FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004
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, INCLUDING 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 MAY 14, 2004
-------------------
COMMON STOCK, $.001 PAR VALUE 2,336,723
Transitional Small Business Disclosure Format: YES |_| NO |X|
-
SIMTROL, INC. AND SUBSIDIARIES
Form 10-QSB
Quarter Ended March 31, 2004
Index
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited):
Condensed Consolidated Balance Sheet as of
March 31, 2004 ........................................ 3
Condensed Consolidated Statements of Operations for the
Three Months Ended March 31, 2004 and 2003 ............ 4
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 2004 and 2003 ............ 5
Notes to Condensed Consolidated Financial Statements .. 6
Item 2. Management's Discussion and Analysis of
Financial Conditionand Results of Operations ......... 10
Item 3. Controls and Procedures .............................. 13
PART II OTHER INFORMATION
Item 1. Legal Proceedings ..........................................14
Item 2. Changes in Securities and Purchases of Equity Securities .. 14
Item 6. Exhibits and Reports on Form 8-K .......................... 14
2
SIMTROL, INC.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SIMTROL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 2004
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 94,233
Accounts receivable, net 31,916
Capitalized financing costs 148,978
------------
Total current assets 275,127
Property and equipment, net 69,115
Other long-term assets 11,187
------------
Total assets $ 355,429
============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current Liabilities:
Current portion of long-term debt and short-term borrowings $ 185,065
Convertible debt, net of unamortized discounts of $145,629 849,371
Accounts payable 602,587
Accrued expenses 591,967
Deferred revenues 6,037
------------
Total Current Liabilities 2,235,027
Long-term debt, less current portion 41,920
Commitments and contingencies
Stockholders' deficiency:
Common stock, authorized 40,000,000 shares of
$.001 par value; 2,336,723 issued and outstanding 2,337
Additional paid-in capital 60,034,533
Accumulated deficit (61,958,388)
------------
Total stockholders' deficiency (1,921,518)
------------
Total liabilities and stockholders' deficiency $ 355,429
============
See notes to condensed consolidated financial statements.
3
SIMTROL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
2004 2003
-------------- --------------
Revenues:
Software licenses $ 25,816 $ 34,492
Service 25,042 115,813
----------- -----------
Total revenues 50,858 150,305
Cost of revenues
Software licenses 70,522 71,000
Service -- 56,510
----------- -----------
Total cost of revenues 70,522 127,510
----------- -----------
Gross (loss) profit (19,664) 22,795
Operating expenses:
Selling, general, and administrative 271,547 131,390
Research and development 107,349 102,022
----------- -----------
Total operating expenses 378,896 233,412
Loss from operations (398,560) (210,617)
Other income/(expenses)
Gain on debt extinguishment 254,302 --
Other expense, primarily finance charges (162,749) (59,973)
Debt conversion expense -- (431,599)
----------- -----------
Total other income (expenses) 91,553 (491,572)
Net loss $ (307,007) $ (702,189)
=========== ===========
Net loss per common share:
Basic and Diluted $ (0.13) $ (0.35)
Weighted average shares outstanding
Basic and diluted 2,336,494 2,010,062
=========== ===========
See notes to condensed consolidated financial statements.
4
SIMTROL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
2004 2003
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash used in operating activities (392,565) (163,979)
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash provided by investing activities -- --
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (payments) on short-term credit facilities (1,200) (4,891)
Net proceeds from convertible debt 479,000 30,000
Net proceeds from stock issuances 5,000 142,600
--------- ---------
Net cash provided by financing activities 482,800 167,709
Increase (decrease) in cash and cash equivalents 90,235 3,730
Cash and cash equivalents, beginning of the period 3,998 1,307
--------- ---------
Cash and cash equivalents, end of the period $ 94,233 $ 5,037
========= =========
Supplemental schedule of non-cash investing and financing activities:
Issuance of stock warrants $ 192,602 $ 58,460
--------- ---------
Beneficial conversion feature of convertible debt $ 127,242 $ 229,284
--------- ---------
Conversion of debt and accrued interest to common stock $ -- $ 768,061
--------- ---------
See notes to condensed consolidated financial statements.
