FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______ TO _____
COMMISSION FILE NUMBER 1-10927
SIMTROL, INC.
(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
DELAWARE 84-1104448
(STATE OF (I.R.S. EMPLOYER
INCORPORATION) IDENTIFICATION NO.)
2200 NORCROSS PARKWAY, SUITE 255
NORCROSS, GEORGIA 30071
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(770) 242-7566
(ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the issuer (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, and (2) has been subject to such filing requirements
for the past 90 days.
YES NO X
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
OUTSTANDING AT
CLASS OF SECURITIES FEBRUARY 29, 2004
-------------------
COMMON STOCK, $.001 PAR VALUE 23,367,226
Transitional Small Business Disclosure Format YES NO X
--- ---
1
SIMTROL, INC. AND SUBSIDIARIES
Form 10-QSB
Quarter Ended March 31, 2003
Index
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited):
Condensed Consolidated Balance Sheet as of
March 31, 2003..................................................... 3
Condensed Consolidated Statements of Operations for the
Three Months Ended March 31, 2003 and 2002......................... 4
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 2003 and 2002......................... 5
Notes to Condensed Consolidated Financial Statements .............. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................ 10
Item 3. Controls and Procedures................................................. 13
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Purchases of Equity Securities............... 14
Item 6. Exhibits and Reports on Form 8-K....................................... 14
2
SIMTROL, INC.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SIMTROL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 2003
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 5,037
Accounts receivable, net 42,538
Prepaid expenses and other current assets 20,169
----------------
Total current assets 67,744
Property and equipment, net 127,196
Other assets:
Software development costs, net 277,624
Other long term assets 11,187
----------------
Total assets $ 483,751
================
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current Liabilities:
Current portion of long-term debt and short-term borrowings $ 126,235
Convertible debt 262,404
Accounts payable 915,677
Accrued expenses 446,002
Deferred revenues 107,922
----------------
Total Current Liabilities 1,858,240
Long-term debt, less current portion 113,603
Commitments and contingencies
Stockholders' deficiency:
Common stock, authorized 40,000,000 shares of
$.001 par value; 20,981,202 shares issued and outstanding 20,982
Additional paid-in capital 59,199,123
Accumulated deficiency (60,708,197)
----------------
Total stockholders' deficiency (1,488,092)
----------------
Total liabilities and stockholders' deficiency $ 483,751
================
See notes to condensed consolidated financial statements.
3
SIMTROL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
March 31,
2003 2002
------------- -------------
Revenues:
Software licenses $ 34,492 $ 130,356
Service 115,813 255,194
------------- -------------
Total revenues 150,305 385,550
Cost of revenues
Software licenses 71,000 99,789
Service 56,510 144,751
------------- -------------
Total cost of revenues 127,510 244,540
------------- -------------
Gross profit 22,795 141,010
Operating expenses:
Selling, general, and administrative 131,390 540,988
Research and development 102,022 138,753
------------- -------------
Total operating expenses 233,412 679,741
Loss from operations (210,617) (538,731)
Other Expenses
Other expense, primarily finance charges (59,973) (159,670)
Debt conversion expense (431,599) -
------------- -------------
Total other expenses (491,572) (159,670)
Net Loss $ (702,189) $ (698,401)
============= =============
Net loss per common share:
Basic and Diluted $ (0.03) $ (0.05)
Weighted average shares outstanding
Basic and diluted 20,100,617 15,242,341
============= =============
See notes to condensed consolidated financial statements.
