##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-QSB
 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
 For the quarterly period ended: June 30, 2006
 Commission File Number: 333-106247
 Remote Knowledge, Inc.
  Delaware
(State or other jurisdiction of
incorporation or organization)
    
    74-1664837
(I.R.S. Employer
Identification number)
 
   þ o
  o þ
  o þ




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##### 



Remote Knowledge, Inc.
 INDEX TO QUARTERLY REPORT ON FORM 10-QSB
 PagePART IItem 1. Financial Statements
    
    
    2Item 2. Managements Discussion and Analysis or Plan of Operation
    
    
    10Item 3. Controls and Procedures
    
    
    14PART IIItem 1. Legal Proceedings
    
    
    15Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    15Item 6. Exhibits
    
    
    16Summary of Director CompensationGuaranteed Promissory NotePut Agreement - Robert D. DuncanGuaranteed Promissory NotePut Agreement - Hydie McAlisterBridge Loan Promissory Note - Robert D. DuncanBridge Loan Promissory Note - John R. HuffSubscription AgreementCertification required by Section 302Certification required by Section 302Certification required by Section 906
  -1-




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 Item 1. Financial Statements.
  Remote Knowledge, Inc.  (A Development Stage Enterprise)  Condensed Balance Sheet  Unaudited
 June 30, 2006ASSETSCurrent AssetsCash and cash equivalents
    
    $
    379,458Accounts receivable
    
    
    8,600Inventory
    
    
    89,316Related party receivable
    
    
    80,000Prepaid and other current assets
    
    
    147,008Total current assets
    
    
    704,382Property and Equipment,net
    
    
    442,464Total assets
    
    $
    1,146,846LIABILITIES AND SHAREHOLDERS DEFICITCurrent Liabilities:Accounts
payable  trade
    
    $
    264,312Accrued expenses
    
    
    2,218,425Payable to shareholder
    
    
    127,926Notes payable  current
    
    
    1,789,100Total current liabilities
    
    
    4,399,763Notes payable  long-term
    
    
    1,320,207Total liabilities
    
    
    5,719,970Shareholders Deficit:Preferred stock  series A, $.001 par value;
15,000 shares authorized; 4,414 shares
issued and outstanding
    
    
    4Preferred stock  series B, $.001 par value;
13,500 shares authorized; 6,334 shares
issued and outstanding
    
    
    6Common stock, $.001 par value; 100,000,000
shares authorized; 14,479,930 shares issued
and outstanding
    
    
    14,480Additional paid-in capital
    
    
    62,280,104Deferred compensation
    
    
    (73,168
    )Accumulated deficit
    
    
    (10,234,380
    )Deficit accumulated during development stage
    
    
    (56,560,170
    )Total shareholders deficit
    
    
    (4,573,124
    )Total liabilities and shareholders deficit
    
    $
    1,146,846
 The accompanying notes are an integral part of these financial statements.
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Remote Knowledge, Inc.  (A Development Stage Enterprise)  Unaudited
 Condensed Statements of Operations
 Period FromJanuary 1, 2001(Inception ofThree-Month Periods Ended
    
    
    Six-Month Periods Ended
    
    
    Development Stage)JUNE 30,
    
    
    JUNE 30,
    
    
    JUNE 30,
    
    
    JUNE 30,
    
    
    to JUNE30,2006
    
    
    2005
    
    
    2006
    
    
    2005
    
    
    2006Revenues
    
    $
    10,890
    
    
    $
    20,172
    
    
    $
    24,311
    
    
    $
    20,172
    
    
    $
    75,358Cost of Goods Sold
    
    
    9,914
    
    
    
    19,684
    
    
    
    21,408
    
    
    
    19,684
    
    
    
    66,306Gross Profit
    
    
    976
    
    
    
    488
    
    
    
    2,903
    
    
    
    488
    
    
    
    9,052Operating Costs and
Expenses:Advisory services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,169,146Research and development
    
    
    157,939
    
    
    
    157,152
    
    
    
    280,500
    
    
    
    256,435
    
    
    
    5,866,522Loss on impairment of
assets
    
    
    14,672
    
    
    
    
    
    
    
    14,672
    
    
    
    
    
    
    
    2,200,247Professional fees
    
    
    86,417
    
    
    
    32,573
    
    
    
    272,303
    
    
    
    278,780
    
    
    
    2,798,372Advertising and promotion
fees
    
    
    58,832
    
    
    
    22,571
    
    
    
    129,876
    
    
    
    63,479
    
    
    
    1,593,230General and administrative
expenses
    
    
    624,058
    
    
    
