UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-KSB
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Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Fiscal Year Ended December 31, 2004
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Commission File No. 1-10927
SIMTROL, INC.
A Delaware Corporation
(IRS Employer Identification No. 58-2028246)
2200 Norcross Parkway Suite 255
Norcross, Georgia 30071
(770) 242-7566
Securities Registered Pursuant to Section 12(b)
of the Securities Exchange Act of 1934:
None
Securities Registered Pursuant to Section 12(g)
of the Securities Exchange Act of 1934:
Common Stock, $.001 par value per share
Indicate by check mark whether the registrant (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 (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. |X|
The registrant's revenues for the fiscal year ended December 31, 2004 were
$565,870.
The aggregate market value of the shares of common stock held by non-affiliates
of the registrant was approximately $2,411,033, based on the closing price of
the registrant's common stock as quoted on the Over The Counter Bulletin Board
on March 18, 2005. For the purposes of this response, officers, directors and
holders of 5% or more of the registrant's common stock are considered to be
affiliates of the registrant at that date.
The number of shares outstanding of the registrant's common stock as of March
18, 2005: 3,722,914 shares of $.001 par value common stock.
PART I
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of the
federal securities laws. Forward-looking statements are those that express
management's views of future events, developments, and trends. In some cases,
these statements may be identified by terminology such as "may," "will,"
"should," "expects," "plans," "intends," "anticipates," "believes," "estimates,"
"predicts," "potential," or "continue" or the negative of such terms and other
comparable expressions. Forward-looking statements include statements regarding
our anticipated or projected operating performance, financial results,
liquidity, and capital resources. These statements are based on management's
beliefs, assumptions, and expectations, which in turn are based on the
information currently available to management. Information contained in these
forward-looking statements is inherently uncertain, and our actual operating
performance, financial results, liquidity, and capital resources may differ
materially due to a number of factors, most of which are beyond our ability to
predict or control. Factors that may cause or contribute to such differences
include, but are not limited to, our ability to compete successfully in our
industry and to continue to develop products for new and rapidly changing
markets, and the other risks described under the caption "Factors Affecting
Future Performance" in Item 1 of this Report.
ITEM 1. BUSINESS.
History
We were incorporated under the laws of the State of Delaware on September 19,
1988. From 1990 to 2001, we primarily designed, manufactured, marketed and
supported hardware-based command and control systems, including
videoconferencing systems. We still provide maintenance support for certain of
these systems. In September 2001 we changed our name from VSI Enterprises, Inc.
to Simtrol, Inc.
General
We design, develop and market Windows-based software solutions that enable the
command, control and monitoring of otherwise incompatible electronic devices,
particularly corporate audiovisual ("AV") assets. Our end-to-end solutions are
designed to provide Fortune 1000 corporations, government entities and other end
users a cost-effective solution to simplify the automation and integration of AV
and information technology ("IT") assets.
Over the past three years, we have focused our resources to develop proven
software technologies to meet the growing demand for PC-based control systems.
The resulting ONGOERTM and OnGuard solutions have the benefit of being less
expensive, more customizable, and more compatible with existing technology
infrastructure than the hardware-based solutions of our historical competitors,
AMX Corporation (NASDAQ: AMXC) and Crestron Electronics, Inc. (privately held).
Our solutions also provide easy scalability, as customers only need to add
additional PCs or servers to provide additional processing power, rather than
purchase large-scale proprietary hardware controllers and touch panels. In
addition, much of our sales focus has been in AV meeting rooms of large
corporations and government agencies where there are usually existing PCs,
because adding our software to these PCs is a compelling cost savings versus
adding closed-architecture hardware. During 2003, most AV devices were designed
to be Internet Protocol (IP) enabled, allowing them to become part of the IT
network versus a separate, standalone application. IT professionals manage
technology assets such as PCs, servers and routers with tremendous efficiencies
and expect to manage new IP-enabled AV assets with the same efficiencies. These
professionals demand that these solutions work with existing IT infrastructures
and are reluctant to add unfamiliar, proprietary technologies to their IT
networks. We believe our Windows-based products are very well suited to meet
this demand.
Our principal executive offices are located at 2200 Norcross Parkway, Suite 255,
Norcross, Georgia 30071 and our telephone number is (770) 242-7566.
4
Recent Developments
During 2004, we continued our plan to restructure our business around the sales
of our ONGOER and OnGuard PC-based control software. ONGOER was originally
available for sale in April 2001 and represented a departure from our previous
business of selling, installing and servicing our Omega videoconferencing
control systems. We continue to service certain Omega videoconferencing control
systems under maintenance contracts.
Strengthening & Growing Integrator Partnerships
We continue to build a strong relationship with Telaid, a Connecticut-based
systems integration and service firm. We have successfully deployed units at 110
secure communications facilities of a large metropolitan municipality as part of
a major homeland security project, our largest software order to date of
approximately $364,000. We have also successfully deployed more than 50 ONGOER
units at Morgan Stanley and this account was instrumental in shaping our second
software product - OnGuard monitoring software. Telaid has also deployed units
at Merrill Lynch and Bank of America. Success at Telaid has provided us with
increased visibility in the AV integration community, strong reference accounts
and valuable feedback on additional software features that will further enhance
our ONGOER and OnGuard products.
In February of 2005, we added Matrix Ingenuity as one of our reseller partners.
Matrix Ingenuity is a Sacramento-based, Service-Disabled Veteran, Woman-Owned
Small Business (SDVOSB / WOSM) that focuses on providing information technology
(IT) consulting and multimedia solutions for education, corporate and military
customers.
Matrix Ingenuity deployed its first project at the California National Guard,
where ONGOER is installed on a PC that is used for both device control and
videoconferencing via a board level codec. The control application handles VCR,
volume, pan/tilt camera, projector and video switcher operations. The user
interface is designed to blend perfectly with basic PC operations by allowing
the user to toggle the operation on or off any time by clicking a Windows tray
icon.
Including Matrix Ingenuity, we have signed five additional resellers during the
past few months and we continue to educate and support these new customers as
they consider ONGOER and OnGuard for their projects.
Wainhouse Research White Paper
In December of 2004, we sponsored a Wainhouse Research white paper titled "The
Intelligent Meeting Environment". Wainhouse Research, headquartered in
Brookline, Massachusetts, is an independent market research firm that focuses on
critical issues in rich media communications, conferencing and collaboration,
and streaming media.
As the information technology and audiovisual industries converge, the need for
centralized management tools continues to increase. By deploying `intelligent'
management systems, organizations can leverage their AV and IT investments to
increase efficiency and provide superior service to their user community. In
addition, AV applications have advanced from `local-only' solutions into
enterprise solutions that are part of the enterprise IT network. The
professionals that manage these assets expect both local and remote control of
these assets, powerful diagnostics and rich monitoring / reporting mechanisms.
To effectively implement these applications, there are several important factors
to consider. This research paper provides insight and guidance into the
deployment of an Intelligent Meeting Environment featuring our products.
Altinex Partnership
In February of 2005, we launched a new product offering with Altinex, a
privately held signal management corporation headquartered in Brea, California.
This launch has resulted in several new reseller agreements and purchase orders
with Altinex's dealers.
