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 MARCH 31, 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) 997-2250
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 [X] No [ ]
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 May 18, 2006
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Common, $.01 par value 15,998,278
Transitional Small Business Disclosure Format Yes [X] No [ ]
File Number
0-25380
ULTRADATA SYSTEMS, INCORPORATED
FORM 10-QSB
March 31, 2006
INDEX
PART I - FINANCIAL INFORMATION
PAGE
Item 1. Condensed Financial Statements
Condensed Balance Sheets as of
March 31, 2006 (unaudited) and December 31, 2005 3.
Condensed Statements of Operations for the three
months ended March 31, 2006 and 2005 (unaudited) 4.
Condensed Statements of Cash Flows for the three
months ended March 31, 2006 and 2005 (unaudited) 5.
Notes to Condensed Financial Statements (unaudited) 6.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8.
PART II - OTHER INFORMATION 11.
Signatures 11.
ULTRADATA SYSTEMS, INCORPORATED
Condensed Balance Sheets
As of March 31, 2006 (unaudited) and December 31, 2005
March 31, December 31,
2006 2005
----------- ------------
(Unaudited)
Assets
Current assets:
Cash $ 21,028 $ 133,524
Trade accounts receivable, net of
allowance for doubtful accounts of $100 15,597 96,910
Inventories, net 68,945 86,314
Prepaid expenses 42,900 39,144
--------- ---------
Total current assets 148,470 355,892
Property and equipment, net 29,069 33,251
Notes receivable - long term - -
Other assets 5,444 5,444
--------- ---------
Total assets $ 182,983 $ 394,587
========= =========
Liabilities and Stockholders' Deficiency
Current liabilities:
Accounts payable $ 128,113 $ 200,172
Accrued liabilities 242,519 177,687
Notes payable 154,332 119,993
Derivative and warrant liability 3,571,073 4,816,193
--------- ---------
Total current liabilities 4,096,037 5,314,045
--------- ---------
Total liabilities 4,096,037 5,314,045
Stockholders' deficiency:
Preferred Stock, $0.01 par value, 4,996,680
shares authorized, none outstanding - -
Series A convertible preferred stock,
3,320 shares authorized with a stated value
of $1,000, none outstanding - -
Common stock, $.01 par value; 50,000,000
shares authorized; 8,341,343 and 11,530,164
shares issued and outstanding 115,301 83,413
Additional paid-in capital 10,813,597 9,528,366
Accumulated deficit (14,841,952) (14,531,237)
---------- ----------
Total stockholders' deficiency (3,913,054) (4,919,458)
---------- ----------
Total liabilities and stockholders'
deficiency $ 182,983 $ 394,587
========== ==========
See accompanying summary of accounting policies and notes to financial
statements.
-3-
ULTRADATA SYSTEMS, INCORPORATED
Condensed Statements of Operations
For the three months ended March 31, 2006 and 2005
(unaudited)
2006 2005
------- -------
Net sales $ 85,326 $ 83,825
Cost of sales 50,394 43,902
-------- --------
Gross profit 34,932 39,923
Selling expense 17,303 22,410
General and administrative expenses 175,764 99,584
Research and development expense 43,263 35,201
-------- --------
Total operating expenses 236,330 157,195
-------- --------
Operating loss (201,398) (117,272)
-------- --------
Other income (expense):
Interest and dividend income 130 379
Interest expense (109,447) (6,758)
Other, net - 50
-------- --------
Total other expense (109,317) (6,329)
-------- --------
Loss before income tax expense (310,715) (123,601)
Income tax expense - -
-------- --------
Net loss $(310,715) $(123,601)
======== ========
Loss per share:
Basic and fully diluted $ (0.03) $ (0.02)
======== ========
Weighted Average Shares Outstanding:
Basic 8,930,617 6,410,187
========= =========
See accompanying summary of accounting policies and notes to financial
statements.
