Item 1. Business
Description of Business.
National Datacomputer, Inc. (hereinafter referred to as the “Company”, “we”, “us” or “our”) was organized as a Delaware corporation in 1986 and began active operations in 1987 following our merger with an established computer systems engineering business. We are 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 data communication, application-specific software, handheld computers, related peripherals, and accessories, as well as associated education and support services for our products. In early January 2011, our business ceased active operations with the sale of our remaining product and service business to Micronet, Ltd. (“Micronet”).
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. Historically we have provided dependable solutions for distribution markets such as baking, dairy, beer, soda, water, wine and spirits.
During the fiscal year ended December 31, 2006, we sold 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. On November 29, 2006, we 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 2,022,616 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.
Convertible Debt
During 2010, we entered into subscription agreements with three investors, including an officer of the Company, pursuant to which we issued an aggregate of $250,000 of our secured convertible promissory notes (the “Notes”). The Notes bear interest at the rate of 7.0% per annum, compounded annually. All principal and accrued interest are payable on April 21, 2013. Our obligations under the Notes are secured by the grant of a first priority security interest in all of our assets.
At any time prior to the Maturity Date, provided that the Company then has authorized a sufficient number of unissued shares of Common Stock to permit the conversion of this Note, this Note shall be convertible (in whole or in part), at the option of the Holder (the “Conversion Option”), into such number of fully paid and non-assessable shares of Common Stock as shall be equal to (i) the aggregate amount of the principal and interest so converted, divided by (ii) $.005 per share (as adjusted to reflect stock splits, stock dividends, reorganizations, reclassifications, consolidations, mergers or sales and similar events).
Subject to applicable cure periods, the holders of a majority of the principal amount of the Notes outstanding from time to time may declare the entire unpaid principal balance of the Notes to be due and payable upon certain events of default.
The Notes may be prepaid by us at our election with the written consent of the holders of at least 75% in original principal amount of the Notes. .
The Company’s obligations under the Notes are secured by the grant of a first priority security interest in all of the Company’s assets.
The issuance of the Notes was exempt from registration under the Securities Act of 1933, as amended, pursuant to an exemption provided by Section 4(2) of the Securities Act.
Asset Purchase Agreement and Amendment to Distribution Agreement
In January 2011, due to our inability to meet our financial obligations and the impending loss of a critical distribution agreement granting us the right to distribute certain products, our secured lenders (“Secured Parties”) acting upon an event of default, sold certain of our assets (other than cash and accounts receivable) to Micronet, Ltd. (“Micronet”), an unaffiliated corporation pursuant to the terms of an asset purchase agreement between the Secured Parties and Micronet dated January 10, 2010 (the “Asset Purchase Agreement”). In order to induce Micronet to enter into the agreement, the Company also provided certain representations and warranties regarding certain business matters.
The purchase price for the assets is (a) $50,000 which was paid at closing and (b) an additional amount pursuant to the following terms (the “Additional Consideration”): Micronet shall pay an aggregate amount which equals to 25% of the Net Profit Before Tax of the Micronet's subsidiary, Micronet Mobile Technologies, Inc. (the "US Subsidiary") made during the calendar year 2011 as a result of its RouteRiderLE operations in the US. $40,000 of the initial $50,000 was considered as an advance payment on account of the Additional Consideration, and will be deducted from the first quarterly Additional Consideration payments. For the purpose of calculating the Additional Consideration, Micronet agreed that during the year 2011, it shall charge the US Subsidiary only 35% of the license and maintenance revenues of the US Subsidiary, regardless of the amount actually charged. Such charge will be considered as an expense in the RouteRiderLE US Subsidiary operation for the purpose of calculating the Net Profit Before Tax. The Additional Consideration shall be paid quarterly, within sixty (60) days of the end of each quarter. Calculations of the Additional Consideration will be made on a yearly cumulative basis. Micronet has also agreed to allow the Secured Parties, NDI and its shareholders, at NDI's expense and subject to the execution of confidentiality agreements with Micronet, access to Micronet and the US Subsidiary's quarterly and annual financial reports for the year 2011. If NDI or any of its shareholders, directors, officers or employees bring any action against Micronet other than for the enforcement of this Agreement or for damages for its breach, NDI shall not be entitled to the Additional Consideration, until such time that such action is finally adjudicated or settled.
The initial $50,000 payment was used to pay accrued salaries and payroll taxes, sums due certain creditors and for other expenses of the transaction. Any additional proceeds, if any, to be received under the Asset Purchase Agreement, will be used first to pay sums due to the Secured Parties, which, as of December 31, 2010 totaled $237,979. Interest on sums due the Secured Parties accrues interest at the rate of 7.0% per annum. If there are any additional proceeds, the Company currently intends for such proceeds to be used to pay other obligations to creditors. It is not anticipated that there will be additional proceeds from the Asset Sale for distribution to stockholders.
The foregoing description of the Asset Sale does not purport to be a complete statement of the parties’ rights under the Asset Purchase Agreement and is qualified in its entirety by reference to the full text of the Asset Purchase Agreement, a copy of which is filed with the a Current Report on Form 8-K dated January11, 2011 as Exhibit 99.1.
Products
We previously implement software solutions, such as our Microsoft™ DOS®-based RouteRider product and the Microsoft™ Windows Mobile®-based RouteRider LE product, for companies that required the latest technology to manage and improve their business operations to account for inventory in route based deliveries. Our Route Accounting solution functions was a combined point of sale and a rolling warehouse management system with all the technical and audit functionality needed for today’s working environments.
In June 2004 we signed a distribution partnership with Micronet, LTD, giving us rights to market, sell and support a new mobile accounting software product throughout the United States, Canada and Mexico. Since that time we have worked with Micronet to modify this software so that it conforms to the North American market.
Key Customers
During 2010, three customers accounted for approximately 78% of our total revenues. The majority of our customers place orders with us on an “as needed basis”; however there are times when a customer will place an order for delivery over a twelve month period.
Competition
The market for our route service products is highly competitive and acutely influenced by advances in technology, new product introduction and price competition. Our competitors include Trimble, Apacheta Corporation, BelTech Systems and High Jump Software, all of which have greater financial, marketing and technical resources than we do. In addition, larger corporations could enter the direct store delivery sales and service segment of the hand-held computer market.
Employees
As of December 31, 2010, we had 6 full-time employees. Of these employees, two were engaged in sales and marketing, two in service and customer support, and two in administration and finance. Our employees are not represented by a labor union. We believe that our relationship with our employees is good. Subsequent to December 31, 2010, we have no employees.
Item 1A.
Item 1A.
Risk Factors.
