##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-QSB
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
 For the quarterly period ended: September 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




---



##### 



Remote Knowledge, Inc.
 INDEX TO QUARTERLY REPORT ON FORM 10-QSB
 PagePART IItem 1. Financial Statements
    
    
    3Item 2. Management's Discussion and Analysis or Plan of Operation
    
    
    12Item 3. Controls and Procedures
    
    
    16PART IIItem 1. Legal Proceedings
    
    
    17Item 2. Unregistered Sales of Equity Securities and Issuance of Notes and Use of Proceeds
    
    
    17Item 4. Submission of Matters to a Vote of Security Holders
    
    
    18Item 6. Exhibits and Reports on Form 8-K
    
    
    18Exhibit 3Exhibit 10.1Exhibit 10.2Exhibit 10.3Exhibit 10.4Exhibit 10.5Exhibit 31.1Exhibit 31.2Exhibit 32
   2




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 Item 1. Financial Statements.
  remote knowledge, inc.(a development stage enterprise)Condensed Balance Sheetunaudited
 September 30, 2006ASSETSCurrent AssetsCash
    
    $
    7,456Accounts receivable
    
    
    4,825Inventory
    
    
    89,316Prepaid and other current assets
    
    
    114,356Total current assets
    
    
    215,953Property and Equipment,net
    
    
    434,103Total assets
    
    $
    650,056LIABILITIES AND SHAREHOLDERS DEFICITCurrent Liabilities:Accounts payable  trade
    
    $
    327,001Accrued expenses
    
    
    2,206,400Payable to shareholder
    
    
    127,926Notes payable  related party  net of discount of $53,703
    
    
    668,797Notes payable  net of discount of $140,026
    
    
    1,526,071Total current liabilities
    
    
    4,856,195Notes payable  related party  long-term, net of discount of $2,004,904
    
    
    1,595,096Total liabilities
    
    
    6,451,291Shareholders 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; 13,000 shares
authorized; 6,254 shares issued and outstanding
    
    
    6Common stock, $.001 par value; 100,000,000 shares authorized;
14,719,929 shares issued and outstanding
    
    
    14,720Additional paid-in capital
    
    
    62,585,180Deferred compensation
    
    
    (58,180
    )Accumulated deficit
    
    
    (10,234,380
    )Deficit accumulated during development stage
    
    
    (58,108,585
    )Total shareholders deficit
    
    
    (5,801,235
    )Total liabilities and shareholders deficit
    
    $
    650,056
 The accompanying notes are an integral part of these financial statements.
  3




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##### Table of Contents



remote knowledge, inc.(a development stage enterprise)unaudited
 Condensed Statements of Operations
 Period FromJanuary 1, 2001(inception ofThree-Month Periods Ended
    
    
    Nine-Month Periods Ended
    
    
    development stage)September 30,
    
    
    September 30,
    
    
    September 30,
    
    
    September 30,
    
    
    to September30,2006
    
    
    2005
    
    
    2006
    
    
    2005
    
    
    2006Revenues
    
    $
    7,150
    
    
    $
    
    
    
    $
    31,461
    
    
    $
    20,172
    
    
    $
    82,508Cost of Goods Sold
    
    
    9,765
    
    
    
    
    
    
    
    31,173
    
    
    
    19,684
    
    
    
    76,071Gross Profit
    
    
    (2,615
    )
    
    
    
    
    
    
    288
    
    
    
    488
    
    
    
    6,437Operating Costs and
Expenses:Advisory services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,169,146Research and development
    
    
    148,761
    
    
    
    167,085
    
    
    
    429,261
    
    
    
    423,520
    
    
    
    6,015,283Loss on impairment of
assets
    
    
    
    
    
    
    
    
    
    
    14,672
    
    
    
    
    
    
    
    2,200,247Professional fees
    
    
    51,371
    
    
    
    70,431
    
    
    
    323,674
    
    
    
    349,211
    
    
    
    2,849,743Advertising and promotion
fees
    
    
    38,200
    
    
    
    109,888
    
    
    
    168,076
    
    
    
    173,367
    
    
    
