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 JUNE 30, 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
SIMTROL, INC. AND SUBSIDIARIES
Form 10-QSB
Quarter Ended June 30, 2003
Index
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited):
Condensed Consolidated Balance Sheet as of
June 30, 2003...................................................... 3
Condensed Consolidated Statements of Operations for the
Three and Six Months Ended June 30, 2003 and 2002.................. 4
Condensed Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 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................................ 11
Item 3. Controls and Procedures................................................ 14
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Purchases of Equity Securities................ 15
Item 6. Exhibits and Reports on Form 8-K ...................................... 15
2
SIMTROL, INC.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SIMTROL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
JUNE 30,
ASSETS 2003
----
Current assets:
Cash and cash equivalents $ 14,415
Accounts receivable, net 117,065
Prepaid expenses and other current assets 13,446
------------
Total current assets 144,926
Property and equipment, net 107,541
Other assets:
Software development costs, net 208,218
Other long term assets 11,187
------------
Total assets $ 471,872
============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current Liabilities:
Current portion of long-term debt and short-term borrowings $ 144,172
Convertible debt 324,936
Accounts payable 918,277
Accrued expenses 475,798
Deferred revenues 103,131
------------
Total Current Liabilities 1,966,314
Long-term debt, less current portion 95,666
Commitments and contingencies
Stockholders' deficiency:
Common stock, authorized 40,000,000 shares of
$.001 par value; 21,829,535 shares issued
and outstanding 21,830
Additional paid-in capital 59,401,875
Accumulated deficiency (61,013,813)
------------
Total stockholders' deficiency (1,590,108)
------------
Total liabilities and stockholders' deficiency $ 471,872
============
See notes to condensed consolidated financial statements
3
SIMTROL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
------------------------------ ------------------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Revenues:
Software licenses $ 47,025 $ 111,364 $ 81,518 $ 241,720
Service 91,290 263,134 207,102 518,328
------------ ------------ ------------ ------------
Total revenues 138,315 374,498 288,620 760,048
Cost of revenues
Software licenses 72,950 95,666 143,950 195,455
Service 14,387 146,709 70,897 291,460
------------ ------------ ------------ ------------
Total cost of revenues 87,337 242,375 214,847 486,915
------------ ------------ ------------ ------------
Gross profit 50,978 132,123 73,773 273,133
Operating expenses:
Selling, general, and administrative 177,640 531,912 309,029 1,072,900
Research and development 101,972 130,838 203,995 269,594
------------ ------------ ------------ ------------
Total operating expenses 279,612 662,750 513,024 1,342,494
Loss from operations (228,634) (530,627) (439,251) (1,069,361)
Other Expenses
Other expense, primarily finance charges (76,982) (118,114) (136,955) (277,784)
Debt conversion expense -- -- (431,599) --
------------ ------------ ------------ ------------
Total other expenses (76,982) (118,114) (568,554) (277,784)
Loss before extraordinary item (305,616) (648,741) (1,007,805) (1,347,145)
Extraordinary gain from extinguishment of debt, net of tax -- 148,915 -- 148,915
------------ ------------ ------------ ------------
Net loss $ (305,616) $ (499,826) $ (1,007,805) $ (1,198,230)
============ ============ ============ ============
Net loss per common share, Basic and Diluted:
Loss before extraordinary item $ (0.01) $ (0.04) $ (0.05) $ (0.09)
Extraordinary gain -- 0.01 -- 0.01
------------ ------------ ------------ ------------
Net loss per share $ (0.01) $ (0.03) $ (0.05) $ (0.08)
============ ============ ============ ============
Weighted shares outstanding
Basic and diluted 21,394,549 15,369,970 20,751,157 15,306,337
============ ============ ============ ============
See notes to condensed consolidated financial statements.
