Form 10-QSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 58-2028246
(State of incorporation) (I.R.S. Employer
Identification No.)
2200 Norcross Parkway, Suite 255
Norcross, Georgia 30071
(Address of principal executive offices) (Zip Code)
(770) 242-7566
(Issuer's telephone number, including area code)
Indicate by check mark whether the issuer (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
YES |X| NO |_|
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding at
Class of Securities October 31, 2004
Common Stock, $.001 Par Value 3,712,914
SIMTROL, INC. AND SUBSIDIARIES
Form 10-QSB
Quarter Ended September 30, 2004
Index
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited):
Condensed Consolidated Balance Sheet as of
September 30, 2004................................................. ...3
Condensed Consolidated Statements of Operations for the
Three and Nine Months Ended September 30, 2004 and 2003............ ...4
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended September 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................................ ...9
Item 3. Controls and Procedures ..................................................14
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Purchases of Equity Securities............... ..14
Item 6. Exhibits............................................................... ..14
2
SIMTROL, INC.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SIMTROL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
ASSETS September 30,
2004
------------
Current assets:
Cash and cash equivalents $ 490,364
Accounts receivable, net 264,987
------------
Total current assets 755,351
Property and equipment, net 51,700
Other assets:
Other long-term assets 11,187
------------
Total assets $ 818,238
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt and short-term borrowings $ 6,090
Accounts payable 146,221
Accrued expenses 77,000
Deferred revenue 29,167
------------
Total current liabilities 258,478
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.00025 par value; authorized
800,000 shares, none issued and outstanding --
Common stock, authorized 40,000,000 shares of
$.001 par value; 3,712,914 shares issued and
outstanding 3,713
Additional paid-in capital 62,820,260
Accumulated deficit (62,264,213)
------------
Total stockholders' equity 559,760
------------
Total liabilities and stockholders' equity $ 818,238
============
See notes to condensed consolidated financial statements.
3
SIMTROL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
Revenues:
Software licenses $ 32,218 $ 76,563 $ 451,274 $ 158,078
Service 23,503 56,705 67,073 263,809
----------- ----------- ----------- -----------
Total revenues 55,821 133,268 518,347 421,887
Cost of revenues
Software licenses 933 72,841 78,882 216,791
Service -- 60 2,069 70,957
----------- ----------- ----------- -----------
Total cost of revenues 933 72,901 80,951 287,748
----------- ----------- ----------- -----------
Gross profit 54,888 60,367 437,396 134,139
Operating expenses:
Selling, general, and administrative 192,044 161,486 723,627 470,516
Research and development 111,756 107,224 329,463 311,218
----------- ----------- ----------- -----------
Total operating expenses 303,800 268,710 1,053,090 781,734
Loss from operations (248,912) (208,343) (615,694) (647,595)
Other (income)/expenses:
Other expense, primarily finance charges (20,458) (77,164) (467,794) (214,118)
Debt conversion expense (81,488) -- (245,643) (431,599)
Gain on debt extinguishments 67,688 -- 716,299 --
----------- ----------- ----------- -----------
Total other (income)/expenses (34,258) (77,164) 2,862 (645,717)
----------- ----------- ----------- -----------
Net loss $ (283,170) $ (285,507) $ (612,832) $(1,293,312)
=========== =========== =========== ===========
Net loss per common share, basic and diluted $ (0.08) $ (0.13) $(0.23) $ (0.61)
=========== =========== =========== ===========
Weighted shares outstanding, basic and diluted 3,401,729 2,217,426 2,683,799 2,123,074
=========== =========== =========== ===========
See notes to condensed consolidated financial statements.