    1,631,430General and administrative
expenses
    
    
    741,089
    
    
    
    712,131
    
    
    
    3,411,822
    
    
    
    3,028,913
    
    
    
    18,093,661Total operating costs
and expenses
    
    
    979,421
    
    
    
    1,059,535
    
    
    
    4,347,505
    
    
    
    3,975,011
    
    
    
    34,959,510Loss from Operations
    
    
    (982,036
    )
    
    
    (1,059,535
    )
    
    
    (4,347,217
    )
    
    
    (3,974,523
    )
    
    
    (34,953,073
    )Other Expense (Income):Interest expense
    
    
    551,221
    
    
    
    1,068,541
    
    
    
    1,673,516
    
    
    
    1,194,212
    
    
    
    5,806,096Amortization of deferred
financing costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,188,432Interest income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (27,420
    )Other income
    
    
    (3,806
    )
    
    
    
    
    
    
    (14,195
    )
    
    
    (3,075
    )
    
    
    (17,270
    )Other expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,198
    
    
    
    12,698Debt forgiveness
    
    
    (6,766
    )
    
    
    
    
    
    
    (317,573
    )
    
    
    
    
    
    
    (1,702,551
    )Total other expense
(income)
    
    
    540,649
    
    
    
    1,068,541
    
    
    
    1,341,748
    
    
    
    1,196,335
    
    
    
    5,259,985Net Loss
    
    
    (1,522,685
    )
    
    
    (2,128,076
    )
    
    
    (5,688,965
    )
    
    
    (5,170,858
    )
    
    
    (40,213,058
    )Effective Dividend Related to
Beneficial Conversion of Series
B Preferred Stock
    
    
    (25,730
    )
    
    
    
    
    
    
    (37,422
    )
    
    
    (2,267,000
    )
    
    
    (11,049,615
    )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
    
    $
    (1,548,415
    )
    
    $
    (2,128,076
    )
    
    $
    (5,726,387
    )
    
    $
    (7,437,858
    )
    
    $
    (58,108,585
    )Net Loss Per Common Share:BASIC AND DILUTED
    
    $
    (.11
    )
    
    $
    (.26
    )
    
    $
    (0.41
    )
    
    $
    (0.99
    )
    
    $
    (8.37
    )Number of Shares Used in
Calculating Net Loss Per Common
Share:BASIC AND DILUTED
    
    
    14,596,120
    
    
    
    8,284,897
    
    
    
    14,054,317
    
    
    
    7,489,114
    
    
    
    6,941,429
 The accompanying notes are an integral part of these financial statements.
  4




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##### Table of Contents



remote knowledge, inc.(a development stage enterprise)Condensed Statements of Cash Flowsunaudited
 Period FromJanuary 1, 2001(inception ofdevelopmentNine-month Periods Ended
    
    
    stage) toSeptember 30,
    
    
    September 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006Cash Flows From Operating Activities:Net loss
    
    $
    (5,688,965
    )
    
    $
    (5,170,858
    )
    
    $
    (40,213,058
    )Adjustments to reconcile net loss to net cash used in
operating activities:Amortization of debt discount and discount
related to beneficial conversion of convertible
debt
    
    
    1,360,594
    
    
    
    987,451
    
    
    
    4,495,180Depreciation
    
    
    184,390
    
    
    
    161,126
    
    
    
    876,370Loss on impairment of fixed assets
    
    
    
    
    
    
    
    
    
    
    1,564,282Amortization of deferred financing costs
    
    
    
    
    
    
    
    
    
    
    1,188,432Equity issued for services and interest
    
    
    1,636,343
    
    
    
    1,002,653
    
    
    
    9,695,343Provision for loss on inventory
    
    
    14,672
    
    
    
    
    
    
    
    675,001Debt forgiveness
    
    
    (317,573
    )
    
    
    
    
    
    
    (1,702,551
    )Charge off of receivables
    
    
    
    
    
    
    
    
    
    
    446,414Changes in assets and liabilities:Accounts receivable
    
    
    (925
    )
    
    
    (2,439
    )
    
