FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 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) (ZIP CODE)
(770) 242-7566
(ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the issuer (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
YES ___ NO _X_
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
OUTSTANDING AT
CLASS OF SECURITIES AUGUST 6, 2004
COMMON STOCK, $.001 PAR VALUE 3,389,381
Transitional Small Business Disclosure Format YES ___ NO _X_
SIMTROL, INC. AND SUBSIDIARIES
Form 10-QSB
Quarter Ended June 30, 2004
Index
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited):
Condensed Consolidated Balance Sheet as of
June 30, 2004...................................................... 3
Condensed Consolidated Statements of Operations for the
Three Months and Six Months Ended June 30, 2004 and 2003........... 4
Condensed Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 2004 and 2003............................ 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 1. Legal Proceedings ................................................. 15
Item 2. Changes in Securities and Purchases of Equity Securities........... 15
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
(UNAUDITED)
JUNE 30,
ASSETS 2004
------------
Current assets:
Cash and cash equivalents $ 360,540
Accounts receivable, net 446,646
------------
Total current assets 807,186
Property and equipment, net 60,407
Other assets:
Other long term assets 11,187
------------
Total assets $ 878,780
============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current Liabilities:
Current portion of long-term debt and short-term borrowings $ 11,739
Convertible debt 410,000
Accounts payable 188,160
Accrued expenses 406,733
Deferred revenues 41,667
------------
Total Current Liabilities 1,058,299
Commitments and contingencies
Stockholders' deficiency:
Common stock, authorized 40,000,000 shares of
$.001 par value; 3,233,131 issued and outstanding 3,233
Additional paid-in capital 61,798,291
Accumulated deficit (61,981,043)
------------
Total stockholders' deficiency (179,519)
------------
Total liabilities and stockholders' deficiency $ 878,780
============
See notes to condensed consolidated financial statements.
3
SIMTROL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
---------------------------- ----------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
Revenues:
Software licenses $ 393,240 $ 47,025 $ 419,056 $ 81,518
Service 18,428 91,290 43,470 207,102
----------- ----------- ----------- -----------
Total revenues 411,668 138,315 462,526 288,620
Cost of revenues
Software licenses 7,427 72,950 77,949 143,950
Service 2,069 14,387 2,069 70,897
----------- ----------- ----------- -----------
Total cost of revenues 9,496 87,337 80,018 214,847
----------- ----------- ----------- -----------
Gross profit 402,172 50,978 382,508 73,773
Operating expenses:
Selling, general, and administrative 260,036 177,640 531,583 309,029
Research and development 110,358 101,972 217,707 203,995
----------- ----------- ----------- -----------
Total operating expenses 370,394 279,612 749,290 513,024
Income/(loss) from operations 31,778 (228,634) (366,782) (439,251)
Other income/(expenses)
Other expense, primarily finance charges (284,587) (76,982) (447,336) (136,955)
Debt conversion expense (164,155) -- (164,155) (431,599)
Gain on debt extinguishment 394,309 -- 648,611 --
----------- ----------- ----------- -----------
Total other income/(expenses) (54,433) (76,982) 37,120 (568,554)
----------- ----------- ----------- -----------
Net loss $ (22,655) $ (305,616) $ (329,662) $(1,007,805)
Net loss per common share, basic and diluted:
Net loss per share $ (0.01) $ (0.14) $ (0.13) $ (0.49)
=========== =========== =========== ===========
Weighted shares outstanding
basic and diluted 2,600,208 2,139,455 2,468,351 2,075,158
=========== =========== =========== ===========
See notes to condensed consolidated financial statements.
4
SIMTROL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
----------------------------
2004 2003
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash used in operating activities $ (904,619) $ (358,201)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash provided by investing activities -- --
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on short-term credit facilities (156,654) (4,891)
Payments proceeds on long-term debt (59,792) --
Payments of convertible debt (60,000)
Net proceeds from convertible debt 479,000 30,000
Net proceeds from stock issuances 1,058,607 346,200
----------- -----------
Net cash provided by financing activities 1,261,161 371,309
----------- -----------
Increase in cash and cash equivalents 356,542 13,108
Cash and cash equivalents, beginning of the period 3,998 1,307
----------- -----------
Cash and cash equivalents, end of the period $ 360,540 $ 14,415
=========== ===========
Supplemental schedule of non-cash investing and financing activities:
Issuance of stock warrants $ 91,202 $ 58,460
----------- -----------
Capitalization of financing fees $ 101,400 --
----------- -----------
Beneficial conversion feature of convertible debt $ 127,242 $ 229,284
----------- -----------
Conversion of debt and accrued interest to common stock $ 542,825 $ 768,061
----------- -----------
See notes to condensed consolidated financial statements.