RISKS RELATED TO OUR BUSINESS
WE HAVE NO CURRENT BUSINESS OPERATIONS
With the sale of our remaining line of business to Micronet, we have no current business other than to collect any future sums due to us from Micronet. We are currently exploring opportunities to use our public entity in another manner in order to seek to derive some additional benefit to our creditors and our stockholders. There can be no assurance that we will be successful in such efforts.
IF WE ARE UNABLE TO HIRE OR RETAIN KEY PERSONNEL, WE MAY NOT BE ABLE TO OPERATE OUR BUSINESS SUCCESSFULLY.
We may not be successful in recruiting and retaining executive officers and other key management and technical personnel. The competition for employees with the necessary high level of technical expertise to design, market and sell our products is intense, particularly in Massachusetts. We will need to hire executives and a number of additional technical personnel if we are to sustain the development of new products and our ability to sell those products. Because competition for highly skilled technical personnel is so intense, companies in the Company’s industry are subject from time to time to complaints brought by competitors alleging interference with contractual relations or wrongful hiring of employees. Such lawsuits may be costly, may divert management attention and resources from the operation of our business, and may therefore adversely affect our financial condition and results of operations. In addition, the loss of the management and technical expertise of our senior management could seriously harm us.
RISKS RELATING TO OUR COMMON STOCK
TRADING ON THE OTC BULLETIN BOARD MAY BE VOLATILE AND SPORADIC, WHICH COULD DEPRESS THE MARKET PRICE OF OUR COMMON STOCK AND MAKE IT DIFFICULT FOR OUR STOCKHOLDERS TO SELL THEIR SHARES.
Our common stock is quoted on the OTC Bulletin Board service of the National Association of Securities Dealers. Trading in stock quoted on the OTC Bulletin Board is often limited and characterized by wide fluctuations in trading prices, due to many factors that may have little to do with our operations or business prospects. This volatility could depress the market price of our common stock for reasons unrelated to operating performance. Moreover, the OTC Bulletin Board is not a stock exchange, and trading of securities on the OTC Bulletin Board is often more sporadic than the trading of securities listed on a quotation system like Nasdaq or a stock exchange. Accordingly, shareholders may have difficulty reselling any of the shares.
OUR STOCK IS A PENNY STOCK. TRADING OF OUR STOCK MAY BE RESTRICTED BY THE SEC’S PENNY STOCK REGULATIONS AND THE NASD’S SALES PRACTICE REQUIREMENTS, WHICH MAY LIMIT A STOCKHOLDER’S ABILITY TO BUY AND SELL OUR STOCK.
Our stock is a penny stock. The Securities and Exchange Commission has adopted Rule 15g-9 which generally defines “penny stock” to be any equity security that has a market price (as defined) less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions. Our
securities are covered by the penny stock rules, which impose additional sales practice requirements on broker-dealers who sell to persons other than established customers and “accredited investors”. The term “accredited investor” refers generally to institutions with assets in excess of $5,000,000 or individuals with a net worth in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 jointly with their spouse. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document in a form prepared by the SEC which provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction and monthly account statements showing the market value of each penny stock held in the customer’s account. The bid and offer quotations, and the broker-dealer and salesperson compensation information, must be given to the customer orally or in writing prior to effecting the transaction and must be given to the customer in writing before or with the customer’s confirmation. In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from these rules; the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for the stock that is subject to these penny stock rules. Consequently, these penny stock rules may affect the ability of broker-dealers to trade our securities. We believe that the penny stock rules discourage investor interest in and limit the marketability of our common stock.
In addition to the “penny stock” rules promulgated by the Securities and Exchange Commission, the NASD has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives and other information. Under interpretations of these rules, the NASD believes that there is a high probability that speculative low priced securities will not be suitable for at least some customers. The NASD requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit your ability to buy and sell our stock.
FACTORS UNRELATED TO OUR BUSINESS COULD NEGATIVELY IMPACT THE MARKET PRICE OF OUR COMMON STOCK.
The stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many technology companies. These fluctuations often have been unrelated or disproportionate to the operating performance of those companies. We expect that the market price of our common stock will fluctuate as a result of variations in our quarterly operating results, or for other reasons that are not related to the performance of our business. These fluctuations may be exaggerated if the trading volume of our common stock is low. In addition, due to the technology-intensive nature of our business, the market price for our common stock may rise and fall in response to various factors, including:
·
announcements of technological innovations or new products, or competitive developments;
·
investor perceptions and expectations regarding our or our competitors’ products;
·
acquisitions or strategic alliances by us or our competitors; and
·
the gain or loss of a significant customer or order
In addition, market fluctuations, as well as general economic, political and market conditions such as recessions, interest rate changes or international currency fluctuations, may negatively impact the market price of our common stock.
IF WE FAIL TO REMAIN CURRENT IN OUR REPORTING REQUIREMENTS, WE COULD BE REMOVED FROM THE OTC BULLETIN BOARD WHICH WOULD LIMIT THE ABILITY OF BROKER-DEALERS TO SELL OUR SECURITIES AND THE ABILITY OF STOCKHOLDERS TO SELL THEIR SECURITIES IN THE SECONDARY MARKET.
Companies trading on the OTC Bulletin Board, such as us, must be reporting issuers under Section 12 of the Securities Exchange Act of 1934, as amended, and must be current in their reports under Section 13, in order to maintain price quotation privileges on the OTC Bulletin Board. If we fail to remain current in our reporting requirements, we could be removed from the OTC Bulletin Board. As a result, the market liquidity for our securities could be severely adversely affected by limiting the ability of broker-dealers to sell our securities and the ability of stockholders to sell their securities in the secondary market.
Item 1B.
Item 1B.
Unresolved Staff Comments.
Not applicable
Item 2.
Item 2.
Properties.
We maintain our principal offices and support operations in a leased 3,500 square foot facility in Bedford, Massachusetts. Our lease expires on April 30, 2011. The annual base rent for our leased facilities is approximately $36,000.
Item 3.
Item 3.
Legal Proceedings.
We are not a party to any legal proceedings.
Item 4.
Item 4.
Submission of Matters to a Vote of Security-Holders.
Not applicable.
PART II
Item 5.
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Our common stock trades on the OTC Bulletin Board (“OTC”) under the symbol NDCP. On March 31, 2011, the last traded price for our common stock as reported by OTC was $0.06 per share.
For the periods indicated below, the table sets forth the range of high and low last sale prices for our Common Stock as reported by the OTC. The quotations reflect inter-dealer prices, without retail mark-up, markdown or commission, and may not represent actual retail transactions.
As of March 31, 2011, there were approximately 928 stockholders of record of our common stock.
Since many of the shares are held by brokers and other institutions on behalf of stockholders, the Company is unable to estimate the total number of individual stockholders represented by these holders of record.
