NATIONAL DATACOMPUTER, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
1. Basis of presentation:
Company
National Datacomputer is engaged exclusively in providing solutions through the use of mobile information systems in the distribution market segment within the product supply chain. We design, market, sell and service computerized systems used to automate the collection, processing, and communication of information related to product sales and inventory control. Our products and services include application-specific software, data communication, handheld computers, related peripherals and accessories, as well as associated education and support.
General
The unaudited financial statements included herein have been presented pursuant to the rules of the Securities and Exchange Commission (the “SEC”) for quarterly reports on Form 10-Q, except that such financial statements have not been reviewed by our Independent Registered Public Accounting Firm. The financial statements do not include all of the information and note disclosure required by accounting principles generally accepted in the United States of America. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. In the opinion of management, these statements include all adjustments, consisting only of normal, recurring adjustments necessary for a fair presentation of the financial position of National Datacomputer, Inc. (the “Company”) as of September 30, 2008, and the results of their operations and cash flows for the three and nine months ended September 30, 2008 and 2007. These financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s annual report for the year ended December 31, 2007, which are included in the Company’s Form 10-KSB. The year-end condensed balance sheet data was derived from audited financial statements.
Reverse Stock Split
On July 31, 2008, our Board of Directors approved a reverse stock split and established a ratio of 1-for-15. This move followed a vote at our Annual Shareholders’ Meeting on June 24, 2008, in which shareholders authorized the Board to effect the reverse stock split. Upon market open on July 31, 2008, our common stock began trading on a split-adjusted basis under the new trading symbol “NDCP.”
The number of shares of our authorized common stock was reduced from 50,000,000 shares as of July 30, 2008, to approximately 3,333,333 shares post-split. The number of shares reserved for issuance under our stock option plans was also reduced proportionately. As a result of the reverse stock split, every 15 shares of common stock that was issued and outstanding was automatically combined into one issued and outstanding share, without any change in the par value of such shares. No fractional shares were issued in connection with the reverse stock split. Stockholders who would be entitled to fractional shares will receive cash in lieu of receiving fractional shares. The reverse stock split affected all shares of common stock, stock options and warrants of NDI outstanding as of immediately prior to the effective time of the reverse stock split.
All shares of common stock have been adjusted to reflect a 1 for 15 reverse stock split which was effective July 31, 2008.
2. Recent accounting pronouncements:
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”. SFAS 157 prescribes a single definition of fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The adoption of SFAS No. 157 with respect to financial assets and liabilities in the first quarter of 2008 had no effect on the Company’s results of operations or financial position. In addition, the Company is evaluating the impact of SFAS No. 157 for measuring nonfinancial assets and liabilities on future results of operations and financial position.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” This statement permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. The adoption of SFAS No. 159 in the first quarter of 2008 did not have an impact on the Company’s results of operations or financial position.
In December 2007, the FASB issued SFAS No. 141R, “Business Combinations,” which changes how business acquisitions are accounted. SFAS No. 141R requires the acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed in the transaction and establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed in a business combination. Certain provisions of this standard will, among other things, impact the determination of acquisition-date fair value of consideration paid in a business combination (including contingent consideration); exclude transaction costs from acquisition accounting; and change accounting practices for acquired contingencies, acquisition-related restructuring costs, in-process research and development, indemnification assets and tax benefits. SFAS No. 141R is effective for the Company for business combinations and adjustments to an acquired entity’s deferred tax asset and liability balances occurring after December 31, 2008. The Company is currently evaluating the future impacts and disclosures of this standard.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51.” This statement is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. SFAS No. 160 requires the recognition of a noncontrolling interest (minority interest) as equity in the consolidated financial statements and separate from the parent’s equity. The amount of net income attributable to the noncontrolling interest will be included in consolidated net income on the face of the income statement. SFAS No. 160 amends certain of ARB No. 51’s consolidation procedures for consistency with the requirements of SFAS No. 141(R). This statement requires changes in the parent’s ownership interest of consolidated subsidiaries to be accounted for as equity transactions. This statement also includes expanded disclosure requirements regarding the interests of the parent and its noncontrolling interest. The Company is currently evaluating the future impacts and disclosures of this standard.
