U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(MARK ONE)
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 -
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2006
( ) TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE EXCHANGE ACT OF
1934
FOR THE TRANSITION PERIOD FROM ______________TO_______________
COMMISSION FILE NUMBER 0-25380
ULTRADATA SYSTEMS, INCORPORATED
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(Exact name of small business issuer as specified in its charter)
Delaware 43-1401158
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1240 Dielman Industrial Court, St. Louis, MO 63132
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (314) 991-8494
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15 (d) of the Securities Exchange Act during the past 12
months (or for such shorter period that the registrant was required to file
such reports) and (2) has been subject to such filing requirements for the
past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act) Yes [ ] No [X]
State the number of shares outstanding of each of the issuer's classes
of common equity as of the latest practicable date.
Class Outstanding as of November 6, 2006
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Common, $.01 par value 17,548,665
Transitional Small Business Disclosure Format Yes [ ] No [X]
File Number
0-25380
ULTRADATA SYSTEMS, INCORPORATED
FORM 10-QSB
September 30, 2006
INDEX
PART I - FINANCIAL INFORMATION PAGE
Item 1. Condensed Unaudited Financial Statements
Condensed Balance Sheets at September 30, 2006
(consolidated and unaudited) and December 31, 2005 3.
Condensed Statements of Operations for the three months
and nine months ended September 30, 2006 (consolidated
and unaudited) and 2005 (unaudited) 4.
Condensed Statements of Cash Flows for the nine months
ended September 30, 2006 (consolidated and unaudited)
and 2005 (unaudited) 5.
Notes to Condensed Consolidated Financial Statements
(unaudited) 6.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9.
PART II - OTHER INFORMATION 13.
Signatures 13.
Exhibits 13.
ULTRADATA SYSTEMS, INCORPORATED, AND SUBSIDIARY
Condensed Balance Sheets
As of September 30, 2006 (Consolidated) (unaudited) and December 31, 2005
September 30, December 31,
2006 2005
--------------- -------------
(Consolidated)
Assets (Unaudited)
Current assets:
Cash $ 42,679 $ 133,524
Trade accounts receivable, net of
allowance for doubtful accounts
of $100 16,259 96,910
Inventories, net 70,309 86,314
Prepaid expenses 2,614 39,144
-------- --------
Total current assets 131,861 355,892
-------- --------
Property and equipment, net 22,310 33,251
Other assets - 5,444
-------- --------
Total assets $ 154,171 $ 394,587
======== ========
Liabilities and Stockholders' Deficiency
Current liabilities:
Accounts payable 117,013 200,172
Accrued liabilities 308,685 177,687
Notes payable 114,039 119,993
Derivative and warrant liability - 4,816,193
-------- ---------
Total current liabilities 539,737 5,314,045
-------- ---------
Total liabilities 539,737 5,314,045
Redeemable Preferred Stock Series B
convertible preferred stock, 210,000
shares authorized and outstanding
with a stated value of $1,050 1,050 -
Series C convertible preferred stock,
150,000 shares authorized, with a
stated value of $750
100,000 shares outstanding 500 -
Stockholders' deficiency:
Preferred Stock, $0.01 par value,
4,636,680 shares authorized, none
outstanding - -
Common stock, $.01 par value;
50,000,000 shares authorized;
17,548,665 and 8,341,343 shares
issued and outstanding 175,487 83,413
Additional paid-in capital 13,852,273 9,528,366
Accumulated deficit (14,414,876) (14,531,237)
---------- ----------
Total stockholders' deficiency (387,116) (4,919,458)
---------- ----------
Total liabilities and stockholders'
deficiency $ 154,171 $ 394,587
========== ==========
See accompanying summary of accounting policies and notes to financial
statements.