    1,583,279
    
    
    
    2,670,733
    
    
    
    2,316,782
    
    
    
    17,352,572Total operating costs
and expenses
    
    
    941,918
    
    
    
    1,795,575
    
    
    
    3,368,084
    
    
    
    2,915,476
    
    
    
    33,980,089Other Expense (Income):Interest expense
    
    
    554,868
    
    
    
    75,356
    
    
    
    1,122,295
    
    
    
    125,671
    
    
    
    5,254,875Amortization of deferred
financing costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,188,432Interest income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (27,420
    )Other income
    
    
    (5,443
    )
    
    
    (400
    )
    
    
    (10,389
    )
    
    
    (3,075
    )
    
    
    (13,464
    )Other expense
    
    
    (9,376
    )
    
    
    5,198
    
    
    
    
    
    
    
    5,198
    
    
    
    12,698Debt forgiveness
    
    
    (310,807
    )
    
    
    
    
    
    
    (310,807
    )
    
    
    
    
    
    
    (1,695,785
    )Total other expense
(income)
    
    
    229,242
    
    
    
    80,154
    
    
    
    801,099
    
    
    
    127,794
    
    
    
    4,719,336Net Loss
    
    
    (1,170,184
    )
    
    
    (1,875,241
    )
    
    
    (4,166,280
    )
    
    
    (3,042,782
    )
    
    
    (38,690,373
    )Effective Dividend Related to
Beneficial Conversion of Series
B Preferred Stock
    
    
    (11,692
    )
    
    
    (729,462
    )
    
    
    (11,692
    )
    
    
    (2,267,000
    )
    
    
    (11,023,885
    )Effective Dividend Related to
Beneficial Conversion of Series
A Preferred Stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,554,000
    )Warrants issued for release of
redemption provision on
preferred stock  series A
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,291,912
    )Net Loss Attributable to Common
Shares
    
    $
    (1,181,876
    )
    
    $
    (2,604,703
    )
    
    $
    (4,177,972
    )
    
    $
    (5,309,782
    )
    
    $
    (56,560,170
    )Net Loss Per Share:BASIC AND DILUTED
    
    $
    (.08
    )
    
    $
    (.35
    )
    
    $
    (.30
    )
    
    $
    (.75
    )
    
    $
    (8.58
    )Number of Shares Used in
Calculating Net Loss Per Share:BASIC AND DILUTED
    
    
    14,223,116
    
    
    
    7,423,306
    
    
    
    13,778,042
    
    
    
    7,082,381
    
    
    
    6,590,424
 The accompanying notes are an integral part of these financial statements.
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Remote Knowledge, Inc.  (A Development Stage Enterprise)  Condensed Statements of Cash Flows  Unaudited
 Period FromJanuary 1, 2001(inception ofdevelopmentSIX-MONTH PERIOD ENDED
    
    
    stage) toJUNE 30,
    
    
    JUNE 30,
    
    
    JUNE 30,2006
    
    
    2005
    
    
    2006Cash Flows From Operating Activities:Net loss
    
    $
    (4,166,280
    )
    
    $
    (3,042,782
    )
    
    $
    (38,690,373
    )Adjustments to reconcile net loss to net cash used in
operating activities:Accretion of debt discount and discount related
to beneficial conversion of convertible debt
    
    
    881,656
    
    
    
    20,833
    
    
    
    4,016,242Depreciation
    
    
    120,632
    
    
    
    109,348
    
    
    
    812,612Loss on impairment of fixed assets
    
    
    
    
    
    
    
    
    
    
    1,564,282Amortization of deferred financing costs
    
    
    
    
    
    
    
    
    
    
    1,188,432Equity issued for services and interest
    
    
    1,561,769
    
    
    
    892,058
    
    
    
    9,620,769Provision for loss on inventory
    
    
    14,672
    
    
    
    
    
    
    
    675,001Debt forgiveness
    
    
    (310,807
    )
    
    
    
    
    
    
    (1,695,785
    )Charge off of receivables
    
    
    
    
    
    
    
    
    
    
    446,414Changes in assets and liabilities:Accounts receivable
    
    
    (4,700
    )
    
    
    (2,439
    )
    
    
    (8,600
    )Inventory
    
    
    48,903
    
    
    
    (471,330
    )
    
    
    (841,792
    )Prepaid and other current assets
    
    
    (120,785
    )
    
    
    (157,989
    )
    
    
    (198,736
    )Accounts payable  trade
    
    
    (370,057
    )
    
    
    285,579
    
    
    
    1,133,242Accrued expenses
    
    
    (177,390
    )
    
