10-Q 1 d32198e10vq.htm FORM 10-Q e10vq
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended November 30, 2005,
OR
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the period from                                          to                                         
Commission file number 0-26140
REMOTE DYNAMICS, INC.
 
(Exact name of registrant as specified in its charter)
     
Delaware   51-0352879
     
(State or other jurisdiction of   (I.R.S. Employer Identification No.)
incorporation or organization)    
     
1155 Kas Drive, Suite 100, Richardson, Texas   75081
     
(Address of principal executive offices)   (Zip Code)
Registrant’s telephone number, including area code (972) 301-2000
 
(Former name, former address and former fiscal year, if changed since last report.)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 þ No o
Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS;
Indicate by check mark whether the registrant has filed all documents and reports required by Sections 12, 13, or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes þ No o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No o
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.
     
    Number of Shares Outstanding as of
Title of each class   January 23, 2006
Common Stock, $.01 par value   8,390,937
 
 

 


 

REMOTE DYNAMICS, INC. AND SUBSIDIARIES
Form 10-Q
INDEX
         
    PAGE
    NUMBER
PART I. FINANCIAL INFORMATION
       
 
       
Item 1 Condensed Consolidated Financial Statements:
       
 
       
    3  
 
       
    4  
 
       
    5  
 
       
    6  
 
       
    7  
 
       
    21  
 
       
    27  
 
       
    28  
 
       
       
 
       
    28  
 
       
    28  
 
       
    32  
 
       
    33  
 
       
EXHIBITS:
       
 
       
 Subsidiaries of the Registrant
 Certification Pursuant to Section 302
 Certification Pursuant to Section 302
 Certification Pursuant to Section 906
 Certification Pursuant to Section 906

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REMOTE DYNAMICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
                 
    (Unaudited)        
    November 30,     August 31,  
    2005     2005  
ASSETS
               
Current assets:
               
Cash and cash equivalents
  $ 177     $ 503  
Accounts receivable, net of allowance for doubtful accounts of $98 and $197, respectively
    1,233       2,695  
Inventories
    1,104       791  
Deferred product costs — current portion
    1,002       950  
Lease receivables and other current assets, net
    556       632  
 
           
Total current assets
    4,072       5,571  
Property and equipment, net of accumulated depreciation and amortization of $1,942 and $1,565 respectively
    3,338       3,743  
Deferred product costs — non-current portion
    1,099       1,007  
Goodwill
    5,130       10,120  
License right, net
    357       580  
Other intangibles, net
    68       271  
Lease receivables and other assets, net
    347       414  
 
           
Total assets
  $ 14,411     $ 21,706  
 
           
 
               
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY
               
Current liabilities:
               
Accounts payable
  $ 1,941     $ 1,557  
Deferred product revenues — current portion
    2,042       2,038  
Note payable — SDS
          1,750  
Accrued expenses and other current liabilities
    1,874       2,083  
 
           
Total current liabilities
    5,857       7,428  
Deferred product revenues — non-current portion
    2,138       2,112  
Other notes payable
    367       423  
Note payable — HFS
    2,000       2,000  
Other non-current liabilities
    226       300  
 
           
Total liabilities
    10,588       12,263  
 
           
 
               
Redeemable Preferred Stock — Series A (8% cumulative, $1,000 stated value, 2,000,000 shares authorized, 5,000 shares issued and outstanding at August 31, 2005 (redeemable in liquidation at an aggregate of $5,750,000)
          3,542  
Redeemable Preferred Stock — Series B (8% cumulative, $10,000 stated value, 2,000,000 shares authorized, 650 shares issued and outstanding at November 30, 2005 (redeemable in liquidation at an aggregate of $7,475,000)
    5,254        
 
               
Stockholders’ equity:
               
Common stock, $0.01 par value, 50,000,0000 shares authorized, 8,295,885 shares issued and 7,365,937 outstanding at November 30, 2005; 50,000,0000 shares authorized, 8,255,785 shares issued and 7,325,937 outstanding at August 31, 2005
    83       83  
Treasury stock, 929,948 shares at November 30, 2005 and August 31, 2005, at cost
    (1,860 )     (1,860 )
Additional paid-in capital
    27,258       24,775  
Deferred stock compensation
    (283 )     (525 )
Accumulated deficit
    (26,629 )     (16,572 )
 
           
Total stockholders’ equity (deficit)
    (1,431 )     5,901  
 
           
Total liabilities and stockholders’ equity
  $ 14,411     $ 21,706  
 
           
See accompanying notes to condensed consolidated financial statements.

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REMOTE DYNAMICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(in thousands, except per share data)
                 
    Three Months Ended  
    November 30,  
    2005     2004  
Revenues:
               
Product
  $ 71     $ 249  
Ratable product
    623       781  
Service
    1,236       3,494  
 
           
Total revenues
    1,930       4,524  
 
           
Cost of revenues:
               
Product
    148       194  
Ratable product
    303       337  
Service
    1,008       1,769  
 
           
Total cost of revenues
    1,459       2,300  
 
           
 
               
Gross profit
    471       2,224  
 
           
 
               
Expenses:
               
General and administrative
    1,046       1,368  
Customer service
    247       421  
Sales and marketing
    743       448  
Engineering
    287       321  
Depreciation and amortization
    669       644  
Impairment loss on license right
    144        
Goodwill impairment
    4,990        
 
           
 
    8,126       3,202  
 
           
Operating loss
    (7,655 )     (978 )
 
               
Interest income
    31       76  
Interest expense
    (82 )     (82 )
Other expense
    (13 )     (101 )
 
           
Loss before reorganization items
    (7,719 )     (1,085 )
Reorganization items
          (46 )
 
           
Net loss
    (7,719 )     (1,131 )
 
               
Preferred stock dividend
    (130 )     (67 )
Deemed dividend-loss on redemption of Series A preferred stock
    (2,208 )      
 
           
Net loss attributable to common shareholders
  $ (10,057 )   $ (1,198 )
 
           
 
               
Basic and diluted loss per common share
  $ (1.48 )   $ (0.19 )
 
           
 
               
Weighted average number of shares outstanding:
               
Basic and diluted
    6,801       6,241  
 
           
See accompanying notes to condensed consolidated financial statements.

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REMOTE DYNAMICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in thousands)
                 
    Three Months Ended  
    November 30,  
    2005     2004  
Cash flows from operating activities:
               
 
               
Net loss
  $ (7,719 )   $ (1,131 )
 
               
Adjustments to reconcile net loss to cash used in operating activities:
               
Reorganization expense
               
Depreciation and amortization
    387       334  
Amortization of license rights and other intangibles
    282       310  
Impairment loss on license right
    144        
Goodwill impairment
    4,990        
Provision for bad debts
    34       72  
Amortization of deferred service revenues
          (19 )
Loss on equipment retired or sold
    18       18  
Non-cash expense on repricing of warrants
          85  
Changes in operating assets and liabilities:
               
Decrease in restricted cash
          200  
(Increase) decrease in accounts receivable
    1,411       (542 )
Increase in inventory
    (313 )     (161 )
Decrease in lease receivables and other assets
    304       212  
(Increase) decrease in deferred product costs
    (144 )     309  
(Decrease) increase in accounts payable
    384       (493 )
Decrease (increase) in deferred product revenues
    30       (720 )
Increase in accrued expenses and other liabilities
    (166 )     (545 )
 
           
Net cash used in operating activities
    (358 )     (2,071 )
 
           
 
               
Cash flows from investing activities:
               
Additions to property and equipment
          (349 )
 
           
Net cash used in investing activities
          (349 )
 
           
 
               
Cash flows from financing activities:
               
Proceeds from issuance of Series A preferred stock and warrants, net of offering costs
          4,651  
Proceeds from issuance of Series B preferred stock and warrants, net of offering costs
    443        
Accrued interest paid on bridge note
    36          
Dividends paid on preferred stock
    (130 )     (67 )
Payments on capital leases and other note payables
    (317 )     (170 )
 
           
Net cash provided by financing activities
    32       4,414  
 
           
Decrease in cash and cash equivalents
    (326 )     1,994  
Cash and cash equivalents, beginning of period
    503       1,312  
 
           
Cash and cash equivalents, end of period
  $ 177     $ 3,306  
 
           
 
               
Supplemental cash flow information:
               
Interest paid
  $ 74     $ 81  
 
           
 
               
Non-cash investing and financing activities:
               
Exchange of bridge note into bridge warrants
  $ 1,750     $  
 
           
Purchases of assets through capital leases and other note payables
  $ 144     $ 199  
 
           
See accompanying notes to condensed consolidated financial statements.

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REMOTE DYNAMICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (Unaudited)
(in thousands, except share information)
                                                                 
                    Additional                          
    Common Stock     Paid-in     Deferred     Treasury Stock     Accumulated        
    Shares     Amount     Capital     Comp.     Shares     Amount     Deficit     Total  
Stockholders’ equity at August 31, 2005
    8,255,885     $ 83     $ 24,775     $ (525 )     929,948     $ (1,860 )   $ (16,572 )   $ 5,901  
Issuance of warrants in connection with Series B preferred stock offering
                    975                                       975  
Exchange of note payable to SDS for warrants
                    1,750                                       1,750  
Series B preferred stock dividends
                                                    (130 )     (130 )
Deemed dividend-loss on redemption of Series A preferred stock
                                                    (2,208 )     (2,208 )
Repricing of warrants
                                                             
Exercise of warrants
                                                             
Issuance of restricted stock
    40,000               48       (48 )                              
Change in deferred stock compensation
                    (290 )     290                                
Net loss
                                                    (7,719 )     (7,719 )
 
                                               
Stockholders’ deficit at November 30, 2005
    8,295,885     $ 83     $ 27,258     $ (283 )     929,948     $ (1,860 )   $ (26,629 )   $ (1,431 )
 
                                               
See accompanying notes to condensed consolidated financial statements.

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REMOTE DYNAMICS, INC. AND SUBSIDIARIES
Notes To Condensed Consolidated Financial Statements
(Unaudited)
1. Business Overview, Reorganization and Going Concern
Business Overview
     Remote Dynamics, Inc., a Delaware Corporation (the “Company”), markets, sells and supports automatic vehicle location (“AVL”) and mobile resource management solutions targeting companies that operate private vehicle fleets. The REDIview™ family of solutions is ideal for metro, short-haul fleets within diverse industry vertical markets such as field services, distribution, courier, limousine, electrical/plumbing, waste management, and government. The Company’s core technology, telematics, combines wireless communications, GPS location technology, geospatial solutions and vehicle data integration with an easy-to-use web-accessible application that aids in the optimization of remote business solutions. The Company’s state of the art fleet management solution contributes to higher customer revenues and improved operator efficiency by improving the productivity of mobile workers through real-time position reports, route-traveled information, and exception based reporting designed to highlight mobile workforce inefficiencies. This in-depth reporting enables the Company’s customers to correct those inefficiencies and deliver significant savings to the bottom line.
     Historically, much of the Company’s revenues have been derived from products sold to the long-haul trucking industry and to member companies of SBC Communications, Inc. (“SBC”). Revenues from these legacy customers have ceased as of December 31, 2005, and for the Company to sustain ongoing business operations and ultimately achieve profitability, it must substantially increase its sales and penetration into the marketplace with next generation products and services.
     The Company commercially introduced its next generation AVL product, REDIview, in January of 2005. REDIview was designed with a flexible architecture to accommodate expected additional functional requirements that will be required to effectively compete in the marketplace. Anticipated marketplace needs include; 1) ability for the AVL mobile device to function as a communications hub for personal computers and handheld devices, 2) ability for the AVL mobile device to communicate with WiFi hotspots, 3) ability for the AVL mobile device to integrate with a variety of in-vehicle sensors, and 4) ability to integrate the AVL information into existing customer legacy applications.
     The Company’s new REDIview product line forms the basis of management’s business plan for calendar year 2006 and beyond and will be the foundation for expected growth in revenues and ultimately profitability for the Company. In addition, the REDIview product line allows the Company to move to a recurring revenue model for all of its current product offerings, an important and necessary change to the Company’s revenue model to achieve overall sustained revenue growth and cash flow positive operations.
     Based on the Company’s failure to achieve its forecasted sales targets for the three months ended November 30, 2005, the Company began analyzing and revising its current and long-term business plans with the goal of optimizing the Company’s sales and marketing strategy in order to maximize its revenues and further reduce its operating costs. As a result, in late-December 2005, the Company materially modified its existing business plan. Key to the Company’s new business plan was its decision to exclusively market and sell its REDIview product line through its existing network of over 30 third-party distribution partners which the Company expects will result in a significant reduction in the Company’s sales and marketing expenses related to maintaining a significant direct sales effort. Additionally, in implementing its new business plan, the Company completed a significant cost and operational-based restructuring rightsizing its workforce at all levels including its senior management level and ceased its development efforts to launch two new product lines during 2006 instead focusing the Company’s efforts on enhancing its existing REDIview product line. As a result, in addition to significantly reducing its projected operational costs, the Company significantly reduced its projected sales targets and associated cash flows from its previous business plan which included multiple product offerings sold through both a direct sales force and third-party distributors.
Voluntary Bankruptcy Filing and Reorganization
     On February 2, 2004, (the “Commencement Date”), the Company and two of its wholly-owned subsidiaries, Caren (292) Limited (“Caren”) and Minorplanet Systems USA Limited (“Minorplanet Limited”) (the Company, Caren and Minorplanet Limited shall hereinafter collectively be referred to as the “Debtors”) filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Northern District