    
    (4,825
    )Inventory
    
    
    48,903
    
    
    
    (398,535
    )
    
    
    (841,792
    )Prepaid and other current assets
    
    
    (3,909
    )
    
    
    (94,812
    )
    
    
    (81,860
    )Accounts payable  trade
    
    
    (300,602
    )
    
    
    180,073
    
    
    
    1,202,697Accrued expenses
    
    
    (189,415
    )
    
    
    (91,816
    )
    
    
    1,439,246Related party payable
    
    
    
    
    
    
    
    
    
    
    399,259Net cash used in operating activities
    
    
    (3,256,487
    )
    
    
    (3,427,157
    )
    
    
    (20,861,862
    )Cash Flows From Investing Activities:Net additions of fixed assets
    
    
    (72,178
    )
    
    
    (69,633
    )
    
    
    (1,003,227
    )Related party receivable
    
    
    
    
    
    
    
    
    
    
    (300,000
    )Net cash used in investing activities
    
    
    (72,178
    )
    
    
    (69,633
    )
    
    
    (1,303,227
    )Cash Flows From Financing Activities:Payments of notes payable
    
    
    (1,096,580
    )
    
    
    (1,116,822
    )
    
    
    (2,521,407
    )Capital contributions
    
    
    
    
    
    
    
    
    
    
    27,900Proceeds from SMH note payable
    
    
    
    
    
    
    
    
    
    
    1,500,000Proceeds from short term note payable
    
    
    2,950,000
    
    
    
    545,000
    
    
    
    3,535,000Proceeds from sale of common stock
    
    
    
    
    
    
    
    
    
    
    903,800Proceeds from other notes payable
    
    
    62,710
    
    
    
    178,465
    
    
    
    3,350,038Net proceeds from sale of mandatory redeemable
preferred stock
    
    
    
    
    
    
    
    
    
    
    5,040,033Net proceeds from sale of series B preferred stock
with warrants
    
    
    145,000
    
    
    
    2,259,000
    
    
    
    6,784,073Net proceeds from related party note payable
    
    
    1,270,000
    
    
    
    1,680,000
    
    
    
    3,520,000Net cash provided by financing activities
    
    
    3,331,130
    
    
    
    3,545,643
    
    
    
    22,139,437Net Change in Cash and Cash Equivalents
    
    
    2,465
    
    
    
    48,853
    
    
    
    (25,652
    )Cash and Cash Equivalents, beginning of period
    
    
    4,991
    
    
    
    52,658
    
    
    
    33,108Cash and Cash Equivalents, end of period
    
    $
    7,456
    
    
    $
    101,511
    
    
    $
    7,456
 (Continued)
  5




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Period FromJanuary 1, 2001(inception ofdevelopmentNine-month Periods Ended
    
    
    stage) toSeptember 30,
    
    
    September 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006Non-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 (0 shares; 488,244
shares; and 1,507,419 shares, respectively)
upon conversion of Series A preferred stock
    
    $
    
    
    
    $
    488
    
    
    $
    1,507Issuance of common stock (1,473,332 shares;
1,598,000 shares; and 6,567,332 shares,
respectively) upon conversion of Series B
preferred stock
    
    $
    1,473
    
    
    $
    1,598
    
    
    $
    6,567Issuance of common stock upon conversion of
mandatorily redeemable preferred stock
classified as debt
    
    $
    
    
    
    $
    
    
    
    $
    20,000Reclassification of mandatory redeemable
preferred stock to equity
    
    $
    
    
    
    $
    
    
    
    $
    5,534,000Discount 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
    
    $
    
    
    
    $
    
    
    
    $
    1,291,912Discount related to beneficial conversion of
Series B preferred stock and warrants
    
    $
    37,422
    
    
    $
    2,267,000
    
    
    $
    11,049,615Reclassification of demo units from inventory
to fixed assets
    
    $
    
    
    
    $
    
    
    
    $
    77,475Discount related to stock issued as interest on
notes payable
    
    $
    2,070,000
    
    
    $
    
    
    
    $
    2,070,000Supplemental Disclosure of Cash Flow
Information:Cash paid for interest
    