ULTRADATA SYSTEMS, INCORPORATED, AND SUBSIDIARY
Condensed Statements of Operations
For the three and nine months ended September 30, 2006 (Consolidated and
unaudited) and 2005 (unaudited)
Three months ended Nine months ended
September 30, September 30,
2006 2005 2006 2005
-----------------------------------------------------
Net sales $ 7,827 $ 140,119 $ 138,185 $ 335,288
Cost of sales 40,714 110,892 112,146 199,395
--------- --------- --------- ---------
Gross profit (loss) (32,887) 29,227 26,039 135,893
Selling expense 402 61,388 34,591 209,418
General and
administrative expenses 100,507 247,091 434,365 608,958
Research and development
expense 923 93,801 59,505 219,795
--------- --------- --------- ---------
Total operating expenses 101,832 402,280 528,461 1,038,171
--------- --------- --------- ---------
Operating loss (134,719) (373,053) (502,422) (902,278)
Other income (expense):
Interest and dividend
income 25 82 168 597
Interest expense - (80,550) (163,044) (101,963)
Fair Value expense - - 782,212 -
Royalty income - 44,800 - 84,800
Settlement of legal
dispute - - - 13,844
Other, net (553) 1 (553) 65
--------- --------- --------- ---------
Total other (expense)
income, net (528) (35,667) 618,783 (2,657)
--------- --------- --------- ---------
(Loss) earnings income
before income taxes (135,247) (408,720) 116,361 (904,935)
Income tax - - - -
--------- --------- --------- ---------
Net (loss) income $ (135,247) $ (408,720) $ 116,361 $ (904,935)
========= ========= ========= =========
(Loss) earnings per
share - basic $ (0.01) $ (0.06) $ 0.01 $ (0.14)
========= ========= ========= =========
(Loss) earnings per
share - fully diluted $ (0.01) $ (0.06) $ 0.01 $ (0.14)
========= ========= ========= =========
Weighted Average Shares
Outstanding - Basic 17,548,665 6,587,587 12,239,245 6,470,168
========== ========= ========== =========
Weighted Average Shares
Outstanding:
Fully diluted 17,548,665 6,587,587 12,239,245 6,470,168
========== ========= ========== =========
See accompanying summary of accounting policies and notes to financial
statements.
ULTRADATA SYSTEMS, INCORPORATED, AND SUBSIDIARY
Condensed Statements of Cash Flows
Nine months ended September 30, 2006 (Consolidated and unaudited) and 2005
(unaudited)
2006 2005
------------- -------------
(unaudited) (unaudited)
Cash flows from operating activities:
Net income (loss) $ 116,361 $ (904,935)
Adjustments to reconcile net income
(loss) to net cash used in operating
activities:
Depreciation and amortization 10,378 12,171
Loss on disposal of asset 563 -
Provision for doubtful accounts (5,141) (176,104)
Reserve for inventory impairment 6,855 9,597
Stock issued for services 1,550 117,430
Non-cash derivitive liability (782,212) -
Non-cash amortization of note payable
discount 158,507 96,800
Increase (decrease) in cash due to
changes in operating assets and
liabilities:
Trade accounts receivable 85,791 162,502
Inventories 9,150 (79,320)
Prepaid expenses and other current
assets 36,530 (27,686)
Accounts payable (83,158) 18,332
Accrued expenses 130,998 -
Other 5,444 67,561
-------- --------
Net cash used in operating activities (308,384) (703,652)
-------- --------
Cash flows from investing activities:
Capital expenditures - (816)
-------- --------
Net cash used in investing activities - (816)
-------- --------
Cash flows from financing activities:
Sale of preferred stock 210,000 -
Proceeds from sale of convertible
debentures - 300,000
Advance on future debenture conversion - 60,000
Note payable - Short term 114,039 -
Principal payments on notes payable (106,500) -
-------- --------
Net cash provided by financing activities 217,539 360,000
-------- --------
Net decrease in cash (90,845) (344,468)
Cash at beginning of period 133,524 385,966
-------- --------
Cash at end of period $ 42,679 $ 41,498
======== ========
During the nine months ended September 30, 2006, the Company issued
9,207,322 shares of common stock to satisfy convertible debt aggregating
$172,000.
See accompanying summary of accounting policies and notes to condensed
financial statements.
ULTRADATA SYSTEMS, INCORPORATED, AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements
September 30, 2006 (Unaudited)
Basis of Presentation
The accompanying interim condensed financial statements included
herein have been prepared by Ultradata Systems, Incorporated (the
"Company"), without audit in accordance with generally accepted
accounting principles and pursuant to the rules and regulations of the
Securities and Exchange Commission for interim financial information.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such
rules and regulations, although the Company believes that the
disclosures made are adequate to make the information presented not
misleading.