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of Texas Dallas Division (the “Bankruptcy Court”), in order to facilitate the restructuring of their debt, trade liabilities, and other obligations. During the bankruptcy, the Debtors remained in possession of their assets and operated as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of Bankruptcy Code, the Federal Rules of Bankruptcy Procedure and applicable court orders.
     On June 29, 2004, the Bankruptcy Court entered an order confirming the Debtors’ Third Amended Joint Plan of Reorganization, as Modified (the “Plan”). The Bankruptcy Court set the enterprise value of the Company at $25.3 million for purposes of distributions of new common stock under the Plan. The effective date of the Plan was set by the Debtors pursuant to the Plan as Friday, July 2, 2004 (the “Effective Date”). Caren and Minorplanet Limited, as a matter of law, were merged with and into the Company, ceasing to exist as separate entities as of the Effective Date. The Plan was substantially consummated on July 8, 2004. On August 25, 2005, the Bankruptcy Court signed the Final Decree closing the Company’s case. In connection with the Company’s Chapter 11 reorganization, the Company applied “Fresh Start Accounting” which resulted in approximately $19.7 million of excess reorganizational value which was recorded as goodwill. The goodwill has subsequently been impaired (see Note 2).
Going Concern
     Historically, much of the Company’s revenues have been derived from products and services sold to the long-haul trucking industry, small to medium-sized companies through its Vehicle Management Information™ (“VMI”) product line and to SBC. Revenues from the long-haul trucking industry and SBC have ceased as of December 31, 2005. For the Company to sustain ongoing business operations and ultimately achieve profitability, it must substantially increase its sales and penetration into the marketplace with competitive products and services. The Company believes that the potential market opportunity for automatic vehicle location products in the United States, such as its GPRS-based REDIview product, is significant and that it will be positioned with its telematics product lines and proven operations support to take advantage of the significant market potential.
     However, management currently does not expect to achieve profitability during the 2006 fiscal year since the Company will be expanding its channels sales force and building a base of customers that purchase information and data services from the Company on a monthly recurring basis. Key to achieving profitability is to obtain a REDIview customer base that provides monthly recurring revenues and corresponding gross margins that exceed operating costs and expenses to support the REDIview customer base. Based on the Company’s latest revised pricing structure and cost-based reduction in workforce, management currently estimates that for the Company to achieve profitability, it will need to have approximately $1.1 million in monthly revenues. However, there can be no assurances that the Company will achieve its REDIview sales targets and the Company’s failure to do so may have a material adverse effect upon the Company’s business, financial condition and results of operations.
     Critical success factors in management’s plans to achieve positive cash flow from operations include:
    Ability to raise a minimum of $2.5 million in additional capital resources to fund ongoing operations through August 31, 2006.
 
    Ability to increase sales of the REDIview product line to lessen the amount of capital resources necessary to fund our operations until such time that revenues from the REDIview product line are sufficient to fund ongoing operations.
 
    Ability to complete development of additional features and functionality to the REDIview product line.
 
    Significant market acceptance of the Company’s product offerings from new customers, including the Company’s REDIview product line, in the United States.
 
    Maintaining and expanding indirect distribution channels for the Company’s REDIview product line.
 
    Securing and maintaining adequate third party leasing sources for customers who purchase the Company’s products.
     There can be no assurances that any of these success factors will be realized or maintained.
     On October 1, 2004, the Company closed the sale of 5,000 shares of Series A convertible preferred stock (“Series A convertible preferred stock “), with each preferred share having a face value of $1,000, for a total purchase price of $5,000,000. Net cash proceeds received by the Company were $4,651,000 after payment of expenses. The

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Series A convertible preferred stock was convertible into shares of the Company’s common stock at a conversion price of $2.00 per share. The Company sold the Series A Preferred Stock to SDS Capital Group SPC, Ltd (“SDS”) pursuant to that certain Securities Purchase Agreement , dated October 1, 2004, by and between the Company and SDS. The Series A Preferred Stock was issued to SDS pursuant to the exemption from the registration requirements of the Securities Act of 1933 as amended, provided by Regulation D promulgated thereunder.
     On May 31, 2005, the Company consummated a bridge loan and security agreement with SDS in which the Company issued a promissory note in the amount of $1.75 million to SDS (the “Bridge Note”). The Bridge Note was secured by the assets of the Company, accrued interest at 8% per annum and was due and payable on September 30, 2005. The Bridge Note automatically exchanged into a common stock purchase warrant with a 5-year term to purchase 1,666,667 shares of common stock at an exercise price of $0.01 per share and a common stock purchase warrant with a 5-year term to purchase 700,000 shares of common stock at an exercise price of $1.75 per share (the “Bridge Warrants”) upon approval of the Company’s stockholders. The Company’s stockholders approved the exchange of the Bridge Note into the Bridge Warrants at the Company’s August 31, 2005 annual stockholders meeting. On September 2, 2005, the Bridge Note was extinguished and exchanged for the Bridge Warrants.
     On September 2, 2005, the Company closed the sale of $6.5 million of preferred stock and common stock purchase warrants in a private placement transaction with SDS previously entered into on May 31, 2005. In consideration for the issuance of the Series B convertible preferred stock, SDS paid $750,000 and returned to the Company all of the outstanding Series A convertible preferred stock which was held by SDS. Net cash proceeds received by the Company were approximately $443,000 after deduction of brokers’ commissions, accrued interest on the bridge note and other expenses. The Series A convertible preferred stock returned to the Company had a face value of $5 million. The Series B convertible preferred stock is convertible into common stock at a conversion price of $1.55 per share. SDS also received a common stock purchase warrant with a 5-year term to purchase 2 million shares at an exercise price of $1.75 per share. The Company intends to use the net proceeds from the financing transaction to fund its business plan. The Company is obligated to register the common stock issuable upon conversion of the Series B convertible preferred stock or exercise of the common stock purchase warrants for public resale under the Securities and Exchange Act of 1933.
     On December 16, 2005, in consideration of the Company reducing the exercise price on certain warrants held by SDS Capital Group SPC Ltd. (“SDS”), the sole holder of the Company’s Series B convertible preferred stock, from $0.67 to $0.30 per share, SDS exercised the warrants for the purchase of 1,125,000 shares of the Company’s common stock resulting in the receipt by the Company of cash proceeds in the amount of $337,500 (the “Warrant Exercise”).
     On December 23, 2005, the Company consummated the sale and assignment of certain of its patents and pending patent applications to Vehicle IP LLC in exchange for the payment by Vehicle IP LLC to the Company of $500,000 (the “Patent Sale”).
     As a result of the Warrant Exercise and the Patent Sale, the Company, in the aggregate, raised $837,500 of working capital in the month of December 2005. The Company is also currently in the process of seeking additional capital through the sale of debt and/or equity securities and currently believes that it will be able to consummate a transaction for such additional capital prior to depleting its available cash reserves. The certificate of designation for the Company’s Series B convertible preferred stock, which is part of the Company’s Certificate of Incorporation, requires the approval of the holders of its Series B convertible preferred stock to effect certain transactions, such as issuing senior or pari passu securities or issuing certain debt, and there can be no assurance that the Company will be able to obtain such approval.
     The Company currently believes that it must raise a minimum of $2.5 million in additional capital in order to sustain its operations through August 31, 2006. The Company is currently forecasting an average monthly cash shortfall of approximately $310,000 for the period beginning January 1, 2006 through August 31, 2006. However, the Company’s ability to meet its current sales projections of the REDIview product line heavily influences its capital requirements and there can be no assurances that the Company will be able to achieve its current sales forecasts. If the Company fails to meet its current sales forecasts, the Company will require more than $2.5 million in additional capital to sustain its operations through August 31, 2006.
     The Company currently believes that with the receipt of the proceeds from the Warrant Exercise and the Patent Sale and additional savings from operating cost reductions implemented in December 2005, the Company has sufficient funds to sustain its operations through mid-February 2006 which the Company currently believes will provide it with sufficient time to raise additional capital prior to depleting its available cash reserves. However, if the Company fails to achieve its current sales forecasts, the Company may deplete its cash reserves sooner than currently anticipated. There

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can be no assurance that the Company will be able to consummate a transaction for additional capital prior to substantially depleting its available cash reserves, and its failure to do so may force the Company to file for bankruptcy protection and/or cease operations.
2.   Basis of Presentation and Significant Accounting Policies
Basis of Presentation
     The unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all footnote disclosures required by accounting principles generally accepted in the United States of America. These condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto in its Annual Report on Form 10-K for the year ended August 31, 2005. The accompanying condensed consolidated financial statements reflect all adjustments which are, in the opinion of management, necessary for a fair presentation of the Company’s financial position, results of operations and cash flows for the interim periods in accordance with accounting principles generally accepted in the United States of America. The results for any interim period are not necessarily indicative of the results for the entire fiscal year.
Estimates Inherent in the Preparation of Financial Statements
     The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Revenue Recognition
     The Company recognizes revenue when earned in accordance with the applicable accounting literature including: EITF No. 00-21, “Revenue Arrangements With Multiple Deliverables”, Statement of Position 97-2, “Software Revenue Recognition”, and Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements”, as amended by Staff Accounting Bulletin No. 104, “Revenue Recognition in Financial Statements”. Revenue is recognized when the following criteria are met: there is persuasive evidence that an arrangement exists, delivery has occurred and all obligations under such arrangement have been fulfilled, the price is fixed and determinable and collectibility is reasonably assured.
     Initial sale proceeds received under multiple-element sales arrangements that require the Company to deliver products and services over a period of time and which are not determined by the Company to meet certain criteria are deferred. All REDIview and VMI sales proceeds related to delivered products are deferred and recognized over the contract life that typically ranges from one to five years. Product sales proceeds recognized under this method are portrayed in the accompanying Condensed Consolidated Statement of Operations as “Ratable product revenues.” The related deferred revenue is classified as a current and long term liability on the Condensed Consolidated Balance Sheets under the captions “Deferred product revenues – current portion” and “Deferred product revenues non-current portion.” If the customer relationship is terminated prior to the end of the customer contract term, such deferred sales proceeds are recognized as revenue in the period of termination. Under sales arrangements, which initially meet the earnings criteria described above, revenues are recognized upon shipment of the products or upon customer acceptance of the delivered products if terms of the sales arrangement give the customer the right of acceptance. Sales arrangements recognized upon initial delivery and acceptance relate primarily to products delivered under the service vehicle contract with SBC.
     Service revenue generally commences upon product installation and customer acceptance and is billed and recognized during the period such services are provided.
     The Company provides lease financing to certain customers of its REDIview and VMI products. Leases under these arrangements are classified as sales-type leases or operating leases. These leases typically have terms of one to five years, and all sales type leases are discounted at interest rates ranging from 14% to 18% depending on the customer’s credit risk. The net present value of the lease payments for sales-type leases is recognized as product revenue and deferred under the Company’s revenue recognition policy described above. Income from operating leases is recognized ratably over the term of the leases.

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VMI License Right
     In June of 2001, the Company received a 99-year exclusive license right to market, sell and operate Minorplanet Systems PLC’s (“PLC”) VMI technology in the United States, Canada and Mexico. On June 14, 2004, the Bankruptcy Court approved a Compromise and Settlement Agreement (the “Agreement”) by and among the Company and Minorplanet Limited and PLC regarding the license agreement for the VMI technology which allowed the Company to use, market and sell the VMI technology until December 31, 2004. On January 6, 2005, the Company and PLC entered into an Addendum to Compromise and Settlement Agreement (the “Addendum”) which granted the Company the right to continue to market and sell the VMI product line to the Company’s existing VMI customers. Although the Company has ceased actively marketing and selling the VMI product, the Addendum allows the Company to fulfill VMI product orders from existing VMI customers.
     Management accounts for the VMI license right in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”). SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”), requires management of the Company to review for impairment of its long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset might not be recoverable and exceeds its fair value. Thus, management used an expected present value technique, in which multiple cash flow scenarios that reflect the range of possible outcomes and a risk-free rate, to estimate the fair value of the VMI license right at November 30, 2005. Accordingly, the Company recorded an impairment loss of $0.1 million during the three months ended November 30, 2005 to reflect the fair value of the VMI license right based on the Company’s revised sales and cash flow forecasts. The new fair value of the VMI license right is being amortized over its expected useful life of nineteen months. At November 30, 2005, the carrying value of the license right was $0.4 million.
Goodwill and Other Intangibles
     The Company tests its Goodwill for impairment on an annual basis, or between annual tests if it is determined that a significant event or change in circumstances warrants such testing, in accordance with the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets”, (“SFAS 142”) which requires a comparison of the carrying value of goodwill to the fair value of the reporting unit. If the fair value of the reporting unit is less than the carrying value of goodwill, an adjustment to the carrying value of goodwill is required.
     Based on the Company’s failure to achieve its forecasted sales targets for the three months ended November 30, 2005, the Company began analyzing and revising its current and long-term business plans materially modifying its existing business plan in late-December 2005 as described above in Note 1 “Business Overview”. The Company’s new business plan significantly reduces its projected sales forecasts and operational costs from the Company’s former plan.
     As a result and in accordance with SFAS 142, the Company performed an interim test of its Goodwill utilizing a discounted future cash flow analysis based on the Company’s new projected sales targets and the estimated impact of its cost savings. The Company has determined its Goodwill was impaired by an estimated $5.0 million. Goodwill was thus written off by $5.0 million representing the full amount of the estimated impairment. At November 30, 2005, the carrying value of the Company’s Goodwill was $5.1 million.
Restricted Stock
     On July 2, 2004, in accordance with the plan of reorganization, the Company adopted the Restated 2004 Management Incentive Plan (the “Incentive Plan”). The Incentive Plan allows for the issuance of up to 700,000 restricted shares of common stock to management. As of November 30, 2005, 565,000 shares of restricted stock had been issued to certain members of the senior management for the Company. These grants vest based on the achievement of specific corporate performance targets over a three-year period and are subject to forfeiture if such performance targets are not achieved. These restricted shares will be accounted for in accordance with variable plan accounting, which requires that the fair value of the shares be measured and charged to the income statement upon determination that the fulfillment of the performance criteria has been met or is probable. The Company did not record any compensation expense associated with these restricted shares during the three month period ended November 30, 2005 as no vesting had occurred.
Business Concentrations
     During the three months ended November 30, 2005, SBC accounted for approximately 41% of the Company’s total revenues. The SBC contract expired effective December 31, 2005. During the three months ended November 30, 2004, SBC and Geologic Solutions, Inc. (“Geologic”) accounted for approximately 74% of the Company’s total