Today's professional AV market is evolving as control systems companies (AMX and
Crestron) are encroaching on the space previously dominated by signal management
companies (e.g., Altinex) and vice versa. Signal management solutions are used
to handle the routing of computer video, broadcast video, audio, and control
signals in presentation systems. Altinex, an ISO-9001 certified corporation with
worldwide distribution channels, has a robust platform for this market in its
MultiTasker card cage line. The MultiTasker product makes available advanced
technology cards such as video distribution, audio distribution and CAT-5
transmitter/receiver cards to help create powerful, flexible and scalable AV
signal management solutions. At InfoComm 2004 - the AV industry's largest trade
show - Altinex announced prototype Simtrol software that complements its
MultiTasker product line. Successful demonstrations of this beta software to
Altinex's partners led to valuable experience and feedback to move the software
through the development phases and into production with the recent launch. As
part of the co-marketing partnership, Altinex-Simtrol will educate integration
partners about how ONGOER automatically discovers Altinex cards that are
installed in the MultiTasker and how this "self-discovery" process produces an
automatic, yet customizable user interface featuring our ONGOER software.
5
We believe our ONGOER software combined with the Altinex MultiTasker is an
exciting and valuable co-marketing offering to AV integrators and their end
customers. The collaborative solution features powerful and flexible signal
management as well as device control and monitoring capabilities.
Managed Services
With the rapid development and deployment of IP-addressable AV assets onto
corporate networks, the need to proactively and remotely control, monitor,
manage, schedule and diagnose device health/status information is quickly
increasing. In February of 2005, ReView Video announced a new managed services
offering, called Gold Seal Managed, powered by our software. ReView Video, a
privately held company based near Chicago, is the world's largest distributor of
Polycom products. With thousands of Polycom video products under Gold Seal
service contracts, there is a unique opportunity to proactively manage these
assets for their integrator partners and their end user clients. Currently,
service contracts are reactive in nature in that clients call the ReView Video
help desk when a problem occurs. Gold Seal Managed replaces this reactive
service with a proactive one.
With Gold Seal Managed powered by Simtrol, OnGuard software proactively monitors
assets 24x7, alerting the ReView Video help desk when a problem occurs. OnGuard
constantly polls the devices - even when they are not being used - to ensure
they are in a healthy state and ready for use. If a problem does occur, our
sophisticated diagnostic tools allow the help desk technician to connect to that
device from anywhere in the world and solve the technical problem remotely.
In addition to handling videoconferencing products from its distribution
partners Polycom and Sony, ReView has set up the Gold Seal Managed offering to
handle all AV assets, including audio processors, display devices such as
projectors and plasmas as well as video switchers and cameras.
Expansion of Board of Directors
To aid us as we continue to roll out our products, develop our reseller system,
and expand our sales efforts, our Board of Directors recently expanded by two
members with the addition of Adam Senter and Thomas Stallings, two software
industry veterans.
InfoComm IQ
In February of 2005, we became a member of InfoComm iQ, an online product
research tool set that dynamically serves more than 1,000 web-based AV product
catalogs from a central database and is supported by a very extensive
pay-per-click marketing campaign through the major search engines. Our product
information will be available to the more than 60,000 unique visitors who
utilize iQ's exclusive application-based search criteria over 150,000 times each
month when they are looking for specific products.
Investor Relations Firm
In an effort to help build investor awareness and shareholder value as we
continue our product rollouts and sales channel expansion, we hired de Jong &
Associates in January 2005. de Jong & Associates is a San Diego-based
international investor relations firm specializing in helping firms,
undiscovered by the investment community at large, implement and monitor
investor relations strategies designed to help build and sustain investor
support.
Funding of Operations
6
We issued additional convertible notes and private common stock during 2003 and
2004 to fund our operations. However, we continue to use significant cash in
operations and will require additional debt or equity financing. This additional
financing could be in the form of the sale of assets, the issuance of debt or
equity securities, or a combination of these financing methods. The amount of
such funding that may be required will depend primarily on the pace of sales of
our ONGOER product and to what extent we are able to work out our overdue
accounts payables with our various vendors. 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 will be adversely affected.
As of December 31, 2004, we had cash and cash equivalents of $414,051. We may
not have sufficient funds for the next twelve months and have relied on periodic
investments in the form of common stock and convertible debt since the fourth
quarter of 2001 to sustain its 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 and OnGuard product lines. There can be
no assurance that we will be successful in our attempts to develop and deploy
our ONGOER and OnGuard product lines, to generate positive cash flows or raise
sufficient capital essential to our survival. To the extent that we are unable
to generate or raise the necessary operating capital, it will become necessary
to curtail operations. Additionally, even if we do raise operating capital,
there can be no assurance that the net proceeds will be sufficient to enable us
to develop our business to a level where we will generate profits and positive
cash flows. These matters raise substantial doubt about our ability to continue
as a going concern.
Products
We design, develop, and market sophisticated, Windows-based software solutions
that enable the command, control monitoring and diagnostics of otherwise
incompatible electronic devices, particularly corporate AV assets. Our
end-to-end solutions are designed to provide Fortune 1000 corporations,
government entities and other end users a cost-effective solution to simplify
the automation and integration of audiovisual and information technology assets.
Based on open PC architecture, our solutions provide the market better pricing,
more choices and are simpler to deploy without sacrificing functionality.
Specifically, our software solutions can be used to locally and remotely
control, monitor, manage and diagnose AV and IT assets in corporate board rooms,
business training centers, meeting and convention centers, and distance learning
classrooms; provide security camera control and coordination for corporations
and government entities; and support multimedia and communications for
government and educational facilities. With the heightened increase in travel
security and the corresponding burden on employees, companies are taking
advantage of the increasing functionality, greater affordability, and widespread
use of a diverse array of electronic devices, particularly sophisticated audio,
video, and presentation equipment. However, these companies do not want to bear
the costs - downtime and increased staffing - associated with maintaining
complex AV device applications that are separate from the IT network.
Accordingly, these companies are turning to systems integrators to provide
turnkey solutions for integrating AV assets associated with meeting and
communications rooms directly into existing IT networks, so that these assets
can be managed with the same efficiencies that currently manage IT assets, such
as PCs, servers and routers. System integrators rely on our products not only to
enable simplified command and control of all devices related to these rooms
using standard, open PC hardware, but also to leverage our software to deliver
real-time remote monitoring and maintenance as part of an ongoing support
contract. Unlike other AV control companies that focus on selling expensive
closed system hardware to manage AV assets, our software model provides end
users with the flexibility to manage, control and monitor a variety of devices
on an enterprise-wide basis, without the hardware expenditures historically
associated with device control and monitoring. As a result, AV system
integrators, IT integrators, Other Equipment Manufacturers (OEM), distributors
and end users gain significant flexibility in the design and scalability of
enterprise AV systems, while increasing functionality and life of these assets.
We have developed two software-based solutions for the AV control systems
market, ONGOER and OnGuard. ONGOER allows end users to operate, as a single
system, a broad range of devices in a variety of settings. This is a significant
departure from the products currently available on the AV control systems market
in that it is a software-based system that can be installed to run on readily
available third-party hardware such as PCs and servers. Major competitors' AV
control systems are based on proprietary hardware components employing code
written in proprietary scripting languages. ONGOER can be operated from any PC
running the Windows operating system. All interfaces, cables and cards and the
hardware controller itself (a PC or server) can be purchased on the open market.
With its unique open architecture, this software delivers real-time control to
AV system management. ONGOER's software-based technology allows integrators to
change configurations with ease and any device that can connect to a PC can be
controlled with ONGOER.
7
ONGOER provides control of devices by enabling a PC to become a robust and
reliable control platform that is easy to configure, easy to program, and easy
to use. OnGuard provides remote, server-based proactive monitoring, management
and diagnostics as it collects real-time information from ONGOER installations
to provide instant status, control, notification, scheduling and reporting
functions.