    
    (32,134
    )
    
    
    1,451,271Related party payable
    
    
    
    
    
    
    
    
    
    
    399,259Net cash used in operating activities
    
    
    (2,522,387
    )
    
    
    (2,398,856
    )
    
    
    (20,127,762
    )Cash Flows From Investing Activities:Additions of fixed assets
    
    
    (25,281
    )
    
    
    (67,663
    )
    
    
    (956,330
    )Sale of fixed assets
    
    
    8,500
    
    
    
    
    
    
    
    8,500Related party receivable
    
    
    
    
    
    
    
    
    
    
    (300,000
    )Net cash used in investing activities
    
    
    (16,781
    )
    
    
    (67,663
    )
    
    
    (1,247,830
    )Cash Flows From Financing Activities:Payments of notes payable
    
    
    (1,044,075
    )
    
    
    (437,534
    )
    
    
    (2,468,902
    )Capital contributions
    
    
    
    
    
    
    
    
    
    
    27,900Proceeds from SMH note payable
    
    
    
    
    
    
    
    
    
    
    1,500,000Proceeds from short term note payable
    
    
    2,500,000
    
    
    
    500,000
    
    
    
    3,085,000Proceeds from sale of common stock
    
    
    
    
    
    
    
    
    
    
    903,800Proceeds from other notes payable
    
    
    62,710
    
    
    
    178,464
    
    
    
    3,350,038Net proceeds from sale of mandatory redeemable
preferred stock
    
    
    
    
    
    
    
    
    
    
    5,040,033Net proceeds from sale of series B preferred stock
    
    
    45,000
    
    
    
    2,259,000
    
    
    
    6,684,073Proceeds from related party note payable
    
    
    1,350,000
    
    
    
    
    
    
    
    3,600,000Net cash provided by financing activities
    
    
    2,913,635
    
    
    
    2,499,930
    
    
    
    21,721,942Net Change in Cash and Cash Equivalents
    
    
    374,467
    
    
    
    33,411
    
    
    
    346,350Cash and Cash Equivalents, beginning of period
    
    
    4,991
    
    
    
    52,658
    
    
    
    33,108Cash and Cash Equivalents, end of period
    
    $
    379,458
    
    
    $
    86,069
    
    
    $
    379,458
 The accompanying notes are an integral part of these financial statement.
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Remote Knowledge, Inc.  (A Development Stage Enterprise)  Condensed Statements of Cash Flows  Unaudited
 Non-Cash Transactions:Issuance of common stock for related party debt
    
    $
    
    
    
    $
    
    
    
    $
    888,832Issuance of common stock for debt
    
    $
    
    
    
    $
    
    
    
    $
    1,157,114Issuance of common stock for assets
    
    $
    
    
    
    $
    
    
    
    $
    8,000Conversion of accounts payable to notes payable
    
    $
    
    
    
    $
    
    
    
    $
    766,484Conversion of notes payable to equity
    
    $
    
    
    
    $
    
    
    
    $
    4,201,000Contribution of capital by shareholders for
financing costs
    
    $
    
    
    
    $
    
    
    
    $
    1,188,432Issuance of common stock upon conversion of
Series A preferred stock
    
    $
    
    
    
    $
    404,202
    
    
    $
    1,507,419Issuance of common stock upon conversion of
Series B preferred stock
    
    $
    1,233,333
    
    
    $
    
    
    
    $
    6,327,333Issuance of common stock upon conversion of
mandatory redeemable preferred stock
classified as debt
    
    $
    
    
    
    $
    
    
    
    $
    20,000Reclassification of mandatorily redeemable
preferred stock to equity
    
    $
    
    
    
    $
    
    
    
    $
    5,534,000Effective dividend from amortization of
discount related to beneficial conversion of
mandatory redeemable Series A preferred stock
    
    $
    
    
    
    $
    
    
    
    $
    5,554,000Warrants issued for release of redemption
provision of Series A preferred stock
    
    $
    
    
    
    $
    
    
    
    $
    1,291,912Effective dividend from amortization of
discount related to beneficial conversion of
Series B preferred stock and warrants
    
    $
    11,692
    
    
    $
    2,267,000
    
    
    $
    11,023,885Reclassification of demo units from inventory
to fixed assets
    
    $
    
    
    
    $
    
    
    
    $
    77,475Supplemental Disclosure of Cash Flow
Information:Cash paid for interest
    