In the opinion of management, the information furnished for the
three-month and nine-month periods ended September 30, 2006 and 2005,
respectively, includes all adjustments, consisting solely of normal
recurring accruals necessary for a fair presentation of the financial
results for the respective interim periods and is not necessarily
indicative of the results of operations to be expected for the entire
fiscal year ending December 31, 2006. It is suggested that the interim
financial statements be read in conjunction with the audited financial
statements for the year ended December 31, 2005, as filed with the
Securities and Exchange Commission on Form 10-KSB (Commission File
Number 0-25380).
Cash
Cash includes deposits at financial institutions with maturities
of three months or less. The Company at times has cash in banks in
excess of FDIC insurance limits and places its temporary cash
investments with high credit quality financial institutions. At
September 30, 2006, the Company had no amounts in excess of the FDIC
insured limits.
Income Tax
The Company accounts for income taxes under the Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes",
("SFAS 109"). Under SFAS 109, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and tax
credit carry-forwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years
in which those temporary differences are expected to be recovered or
settled. Under SFAS 109, the effect on deferred tax assets and
liabilities of a change in tax rates is recognized income in the period
that includes the enactment date.
Inventories
Inventories are valued at the lower of cost or market. Cost is
determined using the first-in, first-out (FIFO) method. Provision for
potentially obsolete or slow moving inventory is made based on
management's analysis of inventory levels and future sales forecasts.
ULTRADATA SYSTEMS, INCORPORATED, AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements
September 30, 2006 (Unaudited)
Recent Pronouncements
SFAS 155, Accounting for Certain Hybrid Financial Instruments and
SFAS 156, Accounting for Servicing of Financial Assets were recently
issued. SFAS 155 and 156 have no current applicability to the Company
and have no effect on the financial statements.
Principles of Consolidation
The 2006 consolidated financial statements include the accounts of
Ultradata Systems, Incorporated, and its wholly-owned subsidiary, RW
Data, Inc. (June 1, 2006, inception). The 2005 financial statements
include Ultradata Systems, Incorporated. All significant intra-company
accounts and transactions have been eliminated in consolidation.
Ultradata Systems, Inc. and RW Data, Inc. are hereafter referred to as
the "Company".
Use of Estimates
The financial statements have been prepared in conformity with
generally accepted accounting principles and, as such, include amounts
based on informed estimates and adjustments by management, with
consideration given to materiality. Actual results could vary from those
estimates.
Note 1. Inventories
Inventories consist of the following:
September 30, December 31,
2006 2005
------------ ------------
Raw Materials, net of obsolete $ 5,602 $ 9,664
Finished Goods, net of obsolete 64,707 76,649
------- -------
Total $ 70,309 $ 86,313
======= =======
Obsolete inventory on hand $228,600 $712,062
Note 2. Prepaid Expenses
Prepaid expenses consist of the following:
September 30, December 31,
2006 2005
------------ ------------
Prepaid insurance $ 2,615 $ 6,752
Prepaid expenses - 32,392
------- -------
$ 2,615 $ 39,144
======= =======
ULTRADATA SYSTEMS, INCORPORATED, AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements
September 30, 2006 (Unaudited)
Note 3. Income (Loss) Per Share
For the three months For the nine months
ended September 30, ended September 30,
2006 2005 2006 2005
---------------------- ---------------------
Basic
Numerator:
Net (loss) income $(135,247) $(408,720) $(116,361) $(904,935)
Numerator for basic income
(loss) per share $(135,247) $(408,720) $(116,361) $(904,935)
Denominator:
Weighted average common
shares 17,548,655 6,587,587 12,239,245 6,470,168
Denominator for basic
income (loss) per share 17,548,655 6,587,587 12,239,245 6,470,168
Basic income (loss) per share $ (0.01) $ (0.06) $ (0.01) $ (0.14)
Fully Diluted Numerator:
Net income (loss) $(135,247) $(408,720) $(116,361) $(904,935)
Numerator for fully diluted
income (loss) per share $(135,247) $(408,720) $(116,361) $(904,935)
Denominator:
Weighted average common
shares 17,548,655 6,587,587 12,239,245 6,470,168
Common stock equivalents - - - -
Denominator for fully
diluted income (loss)
per share 17,548,655 6,587,587 12,239,245 6,470,168
Fully diluted income (loss)
per share $ (0.01) $ (0.06) $ (0.01) $ (0.14)
Note 4. Convertible Debentures
To obtain funding for ongoing operations, the Company entered into
a Securities Purchase Agreement (the SPA) and various amendments to the
SPA with Golden Gate Investors, Inc. (GGI) on February 14, 2005 for the
sale of (i) $300,000 in unsecured convertible debentures (the Notes) and
(ii) warrants to purchase 300,000 shares of the Company's common stock.