4
SIMTROL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
March 31,
2003 2002
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (702,189) $ (698,401)
Adjustments to reconcile net loss to net cash
used by operating activities:
Loss in decline of market value of investments - 10,853
Depreciation and amortization 89,669 137,725
Interest expense-Deferred Financing Costs 38,291 23,766
Interest Expense-Non-cash beneficial conversion feature
of convertible debt 41,688 71,349
Debt conversion expense 431,599 -
Changes in operating assets and liabilities:
Accounts receivable 22,960 152,010
Inventories - (3,577)
Prepaid expenses and other current assets 39,170 8,066
Accounts payable (48,862) 55,033
Accrued expenses 13,189 (63,847)
Deferred revenues (89,494) (145,717)
------------- -------------
Net cash used in operating activities (163,979) (452,740)
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash provided by investing activities - -
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (payments) on short-term credit facilities (4,891) (11,978)
Proceeds from exercise of stock options - 2,438
Proceeds from convertible debt 30,000 405,000
Deferred offering costs - (15,000)
Net proceeds from stock issuances 142,600 -
------------- -------------
Net cash provided by financing activities 167,709 380,460
Increase (decrease) in cash and cash equivalents 3,730 (72,280)
Cash and cash equivalents, beginning of the period 1,307 72,764
------------- -------------
Cash and cash equivalents, end of the period $ 5,037 $ 484
============= =============
Supplemental schedule of non-cash investing and financing activities:
Issuance of stock warrants $58,460 $193,747
------- --------
Beneficial Conversion Feature of Convertible Debt $229,284 $64,993
-------- --------
Conversion of debt and accrued interest to common stock $768,061 -
--------
See notes to condensed consolidated financial statements.
5
SIMTROL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(Unaudited)
NOTE 1 - NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Simtrol, Inc., formerly known as VSI Enterprises, Inc., was incorporated in
Delaware in September 1988 and, together with its wholly-owned subsidiaries (the
"Company"), develops, markets, and supports software based audiovisual control
systems and videoconferencing products that operate on PC platforms.
The accompanying unaudited condensed consolidated financial statements have been
prepared by the Company in conformity with accounting principles generally
accepted in the United States of America. It is management's opinion that these
statements include all adjustments, consisting of only normal recurring
adjustments necessary in order to make the financial statements not misleading.
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 disclosures 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.
Certain information and footnote disclosures normally included in the annual
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America have been condensed or omitted. It is
suggested that these condensed consolidated financial statements be read in
conjunction with the consolidated financial statements and notes thereto as of
December 31, 2002 and 2001 and for each of the three years ended December 31,
2002, which are included in the Annual Report on Form 10-K for the year ended
December 31, 2002 filed with the Securities and Exchange Commission.
NOTE 2 - GOING CONCERN UNCERTAINTY
As of March 31, 2003, the Company had cash and cash equivalents of $5,037. The
Company does not have sufficient funds for the next twelve (12) months and have
relied on periodic investments in the form of common stock and convertible debt
by certain of our existing stockholders since the fourth quarter of 2001. The
Company currently requires substantial amounts of capital to fund current
operations and for the payment of past due obligations including payroll and
other operating expenses and the continued development and deployment of its
Ongoer product line. On February 4, 2004, the Company issued $575,000 of
convertible debt (see Note 9) and continues to attempt to raise capital.
However, there can be no assurance that the Company will be successful in its
attempts to develop and deploy its Ongoer product line, to generate positive
cash flows or raise sufficient capital essential to its survival. To the extent
that the Company is unable to generate or raise the necessary operating capital,
it will become necessary to curtail operations. Additionally, even if the
Company does raise operating capital, there can be no assurance that the net
proceeds will be sufficient to enable it to develop its business to a level
where it will generate profits and positive cash flows.
These matters raise substantial doubt about the Company's ability to continue as
a going concern. However, the accompanying financial statements have been
prepared on a going concern basis, which contemplate the realization of assets
and satisfaction of liabilities in the normal course of business. The financial
statements do not include any adjustments relating to the recoverability of the
recorded assets or the classification of the liabilities that might be necessary
should the Company be unable to continue as a going concern.
6
NOTE 3 - SELECTED SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The condensed consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant intercompany
transactions and balances have been eliminated in consolidation.
Loss Per Share
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share", requires the presentation of basic and diluted earnings per share
("EPS"). Basic EPS is computed by dividing loss available to common stockholders
by the weighted-average number of common shares outstanding for the period.
Diluted EPS includes the potential dilution that could occur if options or other
contracts to issue common stock were exercised or converted. The Company's
outstanding stock options and warrants of 4,043,213 and 3,701,874 for 2003 and
2002 are not reflected in diluted earnings per share because their effects would
be anti-dilutive. Accordingly, basic and diluted earnings per share are
identical.