Dividends
Since inception, we have not paid any dividends on our common stock and we do not anticipate the payment of any dividends to our common stockholders in the foreseeable future. The declaration of dividends in the future will be at the election of our Board of Directors and will depend upon our earnings, capital requirements and financial position, general economic conditions, and other pertinent factors.
Summary of Equity Compensation Plans
We maintain an equity compensation plans for employees, officers, directors and others whose efforts contribute to our success. The table below sets forth certain information as of our fiscal year ended December 31, 2010 regarding the shares of our common stock available for grant or granted under stock option plans that (i) were approved by our stockholders, and (ii) were not approved by our stockholders.
Plan Category
Number of Securities to be issued upon exercise of outstanding options, warrants and rights
Weighted-average exercise price of outstanding options, warrants and rights
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
(a)
(b)
(c)
Equity compensation plans approved by security holders
38,331
$0.44
161,669
Equity compensation plans not approved by security holders
Total
38,331
$0.44
161,669
Unregistered Sales of Securities
The following summarizes all sales of our unregistered securities during the fiscal year ended December 31, 2010. The securities in each of the below-referenced transactions were (i) issued without registration and (ii) were subject to restrictions under the Securities Act and the securities laws of certain states, in reliance on the private offering exemptions contained in Sections 4(2), 4(6) and/or 3(b) of the Securities Act and on Regulation D promulgated thereunder, and in reliance on similar exemptions under applicable state laws as a transaction not involving a public offering. No placement or underwriting fees were paid in connection with these transactions. Proceeds from the sales of these securities were used for general working capital purposes.
The securities issued as set forth above were issued in reliance upon exemptions from the registration provisions of the Securities Act set forth in Section 4(2) thereof relative to sales by an issuer not involving any public offering, to the extent an exemption from such registration was required.
Item 6.
Item 6.
Selected Financial Data.
Not applicable.
Item 7.
Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations.
Overview
Our total revenues for the fiscal year ended December 31, 2010, were $908,971 as compared to $1,723,361 for the fiscal year ended December 31, 2009, a decrease of 47%. Net loss for 2010 was $288,368, or $(0.09) per share, as compared to a loss of $231,994 or $(0.05) per share for 2009.
During 2009, we delivered a comprehensive RRLE Direct Store Delivery solution to a major national bakery. This solution had a value of approximately $1,000,000.
Results of Operations
As we have sold all of our operating business, we are exploring opportunities to utilize our corporate asset to generate revenues. If we fail to increase our revenues and to obtain financing, we would seek to adopt a plan of liquidation and dissolution.
The following discussion and analysis of results of operation focuses on continuing operations and should be read in conjunction with the financial statements and notes thereto appearing elsewhere herein.
Year Ended December 31, 2010 Compared with Year Ended December 31, 2009
For the year ended December 31, 2010, we reported a loss of $288,368, or $(0.09) per share, as compared to a loss of $231,994 or $(0.05) per share for the comparable prior year. The increased net loss was a direct result of lower revenues.
Revenue
Our total revenue for the year ended December 31, 2010 decreased 47% to $908,971 compared to $1,723,361 for the comparable prior year.
Product revenues for the year ended December 31, 2010 decreased 59% to $480,465 compared to $1,173,317 for the prior year. The decrease is due to the delivery in 2009 of our RRLE Direct Store Delivery solution to a major national bakery which we were not able to repeat in 2010.
Service revenues for the year ended December 31, 2010 decreased 22% to $428,106 compared to $550,044 for the prior year. The decrease is a direct result of lower maintenance and repair contracts for our Datacomputers, along with lower billings of our professional services for RRLE implementation projects.
Our gross profit was $203,457 or 22% of revenues for the year ended December 31, 2010, compared to $466,404 or 27% of revenues from the prior year. The lower margin is a direct result of the decreased revenues.
Operating Expenses
Total operating expenses of $486,180 decreased 30% for the year ended December 31, 2010 from $696,569 for the comparable prior year.
Selling and marketing expenses for the year ended December 31, 2010 were $163,674 compared to $209,947 for the prior year, a decrease of 22%. The decrease is due primarily to lower payroll cost resulting from reduced manpower.
General and administrative expenses for the year ended December 31, 2010 were $322,506 compared to $486,622 for the prior year, a decrease of 34%. The decrease is a result of lower professional and legal fees combined with lower occupancy cost related to our relocation to smaller quarters.
Liquidity and Capital Resources
We used cash of $315,586 and $27,616 for operating activities for the years ended December 31, 2010 and 2009, respectively. For the year ended December 31, 2010, our principal operating cash requirement was used to fund our loss from operations along with a decrease in deferred revenue offset by a decrease in deferred hardware and software costs, along with a decrease in prepaid expenses and account receivable. For the year ended December 31, 2009, our principal operating cash requirement was used to fund our loss from operations along with a decrease in deferred revenue and accounts payable offset by a decrease in deferred hardware and software costs.
We used cash of $8,272 and $11,611 for investing activities for the years ended December 31, 2010 and 2009, respectively. The cash was used for the purchase of capital equipment and capitalized software development costs. As of December 31, 2010, we had no material commitments for capital expenditures.
We generated cash of $221,272 and $28,795 from financing activities for the years ended December 31, 2010 and 2009, respectively. For the year ended December 31, 2010, we raised capital in the amount of $231,700 from the issuance of convertible notes and made payments on obligations under our capital leases for the year ended December 31, 2009, we raised capital in the amount of $50,000 and made payments on obligations under our capital leases.
Although we have been able to reduce our operating expenses by 30% in 2010, as compared to 2009, we still have incurred an accumulated deficit of approximately $17.5 million through December 31, 2010. As of December 31, 2010, we had approximately $6,500 in cash and negative working capital of $1,030,000. The 2010 results reflect significant cost reductions, which efforts we are continuing to undertake. However, even with the additional working capital from the convertible notes during 2010 and equity transactions during 2009, we have a current ratio of 0.05 as of December 31, 2010, compared to our current ratio of 0.33 at December 31, 20089, both significantly less than 1.00, which is generally considered to place a company at higher financial risk. . At this point, we are seeking to utilize our corporate assets to repay creditors and, if possible, distribute nay remaining funds, if any, to our stockholders.
At December 31, 2010, approximately 95% of our accounts payable was comprised of amounts due for services to our Directors and a legal firm. Although no formal payment plans have been established, we plan on making monthly payment based on our availability of cash.
Commitments, Contractual Obligations and Off-Balance Sheet Arrangements
We lease our office facilities under an operating lease expiring April 30, 2011. The lease contains an option for renewal and requires the payment of taxes and other operating costs. Total rent expense under this operating lease was $32,258 and $68,350 for the years ended December 31, 2010 and 2009, respectively.