In December 2007, the SEC issued SAB No. 110. SAB 110 allows for the continued use of a “simplified” method, as discussed in SAB No. 107, in developing an estimate of expected term of “plain vanilla” share options in accordance with SFAS 123 (revised 2004). Originally the SEC staff stated in SAB 107 that it would not expect a company to use the simplified method for share option grants after December 31, 2007. Accordingly, the SEC
staff will continue to accept, under certain circumstances, the use of the simplified method beyond December 31, 2007. The Company will continue to use of the simplified method for determining the value of options granted as allowed by SAB 110.
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities,” which changes the disclosure requirements for derivative instruments and hedging activities. SFAS No. 161 requires enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. This statement’s disclosure requirements are effective for fiscal years and interim periods beginning after November 15, 2008. The Company is currently evaluating the future impacts and disclosures of this standard.
3. Share-based payments:
The Company accounts for share-based compensation according to the provisions of SFAS No. 123(R), “Share−based Payment”, which establishes accounting for equity instruments exchanged for employee services. Under SFAS 123(R), share-based compensation cost is measured at the grant date, based on the fair value of the award, and is recognized as an expense over the employee’s requisite service period (generally the vesting period of the equity grant).
During the nine months ended September 30, 2008 and 2007, share-based compensation expense amounted to $5,526 and $2,266.
The Company estimates the fair value of stock options using the Black-Scholes valuation model. Key input assumptions used to estimate the fair value of stock options include the exercise price of the award, the expected option term, the expected volatility of the Company’s stock over the option’s expected term, the risk-free interest rate over the option’s expected term, and the Company’s expected annual dividend rate. The Company believes that the valuation technique and the approach utilized to develop the underlying assumptions are appropriate in calculating the fair values of the Company’s stock options granted in the nine months ended September 30, 2008. Estimates of fair values are not intended to predict actual future events or the value ultimately realized by persons who receive equity awards.
Stock options outstanding and related disclosures have been adjusted to reflect a 1 for 15 reverse stock split which was effective July 31, 2008.
The weighted average grant date fair value of options granted was $0.15 and $0.45 during the nine months ended September 30, 2008 and 2007, respectively. The fair value of options at date of grant was estimated using the Black-Scholes option-pricing model with the following assumptions:
| | | | Nine Months ended | | Nine Months ended |
| | | | September 30, 2008 | | September 30, 2007 |
| | | | | | |
| | Expected option term (1) | | 6.25 years | | 6.25 years |
| | Expected volatility factor (2) | | 103.8% | | 99.6% |
| | Risk-free interest rate (3) | | 2.62% | | 4.57% |
| | Expected annual dividend rate | | 0% | | 0% |
(1) The option life was determined using the simplified method for estimating expected option life, which qualifies as “plain-vanilla” options.
(2) The stock volatility for each grant is determined based on the review of the experience of the weighted average of historical monthly price changes of the Company’s common stock over the most recent six years, which approximates the expected option life of the grant of 6.25 years.
(3) The risk-free interest rate for periods equal to the expected term of the share option is based on the U.S. Treasury yield curve in effect at the time of grant.
Stock Option Plans
On August 19, 1997, the Board of Directors adopted the 1997 Stock Option Plan (“1997 Plan”) which provided for issuance of both incentive stock options and non-qualified options to employees. As of September 30, 2008, there were options to purchase 13,333 shares of common stock outstanding and no shares available for grant under the 1997 Plan.
On January 1, 1998, the Board of Directors adopted the 1998 Stock Option Plan (“1998 Plan”) which provides for issuance of non-qualified options to employees. As of September 30, 2008, there were options to purchase 1,332 shares of common stock outstanding and no shares available for grant under the 1998 Plan.
On March 30, 2007, the Board of Directors adopted the 2007 Employee, Director and Consultant Stock Option Plan (“2007 Plan”) which provides for the issuance of both incentive and non-qualified stock options to employees, consultants and directors. A maximum of 133,333 shares of common stock of the Company was reserved for issuance in accordance with the terms of the 2007 Plan. On June 24, 2008, upon stockholders approval the maximum number of shares reserved for issuance under the 2007 Plan was increased to 200,000.
