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 SEPTEMBER 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 INCORPORATION) (I.R.S. EMPLOYER 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 X NO
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 September 30, 2003
Index
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited):
Condensed Consolidated Balance Sheet as of
September 30, 2003................................................. 3
Condensed Consolidated Statements of Operations for the
Three and Nine Months Ended September 30, 2003 and 2002............ 4
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended September 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................................ 10
Item 3. Controls and Procedures............................................ 15
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Purchases of Equity Securities........... 16
Item 6. Exhibits and Reports on Form 8-K................................... 16
2
SIMTROL, INC.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SIMTROL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 2003
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 12,157
Accounts receivable, net 66,716
Prepaid expenses and other current assets 10,406
-------------
Total current assets 89,279
Property and equipment, net 90,453
Other assets:
Software development costs, net 138,812
Other long term assets 11,187
-------------
Total assets $ 329,731
=============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current Liabilities:
Current portion of long-term debt and short-term borrowings $ 162,110
Convertible debt 357,468
Accounts payable 887,632
Accrued expenses 526,084
Deferred revenues 58,503
-------------
Total Current Liabilities 1,991,797
Long-term debt, less current portion 77,728
Commitments and contingencies
Stockholders' deficiency:
Common stock, authorized 40,000,000 shares of
$.001 par value; 22,611,873 shares issued
and outstanding 22,612
Additional paid-in capital 59,536,914
Accumulated deficiency (61,299,320)
-------------
Total stockholders' deficiency (1,739,794)
-------------
Total liabilities and stockholders' deficiency $ 329,731
=============
See notes to condensed consolidated financial statements.
3
SIMTROL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
----------------------------- -----------------------------
2003 2002 2003 2002
-------------- -------------- -------------- -------------
Revenues:
Software licenses $ 76,563 $ 105,607 $ 158,078 $ 347,327
Service 56,705 265,313 263,809 783,641
-------------- -------------- -------------- -------------
Total revenues 133,268 370,920 421,887 1,130,968
Cost of revenues
Software licenses 72,841 125,896 216,791 321,351
Service 60 115,310 70,957 406,770
-------------- -------------- -------------- -------------
Total cost of revenues 72,901 241,206 287,748 728,121
-------------- -------------- -------------- -------------
Gross profit 60,367 129,714 134,139 402,847
Operating expenses:
Selling, general, and administrative 161,486 326,791 470,516 1,399,691
Research and development 107,224 75,632 311,218 345,223
--------------- -------------- -------------- -------------
Total operating expenses 268,710 402,423 781,734 1,744,914
Loss from operations (208,343) (272,709) (647,595) (1,342,067)
Other Expenses
Other expense, primarily finance charges (77,164) (133,538) (214,118) (411,322)
Debt conversion expense - - (431,599) -
-------------- -------------- -------------- -------------
Total other expenses (77,164) (133,538) (645,717) (411,322)
Loss before extraordinary item (285,507) (406,247) (1,293,312) (1,753,389)
Extraordinary gain from extinguishment of debt, net of tax - - - 148,915
-------------- -------------- -------------- -------------
Net loss $ (285,507) $ (406,247) $ (1,293,312)$ (1,604,474)
============== ============== ============== =============
Net loss per common share, Basic and Diluted:
Loss before extraordinary item $ (0.01) $ (0.02) $ (0.06)$ (0.11)
Extraordinary gain - 0.00 - 0.01
-------------- -------------- -------------- -------------
Net loss per share $ (0.01) $ (0.02) $ (0. 06)$ (0.10)
============== ============== ============== =============
Weighted shares outstanding
Basic and diluted 22,174,263 16,851,519 21,230,739 15,827,057
============== ============== ============== =============
See notes to condensed consolidated financial statements.
4
SIMTROL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
2003 2002
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,293,312) $(1,604,474)
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 265,224 331,129
Interest expense-Deferred Financing Costs 51,737 165,779
Interest Expense-Non-cash beneficial conversion feature
of
convertible debt 166,752 110,749
Debt extinguishments - (148,915)
Debt conversion expense 431,599 -
Changes in operating assets and liabilities:
Accounts receivable (1,218) 321,665
Inventories - 79,126
Prepaid expenses and other current assets 35,487 (44,885)
Accounts payable (76,907) (65,615)
Accrued expenses 94,091 37,749
Deferred revenues (138,913) (385,360)
----------- -----------
Net cash used in operating activities (465,460) (1,192,199)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment - (21,068)
----------- -----------
Net cash used in investing activities - (21,068)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (payments) proceeds on short-term credit facilities (4,890) 187,142
Proceeds from exercise of stock options - 2,438
Proceeds from convertible debt 30,000 750,000
Net proceeds from stock issuances 451,200 255,400
----------- -----------
Net cash provided by financing activities 476,310 1,194,980
----------- -----------
Increase (decrease) in cash and cash equivalents 10,850 (18,287)
Cash and cash equivalents, beginning of the period 1,307 72,764
----------- -----------
Cash and cash equivalents, end of the period $ 12,157 $ 54,477
=========== ===========
Supplemental schedule of non-cash investing and financing activities:
Issuance of stock warrants $ 58,460 $ 239,606
----------- -----------
Beneficial conversion feature of convertible debt $ 229,284 $ 64,993
----------- -----------
Conversion of debt and accrued interest to common stock $ 798,882 $ -
-----------
See notes to condensed consolidated financial statements
5
SIMTROL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
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 September 30, 2003, the Company had cash and cash equivalents of $12,157.