Recent Accounting Pronouncements
Accounting Pronouncements - The Financial Accounting Standards Board (“FASB”) is the authoritative body for financial accounting and reporting in the United States. On July 31, 2009, the FASB Accounting Standards Codification (“the Codification”) became the authoritative source of accounting principles to be applied to the financial statements of nongovernmental entities prepared in accordance with GAAP. The following is a list of recent pronouncements issued by the FASB which affect our Company:
Revenue Arrangements with Multiple Deliverables: The guidance amends the current revenue recognition guidance for multiple deliverable arrangements. It allows the use of management’s best estimate of selling price for individual elements of an arrangement when vendor specific objective evidence, vendor objective evidence, or third-party evidence is unavailable. Additionally, it eliminates the residual method of revenue recognition in accounting for multiple deliverable arrangements. The guidance is effective for fiscal years beginning on or after June 15, 2010, but early adoption is permitted. The Company adopted this pronouncement on January 1, 2010.
Revenue Arrangements with Software Elements: The pronouncement modifies the scope of the software revenue recognition guidance to exclude tangible products that contain both software and non-software components that function together to deliver the product’s essential functionality. The pronouncement is effective for fiscal years beginning on or after June 15, 2010, but early adoption is permitted. This guidance must be adopted in the same period an entity adopts the amended revenue arrangements with multiple deliverables guidance described above. The Company adopted this pronouncement on January 1, 2010.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP). The preparation of these financial statements requires us to make significant estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. These items are monitored and analyzed by management for changes in facts and circumstances, and material changes in these estimates could occur in the future. Changes in estimates are recorded in the period in which they become known. We base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from our estimates if past experience or other assumptions do not turn out to be substantially accurate.
A summary of those accounting policies that we believe are most critical to fully understanding and evaluating our financial results is set forth below. This summary should be read in conjunction with our financial statements and the related notes included elsewhere in this Annual Report on Form 10-K.
Revenue Recognition.
We recognize product 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 revenue arrangements sometimes involve multiple elements (i.e. products and services). Revenue under multiple arrangements is recognized in accordance with Accounting Standards Codification (“ASC”) Topic 605-25 “Revenue Recognition”. 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. When products and services are sold together and fair values have been established, revenue related to the hardware is generally recognized when title and risk of loss have passed, and revenue related to services are recognized as the services are provided. If fair values of the various elements have not been established, we defer all revenue until all elements have been delivered.
For revenue arrangements with multiple deliverables that include or represent software products and services as well as any non-software deliverables for with a software deliverable is essential to its functionality, we recognize revenue in accordance with ASC Topic 985-605-15 Software Revenue Recognition. This requires judgment, including whether a software arrangement includes multiple elements, and if so, whether vendor-specific objective evidence (VSOE) of fair value exists, no significant obligations with regard to installation on implementation remain, and customer acceptance, when applicable, is obtained. Our revenue arrangements may include hardware, software, services and maintenance. If software is essential to the functionality of the hardware, we generally defer the recognition of revenue related to the hardware until the software revenue can be recognized. If services are essential to the functionality of the software, revenue related to the services are also deferred until the software revenue can be recognized. If the only undelivered element is maintenance for which VSOE of fair value can be established, revenue related to the software and the related elements is recognized upon customer acceptance of the software. The maintenance will then be recognized ratably over the contract term.
Service revenue that is not essential to the functionality of a software product is recognized as the services are provided on a time and materials basis.
Hardware and software maintenance that is not sold as part of a multiple element arrangement is recognized ratably over the contract maintenance term.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out (FIFO) method. We evaluate our inventories to determine excess or slow moving products based on quantities on hand, current orders and expected future demand. For those items in which we believe we have an excess supply or for those items that are obsolete, we estimate the net amount that we expect to realize from the sale of such products and record an allowance.
Long-Lived Assets
In accordance with ASC Topic 360-10, Property, Plant and Equipment, we review the carrying values of our long-lived assets for possible impairment whenever events or changes in circumstances indicate that the carrying amounts of the assets may not be recoverable. Any long-lived assets held for disposal are reported at the lower of their carrying amounts or fair values less costs to sell.
Share-Based Compensation
The Company accounts for share-based compensation according to the provisions of ASC Topic 718-10, Compensation - Stock Compensation, which establishes accounting for equity instruments exchanged for employee services. 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). The majority of the Company’s share-based compensation arrangements vest over four years.
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. Estimates of fair values are not intended to predict actual future events or the value ultimately realized by persons who receive equity awards.
Capitalized Software Research and Development Costs.
Costs associated with the development of computer software are charged to operations prior to establishment of technological feasibility, as defined by ASC Topic 985-20 “Costs of Computer Software to be Sold, Leased or 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.
The Company did not capitalize any software development costs during 2010. Amortization of capitalized software costs was $3,216 and $4,365 for the years ended December 31, 2010 and 2009, respectively.
Accounting for Income Taxes.
The Company follows the provisions of ASC Topic 740-10, Income Taxes. The impact of tax positions are 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. The Company has a valuation allowance against the full amount of its 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. Management believes the Company has no uncertain tax position at December 31, 2010 or 2009. 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 2007-2010 remains open to examination by the I.R.S. and state authorities.
Item 7A.
Item 7A.
Quantitative and Qualitative Disclosure About Market Risk.
Not applicable.
Item 8.
Item 8.
Financial Statements and Supplemental Data.
The financial statements and supplementary data are listed under Part IV, Item 15 in this Annual Report on Form 10-K.
Item 9.
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A.
Item 9A.
Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
We have conducted an evaluation under the supervision of the Chief Executive Officer and Chief Accounting Officer (our principal executive officer and principal financial officers, respectively), regarding the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of December 31, 2010. Based on the aforementioned evaluation, management has concluded that our disclosure controls and procedures were not effective as of December 31, 2010 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. Notwithstanding the existence of the material weaknesses described below, management has concluded that the financial statements in this Form 10-K fairly present, in all material respects, the Company’s financial position, results of operations and cash flows for the periods and dates presented.
(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 December 31, 2010. 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 year ended December 31, 2008, which still exist at December 31, 2010. 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. In addition, as a result of the fact that our September 30, 2009 Form 10-Q was filed without a review having been performed by an Independent Registered Public Accounting Firm, we have concluded that as of September 30, 2009 a material weakness existed related to our disclosure controls and procedures, specifically with regard to disclosures and procedures mandated by Securities and Exchange Commission regulations.
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 December 31, 2010. 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.
(iv) This annual report does not include an attestation report of an independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by an independent registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.