The Notes bore interest at 4.75% per annum, matured three years
from the date of issuance and were convertible into the number of shares
of the Company's common stock equal to the dollar amount of the Notes
being converted multiplied by 11, less the product of the conversion
formula multiplied by 10 times the dollar amount of the Notes being
converted, which is divided by the conversion formula. The conversion
formula was the lesser of (a) $1.25, (b) eighty percent of the average
of the three lowest volume weighted average prices during the twenty
trading days prior to the conversion. Accordingly, there was no limit
on the number of shares into which the Notes may be converted.
ULTRADATA SYSTEMS, INCORPORATED, AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements
September 30, 2006 (Unaudited)
The Notes included certain features that are considered embedded
derivative financial instruments, such as the conversion feature, events
of default and a variable liquidated damages clause. These features are
described below, as follows:
- The Notes' conversion feature is identified as an embedded
derivative and has been bifurcated and recorded on the Company's
balance sheet at its fair value;
- The SPA includes a penalty provision based on any failure to meet
registration requirements for shares issuable under the conversion
of the Notes or exercise of the warrants, which represents an
embedded derivative, but such derivative has a de minimus value
and has not been recorded in the accompanying financial
statements; and
- The SPA contains certain events of default including not having
adequate shares registered to effectuate allowable conversions; in
that event, the Company is required to pay a conversion default
payment at 125% of the then outstanding principal balance on the
Notes, which is identified as an embedded derivative, but such
derivative has a de minimus value and has not been recorded in the
accompanying consolidated financial statements.
In conjunction with the Notes, the Company issued warrants to
purchase 300,000 shares of common stock. The accounting treatment of the
derivatives and warrants requires that the Company record the warrants
at their fair values as of the inception date of the agreement, which
totaled $600.
The initial fair value assigned to the embedded derivatives and
warrants was $5,957,188. The Company recorded the first $300,000 of
fair value of the derivatives and warrants to debt discount which will
be amortized to interest expense over the term of the Notes. The
Company recorded an amortization expense for the three months ended
March 31, 2006 of $34,339. During the quarter ending June 30, 2006, no
such amortization expense was incurred
The market price of the Company's common stock significantly
impacts the extent to which the Company may be required or may be
permitted to convert the unrestricted and restricted portions of the
Notes into shares of the Company's common stock. The lower the market
price of the Company's common stock at the respective times of
conversion, the more shares the Company will need to issue to convert
the principal and interest payments then due on the Notes. If the market
price of the Company's common stock falls below certain thresholds, the
Company will be unable to convert any such repayments of principal and
interest into equity, and the Company will be forced to make such
repayments in cash. The Company's operations could be materially
adversely impacted if the Company was forced to make repeated cash
payments on the Notes.
ULTRADATA SYSTEMS, INCORPORATED, AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements
September 30, 2006 (Unaudited)
During the 3-month period ending June 30, 2006, conversions of
$100,000 of the debenture resulted in eliminating the Fair Value
liability taken in 2005 in accordance with guidance provided in EITF 00-
19:
Note payable as of 12/31/2005 $ 278,500
Conversions during the first quarter 2006 72,000
Conversions during the second quarter 2006 100,000
Note payable principal balance paid in cash in
second quarter 2006 106,500
Discount on note payable -
Note payable - net -
Amortized amount charged to interest 52,280
Initial (non-cash) fair-value charge $ 4,816,193
Reduction in liability due to first quarter
conversions 1,245,120
Reduction in liability due to second quarter
conversions 2,788,861
---------
Gain from reduction in fair-value liability 782,212
=========
On June 8, 2006 the Company fully satisfied the Notes by a
payment of $106,612.40, which equaled the remaining principal balance
and accrued interest on that date. In connection with that payment,
Golden Gate Investors, Inc. agreed to a termination of the Warrant to
Purchase Common Stock that had been linked to the Debenture.