5
SIMTROL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003
(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 and the instructions of Form 10-QSB. It
is management's opinion that these statements include all adjustments,
consisting of only normal recurring adjustments necessary to make the financial
position, results of operations, and cash flows not misleading as of March 31,
2004 and for all periods presented.
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, 2003 and for each of the two years ended December 31, 2003, which
are included in the Company's Annual Report on Form 10-KSB for the year ended
December 31, 2003 filed with the Securities and Exchange Commission.
On May 7, 2004, the Company effected a 1:10 reverse split of the Company's
common stock. All share totals have been adjusted to reflect the 1:10 reverse
split for all periods presented.
NOTE 2 - GOING CONCERN UNCERTAINTY
As of March 31, 2004, the Company had cash and cash equivalents of $94,233. 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
since the fourth quarter of 2001 to sustain its operations. 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 5) and continues to attempt to raise capital. However, there can be no
assurance that the Company will be successful in its attempts to develop and
deploy its Ongoer product line, to generate positive cash flows or raise
sufficient capital essential to its survival. To the extent that the Company is
unable to generate or raise the necessary operating capital, it will become
necessary to curtail operations. Additionally, even if the Company does raise
operating capital, there can be no assurance that the net proceeds will be
sufficient to enable it to develop its business to a level where it will
generate profits and positive cash flows.
These matters raise substantial doubt about the Company's ability to continue as
a going concern. However, the accompanying financial statements have been
prepared on a going concern basis, which contemplate the realization of assets
and satisfaction of liabilities in the normal course of business. The financial
statements do not include any adjustments relating to the recoverability of the
recorded assets or the classification of the liabilities that might be necessary
should the Company be unable to continue as a going concern.
6
NOTE 3 - SELECTED SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The condensed consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant intercompany
transactions and balances have been eliminated in consolidation.
Loss Per Share
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share", requires the presentation of basic and diluted earnings per share
("EPS"). Basic EPS is computed by dividing loss available to common stockholders
by the weighted-average number of common shares outstanding for the period.
Diluted EPS includes the potential dilution that could occur if options or other
contracts to issue common stock were exercised or converted. The following
equity securities are not reflected in diluted loss per share because their
effects would be anti-dilutive:
March 31, 2004 March 31, 2003
-------------- --------------
Options 137,525 97,450
Warrants 900,923 306,871
Convertible Debt 488,569 200,040
--------- ---------
Total 1,527,017 604,361
--------- ---------
Accordingly, basic and diluted loss per share are identical.
Stock Based Compensation
SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and
Disclosure-an amendment of FASB Statement No. 123" amends SFAS No. 123,
"Accounting for Stock-Based Compensation", to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, this Statement amends the
disclosure requirements of SFAS 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based compensation and the effect of the method used on reported results.
The Company continues to follow the pro-forma disclosures for stock-based
compensation as permitted in SFAS 123. The following table illustrates the
effect on net loss per share if the Company had applied the fair value
recognition provisions of SFAS 123 to stock-based employee compensation:
Three Months Ended
March 31,
2004 2003
==========================
Net loss as reported ($307,007) ($702,189)
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 (7,789) (68,122)
--------- ---------
Pro forma net loss ($314,796) ($770,311)
========== =========
Net loss per share as reported-Basic and diluted ($ 0.13) ($ 0.35)
Pro forma net loss per share- Basic and diluted ($ 0.13) ($ 0.38)
7
Pro forma Information
The fair value for the fiscal 2004 and 2003 options issued was estimated at the
date of grant using a Black-Scholes option-pricing model to be $0 and $86,667,
respectively, with the following weighted-average assumptions.
Assumptions 2004 2003
--------- ---------
Risk-free rate 4.00% 4.00%
Annual rate of dividends 0 0
Volatility 85% 86%
Average life 7 years 7 years
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options, which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. The
Company's employee stock options have characteristics significantly different
from those of traded options, and changes in the subjective input assumptions
can materially affect the fair value estimate.
The following summarizes the stock option transactions for the three months
ended March 31, 2004 and 2003:
Weighted
Average
Exercise
Options Price
---------- ---------
Options outstanding at January 1, 2003 97,450 $17.60
Granted - -
Exercised - -
Terminated - -
-----------
Options outstanding at March 31, 2003 97,450 $17.60
===========
Options outstanding at January 1, 2004 137,525 $13.20
Granted -
Exercised -
Terminated -
Options outstanding at March 31, 2004 137,525 $13.20
===========
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, 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
8
accounting pronouncement is not expected to have a significant impact on the
Company's financial statements.