(c) Changes in Internal Control over Financial Reporting
No changes in our internal control over financial reporting occurred during the quarter ended December 31, 2010 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 fiscal year 2011 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.
·
Engage additional expert resources and legal counsel to provide guidance on SEC reporting regulations.
Item 9B.
Item 9B.
Other Information.
None.
PART III
Item 10.
Item 10.
Directors, Executive Officers and Corporate Governance.
On July 15, 2010 our Board of Directors elected one new member, Mary Lee Ingoldsby, and appointed Ms. Bruna Bucacci, a current member of the Company’s Board of Directors, as the interim Chairman of the Board upon the resignation of Mr. Anthony Stafford. Each of our directors is elected for a period of one year and holds office until his successor is elected and qualified. Vacancies may be filled by a majority vote of the directors then remaining in office. Our officers are elected by, and serve at, the discretion of our Board of Directors. The following table sets forth the year each of our current directors was elected to our Board of Directors and the age, positions and offices currently held by each director. For information about ownership of our voting securities by each director, see Item 11
Item 11.
Executive Compensation
The following table sets forth all compensation paid or accrued during the last two fiscal years ended December 31, 2010 and December 31, 2009 to our Chief Executive Officer and to all other executive officers whose compensation exceeded $100,000 for the fiscal year ended December 31, 2010.
SUMMARY COMPENSATION TABLE
Name and Principal Position
Year
Salary
($)
Bonus
($)
Option Awards
($)
Total
($)
Bruna A. Bucacci, Chief Executive Officer
85,637
101,237
85,637
101,237
Ms. Bucacci became our Chief Executive Officer on October 2009, and has been our Chief Accounting Officer since November 21, 2005. We have not entered into a written employment agreement with her, but we have arranged for her to receive an annual salary of $101,000. During 2010, Ms. Bucacci elected to reduce her salary by 10% until such time as the financial status of the Company would improve. We do not have any arrangements with Ms. Bucacci for any types of additional compensation, including bonus payments, severance payments, insurance premium payments, payments upon a termination following a change of control and retirement benefits.
Outstanding Equity Awards Table at Fiscal Year End
Name
Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (1)
Option Exercise Price
($)
Option Expiration Date
Bruna Bucacci
6,666
$0.45
4/23/17
(1)
All options vest and become exercisable ratably in four equal installments beginning on the first anniversary of the grant date, which was 4/23/07.
Stock Option Exercises
There were no stock options exercised by the named executive officers for the fiscal year ended December 31, 2010.
Director Compensation Table
The following table details the total compensation earned by the Company’s outside Directors for the year ended December 31, 2010.
Member of the Board of Directors of the Company were not compensated by the Company for their services. Additionally, none of the non-employee Directors was paid for attending board meetings. The Company reimbursed the non-employee Directors for their reasonable out-of-pocket expenses related to attending meetings of the Board of Directors or any of its committees. Management Directors did not receive any compensation for their services as Directors.
Item 12.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to the beneficial ownership of our common stock as of March 31, 2011 for (a) each stockholder known by us to own beneficially more than 5% of our common stock, (b) each current member of the Board of Directors, (c) each executive officer named in the Summary Compensation Table on page 7 hereof, and (d) all current directors and executive officers as a group. Beneficial ownership is determined in accordance with the rules of the SEC and includes voting or investment power with respect to the securities.
For the purpose of this table, our secured convertible promissory notes are treated on as “as converted basis” with the note being converted into such number of fully paid shares of Common Stock equal to the aggregate amount of the principal and interest so converted, divided by $.005 per share. Based upon these conversion prices, the Notes would be convertible into a total of 46,340,000 shares of our common stock.
(1)
The number of shares of common stock issued and outstanding on March 31, 2011 was 1,659,419. The calculation of percentage ownership of each listed beneficial owner is based upon the number of shares of common stock issued and outstanding on March 31, 2011, including shares of common stock held upon conversion of secured convertible promissory notes, common stock subject to options and/or warrants held by such person at March 31, 2011 and exercisable within 60 days thereafter. The persons and entities named in the table have sole voting and investment power with respect to all Shares shown as beneficially owned by them, except as noted below.
(2)
Includes 32,340,000 of common stock to be issued upon conversion of secured promissory notes in the amount of $161,700.
(3)
Includes 12,000,000 of common stock to be issued upon conversion of secured promissory notes in the amount of $60,000.
(4)
Includes 144,097 shares jointly owned by Mr. MacKinnon’s spouse.
(5)
Includes 6,000,000 of common stock to be issued upon conversion of secured promissory notes in the amount of $10,000.
Item 13.
Item 13.
Certain Relationships and Related Transactions.
The audit committee is responsible for reviewing, approving or ratifying all material transactions between us and related person. Related persons can include any of our directors or executive officers, certain of our stockholders, and any of their immediate family members. This obligation is set forth in our audit committee charter. In evaluating related person transactions, the committee members apply the same standard of good faith and fiduciary duty they apply to their general responsibilities as a committee of the board and as individual directors. In any transactions involving a related party, our audit committee considers all available material facts and circumstances of the transaction, including: (i) the direct and indirect interests of related party; (ii) if the related party is a director (or immediate family member of a director or an entity with which the director is affiliated), the impact such transaction would have on the director’s independence; (iii) the risks, costs and benefit to us; and (iv) whether any alternative transaction for comparable purposed are available. Our audit committee then makes a determination as to whether the proposed terms of the transaction are in the best interest of the Company and otherwise consistent with arm’s-length dealings with unrelated third-parties.
On July 13, 2010 the Company repurchased 3,115,077 shares of its Common Stock owned by Anthony Stafford, for an aggregate purchase price of $5,000, or $0.0016 per share. Such shares constituted 65.24% of the Company’s common Stock outstanding as of such date.
Item 14.
Item 14.
Principal Accountant Fees and Services
Due to a lack of resources, the Company did not engage an independent registered public accounting firm in 2010 and 2009.
Audit Fees
For the year ended December 31, 2009, CCR LLP billed us $19,165 for its review of our Quarterly Reports on Form 10-Q for first and second quarters.
Audit-Related Fees
N/A
Tax Fees
For the year ended December 31, 2009, CCR LLP billed us $4,000 for the preparation of our 2008 corporate tax returns.
All Other Fees
N/A
Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Certified Public Auditors
Consistent with SEC policies regarding auditor independence, the Audit Committee has responsibility for appointing, setting compensation and overseeing the work of the independent registered public accounting firm. In recognition of this responsibility, the Audit Committee has established a policy to pre-approve all audit and permissible non-audit services provided by the independent registered public accounting firm.
Prior to engagement of the independent registered public accounting firm for the next year’s audit, management will submit an aggregate of services expected to be rendered during that year for each of four categories of services to the Audit Committee for approval.