-4-
ULTRADATA SYSTEMS, INCORPORATED
Condensed Statements of Cash Flows
For the three months ended March 31, 2006 and 2005
(unaudited)
2006 2005
----------- -----------
Cash flows from operating activities:
Net (loss) income $ (310,715) $ (123,601)
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 4,182 4,461
Provision for doubtful accounts 25 (176,282)
Stock issued for services - 43,485
Reserve for inventory impairment 4,138 3,489
Non-cash Amortization of note payable discount 106,338 6,164
Increase (decrease) in cash due to changes in
operating assets and liabilities:
Trade accounts receivable, net 81,288 33,768
Inventories 13,231 (26,850)
Prepaid expenses and other current assets (3,756) (91,103)
Accounts payable (72,059) (69,492)
Accrued expenses and other liabilities 64,831 24,929
-------- --------
Net cash used in operating activities (112,496) (371,032)
-------- --------
Cash flows from investing activities:
Capital expenditures - (1,366)
-------- --------
Net cash used in investing activities - (1,366)
-------- --------
Cash flows from financing activities:
Common stock - 100,000
-------- --------
Net cash provided by financing activities - 100,000
-------- --------
Net decrease in cash (112,496) (272,398)
Cash at beginning of period 133,524 385,966
-------- --------
Cash at end of period $ 21,028 $ 113,568
======== ========
See accompanying summary of accounting policies and notes to financial
statements.
Non-cash Investing and Financing:
During 2006, note payable holders converted $72,000 of notes payable and
Derivative Liability of $1,245,120 into 3,188,821 shares of common stock.
-5-
ULTRADATA SYSTEMS, INCORPORATED
Notes to Condensed Financial Statements
March 31, 2006 (Unaudited)
Summary of Significant Accounting Policies
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 periods ended March 31, 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), from which these statements
were derived.
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:
March 31, December 31,
2006 2005
------------ ------------
(Unaudited)
Raw Materials, net of obsolete $ 5,402 $ 9,664
Finished Goods, net of obsolete 63,543 76,649
-------- --------
Total $ 68,945 $ 86,313
======== ========
-6-
Obsolete inventory on hand $ 697,539 $ 712,062
Note 2. Accrued Expenses
Accrued expenses consist of the following:
March 31, December 31,
2006 2005
------------ ------------
(Unaudited)
Payroll and payroll-
related liabilities $ 203,414 $ 141,001
Accrued vacations 29,698 20,797
Accrued expenses 8,494 15,889
Other 913 -
-------- --------
Total $ 242,519 $ 177,687
======== ========
The large payroll-related accrual is due to management deferring
most of its salaries in order to preserve cash.
Note 3. (Loss) Per Share
For the three months ended
March 31,
2006 2005
Basic --------------------------
Numerator:
Net loss $ (310,715) $ (123,601)
Numerator for basic (loss) per share $ (310,715) $ (123,601)
======== ========
Denominator:
Weighted average common shares 8,930,617 6,410,187
Denominator for basic (loss) per share 8,930,617 6,410,187
Basic loss per share $ (0.03) $ (0.02)
Fully Diluted
Numerator:
Net loss $ (310,715) $ (123,601)
Numerator for fully diluted loss
per share $ (310,715) $ (123,601)
======== ========
-7-
Denominator:
Weighted average common shares 8,930,617 6,410,187
Common stock equivalents - -
--------- ---------
Denominator for fully diluted loss
per share 8,930,617 6,410,187
========= =========
Fully diluted loss per share $ (0.03) $ (0.02)
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 bear interest at 4.75% per annum, mature three years from
the date of issuance and are 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 is 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 is no limit on the number of shares into
which the Notes may be converted. The Company has agreed to register the
shares that may be issued upon conversion of the Notes and exercise of the
related warrants.
Beginning in the first full calendar month after the registration
statement is declared effective, GGI has agreed to convert at least 3%,
but no more than 10% of the face value of the Notes into shares of the
Company's common stock. If GGI converts more than 3% of the Notes in any
calendar month, the excess over 3% shall be credited against the
subsequent month's minimum conversion amount. If GGI fails to convert at
least 3% of the face amount of the Notes in any given calendar month, GGI
will not be entitled to collect interest on the Notes for that month. If
the volume weighted average price of the Company's common stock is below
$0.50, the Company shall have the right to prepay that portion of the
Notes that GGI is required to convert, plus any accrued but unpaid
interest at 125% of such amount. If at any time during the calendar month,
the volume weighted average price is below $0.20, GGI shall not be
obligated to convert any portion of the Notes during that month.