A typical application for this software involves the control and monitoring of
AV devices. Business meeting rooms contain an array of AV devices such as
videoconferencing equipment, audio processors, video switchers, electronic
whiteboards, cameras, VCR's, DVD players, plasma monitors and projectors. Users
wish to control these devices from a common interface (a touch panel or computer
monitor) and IT support personnel wish to manage these assets with the highest
level of efficiency.
ONGOER operates on any PC running Windows(R) 2000, Windows(R) XP or Windows(R)
XP Embedded. All interfaces, cables and cards and the hardware controller itself
can be purchased on the open market from a wide variety of suppliers. With its
unique open architecture, this software delivers real-time control to AV-system
management. ONGOER's software-based technology allows integrators to change
configurations with ease and ensures that any device that can connect to a PC
can be controlled with ONGOER.
The PC controller is the heart of the ONGOER control system. The flexibility of
ONGOER lets integrators choose the controller: anything from a single-box
chassis to a multiprocessor server. There is no need to have a proprietary
hardware controller because the PC can handle all of an AV system's computing
needs, as well as any additional software required for presentations and other
applications. ONGOER not only makes the PC a control platform for numerous
third-party AV devices, but its broad range of connection methods extends the
flexibility further. One may choose among numerous devices and connect via a
number of different methods including infrared, serial, IP and digital IO.
End-users normally have contact with ONGOER only through the user interface.
ONGOER provides a great deal of flexibility in creating methods for human
interaction with the system. Because it relies on third-party hardware,
integrators can choose to incorporate a wide range of devices as user interfaces
such as inexpensive VGA monitors, sophisticated wired or wireless touch screens,
personal digital assistants like Palm Pilots, IPaqs, Visors, wireless PC's and
even cellular phones. Graphical user interfaces can be quickly and easily
created with Microsoft(R) Visual Basic or ONGOER Builder. Both methods include a
library of artwork for user interface buttons and panels as well as control
files to efficiently gain control of a wide variety of device. In addition,
OnLooker supports customized ActiveX controls to allow integrators to expedite
the user interface development process.
OnGuard is server-based management and monitoring software. The OnGuard Server
connects via standard TCP/IP networking to a set of ONGOER controllers to
monitor and control devices at remote locations. OnGuard displays information
about device health and status via a standard, web-based browser interface.
Technicians can log in from any place at any time using standard web browsers to
view the entire device control network at a glance. OnGuard provides visual,
audible and email notification of device alarms, programmable remote control
user interface panels, customizable graphic site/device views, a help-desk
subsystem with two-way chat as well as the scheduling of arbitrary events (e.g.,
turn off all plasmas on the 3rd floor every weekend).
We have developed Technician, ONGOER's remote, administration and diagnostics
utility, to facilitate detection and correction of system problems from any
remote location. As a result, integrators will no longer have to travel to
customers' locations to fix technical problems. Technician allows integrators to
diagnose and repair the vast majority of system conflicts remotely, via TCP/IP.
We provide Technician as an integral part of the base software package and no
additional hardware or software is needed to perform these functions.
ONGOER is PC-based general-purpose control software running as a system service
on a Windows 2000 or XP platform. ONGOER is capable of controlling any equipment
using a variety of interfaces, including serial, infrared, contact closure, and
others. PCI and AGP cards and Ethernet or USB interfaces may be utilized to
create connectivity to external equipment. Commodity, off-the-shelf PC hardware
is leveraged to create high quality, affordable solutions. Custom user
interfaces may be quickly generated in Visual Basic or ONGOER Builder to assume
any form or function desired. ONGOER uses a protocol called GoTalk over TCP/IP
for command and control signaling.
8
ONGOER control software communicates with the devices in the meeting room as
well as the OnGuard monitoring software on the server. Devices are controlled
locally as part of the room application or remotely as a help desk application.
Health and status information of all devices is tracked real time and proactive
alarms (email or text pages to wireless devices such as pagers or cell phones)
are sent to service personnel.
IT professionals have long managed corporate assets such as PCs, servers and
routers. During the past two years, most AV products became IP addressable - a
requirement from IT professionals that wish to manage the AV devices with the
same power and flexibility they use to manage IT assets. IT departments demand
that these devices tie into their existing IT network and wish to use global IT
tools such as IBM's NetView, Hewlett-Packerd's OpenView, or Computer Associates'
Unicenter to monitor and manage them. ONGOER and OnGuard complement OpenView,
NetView and Unicenter by passing valuable health/status information to them. IT
professionals need a product to control the devices locally and remotely
(ONGOER) and a product to monitor/manage/diagnose the devices remotely
(OnGuard). Our products support these needs while using industry standard PC
technology.
The hardware supported by our software is based on the open PC market and comes
from a variety of companies. Our integration and OEM partners choose from many
familiar brands to receive high quality and competitive pricing and our approach
takes advantage of this high quality, low price, and easily available hardware.
PC equipment vendors are able to offer tremendous value because of the enormous
economies of scale inherent in the PC marketplace. Our partners are not locked
into expensive, proprietary controllers, touch panels and connectivity hardware
from AMX and Crestron.
Proprietary Technology
We regard our ONGOER and OnGuard software as proprietary and have implemented
protective measures of both a legal (copyright) and practical nature. We derive
considerable practical protection by supplying and licensing only a
non-modifiable run-time version to our customers and keeping confidential all
versions that can be modified. By licensing the software rather than
transferring title, we in most cases have been able to incorporate restrictions
in the licensing agreements, which impose limitations on the disclosure and
transferability of the software. No determination has been made as to the legal
or practical enforceability of these restrictions, or the extent of customer
liability for violations.
Product Development Strategies
The AV world and the IT world are converging, with more and more devices
becoming network enabled. Like PCs and servers, we believe IT departments will
demand AV products (projectors, audio processors, video codecs, video switchers,
cameras, electronic whiteboards, etc.) be accessible on a corporate network,
where they can be controlled, managed and monitored from centralized and/or
remote locations. ONGOER and OnGuard install on PCs and servers and support a
product architecture that allows them to control, monitor and manage any device
connected to them via the network.
During 2005, ONGOER and OnGuard will continue to add major functionality
enhancements including: parameterized device reporting, additional report
engines, customizable alerts, email notification filtering options for device
alarms, device scheduling and the ability to view devices in a flexible,
configurable live table.
As the price points for AV device hardware continue to drop, deployment
increases, thus driving the demand for powerful software to control, monitor,
manage, schedule and diagnose these devices. The ONGOER/OnGuard software
architecture - based on the open PC/Server platform - is well-suited to deliver
this functionality to the IT professionals that demand these capabilities.
Markets
9
Based on the long-term objective of becoming the industry standard software for
controlling and monitoring AV devices, management has developed a sales and
marketing strategy to aggressively pursue relationships at each point of the
distribution channel. The following provides an overview of the AV distribution
channel.
End Users
Businesses, universities and government agencies purchase device control and
monitoring solutions to aid productivity associated with the use of AV meeting
room assets. During 2003 and 2004, we installed our products with a number of
end users, including: Boeing, Lockheed, Morgan Stanley, and Merrill Lynch.
AV and IT System Integrators
Integrators are hired by end users to "integrate" technology to help them
increase productivity and save money. Integrators purchase hardware and software
products from various manufacturers and design, install, and service those
solutions for end users. The integrator is typically the entry point into the
end user and, therefore, is a critical relationship for us. These include the
Value Added Reseller ("VAR") 500, the top 500 VARs in the U.S., and AV
integrators. We have successfully developed relationships with a number of
integrators, including Telaid and IBM Global Services. Management considers this
a critical element in the distribution channel and is focusing significant
effort on developing relationships with other integrators.
