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.
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.
Although customers can still buy our Datacomputers running our original RouteRider software, we have now channeled all of our experience into a new portable and highly parameterized Route Accounting solution designed to run on the very latest industry standard Microsoft™ operating systems and architectures which we believe increases our market potential by running on industry preferred operating systems and handheld devices.
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.
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.
- 3 -
Products
We implement software solutions, such as our Microsoft™ DOS®-based RouteRider product and the Microsoft™ Windows Mobile®-based RouteRider LE product, for companies that need the latest technology to manage and improve their business operations to account for inventory in route based deliveries. Our Route Accounting solution functions as 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. We plan to expand our sales team in order to seek to increase revenues and boost productive partnerships with software and hardware partners. In addition we also plan to design and develop ancillary application software to go along with the existing Direct Store Delivery (“DSD”) software. Our goal in undertaking these projects is to:
●
Expand the market into non DSD sales;
●
Increase our margins;
●
Increase our competitive capabilities; and
●
Improve our overall position as a preferred vendor for these products and services.
Products meeting these needs provide concurrent order taking, product delivery, signature capture, inventory tracking, and asset control. Salespeople enter customer orders in handheld computers and use portable printers to generate invoices that are left with the customers' orders at their locations. At the end of a route delivery day, information stored in the handheld computer is transferred to the host information system and instructional and control information for the next day's delivery routes is transferred back to the handheld computer.
Our Tailored Software Solutions
1.
RouteRider® LE
We have accumulated over 18 years of experience by developing an installed base of well over 100 clients. We believe that our experience and industry knowledge are a competitive advantage as we seek to attain revenue growth. Also, our distribution agreement with Micronet LTD, enables us to target major food and beverage distributors, as well as distributors in other markets, by providing them with an efficient solution which reduces costs, increases sales, tracks operations more accurately, and enhances customer service.
The software, named RouteRider® LE, (“RouteRider LE”) 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.
- 4 -
We believe that RouteRider LE utilizes state of the art technology to provide a complete and comprehensive mobile solution for sales and route accounting applications, including pre-sale; van sale (DSD) and distribution. The sales/field force is equipped with handheld computers or PDA's (Personal Digital Assistants) and communicates to the host or back office system through a dedicated communication server. RouteRider LE is designed to enable sales and field representatives to receive timely and updated information needed to make decisions and close transactions effectively and efficiently.
RouteRider LE runs on standard Microsoft™ Windows® operating systems. RouteRider LE software includes a communications server that mediates between a back office system and the handheld computers. The server implements a unique development that greatly increases communication data rates. The software is designed to include all of the functions that a sales person might perform during his or her work.
RouteRider LE contains detailed information on customers, products, prices and promotions. Historical information, down to the line item detail, can also be supplied. Surveys, voice messages, notes, graphics, e-mails, business intelligence, accounts receivable and other information are designed to improve the efficiency of the sales person on a daily basis.
RouteRider LE is a portable and highly parameterized Route Accounting solution, which is designed to run on standard Microsoft™ Windows operating systems, databases and utilizes cellular, Wi-Fi, and Bluetooth communications protocols.
2.
RouteRider®
Our Datacomputers can be equipped with our Microsoft™ DOS-based version of RouteRider® software, which is designed to be a powerful but easy-to-use route service system that can be customized for customers based on how they run their businesses. RouteRider-equipped Datacomputers allow sales people to communicate orders electronically as often as they want throughout the day, by modem or cellular phone.
Salespeople returning to an office or warehouse at the end of the day can exchange information by connecting their RouteRider Datacomputer to a communications server either directly or through NDINet™, our proprietary network software, which unattended, can receive information from multiple RouteRider Datacomputers at multiple locations. Sales people who do not return to an office or warehouse at the end of the day can call their home base every evening to communicate the day’s activities and load the RouteRider Datacomputer with up-to-the-minute information on products, pricing, and the next day’s customers.
Once the results of daily activities are uploaded from the RouteRider Datacomputer to the communications server, the server uploads this new data to the customer’s host system’s route accounting, sales, distribution, accounts receivable (“A/R”), and inventory programs, thereby saving data-entry costs and eliminating transcription and keying errors. The server also downloads to the salesperson’s RouteRider Datacomputer all the updated information needed for the next day’s work-route schedule, customer files, history updates, customer specific pricing changes, promotions, updated A/R status, open invoices, and more. During the day, at each route stop, the driver takes the customer's inventory, calculates what new stock needs to be added, prints out a delivery slip for each customer and also captures customer signature. At the end of the day, a complete report of the driver's deliveries can be printed. According to a number of our customers, the use of our RouteRider Datacomputers has significantly improved driver efficiency.
- 5 -
Marketing and Distribution
Recognizing the need to focus our marketing resources, we have targeted our business strategy for our software solutions to a limited number of markets. We currently focus on market sectors where businesses distribute their products through routes. We believe that the route sales and service market is attractive because: (i) customer acceptance of handheld computers has been established in those sectors; (ii) customers have realized a substantial return on their investment in handheld computers; and (iii) we enjoy a competitive advantage in this market due to our software and related services.