Note 5. Note Payable
Since May 2006, cash advances have been provided by our supplier
Sweda to allow the Company to buy product and continue operations during
this transition period. The Company issued a note payable to Sweda,
which is to be repaid from proceeds of the sale of the assets of the RW
Data subsidiary of the Company when that occurs. The note is non-
interest-bearing, is due and payable December 31, 2006, and is secured
by the assets of the Company. The loan balance as of September 30,
2006, was $114,039.
Note 6. Preferred Stock
On June 6, the Company filed with the Delaware Secretary of State
a Certificate of Designation of 210,000 shares of Series B Preferred
Stock. The holder of the Series B shares will be entitled to cast 51%
of the votes at any shareholders meeting. The holder will be entitled
to convert the Series B stock into 10% of the outstanding shares of
Ultradata common stock, but only if Ultradata has acquired an operating
company during 2006. Otherwise the Series B Preferred Stock will be
redeemed automatically for a price of $.001 per share on December 31,
2006. In the event the Company declares a dividend, the holder of a
share of Series B Preferred Stock will receive the same dividend as the
holder of a share of common stock. In the event of a liquidation of the
Company, the holder of a share of Series B Preferred Stock will receive
$.005 per share before any distribution is made to the holders of common
stock, and will then share in the distribution on a pari passu basis.
On June 6, the Company filed with the Delaware Secretary of State
a Certificate of Designation of 150,000 shares of Series C Preferred
Stock. The holder of the Series C shares will not be entitled to cast
votes at any shareholders meeting. The holder will be entitled to
convert the Series C stock into 2% of the outstanding shares of
Ultradata common stock, but only if Ultradata has acquired an operating
company during 2006. Otherwise the Series C Preferred Stock will be
redeemed automatically for a price of $.001 per share on December 31,
2006. In the event the Company declares a dividend, the holder of a
share of Series C Preferred Stock will receive the same dividend as the
holder of a share of common stock. In the event of a liquidation of the
Company, the holder of a share of Series C Preferred Stock will receive
$.005 per share before any distribution is made to the holders of common
stock, and will then share in the distribution on a pari passu basis.
ULTRADATA SYSTEMS, INCORPORATED, AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements
September 30, 2006 (Unaudited)
Note 7. Financing Activity
On June 1, 2006 Ultradata entered into a group of agreements. The
purpose of the agreements is to fund Ultradata's ongoing operations and
enable Ultradata to acquire a new business under new management. The
business that will be acquired has not yet been determined.
Under the primary agreement on June 1, 2006 Ultradata sold to
Warner Technology & Investment Corp. ("Warner Technology") 210,000
shares of Series B Preferred Stock for $210,000 in cash paid on that
date. In connection with the purchase by Warner Technology of the
Series B Preferred Stock, the present directors of Ultradata elected to
the Board a designee of Warner Technology and submitted their
resignations from the Board, effective June 30, 2006. After that change
of control, Warner Technology and its designee to the Board bear
responsibility for negotiating the acquisition of an operating company.
The Certificate of Designation of the Series C stock provides, however,
that no corporation acquisition can be completed without the approval of
the holders of the Series C stock - i.e. the Managers (identified
below). In the Management Agreement, the Managers agreed that they will
approve any corporate acquisition in which (a) the acquired company had
not less than $2.5 million in revenue and not less than $700,000 in net
pre-tax income in the year ended September 30, 2005, (b) the
shareholders of Ultradata at the time of the merger and the holders of
the Series C Preferred Stock will, on closing of the acquisition, own
not less than five percent of the equity in Ultradata, and (c) there are
no other material terms of the corporate acquisition that are
objectionable to the Managers.
Also on June 1, 2006, Ultradata entered into an Assignment and
Assumption Agreement, which effected the transfer of all of Ultradata's
operating assets to a wholly-owned subsidiary named "RW Data, Inc." In
the same agreement, RW Data agreed to pay all of Ultradata's debts and
obligations existing on June 1, 2006.