Equipment OEM Partners
Videoconferencing companies, presentation equipment manufacturers and signal
management firms represent alliance partners that could co-brand or private
label our technology into value-add solutions featuring their products. The goal
of alliances is for our partners and us to package turnkey solutions that make
it easier for integrators to deploy at end user customer sites. Hardware from
these companies needs to be controlled by end users for ease-of-use and
monitored by support staff to guarantee the technology works in the meeting
rooms. Providing turnkey solutions straight from the manufacturer helps the
integrator and the end user. The large equipment Original Equipment
Manufacturers ("OEMs") include, for video conferencing: Polycom, Tandberg, Sony,
VCON and VTEL; for presentation equipment: SMART, Polyvision, Hitachi, 3M, and
Panasonic; and for signal management: Altinex and Kramer Electronics. In 2002
and 2003, we established relationships with Polycom and SMART Technologies, Inc.
OEM relationships also increase our sales leverage in the AV and systems
integrator channels. Each of these OEMs has relationships throughout that
channel, including the VAR 500. As our products are packaged with OEM hardware,
those products are introduced throughout the integrator sales channel, where
they can be added to bids and specification sheets with minimal sales lead time
and expense to us.
PC OEM Partners
Computer manufacturers represent the core platform - the PC and server - that
run our software products. Their products are sold through integrators and
directly to end-users. Computer companies have entered the consumer electronics
business; therefore, providing turnkey control and monitoring software to
integrators could drive additional sales of PCs and servers, plasma monitors,
and other PC hardware required for control applications. Potential PC OEM
partners include Dell, Hewlett-Packard, Gateway, IBM, and Sony.
Operating System Providers
Because the PC manufacturers are beginning to produce turnkey sets of products
for the AV industry, Microsoft Corporation started working with PC companies on
a Media Center PC, a solution specifically designed for media-related computers
used for applications such as home entertainment. We are positioning our
products as the solution for command, control, and monitoring devices within
such an operating system. Management sees this as a long-term possibility for an
additional revenue stream.
Competition
10
We primarily compete with two companies, both of which have significantly
greater resources and market share. Both companies offer control solutions based
on proprietary hardware and software. We offer control solutions utilizing open
PC technology.
Our two major competitors in the AV control systems market are AMX and Crestron,
who combined currently have close to 100% of the sales in this market.
AMX, headquartered in Richardson, Texas, was established in 1982. This publicly
traded company employs about 400 people, with dealers and distributors in 40
countries. AMX has a strong foothold in Fortune 500 companies. Typical AMX
applications include control of devices in corporate boardrooms, meeting
facilities, professional sporting arenas, museums, hospital operating rooms,
transportation systems, and schools.
Headquartered in Rockleigh, New Jersey, Crestron designs and manufactures
control and automation systems for corporate, industrial, educational, and
residential markets.
Both Crestron and AMX offer hardware-based control systems, the cores of which
are proprietary controllers fitted with proprietary cards and connectors
manufactured by or for them, and running proprietary operating systems. These
proprietary controllers communicate with controlled devices by means of code
written in proprietary languages (each company has developed its own).
Integrators who re-sell systems from each of these companies must send their
technical personnel to training courses offered by the companies themselves and
by several independent organizations.
Because ONGOER is a software-based control system designed to run on commodity
hardware, we believe we have several advantages over AMX and Crestron. The PC
industry is a vast marketplace with enormous economies of scale. Computer
hardware including touch screens, wireless Smart Displays, and serial ports are
extremely powerful and inexpensive. Innovative and wireless network-enabled
devices are regularly introduced into the mass PC market. There are advantages
for end customers in familiarity and cost compared to proprietary,
hardware-based control systems.
Many end customers also strive for a unified collaboration/control solution,
such as the combination of Polycom iPower and Simtrol ONGOER, or the combination
of a SMART Display and Simtrol ONGOER. When the PC is already part of an AV
room, there are even more compelling cost advantages to adding ONGOER software
to the existing PC and existing display.
End customers are also demanding a new breed of proactively monitored control
solutions. Traditional control systems companies are reacting by introducing
PC-like services and interfaces to PCs and innovative PC wireless Smart
Displays. These PC-like services cannot compete in terms of price and
performance with the much larger PC marketplace.
Traditional control systems position themselves to be the central technology and
view the PC as an "important device." We believe the PC is the central
technology and view traditional hardware control boxes as a declining
technology.
Factors Affecting Future Performance
The following summarizes certain of the risks inherent in our business:
We have limited resources available to service our existing indebtedness and
limited sources of additional working capital.
The degree to which we are leveraged could have important consequences. For
example, it could:
o make it more difficult for us to obtain additional financing for
working capital, capital expenditures and other general corporate
purposes;
o require a substantial portion of our cash flow from operations to be
dedicated to the payment of principal and interest on our existing
indebtedness, thereby reducing the availability of any cash flow for
other purposes;
o place us at a relative competitive disadvantage to our less highly
leveraged competitors; or
o make us more vulnerable to economic downturns.
11
We currently have no credit lines available and must satisfy all of our working
capital and capital expenditure requirements from cash provided by operating
activities, from external capital sources or from the sale of assets.
Our long-term viability, as well as our ability to meet our existing and future
debt and other obligations and future capital commitments, depends on our
financial and operating performance, which is subject to, among other things,
prevailing economic conditions and to certain other financial, business and
other factors beyond our control. We require additional capital or other funding
to finance our operations, as we do not generate sufficient cash from operations
to sustain our operations. If we are unable to attain sufficient funding, we
will not be able to continue to operate. We can not assure that projected sales
will occur and, therefore, that our operating results or other financing
activities will be sufficient to meet debt and other obligations and future
working capital needs.
We may not be able to achieve or sustain profitability.
After 17 years of operations, we have not reported any profits for a full year
of operations and, as of December 31, 2004, we had an accumulated deficit of
$62.6 million. We may not be able to achieve or sustain profitability in the
future, as sales of our ONGOER product have not proven to be sufficient to fund
our operations. As a result, we may incur additional losses and negative cash
flow from operations for the foreseeable future.
If we fail to secure sufficient capital or fail to create a strong marketing
support team, then our efforts to penetrate new markets could fail, resulting in
decreased cash flow.
Expanding our presence in the audiovisual command and control market will
require capital for further software product development and the creation of new
sales channels. The inability to secure sufficient capital or the failure to
create a strong sales channel/marketing support organization could result in a
failed effort to penetrate these new markets and adversely affect operating
results and cash flow.
We depend on purchases from a few significant customers and any loss,
cancellation, or reduction of purchases by these customers could harm our
business.
We currently sell control software and service previously sold videoconferencing
systems for a small number of major customers. During the year ended December
31, 2004, approximately 85% of our revenues were from one large customer.
Further, we do not have long-term contracts with these or any of our other
customers, so our customers could stop purchasing our products at any time. The
loss of any of our major customers, or any reduction in purchases by these
customers, could significantly harm our business.
If we cannot attract, retain, train or manage our key management or technical
personnel effectively, our ability to develop and sell new products could be
hindered, resulting in a reduction in sales.
Our development, management of our growth and other activities depend on the
efforts of key management and technical employees. Competition for such persons
is intense. Because we do not have long-term employment agreements with our key
management personnel or technical employees, we could lose one or more of our
key management or technical personnel, which could result in significant harm to
our business. Our future success is also dependent upon our ability to
effectively attract, retain, train, motivate and manage our employees and
failure to do so could hinder the development and marketing of our products and
result in a reduction in sales and our customers could shift their purchases to
our competitors.