Direct Sales Force
We primarily sell and distribute our products through a direct sales force, which we believe offers the best method for marketing and selling our products. Direct selling is our primary strategy in the route sales and inventory service market. We believe that the key elements to successful direct selling include: (i) maintaining a well-qualified direct sales staff that is experienced in marketing and selling solutions to medium and large accounts; (ii) using a consultative sales approach; (iii) offering excellent service and support; and (iv) maintaining outstanding customer references.
Service and Support
Superior service is a vital part of our competitive strategy and institutionally we emphasize the quality of both our hardware and software service. Our customer service department manages all installations, preparations and follow-up support. We provide depot repair services for our own manufactured hardware as well as other manufacturers’ handhelds.
We typically offer industry standard 90-day warranties and several flexible service arrangements and maintenance contracts to meet customer needs. In addition to technical support of installed systems, we provide pre-installation site surveys, installation services, customization and enhancements, user training, technical training, application software support, and host information system interface assistance.
Approximately 32% of our 2009 total revenue was attributed to service and support sales.
Key Customers
During 2009, four customers accounted for approximately 87% 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, 2009, we had 5 full-time employees. Of these employees, two were engaged in sales and marketing, two in service and customer support, and one in administration and finance. Our employees are not represented by a labor union. We believe that our relationship with our employees is good.
- 6 -
Item 1A.
Item 1A. Risk Factors.
RISKS RELATED TO OUR BUSINESS
WE HAVE A HISTORY OF LOSSES AND MAY NEVER ACHIEVE OR SUSTAIN PROFITABILITY.
We will need to generate more revenues than we did in 2009 in order to become profitable and sustain profitability and positive cash flow. Our ability to generate future revenue and sustain profitability will depend on a number of factors, many of which are described throughout this risk factor section. Although we believe that many of the cost savings and other activities we undertook last year, together with our expected levels of revenues for this year, will allow us to generate cash flow from operations, we may not achieve profitability this year or be able to sustain profitability in future years. Failure to achieve and maintain profitability will likely adversely affect the price of our Common Stock.
WE MAY NEED TO RAISE ADDITIONAL CAPITAL IN ORDER TO CONTINUE TO OPERATE OUR BUSINESS, AND SUCH TRANSACTIONS MAY NOT BE AVAILABLE TO US ON FAVORABLE TERMS, IF AT ALL.
Because we have historically had losses and only a limited amount of cash has been generated from operations, we have funded our operating activities to date primarily from the sale of securities and from the sale of a product line in 2009. In order to continue to fund our operations, we may need to raise additional capital, through the sale of securities. We cannot be certain that any such financing will be available on acceptable terms, or at all. Moreover, additional equity financing, if available, would likely be dilutive to the holders of our common stock, and debt financing, if available, would likely involve restrictive covenants and a security interest in all or substantially all of our assets. If we fail to obtain acceptable financing when needed, we may not have sufficient resources to fund our normal operations which would have a material adverse effect on our business.
IF WE ARE UNABLE TO GENERATE ADEQUATE WORKING CAPITAL FROM OPERATIONS OR RAISE ADDITIONAL CAPITAL THERE IS SUBSTANTIAL DOUBT ABOUT THE COMPANY’S ABILITY TO CONTINUE AS A GOING CONCERN.
Although we have been able to reduce our operating expenses by 29% in 2009, as compared to 2008, we still have incurred an accumulated deficit of approximately $17.2 million through December 31, 2009. As of December 31, 2009, we had approximately $110,000 in cash and negative working capital of $917,000. The 2009 results reflect significant cost reductions, which efforts we are continuing to undertake. However, even with the additional working capital from equity transactions during 2008 and 2009, we have a current ratio of 0.33 as of December 31, 2009, which is slightly lower than our current ratio of 0.46 at December 31, 2008 and is significantly less than 1.00, which is generally considered to place a company at higher financial risk. In the event that we cannot generate sufficient cash for working capital, we may have to reduce our level of operations, which will make it more difficult for us to continue our business as a going concern.
- 7 -
THE CURRENT FINANCIAL CRISIS AND UNCERTAINTY IN GLOBAL ECONOMIC CONDITIONS COULD CONTINUE TO NEGATIVELY AFFECT OUR BUSINESS, RESULTS OF OPERATIONS, AND FINANCIAL CONDITION.
The current financial crisis and uncertainty in global economic conditions have resulted in a tightening in the credit markets, a low level of liquidity in many financial markets, and extreme volatility in credit, equity and fixed income markets. There could be a number of follow-on effects from these economic developments on our business, including unavailability of credit; insolvency of key suppliers resulting in product delays; customer insolvencies; rapid changes to the foreign currency exchange rates; decreased customer confidence; and decreased customer demand. Any of these events, or any other events caused by the current financial crisis, may have a material adverse effect on our business, operating results, and financial condition.