    $
    190,323
    
    
    $
    52,480
    
    
    $
    371,055
 The accompanying notes are an integral part of these financial statements.
  6




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DRAFT
Remote Knowledge, Inc.
Notes To Condensed Financial Statements
 Note 1  Basis of Presentation
  Note 2  Significant Accounting Policies
 Share-Based Compensation
    Pro-Forma Stock Compensation Expense for the Quarter and Nine Month Period Ended September 30, 2005
   7




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Remote Knowledge, Inc.
Notes To Condensed Financial Statements
 Three Months Ended
    
    
    Nine Months EndedSeptember 30, 2005
    
    
    September 30, 2005Net loss attributable to common shareholders as reported
    
    $
    (2,128,076
    )
    
    $
    (7,437,858
    )Add: Stock-based employee compensation included in
reported net loss
    
    
    5,441
    
    
    
    816,323Deduct: Stock-based employee compensation expense,
determined under fair value method for all awards
    
    
    (63,914
    )
    
    
    (1,038,286
    )Net loss  pro-forma
    
    $
    (2,186,549
    )
    
    $
    (7,659,821
    )Loss per share  basic and diluted, as reported
    
    $
    (0.26
    )
    
    $
    (0.99
    )Loss per share  basic and diluted, pro-forma
    
    $
    (0.26
    )
    
    $
    (1.02
    )
   Stock Options as of the Quarterly Period Ended September 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.
    
    Effective September 7, 2006, the Board of Directors established the Omnibus Stock and
Incentive Compensation Plan 2006 to replace the 2004 Stock Option Plan. The new plan
permits the grant of nonqualified stock options, stock appreciation rights, restricted
stock, restricted stock units, performance shares, and performance units and is available
to Directors, employees and agents of the Company.
   Weighted
    
    
    Weighted AverageAverage
    
    
    Remaining
    
    
    AggregateExercise
    
    
    Contractual Term
    
    
    IntrinsicNumber of Shares
    
    
    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
    
    
    
    6.10Granted
    
    
    100,000
    
    
    
    0.35Exercised
    
    
    (0
    )
    
    
    0.00Canceled or forfeited
    
    
    (0
    )
    
    
    0.00Options outstanding at June 30, 2006
    
    
    6,935,000
    
    
    $
    0.71
    
    
    
    5.83Granted
    
    
    120,000
    
    
    
    0.90Exercised
    
    
    (0
    )
    
    
    0.00Canceled or forfeited
    
    
    (0
    )
    
    
    0.00Options outstanding at September 30, 2006
    
    
    7,055,000
    
    
    $
    0.72
    
    
    
    5.57
    
    
    $
    0Options exercisable at September 30, 2006
    
    
    6,296,666
    
    
    $
    0.72
    
    
    
    5.19
    
    
    $
    0
  8




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Remote Knowledge, Inc.
Notes To Condensed Financial Statements
   Weighted
    
    
    Weighted
    
    
    
    
    
    
    WeightedNumber of
    
    
    Average
    
    
    Average
    
    
    Number of
    
    
    AverageOptions
    
    
    Contractual
    
    
    Exercise
    
    
    Options
    
    
    ExerciseExercise prices
    
    Outstanding
    
    
    Life (in years)
    
    
    price
    
    
    Exercisable
    
    
    Price$0.35
    
    
    100,000
    
    
    
    4.30
    
    
    
    
    
    
    
    00.45
    
    
    240,000
    
    
    
    9.20
    
    
    
    
    
    
    
    65,0000.50
    
    
    3,870,000
    
    
    
    4.63
    
    
    
    
    
    
    
    3,790,0000.80
    
    
    375,000
    
    
    
    8.15
    
    
    
    
    
    
    
    200,0000.90
    
    
    120,000
    
    
    
    4.86
    
    
    
    
    
    
    
    01.00
    
    
    1,850,000
    
    
    
    6.09
    
    
    
    
    
    
    
    1,775,0001.10
    
    
    150,000
    
    
    
    7.85
    
    
    
    
    
    
    