5
SIMTROL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 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 June 30,
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 June 30, 2004, the Company had cash and cash equivalents of $360,540. 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 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 on June
4, 2004, the Company issued $1,250,000 of equity securities (see Note 6) in
private placements. 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
6
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.
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:
June 30, 2004 June 30, 2003
--------- ---------
Options 347,525 124,525
Warrants 2,190,741 306,871
Convertible Debt 194,217 202,403
--------- ---------
Total 2,732,483 633,799
--------- ---------
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 Six Months Ended
June 30, June 30,
--------------------------------------------------------------------
2004 2003 2004 2003
---------------------------------------------------------------------
Net loss as reported ($22,655) ($305,616) ($329,662) ($1,007,805)
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 (14,924) (22,827) (22,712) (90,949)
---------------------------------------------------------------------
Pro forma net loss ($37,579) ($328,443) ($352,374) ($1,098,754)
=====================================================================
Net loss per share as reported-Basic and diluted ($0.01) ($0.14) ($0.13) ($0.49)
Pro forma net loss per share- Basic and diluted ($0.01) ($0.15) ($0.14) ($0.53)
7
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
accounting pronouncement is not expected to have a significant impact on the
Company's financial statements.
Revenue Recognition
Revenue consists of the sale of software control devices, videoconferencing
systems and related maintenance contracts on these systems. The Company sold two
different products during the presented periods: its PC based software product,
Ongoer, and its older proprietary hardware and software product, Omega. Revenue
on the sale of hardware is recognized upon shipment. The Company recognizes
revenue from Ongoer software sales upon shipment as the Company sells the
product to audiovisual integrators. Revenue on maintenance contracts for Omega
systems is recognized over the term of the related contract resulting in $41,667
of deferred revenue at June 30, 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.
On May 1, 2003, Citibank (West), FSB, filed suit in San Diego Superior Court,
North County Division, against one of the Company's subsidiaries, Quality
Software Associates, Inc. ("QSA"), and Mark Scovel, the individual from whom the
Company 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 the Company claiming that the Company 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 the Company are also liable for several
other QSA debts, in an aggregate amount of less than $50,000. Mr. Scovel also
seeks attorneys' fees.
The Company has 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 the Company 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. As of June 30, 2004, both of these amounts had been fully paid.
NOTE 5 - CONVERTIBLE DEBT
The Company issued an aggregate of $30,000 of convertible debt ("2003 Debt") to
two of its directors during the six months ended June 30, 2003. The 2003 Debt
accrued interest at prime plus 1% (5.00% at June 30, 2003) and was convertible
into restricted common stock at a price of $2.40 per share. All outstanding
principal and interest amounts were converted into 12,842 shares of restricted
common stock on July 22, 2003.
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 one Board member for $15,000. The
8
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 per share. 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. 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 2004 Debt, but the warrants may only be exercised
in the event a holder actually elects to convert the 2004 Debt into the
Company'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 net 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 were 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. In June 2004,
$525,000 of the 2004 Debt converted in to 271,409 shares of common stock. As a
result, the Company recorded $164,155 of warrant value 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. For the three months ended, June 30, 2004, $146,329
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 was 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 and the remaining $67,600 was expensed in the three months ended June
30, 2004.
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.
On June 4, 2004, the Company issued 625,000 shares of its common stock for gross
proceeds of $1,250,000 in a private placement of equity to a limited number of
accredited investors. The Company also issued warrants to purchase a total of
625,000 shares of stock to these investors. The exercise price of the warrants
is $2.00 per share.
NOTE 7- MAJOR CUSTOMERS
Revenue from a customer of $424,461 comprised approximately 92% of consolidated
revenues for the six months ended June 30, 2004. At June 30, 2004, related
accounts receivable from this company comprised $427,430 (96%) of consolidated
receivables.