WE HAVE ONLY A SMALL NUMBER OF CUSTOMERS IN FINITE FIELDS, AND THE LOSS OF ANY OF THESE CUSTOMERS WOULD HAVE A MATERIAL ADVERSE EFFECT ON THE COMPANY’S BUSINESS.
Approximately 32% of our 2009 total revenue was attributed to service and support sales. During 2009, one customer accounted for approximately 60% of our total revenues. Additionally, in 2009 our top four customers collectively accounted for 87% of our total revenues.
OUR MARKETS ARE SUBJECT TO RAPID TECHNOLOGICAL CHANGE, THEREFORE, OUR SUCCESS DEPENDS ON OUR ABILITY TO ADAPT AND/OR INTRODUCE NEW PRODUCTS IN A TIMELY FASHION.
The life cycle of the technology and any future products developed by us may be limited by the emergence of new products and technologies, changes in customer preferences and other factors. Our future performance will depend on our ability to consistently:
●
identify emerging technological trends in our market;
●
identify changing customer requirements;
●
develop or maintain competitive technology, including new product offerings;
●
improve the performance, features and reliability of our products, particularly in response to technological change and competitive offerings;
●
bring technology to market quickly at cost-effective prices; and
●
protect our intellectual property.
We may not succeed in developing and marketing new products that respond to technological and competitive developments and changing customer needs, and such products may not gain market acceptance or be incorporated into the technology or products of third parties. Any significant delay or failure to develop new enhanced technologies, including new product offerings, and any failure of the marketplace to accept any new technology and product offerings would have a material adverse effect on our business, financial condition and results of operations.
COMPETITION IN THE HANDHELD COMPUTERIZED ROUTE ACCOUNTING INVENTORY SOLUTIONS INDUSTRIES COULD PREVENT US FROM ACHIEVING PROFITABILITY.
The computerized route accounting industries are highly competitive, and we expect the intensity of the competition to increase. Many of our competitors have greater financial, technical, research, marketing, sales, distribution, service and other resources than we do. Moreover, our competitors may offer broader
- 8 -
product lines and have greater name recognition than we do, and may offer discounts as a competitive tactic, forcing intense pricing pressure on our products. In addition, several development stage companies are currently creating or developing technologies and products that compete with or are being designed to compete with our technologies and products. Our competitors may develop or market technologies or products that are more effective or more commercially attractive than our current or future products, or that may render our technologies or products less competitive or obsolete.
OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE.
Due to the nature of our business and our competitive role in the industry, we will experience fluctuations in our quarterly operating results as we have in the past and it is likely that these fluctuations will continue in the future. These fluctuations are caused by many factors, including, but not limited to:
●
availability and pricing from our suppliers;
●
changes in the demand for our products by customers;
●
introductions or enhancements of products, or delays in the introductions or enhancements of products, by us or our competitors;
●
rate and success of new customer development;
●
changes in our pricing policies or those of our competitors;
●
success in attracting, retaining and motivating qualified personnel;
●
changes in general economic conditions; and
●
obsolescence of inventory.
A substantial portion of our operating expenses is related to personnel, facilities, and sales and marketing programs and is fixed. Our expense level is based in part on our expectations of future orders and sales, which are extremely difficult to predict. Accordingly, we may not be able to adjust our fixed expenses quickly enough to address any significant shortfall in demand for our products in relation to our expectations.
Fluctuations in our operating results may also result in fluctuations in our common stock price. In such event, the trading price of our common stock would likely suffer and adversely affect our ability to raise capital and the value of your investment in the Company.
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.
- 9 -
NEITHER OUR DISCLOSURE CONTROLS AND PROCEDURES NOR OUR INTERNAL CONTROL OVER FINANCIAL REPORTING CAN PREVENT ALL ERRORS OR FRAUD.
Our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors or fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system will be attained. Furthermore, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in a cost-effective control system, no evaluation of controls can provide absolute assurance that all misstatements due to error or fraud, if any, may occur and not be detected on a timely basis. These inherent limitations include the possibility that judgments in decision-making can be faulty and that breakdowns can occur because of errors or mistakes. Our controls and procedures can also be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Furthermore, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. While we seek to design our controls and procedures to provide reasonable assurance that information required to be disclosed in our periodic filings is timely disclosed, these inherent limitations expose us to breakdowns in such controls and procedures.
AS A PUBLIC COMPANY, WE NEED TO COMPLY WITH THE REPORTING OBLIGATIONS OF THE SECURITES EXCHANGE ACT OF 1934 AND SECTION 404 OF THE SARBANES-OXLEY ACT OF 2002. IF WE FAIL TO COMPLY WITH THE REPORTING OBLIGATIONS OF THE EXCHANGE ACT AND SECTION 404 OF THE SARBANES-OXLEY ACT, OR IF WE FAIL TO MAINTAIN ADEQUATE INTERNAL CONTROLS OVER FINANCIAL REPORTING, OUR BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL CONDITION, AND INVESTORS’ CONFIDENCE IN US, COULD BE MATERIALLY AND ADVERSELY AFFECTED.