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revenues. Geologic terminated its contract with the Company effective August 31, 2005.
Recent Accounting Pronouncements
     In December of 2004, the Financial Accounting Standards Board (“FASB”) issued FAS 123R which is effective for reporting periods beginning after June 15, 2005. FAS 123R applies to transactions in which an entity exchanges its equity instruments for goods or services and also applies to liabilities an entity may incur for goods or services that are based on the fair value of those equity instruments. For any unvested portion of previously issued and outstanding awards, compensation expense is required to be recorded based on the previously disclosed FAS 123 methodology and amounts. Prior periods presented are not required to by restated. FAS 123R may require the Company to reflect the tax savings resulting from tax deductions in excess of expense reflected in its financial statements as a financing cash flow. The Company adopted FAS 123R as of September 1, 2005 and applied the standard using the modified prospective method, which requires compensation expense to be recorded for new and modified awards. The Company currently believes the adoption of FAS 123R will not have a material impact on the Company at this time. The Company extinquished its prior stock options upon emergence from bankruptcy effective July 2, 2004 and has not issued any new stock options beyond that date. As discussed above, the Company has issued restricted stock to certain members of the senior management for the Company; however, no vesting has occurred and therefore no compensation expense has been recorded through November 30, 2005.
     In June of 2005, the FASB issued Statement of Financial Accounting Standards No. 154, (“SFAS 154”), “Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20, “Accounting Changes” and FASB Statement No. 3, “Reporting Accounting Changes in Interim Financial Statements.” SFAS 154 applies to all voluntary changes in accounting principle and changes the requirements for accounting for and reporting a change in accounting principle. SFAS 154 requires the retrospective application to prior periods’ financial statements of the direct effect of a voluntary change in accounting principle unless it is impracticable. APB No. 20 required that most voluntary changes in accounting principle be recognized by including in net income of the period of the change the cumulative effect of changing to the new accounting principle. FASB stated that SFAS 154 improves financial reporting because its requirements enhance the consistency of financial information between periods. Unless early adoption is elected, SFAS 154 is effective for fiscal years beginning after December 15, 2005. Early adoption is permitted for fiscal years beginning after June 1, 2005. SFAS 154 does not change the transition provisions of any existing accounting pronouncements, including those that are in a transition phase as of the effective date of this statement. The Company does not believe that the adoption of SFAS 154 will have a material effect on its results of operations or financial position.
3.   Securities Purchase Agreements
     On October 1, 2004, the Company closed the sale of 5,000 shares of Series A convertible preferred stock (“Series A convertible preferred stock “), with each preferred share having a face value of $1,000, for a total purchase price of $5,000,000. Net cash proceeds received by the Company were $4,651,000 after payment of expenses. The Series A convertible preferred stock was convertible into shares of the Company’s common stock at a conversion price of $2.00 per share. The Company sold the Series A Preferred Stock to SDS Capital Group SPC, Ltd (“SDS”) pursuant to that certain Securities Purchase Agreement , dated October 1, 2004, by and between the Company and SDS. The Series A Preferred Stock was issued to SDS pursuant to the exemption from the registration requirements of the Securities Act of 1933 as amended, provided by Regulation D promulgated thereunder.
     On May 31, 2005, the Company consummated a bridge loan and security agreement with SDS in which the Company issued a promissory note in the amount of $1.75 million to SDS (the “Bridge Note”). The Bridge Note was secured by the assets of the Company, accrued interest at 8% per annum and was due and payable on September 30, 2005. The Bridge Note automatically exchanged into a common stock purchase warrant with a 5-year term to purchase 1,666,667 shares of common stock at an exercise price of $0.01 per share and a common stock purchase warrant with a 5-year term to purchase 700,000 shares of common stock at an exercise price of $1.75 per share (the “Bridge Warrants”) upon approval of the Company’s stockholders. The Company’s stockholders approved the exchange of the Bridge Note into the Bridge Warrants at the Company’s August 31, 2005 annual stockholders meeting. On September 2, 2005, the Bridge Note was extinguished and exchanged for the Bridge Warrants.
     On September 2, 2005, the Company closed the sale of $6.5 million of preferred stock and common stock purchase warrants in a private placement transaction with SDS previously entered into on May 31, 2005. In consideration for the issuance of the Series B convertible preferred stock, SDS paid $750,000 and returned to the Company all of the outstanding Series A convertible preferred stock which was held by SDS. Net cash proceeds received by the Company were approximately $443,000 after deduction of brokers’ commissions, accrued interest on the bridge note and other

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expenses. The Series A convertible preferred stock returned to the Company had a face value of $5 million. The Series B convertible preferred stock is convertible into common stock at a conversion price of $1.55 per share. SDS also received a common stock purchase warrant with a 5-year term to purchase 2 million shares at an exercise price of $1.75 per share. The Company intends to use the net proceeds from the financing transaction to fund its business plan. The Company is obligated to register the common stock issuable upon conversion of the Series B convertible preferred stock or exercise of the common stock purchase warrants for public resale under the Securities and Exchange Act of 1933.
Series B Convertible Preferred Stock — Summary of Terms
     On September 2, 2005, the Company closed the sale of $6.5 million of convertible preferred stock and common stock purchase warrants in a private placement transaction with an institutional investor. The Company sold the Series B convertible preferred stock and stock purchase warrants to SDS Capital Group SPC, Ltd (“SDS”) pursuant to that certain Securities Purchase Agreement (the “Securities Purchase Agreement”), dated May 31, 2005, by and between the Company and SDS. The Series B convertible preferred stock was issued to SDS pursuant to the exemption from the registration requirements of the Securities Act of 1933 as amended, provided by Regulation D promulgated thereunder. In consideration for the issuance of the Series B convertible preferred stock, SDS paid $750,000 to the Company and returned to the Company all of the outstanding Series A convertible preferred stock which was held by SDS. Net cash proceeds received by the Company were approximately $443,000 after deduction of brokers’ commissions, accrued interest on the bridge note and other expenses. The Series A convertible preferred stock returned to the Company had a face value of $5 million. The Series B convertible preferred stock is convertible into common stock at a conversion price of $1.55 per share. SDS also received a common stock purchase warrant with a 5-year term to purchase 2 million shares at an exercise price of $1.75 per share. The Company intends to use the net proceeds from the financing transaction to fund its business plan. The Company is obligated to register the common stock issuable upon conversion of the Series B convertible preferred stock or upon the exercise of the common stock purchase warrants for public resale under the Securities and Exchange Act of 1933.
     The terms of the Series B convertible preferred stock are set forth in the Certificate of Designation, Preferences and Rights, the most significant of which are as follows:
     Ranking. The Series B convertible preferred stock ranks senior to the Company’s common stock with respect to payment of dividends and amounts upon any liquidation, dissolution or winding up of the Company.
     Dividends. Dividends accrue from the date of issuance of the Series B convertible preferred stock through August 31, 2008, and will be cumulative from such date. Holders of shares of Series B convertible preferred stock will be entitled to receive cumulative dividends in an amount equal to 8% per year until September 1, 2006 and 3% per year thereafter, payable at the election of the holder of the Company’s Series B convertible preferred stock in cash or additional shares of Series B convertible preferred stock.
     Conversion. Each holder of Series B convertible preferred stock has the right to convert its shares of Series B convertible preferred stock into shares of the Company’s common stock at a conversion price of $1.55 per share of common stock. The conversion price shall be adjusted in the event of stock splits, stock dividends and similar distributions and events affecting all of our common stockholders on a pro rata basis so that the conversion price is proportionately increased or decreased to reflect the event. In addition, if there is a change of control (as discussed below), then each holder of Series B convertible preferred stock has the right to receive upon conversion, in lieu of common stock otherwise issuable, such shares of stock, securities or other property as would have been issued or payable in such change of control with respect to the number of shares of common stock which would have been issuable upon conversion had such change of control not taken place (subject to appropriate revisions to preserve the economic value of the series B preferred shares before the change of control). The Company has to provide 10 days written notice to the holders of its Series B convertible preferred stock before the Company may effect any change of control. In no event can any holder of Series B convertible preferred stock convert shares of Series B convertible preferred stock into shares of common stock or dispose of any shares of Series B convertible preferred stock to the extent that such conversion or disposition would result in the holder and its affiliates together beneficially owning or having the power to vote more than 9.99% of the Company’s outstanding shares of common stock.
     Redemption by Holder. The holders of shares of Series B convertible preferred stock have the right to cause the Company to redeem any or all of its shares at a price equal to 115% of face value (150% of the face value if the redemption event is a change of control event discussed below), plus accrued but unpaid dividends in the following events:

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    the Company’s common stock is suspended from trading or is not listed for trading on at least one of, the New York Stock Exchange, the American Stock Exchange, The Nasdaq National Market or The Nasdaq SmallCap Market for an aggregate of 10 or more trading days in any twelve-month period;
 
    the initial registration statement required to be filed by the Company pursuant to the registration rights agreement has not been declared effective by April 30, 2006, or such registration statement, after being declared effective, cannot be utilized by the holders of Series B convertible preferred stock for the resale of all of their registrable securities for an aggregate of more than 15 days in the aggregate;
 
    the Company fails to remove any restrictive legend on any certificate or any shares of common stock issued to the holders of Series B convertible preferred stock upon conversion of the Series B convertible preferred stock as and when required and such failure continues uncured for five business days;
 
    the Company provides written notice (or otherwise indicate) to any holder of Series B convertible preferred stock, or state by way of public announcement distributed via a press release, at any time, of the Company’s intention not to issue, or otherwise refuse to issue, shares of common stock to any holder of Series B convertible preferred stock upon conversion in accordance with the terms of the certificate of designation for the Company’s Series B convertible preferred stock;
 
    the Company or any of its subsidiaries make an assignment for the benefit of creditors, or applies for or consents to the appointment of a receiver or trustee for the Company or for a substantial part of its property or business;
 
    bankruptcy, insolvency, reorganization or liquidation proceedings or other proceedings for the relief of debtors shall be instituted by or against the Company or any of its subsidiaries which shall not be dismissed within 60 days of their initiation; or
 
    the Company:
    sells, conveys or disposes of all or substantially all of its assets;
 
    merges or consolidates with or into, or engages in any other business combination with, any other person or entity, in any case which results in either (i) the holders of the Company’s voting securities immediately prior to such transaction holding or having the right to direct the voting of fifty percent (50%) or less of our total outstanding voting securities of or such other surviving or acquiring person or entity immediately following such transaction or (ii) the members of the Company’s board of directors comprising fifty percent (50%) or less of the members of its board of directors or such other surviving or acquiring person or entity immediately following such transaction;
 
    either (i) fail to pay, when due, or within any applicable grace period, any payment with respect to any indebtedness in excess of $250,000 due to any third party, other than payments contested by the Company in good faith, or (ii) suffer to exist any other default under any agreement binding the Company which default or event of default would or is likely to have a material adverse effect on the Company’s business, operations, properties, prospects or financial condition;
 
    have fifty percent (50%) or more of the voting power of the Company’s capital stock owned beneficially by one person, entity or “group”;
 
    experience any other change of control not otherwise addressed above; or
 
    the Company otherwise breaches any material term under the private placement transaction documents, and if such breach is curable, shall fails to cure such breach within 10 business days after the Company has been notified thereof in writing by the holder.
   For purposes of the Series B convertible preferred stock, a change of control means any sale, transfer or other disposition of all or substantially all of the Company’s assets, the adoption of a liquidation plan, any merger or consolidation where the Company is not the surviving entity with the Company’s capital stock unchanged, any share exchange where all of the Company’s shares are converted into other securities or property, any sale or issuance by the Company granting a person the right to acquire 50% or more of the Company’s outstanding common stock, any reclassification of the Company’s common stock, and the first day on which the current member of the Company’s board of directors cease to represent at least a majority of the members of the Company’s board of directors then serving.