-8-
The Notes include 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.
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 is forced to make
repeated cash payments on the Notes.
-9-
During the 3-month period ending March 31, 2006, conversions of $72,000
of the debenture resulted in reducing the Fair Value liability taken in 2005
by $1,245,120 in accordance with guidance provided in EITF 00-19:
Note payable as of 12/31/2005 $ 278,500
Conversions during the quarter 72,000
Note payable balance at 3/31/2006 206,500
Discount on note payable (52,168)
Note payable - net 154,332
Amortized amount charged to interest 34,339
Initial (non-cash) fair-value charge ---------
$4,816,193
Reduction in liability due to first
quarter conversions 1,245,120
---------
Remaining fair-value expense $3,571,073
=========
Future minimum principal payments are as follows under the
Debentures and Notes for the years ending December 31:
2006 $ -
2007 $ 206,500
2008 -
Note 5. Equity
During 2006 note holders converted $72,000 of notes payable into
3,188,821 shares of common stock in accordance with the conversion terms
of the notes.
Note 6. Going Concern
As reflected in the accompanying financial statements, for the three
months ended March 31, 2006 the Company has an operating loss of $201,338
and a negative cash flow from operations of $112,496. At March 31, 2006
it had a working capital deficiency of $3,947,567, and a stockholders'
deficiency of $3,913,054. The ability of the Company to continue as a
going concern is dependent on the Company's ability to further implement
its business plan, raise capital and generate revenues. The financial
statements do not include any adjustments that might be necessary if the
Company is unable to continue as a going concern.
The Company has continued its product design and development efforts
to introduce new products in 2006. The Road Genie, introduced in 2005,
will be continued in new outlets in 2006. The Company has also developed
a low-cost voice-activated digital recorder for use in the automobile.
The Company is also opening a new source of revenue by developing the
cell-phone Road Whiz application. These products afford the possibility
of enhancing sales in 2006.
-10-
Note 7. Subsequent Event - Conversion of Debt into Common Stock
During the period from April 1, 2006 through May 8, 2006 Golden Gate
Investors, Inc. converted $80,000 of the principal amount of its Debenture
into 4,468,114 shares of the Company's common stock.
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 introduce new products to the
market, to expand our customer base, to develop products for ease of
travel, 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 develop and market its products. Among these factors
are:
* The fact that our financial resources are minimal and will not
sustain us past this year without significantly improved sales
of the Talking Road WhizTM and Road GenieTM product line;
* The fact that our lack of capital severely limits our ability to
market our products. As a result, the loss of a significant
customer could imperil the marketing of an entire product line;
* The difficulty of attracting mass-market retailers to a seasonal
product like the Talking Road Whiz(tm).
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 this reason, you should not place undue reliance on any of
the forward-looking statements in this report, as there is a significant
risk that we will not be able to fulfill our expectations for Ultradata.
-11-
OVERVIEW
The Company mission is to aid the road traveler with useful
information with products easy to use and affordable in price. Since 1987
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 and represents a quantum jump in user
convenience. 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 funds 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. 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 expect full-scale tests of the system to start in the
second quarter of 2006.
Each of our consumer products is designed to allow the consumer to
access useful information stored in a convenient manner. Our handheld
computers generally sell at retail prices between $19.95 and $59.95 per
unit. The products have been available in retail mass-market chains,
catalogs, credit-card inserts, and other channels.
The goals of the Company's research and development investments are
targeted at attaining the right product at the right price. There are
over 125 million drivers in the U. S., and there is a great demand for
useful, easy-to-access information for convenience and safety on the road.
Low-cost products that achieve these benefits have a significant niche in
the marketplace. Thus far, Management feels the Company has barely
penetrated this huge, largely untapped market. The Company expects to
continue to exploit this niche by bringing the results of merged
technologies to bear on the goals stated above with significant impact on
Company sales and profits. Ease of use and low cost are major
considerations. The introduction of expensive GPS navigation systems has
brought more awareness to this category. However, most consumers do not
wish to pay over $200 or monthly fees for directions. Our low-cost user-
friendly products offer an affordable alternative.