Fluctuations in our quarterly performance could adversely affect our total
revenues and net income levels.
Our revenues have historically occurred predominantly in the third month of each
fiscal quarter. Accordingly, our quarterly results of operations are difficult
to predict and delays in the closing of sales near the end of the quarter could
cause quarterly revenues and, to a greater degree, operating and net income to
fall substantially short of anticipated levels. Our total revenues and net
income levels could also be adversely affected by:
o cancellations or delays of orders,
o changes in customer base or product mix,
o seasonal patterns of capital spending by customers,
o delays in purchase decisions due to new product announcements by us
or our competitors and
o increased competition and reductions in average selling prices.
12
Our PC-based control system is unproven technology and may not be accepted by
the industry.
There is no industry standard for the control of AV systems. Generally, the
market is dominated by proprietary, closed-architecture control systems by
manufacturers such as AMX and Crestron. Our open-architecture, PC-based control
system, which we believe is superior and provides greater flexibility for
end-users than the traditional proprietary systems, is a relatively new
technology for the market. Given the relatively short operating history of such
PC-based systems, it is impossible to determine at this time whether or not
PC-based systems will gain wide acceptance in the marketplace. To increase our
sales, we must establish a greater presence in the AV system control market by
convincing AV integrators and IT Managers and ultimately end-users, to utilize a
PC-based control system rather than the traditional proprietary systems. There
can be no assurance that use of PC-based control systems, such as our ONGOERTM,
will be accepted by the industry. If the use of PC-based AV control systems is
not accepted in the marketplace or if another industry standard is adopted, our
projected sales will not materialize, thereby causing potentially poor financial
performance.
We rely on third parties for the sale of our products.
Sales of our ONGOERTM and OnGuard products are primarily made through
third-party OEMs and AV integrators. Generally, we do not have initial access to
the end-users of AV systems in the marketplace and must, therefore, rely on
third parties for the distribution and sale of our products. We have entered
into dealer agreements with third-party OEM and AV integrators, such as Telaid
and IBM Global Services, for the sale of our products. However, such agreements
are non-exclusive and such third parties may, therefore, also sell products that
directly compete with ours. In addition, such agreements may be terminated at
any time. If our relationships with such third-party OEMs and AV integrators
such as Telaid, who accounted for 85% of our revenue in 2004, were terminated,
we would have to seek a new distribution channel for our products, which would
potentially have a material adverse effect on our operations.
We may be unable to accurately evaluate our business and to forecast our
prospects, which may prevent us from meeting the product demands of our
potential customers in a timely manner.
It is difficult to forecast our future revenues accurately and to plan future
operating expenses. The revenue and income potential of our products and
business are largely unproven. Although proprietary, closed-architecture AV
control systems have been sold successfully, the PC-based AV control system is
largely unproven. Our ability to license our ONGOER software and achieve success
will depend on, among other things, the level of demand for PC-based control
systems and our capacity to meet demand and performance standards of our
prospective clients.
We may not be able to maintain or improve our competitive position because we
face intense competition in the AV control system market from existing
competitors with far greater technical and financial resources and other
companies may enter the marketplace in the future.
Competition in the command and control and video communications markets is
intense. In the command and control market, our primary competitors are AMX,
Inc. and Crestron Electronics, Inc. We compete with AMX and Crestron on features
such as ease of use, scalability and price. Although we feel that our PC-based
system is superior to the proprietary systems developed by AMX and Crestron in
each of these areas, we do not have the name recognition in the industry that is
currently enjoyed by AMX and Crestron, which may result in fewer sales of our
products. In addition, both AMX and Crestron have greater financial and
personnel resources than we do. Given their market share, resources and
reputation, if either or both of these companies choose to develop a PC-based
control system, it could have a serious adverse effect on our results of
operations. In addition, as use of AV systems becomes more widespread in both
businesses and homes, we expect other competitors, some with significantly
greater technical and financial resources such as Microsoft, to enter the
marketplace. If any such competitors choose to develop their own PC-based
control systems, rather than licensing software from us, it could have a serious
adverse effect on our sales. If we cannot continue to offer new command and
control and videoconferencing products with improved performance and reduced
cost, our competitive position will erode. Moreover, competitive price
reductions may adversely affect our results of operations.
Our success will depend in part upon our ability to safeguard our proprietary
software.
13
We rely on a combination of patents, copyrights, trade secret laws and licensing
agreements to protect the proprietary software that we have developed as part of
our business. There can be no assurance that these measures taken by us will
provide significant proprietary protection of our intellectual property or that
competitors will not be able to legitimately ascertain proprietary information
embedded in our products which are not covered by such measures. In such case,
we may be precluded from preventing our competitors from making use of such
information.
There are no pending lawsuits or claims against us regarding infringement of any
existing patents, copyrights or other intellectual property rights of others.
There can be no assurance, however, that such infringement claims will not be
asserted in the future, nor can there be any assurance, if such claims are made,
that we will be able to defend such claims successfully or, if necessary, obtain
licenses on reasonable terms. Adverse determinations in any litigation naming us
could subject us to significant liabilities to third parties, require us to seek
licenses from third parties and prevent us from selling our products. The
occurrence of any of these events could have a material adverse effect on us.
We will also rely on unpatented or copyrighted trade secrets and propriety
know-how. We generally require our employees, consultants, advisors and
prospective partners to enter into confidentiality agreements. There is no
assurance, however, that these agreements will protect any current or future
proprietary information or that others will not gain access to or independently
develop similar trade secrets or know-how. Our competitive position and amount
of potential future income will depend in part upon our ability to obtain and
maintain copyright and other intellectual property protection in various
jurisdictions for proprietary technologies, existing products and products we
may develop in the future.
If necessary licenses of third-party technology become unavailable to us or
become very expensive, it could adversely impact our business.
We currently license technology for use in our ONGOER product and may, from time
to time, be required to license additional technology from third parties to
develop new applications or application enhancements. We cannot assure you that
third-party licenses will be available to us on commercially reasonable terms,
if at all. The inability to obtain any third-party license required to develop
new applications and application enhancements could require us to obtain
substitute technology of lower quality or performance standards or at greater
cost, either of which could have an adverse effect on our business.
Our success will depend on our ability to adapt to rapid technological change.
The AV industry typically experiences rapid technological change, changing
market conditions and customer demands and the emergence of new industry
standards and practices that could render our products obsolete. Our future
success will substantially depend on our ability to enhance our products and
services, develop new services and proprietary technology and respond to
technological advances in a timely and cost-effective manner. The development of
additional products and other proprietary information entails significant
technical and business risk. There can be no assurance that we will succeed in
developing and using new technologies or in adapting our technology and systems
to meet emerging industry standards and customer requirements. If we are unable,
for technical, legal, financial, or other reasons, to adapt in a timely manner
in response to changing market conditions or customer requirements, or if our
new products and services do not achieve market acceptance, our business,
financial condition and results of operations would be materially adversely
affected.
The lack of a developed trading market may make it difficult to sell our
securities.
Trading of our common stock is conducted on the OTC Bulletin Board. Trading
activity in our common stock has fluctuated and at times been limited. We cannot
guarantee that a consistently active trading market will develop in the future.
A holder of our common stock may find it difficult to dispose of or to obtain
quotations as to the market value of our common stock.
The market price for our common stock may be volatile.
14
The market price for our common stock could be subject to significant
fluctuations in response to variations in quarterly operating results,
announcements of technological innovations or new products by us or our
competitors, or our failure to achieve operating results consistent with any
securities analysts' projections of our performance.
