds in its possession, whether from Borrower
account balances, payments, proceeds realized as the result of any collection of
Accounts or other disposition of the Collateral, or otherwise, to the
Obligations in such order as Bank shall determine in its sole
discretion. Any surplus shall be paid to Borrower or other Persons
legally entitled thereto; Borrower shall remain liable to Bank for any
deficiency. If Bank, in its good faith business judgment, directly or
indirectly enters into a deferred payment or other credit transaction with any
purchaser at any sale of Collateral, Bank shall have the option, exercisable at
any time, of either reducing the Obligations by the principal amount of the
purchase price or deferring the reduction of the Obligations until the actual
receipt by Bank of cash therefor.
9.5
Bank’s Liability for
Collateral
. So long as Bank complies with reasonable banking
practices and the applicable provisions of the Code regarding the safekeeping of
the Collateral in the possession or under the control of Bank, Bank shall not be
liable or responsible for: (a) the safekeeping of the Collateral; (b) any loss
or damage to the Collateral; (c) any diminution in the value of the Collateral;
or (d) any act or default of any carrier, warehouseman, bailee, or other
Person. Except as otherwise provided by the Code, Borrower bears all
risk of loss, damage or destruction of the Collateral.
9.6
No
Waiver; Remedies Cumulative
. Bank’s failure, at any time or
times, to require strict performance by Borrower of any provision of this
Agreement or any other Loan Document shall not waive, affect, or diminish any
right of Bank thereafter to demand strict performance and compliance herewith or
therewith. No waiver hereunder shall be effective unless signed by
the party granting the waiver and then is only effective for the specific
instance and purpose for which it is given. Bank’s rights and
remedies under this Agreement and the other Loan Documents are
cumulative. Bank has all rights and remedies provided under the Code,
by law, or in equity. Bank’s exercise of one right or remedy is not
an election and shall not preclude Bank from exercising any other remedy under
this Agreement or other remedy available at law or in equity, and Bank’s waiver
of any Event of Default is not a continuing waiver. Bank’s delay in
exercising any remedy is not a waiver, election, or acquiescence.
9.7
Demand
Waiver
. Borrower waives demand, notice of default or dishonor,
notice of payment and nonpayment, notice of any default, nonpayment at maturity,
release, compromise, settlement, extension, or renewal of accounts, documents,
instruments, chattel paper, and guarantees held by Bank on which Borrower is
liable.
10
NOTICES
All
notices, consents, requests, approvals, demands, or other communication by any
party to this Agreement or any other Loan Document must be in writing and shall
be deemed to have been validly served, given, or delivered: (a) upon the earlier
of actual receipt and three (3) Business Days after deposit in the U.S. mail,
first class, registered or certified mail return receipt requested, with proper
postage prepaid; (b) upon transmission, when sent by electronic mail or
facsimile transmission; (c) one (1) Business Day after deposit with a reputable
overnight courier with all charges prepaid; or (d) when delivered, if
hand-delivered by messenger, all of which shall be addressed to the party to be
notified and sent to the address, facsimile number, or email address indicated
below. Bank or Borrower may change its mailing or electronic mail
address or facsimile number by giving the other party written notice thereof in
accordance with the terms of this Section 10.
11
CHOICE OF
LAW, VENUE, JURY TRIAL WAIVER, AND JUDICIAL REFERENCE
California
law governs the Loan Documents without regard to principles of conflicts of
law. Borrower and Bank each submit to the exclusive jurisdiction of
the State and Federal courts in Santa Clara County, California; provided,
however, that nothing in this Agreement shall be deemed to operate to preclude
Bank from bringing suit or taking other legal action in any other jurisdiction
to realize on the Collateral or any other security for the Obligations, or to
enforce a judgment or other court order in favor of Bank. Borrower
expressly submits and consents in advance to such jurisdiction in any action or
suit commenced in any such court, and Borrower hereby waives any objection that
it may have based upon lack of personal jurisdiction, improper venue, or forum
non conveniens and hereby consents to the granting of such legal or equitable
relief as is deemed appropriate by such court. Borrower hereby waives
personal service of the summons, complaints, and other process issued in such
action or suit and agrees that service of such summons, complaints, and other
process may be made by registered or certified mail addressed to Borrower at the
address set forth in, or subsequently provided by Borrower in accordance with,
Section 10 of this Agreement and that service so made shall be deemed completed
upon the earlier to occur of Borrower’s actual receipt thereof or three (3) days
after deposit in the U.S. mails, proper postage prepaid.
TO
THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, BORROWER AND BANK EACH WAIVE
THEIR RIGHT TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION ARISING OUT OF OR
BASED UPON THIS AGREEMENT, THE LOAN DOCUMENTS OR ANY CONTEMPLATED TRANSACTION,
INCLUDING CONTRACT, TORT, BREACH OF DUTY AND ALL OTHER CLAIMS. THIS WAIVER IS A
MATERIAL INDUCEMENT FOR BOTH PARTIES TO ENTER INTO THIS
AGREEMENT. EACH PARTY HAS REVIEWED THIS WAIVER WITH ITS
COUNSEL.
WITHOUT
INTENDING IN ANY WAY TO LIMIT THE PARTIES’ AGREEMENT TO WAIVE THEIR RESPECTIVE
RIGHT TO A TRIAL BY JURY, if the above waiver of the right to a trial by jury is
not enforceable, the parties hereto agree that any and all disputes or
controversies of any nature between them arising at any time shall be decided by
a reference to a private judge, mutually selected by the parties (or, if they
cannot agree, by the Presiding Judge of the Santa Clara County, California
Superior Court) appointed in accordance with California Code of Civil Procedure
Section 638 (or pursuant to comparable provisions of federal law if the dispute
falls within the exclusive jurisdiction of the federal courts), sitting without
a jury, in Santa Clara County, California; and the parties hereby submit to the
jurisdiction of such court. The reference proceedings shall be
conducted pursuant to and in accordance with the provisions of California Code
of Civil Procedure §§ 638 through 645.1, inclusive. The private judge
shall have the power, among others, to grant provisional relief, including
without limitation, entering temporary restraining orders, issuing preliminary
and permanent injunctions and appointing receivers. All such
proceedings shall be closed to the public and confidential and all records
relating thereto shall be permanently sealed. If during the course of
any dispute, a party desires to seek provisional relief, but a judge has not
been appointed at that point pursuant to the judicial reference procedures, then
such party may apply to the Santa Clara County, California Superior Court for
such relief. The proceeding before the private judge shall be
conducted in the same manner as it would be before a court under the rules of
evidence applicable to judicial proceedings. The parties shall be
entitled to discovery which shall be conducted in the same manner as it would be
before a court under the rules of discovery applicable to judicial
proceedings. The private judge shall oversee discovery and may
enforce all discovery rules and orders applicable to judicial proceedings in the
same manner as a trial court judge. The parties agree that the
selected or appointed private judge shall have the power to decide all issues in
the action or proceeding, whether of fact or of law, and shall report a
statement of decision thereon pursuant to California Code of Civil Procedure §
644(a). Nothing in this paragraph shall limit the right of any party
at any time to exercise self-help remedies, foreclose against collateral, or
obtain provisional remedies. The private judge shall also determine
all issues relating to the applicability, interpretation, and enforceability of
this paragraph.