Revenue from five customers of $63,118, $53,124, $42,081, $33,457, and $20,080
comprised approximately 73% of consolidated revenues for the six months ended
June 30, 2003.
NOTE 8 - GAIN ON DEBT EXTINGUISHMENT
Gains of $394,309 and $648,611 were recorded during the three months and six
months ended June 30, 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.
9
NOTE 9 - SUBSEQUENT EVENT
On July 9, 2004, the Company issued 156,250 shares of its common stock for gross
proceeds of $312,500 in a private placement of equity to a limited number of
accredited investors. The Company also issued warrants to purchase a total of
156,250 shares of stock to these investors. The exercise price of the warrants
is $2.00 per share.
Offering costs totaled approximately $50,000. 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 our 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. We sold two
different products during the presented periods: our PC based
software product Ongoer and our older proprietary hardware and
software product, Omega. Revenue on the sale of hardware is
recognized upon shipment. We recognize revenue from Ongoer software
sales upon shipment as we sell 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
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 six months ended June 30, 2004, total assets increased approximately
283% to $878,780 from $229,299 at December 31, 2003. The increase in assets was
primarily the result of the net proceeds received from the issuance of $575,000
10
of convertible debt (see note 5) in February 2004 and $1,250,000 of equity
securities (see note 6) in June 2004 in private placements, less cash used to
retire overdue liabilities of the Company. See notes 5 and 6 to our financial
statements.
Current liabilities decreased $1,050,563 or 50%, due primarily to the retirement
of liabilities with proceeds of the sale of convertible debt and common stock
and warrants during the current year and the conversion of $525,000 of the
Convertible Debt to equity on June 4, 2004. In conjunction with the retirement
of various liabilities, the Company recorded $648,611 in debt extinguishment
gains for liabilities retired for less than their recorded values.
OFF-BALANCE SHEET ARRANGEMENTS
The Company has no material off-balance sheet arrangements.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2004 AND 2003
REVENUES
Revenues were $411,668 and $138,315 for the three months ended June 30, 2004 and
2003, respectively. The 198% increase for the three months ended June 30, 2004
was primarily due to increased software revenues resulting from an approximately
$364,000 multi-site sale of ONGOER and Onguard to one customer in June 2004.
Service revenues of $18,428 for the three months ended June 30, 2004 represented
a decrease of $72,862 compared to the three months ended June 30, 2003, due
primarily to additional customers discontinuing maintenance support at the end
of multi-year contracts.
COST OF REVENUES AND GROSS PROFIT
Cost of revenues decreased $77,841, or 89%, for the three months ended June 30,
2004 compared to the three months ended June 30, 2003 due primarily to the
previous amortization of previously capitalized software development costs that
ended in March 2004.
Gross margins were approximately 98% and 37% for the three months ended June 30,
2004 and 2003, respectively. The increased margin is due primarily to higher
software sales in the current period as well as the higher amortization of
previously capitalized software development costs during the prior year as
amortization of these costs ended in March 2004.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses were $260,036 and $177,640 for the
three months ended June 30, 2004 and 2003, respectively. The increase in the
three-month period ended June 30, 2004 compared to the similar period in 2003
resulted primarily from increased legal expenses, including a $40,000 settlement
payment regarding certain litigation, professional fees, audit, and travel
expenses due to increased sales and marketing efforts during the current year.
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. Research and development costs expensed increased to $110,358 in
the three months ended June 30, 2004 versus $101,972 in the three months ended
June 30, 2003 due primarily to higher wage and employee benefit expenses during
the current period.
OTHER EXPENSE, PRIMARILY FINANCE CHARGES
Other expense, primarily finance charges of $284,587 and $76,982 for the three
months ended June 30, 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
11
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 $164,155 was recorded in June 2004 upon the
conversion of the convertible notes issued in February 2004 to reflect the fair
value of additional warrants granted upon the conversion. See note 5 to the
unaudited financial statements included herein.
GAIN ON DEBT EXTINGUISHMENTS
A gain of $394,309 was recorded during the three months ended June 30, 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 June 30, 2003.