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     Redemption by the Company. If, at any time after September 2, 2006 and before September 2, 2009, during a period of at least twenty (20) consecutive trading days (a) the closing trading price of the Company’s common stock is at least 200% of the conversion price then in effect and (b) the trading volume and trading price of the Company’s common stock result in a product of at least $350,000 on each trading day, then the Company shall have the right to redeem all shares of Series B convertible preferred stock then outstanding at price per share equal to 200% of the sum of the face amount of such share plus all accrued and unpaid dividends thereon through the closing date of such redemption.
     Restricted Actions. So long as any shares of Series B convertible preferred stock are outstanding, the Company is not permitted to take any of the following corporate actions (whether by merger, consolidation or otherwise) without first obtaining the approval of the majority holders of Series B convertible preferred stock:
  1)   alter or change the rights, preferences or privileges of the Series B convertible preferred stock, or increase the authorized number of shares of Series B convertible preferred stock;
 
  2)   amend the Company’s certificate of incorporation or bylaws;
 
  3)   issue any shares of Series B convertible preferred stock other than pursuant to the securities purchase agreement with the selling stockholder;
 
  4)   redeem, repurchase or otherwise acquire, or declare or pay any cash dividend or distribution on, any junior securities;
 
  5)   increase the par value of the Company’s common stock;
 
  6)   sell all or substantially all of the Company’s assets or stock, or consolidate or merge with another entity;
 
  7)   enter into or permit to occur any change of control transaction;
 
  8)   sell, transfer or encumber technology, other than licenses granted in the ordinary course of business;
 
  9)   liquidate, dissolve, recapitalize or reorganize;
 
  10)   authorize, reserve, or issue common stock with respect to any plan or agreement that provides for the issuance of equity securities to the Company’s employees, officers, directors or consultants in excess of 250,000 shares of common stock;
 
  11)   change the Company’s principal business;
 
  12)   issue shares of the Company’s common stock, other than as contemplated by the certificate of designation or by the warrants issued to the selling stockholder;
 
  13)   increase the number of members of the Company’s board of directors to more than 7 members, or, if no Series B convertible preferred stock director has been elected, increase the number of members of the Company’s board of directors to more than 6 members;
 
  14)   alter or change the rights, preferences or privileges of any of the Company’s capital stock so as to affect adversely the Series B convertible preferred stock;
 
  15)   create or issue any senior securities or pari passu securities to the Series B convertible preferred stock;
 
  16)   except for the issuance of debt securities to, or incurrence of indebtedness from, a recognized financial institution in an aggregate amount not exceeding $5,000,000 and which, in the case of debt securities, are not convertible securities, issue any debt securities or incur any indebtedness that would have any preferences over the Series B convertible preferred stock upon the Company’s liquidation, or redeem, repurchase, prepay or otherwise acquire any of our outstanding debt securities or indebtedness, except as expressly required by the terms of such securities or indebtedness;
 
  17)   make any dilutive issuance;

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  18)   enter into any agreement, commitment, understanding or other arrangement to take any of the foregoing actions; or
 
  19)   cause or authorize any of the Company’s subsidiaries to engage in any of the foregoing actions.
     Voting Rights. Except as otherwise provided in the certificate of designation and as otherwise required by the Delaware General Corporation Law, each holder of Series B convertible preferred stock has the right to vote on all matters before the common stockholders on an as-converted basis voting together with the common stockholders as a single class. This voting right is subject to the limitation that in no event may a holder of shares of Series B convertible preferred stock (or warrants discussed below) have the right to convert shares of Series B convertible preferred stock into shares of the Company’s common stock or to dispose of any shares of Series B convertible preferred stock to the extent that such right to effect such conversion or disposition would result in the holder and its affiliates together beneficially owning or having the power to vote more than 9.99% of the Company’s outstanding shares of common stock. The holders of a majority of the Series B convertible preferred stock also have the right to appoint one representative to the Company’s board of directors and are entitled to designate one observer to the meetings of the Company’s board of directors and committees.
     Warrants Issued to Selling Stockholder. In connection with the issuance of shares of Series B convertible preferred stock to SDS, the Company also issued to SDS three warrants to purchase shares of the Company’s common stock.
     With respect to the first warrant, the holder has the right to purchase up to 1,666,667 shares of the Company’s common stock at an exercise price equal to $0.01 per share. The first warrant may be exercised at any time until September 2, 2010.
     With respect to the second warrant, the holder has the right to purchase up to 700,000 shares of the Company’s common stock at an exercise price equal to $1.75 per share. The second warrant may be exercised at any time until September 2, 2010. The remaining terms of the second warrant are identical to the first warrant except the second warrant contains certain anti-dilution price protections in the event of a dilutive stock issuance (in addition to anti-dilution protections for stock splits and other similar pro rata events).
     With respect to the third warrant, the holder has the right to purchase up to 2,000,000 shares of the Company’s common stock at an exercise price equal to $1.75 per share. The third warrant may be exercised at any time after March 2, 2006 until September 2, 2010. The remaining terms of the third warrant are identical to the first warrant except (i) the third warrant contains a provision which requires the Company to obtain the consent of the holder of the third warrant prior to any issuing any of the Company’s securities in a dilutive issuance and (ii) cashless exercise of the third warrant is not available until September 2, 2006. All three warrants contain a provision that prevents any holder from exercising the warrant to the extent that such exercise would result in such holder beneficially owning or having the right to vote more than 9.99% of the Company’s outstanding shares of common stock.
     In addition to the warrants discussed above, SDS also holds two warrants which were issued in October 2004 and which are described more fully in the “Description of Capital Stock” section of the Company’s registration statement on Form S-3, filed by the Company with the Commission on November 24, 2004.
     Registration Rights Agreement. In connection with the issuance of Series B convertible preferred stock and warrants to SDS, the Company entered into a registration rights agreement, dated September 2, 2005, with the SDS, whereby the Company granted certain registration rights to SDS. On or prior to October 2, 2005, the Company was obligated to file a registration statement on Form S-3 covering 10,000,000 shares of common stock that SDS may acquire upon conversion of the Series B convertible preferred stock or upon exercise of the warrants. SDS and the Company subsequently amended the Registration Rights Agreement to extend the date by which the Company was obligated to file a registration statement on Form S-3 from October 2, 2005 to February 28, 2006. As per the amended registration rights agreement, the Company could face a liquidated damages claim by SDS if (i) the initial registration statement is not declared effective by the SEC on or prior to April 30, 2006, (ii) after the effectiveness of the registration statement, sales of common stock cannot be made by SDS due to a stop order by the SEC or the Company needs to update the registration statement, or (iii) the Company’s common stock is not listed on Nasdaq, the New York Stock Exchange or the American Stock Market. The liquidated damages for the first 30 days equals 3% of the purchase price of the Series B convertible preferred stock and equal 1.5% for each 30 days thereafter of non-compliance. In addition to the liquidated damages provision discussed above, SDS can require the redemption of its shares of Series B convertible preferred stock upon certain default events.

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     SDS also has the right to piggy-back on to the registration statements filed by the Company registering shares of the Company’s common stock (other than Form S-8 and Form S-4 registration statements filed by the Company), subject to share cut-backs by the underwriters (if an underwritten public offering), provided that at least 25% of the shares requested for inclusion in the registration statement by SDS must be included in such underwritten public offering.
Accounting for Sale of Series B Convertible Redeemable Preferred Stock and Exchange of Note Payable for Warrants
     The gross proceeds from the sale of the 650 shares of Series B convertible preferred stock was $6,500,000. The proceeds were used to redeem 5,000 shares of Series A convertible preferred stock at a face value of $5,000,000. The premium paid upon redemption was $750,000. The carrying value on the Series A convertible preferred stock was $3,542,000; thus, the Company recorded a loss on redemption in September, 2005 of approximately $2,208,000. The loss is considered a deemed dividend and is reported after net loss and before net loss attributable to common stockholders.
     Approximately $975,000 of the net proceeds were allocated to the associated third warrant based on its relative fair value as computed using the Black-Scholes pricing model; thus, the Series B convertible preferred stock has a carrying value of $5,254,000. The net cash proceeds received by the Company after redemption of the Series A convertible preferred stock and payment of expenses and interest on the note payable described below was $443,000. As discussed above, the holders of the Series B convertible preferred stock have the right to require the Company to redeem any or all of its outstanding preferred shares upon a change of control or certain other contingent events that could be outside the control of the Company. Thus, the Series B convertible preferred stock is carried outside of permanent equity in the mezzanine section of the Company’s balance sheet.
4.   Related Party Transactions
     On July 20, 2004, the Company entered into and consummated the Third Amended Letter Agreement with HFS issuing a $2.0 million convertible promissory note to HFS with the principal balance being due 36 months from the date of funding, with an annual interest rate of 12 percent. Upon issuance of the Note, HFS provided the $2 million funding to the Company less a commission in the amount of $80,000 representing four percent (4%) of the loan proceeds. Accordingly, Stephen CuUnjieng, the President of HFS, was appointed to the Company’s Board of Directors effective July 13, 2004. Mr. CuUnjieng is a controlling partner in HFS and is deemed to beneficially own 649,351 shares of common stock issuable upon conversion of the HFS convertible promissory note. Mr. CuUnjieng resigned from the Company’s Board of Directors effective December 15, 2005. On January 4, 2006, the Company appointed Dennis Ackerman to serve as a Director on the Company’s Board of Directors. Mr. Ackerman currently serves as the Managing Director of HFS. During the three months ended November 30, 2005 and 2004, the Company made interest payments to HFS totaling $60,000 and $60,000 respectively.
5.   Other Commitments and Contingencies
Product Warranty Guarantees
     The Company provides a limited warranty on all REDIview product sales, at no additional cost to the customer, that provides for replacement of defective parts for one year after the product is sold. The Company provides a limited warranty on all VMI product sales, at no additional cost to the customer, that provides for replacement of defective parts during the contract term, typically ranging from one to five years. The Company establishes an estimated liability for expected future warranty commitments based on a review of historical warranty expenditures associated with these products and other similar products. Changes in the Company’s product warranty liability, which is included in “Accrued expenses and other current liabilities” and “Other non-current liabilities” in the accompanying Consolidated Balance Sheets, are summarized below (in thousands):

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    Three  
    Months Ended  
    November 30, 2005  
Warranty product liability at beginning of period
  $ 210  
 
Accruals for product warranties issued
    20  
Product replacements
    (65 )
Adjustments to pre-existing warranty estimates
    61  
 
     
Warranty product liability at end of period
  $ 226  
 
     
Purchase Obligations
     The Company had purchase obligations of approximately $1.1 million primarily related to the purchase of REDIview inventory as of November 30, 2005.
6. Segment Reporting
     The Company’s reportable segments offer different products and/or services. Each segment also requires different technology and marketing strategies. The Company’s two reportable segments are VMI and Network Service Center Systems (“NSC Systems”). REDIview products and services are included in NSC Systems.
     During the last half of the 2001 calendar year, the Company commenced marketing the VMI product licensed from Minorplanet Limited into the AVL marketplace in the United States. VMI is designed to maximize the productivity of a mobile workforce as well as reduce vehicle mileage and fuel related expenses. The VMI technology consists of: (i) a data control unit (“DCU”) that continually monitors and records a vehicle’s position, speed and distance traveled; (ii) a command and control center (“CCC”) which receives and stores in a database information downloaded from the DCU’s; and (iii) software used for communication, messaging and detailed reporting. VMI uses the satellite-based global positioning system to acquire a vehicle location on a minute-by-minute basis and a global system for mobile communications based cellular network to transmit data between the DCU’s and the CCC. The VMI application is targeted to small and medium-sized fleets in the metro marketplace.
     Through its NSC Systems segment, the Company commercially launched its new product offering, REDIview, during January 2005. REDIview is an Internet and service bureau-based software application that provides an extensive array of real-time and accurate mapping, trip replay, and vehicle activity reports. REDIview includes a series of exception-based reports designed to highlight inefficiencies in the operations of a vehicle fleet. Utilizing GPRS technology and the Company’s proven, high-capacity network service center, customers may access their information securely through the Internet from any personal computer or certain other devices. REDIview incorporates technologies that allow for fast and effective integration into legacy applications operated by companies with vehicle fleets and mobile workers. This design allows companies to easily extend their existing supply chain management systems to the mobile workforce for transaction processing and customer fulfillment. REDIview was also designed to be hardware and network agnostic to provide the maximum flexibility in designing solutions that best fit the customer’s specific needs.
     The REDI 2000™ mobile data logging unit combines global positioning system (GPS) technologies along with the latest in wireless, Internet protocol-based communications to deliver, throughout the day, real-time location, speed, and other conditions of the vehicle on a minute-by-minute basis. In addition, the units may be configured to accept additional sensor inputs regarding operations of the vehicle and vehicle equipment.
     Historically, through its NSC Systems segment, the Company provided long-haul trucking companies with a comprehensive package of mobile communications and management information services, thereby enabling its trucking customers to effectively monitor the operations and improve the performance of their fleets. The initial product application was customized, sold to and installed in the service vehicle fleets of the member companies of SBC Communications, Inc., pursuant to the Service Vehicle Contract.
     Operating expenses are allocated to each segment based on management’s estimate of the utilization of financial resources by each segment. Impairment loss on license right is allocated solely to the VMI segment. Goodwill impairment is allocated solely to the NSC Systems segment. The following tables set forth segment financial information (in thousands):

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    Three Months Ended November 30, 2005  
                    Reorganization        
    NSC Systems     VMI     Items     Consolidated  
     
Revenues
  $ 1,283     $ 647     $     $ 1,930  
Operating loss
    (7,348 )     (307 )           (7,655 )
Interest expense
    (82 )                 (82 )
Interest income
    31                   31  
Depreciation and amortization
    (576 )     (93 )           (669 )
Impairment loss on license right
          (144 )           (144 )
Goodwill impairment
    (4,990 )                 (4,990 )
Net loss
    (7,429 )     (290 )           (7,719 )
Total assets
    12,805       1,606             14,411  
Capital expenditures
                       
                                 
    Three Months Ended November 30, 2004  
                    Reorganization      
    NSC Systems     VMI     Items     Consolidated  
     
Revenues
  $ 3,374     $ 1,150     $     $ 4,524  
Operating loss
    (612 )     (366 )           (978 )
Interest expense
    82                   82  
Interest income
          76             76  
Depreciation and amortization
    515       129             644  
Net loss
    (780 )     (305 )     (46 )     (1,131 )
Total assets
    32,957       4,517             37,474  
Capital expenditures
    316       49             365  
7. Earnings Per Share
     The Company computes earnings per share in accordance SFAS No. 128, “Earnings Per Share.” Net loss per basic share was computed by dividing net loss by the weighted average number of shares outstanding during the respective periods. Diluted earnings per share is computed using the “Treasury Stock Method.” The Company’s potentially dilutive securities have been excluded from the weighted average number of shares outstanding, since their effect would be anti-dilutive.
                 