12
GENERAL
PROVISIONS
12.1
Successors and
Assigns
. This Agreement binds and is for the benefit of the
successors and permitted assigns of each party. Borrower may not
assign this Agreement or any rights or obligations under it without Bank’s prior
written consent (which may be granted or withheld in Bank’s
discretion). Bank has the right, without the consent of or notice to
Borrower, to sell, transfer, assign, negotiate, or grant participation in all or
any part of, or any interest in, Bank’s obligations, rights, and benefits under
this Agreement and the other Loan Documents.
12.2
Indemnification
. Borrower
agrees to indemnify, defend and hold Bank and its directors, officers,
employees, agents, attorneys, or any other Person affiliated with or
representing Bank (each, an “
Indemnified Person
”) harmless
against: (a) all obligations, demands, claims, and liabilities
(collectively, “
Claims
”)
claimed or asserted by any other party in connection with the transactions
contemplated by the Loan Documents; and (b) all losses or expenses (including
Bank Expenses) in any way suffered, incurred, or paid by such Indemnified Person
as a result of, following from, consequential to, or arising from transactions
between Bank and Borrower (including reasonable attorneys’ fees and expenses),
except in each case for Claims and/or losses directly caused by any Indemnified
Person’s gross negligence or willful misconduct.
12.3
Time of
Essence
. Time is of the essence for the performance of all
Obligations in this Agreement.
12.4
Severability of
Provisions
. Each provision of this Agreement is severable from
every other provision in determining the enforceability of any
provision.
12.5
Correction of Loan
Documents
. Bank may correct patent errors and fill in any
blanks in the Loan Documents consistent with the agreement of the parties so
long as Bank provides Borrower with written notice of such correction and allows
Borrower at least ten (10) days to object to such correction. In the
event of such objection, such correction shall not be made except by an
amendment signed by both Bank and Borrower.
12.6
Amendments in Writing; Waiver;
Integration
. No purported amendment or modification of any
Loan Document, or waiver, discharge or termination of any obligation under any
Loan Document, shall be enforceable or admissible unless, and only to the
extent, expressly set forth in a writing signed by the party against which
enforcement or admission is sought. Without limiting the generality
of the foregoing, no oral promise or statement, nor any action, inaction, delay,
failure to require performance or course of conduct shall operate as, or
evidence, an amendment, supplement or waiver or have any other effect on any
Loan Document. Any waiver granted shall be limited to the specific
circumstance expressly described in it, and shall not apply to any subsequent or
other circumstance, whether similar or dissimilar, or give rise to, or evidence,
any obligation or commitment to grant any further waiver. The Loan
Documents represent the entire agreement about this subject matter and supersede
prior negotiations or agreements. All prior agreements,
understandings, representations, warranties, and negotiations between the
parties about the subject matter of the Loan Documents merge into the Loan
Documents.
12.7
Counterparts
. This
Agreement may be executed in any number of counterparts and by different parties
on separate counterparts, each of which, when executed and delivered, is an
original, and all taken together, constitute one Agreement.
12.8
Survival
. All
covenants, representations and warranties made in this Agreement continue in
full force until this Agreement has terminated pursuant to its terms and all
Obligations (other than inchoate indemnity obligations and any other obligations
which, by their terms, are to survive the termination of this Agreement) have
been paid in full and satisfied. The obligation of Borrower in
Section 12.2 to indemnify Bank shall survive until the statute of limitations
with respect to such claim or cause of action shall have run.
12.9
Confidentiality
. In
handling any confidential information, Bank shall exercise the same degree of
care that it exercises for its own proprietary information, but disclosure of
information may be made: (a) to Bank’s Subsidiaries or Affiliates; (b) to
prospective transferees or purchasers of any interest in the Credit Extensions
(provided, however, Bank shall use its best efforts to obtain any prospective
transferee’s or purchaser’s agreement to the terms of this provision);
(c) as required by law, regulation, subpoena, or other order; (d) to
Bank’s regulators or as otherwise required in connection with Bank’s examination
or audit; (e) as Bank considers appropriate in exercising remedies under
the Loan Documents (provided, however, Bank shall use its best efforts to obtain
any prospective transferee’s or purchaser’s agreement to the terms of this
provision); and (f) to third-party service providers of Bank so long as such
service providers have executed a confidentiality agreement with Bank with terms
no less restrictive than those contained herein. Confidential
information does not include information that is either: (i) in the public
domain or in Bank’s possession when disclosed to Bank, or becomes part of the
public domain after disclosure to Bank; or (ii) disclosed to Bank by a third
party if Bank does not know that the third party is prohibited from disclosing
the information.
Bank may
use confidential information for the development of databases, reporting
purposes, and market analysis so long as such confidential information is
aggregated and anonymized prior to distribution unless otherwise expressly
permitted by Borrower. The provisions of the immediately preceding
sentence shall survive the termination of this Agreement.
12.10
Attorneys’ Fees, Costs and
Expenses
. In any action or proceeding between Borrower and
Bank arising out of or relating to the Loan Documents, the prevailing party
shall be entitled to recover its reasonable attorneys’ fees and other costs and
expenses incurred, in addition to any other relief to which it may be
entitled.
12.11
Electronic Execution of
Documents
. The words “execution,” “signed,” “signature” and
words of like import in any Loan Document shall be deemed to include electronic
signatures or the keeping of records in electronic form, each of which shall be
of the same legal effect, validity and enforceability as a manually executed
signature or the use of a paper-based recordkeeping systems, as the case may be,
to the extent and as provided for in any applicable law, including, without
limitation, any state law based on the Uniform Electronic Transactions
Act.
12.12
Captions
. The
headings used in this Agreement are for convenience only and shall not affect
the interpretation of this Agreement.
12.13
Construction of
Agreement
. The parties mutually acknowledge that they and
their attorneys have participated in the preparation and negotiation of this
Agreement. In cases of uncertainty, this Agreement shall be construed
without regard to which of the parties caused the uncertainty to
exist.
12.14
Relationship
. The
relationship of the parties to this Agreement is determined solely by the
provisions of this Agreement. The parties do not intend to create any
agency, partnership, joint venture, trust, fiduciary or other relationship with
duties or incidents different from those of parties to an arm’s-length
contract.
12.15
Third
Parties
. Nothing in this Agreement, whether express or
implied, is intended to: (a) confer any benefits, rights or remedies under or by
reason of this Agreement on any persons other than the express parties to it and
their respective permitted successors and assigns; (b) relieve or discharge the
obligation or liability of any person not an express party to this Agreement; or
(c) give any person not an express party to this Agreement any right of
subrogation or action against any party to this Agreement.