Stock Based Compensation
SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and
Disclosure-an amendment of FASB Statement No. 123" amends SFAS No. 123,
"Accounting for Stock-Based Compensation", to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, this Statement amends the
disclosure requirements of SFAS 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based compensation and the effect of the method used on reported results.
The Company continues to follow the pro-forma disclosures for stock-based
compensation as permitted in SFAS 123. The following table illustrates the
effect on net loss per share if the Company had applied the fair value
recognition provisions of SFAS 123 to stock-based employee compensation:
Three Months Ended
March 31,
2003 2002
========================
Net loss as reported ($702,189) ($698,401)
Add: stock-based employee compensation expense
determined under the intrinsic value method - -
Less: stock-based employee compensation expense
determined under fair value-based methods for all
awards (68,122) (78,306)
------------------------
Pro forma net loss ($770,311) ($776,707)
========================
Net loss per share as reported-Basic and diluted ($0.03) ($0.05)
Pro forma net loss per share- Basic and diluted ($0.04) ($0.05)
Pro forma Information
The fair value for the fiscal 2003 and 2002 options issued was estimated at the
date of grant using a Black-Scholes option-pricing model using the following
weighted-average assumptions.
7
Assumptions 2003 2002
----------------------------
Risk-free rate 4.00% 4.25%
Annual rate of dividends 0 0
Volatility 86% 86%
Average life 7 years 7 years
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options, which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. The
Company's employee stock options have characteristics significantly different
from those of traded options, and changes in the subjective input assumptions
can materially affect the fair value estimate.
The following summarizes the stock option transactions for the three months
ended March 31, 2003 and 2002:
Weighted
Average
Exercise
Options Price
---------- --------
Options outstanding at January 1, 2002 919,331 $2.62
Granted - -
Exercised - -
Terminated (17,420) $2.69
----------
Options outstanding at March 31, 2002 901,911 $2.62
==========
Options outstanding at January 1, 2003 974,500 $1.76
Granted -
Exercised -
Terminated -
----------
Options outstanding at March 31, 2003 974,500 $1.76
==========
New Accounting Pronouncements
In January 2003, Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"),
an interpretation of Accounting Research Bulletin No. 51. FIN 46 expands upon
and strengthens existing accounting guidance that addresses when a company
should include in its financial statements the assets, liabilities and
activities of another entity. A variable interest entity is any legal structure
used for business purposes that either does not have equity investors with
voting rights or has equity investors that do not provide sufficient financial
resources for the entity to support its activities. FIN 46 requires a variable
interest entity to be consolidated by a company if that company is subject to a
majority of the risk of loss from the variable interest entity's activities or
entitled to receive a majority of the entity's residual returns or both. The
consolidation requirements of FIN 46 apply immediately to variable interest
entities created after January 31, 2003. The consolidation requirements apply to
older entities in the first fiscal year or interim period beginning after June
15, 2003. However, in December 2003, FASB deferred the latest date by which all
public entities, which meet the definition of small business issuer under SEC
Regulation S-B ("Public SB's), must apply FIN 46 to the first interim or annual
reporting period ended after December 15, 2004. The effect of the adoption of
this new accounting pronouncement is not expected to have a significant impact
on the Company financial statements.
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities"
("SFAS 146"), provides guidance on the recognition and measurement of
liabilities for costs associated with exit or disposal activities. The
provisions of SFAS 146 are effective for exit or disposal activities that are
initiated after December 31, 2002. The Company implemented this standard
effective January 1, 2003 with no material impact to the Company's financial
statements.
8
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" ("SFAS 149"), which is effective
for contracts entered into or modified after June 30, 2003. SFAS 149 amends FASB
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities," to clarify financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts. The effect of the adoption of this new accounting pronouncement on
Company's financial statements has not been significant.
In May 2003, FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity" ("SFAS 150"),
which is effective for financial instruments entered into or modified after May
31, 2003, and otherwise is effective at the begriming of the first interim
period beginning after June 15, 2003. SFAS 150 establishes standards for how an
issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that an issuer
classify a financial instrument that is within its scope as a liability. The
adoption of SFAS 150 did not have a material effect on the Company's financial
statements.