Audit services include audit work performed in the preparation of financial statements, as well as work that generally only the independent registered auditor can reasonably be expected to provide, including comfort letters, statutory audits, and attest services and consultation regarding financial accounting and/or reporting standards.
Audit-Related services are for assurance and related services that are traditionally performed by the independent registered auditor, including due diligence related to mergers and acquisitions, employee benefit plan audits, and special procedures required to meet certain regulatory requirements.
Tax services include all services performed by the independent registered auditor's tax personnel except those services specifically related to the audit of the financial statements, and includes fees in the areas of tax compliance, tax planning, and tax advice.
Other Fees are those associated with services not captured in the other categories. The Company generally does not request such services from the independent registered auditor.
Prior to engagement, the Audit Committee pre-approves these services by category of service. The fees are budgeted and the Audit Committee requires the independent registered auditor and management to report actual fees versus the budget periodically throughout the year by category of service. During the year, circumstances may arise when it may become necessary to engage the independent registered auditor for additional services not contemplated in the original pre-approval. In those instances, the Audit Committee requires specific pre-approval before engaging the independent registered auditor. All of the services performed by CCR LLP during fiscal 2009 were preapproved by the Audit Committee.
The Audit Committee may delegate pre-approval authority to one or more of its members. The member to whom such authority is delegated must report, for informational purposes only, any pre-approval decisions to the Audit Committee at its next scheduled meeting.
PART IV
Item 15.
Item 15.
Exhibits and Financial Statement Schedules
The Company hereby furnishes the exhibits listed in the exhibit index. Exhibits, which are incorporated herein by reference, may be inspected and copied at the public reference facilities maintained by the SEC at Room 1580, Washington, D.C. 20549. Copies of such material may be obtained by mail from the Public Reference Section of the SEC at 100 F Street, N.E., Washington, D.C. 20549, at prescribed rates. The SEC also maintains a website that contains reports, proxy and information statements and other information regarding registrants that file electronically with the SEC at the address http://www.sec.gov.
(a)(1) Financial Statements
Page
Report of Independent Registered Public Accounting Firm
n/a
Balance Sheets as of December 31, 2010 and 2009
Statements of Operations for the years ended December 31, 2010 and 2009
Statement of Stockholders’ Deficit for the years ended December 31, 2010 and 2009
Statements of Cash Flows for the years ended December 31, 2010 and 2009
Notes to Financial Statements
(a)(2) Exhibits.
The following exhibits are filed herewith:
Exhibit
No. Description
3.1(a)
Certificate of Incorporation filed by the Company with the Secretary of State of Delaware on December 17, 1986.
3.2(a)
Certificate of Amendment of Certificate of Incorporation filed by the Company with the Secretary of State of Delaware on April 15, 1987 to increase the number of authorized shares.
3.3(b)
Certificate of Amendment of Certificate of Incorporation filed by the Company with the Secretary of State of Delaware on October 17, 1994 to increase the number of authorized shares.
3.3(c)
Certificate of Amendment of Certificate of Incorporation filed by the Company with the Secretary of State of Delaware on December 18, 1996 to increase the number of authorized shares.
3.4(c)
Certificate of Amendment of Certificate of Incorporation filed by the Company with the Secretary of State of Delaware on December 18, 1996 to affect a 1:4 reverse split of common stock.
3.5(d)
Certificate of Amendment of Certificate of Incorporation filed by the Company with the Secretary of State of Delaware on May 22, 2000 to increase the number of authorized shares.
3.6(j)
Certificate of Correction of Certificate of Amendment of Certificate of Incorporation filed by the Company with the Secretary of State of Delaware on June 5, 2000.
3.7(k)
Certificate of Correction of Certificate of Amendment of Certificate of Incorporations filed by the Company with the Secretary of State of Delaware on June 5, 2000.
3.8(e)
Statement of Designation of Series B Convertible Preferred Stock.
3.9(e)
Certificate of Increase of shares designated as Series B Convertible Preferred Stock.
3.10(f)
Statement of Designation of Series C Convertible Preferred Stock.
3.11(f)
Statement of Designation of Series D Convertible Preferred Stock.
3.12(g)
Statement of Designation of Series E Convertible Preferred Stock.
3.13(m)
Certificate of Amendment of Certificate of Incorporation filed by the Company with the Secretary of State of Delaware on July 31, 2008 to affect a 1:15 reverse split of common stock and reduce the number of shares of common stock authorized under the Certificate of Incorporation.
3.14(h)
Restated By-Laws
4.1
Instruments defining the rights of security holders (see Exhibits 3.1 through 3.12).
4.2(l)
Specimen Certificate of Common Stock.
10.1*(n)
2007 Employee, Director and Consultant Stock Plan, as amended.
10.2*(i)
1998 Stock Option Plan.
10.2(i)
Sixth Amendment to Lease dated August 14, 2000 by and between the Company and Middlesex Technology Center Trust V for the Company’s principal offices.
14.1(l)
Code of Ethics.
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.
________________________
(a)
Previously filed with the Commission as Exhibit to, and incorporated herein by reference from, the Registration Statement on Form S-1 filed on April 17, 1987 (File No. 033-13392)
(b)
Previously filed with the Commission as Exhibit to, and incorporated herein by reference from, the Form 10-KSB for the fiscal year ended December 31, 1994.
(c)
Previously filed with the Commission as Exhibit to, and incorporated herein by reference from, the Form 10-KSB for the fiscal year ended December 29, 1996.
(d)
Previously filed with the Commission as Exhibit to, and incorporated herein by reference from, Form 10-QSB for the quarterly period ended June 30, 2000.
(e)
Previously filed with the Commission as Exhibit to, and incorporated herein by reference from, the Form 8-K filed September 16, 1996.
(f)
Previously filed with the Commission as Exhibit to, and incorporated herein by reference from, the Form 8-K filed March 3, 1997.
(g)
Previously filed with the Commission as Exhibit to, and incorporated herein by reference from, the Form 8-K filed March 6, 1998.
(h)
Previously filed with the Commission as Exhibit to, and incorporated herein by reference from, Form 10-QSB/A for the quarterly period ended September 30, 1999.
(i)
Previously filed with the Commission as Exhibit to, and incorporated herein by reference from, the Company’s Annual Report on Form 10-KSB for the fiscal year ended December 31, 1998.
(j)
Previously filed with the Commission as Exhibit to, and incorporated herein by reference from, the Company’s Annual Report on Form 10-KSB for the fiscal year ended December 31, 2000.
(k)
Previously filed with the Commission as Exhibit to, and incorporated herein by reference from, the Company’s Annual Report on Form 10-KSB for the fiscal year ended December 31, 2001.