13
DEFINITIONS
13.1
Definitions
. As
used in the Loan Documents, the word “shall” is mandatory, the word “may” is
permissive, the word “or” is not exclusive, the words “includes” and “including”
are not limiting, the singular includes the plural, and numbers denoting amounts
that are set off in brackets are negative. As used in this Agreement,
the following capitalized terms have the following meanings:
“
Account
” is any “account” as
defined in the Code with such additions to such term as may hereafter be made,
and includes, without limitation, all accounts receivable and other sums owing
to Borrower.
“
Account Debtor
” is any
“account debtor” as defined in the Code with such additions to such term as may
hereafter be made.
“
Advance
” or “
Advances
” means an advance (or
advances) under the Revolving Line.
“
Affiliate
” is, with respect to
any Person, each other Person that owns or controls directly or indirectly the
Person, any Person that controls or is controlled by or is under common control
with the Person, and each of that Person’s senior executive officers, directors,
partners and, for any Person that is a limited liability company, that Person’s
managers and members.
“
Agreement
” is defined in the
preamble hereof.
“
Availability Amount
” is (a)
the lesser of (i) the Revolving Line or (ii) the amount available under the
Borrowing Base minus (b) the Dollar Equivalent amount of all outstanding
Letters of Credit (including drawn but unreimbursed Letters of Credit) minus (c)
any amounts used for Cash Management Services, and minus (d) the outstanding
principal balance of any Advances.
“
Bank
” is defined in the
preamble hereof.
“
Bank Expenses
” are all audit
fees and expenses, costs, and expenses (including reasonable attorneys’ fees and
expenses) for preparing, amending, negotiating, administering, defending and
enforcing the Loan Documents (including, without limitation, those incurred in
connection with appeals or Insolvency Proceedings) or otherwise incurred with
respect to Borrower.
“
Borrower
” is defined in the
preamble hereof.
“
Borrower’s Books
” are all
Borrower’s books and records including ledgers, federal and state tax returns,
records regarding Borrower’s assets or liabilities, the Collateral, business
operations or financial condition, and all computer programs or storage or any
equipment containing such information.
“
Borrowing Base
” is eighty
percent (80%) of the face amount of all Eligible Accounts as determined by Bank
from Borrower’s most recent Borrowing Base Certificate; provided, however, that
Bank may decrease the foregoing percentage in its good faith business judgment
based on events, conditions, contingencies, or risks which, as determined by
Bank, may adversely affect Collateral.
“
Borrowing Base Certificate
” is
that certain certificate in the form attached hereto as
Exhibit
C
.
“
Borrowing Base Report
” is
defined in Section 6.2(a).
“
Borrowing Resolutions
” are,
with respect to any Person, those resolutions substantially in the form attached
hereto as Exhibit D.
“
Business Day
” is any day that
is not a Saturday, Sunday or a day on which Bank is closed.
“Cash Equivalents”
means
(a) marketable direct obligations issued or unconditionally guaranteed by
the United States or any agency or any State thereof having maturities of not
more than one (1) year from the date of acquisition; (b) commercial paper
maturing no more than one (1) year after its creation and having the highest
rating from either Standard & Poor’s Ratings Group or Moody’s Investors
Service, Inc.; (c) Bank’s certificates of deposit issued maturing no more than
one (1) year after issue; and (d) money market funds at least ninety-five
percent (95%) of the assets of which constitute Cash Equivalents of the kinds
described in clauses (a) through (c) of this definition
.
“Cash Management Services”
is
defined in Section 2.1.3.
“
Code
” is the Uniform
Commercial Code, as the same may, from time to time, be enacted and in effect in
the State of California; provided, that, to the extent that the Code is used to
define any term herein or in any Loan Document and such term is defined
differently in different Articles or Divisions of the Code, the definition of
such term contained in Article or Division 9 shall govern; provided further,
that in the event that, by reason of mandatory provisions of law, any or all of
the attachment, perfection, or priority of, or remedies with respect to, Bank’s
Lien on any Collateral is governed by the Uniform Commercial Code in effect in a
jurisdiction other than the State of California, the term “
Code
” shall mean the Uniform
Commercial Code as enacted and in effect in such other jurisdiction solely for
purposes of the provisions thereof relating to such attachment, perfection,
priority, or remedies and for purposes of definitions relating to such
provisions.
“
Collateral
” is any and all
properties, rights and assets of Borrower described on
Exhibit
A
.
“
Compliance Certificate
” is
that certain certificate in the form attached hereto as
Exhibit
E.
“
Contingent Obligation
” is, for
any Person, any direct or indirect liability, contingent or not, of that Person
for (a) any indebtedness, lease, dividend, letter of credit or other obligation
of another Person such as an obligation, in each case, directly or indirectly
guaranteed, endorsed, co-made, discounted or sold with recourse by that Person,
or for which such Person is directly or indirectly liable; (b) any obligations
for undrawn letters of credit for the account of such Person; and (c) all
obligations from any interest rate, currency or commodity swap agreement,
interest rate cap or collar agreement, or other agreement or arrangement
designated to protect such Person against fluctuation in interest rates,
currency exchange rates or commodity prices; but “Contingent Obligation” does
not include endorsements in the ordinary course of business. The
amount of a Contingent Obligation is the stated or determined amount of the
primary obligation for which the Contingent Obligation is made or, if not
determinable, the maximum reasonably anticipated liability for it determined by
such Person in good faith; but the amount may not exceed the maximum of the
obligations under any guarantee or other support arrangement.
“
Copyrights
” are any and all
copyright rights, copyright applications, copyright registrations and like
protections in each work or authorship and derivative work thereof, whether
published or unpublished and whether or not the same also constitutes a trade
secret.
“
Credit Extension
” is any
Advance, Letter of Credit, amount utilized for Cash Management Services, the
Term Loan, or any other extension of credit by Bank for Borrower’s
benefit.
“
Current Liabilities
” are all
obligations and liabilities of Borrower to Bank, plus, without duplication, the
aggregate amount of Borrower’s Total Liabilities, in each case, that mature
within one (1) year from the date of measurement.
“
Default Rate
” is defined in
Section 2.3(b).
“
Deferred Revenue
” is all
amounts received or invoiced by Borrower in advance of performance under
contracts and not yet recognized as revenue.
“
Designated Deposit Account
” is
Borrower’s deposit account, account number 3300713341, maintained with
Bank.
“
Dollars
,
”
“
dollars
” or use of the sign
“
$
” means only lawful
money of the United States and not any other currency, regardless of whether
that currency uses the “$” sign to denote its currency or may be readily
converted into lawful money of the United States.
“
Dollar Equivalent
” is, at any
time, (a) with respect to any amount denominated in Dollars, such amount, and
(b) with respect to any amount denominated in a Foreign Currency, the equivalent
amount therefor in Dollars as determined by Bank at such time on the basis of
the then-prevailing rate of exchange in San Francisco, California, for sales of
the Foreign Currency for transfer to the country issuing such Foreign
Currency.
“
Domestic Subsidiary
” means a
Subsidiary organized under the laws of the United States or any state or
territory thereof or the District of Columbia.