Upon the approval of the 2007 Plan, our 1997 Plan and our 1998 Plan terminated. All outstanding options under our 1997 and 1998 Stock Option Plans will remain in effect, but no additional option grants may be made. As of September 30, 2008, there were 91,664 options outstanding under the 2007 Plan and 108,333 shares available for grant under the 2007 Plan.
The following table summarizes information about stock options outstanding at September 30, 2008:
| | Number of shares | Weighted average exercise price | Remaining contractual life in years | Aggregate intrinsic value |
| Outstanding at December 31, 2007 | 89,663 | $2.26 | 7.21 | $ — |
| Granted | 16,666 | 0.23 | | |
| Exercised | — | | | |
| Cancelled/forfeited | | | | |
| Outstanding at September 30, 2008 | 106,329 | 1.94 | 7.56 | $ — |
| Options vested or expected to vest at September 30, 2008 (1) | 96,246 | 2.10 | 7.44 | $ — |
| Options exercisable at September 30, 2008 | 33,415 | $5.22 | 4.89 | $ — |
| | | | | |
(1) In addition to the vested options, the Company expects a portion of the unvested options to vest at some point in the future. Options expected to vest are calculated by applying an estimated forfeiture rate to the unvested options.
4. Income Taxes:
The Company adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 9” (“FIN 48”), on January 1, 2007. FIN 48 requires that the impact of tax positions be recognized in the financial statements if they are more likely than not to be sustained upon examination, based on the technical merits of the position. As discussed in the financial statements in the 2007 Form 10-KSB, the Company has a valuation allowance against the full amount of its net deferred tax assets. The Company currently provides a valuation allowance against deferred tax assets when it is more likely than not that some portion, or all of its deferred tax assets, will not be realized. The implementation of FIN 48 had no effect on the Company’s financial position or results of operations and there is no interest or penalties as management believes the Company has no uncertain tax position at September 30, 2008.
The Company is subject to U.S. federal income tax as well as well as income tax of certain state jurisdictions. The Company has not been audited by the I.R.S. or any states in connection with income taxes. The period from 2004-2007 remains open to examination by the I.R.S. and state authorities.
ITEM 2. Management’s Discussion and Analysis or Plan of Operation.
The following discussion provides an analysis of the financial condition and results of operations of the Company and should be read in conjunction with the Unaudited Financial Statements and Notes thereto appearing elsewhere herein and our Annual Report on Form 10-KSB filed with the Securities and Exchange Commission for the year ended December 31, 2007.
The interim financial statements for the 9 months ended September 30, 2008 have not been reviewed by our Independent Registered Public Accounting Firm.
The discussion below contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act that involve risks and uncertainties. We generally use words such as “believe,” “may,” “could,” “will,” “intend,” “expect,” “anticipate,” “plan,” and similar expressions to identify forward-looking statements. You should not place undue reliance on these forward-looking statements. Our actual results could differ materially from those anticipated in the forward-looking statements for many reasons, including the risks described in the Company’s filings with the Security and Exchange Commission, including its Annual Report on Form 10-KSB for the year ended December 31, 2007, filed on March 28, 2008.
Although we believe the expectations reflected in the forward-looking statements are reasonable, they relate only to events as of the date on which the statements are made, and we cannot assure you that our future results, levels of activity, performance or achievements will meet these expectations. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements. We do not intend to update any of the forward-looking statements after the date of this report to conform these statements to actual results or to changes in our expectations, except as required by law.
Summary
Our mission is to provide solutions through the use of mobile information systems in the distribution market segment within the product supply chain. We design, market, sell, and service computerized systems used to automate the collection, processing, and communication of information related to product sales and inventory control. Our products and services include application-specific software, data communication, handheld computers, related peripherals, and accessories, as well as associated education and support.
