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 not been reviewed by our Independent Registered Public Accounting Firm. They have been presented pursuant to the rules of the Securities and Exchange Commission (the “SEC”) for quarterly reports on Form 10-Q and, accordingly, 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, 2009, and the results of its operations and its cash flows for the nine months ended September 30, 2009 and 2008. 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, 2008, which are included in the Company’s Form 10-K filed on March 27, 2009. The year-end condensed balance sheet data was derived from audited financial statements.
These accompanying unaudited interim condensed consolidated financial statements recognize the effects of all subsequent events that provide additional evidence about conditions that existed at September 30, 2009, including the estimates inherent in the process of preparing financial statements. We have evaluated such subsequent events through February 25, 2010, which is the date the accompanying financial statements were issued.
As of September 30, 2009, we had approximately $28,000 in cash and negative working capital of approximately $922,000. We have an accumulated deficit of approximately $17,200,000 through September 30, 2009. As a result of our cash position and our accumulated deficit, the report of our Independent Registered Public Accounting Firm relating to the financial statements as of and for the year ended December 31, 2008 contains an explanatory paragraph regarding substantial doubt about our ability to continue as a going concern. In the event that we cannot generate sufficient cash, we will have to further reduce our level of operations, which will make it more difficult or impossible for us to continue our business as a going concern.
We continue to explore all opportunities to improve our financial condition by pursuing potential
revenues through increased marketing efforts. There can be no assurance, however, that we will realize revenues in the near future that are adequate to meet our cash flow requirements. If we not successful in increasing our revenues sufficiently within the current fiscal quarter, we will be required to implement further cost saving actions and to attempt to obtain additional financing. There can be no assurance that financing will be available to us on reasonable terms, or at all. If we fail to increase our revenues and to obtain financing, we may be required to cease operations as a going concern and/or to adopt a plan of liquidation and dissolution.
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 were 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 June 2009, the Financial Accounting Standards Board (“FASB”) issued FASB ASC 105, Generally Accepted Accounting Principles , which establishes the FASB Accounting Standards Codification (“ASC”) as the sole source of authoritative generally accepted accounting principles (“GAAP”). Pursuant to the provisions ofFASB ASC 105, the Company has updated references to GAAP in its financial statements issued for the period ended September 30, 2009. The adoption of FASB ASC 105 did not impact the Company’s financial position or results of operations.
In May 2009, the FASB issued new authoritative guidance now codified as FASB ASC Topic 855 related to subsequent events, which establishes general standards of accounting for and disclosures of subsequent events that occur after the balance sheet date but prior to the issuance of financial statements. The guidance requires additional disclosure regarding the date through which subsequent events have been evaluated by the entity as well as whether that date is the date the financial statements were issued. This guidance became effective for the Company’s financial statements as of June 30, 2009. The Company has evaluated subsequent events through February 9, 2010, the date these financial statements were issued.
3. Fair Value Financial Instruments:
Cash and cash equivalents, accounts receivable, prepaid expenses, accounts payable and accrued expenses are stated at carrying amounts that approximate fair value because of the short maturity of those instruments.
4. Net Income (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. For the three and nine months ended September 30, 2009, options to purchase 88,331 shares of common stock have not been included in the computation of diluted net loss per share because the effect would have been anti-dilutive. For the three and nine months ended September 30, 2008, options to purchase 106,334 shares of common stock have not been included in the computation of diluted net loss per share because the effect would have been anti-dilutive.
5. Share-based payments:
The Company accounts for share-based compensation arrangements in accordance with generally accepted accounting principles (GAAP). Under GAAP, share-based compensation associated with time-based awards is measured at the grant date, based upon the fair value of the award, and is recognized as an expense over the employee’s requisite service period, which is generally the vesting period of the equity grant.
Share-based compensation expense amounted to $5,348 and $5,527 for the nine months ended September 30, 2009 and 2008, respectively, and $1,802 and $1,905 for the three months ended September 30, 2009 and 2008, respectively.
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. Management 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. 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.
There were no options granted during the three months or nine months ended September 30, 2009. The weighted average grant date fair value of options granted was $0.01 during the nine months ended September 30, 2008. 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, 2009 | | September 30, 2008 |
| | | | | | |
| | Expected option term | | n/a | | 6.25 years |
| | Expected volatility factor | | n/a | | 103.8% |
| | Risk-free interest rate | | n/a | | 2.62% |
| | Expected annual dividend rate | | n/a | | 0% |
The expected term of the grant is determined based on the vesting period and contractual terms of the options. The expected 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 term of the grant of 6.25 years. The risk-free interest rate for the expected term of the stock option is based on the U.S. Treasury yield.