“
EBITDA
” shall mean (a) Net
Income, plus (b) Interest Expense, plus (c) to the extent deducted in the
calculation of Net Income, depreciation expense and amortization expense, plus
(d) income tax expense.
“
Effective Date
” is defined in
the preamble hereof.
“
Eligible Accounts
” means
Accounts which arise in the ordinary course of Borrower’s business that meet all
Borrower’s representations and warranties in Section 5.3. Bank
reserves the right upon prior written notice to Borrower at any time after the
Effective Date to adjust any of the criteria set forth below and to establish
new criteria in its good faith business judgment. Unless Bank
otherwise agrees in writing, Eligible Accounts shall not include:
(a) Accounts
that the Account Debtor has not paid within ninety (90) days of invoice date
regardless of invoice payment period terms;
(b) Accounts
owing from an Account Debtor, fifty percent (50%) or more of whose Accounts have
not been paid within ninety (90) days of invoice date;
(c) Accounts
owing from an Account Debtor which does not have its principal place of business
in the United States;
(d) Accounts
billed and/or payable outside of the United States;
(e) Accounts
owing from an Account Debtor to the extent that Borrower is indebted or
obligated in any manner to the Account Debtor (as creditor, lessor, supplier or
otherwise - sometimes called “contra” accounts, accounts payable, customer
deposits or credit accounts), with the exception of customary credits,
adjustments and/or discounts given to an Account Debtor by Borrower in the
ordinary course of its business;
(f) Accounts
for which the Account Debtor is Borrower’s Affiliate, officer, employee, or
agent;
(g) Accounts
with credit balances over ninety (90) days from invoice date;
(h) Accounts
owing from an Account Debtor, including Affiliates, whose total obligations to
Borrower exceed twenty-five percent (25%) of all Accounts, except for American
Express and FRB Cleveland, for which such percentage is thirty five percent
(35%), in each case for the amounts that exceed those percentages, unless Bank
approves in writing;
(i) Accounts
owing from an Account Debtor which is a United States government entity or any
department, agency, or instrumentality thereof unless Borrower has assigned its
payment rights to Bank and the assignment has been acknowledged under the
Federal Assignment of Claims Act of 1940, as amended;
(j) Accounts
for demonstration or promotional equipment, or in which goods are consigned, or
sold on a “sale guaranteed”, “sale or return”, “sale on approval”, or other
terms if Account Debtor’s payment may be conditional;
(k) Accounts
owing from an Account Debtor that has not been invoiced or where goods or
services have not yet been rendered to the Account Debtor (sometimes called memo
billings or pre-billings);
(l) Accounts
subject to contractual arrangements between Borrower and an Account Debtor where
payments shall be scheduled or due according to completion or fulfillment
requirements where the Account Debtor has a right of offset for damages suffered
as a result of Borrower’s failure to perform in accordance with the contract
(sometimes called contracts accounts receivable, progress billings, milestone
billings, or fulfillment contracts);
(m) Accounts
owing from an Account Debtor the amount of which may be subject to withholding
based on the Account Debtor’s satisfaction of Borrower’s complete performance
(but only to the extent of the amount withheld; sometimes called retainage
billings);
(n) Accounts
subject to trust provisions, subrogation rights of a bonding company, or a
statutory trust;
(o) Accounts
owing from an Account Debtor that has been invoiced for goods that have not been
shipped to the Account Debtor unless Bank, Borrower, and the Account Debtor have
entered into an agreement acceptable to Bank in its sole discretion wherein the
Account Debtor acknowledges that (i) it has title to and has ownership of the
goods wherever located, (ii) a bona fide sale of the goods has occurred, and
(iii) it owes payment for such goods in accordance with invoices from Borrower
(sometimes called “bill and hold” accounts);
(p) Accounts
for which the Account Debtor has not been invoiced;
(q) Accounts
that represent non-trade receivables or that are derived by means other than in
the ordinary course of Borrower’s business;
(r) Accounts
for which Borrower has permitted Account Debtor’s payment to extend beyond 90
days;
(s) Accounts
subject to chargebacks or others payment deductions taken by an Account Debtor
(but only to the extent the chargeback is determined to be
valid);
(t) Accounts
in which the Account Debtor disputes liability or makes any claim (but only up
to the disputed or claimed amount), or if the Account Debtor is subject to an
Insolvency Proceeding, or becomes insolvent, or goes out of business;
and
(u) Accounts
for which Bank in its good faith business judgment after inquiry and
consultation with Borrower determines collection to be doubtful.
“
Equipment
” is all “equipment”
as defined in the Code with such additions to such term as may hereafter be
made, and includes without limitation all machinery, fixtures, goods, vehicles
(including motor vehicles and trailers), and any interest in any of the
foregoing.
“
ERISA
” is the Employee
Retirement Income Security Act of 1974, and its regulations.
“
Event of Default
” is defined
in Section 8.
“
Exchange Act
” is the
Securities Exchange Act of 1934, as amended.
“
Fixed Charge Coverage Ratio”
means a ratio of EBITDA, plus non-cash stock based compensation expense
minus cash taxes and non-financed capital expenditures, divided by all principal
and interest owed by Borrower with respect to all Indebtedness, all measured on
a trailing six (6) month basis, provided however that for the first six (6)
months following the Effective Date all principal and interest owed by Borrower
with respect to all Indebtedness shall be annualized and divided by two
(2).
“
Foreign Currency
” means lawful
money of a country other than the United States.
“
Foreign Subsidiary
” means any
Subsidiary which is not a Domestic Subsidiary.
“
Funding Date
” is any date on
which a Credit Extension is made to or for the account of Borrower which shall
be a Business Day.
“
GAAP
” is generally accepted
accounting principles set forth in the opinions and pronouncements of the
Accounting Principles Board of the American Institute of Certified Public
Accountants and statements and pronouncements of the Financial Accounting
Standards Board or in such other statements by such other Person as may be
approved by a significant segment of the accounting profession, which are
applicable to the circumstances as of the date of determination.
“
General Intangibles
” is all
“general intangibles” as defined in the Code in effect on the date hereof with
such additions to such term as may hereafter be made, and includes without
limitation, all Intellectual Property, claims, income and other tax refunds,
security and other deposits, payment intangibles, contract rights, options to
purchase or sell real or personal property, rights in all litigation presently
or hereafter pending (whether in contract, tort or otherwise), insurance
policies (including without limitation key man, property damage, and business
interruption insurance), payments of insurance and rights to payment of any
kind.
“
Governmental Approval
” is any
consent, authorization, approval, order, license, franchise, permit,
certificate, accreditation, registration, filing or notice, of, issued by, from
or to, or other act by or in respect of, any Governmental
Authority.
“
Governmental Authority
” is any
nation or government, any state or other political subdivision thereof, any
agency, authority, instrumentality, regulatory body, court, central bank or
other entity exercising executive, legislative, judicial, taxing, regulatory or
administrative functions of or pertaining to government, any securities exchange
and any self-regulatory organization.