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 its 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 4,150,563 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 Nine Months Ended
September 30, September 30,
--------------------------------------------------------------------
2003 2002 2003 2002
---------------------------------------------------------------------
Net loss as reported ($285,507) ($406,247) ($1,293,312) ($1,604,474)
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 (39,308) (84,301) (130,257) (232,801)
---------------------------------------------------------------------
Pro forma net loss ($324,815) ($490,548) ($1,423,569) ($1,837,275)
=====================================================================
Net loss per share, as reported ($0.01) ($0.02) ($0.06) ($0.10)
Pro forma net loss per share- Basic and diluted ($0.01) ($0.03) ($0.07) ($0.12)
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 nine months ended
September 30, 2003 and 2002:
Weighted
Average
Exercise
Options Price
---------------------- ----------------------
Options outstanding at January 1, 2002 919,331 $2.62
Granted 340,000 $0.37
Exercised - -
Terminated (263,731) $2.78
----------------------
Options outstanding at September 30, 2002 995,600 $1.81
======================
Options outstanding at January 1, 2003 974,500 $1.76
Granted 275,000 $0.20
Exercised - -
Terminated (4,250) $0.23
----------------------
Options outstanding at September 30, 2003 1,245,250 $1.42
======================
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.
8
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 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
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 $58,503 of deferred revenue at September 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 nine months ended September 30, 2003. The Debt accrued interest at
prime plus 1% and was 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 nine months ended September 30, 2002. The 2002 Debt
accrues interest at prime rate plus 1% (5.75% at the time) 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 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
9
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 were
allocated to beneficial conversion factor of the notes. These debt discounts
were amortized to financing costs over the term of the debt. For the nine months
ended September 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 2001 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 nine months ended
September 30, 2003, the Company recognized $62,532 and $166,752, 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.
During the three months ended September 30, 2003 the Company issued 653,916
shares of its common stock for gross proceeds of $105,000 in a private placement
of its 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. Offering costs were deminimis.
Subsequent to September 30, 2003, the Company issued 755,353 shares of its
common stock for gross proceeds of $157,500 in a private placement of its stock
to a limited number of accredited investors, including two 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.
10
NOTE 8- MAJOR CUSTOMERS
Revenue from five customers comprised approximately $318,610 (76%) of
consolidated revenues for the nine months ended September 30, 2003. At September
30, 2003, related accounts receivable from these companies comprised $57,115
(86%) of consolidated receivables.
Revenue from five customers comprised approximately $807,812 (71%) of
consolidated revenues for the nine months ended September 30, 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 the 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 nine months ended September 30, 2003, total assets decreased
approximately 46% to $329,731 from $611,651 at December 31, 2002. This was
primarily the result of a decrease in software development costs, net of
$208,218, and a decrease in our property and equipment, net of $57,006. 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 nine months ended September 30, 2003.
Current liabilities decreased $901,397 or 31%, due primarily to the conversion
of $765,000 of convertible debt and $33,882 of accrued interest on the debt to
common stock during the nine months ended September 30, 2003, as well as a
decrease in deferred revenue of $138,913 during the period due to the
recognition of the revenues on our Omega maintenance contracts.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
REVENUES
Revenues were $133,268 and $370,920 for the three months ended September 30,
2003 and 2002, respectively. The 64% decrease for the three months ended
September 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 $56,705 for the three months
ended September 30, 2003 represented a decrease of $208,608 compared to the
three months ended September 30, 2002. Our Ongoer revenues of $76,563 for the
three months ended September 30, 2003 represented a decrease of $29,044 compared
to the three months ended September 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 $69,347, or 53%, for the three months ended September
30, 2003 compared to the three months ended September 30, 2002 due primarily to
the decrease in revenue of 64% described above.