Revenue Recognition
The Company's revenue recognition policy is significant because revenue is a key
component of its results of operations. Revenue recognition also determines the
timing of certain expenses. The Company follows 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 the
Company's 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 $6,037 of deferred revenue at
March 31, 2004.
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 - CONVERTIBLE DEBT
On February 4, 2004, the Company completed the sale of convertible notes with
principal balance of $575,000 ("2004 Debt"), in a private placement to a limited
number of accredited investors, including $15,000 to one Board member. The
interest rate of the notes is 10% and the conversion price of the Notes is $2.00
per share for all principal and accrued interest. The due date of the notes is
August 4, 2004 and the notes are convertible to shares of common stock at any
time before that date.
The Company also issued warrants to the Noteholders to purchase an aggregate of
287,500 shares of common stock with an exercise price of $2.00. Each warrant
enables the holder to purchase the same number of shares as the holder would
receive upon conversion of the 2004 Debt. In conjunction with the issuance of
the 2004 Debt, the Company issued 169,000 warrants to Westminster Securities as
a placement fee for the financing. In addition, Noteholders received additional
warrants to purchase an aggregate of 575,000 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 $2.00 per share of common stock.
Offering costs totaled approximately $96,000 and the proceeds of the offering
were used to fund current operational and overhead expenses.
In connection with the issuance of the 2004 Debt, $91,202 and $179,789 of the
proceeds was allocated to the fair value of the warrants granted to purchase
287,500 and 575,000 shares of stock, respectively, and a beneficial conversion
feature of $127,242 was recorded to reflect the discount on the 2004 Debt based
on the relative fair values of the warrants and conversion feature of the 2004
Debt. These debt discounts are amortized to financing costs over the term of the
2004 Debt, except for the $179,789 attributed to the 575,000 warrants that can
be exercised in the event of a conversion of the 2004 Debt. If any or all of the
2004 Debt is converted, the Company will record a portion or all of the $179,789
as debt conversion expense. For the three months ended March 31, 2004, $72,815
was expensed as financing costs relating to the amortization of the beneficial
conversion feature and warrant value. Additionally, $101,400 was capitalized as
a financing fee for the warrants granted to Westminster Securities and this
amount is amortized over the life of the 2004 Debt. Approximately $33,800 of
this amount was amortized as a finance expense in the three months ended March
31, 2004.
9
NOTE 6 - STOCKHOLDERS' DEFICIENCY
During the three months ended March 31, 2004, the Company issued 2,604 shares of
its common stock for gross proceeds of $5,000 ($1.92 per share). During the
three months ended March 31, 2003, the Company issued 59,417 shares of its
common stock for gross proceeds of $142,600 ($2.40 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.
NOTE 7- MAJOR CUSTOMERS
Revenue from Telaid Industries, Polycom, and Lockheed Martin of $32,661,
$11,266, and $6,931, respectively, comprised approximately 100% of consolidated
revenues for the three months ended March 31, 2004. At March 31, 2004, related
accounts receivable from these companies comprised 100% of consolidated
receivables.
Revenue from Lockheed Martin, MCI, Polycom, and Duracell of $38,960, $32,826,
$18,846, and $17,220, respectively, comprised approximately 71% of consolidated
revenues for the three months ended March 31, 2003.
NOTE 8 - GAIN ON DEBT EXTINGUISHMENT
A gain of $254, 302 was recorded during the three months ended March 31, 2004 as
a result of the Company entering into various settlement agreements with
vendors. The gains were recorded at the time of the final payments under the
various agreements.
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. The notes
to our condensed consolidated financial statements included in this report and
the notes to our consolidated financial statements included in our Form 10-KSB
for the year ended December 31, 2003 should be read in conjunction with this
discussion and our consolidated financial statements.
CRITICAL ACCOUNTING POLICIES
We prepare our condensed consolidated financial statements 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.
Revenue on Omega maintenance contracts is recognized over the term of the
related contract.