Stock Option Plans
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. During the second quarter of 2009, options to purchase 1,332 shares of common stock expired; no further grants are available 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. As of September 30, 2009, there were 88,331 options outstanding under the 2007 Plan and 111,669 shares available for grant under the 2007 Plan.
The following table summarizes information about stock options outstanding at September 30, 2009:
| | Number of shares | | Weighted average exercise price | | Remaining contractual life in years | | Aggregate intrinsic value |
| | | | | | | | |
| Outstanding at December 31, 2008 | 92,996 | | $0.61 | | 8.38 | | |
| Granted | - | | | | | | |
| Exercised | - | | | | | | |
| Cancelled/forfeited | (4,665) | | 0.70 | | | | |
| Outstanding at September 30, 2009 | 88,331 | | 0.45 | | 7.75 | | $ - |
| Options vested or expected to vest at September 30, 2009 (1) | 78,612 | | 0.45 | | 7.75 | | $ - |
| Options exercisable at September 30, 2009 | 39,999 | | $0.47 | | 7.67 | | $ - |
| (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. |
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-K filed with the Securities and Exchange Commission for the year ended December 31, 2008.
The interim financial statements for the nine months ended September 30, 2009 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-K for the year ended December 31, 2008, filed on March 27, 2009.
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.
Our goal continues to be a leading supplier in the route accounting system markets and in selected other market sectors which we may identify in the future. The key elements of this strategy include: (i) listening to our customers and prospects and then designing and building solutions that resolve their inventory and supply chain product problems; (ii) continuously updating our software solutions to remain current with customers' needs as well as existing technology; and (iii) hiring people with industry experience.
Results of Operations
Three months ended September 30, 2009 compared to three months ended September 30, 2008.
For the three months ended September 30, 2009, we reported a net loss of $136,501 compared to a net loss of $329,414 for the three months ended September 30, 2008. The decreased loss was a direct result of the company’s continued effort to lower expenses.
Revenue and Gross Profit
Total revenues increased 24% to $197,188 for the three months ended September 30, 2009 from $159,125 for the three months ended September 30, 2008. Total product revenues increased 148% to $47,472 for the three months ended September 30, 2009 from $19,175 for the comparable prior period. The increase was due to additional hardware shipments.
Total service revenues increased 7% to $149,716 for the three months ended September 30, 2009 from $139,950 for the comparable prior period. The increase is a direct result higher support contracts offset by of lower billings of our professional services.
Gross profit was $46,324 or 23% of revenues for the three months ended September 30, 2009, compared to a negative gross profit of $16,733 for the prior comparable period. The improved gross profit was due to reduction in expenses.
Operating Expenses
Selling and marketing expenses for the three months ended September 30, 2009 were $51,783 compared to $94,321 for the prior comparable period, a decrease of $42,538 or 45%. The decrease is due primarily to lower payroll cost resulting from reduced manpower.
General and administrative expenses for the three months ended September 30, 2009 were $130,548 compared to $216,951 for the prior comparable period, a decrease of $86,403 or 40%. The decrease is a
result of lower legal fees combined with lower occupancy cost related to our relocation to smaller quarters.
Nine months ended September 30, 2009 compared to nine months ended September 30, 2008.
For the nine months ended September 30, 2009, we reported a net loss of $243,312 compared to a net loss of $386,561 for the nine months ended September 30, 2008. The decreased loss was a direct result of lower operating expenses, offset by decreased revenues.
Revenue and Gross Profit
Total revenues decreased 17% to $1,365,349 for the nine months ended September 30, 2009 from $1,641,292 for the nine months ended September 30, 2008. Total product revenues decreased 5% to $954,151 for the nine months ended September 30, 2009 from $1,006,077 for the comparable prior period. The decrease was due to lower sales of our new route software product, RRLE.
Total service revenues decreased 35% to $411,198 for the nine months ended September 30, 2009 from $635,215 for the comparable prior period. The decrease is a direct result of lower professional service billings.
Gross profit was $343,455 or 25% of revenues for the nine months ended September 30, 2009, compared to $452,485 or 28% of revenues for the prior comparable period. The decreased gross profit in absolute dollars was due to our decreased sales. The decreased profit margin as a percentage of revenues was due to sales during the nine months ended September 30, 2008 which carried a higher profit.
Operating Expenses
Selling and marketing expenses for the nine months ended September 30, 2009 were $176,736 compared to $251,152 for the prior comparable period, a decrease of $74,416 or 30%. The decrease is due primarily to lower payroll costs due to reduced manpower.
General and administrative expenses for the nine months ended September 30, 2009 were $408,592 compared to $586,003 for the prior comparable period, a decrease of $177,411 or 30%. The decrease is a result of lower professional fees combined with lower occupancy cost related to our relocation to smaller quarters.