The stock market has experienced extreme price and volume fluctuations and
volatility that have particularly affected the market price of many emerging
growth and development stage companies. Such fluctuations and volatility have
often been unrelated or disproportionate to the operating performance of such
companies.
Our common stock is subject to "penny stock" regulations and restrictions on
initial and secondary broker-dealer sales.
The Securities and Exchange Commission ("SEC") has adopted regulations which
generally define "penny stock" to be any listed, trading equity security that
has a market price less than $5.00 per share or an exercise price of less than
$5.00 per share, subject to certain exemptions. Penny stocks are subject to
certain additional oversight and regulatory requirements. These requirements may
restrict your ability to sell our common stock.
Research And Development
Our product engineering, including our costs associated with design and
configuration of fully developed systems for particular customer applications,
is accounted for in our financial statements as research and development
expenses. During the year ended December 31, 2004 our expenditures for research
and development of new products or new components for our ONGOER product totaled
$452,002, an increase of 8% from the total expenditures of $419,361 in 2003. The
increase was due to higher salary and employee benefit costs during the current
year.
Employees
As of December 31, 2004, we employed nine persons full time, including two
executive officers. Of the full-time employees who were not executive officers,
four were engaged in research and development, two in service, and one in
information systems. Employee relations are considered good and we have no
collective bargaining contracts covering any of our employees.
ITEM 2. DESCRIPTION OF PROPERTY.
We maintain our executive and sales offices in 6,400 square feet of leased
office and warehouse space in Norcross, Georgia, under a three-year lease, which
expires in August 2005. Monthly rent is approximately $4,117 including common
area maintenance charges, taxes, and insurance.
We believe that our current facilities are adequate for our current
requirements.
ITEM 3. LEGAL PROCEEDINGS.
We are not party to any pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
PART II
ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER
REPURCHASES OF EQUITY SECURITIES.
From January 1, 2002 to May 21, 2003, our common stock traded on the OTC
Bulletin Board under the symbol "SMOL." Our common stock traded on the Pink
Sheets under the symbol "SMOL" from May 22, 2003 to May 6, 2004. From May 7,
2004 to June 17, 2004, our common stock traded on the Pink Sheets under the
symbol "SMRL." On June 18, 2004 our common stock began trading on the OTC
Bulletin Board under the symbol "SMRL", where it currently trades.
15
The following table sets forth the quarterly high and low bid quotations per
share of common stock on the OTC Bulletin Board and the Pink Sheets as reported
for the periods indicated. These prices also represent inter-dealer quotations
without retail mark-ups, markdowns, or commissions and may not necessarily
represent actual transactions.
HIGH LOW
---------- ---------
FISCAL YEAR ENDED DECEMBER 31, 2003
First Quarter $5.20 $2.00
Second Quarter 3.50 1.50
Third Quarter 4.00 1.20
Fourth Quarter 4.20 1.30
FISCAL YEAR ENDED DECEMBER 31, 2004
First Quarter $2.50 $0.70
Second Quarter 2.60 0.40
Third Quarter 3.45 1.01
Fourth Quarter 2.50 0.85
Share prices have been adjusted to reflect a 1:10 reverse stock split effected
on May 7, 2004.
As of February 28, 2005, there were approximately 563 holders of record and in
excess of 4,400 beneficial holders of our common stock.
We have never paid cash dividends on our common stock and have no plans to pay
cash dividends in the foreseeable future. The policy of our Board of Directors
is to retain all available earnings for use in the operation and expansion of
our business. Whether dividends may be paid in the future will depend upon our
earnings, capital requirements, financial condition, prior rights of any
preferred stockholders, and other relevant factors.
16
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion and analysis should be read in conjunction with the
consolidated financial statements and notes thereto included elsewhere in this
Form 10-KSB.
Overview
We are an Atlanta-based software technology company specializing in AV control.
We design, manufacture, market, service and support our ONGOER software control
system, which is designed to run on third-party hardware. Previously, our core
business was the design, manufacture, marketing and servicing of software based
command and control systems, including videoconferencing control systems,
through our wholly owned subsidiary, Videoconferencing Systems, Inc. We continue
to service certain of our videoconferencing customers but have discontinued
selling to this market.
Our command and control solutions allow end users to operate, as a single
system, a broad range of electronic equipment such as projectors, VCRs,
computers, sound systems, lighting and temperature controls and other
audio-video devices in a variety of settings. A typical customer is a large,
multi-site organization that utilizes sophisticated audio, video and
communications network technologies that require complex command and control
solutions. These solutions can be used in a variety of settings, including
corporate meetings and conferences, distance learning and judicial arraignment
systems. These customers also require superior after-the-sale service.
Historically, we have utilized a direct sales model. However, in order to
attempt to grow sales and to reach and maintain profitability, management
believes that we can better leverage our technological and service competencies
by marketing and selling our products through third party resellers and system
integrators, who specialize in the sale, installation, support and service of
audiovisual equipment, and by entering new markets for our control system
technology.
During 2000, we undertook a restructuring of our business operations and balance
sheet that were intended to achieve profitable operations and provide positive
operating cash flows. As part of this restructuring, we raised additional equity
capital and paid off debt outstanding at that time. These restructuring
initiatives have enabled us to reposition our product line and to expand our
presence in the AV command and control systems market. This market, which to
some degree overlaps the high-end videoconferencing market historically served
by us, is almost exclusively maintained by thousands of resellers and system
integrators. Our products have been re-engineered such that they may also be
sold through these third party channels. We believe we offer a functionally
superior, lower cost, fully integrated solution which provides command and
control and remote diagnostics for audio, visual and room environment devices,
and for network connectivity.
Critical Accounting Policies
We prepare our 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. 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 products, ONGOER and OnGuard, and our older
proprietary hardware and software product, Omega. Revenue from the sale of
hardware and software is recognized upon the transfer of title when
shipped. Revenue on maintenance contracts is recognized over the term of
the related contract, which resulted in $16,666 of deferred revenue at
December 31, 2004.
17
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 and 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 and Liquidity
General
As of December 31, 2004, we had cash and cash equivalents of $414,051. We may
not have sufficient funds to sustain our operations for the next twelve months.
We have relied on periodic investments in the form of common stock and
convertible debt 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. There can be no
assurance that we will be successful in our attempts to develop and deploy our
Ongoer product line, to generate positive cash flows or raise sufficient capital
essential to our survival. To the extent that we are unable to generate or raise
the necessary operating capital, it will become necessary to curtail operations.
Additionally, even if we do raise operating capital, there can be no assurance
that the net proceeds will be sufficient to enable us to develop our business to
a level where we will generate profits and positive cash flows.
These matters raise substantial doubt about our 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 we be unable to continue as a going concern.
We used $1,461,561 in cash from operating activities in 2004, primarily due to
our loss of $898,803 and a reduction in accrued expenses and accounts payable of
$542,733 and $184,829, respectively, that resulted mainly from payments on past
due obligations during 2004 with proceeds from our common stock and debt
offerings during the year. The increase in cash used from operations in 2003 of
$597,465 was due primarily to the payments of the various past due obligations
above. No cash was used in investing activities in either 2004 or 2003.
During 2004, we issued 915,104 shares of our common stock for net proceeds of
$1,537,463 (at prices ranging from $1.92-$2.00 per share) in private placements
of equity to limited numbers of accredited investors. We 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 $292,000,
including sales commissions of $219,000. See note 6 to our consolidated
financial statements.