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
10
feasibility has been established are capitalized and amortized, commencing
with product release, using the greater of the income forecast method or on
a straight-line basis over the useful life of the product. Management is
required to use professional judgment in determining whether development
costs meet the criteria for immediate expense or capitalization.
o Impairments of Assets/Investments. We record impairment losses on assets
and investments when events and circumstances indicate that the assets
might be impaired and the undiscounted cash flows estimated to be
generated by those assets are less than the carrying amount of those
items. Our cash flow estimates are based on historical results adjusted to
reflect our best estimate of future market and operating conditions. The
net carrying value of assets not recoverable is reduced to fair value. Our
estimates of fair value represent our best estimate based on industry
trends and reference to market rates and transactions.
FINANCIAL CONDITION
During the quarter ended March 31, 2004, total assets increased approximately
55% to $355,429 from $229,299 at December 31, 2003. This was primarily the
result of an increase in net capitalized financing costs during the quarter of
$148,978, and an increase in cash of $90,235 resulting from the convertible debt
issued during the quarter, partly offset by decreased software development
costs, net of $69,406 due to amortization of previously capitalized software
costs during the quarter.
Current liabilities increased by $126,164, or 6%, due primarily to the issuance
of $575,000 of convertible debt and during the three months ended March 31,
2004, offset partially by a decrease in accounts payable of $322,263 that
resulted principally from gains from debt extinguishments of $254,302 during the
quarter.
RESULTS OF OPERATIONS
REVENUES
Revenues were $50,858 and $150,305 for the three months ended March 31, 2004 and
2003, respectively. The 66% decrease for the three months ended March 31, 2004
was primarily due to a $90,771 reduction in revenues from our older Omega
product line, as well as a decrease in Ongoer revenues of $8,676. We
discontinued selling our older Omega platform in 2001 in order to concentrate
resources on development and sale of our new Ongoer(TM) product line. The lower
Omega revenues were due mainly to the discontinuance of maintenance contracts by
many of our customers. Our lower Ongoer sales were due mainly to the decrease in
orders from our largest Ongoer customer, whose orders fell due to the declining
business condition of their customer for the product.
COST OF REVENUES AND GROSS PROFIT
Cost of revenues decreased $56,988, or 45%, for the three months ended March 31,
2004 compared to the three months ended March 31, 2003 due primarily to the 66%
decrease in revenues noted above.
Gross (loss) margins were approximately (39%) and 15% for the three months ended
March 31, 2004 and 2003, respectively. The decrease resulted primarily from
lower overall revenues and the amortization of capitalized software costs, equal
to $69,406 in both periods, representing a larger percentage of revenues in the
current year. Amortization of capitalized research and development software
costs ended in March 31, 2004.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES
Selling, general, and administrative expenses were $271,547 and $131,390 for
the three months ended March 31, 2004 and 2003, respectively. The increase in
the three-month period ended March 31, 2004 compared to the similar period in
2003 resulted primarily from accounting and auditing expenses of approximately
$65,000 incurred during 2004, approximately $28,000 of non-refundable investment
banking fees. The company filed all required SEC filings for 2003 during the
quarter ended March 31, 2004 and engaged Westminster Securities to assist in
raising capital during the current year.
11
RESEARCH AND DEVELOPMENT EXPENSES
We charge research and development costs to expense as incurred until
technological feasibility of a software product has been established. Software
development costs incurred after technological feasibility has been established
are capitalized and amortized over the useful life of the product. Research and
development costs expensed were $107,349 and $102,022 for the three months ended
March 31, 2004 and 2003, respectively. During the three months ended March 31,
2004 and 2003, we did not capitalize any software development costs related to
new products under development.
GAIN ON DEBT EXTINGUISHMENTS
A gain of $254, 302 was recorded during the three months ended March 31, 2004 to
reflect the payoffs of various liabilities for less than their previously
recorded balances. No similar debt extinguishments took place during the three
months ended March 31, 2003.
OTHER EXPENSE, PRIMARILY FINANCE CHARGES
Other expense, primarily finance charges of $162,749 and $59,973 for the three
months ended March 31, 2004 and 2003 consisted primarily of finance charges
associated with our issuance of convertible debt since the fourth quarter 2001
to fund our operations. See note 5 to the condensed consolidated financial
statements. The increase in interest expense from the prior year is due
primarily to the issuance of an additional $575,000 of convertible debt during
the three months ended March 31, 2004.