On the same date Ultradata and RW Data entered into a Management
Agreement with Monte Ross, Ernest Clarke and Mark Peterson (the
"Managers"), who were officers and members of Ultradata's Board of
Directors prior to June 30, 2006. All directors of Ultradata resigned,
and a designee of Warner Technology became the sole director. The
Managers agreed to the termination of their employment agreements with
Ultradata, and that they would instead assume responsibility for the
management of RW Data, Inc. The Managers undertake to use their best
efforts to effect a sale of the assets of RW Data during 2006. In
consideration for their commitment, Ultradata issued to the Managers a
total of 100,000 shares of Series C Preferred Stock and granted them
options to purchase a total of 50,000 additional Series C shares for
$150,000.
The Managers will be able to convert the Series C Preferred Stock
into 2% of the outstanding Ultradata shares (3% if they exercise the
option for additional Series C shares), but only if Ultradata has
acquired an operating company during 2006. Otherwise the Series C
Preferred Stock will be cancelled. If the 100,000 shares of Series C
Preferred Stock are converted into common stock, the Managers will be
entitled to sell the shares to Ultradata after April 1, 2007 for a price
equal to the sum of $275,000 less all liabilities of RW Data at December
31, 2006 and all liabilities of Ultradata that existed on June 1, 2006
and remain on the balance sheet on December 31, 2006. In the event that
the afore-mentioned liabilities exceed $275,000, then the Managers will
be required to surrender one Series C share for each $2.75 of excess
liabilities.
Note 8. Contingency
On August 9, 2006 a lawsuit was commenced in the Superior Court of
the State of California against Ultradata and its previous Chief
Executive Officer and Chief Financial Officer, among other defendants.
The complaint alleged that the defendants conspired to sell the
AutoPilot Talking Road Navigator(tm) in the State of California by means of
false advertising. The complaint asserts claims under California laws
against false advertising and unfair competition, as well as under
California consumer protection statutes. The complaint seeks restitution,
compensatory damages and punitive damages of an unspecified amount as of
September 30, 2006. Ultradata and its management are evaluating the
complaint and the extent to which indemnity for the claim is available
from Ultradata's insurance carrier.
Note 9. Going Concern
As reflected in the accompanying financial statements, for the
three months ended September 30, 2006 the Company had an operating loss
of $133,170 and a negative cash flow from operations of $308,384 for the
nine months ended September 30, 2006. At September 30, 2006, it had a
working capital deficiency of $407,876, and a stockholders' deficiency
of $387,116. As a result of its financing activities (see Notes 5 and
7), the Company has had an infusion of capital from its supplier, Sweda,
and from the sale of Series B Preferred Stock. Consequently, Management
believes the Company has access to sufficient resources to continue
operations throughout the transition period begun with the signing of
the agreements outlined in Note 7.
Note 10. Subsequent Events
Subsequent to September 30, 2006, the Company received $40,000
from Sweda, Ltd. related to the note payable disclosed in Note 5.
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
YOU SHOULD NOT RELY ON FORWARD LOOKING STATEMENTS
This quarterly report contains a number of forward-looking
statements regarding our future prospects. Among the forward-looking
statements are descriptions of our plans to acquire a new operating
company, to sell our existing operations, and to return our company to
profitability. These forward-looking statements are a true statement of
our present intentions, but are neither predictions of the future nor
assurances that any of our intentions will be fulfilled. Many factors
beyond our control could act against Ultradata in its efforts to
implement this plan. Among these factors are:
* The fact that we may not be able to complete a satisfactory
acquisition within the time limits set in the June 2006
agreement.
* The fact that we may not be able to sell our current operations
on satisfactory terms.
* The fact that, if we continue in the current business beyond
2006, our financial resources will be insufficient to sustain us.
There may also be factors that we have not foreseen which could
interfere with our plans. In addition, changing circumstances may cause
us to determine that a change in plans will be in the best interests of
Ultradata. For the reasons given, there is a significant risk that we
will not be able to fulfill our expectations for Ultradata.
OVERVIEW
The Company's mission since 1987 has been to aid the road traveler
with useful information with products easy to use and affordable in
price. For almost 20 years we have been engaged in the business of
manufacturing and marketing handheld computers that provide travel
information. The products are based upon a data compression technology
that we developed, portions of which we have patented. Recent
developments in communications and speech technology have opened up new
opportunities for us to integrate our technology and create new products
merging these technologies with our own. These new products are
consistent with our goal of improved ease of use by the consumer. In
2005, development of the Road Genie Audio Navigation System was
accomplished. We also have developed a low-cost voice-controlled audio
recorder for automobile use using the same voice-recognition technology.