Liquidity and Capital Resources
We used cash of $113,066 and $459,205 for operating activities for the nine months ended September 30, 2009 and 2008, respectively. For the nine months ended September 30, 2009, our principal operating cash was used to fund our loss from operation combined with a decrease in deferred revenue. This was offset by a decrease in deferred hardware and software costs along with a decrease in accounts receivable. 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 prepaid expenses and accounts receivable. This was offset by an increase in deferred revenues related to new orders for RRLE scheduled for completion in early 2009.
We used cash of $11,611 and $15,408 for investing activities from operation for the nine months ended September 30, 2009 and 2008, respectively. The cash was used for the purchase of capital equipment and development of software. As of September 30, 2009, we had no material commitments for capital expenditures.
We generated cash of $33,619 and $381,424 for financing activities for the nine months ended September 30, 2009 and 2008, respectively. During the nine months ended September 30, 2009, we raised capital from the private sale of 500,000 shares of our common stock, to the Chairman of our Board of Directors, in the amount of $50,000 and made payments on obligations under our capital leases. 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.
As of September 30, 2009, we had approximately $28,000 in cash and negative working capital of approximately $922,000. We have an accumulated deficit of approximately $17,200,000 through September 30, 2009. As a result of our cash position and our accumulated deficit, the report of our Independent Registered Public Accounting Firm relating to the financial statements as of and for the year ended December 31, 2008 contains an explanatory paragraph regarding substantial doubt about our ability to continue as a going concern. In the event that we cannot generate sufficient cash, we will have to further reduce our level of operations, which will make it more difficult or impossible for us to continue our business as a going concern.
We continue to explore all opportunities to improve our financial condition by pursuing potential revenues through increased marketing efforts. There can be no assurance, however, that we will realize revenues in the near future that are adequate to meet our cash flow requirements. If we not successful in increasing our revenues sufficiently within the current fiscal quarter, we will be required to implement further cost saving actions and to attempt to obtain additional financing. There can be no assurance that financing will be available to us on reasonable terms, or at all. If we fail to increase our revenues and to obtain financing, we may be required to cease operations as a going concern and/or to adopt a plan of liquidation and dissolution.
Critical Accounting Policies and Estimates
The accompanying discussion and analysis of the Company’s financial condition and results of operations are based on the Company’s financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The Company’s most critical accounting policies have a significant impact on the preparation of these financial statements. These policies include estimates and significant judgments that affect the reported amounts of assets, liabilities, revenues, and expenses. The Company continues to have the same critical accounting policies and estimates as are described in Item 7, in the Company’s Annual Report on Form 10-K for fiscal year 2008 filed with the United States Securities and Exchange Commission.
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-K for the year ended December 31, 2008.
As of September 30, 2009, there are no material changes in our contractual obligations as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2008.
Concentration of Credit Risk
The Company sells its products to customers principally in the United States of America. During the first nine months of 2009, one customer accounted for approximately 72% of our total revenues.
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, 2009. Based on the aforementioned evaluation, management has concluded that our disclosure control and procedures were not effective as of September 30, 2009 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)Changes in Internal Control over Financial Reporting. No changes in our internal control over financial reporting occurred during the quarter ended September 30, 2009 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting, except as follows:
The Board of Directors of National Datacomputer, Inc. (the “Company”) accepted Mr. Berens’ resignation as Director, President and Chief Executive Officer of the Company, effective September 29, 2009. Mr. Berens indicated that his resignation was due to a personal decision to pursue other interests and was not the result of any disagreements with the Company’s management or Board of Directors.
Also on September 29, 2009, the Board of Directors appointed Ms. Bruna Bucacci as the Company’s President and Chief Executive Officer. Ms. Bucacci was also appointed as a Director of the Company. These appointments were effective as of September 29, 2009. Ms. Bucacci remains as our Chief Accounting Officer and her appointment as Chief Executive Officer reduces our segregation of duties.
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 June 10, 2009, Anthony Stafford purchased 500,000 shares of our common stock at a price of $0.10 per share for a total cash consideration of $50,000.
Item 3. Defaults upon Senior Securities
Not Applicable.
Item 4. Submissions of Matters to a Vote of Security Holders
Not Applicable.
Item 5. Other Information
Not Applicable.
Item 6. Exhibits
| 31.1 | Certification of the Chief Executive Officer and 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. | |
| | | | |
| February 25, 2010 | By: | /s/ Bruna Bucacci | |
| | | Bruna Bucacci President and Chief Executive Officer (principal executive officer) Chief Accounting Officer (principal financial and accounting officer) | |
| | | | |
| | | | |
EXHIBIT INDEX
Exhibit No. Title
| 31.1 | Certification of the Chief Executive Officer and Chief Accounting Officer |
| 32.1 | Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