From the very beginning we designed our software solution based on the customer’s unique specifications. Our first entry into the market was a DOS-based Route Accounting software solution named RouteRider® which we developed in 1988. The RouteRider software, running on our first generation of rugged handheld Datacomputer® (“Datacomputer”) the DC3.0, was originally designed and built for an office coffee service company. Since that time multiple generations of Datacomputers (DC3X, DC4 and DC4CE) were designed and brought to market and our software application was improved customer by customer and market by market. To date we have provided dependable solutions for distribution markets such as baking, dairy, beer, soda, water, wine and spirits.
Although our Datacomputers running our original RouteRider software are still available for purchase, we have now channeled all of our experience into new portable and highly parameterized Route Accounting solution software named RouteRider LE®, (“RRLE”). RRLE is a mobile sales force automation application designed to increase efficiency, improve productivity and make companies more profitable and competitive by allowing sales and distribution personnel to gather, enter and share data at the point of work. It has been designed to run on the very latest industry standard Microsoft™ operating systems and architectures which increases our market potential by running on industry preferred operating systems and handheld devices.
During 2006 we divested ourselves from our audit business to better concentrate our efforts on our new Route Accounting solution. The hand-held route solution, interfacing with the J.D. Edwards system, we delivered in 2006 to an internationally recognized company in the food services industry has been successful and the company has continued to deploy additional routes in Europe. During the last quarter of 2007, we contracted to deliver a comprehensive RRLE Direct Store Delivery solution to a major national bakery, and also to a major bottling company. The combined orders have a value of approximately $2,000,000 with delivery scheduled in 2008.
Results of Operations
Three months ended September 30, 2008 compared to three months ended September 30, 2007.
For the three months ended September 30, 2008, we reported a net loss of $329,414 compared to a net loss of $85,461 for the three months ended September 30, 2007. The increased loss was a direct result of lower revenues.
Revenue and Gross Profit
Total revenues decreased 76% to $159,125 for the three months ended September 30, 2008 from $667,668 for the three months ended September 30, 2007. Total product revenues decreased 96% to $19,175 for the three months ended September 30, 2008 from $444,686 for the comparable prior period. The decrease was due to lower sales of our new route software product, RRLE. Total service revenues decreased 37% to $139,950 for the three months ended September 30, 2008 from $222,982 for the comparable prior period. The decrease is a direct result of lower maintenance and repair contracts for our Datacomputers.
We experienced a negative gross profit of $16,733 for the three months ended September 30, 2008, compared to $155,682 or 23% of revenues for the prior comparable period. The decline in gross profit was due to our decreased product sales and lower professional service billings.
Operating Expenses
Selling and marketing expenses for the three months ended September 30, 2008 were $94,321 compared to 76,758 for the prior comparable period, an increase of $17,563 or 23%. The increase is due primarily to higher expenses to support marketing of our flagship RouteRider LE™ Direct Store Delivery solution for the Beverage, Baking, Coffee & Tea, Dairy, and Snack Food industries.
General and administrative expenses for the three months ended September 30, 2008 were $216,951compared to $175,048 for the prior comparable period, an increase of $41,903 or 24%. The increase is a result of higher legal and professional fees related to the company’s reverse stock split.
Nine months ended September 30, 2008 compared to Nine months ended September 30, 2007.
For the Nine months ended September 30, 2008, we reported a net loss of $386,561 compared to a net loss of $398,584 for the Nine months ended September 30, 2007. The reduced loss was a direct result of higher revenues combined with lower payroll costs, resulting from reduced manpower, along with reduced legal and directors’ fees.
Revenue and Gross Profit
Total revenues increased 11% to $1,641,292 for the nine months ended September 30, 2008 from $1,481,018 for the nine months ended September 30, 2007. Total product revenues increased 26% to $1,006,077 for the nine months ended September 30, 2008 from $797,739 for the comparable prior period. The increase was due to higher sales of our new route software product, RRLE, offset by decreased sales of our Datacomputers. Total service revenues decreased 7% to $635,215 for the nine months ended September 30, 2008 from $683,279 for the comparable prior period. The decrease is a direct result of lower maintenance and repair contracts for our Datacomputers, offset by higher billings of our professional services for RRLE implementation projects.