4
SIMTROL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
September 30,
---------------------------
2004 2003
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash used in operating
activities $(1,244,808) $ (465,460))
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash used in investing activities -- --
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on short-term credit facilities (162,303) (4,890)
Payments on long-term debt (59,792) --
Payments of convertible debt (70,000) --
Proceeds from convertible debt 479,000 30,000
Net proceeds from stock issuances 1,544,269 451,200
----------- -----------
Net cash provided by financing activities 1,731,174 476,310
----------- -----------
Increase in cash and cash equivalents 486,366 10,850
Cash and cash equivalents, beginning of the period 3,998 1,307
----------- -----------
Cash and cash equivalents, end of the period $ 490,364 $ 12,157
=========== ===========
Supplemental schedule of non-cash investing and financing activities:
Conversion of debt and accrued interest to common stock $ 1,004,304 $ 798,882
----------- -----------
See notes to condensed consolidated financial statements.
6
SIMTROL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
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 September
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 amounts have been adjusted to reflect the 1:10 reverse
split for all periods presented.
Note 2 - Going Concern Uncertainty
As of September 30, 2004, the Company had cash and cash equivalents of $490,364.
The Company may not have sufficient funds for the next twelve 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. During the nine
months ended September 30, 2004 the Company issued $575,000 of convertible debt
(see Note 5) and sold 915,104 shares of its common stock for an aggregate
purchase price of $1,830,000 in gross proceeds (see note 6). 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.
7
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:
September 30, 2004 September 30, 2003
------------------ -------------------
Options 400,275 124,525
Warrants 2,792,436 306,871
Convertible Debt -- 202,403
--------- ---------
Total 3,192,711 633,799
--------- ---------
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 No. 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 No. 123. The following table illustrates the
effect on net loss per share if the Company had applied the fair value
recognition provisions of SFAS No. 123 to stock-based employee compensation:
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------------------------------------------
2004 2003 2004 2003
---------------------------------------------------------------------
Net loss as reported ($283,170) ($285,507) ($612,832) ($1,293,312)
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 (121,840) (39,308) (144,553) (130,257)
---------------------------------------------------------------------
Pro forma net loss ($405,010) ($324,815) ($757,385) ($1,423,569)
=====================================================================
Net loss per share, as reported ($0.08) ($0.13) ($0.23) ($0.61)
Pro forma net loss per share- Basic and diluted ($0.12) ($0.15) ($0.28) ($0.67)
Revenue Recognition
8
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
from the sale of hardware is recognized upon the transfer of title when shipped.
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 $29,167 of deferred revenue at September 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 we
acquired QSA in March 2001. 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. In April 2004, the Company and QSA
settled its pending lawsuit with Citibank (West) and Mr. Scovel. The aggregate
claims paid in the settlement were approximately $46,000.
Note 5 - Convertible Debt
On February 4, 2004, the Company completed the sale of convertible notes with a
principal balance of $575,000 ("2004 Debt"), in a private placement to a limited
number of accredited investors, including one Board member who purchased
$15,000. 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 was August 4, 2004 and the notes were 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 such holder's notes. 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 such holder's notes, but the warrants
may only be exercised in the event a holder actually elects to convert his or
her notes into the Company's common stock. The exercise price of the warrants is
$2.00 per share of common stock.
Offering costs totaled $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 were amortized to financing costs over the term of
the 2004 Debt, except for the $179,789 attributed to the 575,000 warrants that
could be exercised in the event of a conversion of the 2004 Debt. In June 2004,
$525,000 of the 2004 Debt was converted into 271,409 shares of common stock. As
a result, the Company recorded $164,155 of warrant value as debt conversion
expense. For the nine months ended September 30, 2004, $219,144 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 financing expense prior to conversion and the remaining
$67,600 was expensed at the conversion date.
In January 2004, the 2001 Debt was extended to December 31, 2004 and the debt
holders agreed to convert all principal and interest to common stock at the
close of the private placement of equity securities. Additionally, the Company
agreed to issue the debt holders warrants to purchase two shares of stock for
each share of stock created by conversion of the 2001 Debt, contingent upon the
conversion of the principal note and interest to common stock. All the principal
and interest of the 2001 Debt converted to 192,283 shares of common stock on
September 30, 2004. The Debt holders were granted warrants to purchase 384,566
shares of stock on the conversion date of the Debt at an exercise price of $2.00
per share. As a result, the Company recorded $81,488 of warrant value as debt
conversion expense on that date.