Production of this unit was initiated in the first quarter of 2006.
Availability for sale depends on obtaining commitments sufficient to
complete production.
The Company has sold over 3 million of its low-cost handheld
travel computers, demonstrating that there is a market for travel
information products. To re-awaken that market with an improved product
that speaks, the Company has developed a Talking Road WhizTM.
Significant deliveries of this product began in September of 2003 and,
the Company received significant revenue in the last four months of 2003
from sales of this new addition to its product line. This success
continued in the first two quarters of 2004, which have traditionally
been weak quarters for Ultradata. Our growth was stalled, however, in
the second half of 2004, when our primary distributor and one
significant customer both ceased placing orders. We engaged in efforts
to replace those sales lost in 2005 but without success, although sales
of the product continue in the same channels as in 2005. More broadly,
the Company is completing development of a Cellular Road Whiz
application using our proprietary database and enabling access via a
cell phone rather through separate hardware. Users who subscribe to our
service can get not only information about services along their route
with directions and distance from their location but, in addition, can
obtain fuel prices in real time and select their stop on that basis. We
started tests of the system in June 2006.
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In the Spring of 2006 Management determined that the Company was
unlikely to obtain the funding necessary to carry out its plans for
launching new products. Accordingly, in June 2006 we commenced an
initiative whose goal is to (a) acquire a new operating company and (b)
dispose of our current operations. Towards that end we sold a
controlling interest in Ultradata to Warner Technology, subject to a
provision that Warner Technology will lose its shares if Ultradata has
not completed a satisfactory acquisition by the end of 2006. We also
transferred our operating assets to a wholly-owned subsidiary, and
entered into an agreement with members of our Management that charges
them with responsibility for obtaining a buyer for those operations. To
date no transaction of the sort contemplated in the June 2006 activities
has been completed.
RESULTS OF OPERATIONS
Three and Nine Months Ended September 30, 2006 Compared to Three
and Nine Months Ended September 30, 2005
Operating results for the three- and nine-month periods ended
September 30, 2006, were significantly below those of the same periods
in 2005.
Sales. During the three and nine months ended September 30, 2006,
net sales totaled $7,827 and $138,185, respectively, compared with
$140,119 and $335,288, respectively, for the same periods in 2005. The
reduction in 2006 was primarily due to a lack of sales to large
retailers and a lack of significant sales through QVC during this period
of transition.
Backlog. As of September 30, 2006, the Company had no backlog. On
September 30, 2005 we had a backlog of $300,204.
Gross Profit. Gross profit margin for the three-month period
ending September 30, 2006 was negative due to the write-off of a deposit
for electronic parts to guarantee a minimum purchase that will not be
realized in our current business climate. The nine-month period was
negatively affected as well, with gross margin as a percent of sales
equaling 18.8% compared with gross margin in the corresponding period of
2005 of 40.5% of sales.
S,G&A Expense. Selling expenses for the three- and nine-month
periods ended September 30, 2006 were $402 and $34,591, respectively,
compared with $61,388 and $209,418, respectively, for the corresponding
periods in 2005. These figures reflect the elimination of sales
activity due to lack of funds.
General and administrative expenses for the three- and nine-month
periods ended September 30, 2006 were $100,507 and $434,365,
respectively, compared with $247,091 and $608,958, respectively, for the
corresponding periods in 2005. These comparisons also reflect the
reduction of expenses due to our lack of funds.
R&D Expense. Research and development expenses in the three- and
nine-month periods ended September 30,2006 were $923 and $59,505,
respectively, as compared to $93,801 and $219,795, respectively, for the
same periods in 2005. These decreases also reflect the cessation of R&D
activity in the transition period.
The Company recognized a loss from operations of ($134,719) and
($502,422) for the three- and nine-month periods ended September 30,
2006, respectively, compared to ($373,053) and ($902,278) for the
corresponding periods in 2005.