Gross profit was $452,485 or 28% of revenues for the nine months ended September 30, 2008, compared to $451,775 or 31% of revenues for the prior comparable period. The decreased profit was due to sales during the nine months ended September 30, 2007 which carried a higher profit.
Operating Expenses
Selling and marketing expenses for the nine months ended September 30, 2008 were $251,152 compared to $243,378 for the prior comparable period, an increase of $7,774 or 3%. The increase is due primarily to higher commission expenses resulting from higher revenues.
General and administrative expenses for the nine months ended September 30, 2008 were $586,003 compared to $625,507 for the prior comparable period, a decrease of $39,504 or 6%. The decrease is a result of reduced legal and directors’ fees combined with lower payroll costs resulting from reduced manpower. These were offset by higher professional fees related to the company’s reverse stock split.
Liquidity and Capital Resources
We used cash of $459,206 and $204,710 for operating activities for the nine months ended September 30, 2008 and 2007, respectively. For the nine months ended September 30, 2008, our principal operating cash was used to fund our loss from operations combined with a decrease in accounts payable, along with an increase in accounts receivable and prepaid expenses, offset by a decrease in deferred hardware and software cost and an increase in deferred revenues related to new orders for RRLE scheduled for completion in the later part of 2008. For the nine months ended September 30, 2007, our principal operating cash was used to fund our loss from operations combined with an increase in prepaid expenses, along with a decrease in accrued expenses and customer deposits, offset by an increase in accounts payable and deferred revenues.
We used cash of $15,408 and $16,861 for investing activities from operations for the nine months ended September 30, 2008 and 2007, respectively. The cash was used for the purchase of capital equipment. As of September 30, 2008, we had no material commitments for capital expenditures.
We generated cash of $381,425 and $230,571 for financing activities for the nine months ended September 30, 2008 and 2007, respectively. During the nine months ended September 30, 2008, we raised capital in the amount of $415,000, and made payments on obligations under our notes payable and capital leases. During the nine months ended September 30, 2007, we raised capital, net of expenses, in the amount of $262,165 and made payments on obligations under our notes payable and capital leases.
We have an accumulated deficit of approximately $16,823,000 through September 30, 2008. As a result of our deficit and our cash position, the report of our independent registered public accounting firm relating to the financial statements as of and for the year ended December 31, 2007 contains an explanatory paragraph regarding substantial doubt about our ability to continue as a going concern. We have taken numerous steps to address this situation. In prior periods, we divested ourselves of our audit business line in connection with a transaction relating to shares of our preferred and common stock held by a majority holder of our capital stock. We also entered into an arrangement with A.S.T., Inc. (“AST”) and Phyle Industries, Inc. (“Phyle”) pursuant to which we sold our audit business line to AST in exchange for 4,150 shares of our preferred stock (representing all of our issued and outstanding preferred stock).
During January 2007 acting as agent for certain new investors interested in purchasing shares of our common stock, we caused the transfer of 30,339,236 shares of our common stock, together with accrued but unpaid stock dividends (representing approximately 90% of our common stock in the aggregate) that Phyle had previously purchased from Capital Bank Grawe Gruppe AG (“CapitalBank”). These investors paid Phyle $250,000 for the purchase of our common stock and agreed to also provide us $350,000 to be used as working capital.
We continue exploring all opportunities to improve our financial condition by pursuing potential revenues sources through increased marketing efforts. There is a possibility that we may not realize adequate revenues in the near future to meet cash flow requirements, and therefore might require us to implement further cost saving actions or attempt to obtain additional financing. We believe that based on our current revenue expectations, the expected timing of such revenues, and our current level of expenses we have sufficient cash to fund our operations through the end of 2008. There can be no assurance that such financing, if required, will be available on reasonable terms, if at all.
Commitments, Contractual Obligations and Off-Balance Sheet Arrangements
Our only off-balance sheet arrangements are non-cancelable operating leases entered into in the ordinary course of business, as discussed in our Annual Report on Form 10-KSB for the year ended December 31, 2007.
As of September 30, 2008, there are no material changes in our contractual obligations as disclosed in our Annual Report on Form 10-KSB for the year ended December 31, 2007.