    Three Months     Three Months  
    Ended November 30,     Ended November 30,  
    2005     2004  
Net loss attributable to common stockholders:
  $ (10,057 )   $ (1,198 )
 
               
Weighted average number of shares outstanding:
               
Weighted average number of shares outstanding, net of treasury shares — Basic EPS
    6,801       6,241  
Additional weighted average shares for assumed exercise of stock options, net of shares assumed to be repurchased with exercise proceeds
           
 
               
 
           
Weighted average number of shares outstanding, net of treasury shares — Diluted EPS
    6,801       6,241  
 
           
 
               
Basic and diluted loss per common share
  $ (1.48 )   $ (0.19 )
 
           
The securities listed below were not included in the computation of diluted earnings per share as the effect from their conversion would have been antidilutive:

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    Three Months   Three Months
    Ended November 30,   Ended November 30,
    2005   2004
Restricted stock ( not vested)
    565,000       525,000  
Convertible note payable
    649,350       689,655  
Convertible series A preferred stock
          2,500,000  
Convertible series B preferred stock
    4,193,548        
Outstanding warrants to purchase common stock
    5,491,667       1,625,000  
8. Nasdaq Delisting Notification
     On November 2, 2005, Remote Dynamics, Inc. (the “Company”) received a Nasdaq Staff Deficiency Letter from the Nasdaq Listing Qualifications Department that for the previous 30 days, the bid price for the Company’s common stock had closed below the minimum $1.00 per share requirement for continued inclusion under Marketplace Rule 4310(c)(4). In accordance with Marketplace Rule 4310(c)(8)(D), the Company was provided 180 calendar days, or until May 1, 2006, to regain compliance. In order to regain compliance, the Company must demonstrate a closing bid price for its common stock of $1.00 per share or more for a minimum of 10 consecutive business days. The Company has not determined to take any particular course of action at this time with respect to the Nasdaq notice.
     The Nasdaq Staff Deficiency Letter further provided that if compliance with the $1.00 minimum bid price requirement cannot be demonstrated by the Company by May 1, 2006, the Nasdaq Staff will grant the Company an additional 180 calendar days to regain compliance, if at that time, the Company meets The Nasdaq SmallCap Market initial listing requirements as set forth in Marketplace Rule 4310(c), except for the $1.00 minimum bid price requirement. If the Company fails to regain compliance with the $1.00 minimum bid price requirement during the initial 180 day period and is not eligible for an additional 180 day compliance period, the Nasdaq Staff would notify the Company at that time that the Company’s securities would be delisted and the Company would have the right to appeal such delisting to the Nasdaq Listing Qualifications Panel which stays the effect of the delisting pending a hearing on the matter before the Panel.
     On January 9, 2006, the Company received a Nasdaq Staff Deficiency Letter stating that with the resignation of Gerry Quinn who served as a Director on the Company’s Board of Directors and its Audit Committee, the Company no longer complied with Nasdaq’s audit committee requirements as set forth in Marketplace Rule 4350.
     In accordance with Marketplace Rule 4350(d)(4), the Company was provided with a cure period to regain compliance until the earlier of the Company’s next annual shareholders’ meeting or December 29, 2006 by submitting to Nasdaq documentation, including biographies of any proposed directors, evidencing compliance with Marketplace Rule 4350(d)(4). In the event the Company fails to regain compliance within this period, the Staff Deficiency Letter stated that the Nasdaq Staff would provide written notification to the Company that its securities would be delisted. At that time, the Company would have the right to appeal Staff’s determination to a Listing Qualifications Panel, which would stay the effectiveness of the delisting prior to a decision being rendered by the Panel.
     The failure of the Company to maintain its common stock listed on the Nasdaq SmallCap Market would constitute a redemption event under the Company’s Certificate of Designation for the Series B convertible preferred stock entitling the holders of the Company’s Series B convertible preferred stock to force the Company to redeem their shares of Series B convertible preferred stock. The Company may not have the funds available to effect such forced redemption and the holders could take further actions such as forcing the Company into involuntary bankruptcy.
     Additionally, if the closing bid for the Company’s common stock remains below $1.00 per share and it is no longer listed on The Nasdaq SmallCap Market, the Company’s common stock may be deemed to be penny stock. If the Company’s common stock is considered penny stock, it will be subject to rules that impose additional sales practices on broker-dealers who sell the Company’s securities. For example, broker-dealers selling penny stock must make a special suitability determination for the purchaser and must have received the purchaser’s written consent to the transaction prior to sale. Also, a disclosure schedule must be prepared before any transaction involving a penny stock can be completed, including required disclosure concerning:
    sales commissions payable to both the broker-dealer and the registered representative; and

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    current quotations for the securities.
     Monthly statements are also required to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stock. Because of these additional obligations, some brokers may not effect transactions in penny stock. This could have a material and adverse effect on the market for the Company’s common stock, and the ability of stockholders to sell shares.
ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Executive Summary
     Remote Dynamics, Inc., a Delaware Corporation (the “Company”), markets, sells and supports automatic vehicle location (“AVL”) and mobile resource management solutions targeting companies that operate private vehicle fleets. The REDIview™ family of solutions is ideal for metro, short-haul fleets within diverse industry vertical markets such as field services, distribution, courier, limousine, electrical/plumbing, waste management, and government. The Company’s core technology, telematics, combines wireless communications, GPS location technology, geospatial solutions and vehicle data integration with an easy-to-use web-accessible application that aids in the optimization of remote business solutions. The Company’s state of the art fleet management solution contributes to higher customer revenues and improved operator efficiency by improving the productivity of mobile workers through real-time position reports, route-traveled information, and exception based reporting designed to highlight mobile workforce inefficiencies. This in-depth reporting enables the Company’s customers to correct those inefficiencies and deliver significant savings to the bottom line.
     Historically, much of the Company’s revenues have been derived from products sold to the long-haul trucking industry and to member companies of SBC Communications, Inc. (“SBC”). Revenues from these legacy customers have ceased as of December 31, 2005, and for the Company to sustain ongoing business operations and ultimately achieve profitability, it must substantially increase its sales and penetration into the marketplace with next generation products and services.
     The Company commercially introduced its next generation AVL product, REDIview, in January of 2005. REDIview was designed with a flexible architecture to accommodate expected additional functional requirements that will be required to effectively compete in the marketplace. Anticipated marketplace needs include; 1) ability for the AVL mobile device to function as a communications hub for personal computers and handheld devices, 2) ability for the AVL mobile device to communicate with WiFi hotspots, 3) ability for the AVL mobile device to integrate with a variety of in-vehicle sensors, and 4) ability to integrate the AVL information into existing customer legacy applications.
     The Company’s new REDIview product line forms the basis of management’s business plan for calendar year 2006 and beyond and will be the foundation for expected growth in revenues and ultimately profitability for the Company. In addition, the REDIview product line allows the Company to move to a recurring revenue model for all of its current product offerings, an important and necessary change to the Company’s revenue model to achieve overall sustained revenue growth and cash flow positive operations.
     Based on the Company’s failure to achieve its forecasted sales targets for the three months ended November 30, 2005, the Company began analyzing and revising its current and long-term business plans with the goal of optimizing the Company’s sales and marketing strategy in order to maximize its revenues and further reduce its operating costs. As a result, in late-December 2005, the Company materially modified its existing business plan. Key to the Company’s new business plan was its decision to exclusively market and sell its REDIview product line through its existing network of over 30 third-party distribution partners which the Company expects will result in a significant reduction in the Company’s sales and marketing expenses related to maintaining a significant direct sales effort. Additionally, in implementing its new business plan, the Company completed a significant cost and operational-based restructuring rightsizing its workforce at all levels including its senior management level and ceased its development efforts to launch two new product lines during 2006 instead focusing the Company’s efforts on enhancing its existing REDIview product line. As a result, in addition to significantly reducing its projected operational costs, the Company significantly reduced its projected sales targets and associated cash flows from its previous business plan which included multiple product offerings sold through both a direct sales force and third-party distributors.
Voluntary Bankruptcy Filing
     On February 2, 2004, (the “Commencement Date”), the Company and two of its wholly-owned subsidiaries,

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Caren (292) Limited (“Caren”) and Minorplanet Systems USA Limited (“Limited”) (the Company, Caren and Limited shall hereinafter collectively be referred to as the “Debtors”) filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Northern District of Texas Dallas Division (the “Bankruptcy Court”), in order to facilitate the restructuring of their debt, trade liabilities, and other obligations. During the bankruptcy, the Debtors remained in possession of their assets and operated as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of Bankruptcy Code, the Federal Rules of Bankruptcy Procedure and applicable court orders.
     On June 29, 2004, the Bankruptcy Court entered an order confirming the Debtors’ Third Amended Joint Plan of Reorganization, as Modified (the “Plan”). The Bankruptcy Court set the enterprise value of the Company at $25.3 million for purposes of distributions of new common stock under the Plan. The effective date of the Plan was set by the Debtors pursuant to the Plan as Friday, July 2, 2004 (the “Effective Date”). Caren and Limited, as a matter of law, were merged with and into the Company, ceasing to exist as separate entities as of the Effective Date. The Plan was substantially consummated on July 8, 2004. On August 25, 2005, the Bankruptcy Court signed the Final Decree closing the Company’s case. In connection with the Company’s Chapter 11 reorganization, the Company applied “Fresh Start Accounting” which resulted in approximately $19.7 million of excess reorganizational value which was recorded as goodwill. The goodwill has subsequently been impaired as noted below.
Goodwill and Other Intangibles
     The Company tests its Goodwill for impairment on an annual basis, or between annual tests if it is determined that a significant event or change in circumstances warrants such testing, in accordance with the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets”, (“SFAS 142”) which requires a comparison of the carrying value of goodwill to the fair value of the reporting unit. If the fair value of the reporting unit is less than the carrying value of goodwill, an adjustment to the carrying value of goodwill is required.
     Based on the Company’s failure to achieve its forecasted sales targets for the three months ended November 30, 2005, the Company began analyzing and revising its current and long-term business plans materially modifying its existing business plan in late-December 2005 as described in the “Executive Summary” section above. The Company’s new business plan significantly reduces its projected sales forecasts and operational costs from the Company’s former plan.
     As a result and in accordance with SFAS 142, the Company performed an interim test of its Goodwill utilizing a discounted future cash flow analysis based on the Company’s new projected sales targets and the estimated impact of its cost savings. The Company has determined its Goodwill was impaired by an estimated $5.0 million. Goodwill was thus written off by $5.0 million representing the full amount of the estimated impairment. At November 30, 2005, the carrying value of the Company’s Goodwill was $5.1 million.
VMI License Right
     In June of 2001, the Company received a 99-year exclusive license right to market, sell and operate Minorplanet Systems PLC’s (“PLC”) VMI technology in the United States, Canada and Mexico. On June 14, 2004, the Bankruptcy Court approved a Compromise and Settlement Agreement (the “Agreement”) by and among the Company and Minorplanet Limited and PLC regarding the license agreement for the VMI technology which allowed the Company to use, market and sell the VMI technology until December 31, 2004. On January 6, 2005, the Company and PLC entered into an Addendum to Compromise and Settlement Agreement (the “Addendum”) which granted the Company the right to continue to market and sell the VMI product line to the Company’s existing VMI customers. Although the Company has ceased actively marketing and selling the VMI product, the Addendum allows the Company to fulfill VMI product orders from existing VMI customers.
     Management accounts for the VMI license right in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”). SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”), requires management of the Company to review for impairment of its long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset might not be recoverable and exceeds its fair value. Thus, management used an expected present value technique, in which multiple cash flow scenarios that reflect the range of possible outcomes and a risk-free rate, to estimate the fair value of the VMI license right at November 30, 2005. Accordingly, the Company recorded an impairment loss of $0.1 million during the three months ended November 30, 2005 to reflect the fair value of the VMI license right based on the Company’s revised sales and cash flow forecasts. The new fair value of the VMI license right is being amortized over its

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expected useful life of nineteen months. At November 30, 2005, the carrying value of the license right was $0.4 million.
Results of Operations — Three Months Ended November 30, 2005 Compared to Three Months Ended November 30, 2004
     Total revenue of $1.9 million for the three months ended November 30, 2005 decreased from $4.5 million during the three months ended November 30, 2004. NSC Systems revenue decreased from $3.4 million during the three months ended November 30, 2004 to $1.3 million during the three months ended November 30, 2005. These decreases were primarily due to a reduction in active SBC network subscriber units from 29,821 at November 30, 2004 to 8,333 as of November 30, 2005 and a reduction in active Geologic network subscriber units from 3,758 at November 30, 2004 to –0- as of November 30, 2005. The decrease in SBC network subscriber units was anticipated as SBC has selected an alternative vendor to supply its next generation AVL product. As of December 31, 2005, SBC had deactivated all of its units. The decrease in Geologic network services subscriber units was also anticipated after the sale to Geologic as all of these units have converted to either Geologic’s network or to other carrier networks. As the revenues from the SBC Contract ends, the Company’s future revenues will be solely dependent upon sales of its REDIview product line. REDIview contributed $0.5 million to the Company’s total revenue and NSC Systems segment. The failure of the Company to achieve its sales targets of the REDIview product line will have a material adverse effect on the Company’s business, financial condition and results of operations.
     VMI revenue for the three months ended November 30, 2005 was $0.6 million down from $1.1 million during the three months ended November 30, 2004 primarily due to VMI customers converting to REDIview and normal expected attrition of the VMI customer base. New VMI unit sales were minimal during the three months ended November 30, 2005 and 2004 as sales and marketing focused on sales of the REDIview product line. The Company no longer actively markets the VMI product; however, the Company will continue to service and support existing VMI customers and will continue to recognize deferred product revenues and costs over the remaining VMI contract lives.
     Total gross profit margin decreased from 49% for the three months ended November 30, 2004 to 24% for the three months ended November 30, 2005. During the three months ended November 30, 2005, profit margins on the sales of the REDIview product line were offset by the fixed costs of operating the network services center. During the three months ended November 30, 2004, higher revenues from SBC and Geologic offset these fixed costs. While fixed costs of operating the network services center remained relatively constant during both three-month periods at approximately $0.2 million, these fixed costs as a percentage of revenue increased from 5% during the three months ended November 30, 2004 to 19% during the same period in 2005.
     Total operating expenses increased to $8.1 million during the three months ended November 30, 2005 from $3.2 million during the same period in 2004. The Company recorded a $0.1 million impairment loss on the VMI license right and a $5.0 million Goodwill impairment loss during the three months ended November 30, 2005 as explained above. Sales and marketing expenses increased to $0.7 million during the three months ended November 30, 2005 from $0.4 million during the three months ended November 30, 2004. The increase in sales and marketing costs was primarily attributable to an increase in sales and marketing personnel to support the ongoing REDIview sales effort. General and administrative expenses decreased from $1.4 million during the three months ended November 30, 2004 to $1.0 million during the three months ended November 30, 2005 primarily due to a cost-based reduction in workforce. Customer service expense decreased to $0.2 million during the three months ended November 30, 2005 from $0.4 million during the same period in 2004 also primarily due to a cost-based reduction in workforce. Operating losses increased from $1.0 million during the three months ended November 30, 2004 to $7.7 million during the three months ended November 30, 2005 primarily due to the Goodwill impairment loss and the loss of revenues related to the declining SBC and Geologic network subscriber units described above.
Critical Accounting Policies and Estimates
     The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.
     The significant accounting policies and estimates, which are believed to be the most critical to aid in fully understanding and evaluating reported financial results, are stated in Management’s Discussion and Analysis of Financial Condition and Results of Operations reported in the Company’s Annual Report on Form 10-K for the year ended August 31, 2005.