“
Indebtedness
” is (a)
indebtedness for borrowed money or the deferred price of property or services,
such as reimbursement and other obligations for surety bonds and letters of
credit, (b) obligations evidenced by notes, bonds, debentures or similar
instruments, (c) capital lease obligations, and (d) Contingent
Obligations.
“
Indemnified Person
” is defined
in Section 12.2.
“
Initial Audit
” is Bank’s
inspection of Borrower’s Accounts, the other Collateral, and Borrower’s
Books.
“
Insolvency Proceeding
” is any
proceeding by or against any Person under the United States Bankruptcy Code, or
any other bankruptcy or insolvency law, including assignments for the benefit of
creditors, compositions, extensions generally with its creditors, or proceedings
seeking reorganization, arrangement, or other relief.
“
Intellectual Property
” means
all of Borrower’s right, title, and interest in and to the
following:
(a) its
Copyrights, Trademarks and Patents;
(b) any
and all trade secrets and trade secret rights, including, without limitation,
any rights to unpatented inventions, know-how, operating manuals;
(c) any
and all source code;
(d) any
and all design rights which may be available to a Borrower;
(e) any
and all claims for damages by way of past, present and future infringement of
any of the foregoing, with the right, but not the obligation, to sue for and
collect such damages for said use or infringement of the Intellectual Property
rights identified above; and
(f) all
amendments, renewals and extensions of any of the Copyrights, Trademarks or
Patents.
“
Interest Expense
” means for
any fiscal period, interest expense (whether cash or non-cash) determined in
accordance with GAAP for the relevant period ending on such date, including, in
any event, interest expense with respect to any Credit Extension and other
Indebtedness of Borrower and its Subsidiaries, including, without limitation or
duplication, all commissions, discounts, or related amortization and other fees
and charges with respect to letters of credit and bankers’ acceptance financing
and the net costs associated with interest rate swap, cap, and similar
arrangements, and the interest portion of any deferred payment obligation
(including leases of all types).
“
Inventory
” is all “inventory”
as defined in the Code in effect on the date hereof with such additions to such
term as may hereafter be made, and includes without limitation all merchandise,
raw materials, parts, supplies, packing and shipping materials, work in process
and finished products, including without limitation such inventory as is
temporarily out of Borrower’s custody or possession or in transit and including
any returned goods and any documents of title representing any of the
above.
“
Investment
” is any beneficial
ownership interest in any Person (including stock, partnership interest or other
securities), and any loan, advance or capital contribution to any
Person.
“
IP Agreement
” is that certain
Intellectual Property Security Agreement executed and delivered by Borrower to
Bank dated as of the Effective Date.
“
Letter of Credit”
means a
standby letter of credit issued by Bank or another institution based upon an
application, guarantee, indemnity or similar agreement on the part of Bank as
set forth in Section 2.1.2.
“
Letter of Credit Application
”
is defined in Section 2.1.2(b).
“
Lien
” is a claim, mortgage,
deed of trust, levy, charge, pledge, security interest or other encumbrance of
any kind, whether voluntarily incurred or arising by operation of law or
otherwise against any property.
“
Loan Documents
” are,
collectively, this Agreement, the Perfection Certificate, the IP Agreement, the
Subordination Agreement, any note, or notes or guaranties executed by Borrower,
and any other present or future agreement between Borrower and/or for the
benefit of Bank in connection with this Agreement, all as amended, restated, or
otherwise modified.
“
Material Adverse Change
” is
(a) a material impairment in the perfection or priority of Bank’s Lien in the
Collateral or in the value of such Collateral; (b) a material adverse change in
the business, operations, or condition (financial or otherwise) of Borrower; or
(c) a material impairment of the prospect of repayment of any portion of the
Obligations
.
“
Monthly Financial Statements
”
is defined in Section 6.2(c).
“
Net Income
” means, as
calculated on a consolidated basis for Borrower and its Subsidiaries in
accordance with GAAP for any period as at any date of determination, the net
profit (or loss), after provision for taxes, of Borrower and its Subsidiaries
for such period taken as a single accounting period.
“
Obligations
” are Borrower’s
obligations to pay when due any debts, principal, interest, Bank Expenses and
other amounts Borrower owes Bank now or later, whether under this Agreement, the
Loan Documents, or otherwise, including, without limitation, all obligations
relating to letters of credit (including reimbursement obligations for drawn and
undrawn letters of credit), cash management services, and foreign exchange
contracts, if any, and including interest accruing after Insolvency Proceedings
begin and debts, liabilities, or obligations of Borrower assigned to Bank, and
to perform Borrower’s duties under the Loan Documents.
“Operating Documents”
are, for
any Person, such Person’s charter documents, as certified by the Secretary of
State of such Person’s state of formation on a date that is no earlier than 30
days prior to the Effective Date, and, (a) if such Person is a corporation, its
bylaws in current form, (b) if such Person is a limited liability company, its
limited liability company agreement (or similar agreement), and (c) if such
Person is a partnership, its partnership agreement (or similar agreement), each
of the foregoing with all current amendments or modifications
thereto.
“
Nicholson/Ramey Subordinated
Debt
” means that certain Subordinated Debt in the form of amended
refinance notes (and related loan documents) in the aggregate principal amount
of approximately Three Million Nine Hundred Thousand Dollars ($3,900,000) held
by John L. Nicholson and Charles E. Ramey with a maturity date of January 1,
2014.
“
Patents
” means all patents,
patent applications and like protections including without limitation
improvements, divisions, continuations, renewals, reissues, extensions and
continuations-in-part of the same.
“
Payment/Advance Form
” is that
certain form attached hereto as
Exhibit
B
.
“
Perfection Certificate
” is
defined in Section 5.1.
“
Permitted Indebtedness
”
is:
(a) Borrower’s
Indebtedness to Bank under this Agreement and the other Loan
Documents;
(b) Indebtedness
of Borrower existing on the Effective Date and shown on the Perfection
Certificate;
(c) any
Subordinated Debt, including the Nicholson/Ramey Subordinated Debt;
(d) unsecured
Indebtedness of Borrower to trade creditors incurred in the ordinary course of
business;
(e) Indebtedness
of Borrower incurred as a result of endorsing negotiable instruments received in
the ordinary course of business;
(f) Indebtedness
of Borrower secured by Liens permitted under clauses (a) and (c) of the
definition of “Permitted Liens” hereunder;
(g) extensions,
refinancings, modifications, amendments and restatements of any items of
Permitted Indebtedness (a) through (f) above, provided that the principal amount
thereof is not increased or the terms thereof are not modified to impose more
burdensome terms upon Borrower or its Subsidiary, as the case may be;
and
(h) unsecured
Indebtedness of Borrower that does not otherwise qualify as Permitted
Indebtedness pursuant to clauses (a) through (g) in an aggregate amount not
exceeding One Hundred Thousand Dollars ($100,000).