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Other Income (Expense). Other income for the three- and nine-
month periods ended September 30, 2006 totaled ($528) and $618,783,
respectively, compared with ($35,667) and ($2,657), respectively, for
the corresponding periods of 2005. The nine-month 2006 numbers included
a non-cash gain due to the reversal of most of the non-cash Fair Value
expense incurred in the fourth quarter of 2005 due to the Golden Gate
Investors convertible debenture (see Note 6). These debentures were
completely retired in June 2006 through conversions and a cash payment
as described in the note.
As a result of the foregoing, the Company realized a net loss of
($135,247), or ($0.01) per basic and diluted common share, for the
three-month period ended September 30, 2006, compared to ($408,720), or
($0.06) per basic and diluted common share, for the three-month period
ended September 30, 2005. The Company realized a net income of
$116,361, or $0.01 per basic and diluted common share, for the nine-
month period ended September 30, 2006, compared to a net loss of
($904,935), or ($0.14) per basic and diluted common share, for the six-
month period ended September 30, 2005.
FINANCIAL CONDITION AND LIQUIDITY
At September 30, 2006, the Company had $42,679 in cash, compared
to $133,524 at December 31, 2005. The Company's operating activities in
the nine months ended September 30, 2006 used cash totaling ($308,384)
as compared to ($703,652) during the same period in 2005.
No cash was used in investing activities for the six-month period
ended September 30, 2006, compared to ($816) in the same period in 2005.
Cash provided by financing activities for the nine-month period
ended September 30, 2006 was $217,539 compared to $360,000 in the same
period in 2005. The 2006 amount resulted from loans and proceeds from
sale of preferred stock (see Note 7).
As a result of our present business situation, our recent net
losses, and our negative cash flow, our auditor has expressed
substantial doubt in its opinion on our December 31, 2005 financial
statements regarding our ability to continue as a going concern.
Management believes that the financing described in Notes 5 and 7 above
will provide sufficient resources to complete the actions outlined in
the agreements itemized in Note 7 but insufficient resources for
operations for the next 12 months.
SFAS 155, Accounting for Certain Hybrid Financial Instruments and
SFAS 156, Accounting for Servicing of Financial Assets were recently
issued. SFAS 155 and 156 have no current applicability to the Company
and have no effect on the financial statements.
ITEM 3. Controls and Procedures
Evaluation of Disclosure Controls and Procedures: As of September
30, 2006, the Company's management carried out an evaluation, under the
supervision of the Company's Chief Executive Officer and the Chief
Financial Officer, of the effectiveness of the design and operation of
the Company's system of disclosure controls and procedures pursuant to
the Securities and Exchange Act, Rule 13a-15(e) and 15d-15(e) under the
Exchange Act). Based upon that evaluation, the Chief Executive Officer
and Chief Financial Officer concluded that the Company's disclosure
controls and procedures are effective to provide reasonable assurance
that information we are required to disclose in reports that we file or
submit under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in Securities and Exchange
Commission rules and forms, and that such information is accumulated and
communicated to our management, including our chief executive officer
and chief financial officer, as appropriate, to allow timely decisions
regarding required disclosure.
Changes in internal controls: There were no changes in internal
controls over financial reporting that occurred during the period
covered by this report that have materially affected, or are reasonably
likely to materially effect, our internal control over financial
reporting.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings:
On August 9, 2006 a lawsuit was commenced in the Superior Court of
the State of California against Ultradata and its previous Chief
Executive Officer and Chief Financial Officer, among other defendants.
The complaint alleged that the defendants conspired to sell the
AutoPilot Talking Road Navigator(tm) in the State of California by means of
false advertising. The complaint asserts claims under California laws
against false advertising and unfair competition, as well as under
California consumer protection statutes. The complaint seeks
restitution, compensatory damages and punitive damages. Ultradata and
its management are evaluating the complaint and the extent to which
indemnity for the claim is available from Ultradata's insurance carrier.
Item 2. Changes in Securities and Small Business Issuer Purchases of
Equity Securities:
None
Item 3. Defaults upon Senior Securities:
None
Item 4. Submission of Matters to a Vote of Security Holders:
None
Item 5. Other Information: Change in Management
None
Item 6. Exhibits:
Exhibits:
31 Rule 13a-14(a) Certification.
32 Rule 13a-14(b) Certification.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
November 6, 2006 /s/ Huakang Zhou
------------------------
Huakang Zhou
(Chief executive officer and chief
financial officer)