9
Note 6 - Stockholders' Equity
On January 9, 2004, the Company issued 2,604 shares of its common stock for
gross proceeds of $5,000 ($1.92 per share). During the nine months ended
September 30, 2004 the Company issued 912,500 shares of its common stock for
gross proceeds of $1,825,000 ($2.00 per share) in private placements of equity
to limited numbers of accredited investors. The Company also issued warrants to
purchase a total of 915,104 shares of stock to these investors at exercise
prices of $2.00 per share. Offering costs totaled approximately $286,000.
Note 7- Major Customers
Revenue from one customer of $461,216 comprised approximately 89% of
consolidated revenues for the nine months ended September 30, 2004. At September
30, 2004, related accounts receivable from this customer comprised $252,165
(95%) of consolidated net receivables.
Revenue from five customers in the amounts of $75,360, $71,957, 68,031, $56,325,
and $46,937 comprised approximately 76% of consolidated revenues for the nine
months ended September 30, 2003.
Note 8 - Gain on Debt Extinguishments
Gains of $67,688 and $716,299 were recorded during the three months and nine
months ended September 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. There were no such agreements
during the three and nine months ended September 30, 2003.
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. 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.
10
o Capitalized software research and development costs. Our policy on
capitalized software costs determines the timing of our recognition of
certain development costs. In addition, this policy determines whether the
cost is classified as development expense or capitalized. Software
development costs incurred after technological feasibility has been
established are capitalized and amortized, commencing with product release,
using the greater of the income forecast method or on a straight-line basis
over the useful life of the product. Management is required to use
professional judgment in determining whether development costs meet the
criteria for immediate expense or capitalization.
o Impairments of Assets/Investments. We record impairment losses on assets and
investments when events and circumstances indicate that the assets might be
impaired and the undiscounted cash flows estimated to be generated by those
assets are less than the carrying amount of those items. Our cash flow
estimates are based on historical results adjusted to reflect our best
estimate of future market and operating conditions. The net carrying value
of assets not recoverable is reduced to fair value. Our estimates of fair
value represent our best estimate based on industry trends and reference to
market rates and transactions.
Financial Condition
During the nine months ended September 30, 2004, total assets increased
approximately 257% to $818,238 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 of Convertible Debt (see note 5 to the condensed
consolidated financial statements) and $1,830,000 of equity securities (see note
6) in private placements during the current year, less cash used to retire
overdue liabilities and operating losses incurred during the period.
Current liabilities decreased $1,850,384 or 88%, due primarily to the retirement
of liabilities with proceeds of the Convertible Debt and equity placements
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 $716,299 in debt extinguishment gains for
liabilities retired for less than their recorded values.
The Company does not have any material off-balance sheet arrangements.
Results of Operations
Three Months Ended September 30, 2004 and 2003
Revenues
Revenues were $55,821 and $133,268 for the three months ended September 30, 2004
and 2003, respectively. The 58% decrease for the three months ended September
30, 2004 was primarily due to lower software sales to one continuing customer in
the current year and decreased service revenues during the current year. Service
revenues decreased due primarily to additional customers discontinuing
maintenance support at the end of multi-year contracts on our older Omega
videoconferencing product.
Cost of Revenues and Gross Profit
Cost of revenues decreased $71,968, or 99%, for the three months ended September
30, 2004 compared to the three months ended September 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 45% for the three months ended
September 30, 2004 and 2003, respectively.
The increased margin is due primarily to the amortization of previously
capitalized software development costs in the prior year results.
Selling, General, and Administrative Expenses
11
Selling, general and administrative expenses were $192,044 and $161,486 for the
three months ended September 30, 2004 and 2003, respectively. The increase in
the three-month period ended September 30, 2004 compared to the similar period
in 2003 resulted primarily from increased professional fees, audit, and travel
and marketing 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, using the greater of the income forecast method
or on a straight-line basis over the useful life of the product. Capitalized
development costs expensed as cost of revenues were $0 and $69,406 for the three
months ended September 30, 2004 and 2003, respectively, as we began to expense
previously capitalized research and development costs to cost of revenues.