“
Permitted Investments
”
are:
(a) Investments
of Borrower (including, without limitation, Subsidiaries) existing on the
Effective Date and shown on the Perfection Certificate;
(b) (i)
Investments of Borrower consisting of Cash Equivalents, and (ii) any Investments
of Borrower permitted by Borrower’s investment policy, as amended from time to
time, provided that such investment policy (and any such amendment thereto) has
been approved in writing by Bank
;
(c) Investments
of Borrower consisting of the endorsement of negotiable instruments for deposit
or collection or similar transactions in the ordinary course of
Borrower;
(d) Investments
of Borrower consisting of deposit accounts in which Bank has a perfected
security interest;
(e) Investments
of Borrower accepted in connection with Transfers permitted by Section
7.1;
(f) Investments
of Borrower consisting of (i) travel advances and employee relocation loans and
other employee loans and advances in the ordinary course of business, and (ii)
loans to employees, officers or directors relating to the purchase of equity
securities of Borrower or its Subsidiaries pursuant to employee stock purchase
plans or agreements approved by Borrower’s Board of Directors;
(g) Investments
of Borrower (including debt obligations) received in connection with the
bankruptcy or reorganization of customers or suppliers and in settlement of
delinquent obligations of, and other disputes with, customers or suppliers
arising in the ordinary course of business;
(h) Investments
of Borrower consisting of notes receivable of, or prepaid royalties and other
credit extensions, to customers and suppliers who are not Affiliates, in the
ordinary course of business; provided that this paragraph (h) shall not apply to
Investments of Borrower in any Subsidiary; and
(i) Investments
that do not otherwise qualify as a Permitted Investment pursuant to clauses (a)
through (h) in an aggregate amount not exceeding One Hundred Thousand Dollars
($100,000)..
“Permitted Liens”
are:
(a) Liens
existing on the Effective Date and shown on the Perfection Certificate or
arising under this Agreement and the other Loan Documents;
(b) Liens
for taxes, fees, assessments or other government charges or levies, either (i)
not due and payable or (ii) being contested in good faith and for which Borrower
maintains adequate reserves on its Books,
provided
that no
notice of any such Lien has been filed or recorded under the Internal Revenue
Code of 1986, as amended, and the Treasury Regulations adopted
thereunder;
(c) purchase
money Liens (i) on Equipment acquired or held by Borrower incurred for financing
the acquisition of the Equipment securing no more than One Hundred Thousand
Dollars ($100,000) in the aggregate amount outstanding, or (ii) existing on
Equipment when acquired,
if
the Lien is
confined to the property and improvements and the proceeds of the
Equipment;
(d) Liens
of carriers, warehousemen, suppliers, or other Persons that are possessory in
nature arising in the ordinary course of business so long as such Liens attach
only to Inventory, securing liabilities in the aggregate amount not to exceed
One Hundred Thousand Dollars ($100,000) and which are not delinquent or remain
payable without penalty or which are being contested in good faith and by
appropriate proceedings which proceedings have the effect of preventing the
forfeiture or sale of the property subject thereto;
(e) Liens
to secure payment of workers’ compensation, employment insurance, old-age
pensions, social security and other like obligations incurred in the ordinary
course of business (other than Liens imposed by ERISA);
(f) Liens
incurred in the extension, renewal or refinancing of the indebtedness secured by
Liens described in (a) through (c),
but
any extension,
renewal or replacement Lien must be limited to the property encumbered by the
existing Lien and the principal amount of the indebtedness may not increase
other than as a result of accrued interest and penalties;
(g) leases
or subleases of real property granted in the ordinary course of Borrower’s
business (or, if referring to another Person, in the ordinary course of such
Person’s business), and leases, subleases, non-exclusive licenses or sublicenses
of personal property (other than Intellectual Property) granted in the ordinary
course of Borrower’s business (or, if referring to another Person, in the
ordinary course of such Person’s business),
if
the leases,
subleases, licenses and sublicenses do not prohibit granting Bank a security
interest therein;
(h) non-exclusive
licenses of Intellectual Property granted to third parties in the ordinary
course of business, and licenses of Intellectual Property that could not result
in a legal transfer of title of the licensed property that may be exclusive in
respects other than territory and that may be exclusive as to territory only as
to discreet geographical areas outside of the United States; and
(i) Liens
arising from attachments or judgments, orders, or decrees in circumstances not
constituting an Event of Default under Sections 8.4 and 8.7.
“
Person
” is any individual,
sole proprietorship, partnership, limited liability company, joint venture,
company, trust, unincorporated organization, association, corporation,
institution, public benefit corporation, firm, joint stock company, estate,
entity or government agency.
“
Prime Rate
” is Bank’s most
recently announced “prime rate,” even if it is not Bank’s lowest
rate.
“
Quick Assets
” is, as of a
particular date, Borrower’s unrestricted cash at Bank plus the face amount of
all Eligible Accounts, as of such date.
“
Registered Organization
” is
any “registered organization” as defined in the Code with such additions to such
term as may hereafter be made.
“
Requirement of Law
” is as to
any Person, the organizational or governing documents of such Person, and any
law (statutory or common), treaty, rule or regulation or determination of an
arbitrator or a court or other Governmental Authority, in each case applicable
to or binding upon such Person or any of its property or to which such Person or
any of its property is subject.
“
Responsible Officer
” is any of
the Chief Executive Officer, President, Chief Financial Officer and Controller
of Borrower.
“
Restricted License
” is any
material license or other agreement with respect to which Borrower is the
licensee (a) that prohibits or otherwise restricts Borrower from granting a
security interest in Borrower’s interest in such license or agreement or any
other property, or (b) for which a default under or termination of could
interfere with the Bank’s right to sell any Collateral.
“
Revolving Line
” is an Advance
or Advances in an amount equal to (i) Two Hundred Fifty Thousand Dollars
($250,000) at all times prior to March 31, 2010, provided that Borrower
maintained an Adjusted Quick Ratio of at least 1.15 to 1.0 as of the last day of
the prior calendar month, (ii) Two Hundred Fifty Thousand Dollars ($250,000) at
all times from April 1, 2010 through June 30, 2010, provided that Borrower
maintained an Adjusted Quick Ratio of at least 1.35 to 1.0 as of the last day of
the prior calendar month and (iii) One Million Dollars ($1,000,000) at all times
beginning on July 1, 2010 provided that Borrower maintained an Adjusted Quick
Ratio of at least 1.50 to 1.0 as of the last day of the prior calendar
month. If Borrower fails to meet the foregoing Adjusted Quick Ratio
Requirements the Revolving Line shall be immediately reduced to Zero Dollars
($0), provided however when Borrower is back in compliance with the foregoing
Adjusted Quick Ratio amounts as of the last day of a subsequent calendar month,
the foregoing amounts of the Revolving Line shall be re-instated for as long as
Borrower remains in compliance therewith.
“Revolving Line Early Termination
Fee”
is an amount equal to one percent (1.00%) of the amount of the
Revolving Line if the Revolving Line is terminated by Borrower on or before
the Revolving Line Maturity Date;
“Revolving Line Maturity Date”
is the date three hundred sixty four (364) days from the Effective
Date.
“
SEC
” shall mean the Securities
and Exchange Commission, any successor thereto, and any analogous Governmental
Authority.