DEBT CONVERSION EXPENSE
A debt conversion expense of $431,599 was recorded in the three months ended
March 31, 2003 to reflect the fair value of the additional shares issued to
convertible debt holders who extended their notes originally due on December 31,
2002 in exchange for a reduction of the conversion price of the debt.
NET LOSS
Net loss for the three months ended March 31, 2004 was $307,007 compared to a
net loss of $702,189 for the three months ended March 31, 2003. The loss in the
three months ended March 31, 2003 was due primarily to the debt conversion
expense of $431,599 recorded in conjunction with the conversion of a majority of
the Company's convertible debt in January 2003.
LIQUIDITY AND SOURCES OF CAPITAL
GENERAL
As of March 31, 2004, we had cash and cash equivalents of $94,233. We do not
have sufficient funds to meet our cash flow requirements for the next twelve
(12) months. We have relied on periodic investments in the form of common stock
and convertible debt by certain of our existing stockholders since the fourth
quarter of 2001 to sustain our operations. 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. 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, 2003.
We used $392,565 in cash from operating activities in the three months ended
March 31, 2004 primarily due to our loss of $307,007, which included a gain on
debt extinguishments of $254,302 and the costs associated with filing of our
overdue financial filings with the SEC, discontinuing the previous year's
deferral of a portion of employees' salaries, and reducing accounts payable with
proceeds of the convertible debt issued during the three months ended
12
March 31, 2004. The majority of the loss during the three months ended March 31,
2003 was due to debt conversion expense of $431,599. There was no cash used in
investing activities for the three months ended March 31, 2004 or the three
months ended March 31, 2003. Cash provided by financing activities in the three
months ended March 31, 2004 consisted primarily of $479,000 of net proceeds from
convertible debt issued in February 2004. Cash provided by financing activities
in the three months ended March 31, 2003 of $167,709 consisted primarily of
$142,600 of proceeds from the issuance of common stock and $30,000 of proceeds
from the issuance of convertible debt.
We will require additional funding during the remainder of fiscal 2004 and
thereafter to fund our development and operating activities. This additional
funding could be in the form of the sale of assets, debt, equity, or a
combination of these financing methods. However, there can be no assurance that
we will be able to obtain such financing if and when needed, or that if
obtained, such financing will be sufficient or on terms and conditions
acceptable to us. If we are unable to obtain this additional funding, our
business, financial condition and results of operations would be adversely
affected. The accompanying financial statements contemplate our continuation as
a going concern. However, we have sustained substantial losses from operations
in recent years, and such losses have continued through March 31, 2004. We have
also used, rather than provided, cash in our operations for the three months
ended March 31, 2004.
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, we are
currently in the process of attempting to secure additional equity and debt
financing.
We expect to spend less than $35,000 for capital expenditures in the remainder
of fiscal 2004.
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-KSB 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 our Securities Exchange Act reports is
recorded, processed, summarized, and reported within the time periods specified
in the SEC's rules and forms, and that such information is accumulated and
communicated to the Company's management, including its Chief Executive Officer
and Chief Financial Officer, as appropriate, to allow timely decisions regarding
required disclosure. In designing and evaluating the disclosure controls and
procedures, management recognized that any controls and procedures, no matter
how well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives, as ours are designed to do, and
management necessarily was required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures.
An evaluation was performed under the supervision and with the participation of
our Company's management, including the Chief Executive Officer and the Chief
Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures as of March 31, 2004. Based upon that
evaluation, the Chief Executive Officer and the Chief Financial Officer
13
concluded that our disclosure controls and procedures were effective. Except as
discussed in the following paragraph, subsequent to the date of this evaluation,
there have been no significant changes in the Company's internal controls or in
other factors that could significantly affect these controls.
In connection with its audit of our consolidated financial statements as of and
for the year ended December 31, 2003, Marcum & Kliegman 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 1. LEGAL PROCEEDINGS
On May 1, 2003, Citibank (West), FSB, filed suit in San Diego Superior Court,
North County Division, against one of our subsidiaries, Quality Software
Associates, Inc. ("QSA"), and Mark Scovel, the individual from whom we acquired
QSA in March 2001. CitiBank seeks to recover $8,000 of credit card indebtedness
under a credit card held by QSA that was personally guaranteed by Mr. Scovel. On
June 24, 2003, Mr. Scovel filed a cross-complaint against QSA and Simtrol, Inc.
claiming that Simtrol had assumed the debt in connection with its acquisition of
QSA. Mr. Scovel's complaint also seeks declaratory relief, seeking a judgment
that QSA and Simtrol are also liable for several other QSA debts, in an
aggregate amount of less than $50,000. Mr. Scovel also seeks attorneys' fees.