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Liquidity and Capital Resources
     The Company has incurred significant operating losses since inception and has limited financial resources to support itself until such time that it is able to generate positive cash flow from operations. The Company had cash and cash equivalents of $0.2 million as of November 30, 2005.
     On October 1, 2004, the Company closed the sale of 5,000 shares of Series A convertible preferred stock (“Series A convertible preferred stock “), with each preferred share having a face value of $1,000, for a total purchase price of $5,000,000. Net cash proceeds received by the Company were $4,651,000 after payment of expenses. The Series A convertible preferred stock was convertible into shares of the Company’s common stock at a conversion price of $2.00 per share. The Company sold the Series A Preferred Stock to SDS Capital Group SPC, Ltd (“SDS”) pursuant to that certain Securities Purchase Agreement , dated October 1, 2004, by and between the Company and SDS. The Series A Preferred Stock was issued to SDS pursuant to the exemption from the registration requirements of the Securities Act of 1933 as amended, provided by Regulation D promulgated thereunder.
     On May 31, 2005, the Company consummated a bridge loan and security agreement with SDS in which the Company issued a promissory note in the amount of $1.75 million to SDS (the “Bridge Note”). The Bridge Note was secured by the assets of the Company, accrued interest at 8% per annum and was due and payable on September 30, 2005. The Bridge Note automatically exchanged into a common stock purchase warrant with a 5-year term to purchase 1,666,667 shares of common stock at an exercise price of $0.01 per share and a common stock purchase warrant with a 5-year term to purchase 700,000 shares of common stock at an exercise price of $1.75 per share (the “Bridge Warrants”) upon approval of the Company’s stockholders. The Company’s stockholders approved the exchange of the Bridge Note into the Bridge Warrants at the Company’s August 31, 2005 annual stockholders meeting. On September 2, 2005, the Bridge Note was extinguished and exchanged for the Bridge Warrants.
     On September 2, 2005, the Company closed the sale of $6.5 million of preferred stock and common stock purchase warrants in a private placement transaction with SDS previously entered into on May 31, 2005. In consideration for the issuance of the Series B convertible preferred stock, SDS paid $750,000 and returned to the Company all of the outstanding Series A convertible preferred stock which was held by SDS. Net cash proceeds received by the Company were approximately $443,000 after deduction of brokers’ commissions, accrued interest on the bridge note and other expenses. The Series A convertible preferred stock returned to the Company had a face value of $5 million. The Series B convertible preferred stock is convertible into common stock at a conversion price of $1.55 per share. SDS also received a common stock purchase warrant with a 5-year term to purchase 2 million shares at an exercise price of $1.75 per share. The Company intends to use the net proceeds from the financing transaction to fund its business plan. The Company is obligated to register the common stock issuable upon conversion of the Series B convertible preferred stock or exercise of the common stock purchase warrants for public resale under the Securities and Exchange Act of 1933.
     A summary of the Company’s cash flows for the three months ended November 30, 2005 and 2004 are as follows:

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    Three months     Three months  
    ended     ended  
    November 30,     November 30,  
    2005     2004  
    (in thousands)  
Net cash used in operating activities
  $ (358 )   $ (2,071 )
 
               
Net cash used in investing activities
          (349 )
 
               
Cash flows from financing activities:
               
Proceeds from issuance of Series A preferred stock and warrants, net of offering costs
            4,651  
Proceeds from issuance of Series B preferred stock and warrants, net of offering costs
    443          
Other
    (411 )     (237 )
 
           
Net cash provided by financing activities
    32       4,414  
 
           
Total change in cash
    (326 )     1,994  
 
           
 
Cash and cash equivalents, end of period
  $ 177     $ 3,306  
 
           
     Net cash used in operating activities decreased by approximately $1.7 million during the three months ended November 30, 2005 compared to the same period of the prior year primarily due to a decrease in accounts receivable of $2.0 million (primarily due to the reduction of SBC and Geologic revenues), an increase in accounts payable of $0.3 million and a decrease in deferred product revenues of $0.6 million due to lower margins on the REDIview product line.
     Critical success factors in management’s plans to achieve positive cash flow from operations include:
    Ability to raise a minimum of $2.5 million in additional capital resources to fund ongoing operations through August 31, 2006.
    Ability to increase sales of the REDIview product line to lessen the amount of capital resources necessary to fund our operations until such time that revenues from the REDIview product line are sufficient to fund ongoing operations.
    Ability to complete development of additional features and functionality to the REDIview product line.
    Significant market acceptance of the Company’s product offerings from new customers, including the Company’s REDIview product line, in the United States.
    Maintaining and expanding indirect distribution channels for the Company’s REDIview product line.
    Securing and maintaining adequate third party leasing sources for customers who purchase the Company’s products.
     There can be no assurances that any of these success factors will be realized or maintained.
     On December 16, 2005, in consideration of the Company reducing the exercise price on certain warrants held by SDS Capital Group SPC Ltd. (“SDS”), the sole holder of the Company’s Series B convertible preferred stock, from $0.67 to $0.30 per share, SDS exercised the warrants for the purchase of 1,125,000 shares of the Company’s common stock resulting in the receipt by the Company of cash proceeds in the amount of $337,500 (the “Warrant Exercise”).
     On December 23, 2005, the Company consummated the sale and assignment of certain of its patents and pending patent applications to Vehicle IP LLC in exchange for the payment by Vehicle IP LLC to the Company of $500,000 (the “Patent Sale”).
     As a result of the Warrant Exercise and the Patent Sale, the Company, in the aggregate, raised $837,500 of

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working capital in the month of December 2005. The Company is also currently in the process of seeking additional capital through the sale of debt and/or equity securities and currently believes that it will be able to consummate a transaction for such additional capital prior to depleting its available cash reserves. The certificate of designation for the Company’s Series B convertible preferred stock, which is part of the Company’s Certificate of Incorporation, requires the approval of the holders of its Series B convertible preferred stock to effect certain transactions, such as issuing senior or pari passu securities or issuing certain debt, and there can be no assurance that the Company will be able to obtain such approval.
     The Company currently believes that it must raise a minimum of $2.5 million in additional capital in order to sustain its operations through August 31, 2006. The Company is currently forecasting an average monthly cash shortfall of approximately $310,000 for the period beginning January 1, 2006 through August 31, 2006. However, the Company’s ability to meet its current sales projections of the REDIview product line heavily influences its capital requirements and there can be no assurances that the Company will be able to achieve its current sales forecasts. If the Company fails to meet its current sales forecasts, the Company will require more than $2.5 million in additional capital to sustain its operations through August 31, 2006.
     The Company currently believes that with the receipt of the proceeds from the Warrant Exercise and the Patent Sale and additional savings from operating cost reductions implemented in December 2005, the Company has sufficient funds to sustain its operations through mid-February 2006 which the Company currently believes will provide it with sufficient time to raise additional capital prior to depleting its available cash reserves. However, if the Company fails to achieve its current sales forecasts, the Company may deplete its cash reserves sooner than currently anticipated. There can be no assurance that the Company will be able to consummate a transaction for additional capital prior to substantially depleting its available cash reserves, and its failure to do so may force the Company to file for bankruptcy protection and/or cease operations.
     Management currently does not expect to achieve profitability during the 2006 fiscal year since the Company will be expanding its sales channels and building a base of customers that purchase information and data services from the Company on a monthly recurring basis. Key to achieving profitability is to obtain a REDIview customer base that provides monthly recurring revenues and corresponding gross margins that exceed operating costs and expenses to support the REDIview customer base. Based on the Company’s latest revised pricing structure, management currently estimates that for the Company to achieve profitability, it will need to have approximately $1.1 million in monthly revenues. However, there can be no assurance that the Company will achieve its REDIview sales targets and failure to do so may have a material adverse effect on the Company’s business, financial condition and results of operations.
Contractual Obligations
     The following summarizes the Company’s significant financial commitments at November 30, 2005:
                                         
    Payments due by period  
            Less than 1                     More than 5  
Contractual Obligations   Total     Year     1-3 Years     3-5 Years     Years  
 
Long-Term Debt (a)
                                       
Principal Payments
  $ 2,000     $     $ 2,000     $     $  
Interest Payments
    400       240       160              
Capital Lease Obligations
    837       417       420                
Operating Leases
    1,719       320       624       600       175  
Other Notes Payable
    71       71                    
Purchase Obligations (b )
    1,070       1,070                    
Other Long-Term Liabilities (c)
    487       282       149       56        
     
Total
  $ 6,584     $ 2,400     $ 3,353     $ 656     $ 175  
     
 
(a)   Convertible promissory note payable to HFS Minorplanet Funding LLC with the principal balance being due in July of 2007. Interest is payable monthly based on an annual rate of 12%.
 
(b)   Primarily includes obligations to purchase REDIview inventory.
 
(c)   Primarily includes obligations under priority tax claims allowed under the bankruptcy proceedings and product warranty commitments.

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Nasdaq Delisting Notification
     On November 2, 2005, Remote Dynamics, Inc. (the “Company”) received a Nasdaq Staff Deficiency Letter from the Nasdaq Listing Qualifications Department that for the previous 30 days, the bid price for the Company’s common stock had closed below the minimum $1.00 per share requirement for continued inclusion under Marketplace Rule 4310(c)(4). In accordance with Marketplace Rule 4310(c)(8)(D), the Company was provided 180 calendar days, or until May 1, 2006, to regain compliance. In order to regain compliance, the Company must demonstrate a closing bid price for its common stock of $1.00 per share or more for a minimum of 10 consecutive business days. The Company has not determined to take any particular course of action at this time with respect to the Nasdaq notice.
     The Nasdaq Staff Deficiency Letter further provided that if compliance with the $1.00 minimum bid price requirement cannot be demonstrated by the Company by May 1, 2006, the Nasdaq Staff will grant the Company an additional 180 calendar days to regain compliance, if at that time, the Company meets The Nasdaq SmallCap Market initial listing requirements as set forth in Marketplace Rule 4310(c), except for the $1.00 minimum bid price requirement. If the Company fails to regain compliance with the $1.00 minimum bid price requirement during the initial 180 day period and is not eligible for an additional 180 day compliance period, the Nasdaq Staff would notify the Company at that time that the Company’s securities would be delisted and the Company would have the right to appeal such delisting to the Nasdaq Listing Qualifications Panel which stays the effect of the delisting pending a hearing on the matter before the Panel.
     On January 9, 2006, the Company received a Nasdaq Staff Deficiency Letter stating that with the resignation of Gerry Quinn who served as a Director on the Company’s Board of Directors and its Audit Committee, the Company no longer complied with Nasdaq’s audit committee requirements as set forth in Marketplace Rule 4350.
     In accordance with Marketplace Rule 4350(d)(4), the Company was provided with a cure period to regain compliance until the earlier of the Company’s next annual shareholders’ meeting or December 29, 2006 by submitting to Nasdaq documentation, including biographies of any proposed directors, evidencing compliance with Marketplace Rule 4350(d)(4). In the event the Company fails to regain compliance within this period, the Staff Deficiency Letter stated that the Nasdaq Staff would provide written notification to the Company that its securities would be delisted. At that time, the Company would have the right to appeal Staff’s determination to a Listing Qualifications Panel, which would stay the effectiveness of the delisting prior to a decision being rendered by the Panel.
     The failure of the Company to maintain its common stock listed on the Nasdaq SmallCap Market would constitute a redemption event under the Company’s Certificate of Designation for the Series B convertible preferred stock entitling the holders of the Company’s Series B convertible preferred stock to force the Company to redeem their shares of Series B convertible preferred stock. The Company may not have the funds available to effect such forced redemption and the holders could take further actions such as forcing the Company into involuntary bankruptcy.
     Additionally, if the closing bid for the Company’s common stock remains below $1.00 per share and it is no longer listed on The Nasdaq SmallCap Market, the Company’s common stock may be deemed to be penny stock. If the Company’s common stock is considered penny stock, it will be subject to rules that impose additional sales practices on broker-dealers who sell the Company’s securities. For example, broker-dealers selling penny stock must make a special suitability determination for the purchaser and must have received the purchaser’s written consent to the transaction prior to sale. Also, a disclosure schedule must be prepared before any transaction involving a penny stock can be completed, including required disclosure concerning:
    sales commissions payable to both the broker-dealer and the registered representative; and
    current quotations for the securities.
     Monthly statements are also required to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stock. Because of these additional obligations, some brokers may not effect transactions in penny stock. This could have a material and adverse effect on the market for the Company’s common stock, and the ability of stockholders to sell shares.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
     The Company does not have any material exposure to market risk associated with its cash and cash equivalents.