Revenue Recognition
Our revenue recognition policy is significant because our revenue is a key
component of our results of operations. In addition, our revenue recognition
determines the timing of certain expenses. We follow very specific and detailed
guidelines in measuring revenue; however, certain judgments affect the
application of our revenue policy. Revenue results are difficult to predict, and
any shortfall in revenue or delay in recognizing revenue could cause our
operating results to vary significantly from quarter to quarter and could result
in future operating losses. Revenue consists of the sale of software control
devices, videoconferencing systems and related maintenance contracts on these
systems. The Company sold two different products during the presented periods:
its PC based software product, Ongoer, and its older proprietary hardware and
software product, Omega. Revenue on the sale of hardware is recognized upon
shipment. The Company recognizes revenue from Ongoer software sales upon
shipment as the Company sells the product to audiovisual integrators. Revenue on
maintenance contracts for Omega systems is recognized over the term of the
related contract resulting in $107,922 of deferred revenue at March 31, 2003.
NOTE 4 - COMMITMENTS AND CONTINGENCIES
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's financial position or results of operations.
NOTE 5 - INVESTMENTS
The investment in equity securities consisted of 57,122 shares of PentaStar
Communications, Inc. common stock, received in conjunction with the Company's
sale of Eastern Telecom Inc. The investment in equity securities was accounted
for as available-for-sale and was stated at fair market value with unrealized
gains and losses on this investment included in the stockholders' deficiency
section of the balance sheet. On April 1, 2002, PentaStar was placed into
receivership. As a result, at March 31, 2002, the Company wrote off the
remainder of the investment balance of $10,853, in accordance with SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities", as
management determined that the decline in the market value of this investment
represented an impairment that was other than temporary.
NOTE 6 - CONVERTIBLE DEBT
The Company issued a total of $30,000 and $405,000 of convertible debt ("Debt")
to numerous private investors at various times during the three months ended
March 31, 2003 and 2002, respectively. The Debt issued during the three months
ended March 31, 2003 accrues interest at prime plus 1% (5.25% at March 31, 2003)
and is convertible into common stock at a price of $0.24 per share. The Debt
issued in the three months ended March 31, 2002 accrued interest at prime plus
1% and was due on December 31, 2002. In conjunction with the issuance of the
Debt in 2002, the Company issued 405,000 common stock purchase warrants to the
holders of the Debt. The Debt is convertible immediately into shares of common
stock of the Company at the market price of the stock on the date of the
issuance of the Debt. The warrants, which expire at various dates in 2006, are
exercisable immediately and entitle the holder to purchase one common share of
the common stock of the Company at the market price of the stock on the day the
Debt was issued. On December 31, 2002 the Company extended the due date of the
2002 Debt until January 31, 2003 and as an inducement to convert, the conversion
price of the Debt was adjusted to $0.24 per share and the warrants granted at
the origination dates of the notes also had their exercise price adjusted to
$0.24. As a result, the Company recognized approximately $58,000 as finance
charges over the remaining terms of the notes to reflect the lowering of the
warrant exercise price at December 31, 2002. In January 2003, $735,000 of the
2002 Debt plus accrued interest was converted into 3,204,083 shares of
restricted common stock. Pursuant to Statement of Financial Accounting Standards
No. 84 "Induced Conversions of Convertible Debt", a debt conversion expense of
$431,599 was recorded to reflect the fair value of the additional shares that
resulted from lowering the conversion price to $0.24.
9
In connection with the issuance of the Debt during the three months ended March
31, 2002, $116,588 of the Debt proceeds was allocated to the fair value of the
warrants. These debt discounts were amortized to financing costs over the term
of the Debt. For the three months ended March 31, 2002, $10,530 was expensed as
financing costs relating to the amortization of the beneficial conversion
feature and warrant value.