As a public company, we are required to comply with the periodic reporting obligations of the Exchange Act, including preparing annual reports, quarterly reports and current reports. Our failure to prepare and disclose this information in a timely manner could subject us to penalties under federal securities laws, expose us to lawsuits and restrict our ability to access financing. We may identify areas requiring improvement with respect to our internal control over financial reporting, and we may be required to design enhanced processes and controls to address issues identified. This could result in significant delays and cost to us and require us to divert substantial resources, including management time, from other activities.
Our management has identified two material weaknesses in our internal control over financial reporting for the year ended December 31, 2009. If we fail to maintain the adequacy of our internal controls, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with the Sarbanes-Oxley Act. Moreover, effective internal controls are necessary for us to produce reliable financial reports and are important to help prevent fraud.
- 10 -
RISKS RELATED TO OUR INTELLECTUAL PROPERTY
OUR INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS MAY BE INSUFFICIENT TO PROTECT OUR COMPETITIVE POSITION.
Our business depends, in part, on our ability to protect our intellectual property. We rely primarily on patent, copyright, trademark and trade secret laws to protect our proprietary technologies. We cannot be sure that such measures will provide meaningful protection for our proprietary technologies and processes. We cannot be sure that any existing or future patents will not be challenged, invalidated or circumvented, or that any rights granted thereunder would provide us meaningful protection. The failure of any patents to provide protection to our technology would make it easier for our competitors to offer similar products.
We also generally enter into confidentiality agreements with our employees and strategic partners, and generally control access to and distribution of our documentation and other proprietary information. Despite these precautions, it may be possible for a third party to copy or otherwise obtain and use our products or technology without authorization, develop similar technology independently or design around our patents. In addition, effective copyright, trademark and trade secret protection may be unavailable or limited in certain foreign countries in which we operate.
WE MAY BE SUBJECT TO INTELLECTUAL PROPERTY RIGHTS DISPUTES WHICH COULD DIVERT MANAGEMENT’S ATTENTION AND COULD BE COSTLY.
From time to time, we may receive notices of claims of infringement, misappropriation or misuse of other parties’ proprietary rights. We cannot be sure that we will prevail in these actions, or that other actions alleging infringement by us of third-party patents, misappropriation or misuse by us of third-party trade secrets or the invalidity of one or more patents held by us will not be asserted or prosecuted against us, or that any assertions of infringement, misappropriation or misuse or prosecutions seeking to establish the invalidity of our patents will not seriously harm our business. For example, in a patent or trade secret action, an injunction could be issued against us requiring that we withdraw particular products from the market or necessitating that specific products offered for sale or under development be redesigned.
Irrespective of the validity or successful assertion of various claims of infringement, misappropriation or misuse of other parties’ proprietary rights, we would likely incur significant costs and diversion of our management and personnel resources with respect to the defense of such claims, which could seriously harm our business. If any claims or actions are asserted against us, we may seek to obtain a license under a third party’s intellectual property rights. We cannot be sure that under such circumstances a license would be available on commercially reasonable terms, if at all. Moreover, we often incorporate the intellectual property of our strategic customers into our designs, and we have certain obligations with respect to the non-use and non- disclosure of such intellectual property. We cannot be sure that the steps taken by us to prevent our or our customers’ misappropriation or infringement of the intellectual property will be successful.
RISKS RELATING TO OUR COMMON STOCK
A SIGNIFICANT HOLDER OF SHARES OF OUR COMMON STOCK HAS SUFFICIENT OWNERSHIP TO SINGULARLY DETERMINE THE RESULTS OF ANY STOCKHOLDER VOTE AND CONTROL OUR BOARD OF DIRECTORS.
As of March 31, 2010, Anthony Stafford and his four children beneficially own an aggregate of 3,115,077 shares of our common stock, or 65.2%, and thus a majority, of all outstanding shares of our common stock. Mr. Stafford has sole voting authority over all of such shares and will thus be able to determine the outcome of all corporate matters requiring stockholder approval, including the election of all of our directors and transactions such as the sale of our company. Mr. Stafford is also a member of our Board of Directors.
- 11 -
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.
- 12 -
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 4,000 square foot facility in Billerica, Massachusetts. Our lease expires on April 30, 2010. The annual base rent for our leased facilities is approximately $69,000. The lease contains an option for renewal, and requires, among other things, that we will pay to our landlord as additional rent our pro rata share of certain operational and maintenance costs at the facility during the term of the lease. We believe that our facilities are adequate for our current needs and that additional space, if required, may be available at competitive rates.
- 13 -
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, 2010, the last traded price for our common stock as reported by OTC was $0.016 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. All information prior to July 31, 2008 and presented herein has been adjusted to reflect the reverse stock split executed on July 31, 2008.
As of March 31, 2010, 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. We currently intend to reinvest earnings, if any, in the development and expansion of our business. 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.