We have filed a cross-complaint against Mr. Scovel seeking damages of
approximately $56,000 and alleging a breach of the representations and
warranties relating to the collectibility of certain accounts receivables
contained in the Merger Agreement under which we acquired QSA.
On April 18, 2004, QSA agreed to pay Citibank (West), FSB, $5,800 in settlement
of the debt to Citibank and to pay Mr. Scovel $40,000 in settlement of all
claims. The $5,800 and $3,000 of the settlement amount to Mr. Scovel were paid
April 30. The remaining $37,000 due Mr. Scovel is due by June 15, 2004.
ITEM 2. CHANGES IN SECURITIES AND PURCHASES OF EQUITY SECURITIES
During the quarter ended March 31, 2004, we issued 2,604 shares of our common
stock for gross proceeds of $5,000 ($1.92 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.
On February 4, 2004, the Company completed the sale of convertible notes with
principal balance of $575,000. In conjunction with the sale, we issued warrants
to Westminster Securities to purchase 169,000 shares of our common stock at a
purchase price of $2.00, as a placement fee. Additional information regarding
these issuances of securities is set forth in note 5 to the financial statements
included in this Report.
The offers and sales of the above-described securities were 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 offers and 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
14
(a) Exhibits. The following exhibits are filed with or incorporated by
reference into this report.
Exhibit No. Description
3.1 Certificate of Incorporation, including Certificate of Stock
Designation dated September 25, 1990, and amendments dated December
26, 1990, August 19, 1991 and October 17, 1991 (incorporated herein by
reference to Exhibit 3-1 of the Post-Effective Amendment No. 3 to the
Company's Registration Statement on Form S-18 (File No. 33-27040-D))
3.2 Amended Bylaws of the Company as presently in use (incorporated herein
by reference to Exhibit 3.2 of the Post-Effective Amendment No. 1 to
the Company's Registration Statement on Form S-18 (File No.
33-27040-D))
3.3 Certificate of Amendment to Certificate of Incorporation filed on
February 10, 1993 (incorporated herein by reference to the Company's
Quarterly Report on Form 10-Q for the quarter ended December 31, 1992)
3.6 Certificate of Amendment to Certificate of Incorporation filed on
February 13, 1995 (incorporated herein by reference to the Company's
Annual Report on Form 10-K for the year ended December 31, 1994)
3.7 Certificate of Amendment to Certificate of Incorporation filed on
September 8, 1995 (incorporated herein by reference to the Company's
Annual Report on Form 10-K for the year ended December 31, 1995)
3.9 Certificate of Amendment of Certificate of Incorporation filed on
January 13, 1999 (incorporated herein by reference to the Company's
Annual Report on Form 10-K for the year ended December 31, 1998, as
amended )
3.10 Certificate of Amendment to Certificate of Incorporation filed on June
28, 1999 (incorporated herein by reference to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1999)
3.11 Certificate of Amendment to Certificate of Incorporation filed on May
7, 2004
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:
On January 26, 2004 we filed a Form 8-K regarding the closing of a private
placement of equity securities to a limited number of accredited investors
effective January 23, 2004. On that date, we also filed a Form 8-K indicating
the resignation of Grant Thornton LLP as our independent auditors effective
January 16, 2004. On February 9, 2004, we filed a Form 8-K reporting the hiring
of Marcum & Kliegman LLP as our independent auditors and the closing of a
Convertible Note financing with a limited number of accredited investors.
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.
15
SIMTROL, INC.
Date: May 17, 2004 /s/ Richard W. Egan
-----------------------------------------
Chief Executive Officer
(Principal executive officer)
/s/ Stephen N. Samp
-----------------------------------------
Chief Financial Officer
(Principal financial and accounting officer)
16
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
3.11 Certificate of Amendment to Certificate of Incorporation
filed on May 7, 2004
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.
17