(l)
Previously filed with the Commission as Exhibit to, and incorporated herein by reference from, the Company’s Annual Report on Form 10-KSB for the fiscal year ended December 31, 2003.
(m)
Previously filed with the Commission as Exhibit 3.1 to, and incorporated herein by reference from, the Company’s Current Report on Form 8-K filed with the Commission on August 5, 2008.
(n)
Previously filed with the Commission as Exhibit B to, and incorporated herein by reference from, the Company’s Proxy Statement filed with the Commission on May 8, 2008.
*
Management contract or compensatory plan, contract or arrangement.
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
In accordance with the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Name
Capacity
Date
/s/ Bruna A. Bucacci
Chief Executive Officer
April 7, 2011
Bruna A. Bucacci
/s/ John H. MacKinnon
Director
April 7, 2011
John H. MacKinnon
NATIONAL DATACOMPUTER, INC.
BALANCE SHEETS
The accompanying notes are an integral part of these financial statements.
NATIONAL DATACOMPUTER, INC.
STATEMENTS OF OPERATIONS
The accompanying notes are an integral part
of these financial statements.
NATIONAL DATACOMPUTER, INC.
STATEMENT OF STOCKHOLDERS' DEFICIT
The accompanying notes are an integral part
of these financial statements.
NATIONAL DATACOMPUTER, INC.
STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part
of these financial statements.
NATIONAL DATACOMPUTER, INC.
NOTES TO FINANCIAL STATEMENTS
1.
Organization
We were previously engaged in providing solutions through the use of mobile information systems in the distribution market segment within the product supply chain. We sold this business in early 2011. Previously, we designed, marketed, sold, and serviced computerized systems used to automate the collection, processing, and communication of information related to product sales and inventory control. Our products and services included data communication, application-specific software, handheld computers, related peripherals, and accessories, as well as associated education and support services for our hardware and software products.
2.
Liquidity and Management Plans
We have an accumulated deficit of approximately $17,500,000 through December 31, 2010.
We continue to explore all opportunities to improve our financial condition by seeking a third party to acquire our corporate asset. If we fail to identify a purchaser, we will be required to cease operations as a going concern and to adopt a plan of liquidation and dissolution.
3.
Summary of Significant Accounting Policies
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 product 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 revenue arrangements sometimes involve multiple elements (i.e. products and services). Revenue under multiple arrangements is recognized in accordance with ASC Topic 605-25, Revenue Recognition. 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. When products and services are sold together and fair values have been established, revenue related to the hardware is generally recognized when title and risk of loss have passed, and revenue related to services are recognized as the services are provided. If fair values of the various elements have not been established, we defer all revenue until all elements have been delivered.
NATIONAL DATACOMPUTER, INC.
NOTES TO FINANCIAL STATEMENTS
For revenue arrangements with multiple deliverables that include or represent software products and services as well as any non-software deliverables for with a software deliverable is essential to its functionality, we recognize revenue in accordance with the ASC Topic 985-605-15, Software Revenue Recognition. This requires judgment, including whether a software arrangement includes multiple elements, and if so, whether vendor-specific objective evidence (VSOE) of fair value exists, no significant obligations with regard to installation on implementation remain, and customer acceptance, when applicable, is obtained. Our revenue arrangements may include hardware, software, services and maintenance. If software is essential to the functionality of the hardware, we generally defer the recognition of revenue related to the hardware until the software revenue can be recognized. If services are essential to the functionality of the software, revenue related to the services are also deferred until the software revenue can be recognized. If the only undelivered element is maintenance for which VSOE of fair value can be established, revenue related to the software and the related elements is recognized upon customer acceptance of the software. The maintenance will then be recognized ratably over the contract term.
Service revenue that is not essential to the functionality of a software product is recognized as the services are provided on a time and materials basis.
Hardware and software maintenance that is not sold as part of a multiple element arrangement 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.
NATIONAL DATACOMPUTER, INC.
NOTES TO FINANCIAL STATEMENTS
Long-Lived Assets
In accordance with ASC Topic 360-10, Property, Plant and Equipment, the Company reviews the carrying values of its long-lived assets for possible impairment whenever events or changes in circumstances indicate that the carrying amounts of the assets may not be recoverable. Any long-lived assets held for disposal are reported at the lower of their carrying amounts or fair values less costs to sell.
Capitalized Software Research and Development Costs.
Costs associated with the development of computer software are charged to operations prior to establishment of technological feasibility, as defined by ASC Topic 985-20, (Accounting for the Costs of Computer Software to be Sold, Leased, or 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.
Income Taxes
The Company follows the provisions ASC Topic 740-10, Income Taxes. The impact of tax positions are 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. The Company has a valuation allowance against the full amount of its 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. Management believes the Company has no uncertain tax position at December 31, 2010 or 2009. 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 2007-2010 remains open to examination by the I.R.S. and state authorities.
Stock-Based Compensation
The Company accounts for share-based compensation according to the provisions of ASC Topic 718-10, Compensation-Stock Compensation, which establishes accounting for equity instruments exchanged for employee services. 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). The majority of the Company’s share-based compensation arrangements vest over four years.
During years ended December 31, 2010 and 2009, share-based compensation expense amounted to $5,121 and $7,151, respectively, and is included in general and administrative expense.
NATIONAL DATACOMPUTER, INC.
NOTES TO FINANCIAL STATEMENTS
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. Estimates of fair values are not intended to predict actual future events or the value ultimately realized by persons who receive equity awards.
There were no options granted in 2010 or 2009.
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. Options to purchase 38,331 and 88,331 shares of common stock have not been included in the computation of diluted net loss per share for the years ended December 31, 2010 and 2009, respectively, because the effect would have been anti-dilutive.
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.
Fair Value of 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.
Recent Accounting Pronouncements
Accounting Pronouncements - The Financial Accounting Standards Board (“FASB”) is the authoritative body for financial accounting and reporting in the United States. On July 31, 2009, the FASB Accounting Standards Codification (“the Codification”) became the authoritative source of accounting principles to be applied to the financial statements of nongovernmental entities prepared in accordance with GAAP. The following is a list of recent pronouncements issued by the FASB which affect our Company:
Revenue Arrangements with Multiple Deliverables: The guidance amends the current revenue recognition guidance for multiple deliverable arrangements. It allows the use of management’s best estimate of selling price for individual elements of an arrangement when vendor specific objective evidence, vendor objective evidence, or third-party evidence is unavailable. Additionally, it eliminates the residual method of revenue recognition in accounting for multiple deliverable arrangements. The guidance is effective for fiscal years beginning on or after June 15, 2010, but early adoption is permitted. The Company adopted the pronouncement on January 1, 2010.
NATIONAL DATACOMPUTER, INC.