- 14 -
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, 2009 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
88,331
$0.42
111,669
Equity compensation plans not approved by security holders
Total
88,331
$0.42
111,669
Unregistered Sales of Securities
The following summarizes all sales of our unregistered securities during the fiscal year ended December 31, 2009. 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.
On June 29, 2009, Anthony Stafford purchased 500,000 shares of our common stock for an aggregate purchase price of $0.10.
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, 2009, were $1,723,361 as compared to $1,820,196 for the fiscal year ended December 31, 2008, a decrease of 5%. Net loss for 2009 was $231,994, or $(0.05) per share, as compared to a loss of $514,204 or $(0.18) per share for 2008.
- 15 -
Starting in 2006 we divested ourselves from our audit business to better concentrate our efforts on our new Route Accounting solution. In 2006, we delivered our first hand-held route solution, interfacing with the J.D. Edwards system, to an internationally recognized company in the food services industry. The implementation was successful and the company continued to deploy additional routes in Europe during 2007 and 2008. During 2008, we delivered a comprehensive RRLE Direct Store Delivery solution to a major bottling company and also contracted to deliver a similar solution to a major national bakery. This solution, with a value of approximately $1,000,000 was delivered in 2009.
Results of Operations
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 year, 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.
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, 2009 Compared with Year Ended December 31, 2008
For the year ended December 31, 2009, we reported a loss of $231,994, or $(0.05) per share, as compared to a loss of $514,204 or $(0.18) per share for the comparable prior year. The decreased net loss was a direct result of lower expenses.
Revenue
Our total revenue for the year ended December 31, 2005 decreased 5% to $1,723,361 compared to $1,820,196 for the comparable prior year.
Product revenues for the year ended December 31, 2009 increased 8% to $1,173,317 compared to $1,082,647 for the prior year.
Service revenues for the year ended December 31, 2009 decreased 25% to $550,044 compared to $737,549 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 $466,404 or 27% of revenues for the year ended December 31, 2009, compared to $471,239 or 26% of revenues from the prior year. The slightly higher margin is a direct result of lower expenses.
Operating Expenses
Total operating expenses of $696,569 decreased 29% for the year ended December 31, 2009 from $982,240 for the comparable prior year.
- 16 -
Selling and marketing expenses for the year ended December 31, 2009 were $209,947 compared to $294,754 for the prior year, a decrease of 29%. The decrease is due primarily to lower payroll cost resulting from reduced manpower.
General and administrative expenses for the year ended December 31, 2009 were $486,622 compared to $687,666 for the prior year, a decrease of 29%. The decrease is a result of lower legal fees combined with lower occupancy cost related to our relocation to smaller quarters.
Liquidity and Capital Resources
We used cash of $27,616 and $498,797 for operating activities for the years ended December 31, 2009 and 2008, respectively. 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. For the year ended December 31, 2008, our principal operating cash requirement was used to fund our loss from operation along with a decrease in accounts payable and an increase in other prepaid expenses, offset by an increase in deferred revenue and a decrease in deferred hardware and software costs.
We used cash of $11,611and $15,408 for investing activities for the years ended December 31, 2009 and 2008, respectively. The cash was used for the purchase of capital equipment and capitalized software development costs. As of December 31, 2009, we had no material commitments for capital expenditures.
We generated cash of $28,795 and $376,735 from financing activities for the years ended December 31, 2009 and 2008, respectively. 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. For the year ended December 31, 2008, we raised capital in the amount of $415,000 and made payments on obligations under our notes payables and capital leases.
Although we have been able to reduce our operating expenses by 29% in 2009, as compared to 2008, we still have incurred an accumulated deficit of approximately $17.2 million through December 31, 2009. As of December 31, 2009, we had approximately $110,000 in cash and negative working capital of $917,000. The 2009 results reflect significant cost reductions, which efforts we are continuing to undertake. However, even with the additional working capital from equity transactions during 2008 and 2009, we have a current ratio of 0.33 as of December 31, 2009, which is slightly lower than our current ratio of 0.46 at December 31, 2008 and is significantly less than 1.00, which is generally considered to place a company at higher financial risk. In the event that we cannot generate sufficient cash for working capital, we may have to reduce our level of operations, which will make it more difficult for us to continue our business as a going concern.
At December 31, 2009, approximately 95% of our accounts payable was comprised of amounts due for services to our Directors and legal firm. Although no formal payment plans have been established, we plan on making monthly payment based on our availability of cash.
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.
- 17 -
We maintain adequate levels of inventory and have not experienced any interruption of supplies or services from vendors.
Commitments, Contractual Obligations and Off-Balance Sheet Arrangements
We lease our office facilities under an operating lease expiring April 30, 2010. 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 $68,350 and $132,828 for the years ended December 31, 2009 and 2008, respectively.
We also lease certain equipment under capital leases expiring at various dates through 2010.
Minimum future lease commitments under operating and capital leases at December 31, 2009 are as follows:
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 is currently evaluating the impact that adoption of this pronouncement will have on the Company’s Financial Statements.