During 2001, the Company issued $400,000 of convertible debt to two stockholders
("2001 Debt"). The 2001 Debt accrues interest at prime rate plus 1% (6.5% at the
time), was originally due February 7, 2002 and is collateralized by all of the
assets of the Company. The 2001 Debt is convertible into shares of common stock
of the Company at $0.49 per share. In conjunction with the issuance of the
convertible debt, the Company issued 400,000 common stock purchase warrants to
the holders of the 2001 Debt. The warrants, which expire at various dates in
2006, are exercisable immediately and entitle the holder to purchase one common
share of the common stock of the Company at prices ranging from $0.46 to $0.53
per share. Also, the agreement called for the issuance of additional warrants to
the debt holders for each 60 day extension period on the debt as follows:
100,000 warrants to each debt holder for the first 60 day extension and 60,000
warrants to each debt holder at the date of each subsequent 60 day extension. On
February 7, 2002, the debt holders granted a 60-day extension and as a result,
the Company issued an additional 100,000 warrants, which entitle the debt
holders to each purchase 100,000 shares of the Company's common stock at $0.49
per share. In conjunction with the issuance of 100,000 warrants to the
stockholders on February 7, 2002, $83,754 was estimated as the fair value of the
warrants and was expensed over the remaining life of the debt. On February 7,
2002, the stockholders agreed to extend the due date of the loans until December
31, 2002 and no additional warrants were granted.
In connection with the issuance of the 2001 Debt, $120,977 of the debt proceeds
was allocated to additional paid in capital to recognize the beneficial
conversion feature of the debentures. This debt discount was amortized to
financing costs over the original term of the debt.
On December 31, 2002 the Company extended the due date of the 2001 Debt until
January 31, 2003 and as an inducement to convert, the conversion price was
reduced to $0.24 per share. On January 31, 2003, the Company extended the due
date until December 31, 2003. At January 31, 2003 the Company recorded a
beneficial conversion feature in the amount of $229,284, to reflect the fair
value of the additional shares that may be issued from lowering the conversion
price. The beneficial conversion feature will accrete to interest expense over
the extended life of the 2001 Debt. During the three months ended March 31,
2003, the Company recognized $41,688 of interest expense related to the
beneficial conversion feature.
NOTE 7 - STOCKHOLDERS' DEFICIENCY
During the three months ended March 31, 2003, the Company issued 594,167 shares
of its common stock for gross proceeds of $142,600 ($0.24 per share), in a
private placement to a limited number of accredited investors, including three
members of the Company's Board. Offering costs were de minimis.
Subsequent to March 31, 2003, the Company issued 2,257,602 shares of its common
stock for gross proceeds of $466,100 in private placements to a limited number
of accredited investors, including three members of the Company's Board. The
share prices ranged from $0.152 to $0.358 per share and were based on a fixed
price of $0.24 for all purchases through June 30, 2003 and the average of the
preceding five days closing prices prior to the purchases for all purchases
subsequent to June 30, 2003.
10
NOTE 8- MAJOR CUSTOMERS
Revenue from four customers comprised approximately $107,852 (71%) of
consolidated revenues for the three months ended March 31, 2003. At March 31,
2003, related accounts receivable from these companies comprised $42,538 (100%)
of consolidated receivables.
Revenue from five customers comprised approximately $302,060 (78%) of
consolidated revenues for the three months ended March 31, 2002.
NOTE 9 - SUBSEQUENT EVENT
On February 4, 2004, Simtrol, Inc., completed the sale of Convertible Notes with
principal balance of $575,000, in a private placement to a limited number of
accredited investors, including one Board member. The interest rate of the notes
is 10% and the conversion price of the Notes is $0.20 per share for all
principal and accrued interest. The due date of the notes is August 4, 2004 and
the notes are convertible to restricted common stock at any time before that
date.
The Company also issued warrants to the Noteholders to purchase an aggregate of
2,875,000 shares of restricted common stock. Each warrant enables the holder to
purchase the same number of shares as the holder would receive upon conversion
of the Convertible Note. In addition, Noteholders received warrants to purchase
an aggregate of 5,750,000 shares of stock. Each warrant entitles the holder to
purchase two shares of common stock for each share the holder would receive upon
conversion of the Convertible Note, but the warrants may only be exercised in
the event a holder actually elects to convert the Convertible Note into the
Registrant's common stock. The exercise price of the warrants is $0.20 per share
of common stock.
Offering costs totaled approximately $96,000. The proceeds of the offering will
be used to fund current operational and overhead expenses of the company.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion highlights the material factors affecting our results
of operations and the significant changes in the balance sheet items. Notes to
the condensed consolidated financial statements included in this report and the
notes to the consolidated financial statements included in our Form 10-K for the
year ended December 31, 2002 should be read in conjunction with the consolidated
financial statements.