4
SIMTROL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
----------------------------
2003 2002
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,007,805) $(1,198,230)
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 178,730 219,891
Interest expense-Deferred Financing Costs 45,014 91,953
Interest Expense-Non-cash beneficial conversion feature
of
convertible debt 104,220 90,941
Debt extinguishment - (148,915)
Debt conversion expense 431,599 -
Changes in operating assets and liabilities:
Accounts receivable (51,567) 124,335
Inventories - (16,310)
Prepaid expenses and other current assets 39,170 13,488
Accounts payable (46,262) 142,585
Accrued expenses 42,985 (19,788)
Deferred revenues (94,285) (196,871)
----------- -----------
Net cash used in operating activities (358,201) (886,068)
----------- -----------
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) (18,893)
Proceeds from exercise of stock options - 2,438
Proceeds from convertible debt 30,000 750,000
Net proceeds from stock issuances 346,200 225,400
----------- -----------
Net cash provided by financing activities 371,309 958,945
----------- -----------
Increase in cash and cash equivalents 13,108 72,877
Cash and cash equivalents, beginning of the period 1,307 72,764
----------- -----------
Cash and cash equivalents, end of the period $ 14,415 $ 145,641
=========== ===========
Supplemental schedule of non-cash investing and financing activities:
Issuance of stock warrants $ 58,460 $ 239,607
----------- -----------
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 SIX MONTHS ENDED JUNE 30, 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 filed with the
Securities and Exchange Commission.
NOTE 2 - GOING CONCERN UNCERTAINTY
As of June 30, 2003, the Company had cash and cash equivalents of $14,415. The
Company does not have sufficient funds for the next twelve (12) months and has
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.
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.
6
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 4,313,963 and 4,134,804 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 Six Months Ended
June 30, June 30,
--------------------------------------------------------------------
2003 2002 2003 2002
---------------------------------------------------------------------
Net loss as reported ($305,616) ($499,826) ($1,007,805) ($1,198,230)
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 (22,827) (70,195) (90,949) (148,501)
---------------------------------------------------------------------
Pro forma net loss ($328,443) ($570,021) ($1,098,754) ($1,346,731)
=====================================================================
Net loss per share as reported-Basic and diluted ($0.01) ($0.03) ($0.05) ($0.08)
Pro forma net loss per share- Basic and diluted ($0.02) ($0.04) ($0.05) ($0.09)
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.
Assumptions 2003 2002
----------------------------------------------------
Risk-free rate 4.00 4.25
Annual rate of dividends 0 0
Volatility 86% 86%
Average life 7 7
7
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 six months ended
June 30, 2003 and 2002:
-------------------------------------------------------------------------------------------------------------------------
Weighted
Average
Exercise
Options Price
------- --------
Options outstanding at January 1, 2002 919,331 $2.62
Granted 196,500 $0.48
Exercised - -
Terminated (125,990) $3.88
----------------------
Options outstanding at June 30, 2002 989,841 $2.03
======================
Options outstanding at January 1, 2003 974,500 $1.76
Granted - -
Exercised - -
Terminated (4,250) $0.23
----------------------
Options outstanding at June 30, 2003 970,250 $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.
In April 2003, 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
8
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 beginning 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
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
$103,131 of deferred revenue at June 30, 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 $30,000 of convertible debt ("Debt") to two of its directors
during the six months ended June 30, 2003. The Debt accrued interest at prime
plus 1% (5.00% at June 30, 2003) and is convertible into restricted common stock
at a price of $0.24 per share. The principal and interest amounts were converted
into 128,421 shares of restricted common stock on July 22, 2003.
The Company also issued a total of $750,000 of convertible debt ("2002 Debt") to
numerous private investors, including four members of the Board of Directors, at
various times during the six months ended June 30, 2002. The 2002 Debt accrued
interest at prime rate plus 1% and was due on December 31, 2002. In conjunction
with the issuance of the 2002 Debt, the Company issued 750,000 common stock
purchase warrants to the holders of the 2002 Debt. The 2002 Debt was convertible
immediately into restricted shares of common stock of the Company at prices
ranging from $0.47 to $0.79 per share, which represented the market prices of
the Company's traded common stock on the date of the issuances of the 2002 Debt.
The warrants, which expire at various dates in 2006, are exercisable immediately
at prices originally ranging from $0.47 to $0.79 per share, the market price of
the company's traded common stock on the day the warrants were issued. Each
warrant entitles the holder to purchase one common share of the restricted
common stock of the Company. On December 31, 2002, the Company extended the due
date of the 2001 Debt and 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 prices adjusted to $0.24. As a result, the Company will recognize
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.
In connection with the issuance of the 2002 Debt, $151,352 of the debt proceeds
was allocated to the fair value of the warrants and $64,993 of the proceeds was
allocated to beneficial conversion feature of the notes. These debt discounts
are to be amortized to financing
9
costs over the term of the debt. For the six months ended June 30, 2002,
$224,030 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 2001
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 2001
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 2001 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 term of the debt. For the six months ended June 30,
2002, $65,564 was expensed as financing costs relating to the amortization of
the beneficial conversion feature.