- 18 -
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 is currently evaluating the impact that adoption of this pronouncement will have on the Company’s Financial Statements.
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
- 19 -
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 granted in the year ended December 31, 2009. Estimates of fair values are not intended to predict actual future events or the value ultimately realized by persons who receive equity awards.
- 20 -
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 capitalized $9,090 of software development costs during 2009. Amortization of capitalized software costs was $4,365 and $6,253 for the years ended December 31, 2009 and 2008, 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, 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 2005-2008 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),
- 21 -
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, 2009. Based on the aforementioned evaluation, management has concluded that our disclosure controls and procedures were not effective as of December 31, 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, (ii) the potential inability of our accounting staff to handle certain complex accounting issues, and (iii) as a result of the fact that our September 30, 2009 Form 10-Q was filed without a review having been performed by our Independent Registered Public Accounting Firm. Notwithstanding the existence of the material weaknesses described below, management has concluded that the consolidated 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, 2009. 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, 2009. 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 our Independent Registered Public Accounting Firm, our Independent Registered Public Accounting Firm has concluded that as of September 30, 2009 a material weakness existed related to our disclosure controls and procedures, specifically with regards 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, 2009. No other material weaknesses in our internal control over financial reporting were identified.
- 22 -
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 the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the company’s 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, 2009 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 2010 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 September 29, 2009, our Board of Directors elected one new member, Bruna Bucacci. On February 12, 2008 and March 21, 2008, each of William Smart and John Ward retired as Directors and became Directors Emeriti. 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, 2009 and December 31, 2008 to our Chief Executive Officer and to all other executive officers whose compensation exceeded $100,000 for the fiscal year ended December 31, 2009.
SUMMARY COMPENSATION TABLE
Name and Principal Position
Year
Salary
($)
Bonus
($)
Option Awards
($)
Total
($)
Bruna A. Bucacci, Chief Executive Officer
101,237
105,017 (1)
101,783
105,563
(1)
Includes a bonus in the amount of $5,000 earned in the fiscal year ended December 31, 2006, but paid in 2008.
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 $101,000. We do not have any arrangements with Ms. Bucacci for any types of additional compensation, including bonus payments, severance payments, insurance premium payments, payments upon a termination following a change of control and retirement benefits.
Outstanding Equity Awards Table at Fiscal Year End
Name
Equity Incentive Plan
Awards: Number of
Securities Underlying
Unexercised Unearned
Options (1)
Option
Exercise Price
($)
Option
Expiration Date
Bruna Bucacci
6,666
$0.03
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.
- 26 -
Stock Option Exercises
There were no stock options exercised by the named executive officers for the fiscal year ended December 31, 2009.
Director Compensation Table
The following table details the total compensation earned by the Company’s outside Directors for the year ended December 31, 2009. Mr. Stafford received no compensation for his services as a member of the Board of Directors in Fiscal 2009.
Mr. MacKinnon is schedule to receive an annual compensation of $20,000 for his services, however due to our cash constraints, we did not paid Mr. MacKinnon during the year ended December 31, 2009. Mr. Stafford has elected to be compensated only for expenses related to attending the Board of Directors and Committee Meeting. Members of the Audit Committee and the Compensation Committee 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, 2010 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.
- 27 -
(1)
The number of shares of common stock issued and outstanding on March 31, 2010 was 4,274,496. 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, 2010, including shares of common stock subject to options and/or warrants held by such person at March 31, 2010 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 666,667 shares in the aggregate beneficially owned by Mr. Stafford’s four children: Conor Stafford, Paula Stafford, Fiona Stafford and Ronan Stafford. Mr. Stafford has voting control over all of such shares.
(3)
Includes 144,097 shares jointly owned by Mr. MacKinnon’s spouse.
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 28, 2008, Anthony Stafford purchased 66,667 shares of our common stock for a purchase price of $0.75 per share.
On September 18, 2008, members of our Board of Directors, along with one outside investor purchases 1,825,000 shares of our common stock for a purchase price of $0.20 per share.
On June 29, 2009, Anthony Stafford purchased 500,000 shares of our common stock for a purchase price of $0.10 per share.
Item 14.
Item 14. Principal Accountant Fees and Services
CCR LLP has been our independent registered public accounting firm since November 4, 2005. CCR LLP has not performed an audit or any audit services related to the 2009 financial statements to be included with the Form 10-K.
- 28 -
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.
For the year ended December 31, 2008, CCR LLP billed us $51,054 for the audit of our financial statements and its review of our Quarterly Reports on Form 10-Q.
Audit-Related Fees
For the year ended December 31, 2008, CCR LLP billed us $1,315 for the review of our proxy statement.
Tax Fees
For the year ended December 31, 2009, CCR LLP billed us $4,000 for the preparation of our 2008 corporate tax returns.
For the year ended December 31, 2008, CCR LLP billed us $3,950 for the preparation of our 2007 corporate tax returns.
All Other Fees
For the year ended December 31, 2008, CCR LLP billed us $7,690 for the preparation of correspondence related to comments from the SEC.