Concentration of Credit Risk
The Company sells its products to customers principally in the United States of America. During the first 9 months of 2008, three customers accounted for approximately 84% of our total revenues.Critical Accounting Policies and Estimates
Use of Estimates
The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America 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 revenues and expenses during the reporting period. Actual results could differ from these estimates.
Revenue Recognition
We recognize the majority of our revenue in accordance with SEC Staff Accounting Bulletin No. 104, “Revenue Recognition in Financial Statements”. Revenue related to product sales is recognized upon shipment provided that title and risk of loss have passed to the customer, there is persuasive evidence of an arrangement, the sales price is fixed or determinable, collection of the related receivable is reasonably assured and customer acceptance criteria, if any, have been successfully demonstrated. Where the criteria cannot be demonstrated prior to shipment, or in the case of new products, revenue is deferred until acceptance has been received. Our sales contracts provide for the customer to accept title and risk of loss at the time of delivery of the product to a common carrier.
Our transactions sometimes involve multiple elements (i.e. systems and services). Revenue under multiple arrangements is recognized in accordance with Emerging Issues Task Force (“EITF”) Issue No. 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables”. Under this method, if an element is determined to be a separate unit of accounting, the revenue for the element is based on fair value and determined by verifiable objective evidence, and recognized at time of delivery. If the arrangement has an undeliverable element, we ensure that we have objective and reliable evidence of the fair value of the undeliverable element. Fair value is determined based upon the price charged when the element is sold separately.
We recognize revenue for software licenses in accordance with the American Institute of Certified Public Accountants (“AICPA”)’s Statement of Position 97-2, “Software Revenue Recognition” (“SOP 97-2”). The application of SOP 97-2 requires judgment, including whether a software arrangement includes multiple elements. License revenue is recognized upon customer acceptance, provided that persuasive evidence of an arrangement exists, no significant obligations with regards to installation or implementation remain, fees are fixed or determinable, and collectibility is probable.
Hardware and software maintenance is marketed under annual and multi-year arrangements and revenue is recognized ratably over the contract maintenance term.
Accounts Receivable
The Company records trade receivables at their principal amount, adjusted for write-offs and allowances for uncollectible amounts. The Company reviews its trade receivables monthly, and determines, based on management’s knowledge and the customer’s payment history, any write-off or allowance that may be necessary. The Company follows the practice of writing off uncollectible amounts against the allowance provided for such accounts.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out (FIFO) method. The Company evaluates its inventories to determine excess or slow moving products based on quantities on hand, current orders and expected future demand. For those items in which the Company believes it has an excess supply or for those items that are obsolete, the Company estimates the net amount that the Company expects to realize from the sale of such products and records an allowance.
Property and Equipment
Property and equipment are recorded at cost and depreciated over the estimated useful lives of the assets using the straight-line method. Leasehold improvements are amortized over the shorter of the useful lives or the remaining terms of the related leases. Maintenance and repair costs are charged to operations as incurred.
Capitalized Software Research and Development Costs.
Costs associated with the development of computer software are charged to operations prior to the establishment of technological feasibility, as defined by Statement of Financial Accounting Standards (SFAS) No. 86, “Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed”. Costs incurred subsequent to the establishment of technological feasibility and prior to the general release of the products are capitalized.
Capitalized software costs are amortized on a product-by-product basis. The annual amortization is the greater of the amount computed using (a) the ratio that current gross revenue for a product bears to the total of current and anticipated future gross revenues for that product or (b) the straight-line method over the remaining estimated economic life of the product. Amortization begins when the product is available for general release to the customer.
Stock-Based Compensation
The Company accounts for share-based compensation according to the provisions of SFAS No. 123(R), “Share-based Payment”, which establishes accounting for equity instruments exchanged for employee services. Under SFAS 123(R), share-based compensation cost is measured at the grant date, based on the fair value of the award, and is recognized as an expense over the employee’s requisite service period (generally the vesting period of the equity grant).
Net Loss Per Share
Basic and diluted loss per share is calculated by dividing net loss attributable to common stockholders by the weighted-average number of common shares outstanding.