NET LOSS
Net loss for the three months ended June 30, 2004 was $22,655 compared to a net
loss of $305,616 for the three months ended June 30, 2003. The decrease in net
loss for the period was due primarily to the higher software revenues during the
current period as well as the gain on debt extinguishment during the period,
partly offset by higher finance costs resulting from the issuance of an
additional $575,000 of convertible debt during the three months ended March 31,
2004.
SIX MONTHS ENDED JUNE 30, 2004 AND 2003
REVENUES
Revenues were $462,526 and $288,620 for the six months ended June 30, 2004 and
2003, respectively. The 60% increase for the six months ended June 30, 2004 was
primarily due to increased software revenues of $337,538 during 2004, including
an approximately $364,000 multi-site sale to an integrator for implementation at
one end user. Partly offsetting the software revenue increase was a reduction in
service revenues of $163,632 associated with our older Omega product line as
additional customers discontinued their service contracts at the end of
multi-year contracts during 2003 and 2004.
COST OF REVENUES AND GROSS PROFIT
Cost of revenues decreased $134,829, or 63%, for the six months ended June 30,
2004 compared to the six months ended June 30, 2003 due primarily to the
discontinuance of the amortization of previously capitalized software
development costs in March 2004 as well as the lower service revenues during the
current period as subcontractors were used to service international customers
that have discontinued service contracts.
Gross margins were approximately 83% and 26% for the six months ended June 30,
2004 and 2003, respectively. The decrease from prior year was due primarily to
the higher software revenues during the current year as well as the periodic
charge for amortization of capitalized software development costs being larger
in the prior year as all capitalized software costs were amortized as of March
31, 2004.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses were $531,583 and $309,029 for the
six months ended June 30, 2004 and 2003, respectively. The increase in the
six-month period ended June 30, 2004 compared to the similar period in 2003
resulted primarily from an $80,000 increase in 2004 in accounting and auditing
expenses, and an increase of approximately $45,000 in non-refundable investment
banking fees. The increase in accounting and auditing expenses resulted from our
filing all required Forms 10-QSB for 2003 during the quarter ended March 31,
2004. The increased investment banking fees related to the engagement of
Westminster Securities to assist in raising capital during the current year.
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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. These expensed costs were $69,406 and $138,812 for the six months
ended June 30, 2004 and 2003, as we began to expense previously capitalized
research and development costs to cost of revenues in April 2001 and ended
amortization in March 2004. Research and development expenses increased to
$217,707 for the six months ended June 30, 2004 from $203,995 forn the six
months ended June 30, 2003 due primarily to higher wage and employee benefit
expenses during the current period.
OTHER EXPENSE, PRIMARILY FINANCE CHARGES
Other expense, primarily finance charges of $447,336 for the six months ended
June 30, 2004 consisted primarily of finance charges associated with our
issuance of convertible debt during previous fiscal years as well as February
2004. A majority of our 2002 Debt was converted to restricted common stock in
January 2003. Other expense, primarily finance charges of $136,955 in the six
months ended June 30, 2003 consisted primarily of the amortization of the
warrant value and the beneficial conversion feature of the convertible debt
issued between the fourth quarter 2001 and the six months ended June 30, 2003.
See note 6 to the financial statements.
DEBT CONVERSION EXPENSE
A debt conversion expense of $164,155 was recorded in June 2004 upon the
conversion of the convertible notices issued in February 2004 to reflect the
fair value of additional warrants granted upon the conversion. See note 5 to the
unaudited financial statements included herein. A debt conversion expense of
$431,599 was recorded for the six months ended June 30, 2003 to reflect the fair
value of 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.
GAIN ON DEBT EXTINGUISHMENTS
A gain of $648,611 was recorded during the six months ended June 30, 2004 to
reflect the payoffs of various liabilities for less than their previously
recorded balances. No similar debt extinguishments took place during the six
months ended June 30, 2003.
NET LOSS
Net loss for the six months ended June 30, 2004 was $329,662 compared to a net
loss of $1,007,805 for the six months ended June 30, 2003. Approximately half
the net loss in the prior year was due to the debt conversion expense recorded
in January 2003 in conjunction with the conversion a majority of our convertible
debt into restricted common shares at that time.