    116,6661.60
    
    
    350,000
    
    
    
    7.52
    
    
    
    
    
    
    
    350,0007,055,000
    
    
    
    5.57
    
    
    $
    0.72
    
    
    
    6,296,666
    
    
    $
    0.72
   Three Months
    
    
    Three Months
    
    
    Nine Months
    
    
    Nine MonthsEnded
    
    
    Ended
    
    
    Ended
    
    
    EndedSeptember 30,
    
    
    September 30,
    
    
    September 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Weighted average grant date fair value
    
    $
    0.83
    
    
    
    NA
    
    
    $
    0.40
    
    
    
    NAWeighed average assumptions used:Volatility
    
    
    185
    %
    
    
    NA
    
    
    
    149
    %
    
    
    NAExpected option term
    
    3 1/2 years
    
    
    NA
    
    
    2 1/2 years
    
    
    NARisk-free interest rate
    
    
    4.9
    %
    
    
    NA
    
    
    
    4.8
    %
    
    
    NAExpected dividend yield
    
    
    0
    %
    
    
    NA
    
    
    
    0
    %
    
    
    NAIntrinsic value of options exercised
or converted
    
    $
    0
    
    
    
    NA
    
    
    $
    0
    
    
    
    NA
 Modifications of Stock Options Granted
  Restricted Stock
   9




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Remote Knowledge, Inc.
Notes To Condensed Financial Statements
 Note 3  Notes Payable
        10




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Remote Knowledge, Inc.
Notes To Condensed Financial Statements
   Note 4  Net Loss Per Common Share
  Note 5  Debt Forgiveness
   11




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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,
    
    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,
  12




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##### Table of Contents




    
    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
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Financial Position
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Results of Operations
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Item 3. Controls and Procedures.
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PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings  None
 
 Item 2. Unregistered Sales of Equity Securities and Issuance of Notes and Use of Proceeds.
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Item 4. Submission of Matters to a Vote of Security Holders
    
 Item 6. Exhibits and Reports on Form 8-K.
  1.
    
    Exhibit 3
    
    Amended and Restated Certificate of Incorporation2.
    
    Exhibit 10.1
    
    Summary of Director Compensation3.
    
    Exhibit 10.2
    
    Bridge Loan Promissory Note in the amount of $250,000 payable to Lewie Ventures, LP4.
    
    Exhibit 10.3
    
    Bridge Loan Promissory Note in the amount of $200,000 payable to Ralph H. Lord5.
    
    Exhibit 10.4
    
    Subscription Agreement for 100 units (Series B Preferred stock and warrants) with
OSA Pension & Trust Eugene F. Morris6.
    
    Exhibit 10.5
    
    Omnibus Stock Plan7.
    
    Exhibit 31.1
    
    Certification required by Section 302 of the Sarbanes-Oxley Act of 20028.
    
    Exhibit 31.2
    
    Certification required by Section 302 of the Sarbanes-Oxley Act of 20029.
    
    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: November 10, 2006
    By:
    /s/ D. Henry HoustonD. Henry HoustonChief Financial and Accounting Officer  19




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##### Table of Contents



EXHIBIT INDEX
 ExhibitNo.
    
    DescriptionExhibit 3
    
    Amended and Restated Certificate of IncorporationExhibit 10.1
    
    Summary of Director CompensationExhibit 10.2
    
    Bridge Loan Promissory Note in the amount of $250,000 payable to Lewie Ventures, LPExhibit 10.3
    
    Bridge Loan Promissory Note in the amount of $200,000 payable to Ralph H. LordExhibit 10.4
    
    Subscription Agreement for 100 units (Series B Preferred stock and warrants) with
OSA Pension & Trust Eugene F. MorrisExhibit 10.5
    
    Omnibus Stock PlanExhibit 31.1
    
    Certification required by Section 302 of the Sarbanes-Oxley Act of 2002Exhibit 31.2
    
    Certification required by Section 302 of the Sarbanes-Oxley Act of 2002Exhibit 32
    
    Certification required by Section 906 of the Sarbanes-Oxley Act of 2002
  20