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 and six months ended June
30, 2003, the Company recognized $62,532 and $104,220, respectively, 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.
During the three months ended June 30, 2003 the Company issued 848,333 shares of
its common stock for gross proceeds of $203,600 ($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 June 30, 2003, the Company issued 1,409,269 shares of its common
stock for gross proceeds of $262,500 in a private placement stock 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 the
average of the preceding five days closing prices prior to the purchases.
NOTE 8- MAJOR CUSTOMERS
Revenue from five customers comprised approximately $211,860 (73%) of
consolidated revenues for the six months ended June 30, 2003. At June 30, 2003,
related accounts receivable from these companies comprised $109,970 (94%) of
consolidated receivables.
Revenue from five customers comprised approximately $558,006 (73%) of
consolidated revenues for the six months ended June 30, 2002.
NOTE 9 - SUBSEQUENT EVENT
10
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.
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.
11
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 six months ended June 30, 2003, total assets decreased approximately
23% to $471,872 from $611,651 at December 31, 2002. This was primarily the
result of a decrease in software development costs, net of $138,812, and a
decrease in our property and equipment, net of $39,918. Software development
costs and property and equipment decreased due to amortization and depreciation
of previously capitalized amounts. There were no additions to these categories
during the six months ended June 30, 2003.
Current liabilities decreased $926,880 or 32%, 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 six months ended June 30, 2003, as well as a decrease in
deferred revenue of $94,285 during the period due to the recognition of the
revenue on our Omega maintenance contracts.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2003 AND 2002
REVENUES
Revenues were $138,315 and $374,498 for the three months ended June 30, 2003 and
2002, respectively. The 63.1% decrease for the three months ended June 30, 2003
was primarily due to a reduction in revenues associated with our older Omega
product line as most of our maintenance customers discontinued maintenance at
the end of 2002. Omega revenues of $91,290 for the three months ended June 30,
2003 represented a decrease of $171,844 compared to the three months ended June
30, 2002. Our Ongoer revenues of $47,025 for the three months ended June 30,
2003 were a decrease of $64,339 compared to the three months ended June 30,
2002, due mainly to the decrease in orders from our largest Ongoer customer,
whose orders fell due to the declining business condition of their customer.
COST OF REVENUES AND GROSS PROFIT
Cost of revenues decreased $155,038, or 64%, for the three months ended June 30,
2003 compared to the three months ended June 30, 2002 due primarily to the
decrease in revenue of 63% described above.
Gross margins were approximately 37% and 35% for the three months ended June 30,
2003 and 2002, respectively.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses were $177,640 and $531,912 for the
three months ended June 30, 2003 and 2002, respectively. The decrease in the
three-month period ended June 30, 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 our
move to a significantly smaller office space in September 2002.
RESEARCH AND DEVELOPMENT EXPENSES
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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 on a straight-line basis over the useful life of
the product. Research and development costs expensed decreased to $101,972 in
the three months ended June 30, 2003 versus $130,838 in the three months ended
June 30, 2002 due primarily to reductions in our research and development
personnel during 2002.
OTHER EXPENSE, PRIMARILY FINANCE CHARGES
Other expense, primarily finance charges of $76,982 for the three months ended
June 30, 2003 consisted primarily of interest charges associated with our
previous issuance of convertible debt and amortization of previously capitalized
finance charges for the extension of convertible debt originally due on December
31, 2002. See note 6 to the condensed consolidated financial statements. Expense
in the prior year consisted primarily of finance charges including warrant value
and beneficial conversion features associated with the original issuance of
convertible debt during the fourth quarter 2001 and the first six months of
2002.
NET LOSS
Net loss for the three months ended June 30, 2003 was $305,616 compared to a net
loss of $499,826 for the three months ended June 30, 2002. The decrease in net
loss for the period was due primarily to the reduction in operating expenses
that resulted from reductions in personnel during the last year as well as lower
financing costs as a majority of our convertible debt was converted to
restricted common stock in January 2003.