-12-
RESULTS OF OPERATIONS
Three Months Ended March 31, 2006 Compared to Three Months Ended
March 31, 2005
Operating results for the first quarter of 2006 were about the same
as for the first quarter of 2005.
Sales. During the first three months of 2006, net sales totaled
$85,326, as compared with $83,825 in sales recorded in the first quarter
of 2005.
Gross Profit. Gross profit margin for the current quarter was
$34,932, or 40.9% of sales compared to $39,923, or 47.6% of sales, for the
first quarter of 2005. Gross profit as a percent of sales was lower in
2006 because of selling at low mark-up in order to move inventory.
S,G&A Expense. Selling expenses amounted to $17,303, or 20.3% of
sales, for the first quarter of 2006 as compared with $22,410, or 26.7% of
sales for the first quarter of 2005. The percentage was lower in 2006
because of a higher portion of sales from direct marketing.
General and administrative expenses were $175,764 for the first
quarter of 2006 as compared with $99,584 for the same quarter in 2005,
representing an increase of 78.6%. This dramatic increase was due to the
settlement of a large outstanding bad debt that had been fully reserved in
2004 of $176,475 and was paid in 2005. The 2006 numbers are low by
historical standards for expenditures in this category. For example,
without this settlement, general and administrative expenses would have
been $276,059 in the first quarter of 2005.
R&D Expense. Research and development expense in the first quarter
of 2006 was $43,263 as compared to $35,201 for the same quarter of 2005.
The 22.9% increase in 2006 reflects primarily the increased development
activities associated with the cell-phone application of our Road Whiz
product in 2006.
The Company posted a net loss from operations of ($201,398) for the
quarter ended March 31, 2006 compared to ($117,272) for the quarter ended
March 31, 2005.
Other Income (Expense). Other expense for the first quarter of 2006
amounted to interest expense and amortization of the note payable discount
of $107,335 compared with other expense of ($6,758) for the same period in
2005. The notes were issued late in the 2005 quarter and therefore
interest expense was not incurred for the entire period.
As a result of the foregoing, the Company posted net loss of
$(310,715), or $(0.03) per basic and fully diluted common share, for the
three-month period ended March 31, 2006, compared to a net loss of
($123,601), or ($0.02) per basic and diluted common share, for the three-
month period ended March 31, 2005.
-13-
FINANCIAL CONDITION AND LIQUIDITY
The Company cash position experienced continued erosion during the
first quarter of 2006 by virtue of its operating losses. Cash used in
operations was $112,496 as compared to $317,032 in the same period in
2005. No cash flow occurred from investing or financing activities during
the period. Our cash at the end of the period stood at $21,028.
At the present time we lack sufficient working capital to fund our
business at its current operating level. As a result of this 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.
In order to conserve cash, we have reduced the working hours of our
employees. This reduction, however, reduces our productivity and
exacerbates our primary problem - that our sales are insufficient to cover
our costs. Unless sales increase significantly in the coming months or we
receive additional capital, it appears doubtful that our business will
continue for the next twelve months.
ITEM 3. Controls and Procedures
Evaluation of Disclosure Controls and Procedures: As of March 31,
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 were effective, as of the date of their
evaluation, for the purposes of recording, processing, summarizing and
timely reporting material information required to be disclosed in reports
filed by the Company under the Securities Exchange Act of 1934.
Changes in internal controls: There were no changes in internal
controls over financial reporting, known to the Chief Executive Officer or
Chief Financial Officer that occurred during the period covered by this
report that has materially affected, or is likely to materially effect,
the Company's internal control over financial reporting.
-14-
ULTRADATA SYSTEMS, INCORPORATED
10QSB
PART II - OTHER INFORMATION
Item 1. Legal Proceedings:
None
Item 2. Changes in Securities and Small Business Issuer Purchase 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:
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.
May 19, 2006 /s/ Monte Ross
-------------------------
Monte Ross, CEO
(Chief executive officer)
/s/ Ernest S. Clarke
----------------------------------
Ernest S. Clarke, President
(Principal financial and accounting
officer)