    $
    152,000
    
    
    $
    35,561
    
    
    $
    332,732
 The accompanying notes are an integral part of these financial statement.
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Note 1  Basis of Presentation
  Note 2  Significant Accounting Policies
 Share-Based Compensation
    Pro-Forma Stock Compensation Expense for the Quarter and Six Month Period Ended June 30, 2005
  -6-




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Three Months Ended
    
    
    Six Months EndedJune 30, 2005
    
    
    June 30, 2005Net loss
attributable to common shares
    
    $
    (2,604,703
    )
    
    $
    (5,309,782
    )Deduct: Stock-based employee compensation
expense, determined under fair value method
for all awards
    
    
    (76,707
    )
    
    
    (174,373
    )Pro forma
net loss
    
    $
    (2,681,410
    )
    
    $
    (5,484,155
    )Loss per
share  basic and diluted, as reported
    
    $
    (0.35
    )
    
    $
    (0.75
    )Loss per share  basic and diluted, as adjusted
    
    $
    (0.36
    )
    
    $
    (0.77
    )
  Stock Options as of the Quarterly Period Ended June 30, 2006
  
    
    Under the 2004 Incentive Stock Option Plan, employees providing material services to the
Company or any subsidiary of the Company may be awarded options.
    
    Under the 2004 Stock Option Plan, employees, Directors of and consultants to the Company
and its affiliates may be awarded options.
   Weighted AverageWeighted
    
    
    RemainingAverage
    
    
    Contractual Term
    
    
    Aggregate IntrinsicNumber of Shares
    
    
    Exercise Price
    
    
    (in years)
    
    
    ValueOptions outstanding at January 1, 2006
    
    
    3,675,000
    
    
    $
    0.99Granted
    
    
    3,750,000
    
    
    
    0.50Exercised
    
    
    (0
    )
    
    
    0.00Canceled or forfeited
    
    
    (590,000
    )
    
    
    1.00Options outstanding at March 31, 2006
    
    
    6,835,000
    
    
    $
    0.72
    
    
    
    6.10
    
    
    $
    0Granted
    
    
    100,000
    
    
    
    0.35Exercised
    
    
    (0
    )
    
    
    0.00Canceled or forfeited
    
    
    (0
    )
    
    
    0.00Options outstanding at June 30, 2006
    
    
    6,935,000
    
    
    $
    0.71
    
    
    
    5.83
    
    
    $
    0Options exercisable at June 30, 2006
    
    
    6,228,333
    
    
    $
    0.72
    
    
    
    5.46
    
    
    $
    1,121,100
 -7-




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Weighted AverageNumber of Options
    
    
    Contractual Life
    
    
    Weighted Average
    
    
    Number of Options
    
    
    Weighted AverageExercise prices
    
    
    Outstanding
    
    
    (in years)
    
    
    Exercise price
    
    
    Exercisable
    
    
    Exercise Price$
    0.35
    
    
    
    100,000
    
    
    
    4.55
    
    
    
    
    
    
    
    00.45
    
    
    
    240,000
    
    
    
    9.45
    
    
    
    
    
    
    
    65,0000.50
    
    
    
    3,870,000
    
    
    
    4.88
    
    
    
    
    
    
    
    3,780,0000.80
    
    
    
    375,000
    
    
    
    8.40
    
    
    
    
    
    
    
    175,0001.00
    
    
    
    1,850,000
    
    
    
    6.35
    
    
    
    
    
    
    
    1,775,0001.10
    
    
    
    150,000
    
    
    
    8.10
    
    
    
    
    
    
    
    83,3331.60
    
    
    
    350,000
    
    
    
    7.78
    
    
    
    
    
    
    
    350,0006,935,000
    
    
    
    6.10
    
    
    $
    0.71
    
    
    
    6,228,333
    
    
    $
    0.72
   Three Months
    
    Three Months
    
    Six Months
    
    Six MonthsEnded
    
    Ended
    
    Ended
    
    EndedJune 30, 2006
    
    June 30, 2005
    
    June 30, 2006
    
    June 30, 2005Weighted average grant date fair value
    
    $
    0.31
    
    
    NA
    
    $
    0.38
    
    
    NAWeighed average assumptions used:Volatility
    
    
    161
    %
    
    NA
    
    
    147
    %
    
    NAExpected option term
    
    3 1/2 years
    
    NA
    
    2 1/2 years
    
    NARisk-free interest rate
    
    
    4.3
    %
    
    NA
    
    
    4.8
    %
    
    NAExpected dividend yield
    
    
    0
    %
    
    NA
    
    
    0
    %
    
    NAIntrinsic value of options exercised
or converted
    
    $
    0
    
    
    NA
    
    $
    0
    
    
    NAFair value of shares vested
    
    $
    91,050
    
    
    NA
    
    $
    1,633,600
    
    
    NA
 Modifications of Stock Options Granted
  Note 3  Notes Payable
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-9-