CRITICAL ACCOUNTING POLICIES
We prepare our condensed consolidated financial statements of Simtrol, Inc. in
conformity with accounting principles generally accepted in the United States of
America. As such, we are required to make certain estimates, judgments and
assumptions that we believe are reasonable based upon the information available.
These estimates and assumptions affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the periods presented. The significant accounting
policies which we believe are the most critical to aid in fully understanding
and evaluating our reported financial results include the following:
o Revenue recognition. Our revenue recognition policy is significant because
our revenue is a key component of our results of operations. In addition,
our revenue recognition determines the timing of certain expenses. We
follow very specific and detailed guidelines in measuring revenue;
however, certain judgments affect the application of our revenue policy.
Revenue results are difficult to predict, and any shortfall in revenue or
delay in recognizing revenue could cause our operating results to vary
significantly from quarter to quarter and could result in future operating
losses. Revenue consists of the sale of software control devices,
videoconferencing systems and related maintenance contracts on these
systems. The Company sold two different products during the presented
periods: its PC based software product Ongoer and its older proprietary
hardware and software product, Omega. Revenue on the sale of hardware is
recognized upon shipment. The Company recognizes revenue from Ongoer
software sales upon shipment as the Company sells the product to
audiovisual integrators.
11
o Capitalized software research and development costs. Our policy on
capitalized software costs determines the timing of our recognition of
certain development costs. In addition, this policy determines whether the
cost is classified as development expense or capitalized. Software
development costs incurred after technological feasibility has been
established are capitalized and amortized, commencing with product
release, using the greater of the income forecast method or on a
straight-line basis over the useful life of the product. Management is
required to use professional judgment in determining whether development
costs meet the criteria for immediate expense or capitalization.
o Impairments of Assets/Investments. We record impairment losses on assets
and investments when events and circumstances indicate that the assets
might be impaired and the undiscounted cash flows estimated to be
generated by those assets are less than the carrying amount of those
items. Our cash flow estimates are based on historical results adjusted to
reflect our best estimate of future market and operating conditions. The
net carrying value of assets not recoverable is reduced to fair value. Our
estimates of fair value represent our best estimate based on industry
trends and reference to market rates and transactions.
FINANCIAL CONDITION
During the quarter ended March 31, 2003, total assets decreased approximately
21% to $483,751 from $611,651 at December 31, 2002. This was primarily the
result of a decrease in software development costs, net of $69,406, a decrease
in accounts receivable of $22,960 and a decrease in our property and equipment,
net of $20,263. Accounts receivable decreased due primarily to improved
collections and software development costs and property and equipment decreased
due to depreciation and amortization of previously capitalized amounts. There
were no additions to these categories during the quarter ended March 31, 2003.
Current liabilities decreased by $1,034,954, or 36%, due primarily to the
conversion of $735,000 of convertible debt and $33,061 of accrued interest on
the debt to common stock during the three months ended March 31, 2003, as well
as a decrease in deferred revenue of $89,494 during the period due to the
recognition of revenue on our Omega maintenance contracts.
RESULTS OF OPERATIONS
REVENUES
Revenues were $150,305 and $385,550 for the three months ended March 31, 2003
and 2002, respectively. The 61% decrease for the three months ended March 31,
2003 was primarily due to a $139,381 reduction in revenues from our older Omega
product line, as well as a decrease in Ongoer revenues of $95,864. We
discontinued selling our older Omega platform in 2001 in order to concentrate
resources on development and sale of our new Ongoer(TM) product line. The lower
Omega revenues were due mainly to the discontinuance of maintenance contracts by
many of our customers. Our lower Ongoer sales were due mainly to the decrease in
orders from our largest Ongoer customer, whose orders fell due to the declining
business condition of their customer for the product.
COST OF REVENUES AND GROSS PROFIT
Cost of revenues decreased $117,030, or 48%, for the three months ended March
31, 2003 compared to the three months ended March 31, 2002 due primarily to the
61% decrease in revenues noted above.
Gross margins were approximately 15% and 37% for the three months ended March
31, 2003 and 2002, respectively. The decrease resulted primarily from lower
overall revenues and the amortization of capitalized software costs, equal to
$69,406 in both periods, representing a larger percentage of revenues in the
current year.