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.
- 29 -
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 2008 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, 2009 and 2008
Statements of Operations for the years ended December 31, 2009 and 2008
Statement of Stockholders’ Deficit for the years ended December 31, 2009 and 2008
Statements of Cash Flows for the years ended December 31, 2009 and 2008
Notes to Financial Statements
- 30 -
(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.
- 31 -
(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.
- 32 -
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/ Anthony Stafford
Chairman of the Board
May 12, 2010
Anthony Stafford
/s/ Bruna A. Bucacci
Chief Executive Officer
May 12, 2010
Bruna A. Bucacci
/s/ John H. MacKinnon
Director
May 12, 2010
John H. MacKinnon
- 33 -
NATIONAL DATACOMPUTER, INC.
BALANCE SHEETS
The accompanying notes are an integral part
of these financial statements.
- 34 -
NATIONAL DATACOMPUTER, INC.
STATEMENTS OF OPERATIONS
The accompanying notes are an integral part
of these financial statements.
- 35 -
NATIONAL DATACOMPUTER, INC.
STATEMENT OF STOCKHOLDERS' DEFICIT
The accompanying notes are an integral part
of these financial statements.
- 36 -
NATIONAL DATACOMPUTER, INC.
STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part
of these financial statements.
- 37 -
NATIONAL DATACOMPUTER, INC.
NOTES TO FINANCIAL STATEMENTS
1.
Organization
We are engaged 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 hardware and software products.
2.
Liquidity and Management Plans
We have an accumulated deficit of approximately $17,200,000 through December 31, 2009. We have taken numerous steps to address this situation, such as re-aligning our spending from administration and manufacturing to maintaining key development programs while carefully managing our overall cash usage. 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.
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.
- 38 -
NATIONAL DATACOMPUTER, INC.
NOTES TO FINANCIAL STATEMENTS
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.
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.
- 39 -
NATIONAL DATACOMPUTER, INC.
NOTES TO FINANCIAL STATEMENTS
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.
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, 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 2005-2008 remains open to examination by the I.R.S. and state authorities.
- 40 -
NATIONAL DATACOMPUTER, INC.
NOTES TO FINANCIAL STATEMENTS
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, 2009 and 2008, share-based compensation expense amounted to $7,151 and $7,022, respectively, and is included in general and administrative expense.
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.
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 in 2009.
The weighted average grant date fair value of options granted was $0.18 during the years ended December 31, 2008. The fair value of options at date of grant was estimated using the Black-Scholes option-pricing model with the following assumptions during the year ended December 31, 2008:
Expected option term (1)
6.25 years
Expected volatility factor (2)
103.8%
Risk-free interest rate (3)
2.62%
Expected annual dividend rate
0%
(1) The option life was determined using the simplified method for estimating expected option life, which qualifies as “plain-vanilla” options.
(2) The stock volatility for each grant is determined based on the review of the experience of the weighted average of historical monthly price changes of the Company’s common stock over the most recent six years, which approximates the expected option life of the grant of 6.25 years.
(3) The risk-free interest rate for periods equal to the expected term of the share option is based on the U.S. Treasury yield curve in effect at the time of grant.
- 41 -
NATIONAL DATACOMPUTER, INC.
NOTES TO FINANCIAL STATEMENTS
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 88,331 and 92,996 shares of common stock have not been included in the computation of diluted net loss per share for the years ended December 31, 2009 and 2008, 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.
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 3,333,333 shares post-split. The number of shares reserved for issuance under our stock option plans was also reduced proportionately. As a result of the reverse stock split, every 15 shares of common stock that was issued and outstanding was automatically combined into one issued and outstanding share, without any change in the par value of such shares. No fractional shares were issued in connection with the reverse stock split. Stockholders who would be entitled to fractional shares received 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.
- 42 -
NATIONAL DATACOMPUTER, INC.
NOTES TO FINANCIAL STATEMENTS
5.
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 is currently evaluating the impact that adoption of this pronouncement will have on the Company’s 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 is currently evaluating the impact that adoption of this pronouncement will have on the Company’s Financial Statements.
6.
Property and Equipment, net
Property and equipment related to continuing operations consist of the following:
- 43 -
NATIONAL DATACOMPUTER, INC.
NOTES TO FINANCIAL STATEMENTS
Depreciation expense was $29,112 and $33,308 for the years ended December 31, 2009 and 2008, respectively
7.
Capitalized Software Development Costs, net
Capitalized software development costs related to continuing operations consist of the following:
Amortization expense was $4,365 and $6,253 for the years ended December 31, 2009 and 2008, respectively.
9.
Note Payable
On April 1, 2006, the Company signed an agreement with its landlord for past due rent plus interest at 12% totaling $54,607. This amount was payable over the remaining 30 months of the lease. At December 31, 2007, the remaining note balance was $18,125. The Company paid off the note in September 2008.
10.
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 2005 through 2008, and certain items carried forward from earlier years and utilized in those returns, remain open to examination by the IRS and various state jurisdictions.