Warranty and Return Policy
The Company’s warranty policy provides 90-day coverage on all parts and labor on all products. The policy with respect to sales returns provides that a customer may not return inventory except at the Company’s option. The Company’s warranty costs have historically been insignificant.
Shipping and Handling Costs
Shipping and handling costs are classified as a component of cost of goods sold. The Company accounts for shipping and handling costs passed on to customers as revenues.
Recent accounting pronouncements
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”. SFAS 157 prescribes a single definition of fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The adoption of SFAS No. 157 with respect to financial assets and liabilities in the first quarter of 2008 had no effect on the Company’s results of operations or financial position. In addition, the Company is evaluating the impact of SFAS No. 157 for measuring nonfinancial assets and liabilities on future results of operations and financial position.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” This statement permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. The adoption of SFAS No. 159 in the first quarter of 2008 did not have an impact on the Company’s results of operations or financial position.
In December 2007, the FASB issued SFAS No. 141R, “Business Combinations,” which changes how business acquisitions are accounted. SFAS No. 141R requires the acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed in the transaction and establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed in a business combination. Certain provisions of this standard will, among other things, impact the determination of acquisition-date fair value of consideration paid in a business combination (including contingent consideration); exclude transaction costs from acquisition accounting; and change accounting practices for acquired contingencies, acquisition-related
restructuring costs, in-process research and development, indemnification assets and tax benefits. SFAS No. 141R is effective for the Company for business combinations and adjustments to an acquired entity’s deferred tax asset and liability balances occurring after December 31, 2008. The Company is currently evaluating the future impacts and disclosures of this standard.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51.” This statement is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. SFAS No. 160 requires the recognition of a noncontrolling interest (minority interest) as equity in the consolidated financial statements and separate from the parent’s equity. The amount of net income attributable to the noncontrolling interest will be included in consolidated net income on the face of the income statement. SFAS No. 160 amends certain of ARB No. 51’s consolidation procedures for consistency with the requirements of SFAS No. 141(R). This statement requires changes in the parent’s ownership interest of consolidated subsidiaries to be accounted for as equity transactions. This statement also includes expanded disclosure requirements regarding the interests of the parent and its noncontrolling interest. The Company is currently evaluating the future impacts and disclosures of this standard.
In December 2007, the SEC issued SAB No. 110. SAB 110 allows for the continued use of a “simplified” method, as discussed in SAB No. 107, in developing an estimate of expected term of “plain vanilla” share options in accordance with SFAS 123 (revised 2004). Originally the SEC staff stated in SAB 107 that it would not expect a company to use the simplified method for share option grants after December 31, 2007. Accordingly, the SEC staff will continue to accept, under certain circumstances, the use of the simplified method beyond December 31, 2007. The Company will continue to use of the simplified method for determining the value of options granted as allowed by SAB 110.
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities,” which changes the disclosure requirements for derivative instruments and hedging activities. SFAS No. 161 requires enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. This statement’s disclosure requirements are effective for fiscal years and interim periods beginning after November 15, 2008. The Company is currently evaluating the future impacts and disclosures of this standard.
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
No discussion is required pursuant to Form 10-Q Instruction to paragraph 305(c).
ITEM 4. Controls and Procedures
a) Evaluation of Disclosure Controls and Procedures. We have conducted an evaluation under the supervision of the Chief Executive Officer and the Chief Accounting Officer (its principal executive officer and principal financial officers, respectively), regarding the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act of 1934) as of September 30, 2008. Based on the aforementioned evaluation, management has concluded that our disclosure control and procedures were not effective as of September 30, 2008 because of the existence of two material weaknesses in our internal control over financial reporting related to (i) our finance group’s inability to perform the testing of internal controls on financial reporting due to our limited number of personnel engaged in accounting and finance functions and a resulting lack in the segregation of duties, and (ii) the potential inability of our accounting staff to handle certain complex accounting issues.
(b) Management’s Annual Report on Internal Control over Financial Reporting
(i) Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control system is designed to provide reasonable assurance to our management and board of directors regarding the reliability of financial reporting and the preparation of published financial statements. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial reporting and financial statement preparation and presentation.