12
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses were $131,390 and $540,988 for the
three months ended March 31, 2003 and 2002, respectively. The decrease in the
three-month period ended March 31, 2003 compared to the similar period in 2002
resulted primarily from the consolidation of operations, reductions in
personnel, and ongoing efforts to reduce administrative costs, including the
move to our smaller office space in September 2002.
RESEARCH AND DEVELOPMENT EXPENSES
We charge research and development costs to expense as incurred until
technological feasibility of a software product has been established. Software
development costs incurred after technological feasibility has been established
are capitalized and amortized over the useful life of the product. Research and
development costs expensed were $102,022 and $138,753 for the three months ended
March 31, 2003 and 2002, respectively. During the three months ended March 31,
2003 and 2002, we did not capitalize any software development costs related to
new products under development. The decrease in total research and development
costs incurred resulted primarily from reductions in our research and
development personnel from the prior year.
OTHER EXPENSE, PRIMARILY FINANCE CHARGES
Other expense, primarily finance charges of $59,973 and $159,670 for the three
months ended March 31, 2003 and 2002 consisted primarily of finance charges
associated with the Company's issuance of convertible debt since the fourth
quarter 2001 to fund the company's operations. See note 6 to the condensed
consolidated financial statements. The decrease in interest expense from prior
year is due primarily to the conversion of a majority of the debt during the
current quarter and the finance expenses associated with the warrants and
beneficial conversion feature of the debt that was expensed through the debt's
original due date of December 31, 2002.
DEBT CONVERSION EXPENSE
A debt conversion expense of $431,599 was recorded in the three months ended
March 31, 2003 to reflect the fair value of the additional shares issued to
convertible debt holders who extended their notes originally due on December 31,
2002 in exchange for a reduction of the conversion price of the debt.
NET LOSS
Net loss for the three months ended March 31, 2003 was $702,189 compared to a
net loss of $698,401 for the three months ended March 31, 2002. The loss in the
three months ended March 31, 2003 was due primarily to the debt conversion
expense of $431,599 recorded in conjunction with the conversion of a majority of
the Company's convertible debt in January 2003.
LIQUIDITY AND SOURCES OF CAPITAL
GENERAL
As of March 31, 2003, we had cash and cash equivalents of $5,037. We do not have
sufficient funds to meet our cash flow requirements for the next twelve (12)
months. We have relied on periodic investments in the form of common stock and
convertible debt by certain of our existing stockholders since the fourth
quarter of 2001. We currently require substantial amounts of capital to fund
current operations and for the payment of past due obligations including payroll
and other operating expenses and the continued development and deployment of our
Ongoer product line. Our inability to pay our audit fees on a timely basis
resulted in the delay of the completion of this quarterly report. Due to
recurring losses from operations, an accumulated deficit, negative working
capital and our inability to date to obtain sufficient financing to support
current and anticipated levels of operations, our independent public
accountant's audit opinion states that these matters have raised substantial
doubt about our ability to continue as a going concern at December 31, 2002 and
2001.
13
We used $163,979 in cash from operating activities in the three months ended
March 31, 2003, primarily due to our loss of $702,189, which included a debt
conversion expense of $431,599 and depreciation and amortization of $89,669. The
decrease in cash used from the three months ended March 31, 2002 of $452,740 was
due mainly to the reduced operations of the Company. The majority of the loss
during the current year was due to debt conversion expense of $431,599. There
was no cash used in investing activities for the three months ended March 31,
2003 or the three months ended March 31, 2002. Cash provided by financing
activities in the three months ended March 31, 2003 of $167,709 consisted
primarily of $142,600 of proceeds from the issuance of restricted common stock
and $30,000 of convertible debt. Cash provided by financing activities of
$380,460 in the three months ended March 31, 2002 consisted primarily of
$405,000 of convertible debt issued during the period.