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Note 4  Net Loss Per Share
  Note 5  Debt Forgiveness
  
 Item 2. Managements Discussion and Analysis or Plan of Operation.
 Forward-Looking Statements
   
    
    timing of products and new product releases,
    
    research and development expenditures, including the timing, amount and nature thereof,
    
    estimates of additional capital requirements,
    
    sales projections,
    
    repayment of debt,
    
    business strategies,
    
    product pricing and demand, and
    
    expansion and growth of business operations.
  
    
    the availability of additional financing on favorable conditions,
    
    general economic, market and business conditions,
 -10-




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##### Table of Contents




    
    the success of our engineering efforts,
    
    our ability to protect our intellectual property,
    
    business opportunities that may be presented to and pursued by us,
    
    changes in laws or regulations, and
    
    successful exploitation of our market opportunities.
  
    
    our inability to obtain financing for research and development, manufacturing, and marketing expenditures,
    
    our inability to compete against existing or future competitors,
    
    a substantial increase in the cost of our products,
    
    declines in the market prices for our products, and
    
    adverse changes in our target markets.
  OVERVIEW AND COMPANY STATUS
  Twelve Month Plan of Operation
    -11-




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Financial Position
       -12-




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Results of Operations
       -13-




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Item 3. Controls and Procedures.
   -14-




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PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings  None
 
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
         -15-




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Item 6. Exhibits.
  1.
    
    Exhibit 10.1
    
    Summary of Director Compensation2.
    
    Exhibit 10.2
    
    Guaranteed Promissory Note in the amount of $800,000 payable to Robert D. Duncan3.
    
    Exhibit 10.3
    
    Put Agreement for 400,000 common shares at $0.50 with Robert D. Duncan4.
    
    Exhibit 10.4
    
    Guaranteed Promissory Note in the amount of $200,000 payable to Hydie McAlister5.
    
    Exhibit 10.5
    
    Put Agreement for 100,000 common shares at $0.50 with Hydie McAlister6.
    
    Exhibit 10.6
    
    Bridge Loan Promissory Note in the amount of $750,000 payable to Robert D. Duncan7.
    
    Exhibit 10.7
    
    Bridge Loan Promissory Note in the amount of $750,000 payable to John R. Huff8.
    
    Exhibit 10.8
    
    Subscription Agreement for 45 units (Series B Preferred Stock and warrants) with 6 C Ranches9.
    
    Exhibit 31.1
    
    Certification required by Section 302 of the Sarbanes-Oxley Act of 200210.
    
    Exhibit 31.2
    
    Certification required by Section 302 of the Sarbanes-Oxley Act of 200211.
    
    Exhibit 32
    
    Certification required by Section 906 of the Sarbanes-Oxley Act of 2002
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SIGNATURES
  Remote Knowledge, Inc.By:
    
    /s/ Randy S. BayneRandy S. BayneChief Executive OfficerDate: August 11, 2006
    
    By:
    
    /s/ D. Henry HoustonD. Henry HoustonChief Financial and Accounting Officer
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##### Table of Contents



1.
    
    Exhibit 10.1
    
    Summary of Director Compensation2.
    
    Exhibit 10.2
    
    Guaranteed Promissory Note in the amount of $800,000 payable to Robert D. Duncan3.
    
    Exhibit 10.3
    
    Put Agreement for 400,000 common shares at $0.50 with Robert D. Duncan4.
    
    Exhibit 10.4
    
    Guaranteed Promissory Note in the amount of $200,000 payable to Hydie McAlister5.
    
    Exhibit 10.5
    
    Put Agreement for 100,000 common shares at $0.50 with Hydie McAlister6.
    
    Exhibit 10.6
    
    Bridge Loan Promissory Note in the amount of $750,000 payable to Robert D. Duncan7.
    
    Exhibit 10.7
    
    Bridge Loan Promissory Note in the amount of $750,000 payable to John R. Huff8.
    
    Exhibit 10.8
    
    Subscription Agreement for 45 units (Series B Preferred Stock and warrants) with 6 C Ranches9.
    
    Exhibit 31.1
    
    Certification required by Section 302 of the Sarbanes-Oxley Act of 200210.
    
    Exhibit 31.2
    
    Certification required by Section 302 of the Sarbanes-Oxley Act of 200211.
    
    Exhibit 32
    
    Certification required by Section 906 of the Sarbanes-Oxley Act of 2002
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