“
Subordinated Debt
” is
indebtedness incurred by Borrower subordinated to all of Borrower’s now or
hereafter indebtedness to Bank (pursuant to a subordination, intercreditor, or
other similar agreement in form and substance satisfactory to Bank entered into
between Bank and the other creditor), on terms acceptable to Bank, including the
Nicholson/Ramey Subordinated Debt.
“
Subordination Agreement
” is
that certain Subordination Agreement by and among, Charles E. Ramey, John L.
Nicholson, M.D. and the Bank dated as of the Effective Date.
“
Subsidiary
” is, as to any
Person, a corporation, partnership, limited liability company or other entity of
which shares of stock or other ownership interests having ordinary voting power
(other than stock or such other ownership interests having such power only by
reason of the happening of a contingency) to elect a majority of the board of
directors or other managers of such corporation, partnership or other entity are
at the time owned, or the management of which is otherwise controlled, directly
or indirectly through one or more intermediaries, or both, by such
Person. Unless the context otherwise requires, each reference to a
Subsidiary herein shall be a reference to a Subsidiary of Borrower.
“Term Loan”
is a loan made by
Bank pursuant to the terms of Section 2.1.4 hereof.
“Term Loan Amount”
is an
amount equal to One Million Dollars ($1,000,000).
“Term Loan Prepayment Fee”
is
an amount equal to one percent (1.00%) of the outstanding Term Loan if the
prepayment is made on or before the first anniversary of the Effective
Date;
“
Term Loan Maturity Date
” is
February 9, 2013.
“
Term Loan Payment
” is defined
in Section 2.1.4(b).
“
Total Liabilities
” is on any
day, all obligations that should, under GAAP, be classified as liabilities on
Borrower’s consolidated balance sheet, including all
Indebtedness.
“
Trademarks
” means any
trademark and servicemark rights, whether registered or not, applications to
register and registrations of the same and like protections, and the entire
goodwill of the business of Borrower connected with and symbolized by such
trademarks.
“
Transfer
” is defined in
Section 7.1.
[
Signature page follows.
]
IN WITNESS WHEREOF
, the
parties hereto have caused this Agreement to be executed as of the Effective
Date.
BORROWER:
US
DATAWORKS, INC.
|
By:
|
/s/
Randall J. Frapart
|
|
Name:
|
Randall
J. Frapart
|
|
Title:
|
Chief
Financial
Officer
|
BANK:
SILICON
VALLEY BANK
|
/s/
Phillip A. Wright
|
|
|
Name:
|
Phillip
A. Wright
|
|
Title:
|
Relationship
Manager
|
The
Collateral consists of all of Borrower’s right, title and interest in and to the
following personal property:
All
goods, Accounts (including health-care receivables), Equipment, Inventory,
contract rights or rights to payment of money, leases, license agreements,
franchise agreements, General Intangibles, commercial tort claims, documents,
instruments (including any promissory notes), chattel paper (whether tangible or
electronic), cash, deposit accounts, fixtures, letters of credit rights (whether
or not the letter of credit is evidenced by a writing), securities, and all
other investment property, supporting obligations, and financial assets, whether
now owned or hereafter acquired, wherever located; and
all
Borrower’s Books relating to the foregoing, and any and all claims, rights and
interests in any of the above and all substitutions for, additions, attachments,
accessories, accessions and improvements to and replacements, products, proceeds
and insurance proceeds of any or all of the foregoing.
EXHIBIT B – LOAN
PAYMENT/ADVANCE REQUEST FORM
Deadline
for same day processing is Noon Pacific Time
*
Fax
To: Date:
_____________________
|
Loan
Payment
:
|
US DATAWORKS, INC.
|
|
|
From
Account #____________________________
|
To
Account #____________________________
|
|
|
(Deposit
Account #)
|
(Loan
Account #)
|
|
|
Principal
$_________________________________
|
and/or
Interest $__________________________
|
|
|
Authorized
Signature: _______________________
|
Phone
Number: _______________________
|
|
|
Print
Name/Title: ___________________________
|
||
*
Unless otherwise provided for an
Advance bearing interest at LIBOR.
EXHIBIT C - BORROWING BASE
CERTIFICATE
Borrower:
US Dataworks, Inc.
Lender: Silicon
Valley Bank
Commitment
Amount: (i) Two Hundred Fifty Thousand
Dollars ($250,000) at all times prior to March 31, 2010, provided that Borrower
maintained an Adjusted Quick Ratio of at least 1.15 to 1.0 as of the last day of
the prior calendar month, (ii) Two Hundred Fifty Thousand Dollars ($250,000) at
all times from April 1, 2010 through June 30, 2010, provided that Borrower
maintained an Adjusted Quick Ratio of at least 1.35 to 1.0 as of the last day of
the prior calendar month and (iii) One Million Dollars ($1,000,000) at all times
beginning on July 1, 2010 provided that Borrower maintained an Adjusted Quick
Ratio of at least 1.50 to 1.0 as of the last day of the prior calendar
month. If Borrower fails to meet the foregoing Adjusted Quick Ratio
Requirements the Revolving Line shall be immediately reduced to Zero Dollars
($0), provided however when Borrower is back in compliance with the foregoing
Adjusted Quick Ratio amounts as of the last day of a subsequent calendar month,
the foregoing amounts of the Revolving Line shall be re-instated for as long as
Borrower remains in compliance therewith.
|
ACCOUNTS
RECEIVABLE
|
||||
|
1.
|
Accounts
Receivable (invoiced) Book Value as of ____________
|
$_______________
|
||
|
2.
|
Additions
(please explain on reverse)
|
$_______________
|
||
|
3.
|
TOTAL
ACCOUNTS RECEIVABLE
|
$_______________
|
||
|
ACCOUNTS
RECEIVABLE DEDUCTIONS (without duplication)
|
||||
|
4.
|
90
Days Past Invoice Date
|
$_______________
|
||
|
5.
|
Balance
of 50% over 90 Day Accounts
|
$_______________
|
||
|
6.
|
Foreign
Account Debtor Accounts
|
$_______________
|
||
|
7.
|
Foreign
Invoiced Accounts
|
$_______________
|
||
|
8.
|
Contra/Customer
Deposit Accounts
|
$_______________
|
||
|
9.
|
Intercompany/Employee
Accounts
|
$_______________
|
||
|
10.
|
Credit
Balances over 90 Days
|
$_______________
|
||
|
11.
|
Concentration
Limits
|
$_______________
|
||
|
12.
|
U.S.