We will require additional funding during the remainder of fiscal 2003 and
thereafter to fund our development and operating activities. This additional
funding could be in the form of the sale of assets, debt, equity, or a
combination of these financing methods. However, there can be no assurance that
we will be able to obtain such financing if and when needed, or that if
obtained, such financing will be sufficient or on terms and conditions
acceptable to us. If we are unable to obtain this additional funding, our
business, financial condition and results of operations would be adversely
affected. The accompanying financial statements contemplate our continuation as
a going concern. However, we have sustained substantial losses from operations
in recent years, and such losses have continued through March 31, 2003. The
Company has also used, rather than provided, cash in its operations for the
three months ended March 31, 2003.
In view of the matters described in the preceding paragraph, recoverability of a
major portion of the recorded asset amounts shown in the accompanying balance
sheet is dependent upon our continued operations, which in turn is dependent
upon our ability to meet its financing requirements on a continuing basis and
attract additional financing. The financial statements do not include any
adjustments relating to the recoverability and classification of recorded asset
amounts or amounts and classification of liabilities that might be necessary
should we be unable to continue in existence.
In response to the matters described in the preceding paragraphs, we are
currently in the process of attempting to secure additional equity and debt
financing.
We expect to spend less than $5,000 for capital expenditures in the remainder of
fiscal 2003.
FORWARD-LOOKING STATEMENTS
Certain statements contained herein are "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995, such as
statements relating to financial results and plans for future sales and business
development activities, and are thus prospective. Such forward-looking
statements are subject to risks, uncertainties and other factors, which could
cause actual results to differ materially from future results expressed or
implied by such forward-looking statements. Potential risks and uncertainties
include, but are not limited to, economic conditions, competition, our ability
to complete the development and market our new Ongoer product line and other
uncertainties detailed from time to time in our Securities and Exchange
Commission filings, including our Annual Report on Form 10-K and our quarterly
reports on Form 10-Q.
ITEM 3. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our Securities Exchange Act reports is
recorded, processed, summarized, and reported within the time periods specified
in the SEC's rules and forms, and that such information is accumulated and
communicated to the Company's management, including its Chief Executive Officer
and Chief Financial Officer, as appropriate, to allow timely decisions regarding
required disclosure. In designing and evaluating the disclosure controls and
procedures, management recognized that any controls and procedures, no matter
how well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives, as ours are designed to do, and
management necessarily was required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures.
14
An evaluation was performed under the supervision and with the participation of
our Company's management, including the Chief Executive Officer and the Chief
Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures as of March 31, 2003. Based upon that
evaluation, the Chief Executive Officer and the Chief Financial Officer
concluded that our disclosure controls and procedures were effective. Except as
discussed in the following paragraph, subsequent to the date of this evaluation,
there have been no significant changes in the Company's internal controls or in
other factors that could significantly affect these controls.
In connection with its audit of our consolidated financial statements as of and
for the year ended December 31, 2002, Grant Thornton LLP advised our management
and Audit Committee that it had identified a deficiency in internal controls,
which was designated a "material weakness." The material weakness indicated that
there was inadequate segregation of duties within our accounting function. We
believe this resulted from continued cost cutting efforts, which resulted in the
termination of various accounting personnel during 2002 and 2003. Management
believes that sufficient compensating controls have been implemented to minimize
the risks associated with this material weakness, including additional Chief
Executive Officer and Board of Directors oversight.
PART II
ITEM 2. CHANGES IN SECURITIES AND PURCHASES OF EQUITY SECURITIES
During the quarter ended March 31, 2003, we issued 594,167 shares of our common
stock for gross proceeds of $142,600 ($0.24 per share), in a private placement
to a limited number of accredited investors, including three of our directors.
The offer and sale of the shares was exempt from the registration requirements
of the Securities Act of 1933 (the "Act") pursuant to Rule 506 and Section 4(2)
of the Act. In connection with the sales, we did not conduct any general
solicitation or advertising, and we complied with the requirements of Regulation
D relating to the restrictions on the transferability of the shares issued.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
31.1 Certification of the Chief Executive Officer pursuant to Exchange Act Rule
13a-14(a).
31.2 Certification of the Chief Financial Officer pursuant to Exchange Act Rule
13a-14(a).
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K:
None.
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.
SIMTROL, INC.
Date: March 24, 2004 /s/ Richard W. Egan
-----------------------------
Chief Executive Officer
(Principal executive officer)
/s/ Stephen N. Samp
-----------------------------
Chief Financial Officer
(Principal financial and
accounting officer)
15