LIQUIDITY AND SOURCES OF CAPITAL
As of June 30, 2004, we had cash and cash equivalents of $360,540. 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 $904,619 in cash from operating activities in the six months ended June
30, 2004 compared to $358,201 during the six months ended June 30, 2003 due
primarily to retirements of various past due obligations with proceeds from the
2004 Debt in February 2004 and equity securities issued in June 2004. We did not
use any cash for investing activities for the six months ended June 30, 2004 or
the six months ended June 30, 2003. Cash provided by financing activities in the
six months ended June 30, 2004 consisted primarily of $575,000 of convertible
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debt issued in February 2004 and $1,250,000 of equity securities issued in June
2004, excluding offering costs. Convertible notes in the amount of $60,000 were
repaid with proceeds from the equity securities and the Company's note payable
for past due rent of approximately $216,000 was also retired in full for
payments totaling $70,000. Cash provided by financing activities in the six
months ended June 30, 2003 of $371,309 consisted primarily of $346,200 of
proceeds from the issuance of restricted common stock and $30,000 of convertible
debt. We have relied on a combination of investments of convertible debt and
common stock from private investors, including four members of our Board of
Directors, to fund operations since November 2001.
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 June 30, 2004. We have
also used, rather than provided, cash in our operations for the six months ended
June 30, 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 operation, which in turn is dependent upon
our ability to meet our financing requirements on a continuing basis and attract
additional financing. The financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset amounts or
amounts and classification of liabilities that might be necessary should we be
unable to continue in existence.
In response to the matters described in the preceding paragraphs, our management
is currently in the process of attempting to secure additional equity and debt
financing.
We expect to spend less than $5,000 for capital expenditures in the remainder of
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 our management, including our 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 management, including our Chief Executive Officer and the Chief Financial
Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures as of June 30, 2004. Based upon that evaluation, our
Chief Executive Officer and Chief Financial Officer concluded that our
14
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 was paid on June 15, 2004.
ITEM 2. CHANGES IN SECURITIES AND PURCHASES OF EQUITY SECURITIES
On June 4, 2004, we issued 625,000 shares of our common stock for gross proceeds
of $1,250,000 in a private placement to a limited number of accredited
investors. We also issued warrants to purchase a total of 625,000 shares of
common stock to these investors. The exercise price of the warrants is $2.00 per
share. The offers and sales of these 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. 4 SUBMISSION OF MATTERS TO A VOTE OF SECURTIY HOLDERS
We held our 2004 Annual Meeting of Shareholders on April 22, 2004. The following
items were voted upon and the results of the voting were as follows:
(1) To elect five directors, Larry M. Carr, Dallas S. Clement, Richard
W. Egan, Julia B. North and Edward S. Redstone, to serve as
Directors on our Board of Directors for a term of one year, expiring
at the 2005 Annual Meeting of shareholders, and until their
successors are elected and qualified. There were 1,325,303,
1,325,310, 1,324,589, 1,320,728, and 1,325,310 votes for, and 7,255,
7,248, 7,969, 11,830, and 7,248 withheld, for each of Mr. Carr, Mr.
Clement, Mr. Egan, Ms. North and Mr. Redstone, respectively.
15
(2) To approve a one-for-ten reverse stock split of the Company's
outstanding common stock. The votes of the shareholders to approve a
one-for-ten reverse stock split of the Company's outstanding common
stock were as follows: 1,291,702 votes in favor, 35,808 votes
opposed, and 5,048 votes abstained.
(3) To approve an amendment to the Company's 2002 Stock Option Plan to
increase the number of shares of the Company's common stock that may
be issued under the Plan. The votes of the shareholders to approve
the amendment were as follows: 1,294,435 votes in favor, 33,067
votes opposed, and 5,056 votes abstained.
(4) To ratify the appointment of Marcum & Kliegman LLP as the Company's
independent auditors for the fiscal year ending December 31, 2004.
The votes of the shareholders to ratify Marcum & Kliegman LLP as our
independent auditors were as follows: 1,322,651 votes in favor,
8,119 votes opposed, and 1,788 votes abstained.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
31.1 Certification of the Chief Executive Officer pursuant to Exchange Act Rule
13a-14(a).
31.2 Certification of the Chief Financial Officer pursuant to Exchange Act Rule
13a-14(a).
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K:
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SIMTROL, INC.
Date: August 12, 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
----------- -----------
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