During 2004, we also issued $575,000 of convertible debt (the "2004 Debt") (see
Note 5 to our consolidated financial statements). In June 2004, $525,000 of the
2004 Debt was converted into 271,409 shares of our common stock.
In 2003, we sold 282,573 shares of our common stock for proceeds of $603,700 in
private placements to individual investors including three members of our Board
of Directors. The share prices ranged from $1.52 to $3.58 per share. Offering
costs for these transactions were de minimis and there were no sales
commissions.
18
We also issued $30,000 of convertible debt ("2003 Debt") to two of our directors
during the year ended December 31, 2003. The 2003 Debt accrued interest at prime
plus 1%. The principal and interest amounts were converted into 12,842 shares
($2.40 per share) of our common stock on July 22, 2003.
During 2002, we issued an aggregate of $760,000 of convertible debt ("2002
Debt") to numerous private investors, including four members of our Board of
Directors. The 2002 Debt accrued interest at prime rate plus 1% and was
originally due on December 31, 2002. In conjunction with the issuance of the
2002 Debt, we issued 75,000 common stock purchase warrants to the holders of the
2002 Debt. The 2002 Debt was convertible immediately into shares of our common
stock at prices originally ranging from $4.70 to $7.90 per share, which
represented the market prices of our traded common stock on the dates of the
issuances of the 2002 Debt. The warrants, which expire at various dates in 2006,
were exercisable immediately at prices ranging from $4.70 to $7.90 per share.
Each warrant entitles the holder to purchase one common share of our common
stock.
On December 31, 2002, we extended the 2002 Debt to January 31, 2003 and as an
inducement to convert, we reduced the conversion price of the debt to $2.40 per
share and reduced the exercise price of the warrants to $2.40. We recognized
approximately $58,000 as finance charges over the remaining terms of the notes
to reflect the lowering of the warrant exercise price at December 31, 2002.
In January 2003, $735,000 of the 2002 Debt plus accrued interest was converted
to 320,408 shares of our common stock. Pursuant to Statement of Financial
Accounting Standard No. 84 "Induced Conversion of Convertible Debt", a debt
conversion expense of $431,599 was recorded to reflect the fair value of the
additional shares that resulted from lowering the conversion price to $2.40.
During 2001, we issued $400,000 of convertible debt to two shareholders ("2001
Debt"). The 2001 Debt accrued interest at prime rate plus 1% (6.5% at the time),
was originally due February 7, 2002 and was collateralized by all of our assets.
The 2001 Debt was originally convertible into shares of our common stock at
$4.90 per share. In conjunction with the issuance of the convertible debt, we
issued 40,000 common stock purchase warrants to the holders of the 2001 Debt.
The warrants, which expire at various dates in 2006, are exercisable immediately
and entitle the holder to purchase one common share of our common stock at
prices ranging from $4.60 to $5.30 per share. Also, the agreement called for the
issuance of additional warrants to the debt holders for each 60 day extension
period on the debt as follows: 10,000 warrants to each debt holder for the first
60 day extension and 6,000 warrants to each debt holder at the date of each
subsequent 60 day extension. On February 7, 2002, the debt holders granted a
60-day extension and as a result, we issued an additional 10,000 warrants, which
entitle the debt holders to each purchase 10,000 shares of our common stock at
$4.90 per share. In conjunction with the issuance of 10,000 warrants to the
shareholders on February 7, 2002, $88,254 was estimated as the fair value of the
warrants and was expensed over the extended life of the note as the shareholders
agreed to extend the due date of the loans until December 31, 2002 and no
additional warrants were granted.
On December 31, 2002 we extended the due date of the 2001 Debt until January 31,
2003 and as an inducement to convert, the conversion price was reduced to $2.40
per share. On January 31, 2003, we extended the due date until December 31,
2003. At January 31, 2003 we recorded a beneficial conversion feature in the
amount of $229,284, to reflect the fair value of the additional shares that may
be issued from lowering the conversion price. The beneficial conversion feature
accreted to interest expense over the extended life of the 2001 Debt. During
2003, we amortized all these amounts as finance charges.
In January 2004, the 2001 Debt was extended to December 31, 2004. Additionally,
we 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 2001 Debt holders were granted warrants to purchase
384,566 shares of stock on the conversion date of the 2001 Debt at an exercise
price of $2.00 per share. As a result, we recorded $81,488 of warrant value as
debt conversion expense on that date.
During 2004, our total assets increased approximately 114% to $489,560 at
December 31, 2004 from $229,299 at December 31, 2003. The increase was due
primarily to our increased cash balance of $410,053 that resulted primarily from
our debt and private equity offering during 2004. Total liabilities decreased
$1,948,192, or 90%, due primarily to the retirement of liabilities with proceeds
of the convertible debt and equity placements during 2004 and the conversion of
$400,000 of the 2001 Debt plus applicable accrued interest to equity in
September 2004. In conjunction with the retirement of various liabilities, we
recorded $716,299 in debt extinguishment gains for liabilities retired for less
than their recorded values.
19
We expect to spend less than $25,000 on capital expenditures in 2005.
Results of Operations
Revenues
Revenues were $565,870 and $504,881 in 2004 and 2003, respectively. The 12%
increase in revenues from 2003 to 2004 was primarily due to higher software
revenues of $277,932, offset partly by the decrease in Omega maintenance revenue
of $216,943 as former customers have either replaced these older systems with
newer equipment or declined maintenance contracts due to budgetary
considerations. The increase in software revenues during 2004 included an
approximate $364,000 multi-site sale to an integrator for implementation at one
end user. Due to our small customer base, we face the risk of fluctuating
revenues should any of our customers discontinue using our products. See Note 8
to our consolidated financial statements.
Gross Profit
Gross profit as a percentage of revenues was approximately 85% and 28% in 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 & Administrative Expenses
Selling, general and administrative expenses were $936,446 and $647,984 for 2004
and 2003, respectively. The 45% increase resulted primarily from accounting and
auditing expenses of approximately $115,000 incurred during 2004, and
approximately $75,000 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.
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, 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. These expensed costs were $452,002 and $419,361 for
2004 and 2003, respectively. The 8% increase from 2003 was due primarily to
higher salary and benefit costs.
Other Expense, Primarily Finance Charges
Other expense, primarily finance charges were $460,789 and $287,798 for 2004 and
2003, respectively. Expense during 2004 consisted primarily of finance charges
associated with our issuance of convertible debt during previous years as well
as debt originated in February 2004. During 2003, this expense 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 note 5 to the consolidated financial
statements.
Debt Conversion Expense
Debt conversion expense during 2004 amounted to $245,643 and consisted of
$164,155 that was recorded at the time of the conversion of the 2004 Debt in
June 2004 to reflect the fair value of additional warrants granted upon the
conversion of a majority of the Debt to common stock, and $81,488 that was
recorded at the time of the conversion of the 2001 Debt in September 2004 to
reflect the fair value of additional warrants granted upon the conversion of the
2001 Debt to common stock. See note 5 to the consolidated financial statements.
20
Debt conversion expense of $431,599 was recorded during 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 Extinguishments of Debt
A gain of $716,299 was recorded during 2004 to reflect the payoffs of various
liabilities for less than their previously recorded balances. No similar debt
extinguishments took place during 2003.
Net Loss
Our net loss for 2004 was $898,803, or $0.30 per share, compared to our net loss
for 2003 of $1,645,374, or $0.76 per share. The decrease in net loss was due
primarily to increased gross profit in the amount of $338,410 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, partly offset by higher finance charges incurred during the
current year relating to the convertible debt financing originated in February
2004.