Governmental Accounts
|
$_______________
|
||
|
13.
|
Promotion
or Demo Accounts; Guaranteed Sale or Consignment Sale
Accounts
|
$_______________
|
||
|
14.
|
Accounts
with Progress/Milestone/Pre-billings; Contract Accounts
|
$_______________
|
||
|
15.
|
Accounts
for Retainage Billings
|
$_______________
|
||
|
16.
|
Trust
Accounts
|
$_______________
|
||
|
17.
|
Bill
and Hold Accounts
|
$_______________
|
||
|
18.
|
Unbilled
Accounts
|
$_______________
|
||
|
19.
|
Non-Trade
Accounts
|
$_______________
|
||
|
20.
|
Accounts
with Extended Term Invoices
|
$_______________
|
||
|
21.
|
Accounts
Subject to Chargebacks
|
$_______________
|
||
|
22.
|
Disputed
Accounts
|
$_______________
|
||
|
23.
|
Other
(please explain on reverse)
|
$_______________
|
||
|
24.
|
TOTAL
ACCOUNTS RECEIVABLE DEDUCTIONS
|
$_______________
|
||
|
25.
|
Eligible
Accounts (#3 minus #24)
|
$_______________
|
||
|
26.
|
ELIGIBLE
AMOUNT OF ACCOUNTS (80% of #25)
|
$_______________
|
||
|
BALANCES
|
||||
|
27.
|
Maximum
Loan Amount
|
$_______________
|
||
|
28.
|
Total
Funds Available [Lesser of #26 or 27]
|
$_______________
|
||
|
29.
|
Present
balance owing on Line of Credit
|
$_______________
|
||
|
30.
|
Outstanding
under Sublimits
|
$_______________
|
||
|
31.
|
RESERVE
POSITION (#28 minus #29 and #30)
|
$_______________
|
||
[Continued
on following page.]
The
undersigned represents and warrants that this is true, complete and correct, and
that the information in this Borrowing Base Certificate complies with the
applicable representations and warranties contained in the Loan and Security
Agreement between the undersigned and Silicon Valley Bank.
|
COMMENTS:
|
BANK USE ONLY
|
||||
|
Received by:
|
|||||
|
authorized signer
|
|||||
|
By:
|
Date:
|
||||
|
Authorized Signer
|
Verified:
|
||||
|
Date:
|
authorized signer
|
||||
|
Date:
|
|||||
|
Compliance Status: Yes No
|
|||||
EXHIBIT
D
BORROWING
RESOLUTIONS
CORPORATE
BORROWING CERTIFICATE
|
Borrower
:
US Dataworks,
Inc.
|
Date
:
February __, 2010
|
Bank
: Silicon
Valley Bank
I hereby
certify as follows, as of the date set forth above:
1. I
am the Secretary, Assistant Secretary or other officer of the
Borrower. My title is as set forth below.
2. Borrower’s
exact legal name is set forth above. Borrower is a corporation
existing under the laws of the State of
.
[print
name of state]
3. Attached
hereto are true, correct and complete copies of Borrower’s Articles/Certificate
of Incorporation (including amendments), as filed with the Secretary of State of
the state in which Borrower is incorporated as set forth in paragraph 2
above. Such Articles/Certificate of Incorporation have not been
amended, annulled, rescinded, revoked or supplemented, and remain in full force
and effect as of the date hereof.
4. The
following resolutions were duly and validly adopted by Borrower’s Board of
Directors at a duly held meeting of such directors (or pursuant to a unanimous
written consent or other authorized corporate action). Such
resolutions are in full force and effect as of the date hereof and have not been
in any way modified, repealed, rescinded, amended or revoked, and Bank may rely
on them until Bank receives written notice of revocation from
Borrower.
Resolved
,
that
any one
of the
following officers or employees of Borrower, whose names, titles and signatures
are below, may act on behalf of Borrower:
Resolved
Further,
that
any
one
of the persons designated above with a checked box beside his or her
name may, from time to time, add or remove any individuals to and from the above
list of persons authorized to act on behalf of Borrower.
Resolved
Further
,
that
such individuals may, on behalf of Borrower:
Borrow
Money
. Borrow money from Silicon Valley Bank
(“Bank”).
Execute Loan
Documents
. Execute any loan documents Bank
requires.
Grant
Security
. Grant Bank a security interest in any of Borrower’s
assets.
Negotiate
Items
. Negotiate or discount all drafts, trade acceptances,
promissory notes, or other indebtedness in which Borrower has an interest and
receive cash or otherwise use the proceeds.
Letters of
Credit
. Apply for letters of credit from Bank.
Further
Acts
. Designate other individuals to request advances, pay
fees and costs and execute other documents or agreements (including documents or
agreement that waive Borrowers right to a jury trial) they believe to be
necessary to effectuate such resolutions.
Resolved
Further
,
that all
acts authorized by the above resolutions and any prior acts relating thereto are
ratified.
5. The
persons listed above are Borrower’s officers or employees with their titles and
signatures shown next to their names.
|
US
DATAWORKS, INC.
|
||
|
By:
|
||
|
Name:
|
||
|
Title:
|
||
***
If the Secretary, Assistant
Secretary or other certifying officer executing above is designated by the
resolutions set forth in paragraph 4 as one of the authorized signing officers,
this Certificate must also be signed by a second authorized officer or director
of Borrower.
I, the __________________________ of
Borrower, hereby certify as to paragraphs 1 through 5 above, as
[print
title]
of the
date set forth above.
|
By:
|
||
|
Name:
|
||
|
Title:
|
EXHIBIT
E
COMPLIANCE
CERTIFICATE
|
TO:
|
SILICON
VALLEY BANK
|
Date:
|
||
|
FROM:
|
US
DATAWORKS, INC.
|
The
undersigned authorized officer of US DATAWORKS, INC. (“Borrower”) certifies that
under the terms and conditions of the Loan and Security Agreement between
Borrower and Bank (the “Agreement”):
(1) Borrower
is in complete compliance for the period ending _______________ with all
required covenants except as noted below; (2) there are no Events of
Default except as noted below; (3) all representations and warranties in
the Agreement are true and correct in all material respects on this date except
as noted below; provided, however, that such materiality qualifier shall not be
applicable to any representations and warranties that already are qualified or
modified by materiality in the text thereof (but only to the extent of such
qualification or modification); and provided, further that those representations
and warranties expressly referring to a specific date shall be true, accurate
and complete in all material respects as of such date; (4) Borrower, and
each of its Subsidiaries, has timely filed all required tax returns and reports,
and Borrower has timely paid all foreign, federal, state and local taxes,
assessments, deposits and contributions owed by Borrower except as otherwise
permitted pursuant to the terms of Section 5.9 of the Agreement; and (5) no
Liens have been levied or claims made against Borrower or any of its
Subsidiaries relating to unpaid employee payroll or benefits of which Borrower
has not previously provided written notification to Bank except for Permitted
Liens.
Attached
are the required documents supporting this certification. The
undersigned certifies that these are prepared in accordance with GAAP
consistently applied from one period to the next except as explained in an
accompanying letter or footnotes and subject to normal year-end adjustments for
interim period unaudited financial statements. The undersigned
acknowledges that no borrowings may be requested at any time or date of
determination that Borrower is not in compliance with any of the applicable
terms of the Agreement, and that compliance is determined not just at the date
this certificate is delivered. Capitalized terms used but not
otherwise defined herein shall have the meanings given them in the
Agreement.
|
Please
indicate compliance status by circling Yes/No under “Complies”
column.
|