Gross margins were approximately 45% and 35% for the three months ended
September 30, 2003 and 2002, respectively.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses were $161,486 and $326,791 for the
three months ended September 30, 2003 and 2002, respectively. The decrease in
the three-month period ended September 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.
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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 on a straight-line basis over the useful life of
the product. Capitalized development costs expensed as cost of revenues were
$69,406 for the three months ended September 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 were $107,224 in the
three months ended September 30, 2003.
OTHER EXPENSE, PRIMARILY FINANCE CHARGES
Other expense, primarily finance charges of $77,164 for the three months ended
September 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 nine months of
2002.
NET LOSS
Net loss for the three months ended September 30, 2003 was $285,507 compared to
a net loss of $406,247 for the three months ended September 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.
NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
REVENUES
Revenues were $421,887 and $1,130,968 for the nine months ended September 30,
2003 and 2002, respectively. The 62.7% decrease for the nine months ended
September 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 $158,078 for the nine months ended September 30, 2003 from
$347,327 during the nine months ended September 30, 2002 as orders from our
largest customer decreased due to business conditions of their customer for the
product. Revenues for Omega were $263,809 for the nine months ended September
30, 2003 compared to $783,641 for the nine months ended September 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 $440,373, or 60%, for the nine months ended September
30, 2003 compared to the nine months ended September 30, 2002 due primarily to
the decrease in revenues during the period of 62.7% described above.
Gross margins were approximately 32% and 36% for the nine months ended September
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 $470,516 and $1,399,691 for
the nine months ended September 30, 2003 and 2002, respectively. The decrease in
the nine months ended September 30, 2003 compared to the similar period in 2002
13
resulted primarily from the consolidation of operations, reductions in
personnel, and ongoing efforts to reduce administrative costs.
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 on a straight-line basis over the useful life of
the product. These expensed costs were $208,218 for the nine months ended
September 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 $311,218 in the nine months ended September
30, 2003 from $345,223 in the nine months ended September 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 $214,118 for the nine months ended
September 30, 2002 consisted primarily of finance charges associated with the
Company's issuance of convertible debt during previous fiscal years. A majority
of the company's convertible debt was converted to restricted common stock in
January 2003. Other expensed, primarily finance charges in the nine months ended
September 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 2001and the nine months ended September 30, 2002. See note 6 to
the financial statements.
DEBT CONVERSION EXPENSE
A debt conversion expense of $431,599 was recorded in the nine months ended
September 30, 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 nine months ended September 30, 2003 was $1,293,312 compared to
a net loss of $1,604,474 for the nine months ended September 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.
LIQUIDITY AND SOURCES OF CAPITAL
GENERAL
As of September 30, 2003, we had cash and cash equivalents of $12,157. 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 and our quarterly report for
September 30, 2003. 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 $465,460 in cash from operating activities in the nine months ended
September 30, 2003, primarily due to our loss of $1,293,312, which included debt
conversion expense of $431,599 and depreciation and amortization of $265,224.
The decrease in cash used from the nine months ended September 30, 2002 of
$1,192,199 was due primarily to the lower net loss that resulted in the current
year from our reduced operations and the lower use of convertible debt as a
source of financing in the current year. There was no cash used in investing
activities for the nine months ended September 30, 2003 and $21,068 used in the
nine months ended September 30, 2002. These amounts represented leasehold
improvements to our new facility. Cash provided by financing activities in the
nine months ended September 30, 2003 of $476,310 consisted primarily of $451,200
of proceeds from the issuance of restricted common stock and $30,000 of
convertible debt. Cash provided by financing activities of $1,194,980 in the
nine months ended September 30, 2002 consisted primarily of $750,000 of
convertible debt and $255,400 of restricted common stock, net of costs, issued
during the period. The company has 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.
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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 September 30, 2003. We
have also used, rather than provided, cash in our operations for the nine months
ended September 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 operations, 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
fiscal 2003.
In September 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 September 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
15
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.
In connection with its audit of the Company's consolidated financial statements
as of and for the year ended December 31, 2002, Grant Thornton LLP advised the
Company's management and its 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 the
Company's accounting function. The Company believes 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 three months ended September 30, 2003 we issued 653,916 shares of our
common stock for gross proceeds of $105,000 in a private placement to a limited
number of accredited investors, including three of our directors. 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. 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 pursuant to Exchange Act Rule 13a-14(a) of the Chief
Executive Officer.
31.2 Certification pursuant to Exchange Act Rule 13a-14(a) of the Chief
Financial Officer.
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 of the President and
Chief Executive Officer of Simtrol, Inc.
(b) Reports on Form 8-K:
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
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)
17