SIX MONTHS ENDED JUNE 30, 2003 AND 2002
REVENUES
Revenues were $288,620 and $760,048 for the six months ended June 30, 2003 and
2002, respectively. The 62% decrease for the six months ended June 30, 2003 was
primarily due to a reduction in service revenues associated with our older Omega
product line as a majority of our customers discontinued their service contracts
at the end of 2002. Revenues for our Ongoer software decreased to $81,518 for
the six months ended June 30, 2003 from $241,720 during the six months ended
June 30, 2002 as orders from our largest customer decreased due to business
conditions of their customer for the product. Revenues for Omega were $207,102
for the six months ended June 30, 2003 compared to $518,328 for the six months
ended June 30, 2002. 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, which began shipping in April 2001.
COST OF REVENUES AND GROSS PROFIT
Cost of revenues decreased $272,068, or 56%, for the six months ended June 30,
2003 compared to the six months ended June 30, 2002 due primarily to the
decrease in revenues during the period of 62% described above.
Gross margins were approximately 26% and 36% for the six months ended June 30,
2003 and 2002, respectively. The decrease from prior year was due primarily to
the periodic charge for amortization of capitalized software development costs
representing a greater percentage of revenues during the current year as
revenues declined as described above.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses were $309,029 and $1,072,900 for
the six months ended June 30, 2003 and 2002, respectively. The decrease in the
six months ended June 30, 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.
RESEARCH AND DEVELOPMENT EXPENSES
13
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 on a straight-line basis over the useful life of
the product. These expensed costs were $138,812 for the six months ended June
30, 2003 and 2002, as we began to expense previously capitalized research and
development costs to cost of revenues in April 2001. Research and development
expenses decreased to $203,995 in the six months ended June 30, 2003 from
$269,594 in the six months ended June 30, 2002 due primarily to reductions in
our research and development personnel from the prior year.
OTHER EXPENSE, PRIMARILY FINANCE CHARGES
Other expense, primarily finance charges of $136,955 for the six months ended
June 30, 2003 consisted primarily of finance charges associated with our
issuance of convertible debt during previous fiscal years. A majority of our
convertible debt was converted to restricted common stock in January 2003. Other
expense, primarily finance charges of $277,784 in the six months ended June 30,
2002 consisted primarily of the amortization of the warrant value and the
beneficial conversion feature of the convertible debt issued during the fourth
quarter 2001 and the six months ended June 30, 2002. See note 6 to the financial
statements.
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 six months ended June 30, 2003 was $1,007,805 compared to a net
loss of $1,198,230 for the six months ended June 30, 2002. The decrease in net
loss for the period was due primarily to the reduction in operating expenses
that resulted from reductions in personnel during the last year. Approximately
half the net loss in the current year is due to the debt conversion expense
recorded in January 2003 in conjunction with the conversion a majority of our
convertible debt into restricted common shares at that time.
LIQUIDITY AND SOURCES OF CAPITAL
GENERAL
As of June 30, 2003, we had cash and cash equivalents of $14,415. We do 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. 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 our annual audit report for 2002, our quarterly report for March 31, 2003 and
this 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.
We used $358,201 in cash from operating activities in the six months ended June
30, 2003, primarily due to our loss of $1,007,805, which included debt
conversion expense of $431,599 and depreciation and amortization of $178,730.
The decrease in cash used from the six months ended June 30, 2003 of $886,068
was due primarily to the lower net loss that resulted in the current year from
our reduced operations. There was no cash used in investing activities for the
six months ended June 30, 2003 or the six months ended June 30, 2002. Cash
provided by financing activities in the six months ended June 30, 2003 of
$371,309 consisted primarily of $346,200 of proceeds from the issuance of
restricted common stock and $30,000 of convertible debt. Cash provided by
financing activities of $958,945 in the six months ended June 30, 2002 consisted
primarily of $750,000 of convertible debt and $225,400 of restricted common
stock, net of costs, issued during the
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period. We have relied on a combination of investments of convertible debt and
common stock from private investors, including four members of the Board of
Directors, to fund operations since November 2001.
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 June 30, 2003. We have
also used, rather than provided, cash in its operations for the six months ended
June 30, 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 operation, which in turn is dependent upon
our ability to meet our 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, our management
is 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
2003.
In June 2002, we exchanged a warrant to purchase 19% of Glovicom for a $64,565
reduction of our outstanding payable to Glovicom. The gain on the exchange of
the warrant was recorded as extraordinary income.
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-QSB.
ITEM 3. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in the Company's 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.
As of June 30, 2003, an evaluation was performed under the supervision and with
the participation of our 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. 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.
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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 June 30, 2003, we issued 848,333 shares of our common
stock for gross proceeds of $203,600 ($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)
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