NOTES TO FINANCIAL STATEMENTS
Revenue Arrangements with Software Elements: The pronouncement modifies the scope of the software revenue recognition guidance to exclude tangible products that contain both software and non-software components that function together to deliver the product’s essential functionality. The pronouncement is effective for fiscal years beginning on or after June 15, 2010, but early adoption is permitted. This guidance must be adopted in the same period an entity adopts the amended revenue arrangements with multiple deliverables guidance described above. The Company adopted the pronouncement on January 1, 2010.
6.
Property and Equipment, net
Property and equipment related to continuing operations consist of the following:
Depreciation expense was $13,336 and $29,112 for the years ended December 31, 2010 and 2009, respectively
7.
Capitalized Software Development Costs, net
Capitalized software development costs related to continuing operations consist of the following:
Amortization expense was $3,216 and $4,365 for the years ended December 31, 2010 and 2009, respectively.
NATIONAL DATACOMPUTER, INC.
NOTES TO FINANCIAL STATEMENTS
8.
Income Taxes
The Company follows the provisions of ASC Topic 740-10, Income Taxes. The impact of tax positions are 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. 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 Company files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. The Company has not been audited by the Internal Revenue Service or by any states in connection with income taxes. The tax returns for the years 2007 through 2010, and certain items carried forward from earlier years and utilized in those returns, remain open to examination by the IRS and various state jurisdictions.
Deferred tax assets are comprised of the following:
The Company’s effective tax rate differs from the statutory U.S. federal tax rate as follows:
The Company generated losses from operations in prior years. Although management’s operating plans anticipate taxable income in future periods, such plans make significant assumptions which cannot be reasonably assured, including continued development and market acceptance of new products and expansion of the Company’s customer base. Based on the weight of all available evidence, the Company has provided a full valuation allowance for deferred tax assets since the realization of these future benefits is not sufficiently assured. As the Company achieves profitability, these deferred tax assets would be available to offset future income tax liabilities and expense.
NATIONAL DATACOMPUTER, INC.
NOTES TO FINANCIAL STATEMENTS
At December 31, 2010, the Company has federal net operating loss carryforwards for federal tax purposes of approximately $9,300,000, which expire in various years through 2030. The Company has state net operating loss carryforwards for tax purposes of approximately $1,600,000, which expire in various years through 2015.
Any significant change in ownership, as defined in Section 382 of the Internal Revenue Code, may result in an annual limitation on the amount of the net operating loss and credit carryforwards which could be utilized in a single year.
The recapitalization of the Company in March 2007 will qualify as a significant change of ownership, as defined in Section 382. Therefore, the ability of the Company to fully utilize its NOL carryforwards in future periods will be limited. At this time, the amount of the NOL limitation is unknown since the Company has not completed its Section 382 study.
9.
Stock Options
Share-Based Incentive Plans
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.
As of December 31, 2010, there were 38,331 options outstanding under the 2007 Plan and 161,669 shares available for grant under the 2007 Plan.
The following table summarizes information about stock options outstanding at December 31, 2010:
Number of shares
Weighted average exercise price
Remaining contractual life in years
Aggregate intrinsic value
Outstanding at December 31, 2009
88,331
$0.42
Granted
-
-
Exercised
-
Cancelled/forfeited
(50,000)
$0.45
Outstanding at December 31, 2010
38,331
0.44
6.7
$ -
Options vested or expected to vest at December 31, 2010 (1)
38,331
0.44
6.7
$ -
Options exercisable at December 31, 2010
24,582
0.48
6.6
$ -
NATIONAL DATACOMPUTER, INC.
NOTES TO FINANCIAL STATEMENTS
(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.
At December 31, 2010, stock-based compensation not yet recognized amounted to $3,465 and is expected to be recognized over a weighted average period of 1.1 years.
10.
Convertible Debt
During 2010, we entered into subscription agreements with three investors, including an officer of the Company, pursuant to which we issued an aggregate of $250,000 of our secured convertible promissory notes (the “Notes”). The Notes bear interest at the rate of 7.0% per annum, compounded annually. All principal and accrued interest are payable on April 21, 2013.
Our obligations under the Notes are secured by the grant of a first priority security interest in all of our assets.
At any time prior to the Maturity Date, provided that the Company then has authorized a sufficient number of unissued shares of Common Stock to permit the conversion of this Note, this Note shall be convertible (in whole or in part), at the option of the Holder (the “Conversion Option”), into such number of fully paid and non-assessable shares of Common Stock as shall be equal to (i) the aggregate amount of the principal and interest so converted, divided by (ii) $.005 per share (as adjusted to reflect stock splits, stock dividends, reorganizations, reclassifications, consolidations, mergers or sales and similar events).
Subject to applicable cure periods, the holders of a majority of the principal amount of the Notes outstanding from time to time may declare the entire unpaid principal balance of the Notes to be due and payable upon certain events of default.
The Notes may be prepaid by us at our election with the written consent of the holders of at least 75% in original principal amount of the Notes. .
The Company’s obligations under the Notes are secured by the grant of a first priority security interest in all of the Company’s assets.
The issuance of the Notes was exempt from registration under the Securities Act of 1933, as amended, pursuant to an exemption provided by Section 4(2) of the Securities Act.
11.
Treasury Stock
On July 13, 2010 the Company repurchased 3,115,077 shares of its Common Stock owned by Anthony Stafford, for an aggregate purchase price of $5,000, or $0.0016 per share. Such shares constituted 65.24% of the Company’s common Stock outstanding as of such date.
12.
Commitments
The Company leases its office facilities under an operating lease expiring April 30, 2011. The lease contains an option for renewal and requires the payment of real estate taxes and other operating costs. Total rent expense under operating leases was $32,258 and $68,350 for the years ended December 31, 2010 and 2009, respectively.
NATIONAL DATACOMPUTER, INC.
NOTES TO FINANCIAL STATEMENTS
13.
Concentration of Credit Risk
The Company sells its products to customers principally in the United States of America. During 2010, three customers accounted for approximately 78% of our total revenues. During 2009, four customers accounted for 87% of our total revenues.
The Company performs on-going credit evaluations of its customers, provides credit on an unsecured basis, and maintains reserves for potential credit losses. Such losses, in the aggregate, have not exceeded management’s expectations. Accounts receivable from two and one customer accounted for approximately 56% and 79% of total accounts receivable at December 31, 2010 and 2009, respectively. Management does not believe that the Company is subject to any unusual credit risk beyond the normal credit risk attendant to operating its business
The Company’s total net revenues were generated by sales to customers in the following countries:
Percentage of net revenues
Percentage of net revenues
USA
81%
79%
Europe
19%
21%
Total
100%
100%