(ii) We have assessed the effectiveness of our internal control over financial reporting as of September 30, 2008. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission, or COSO, in Internal Control—Integrated Framework.
(iii) Two material weaknesses were identified in our internal control over financial reporting relative to accounting for the quarter ended September 30, 2008. The first material weakness was comprised of inadequate segregation of duties to ensure a sufficient review of the work performed by our Chief Accounting Officer (due to the limited number of personnel we retain as employees). The second material weakness was the potential inability of our accounting staff to handle certain complex accounting issues. We believe a mitigating factor for this material weakness is the active participation of our Audit Committee. These material weaknesses did not result in the restatement of any previously reported financial statements or any other related financial disclosure nor did they disclose any errors or misstatements.
Because of the material weaknesses described above, management has concluded that the Company’s internal control over financial reporting was not effective as of September 30, 2008. No other material weaknesses in our internal control over financial reporting were identified.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.
(c) Changes in Internal Control over Financial Reporting
No changes in our internal control over financial reporting occurred during the quarter ended September 30, 2008 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
(d) Remediation Plan for Material Weakness
In response to the identified material weaknesses described above, our management, with oversight from our Audit Committee, intends to continue to enhance our internal control over financial reporting relative to accounting during this fiscal year as follows:
| · | Interview and potentially retain third party consultants which may assist the Company’s accounting staff in providing review and analysis of complex accounting issues, and |
| · | Engage additional expert resources to review material transactions so as to provide a review of what are otherwise unsegregated duties of finance and accounting staff. |
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
We are not a party to any legal proceedings.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On July 28, 2008, Anthony Stafford purchased 66,667 shares of our common stock at a price of $0.75 per share for a total cash consideration of $50,000.
On September 18, 2008 Anthony Stafford, William Berens, Jack MacKinnon and other investors purchased 1,825,000 shares of our common stock at a price of $0.20 for a total cash consideration of $365,000.
Item 3. Defaults upon Senior Securities
Not Applicable.
Item 4. Submissions of Matters to a Vote of Security Holders
As described in our Form 8-K filing on August 5, 2008, on June 24, 2008, we submitted the following matters to a vote of our stockholders:
| 1. | To elect the Company’s director nominees to the Board of Directors. |
| 2. | To approve an amendment to the Company’s Certificate of Incorporation, as amended (the “Certificate of Incorporation”) that Article Fourth of the Company’s Certificate of Incorporation be amended to effect a 1-for-15 reverse stock split of the issued and outstanding shares of the Company’s common stock; |
| 3. | To approve an amendment to the Restated Company’s Certificate of Incorporation to reduce the number of authorized shares of common stock; |
| 4. | To amend the 2007 Employee, Director and Consultant Stock Plan by increasing the shares of the Company’s common stock for grant under that plan from 2,000,000 to 3,000,000 shares (which shares available for grant shall be reduced to 200,000 shares following the reverse stock split; |
| 5. | To ratify the appointment of Carlin, Charron & Rosen, LLP as the independent registered public accounting firm of the Company; |
The votes for each of the proposals were as follows:
| | FOR: | AGAINST | ABSTAIN |
| | | | |
| Proposal 1. | 29,975,674 | -0- | 343 |
| Proposal 2. | 29,925,670 | 50,923 | 83 |
| Proposal 3. | 29,925,793 | 50,775 | 108 |
| Proposal 4. | 29,872,903 | 51,028 | 52,745 |
| Proposal 5. | 29,975,750 | 661 | 265 |
Item 5. Other Information
Not Applicable.
Item 6. Exhibits
31.1 Certification of the Chief Executive Officer
31.2 Certification of the Chief Accounting Officer
32.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | NATIONAL DATACOMPUTER, INC. | |
| | | | |
| | | | |
| January 15, 2009 | | /s/ William B. Berens | |
| | | William B. Berens | |
| | | President and Chief Executive Officer (principal executive officer) | |
| | | | |
| January 15, 2009 | | /s/ Bruna Bucacci | |
| | | Bruna Bucacci | |
| | | Chief Accounting Officer (principal financial and accounting officer) | |
| | | | |