Off Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
ITEM 7. Financial Statements
The audited financial statements and related notes required by this item 7 are
included as Exhibit 99.1 of this Report and are incorporated herein by
reference.
ITEM 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not applicable.
ITEM 8A. 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. As of December 31, 2004, an evaluation was performed under the
supervision and with the participation of our management, including the Chief
Executive Officer and the Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures. Based upon that
evaluation, the Chief Executive Officer and the Chief Financial Officer
concluded that our disclosure controls and procedures were effective.
In connection with the audits of our consolidated financial statements as of and
for the years ended December 31, 2004 and December 31, 2003, Marcum & Kliegman
LLP advised our management and our 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 certain accounting
personnel. Management believes that sufficient compensating controls have since
been implemented to minimize the risks associated with this material weakness,
including additional Chief Executive Officer and Board of Directors oversight.
During the fourth quarter of 2004, there were no changes in our internal control
over financial reporting that have materially affected, or that are reasonably
likely to materially affect, our internal control over financial reporting.
ITEM 8B. OTHER INFORMATION
Not applicable.
21
PART III
Item 9. Directors and Executive Officers.
The information required by this Item will be contained in our definitive Proxy
Statement to be delivered to stockholders in connection with our 2005 Annual
Meeting of Stockholders (the "2005 Proxy Statement") and is incorporated herein
by reference.
Item 10. Executive Compensation.
The information required by this Item will be included in the 2005 Proxy
Statement and is incorporated herein by reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
The information required by this Item will be included in the 2005 Proxy
Statement and is incorporated herein by reference.
Item 12. Certain Relationships and Related Transactions.
The information relating to certain relationships and related transactions
contained in the 2005 Proxy Statement is incorporated herein by reference.
Item 13. Exhibits.
The following exhibits are filed with or incorporated by reference into this
report. The exhibits which are denominated by an asterisk (*) were previously
filed as a part of, and are hereby incorporated by reference from either (i) the
Post-Effective Amendment No. 1 to the Company's Registration Statement on Form
S-18 (File No. 33-27040-D) (referred to as "S-18 No. 1"), (ii) Post-Effective
Amendment No. 2 to the Company's Registration Statement on Form S-18 (File No.
33-27040-D) (referred to as "S-18 No. 2"), (iii) Post-Effective Amendment No. 3
to the Company's Registration Statement on Form S-18 (File No. 33-27040-D)
(referred to as "S-18 No. 3"); (iv) the Company's Quarterly Report on Form 10-Q
for the quarter ended December 31, 1992 (referred to as "1992 10-Q"); (v) the
Company's Registration Statement Form S-1 (File No. 33-85754) (referred to as
"S-1"); (vi) the Company's Annual Report on Form 10-K for the year ended
December 31, 1993 (referred to as "1993 10-K"); (vii) the Company's Annual
Report on Form 10-K for the year ended December 31, 1994 (referred to as "1994
10-K"); (viii) the Company's Annual Report on Form 10-K for the year ended
December 31, 1995 (referred to as "1995 10-K"), (ix) the Company's Annual Report
on Form 10-K for the year ended December 31, 1998, as amended (referred to as
"1998 10-K/A"), (x) the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1999 (referred to as "June 1999 10-Q"), (xi) the Company's Form
S-8 Registration Statement (File No. 333-18239), (referred to as "Warrant Plan
S-8"), (xii) the Company's Form S-8 Registration Statement (File No. 333-18237),
(referred to as "Option Plan S-8"), (xiii) the Company's Registration Statement
on Form S-3 amended January 31, 1999 ("1999 S-3"), (xiv) the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 2001 (referred to as
"2001 10-Q"), (xv) the Company's Annual Report on Form 10-K for the year ended
December 31, 2001 (referred to as "2001 10-K"); and (xvi) the Company's Annual
Report on Form 10-K for the year ended December 31, 2002 (referred to as "2002
10-K").
EXHIBIT NO. DESCRIPTION OF EXHIBIT
*3.1 Certificate of Incorporation, including Certificate of
Stock Designation dated September 25, 1990, and
amendments dated December 26, 1990, August 19, 1991 and
October 17, 1991 (S-18 No. 3, Exhibit 3-1)
*3.2 Amended Bylaws of the Company as presently in use (S-18
No. 1, Exhibit 3.2)
*3.3 Certificate of Amendment to Certificate of Incorporation
filed on February 10, 1993 (1992 10-Q)
*3.6 Certificate of Amendment to Certificate of Incorporation
filed on February 13, 1995 (1994 10-K)
22
*3.7 Certificate of Amendment to Certificate of Incorporation
filed on September 8, 1995 (1995 10-K)
*3.9 Certificate of Amendment of Certificate of Incorporation
filed on January 13, 1999 (1998 10-K/A)
*3.10 Certificate of Amendment to Certificate of Incorporation
filed on June 28, 1999 (June 1999 10-Q)
*10.3 1991 Stock Option Plan (S-18 No. 2, Exhibit 10.1(a))
*10.3.1 Amendment No. 1 to 1991 Stock Option Plan (1993 10-K)
*10.3.2 Amendment No. 2 to 1991 Stock Option Plan (S-1)
*10.3.3 Amendment No. 3 to 1991 Stock Option Plan (S-1)
*10.3.4 Amendment No. 4 to 1991 Stock Option Plan (Option Plan
S-8, Exhibit 4.5)
*10.3.5 Amendment No. 5 to 1991 Stock Option Plan (1998 10-K/A)
*10.4 1995 Performance Warrant Plan (Warrant Plan S-8, Exhibit
4.1)
*10.5 1994 Employee Stock Purchase Plan (1994 10-K)
*10.6 License Agreement between ACIS, Inc. and the Company
dated September 9, 1999 (1999 S-3)
*10.7 First Amendment and Modification of ACIS, Inc. warrant
agreement dated September 7, 2001 (2001 10-Q)
*10.8 ACIS Technology License Agreement between ACIS, Inc. and
the Company dated September 27,2001 (2001 10-Q)
*14.1 Code of Ethics (2002 10-K)
21.1 Subsidiaries of the Company
23.1 Consent of Marcum & Kliegman LLP
31.1 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002, of the President and Chief Executive
Officer.
31.2 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002, of the Chief Financial Officer.
32.1 Certifications Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
99.1 Independent Registered Public Accounting Firm's Report
and Financial Statements
23
ITEM 14. PRINCIPAL ACCOUNTANTS FEES AND SERVICES
The information required by this Item will be included in the 2005 Proxy
Statement and is incorporated herein by reference.
24
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By:/s/ Richard W. Egan
-------------------------------------------
Date: March 28, 2005 Richard W. Egan, Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, the
following persons in the following capacities have signed this report below on
the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Larry M. Carr Chairman of the Board March 28, 2005
---------------------------------------
Larry M. Carr
/s/ Richard W. Egan Chief Executive Officer March 28, 2005
---------------------------------------
Richard W. Egan
/s/ Stephen N. Samp Chief Financial Officer March 28, 2005
--------------------------------------- (Principal Financial and
Stephen N. Samp Accounting Officer)
/s/ Dallas S. Clement Director March 28, 2005
---------------------------------------
Dallas S. Clement
/s/ Julia B. North Director March 28, 2005
---------------------------------------
Julia B. North
/s/ Edward S. Redstone Director March 28, 2005
---------------------------------------
Edward S. Redstone
/s/ Adam D. Senter Director March 28, 2005
---------------------------------------
Adam D. Senter
/s/ Thomas J. Stallings Director March 28, 2005
---------------------------------------
Thomas J. Stallings
25