Research and development expenses were $111,756 and $107,224 in the three months
ended September 30, 2004 and 2003, respectively.
Other expense, primarily finance charges
Other expense, primarily finance charges of $20,458 and $77,164 for the three
months ended September 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.
Debt Conversion Expense
A debt conversion expense of $81,488 was recorded at the time of the conversion
of the 2001 Debt to reflect the fair value of additional warrants granted upon
the conversion of the Debt to common stock in September 2004. See note 5 to the
condensed consolidated financial statements.
Gain on Debt Extinguishments
A gain of $67,688 was recorded during the three months ended September 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 September 30, 2003.
Net Loss
Net loss for the three months ended September 30, 2004 was $283,170 compared to
a net loss of $285,507 for the three months ended September 30, 2003. The
decrease in net loss for the period was due primarily to a decrease in gross
profit of $5,479, increased selling, general, and administrative costs of
$30,558, increased financing cost and debt conversion cost of $24,782, offset by
debt extinguishments of $67,688.
Nine Months Ended September 30, 2004 and 2003
Revenues
Revenues were $518,347 and $421,887 for the nine months ended September 30, 2004
and 2003, respectively. The 3% increase for the nine months ended September 30,
2004 was due primarily to an increase in software revenues of $293,196,
including an approximate $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 $196,736 associated with our older Omega
product line as a 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 $206,797, or 72%, for the nine months ended September
30, 2004 compared to the nine months ended September 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 since discontinued service contracts.
12
Gross margins were approximately 84% and 32% for the nine months ended September
30, 2004 and 2003, respectively. The increase from the 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 $723,627 and $470,516 for the
nine months ended September 30, 2004 and 2003, respectively. The increase in the
nine-month period ended September 30, 2004 compared to the similar period in
2003 resulted primarily from accounting and auditing expenses of approximately
$115,000 incurred during 2004, and approximately $60,000 of non-refundable
investment banking fees. We 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.
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, using the greater of the income forecast method
or on a straight-line basis over the useful life of the product. Capitalized
development costs expensed as cost of revenues were $69,406 and $208,218 for the
nine months ended September 30, 2004 and 2003, respectively, as we began to
expense previously capitalized research and development costs to cost of
revenues and ended amortization in March 2004. Research and development expenses
increased to $329,463 in the nine months ended September 30, 2004 from $311,218
in the nine months ended September 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 $467,794 for the nine months ended
September 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 $214,118 in the nine
months ended September 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 nine months ended September 30,
2003. See notes 5 and 6 to the condensed consolidated financial statements.
Debt Conversion Expense
A debt conversion expense of $164,155 was recorded at the time of the
conversion of the 2004 Debt to reflect the fair value of additional warrants
granted upon the conversion of a majority of the Debt to common stock in June
2004. See note 5. A debt conversion expense of $81,488 was recorded at the time
of the conversion of the 2001 Debt to reflect the fair value of additional
warrants granted upon the conversion of the Debt to common stock in September
2004. See note 5.
A debt conversion expense of $431,599 was recorded during the nine months ended
September 30, 2003 to reflect the fair value of the additional shares issued to
convertible debt holders who extended their notes originally due on December 31,
2002 in exchange for a reduction of the conversion price of the debt.
Gain on Debt Extinguishments
A gain of $716,299 was recorded during the nine months ended September 30, 2004
to reflect the payoffs of various liabilities for less than their previously
recorded balances. No similar debt extinguishments took place during the nine
months ended September 30, 2003.
Net Loss
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Net loss for the nine months ended September 30, 2004 was $612,832 compared to a
net loss of $1,293,312 for the nine months ended September 30, 2003. The
decrease in net loss was due primarily to increased gross profit in the amount
of $303,257 that resulted from increased software sales as well as the gain on
debt extinguishments of $716,299 in the current year to reflect the retirement
of liabilities for less than their recorded values. These increases were offset
by an increase in operating expenses of $271,356 and a net increase in finance
charges and debt conversion expense of $67,720.