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The Company’s note payables are at a fixed rates and, thus, are not exposed to interest rate risk.
Forward Looking Statements
     This report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that are based upon management’s current beliefs and projections, as well as assumptions made by and information currently available to management. When used in this Form 10-Q, the words “anticipate,” “believe,” “estimate,” “expect” and similar expressions are intended to identify forward-looking statements. Any statement or conclusion concerning future events is a forward-looking statement, and should not be interpreted as a promise or conclusion that the event will occur. The Company’s actual operating results or the actual occurrence of any such event could differ materially from those projected in the forward-looking statements. Factors that could cause or contribute to such differences include those discussed in this report, and the Company’s Annual Report on Forms 10-K for the year ended August 31, 2005.
ITEM 4: CONTROLS AND PROCEDURES
     The Company maintains disclosure controls and procedures, which it has designed to ensure that material information related to the Company, including its consolidated subsidiaries, is made known to the Company’s disclosure committee on a regular basis. The Company has a disclosure committee, which consists of certain members of the Company’s senior management.
     Under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), an evaluation of the effectiveness of the Company’s disclosure controls and procedures was performed as of November 30, 2005. Based on this evaluation, the CEO and CFO have concluded that the Company’s disclosure controls and procedures are effective to ensure that material information is recorded, processed, summarized and reported by management of the Company on a timely basis in order to comply with the Company’s public disclosure obligations under the relevant federal securities laws and the SEC rules promulgated thereunder.
     There were no changes in the Company’s internal controls over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act) that occurred during the first fiscal quarter ended November 30, 2005, that have materially affected, or are reasonably likely to materially effect, the Company’s internal controls over financial reporting.
PART II — OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
     None.
ITEM 2: CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASE OF SECURITIES
Series B Convertible Preferred Stock — Summary of Terms
     On September 2, 2005, the Company closed the sale of $6.5 million of convertible preferred stock and common stock purchase warrants in a private placement transaction with an institutional investor. The Company sold the Series B convertible preferred stock and stock purchase warrants to SDS Capital Group SPC, Ltd (“SDS”) pursuant to that certain Securities Purchase Agreement (the “Securities Purchase Agreement”), dated May 31, 2005, by and between the Company and SDS. The Series B convertible preferred stock was issued to SDS pursuant to the exemption from the registration requirements of the Securities Act of 1933 as amended, provided by Regulation D promulgated thereunder. In consideration for the issuance of the Series B convertible preferred stock, SDS paid $750,000 to the Company and returned to the Company all of the outstanding Series A convertible preferred stock which was held by SDS. Net cash proceeds received by the Company were approximately $443,000 after deduction of brokers’ commissions, accrued interest on the bridge note and other expenses. The Series A convertible preferred stock returned to the Company had a face value of $5 million. The Series B convertible preferred stock is convertible into common stock at a conversion price of $1.55 per share. SDS also received a common stock purchase warrant with a 5-year term to purchase 2 million shares at an exercise price of $1.75 per share. The Company intends to use the net proceeds from the financing transaction to fund its business plan. The Company is obligated to register the common stock issuable upon conversion of the Series B convertible preferred stock or upon the exercise of the common stock purchase warrants for public resale under the Securities and Exchange Act of 1933.

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     The terms of the Series B convertible preferred stock are set forth in the Certificate of Designation, Preferences and Rights, the most significant of which are as follows:
     Ranking. The Series B convertible preferred stock ranks senior to the Company’s common stock with respect to payment of dividends and amounts upon any liquidation, dissolution or winding up of the Company.
     Dividends. Dividends accrue from the date of issuance of the Series B convertible preferred stock through August 31, 2008, and will be cumulative from such date. Holders of shares of Series B convertible preferred stock will be entitled to receive cumulative dividends in an amount equal to 8% per year until September 1, 2006 and 3% per year thereafter, payable at the election of the holder of the Company’s Series B convertible preferred stock in cash or additional shares of Series B convertible preferred stock.
     Conversion. Each holder of Series B convertible preferred stock has the right to convert its shares of Series B convertible preferred stock into shares of the Company’s common stock at a conversion price of $1.55 per share of common stock. The conversion price shall be adjusted in the event of stock splits, stock dividends and similar distributions and events affecting all of our common stockholders on a pro rata basis so that the conversion price is proportionately increased or decreased to reflect the event. In addition, if there is a change of control (as discussed below), then each holder of Series B convertible preferred stock has the right to receive upon conversion, in lieu of common stock otherwise issuable, such shares of stock, securities or other property as would have been issued or payable in such change of control with respect to the number of shares of common stock which would have been issuable upon conversion had such change of control not taken place (subject to appropriate revisions to preserve the economic value of the series B preferred shares before the change of control). The Company has to provide 10 days written notice to the holders of its Series B convertible preferred stock before the Company may effect any change of control. In no event can any holder of Series B convertible preferred stock convert shares of Series B convertible preferred stock into shares of common stock or dispose of any shares of Series B convertible preferred stock to the extent that such conversion or disposition would result in the holder and its affiliates together beneficially owning or having the power to vote more than 9.99% of the Company’s outstanding shares of common stock.
     Redemption by Holder. The holders of shares of Series B convertible preferred stock have the right to cause the Company to redeem any or all of its shares at a price equal to 115% of face value (150% of the face value if the redemption event is a change of control event discussed below), plus accrued but unpaid dividends in the following events:
    the Company’s common stock is suspended from trading or is not listed for trading on at least one of, the New York Stock Exchange, the American Stock Exchange, The Nasdaq National Market or The Nasdaq SmallCap Market for an aggregate of 10 or more trading days in any twelve-month period;
    the initial registration statement required to be filed by the Company pursuant to the registration rights agreement has not been declared effective by April 30, 2006, or such registration statement, after being declared effective, cannot be utilized by the holders of Series B convertible preferred stock for the resale of all of their registrable securities for an aggregate of more than 15 days in the aggregate;
    the Company fails to remove any restrictive legend on any certificate or any shares of common stock issued to the holders of Series B convertible preferred stock upon conversion of the Series B convertible preferred stock as and when required and such failure continues uncured for five business days;
    the Company provides written notice (or otherwise indicate) to any holder of Series B convertible preferred stock, or state by way of public announcement distributed via a press release, at any time, of the Company’s intention not to issue, or otherwise refuse to issue, shares of common stock to any holder of Series B convertible preferred stock upon conversion in accordance with the terms of the certificate of designation for the Company’s Series B convertible preferred stock;
    the Company or any of its subsidiaries make an assignment for the benefit of creditors, or applies for or consents to the appointment of a receiver or trustee for the Company or for a substantial part of its property or business;
    bankruptcy, insolvency, reorganization or liquidation proceedings or other proceedings for the relief of debtors shall be instituted by or against the Company or any of its subsidiaries which shall not be dismissed within 60 days of their initiation; or
    the Company:

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    sells, conveys or disposes of all or substantially all of its assets;
    merges or consolidates with or into, or engages in any other business combination with, any other person or entity, in any case which results in either (i) the holders of the Company’s voting securities immediately prior to such transaction holding or having the right to direct the voting of fifty percent (50%) or less of our total outstanding voting securities of or such other surviving or acquiring person or entity immediately following such transaction or (ii) the members of the Company’s board of directors comprising fifty percent (50%) or less of the members of its board of directors or such other surviving or acquiring person or entity immediately following such transaction;
    either (i) fail to pay, when due, or within any applicable grace period, any payment with respect to any indebtedness in excess of $250,000 due to any third party, other than payments contested by the Company in good faith, or (ii) suffer to exist any other default under any agreement binding the Company which default or event of default would or is likely to have a material adverse effect on the Company’s business, operations, properties, prospects or financial condition;
    have fifty percent (50%) or more of the voting power of the Company’s capital stock owned beneficially by one person, entity or “group”;
    experience any other change of control not otherwise addressed above; or
    the Company otherwise breaches any material term under the private placement transaction documents, and if such breach is curable, shall fails to cure such breach within 10 business days after the Company has been notified thereof in writing by the holder.
     For purposes of the Series B convertible preferred stock, a change of control means any sale, transfer or other disposition of all or substantially all of the Company’s assets, the adoption of a liquidation plan, any merger or consolidation where the Company is not the surviving entity with the Company’s capital stock unchanged, any share exchange where all of the Company’s shares are converted into other securities or property, any sale or issuance by the Company granting a person the right to acquire 50% or more of the Company’s outstanding common stock, any reclassification of the Company’s common stock, and the first day on which the current member of the Company’s board of directors cease to represent at least a majority of the members of the Company’s board of directors then serving.
     Redemption by the Company. If, at any time after September 2, 2006 and before September 2, 2009, during a period of at least twenty (20) consecutive trading days (a) the closing trading price of the Company’s common stock is at least 200% of the conversion price then in effect and (b) the trading volume and trading price of the Company’s common stock result in a product of at least $350,000 on each trading day, then the Company shall have the right to redeem all shares of Series B convertible preferred stock then outstanding at price per share equal to 200% of the sum of the face amount of such share plus all accrued and unpaid dividends thereon through the closing date of such redemption.
     Restricted Actions. So long as any shares of Series B convertible preferred stock are outstanding, the Company is not permitted to take any of the following corporate actions (whether by merger, consolidation or otherwise) without first obtaining the approval of the majority holders of Series B convertible preferred stock:
1)   alter or change the rights, preferences or privileges of the Series B convertible preferred stock, or increase the authorized number of shares of Series B convertible preferred stock;
 
2)   amend the Company’s certificate of incorporation or bylaws;
 
3)   issue any shares of Series B convertible preferred stock other than pursuant to the securities purchase agreement with the selling stockholder;
 
4)   redeem, repurchase or otherwise acquire, or declare or pay any cash dividend or distribution on, any junior securities;
 
5)   increase the par value of the Company’s common stock;
 
6)   sell all or substantially all of the Company’s assets or stock, or consolidate or merge with another entity;

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  7)   enter into or permit to occur any change of control transaction;
 
  8)   sell, transfer or encumber technology, other than licenses granted in the ordinary course of business;
 
  9)   liquidate, dissolve, recapitalize or reorganize;
 
  10)   authorize, reserve, or issue common stock with respect to any plan or agreement that provides for the issuance of equity securities to the Company’s employees, officers, directors or consultants in excess of 250,000 shares of common stock;
 
  11)   change the Company’s principal business;
 
  12)   issue shares of the Company’s common stock, other than as contemplated by the certificate of designation or by the warrants issued to the selling stockholder;
 
  13)   increase the number of members of the Company’s board of directors to more than 7 members, or, if no Series B convertible preferred stock director has been elected, increase the number of members of the Company’s board of directors to more than 6 members;
 
  14)   alter or change the rights, preferences or privileges of any of the Company’s capital stock so as to affect adversely the Series B convertible preferred stock;
 
  15)   create or issue any senior securities or pari passu securities to the Series B convertible preferred stock;
 
  16)   except for the issuance of debt securities to, or incurrence of indebtedness from, a recognized financial institution in an aggregate amount not exceeding $5,000,000 and which, in the case of debt securities, are not convertible securities, issue any debt securities or incur any indebtedness that would have any preferences over the Series B convertible preferred stock upon the Company’s liquidation, or redeem, repurchase, prepay or otherwise acquire any of our outstanding debt securities or indebtedness, except as expressly required by the terms of such securities or indebtedness;
 
  17)   make any dilutive issuance;
 
  18)   enter into any agreement, commitment, understanding or other arrangement to take any of the foregoing actions; or
 
  19)   cause or authorize any of the Company’s subsidiaries to engage in any of the foregoing actions.
     Voting Rights. Except as otherwise provided in the certificate of designation and as otherwise required by the Delaware General Corporation Law, each holder of Series B convertible preferred stock has the right to vote on all matters before the common stockholders on an as-converted basis voting together with the common stockholders as a single class. This voting right is subject to the limitation that in no event may a holder of shares of Series B convertible preferred stock (or warrants discussed below) have the right to convert shares of Series B convertible preferred stock into shares of the Company’s common stock or to dispose of any shares of Series B convertible preferred stock to the extent that such right to effect such conversion or disposition would result in the holder and its affiliates together beneficially owning or having the power to vote more than 9.99% of the Company’s outstanding shares of common stock. The holders of a majority of the Series B convertible preferred stock also have the right to appoint one representative to the Company’s board of directors and are entitled to designate one observer to the meetings of the Company’s board of directors and committees.
     Warrants Issued to Selling Stockholder. In connection with the issuance of shares of Series B convertible preferred stock to SDS, the Company also issued to SDS three warrants to purchase shares of the Company’s common stock.
     With respect to the first warrant, the holder has the right to purchase up to 1,666,667 shares of the Company’s common stock at an exercise price equal to $0.01 per share. The first warrant may be exercised at any time until September 2, 2010.
     With respect to the second warrant, the holder has the right to purchase up to 700,000 shares of the Company’s