- 44 -
NATIONAL DATACOMPUTER, INC.
NOTES TO FINANCIAL STATEMENTS
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.
At December 31, 2009, the Company has federal net operating loss carryforwards for federal tax purposes of approximately $9,033,000, which expire in various years through 2029. The Company has state net operating loss carryforwards for tax purposes of approximately $2,412,000, which expire in various years through 2014.
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.
- 45 -
NATIONAL DATACOMPUTER, INC.
NOTES TO FINANCIAL STATEMENTS
11.
Stock Options
Share-Based Incentive 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. As of December 31, 2009, there were no longer any options outstanding and no shares available for grants 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 December 31, 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 December 31, 2009:
Number of shares
Weighted average
exercise price
Remaining
contractual
life in years
Aggregate
intrinsic value
Outstanding at December 31, 2008
92,996
$0,63
Granted
-
-
Exercised
-
Cancelled/forfeited
(4,665)
3.69
Outstanding at December 31, 2009
88,331
0.42
7.5
$ -
Options vested or expected to vest
at December 31, 2009 (1)
78,612
0.45
7.5
$ -
Options exercisable at December 31, 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.
At December 31, 2009, stock-based compensation not yet recognized amounted to $14,552 and is expected to be recognized over a weighted average period of 1.5 years.
12.
Equity Transactions
Anthony Stafford, an investor who has joined our Board of Directors on March 30, 2007, is now a majority stockholder of our Company after investing $400,000 for the purchase of shares of our Common Stock previously held by CapitalBank. As a condition to his investment, Mr. Stafford requested that our executive officers and members of our Board of Directors provide an aggregate of $140,000 of the $600,000 (including Mr. Stafford’s $400,000) in funds which were raised to acquire shares previously held by CapitalBank. Each of our executive officers and the members of our Board of Directors agreed to make such an investment by purchasing an aggregate of 471,944 shares of our Common Stock (the “Management Shares”) on the same terms on which Mr. Stafford purchased his shares.
- 46 -
NATIONAL DATACOMPUTER, INC.
NOTES TO FINANCIAL STATEMENTS
On March 30, 2007 our stockholders approved the sale and issuance of shares of Common Stock to our executive officers and each member of our Board of Directors, and in exchange for an aggregate of $600,000 capital contribution, the new investors received an aggregate of 2,022,616 shares of our Common Stock. The resulting per share purchase price was $.2966 per share.
Mr. Stafford, together with his four children, agreed to invest $400,000 in the Company, provided that at least a majority of the remaining $200,000 funds to be raised be provided on an individual basis by our executive officers and the members of our Board of Directors. Our executive officers and the members of our Board of Directors agreed to invest an aggregate of $140,000 and two additional investors were identified to provide the remaining $60,000. As described above, these funds were used to pay AST $250,000 for our Common Stock held by CapitalBank as partial consideration for the purchase of the CapitalBank Shares and the remaining $350,000 will be used to provide us with needed working capital and to pay transaction expenses. Moreover, Mr. Stafford agreed to acquire only our Common Stock so that we would not have to re-issue shares of our Preferred Stock, thereby ensuring that the holders of our Common Stock would not be affected by any liquidation preferences and that we would no longer have any obligation to make quarterly interest payments in cash or Common Stock with respect to the Preferred Stock.
A result of these transactions is the elimination of the outstanding shares of our Preferred Stock, which results in no other stockholder having a liquidation preference over the holders of our Common Stock as well as the cessation of our obligation to issue cash or Common Stock as interest payments with regard to the Preferred Stock, which would potentially further dilute the shares of our Common Stock that are currently outstanding. Additionally, the stockholders will be able to vote as a single class.
On July 28, 2008, Anthony Stafford purchased 66,667 shares of our common stock. On September 18, 2008, members of our Board of Directors, along with one outside investor purchases 1,825,000 shares of our common stock. Total proceeds from these transactions were $415,000.
On June 30, 2009, Anthony Stafford purchased 500,000 shares of our common stock. Total proceeds from this transaction were $50,000.
13.
Commitments
The Company leases its office facilities under an operating lease expiring October 31, 2010. The lease contains an option for renewal and requires the payment of real estate taxes and other operating costs. Total rent expense under this operating lease was $68,350 and $132,828 for the years ended December 31, 2009 and 2008, respectively.
The Company also leases certain equipment under capital leases expiring at various dates through the year 2010.
- 47 -
NATIONAL DATACOMPUTER, INC.
NOTES TO FINANCIAL STATEMENTS
Minimum future lease commitments under operating and capital leases at December 31, 2009 are as follows:
14.
Concentration of Credit Risk
The Company sells its products to customers principally in the United States of America. During 2009, four customers accounted for approximately 87% of our total revenues. During 2008, three customers accounted for 83% 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 79% and 95% of total accounts receivable at December 31, 2009 and 2008, 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
79%
84%
Europe
21%
16%
Total
100%
100%
- 48 -