Liquidity and Sources of Capital
General
As of September 30, 2004, we had cash and cash equivalents of $490,364. We may
not have sufficient funds to meet our cash flow requirements for the next twelve
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 operating expenses and the continued development and
deployment of our Ongoer product line. Due to recurring losses from operations,
an accumulated deficit, and our inability to date to obtain sufficient financing
to support current and anticipated levels of operations, the report of our
Independent Registered Public Accounting Firm states that these matters have
raised substantial doubt about our ability to continue as a going concern at
December 31, 2003.
We used $1,244,808 in cash from operating activities in the nine months ended
September 30, 2004 compared to $465,460 during the nine months ended September
30, 2003 due primarily to retirements of various past due obligations with
proceeds from the 2004 Debt in February 2004 and equity securities issued
between June and September 2004. There was no cash used in investing activities
for the nine months ended September 30, 2004 or the nine months ended September
30, 2003. Cash provided by financing activities in the nine months ended
September 30, 2004 consisted primarily of $575,000 of Convertible Debt issued in
February 2004 and $1,250,000 of equity securities issued in September2004,
excluding issue costs. $70,000 of convertible notes 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 nine months ended September 30,
2003 of $476,310 consisted primarily of $451,200 of proceeds from the issuance
of restricted common stock and $30,000 of convertible debt. 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 likely require additional funding in the future to fund our development
and operating activities. This additional funding could be in the form of the
sale of assets, debt, equity, or a combination of these financing methods.
However, there can be no assurance that we will be able to obtain such financing
if and when needed, or that if obtained, such financing will be sufficient or on
terms and conditions acceptable to us. If we are unable to obtain this
additional funding, our business, financial condition and results of operations
would be adversely affected. The accompanying financial statements contemplate
our continuation as a going concern. However, we have sustained substantial
losses from operations in recent years, and such losses have continued through
September 30, 2004. We have also used, rather than provided, cash in our
operations for the nine months ended September 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
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Certain statements contained herein are "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995, such as
statements relating to financial results and plans for future sales and business
development activities, and are thus prospective. Such forward-looking
statements are subject to risks, uncertainties and other factors, which could
cause actual results to differ materially from future results expressed or
implied by such forward-looking statements. Potential risks and uncertainties
include, but are not limited to, economic conditions, competition, our ability
to complete the development and market our new Ongoer product line and other
uncertainties detailed from time to time in our Securities and Exchange
Commission filings, including our Annual Report on Form 10-K and our quarterly
reports on Form 10-QSB.
ITEM 3. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in 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 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 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 September 30, 2004. Based upon that
evaluation, the Chief Executive Officer and the Chief Financial Officer
concluded that our disclosure controls and procedures were effective. Except as
discussed in the following paragraph, subsequent to the date of this evaluation,
there have been no significant changes in the Company's internal controls or in
other factors that could significantly affect these controls.
In connection with its audit of our consolidated financial statements as of and
for the year ended December 31, 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 2. CHANGES IN SECURITIES AND PURCHASES OF EQUITY SECURITIES
During the quarter ended September 30, 2004, we issued 287,500 shares of our
common stock for gross proceeds of $575,000 ($2.00 per share), in a private
placement to a limited number of accredited investors. The offer and sale of the
shares was exempt from the registration requirements of the Securities Act of
1933 (the "Act") pursuant to Rule 506 and Section 4(2) of the Act. In connection
with the sales, we did not conduct any general solicitation or advertising, and
we complied with the requirements of Regulation D relating to the restrictions
on the transferability of the shares issued.
ITEM 6. EXHIBITS
The following exhibits are filed with this Report:
Exhibit No. Description
----------- -----------
31.1 Certification pursuant to Exchange Act Rule 13a-14(a) of the Chief
Executive Officer.
31.2 Certification pursuant to Exchange Act Rule 13a-14(a) of the Chief
Financial Officer.
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SIMTROL, INC.
Date: November 15, 2004 /s/ Richard W. Egan
--------------------------------------
Chief Executive Officer
(Principal executive officer)
/s/ Stephen N. Samp
--------------------------------------
Chief Financial Officer
(Principal financial and accounting
officer)
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