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common stock at an exercise price equal to $1.75 per share. The second warrant may be exercised at any time until September 2, 2010. The remaining terms of the second warrant are identical to the first warrant except the second warrant contains certain anti-dilution price protections in the event of a dilutive stock issuance (in addition to anti-dilution protections for stock splits and other similar pro rata events).
     With respect to the third warrant, the holder has the right to purchase up to 2,000,000 shares of the Company’s common stock at an exercise price equal to $1.75 per share. The third warrant may be exercised at any time after March 2, 2006 until September 2, 2010. The remaining terms of the third warrant are identical to the first warrant except (i) the third warrant contains a provision which requires the Company to obtain the consent of the holder of the third warrant prior to any issuing any of the Company’s securities in a dilutive issuance and (ii) cashless exercise of the third warrant is not available until September 2, 2006. All three warrants contain a provision that prevents any holder from exercising the warrant to the extent that such exercise would result in such holder beneficially owning or having the right to vote more than 9.99% of the Company’s outstanding shares of common stock.
     In addition to the warrants discussed above, SDS also holds two warrants which were issued in October 2004 and which are described more fully in the “Description of Capital Stock” section of the Company’s registration statement on Form S-3, filed by the Company with the Commission on November 24, 2004.
     Registration Rights Agreement. In connection with the issuance of Series B convertible preferred stock and warrants to SDS, the Company entered into a registration rights agreement, dated September 2, 2005, with the SDS, whereby the Company granted certain registration rights to SDS. On or prior to October 2, 2005, the Company was obligated to file a registration statement on Form S-3 covering 10,000,000 shares of common stock that SDS may acquire upon conversion of the Series B convertible preferred stock or upon exercise of the warrants. SDS and the Company subsequently amended the Registration Rights Agreement to extend the date by which the Company was obligated to file a registration statement on Form S-3 from October 2, 2005 to February 28, 2006. As per the amended registration rights agreement, the Company could face a liquidated damages claim by SDS if (i) the initial registration statement is not declared effective by the SEC on or prior to April 30, 2006, (ii) after the effectiveness of the registration statement, sales of common stock cannot be made by SDS due to a stop order by the SEC or the Company needs to update the registration statement, or (iii) the Company’s common stock is not listed on Nasdaq, the New York Stock Exchange or the American Stock Market. The liquidated damages for the first 30 days equals 3% of the purchase price of the Series B convertible preferred stock and equal 1.5% for each 30 days thereafter of non-compliance. In addition to the liquidated damages provision discussed above, SDS can require the redemption of its shares of Series B convertible preferred stock upon certain default events.
     SDS also has the right to piggy-back on to the registration statements filed by the Company registering shares of the Company’s common stock (other than Form S-8 and Form S-4 registration statements filed by the Company), subject to share cut-backs by the underwriters (if an underwritten public offering), provided that at least 25% of the shares requested for inclusion in the registration statement by SDS must be included in such underwritten public offering.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
     (a) Exhibits — See the attached Index to Exhibits.

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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.
         
    REMOTE DYNAMICS, INC.
 
       
    Date: January 23, 2006
 
       
 
  By:   /s/ Dennis R. Casey
 
       
 
      Dennis R. Casey
 
      Chief Executive Officer
 
      (Principal Executive Officer)
 
       
 
  By:   /s/ Neil Read
 
       
 
      Neil Read
 
      Vice President, Chief Financial Officer and Treasurer
 
      (Principal Financial and Accounting Officer)

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INDEX TO EXHIBITS
         
EXHIBIT        
NUMBER       TITLE
 
2.1
  -   Stock Purchase and Exchange Agreement by and between the Company, Minorplanet Systems PLC and Mackay Shields LLC, dated February 14, 2001 (14)
 
       
2.2
  -   Asset Purchase Agreement by and between the Company and Aether Systems, Inc. dated March 15, 2002 (15)
 
       
2.3
  -   Findings and Fact, Conclusions of Law and Order Confirming Company’s Third Amended Joint Plan of Reorganization and Approving Settlement of Company’s Amended Motion for Valuation (22)
 
       
2.4
  -   Securities Purchase Agreement by and between the Company and SDS Capital Group SPC, Ltd. dated October 1, 2004 (24)
 
       
2.5
  -   Registration Rights Agreement by and between the Company and SDS Capital Group SPC, Ltd. dated October 1, 2004 (24)
 
       
2.6
  -   Stock Purchase Warrant issued to SDS Capital Group SPC, Ltd. on October 1, 2004 for purchase of 1,000,000 shares of common stock (24)
 
       
2.7
  -   Stock Purchase Warrant issued to SDS Capital Group SPC, Ltd. on October 1, 2004 for purchase of 625,000 shares of common stock (24)
 
       
2.8
  -   Securities Purchase Agreement by and between the Company and SDS Capital Group SPC, Ltd. dated May 31, 2005 (27)
 
       
2.9
  -   Registration Rights Agreement by and between the Company and SDS Capital Group SPC, Ltd. dated September 2, 2005 (29)
 
       
2.10
  -   Stock Purchase Warrant issued to SDS Capital Group SPC, Ltd. on September 2, 2005 for purchase of 2,000,000 shares of common stock (29)
 
       
2.11
  -   Stock Purchase Warrant issued to SDS Capital Group SPC, Ltd. on September 2, 2005 for purchase of 1,666,667 shares of common stock (29)
 
       
2.12
  -   Stock Purchase Warrant issued to SDS Capital Group SPC, Ltd. on September 2, 2005 for purchase of 700,000 shares of common stock (29)
 
       
3.1
  -   Amended and Restated Certificate of Incorporation of the Company (23)
 
       
3.2
  -   Third Amended and Restated By-Laws of the Company (26)
 
       
4.1
  -   Specimen of certificate representing Common Stock, $.01 par value, of the Company (1)
 
       
4.2
  -   Certificate of Designation, Preferences and Rights, Series A Convertible Preferred Stock of Remote Dynamics, Inc. filed with Secretary of State of Delaware on October 1, 2004 (24)
 
       
4.3
  -   Certificate of Designation, Preferences and Rights, Series B Convertible Preferred Stock of Remote Dynamics, Inc. filed with Secretary of State of Delaware on September 1, 2005 (29)
 
       
10.1
  -   Exclusive License and Distribution Agreement by and between Minorplanet Limited, (an @Track subsidiary) and Mislex (302) Limited, dated June 21, 2001 (13)
 
       
10.2
  -   Product Development Agreement, dated December 21, 1995, between HighwayMaster Corporation and IEX Corporation (2)(3)
 
       
10.3
  -   Lease Agreement, dated March 20, 1998, between HighwayMaster Corporation and Cardinal Collins Tech Center, Inc. (4)
 
       
10.4
  -   Agreement No. 980427 between Southwestern Bell Telephone Company, Pacific Bell, Nevada Bell, Southern New England Telephone and HighwayMaster Corporation executed on January 13, 1999 (6)(7)
 
       
10.5
  -   Administrative Carrier Agreement entered into between HighwayMaster Corporation and Southwestern Bell Mobile Systems, Inc. on March 30, 1999 (6)(7)
 
       
10.6
  -   Addendum to Agreement entered into between HighwayMaster Corporation and International Telecommunications Data Systems, Inc. on February 4, 1999 (6)(7)
 
       
10.7
  -   Second Addendum to Agreement entered into between HighwayMaster Corporation and International Telecommunications Data Systems, Inc. on February 4, 1999 (6)(7)
 
       
10.8
  -   Fleet-on-Track Services Agreement entered into between GTE Telecommunications

 


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EXHIBIT        
NUMBER       TITLE
 
 
      Services Incorporated and HighwayMaster Corporation on May 3, 1999 (8)(9)
 
       
10.9
  -   Limited Liability Company Agreement of HighwayMaster of Canada, LLC executed March 3, 2000 (10)
 
       
10.10
  -   Monitoring Services Agreement dated May 25, 2000, by and between the Company and Criticom International Corporation (11) (12)
 
       
10.11
  -   Agreement No. 980427-03, dated January 31, 2002 between SBC Ameritech, SBC Pacific Bell, SBC Southern New England Telephone, SBC Southwestern Bell Telephone, L.P. and the Company (16) (17)
 
       
10.12
  -   Addendum dated September 26, 2002 to Exclusive License and Distribution Agreement (18)
 
       
10.13
  -   Irrevocable Waiver and Consent to Amendment to Bylaws of certain rights executed by Minorplanet Systems PLC, dated October 6, 2003 (19)
 
       
10.14
  -   Variation Agreement to Exclusive License and Distribution Agreement by and between Minorplanet Limited, as Licensor, and Minorplanet Systems USA, Limited, as Licensee, dated October 6, 2003 (19)
 
       
10.15
      Amendment No. 3 to Agreement No. 980427-03 by and between Minorplanet Systems USA, Inc. and SBC Services, Inc. dated January 21, 2004 (21)
 
       
10.16
  -   Amendment No. 5 to Agreement No. 980427-03 by and between Remote Dynamics, Inc. and SBC Services, Inc. dated October 8, 2004 (25)
 
       
10.17
  -   Third Amendment to Lease Agreement between the Company and Cardinal Collins Tech Center, Inc. dated July 1, 2004 (26)
 
       
10.18
  -   Employment Agreement between the Company and Dennis R. Casey dated July 2, 2004 (26)
 
       
10.20
  -   Employment Agreement between the Company and J. Raymond Bilbao dated July 2, 2004 (26)
 
       
10.22
  -   Restricted Stock Agreement between the Company and Dennis R. Casey dated July 2, 2004 (26)
 
       
10.24
  -   Restricted Stock Agreement between the Company and J. Raymond Bilbao dated July 2, 2004 (26)
 
       
10.28
  -   2004 Restated Management Incentive Plan (26)
 
       
14.1
  -   Code of Ethics for Senior Financial Officers approved by the Board of Directors of the Company on November 7, 2003 (20)
 
       
16.1
  -   Letter from Arthur Andersen to the SEC (Omitted pursuant to Item 304T of Regulation S-K)
 
       
21.1
  -   Subsidiaries of Registrant (30)
 
       
31.1
  -   Certification Pursuant to Section 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, by Dennis R. Casey, Chief Executive Officer (Principal Executive Officer) (30)
 
       
31.2
  -   Certification Pursuant to Section 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, by Neil Read, Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) (29)
 
       
32.1
  -   Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by Dennis R. Casey, Chief Executive Officer (Principal Executive Officer) (30)
 
       
32.2
  -   Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by Neil Read, Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) (30)
 
       
99.1
  -   Amended and Restated Audit Committee Charter approved by Audit Committee of the Board of Directors of the Company on November 18, 2003 (20)
 
1.   Filed in connection with the Company’s Registration Statement on Form S-1, as amended (No. 33-91486), effective June 22, 1995.

 


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2.   Filed in connection with the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1995.
 
3.   Certain confidential portions deleted pursuant to Application for Confidential Treatment filed in connection with the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1995.
 
4.   Filed in connection with the Company’s Form 10-Q Quarterly Report for the quarterly period ended September 30, 1998.
 
5.   Filed in connection with the Company’s Form 10-K fiscal year ended December 31, 1998.
 
6.   Filed in connection with the Company’s Form 10-Q Quarterly Report for the quarterly period ended March 31, 1999.
 
7.   Certain confidential portions deleted pursuant to Order Granting Application for Confidential Treatment issued June 22, 1999 in connection with the Company’s Form 10 –Q Quarterly Report for the quarterly period ended March 31, 1999.
 
8.   Filed in connection with the Company’s Form 10-Q Quarterly Report for the quarterly period ended June 30, 1999.
 
9.   Certain confidential portions deleted pursuant to letter granting application for confidential treatment issued October 10, 1999 in connection with the Company’s Form 10-Q Quarterly Report for the quarterly period ended June 30, 1999.
 
10.   Filed in connection with the Company’s Form 10-Q Quarterly Report for the quarterly period ended March 31, 2000.
 
11.   Certain confidential portions deleted pursuant to Order Granting Application for Confidential Treatment issued December 5, 2000 in connection with the Company’s Form 10 –Q Quarterly Report for the quarterly period ended June 30, 2000.
 
12.   Filed in connection with the Company’s Form 10-Q Quarterly Report for the quarterly period ended June 30, 2000.
 
13.   Filed in connection with Company’s Current Report on Form 8-K filed with SEC on June 29, 2001.
 
14.   Filed as Appendix A to the Company’s Definitive Proxy Statement on Schedule 14A filed with the SEC on May 11, 2001.
 
15.   Filed in connection with the Company’s Current Report on Form 8-K filed with the SEC on March 27, 2002. Certain confidential portions deleted pursuant to Order Granting Application for Confidential Treatment issued in connection with the Company’s Current Report on Form 8-K filed with the SEC on March 27, 2002.
 
16.   Filed in connection with the Company’s Form 10-Q Quarterly Report for the quarterly period ended March 31, 2002.
 
17.   Certain confidential portions deleted pursuant to Order Granting Application for Confidential Treatment issued in connection with the Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2002.
 
18.   Filed in connection with the Company’s Form 10-Q Quarterly Report for the quarterly period ended November 30, 2002.
 
19.   Filed in connection with the Company’s Current Report on Form 8-K filed with the SEC on August 27, 2003.
 
20.   Filed in connection with Company’s Form 10-K Annual Report for the year ended August 31, 2003.
 
21.   Filed in connection with the Company’s Form 10-Q Quarterly Report for the quarterly period ended February 29, 2004.
 
22.   Filed in connection with Company’s Current Report on Form 8-K with SEC on June 23, 2004.
 
23.   Filed in connection with the Company’s Form 10-Q Quarterly Report for the quarterly period ended May 31, 2004.
 
24.   Filed in connection with the Company’s Current Report on Form 8-K with SEC on October 4, 2004.
 
25.   Filed in connection with the Company’s Current Report on Form 8-K with SEC on October 13, 2004.
 
26.   Filed in connection with Company’s Annual Report on Form 10-K for the fiscal year ended August 31, 2004.
 
27.   Filed in connection with the Company’s Current Report on Form 8-K with SEC on June 6, 2005.
 
28.   Filed in connection with the Company’s Form 10-Q Quarterly Report for the quarterly period ended May 31, 2005.

 


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29.   Filed in connection with the Company’s Current Report on Form 8-K with SEC on September 7, 2005.
 
30.   Filed herewith.