FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2005
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)
Check 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 |_|
State 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 JULY 31, 2005
----------------------------- --------------
COMMON STOCK, $.001 PAR VALUE 3,733,163
SIMTROL, INC. AND SUBSIDIARIES
Form 10-QSB
Quarter Ended June 30, 2005
Index
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited):
Condensed Consolidated Balance Sheet as of
June 30, 2005.............................................. 3
Condensed Consolidated Statements of Operations for the
Three Months and Six Months Ended June 30, 2005 and 2004... 4
Condensed Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 2005 and 2004.................... 5
Notes to Condensed Consolidated Financial Statements....... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............ ............12
Item 3. Controls and Procedures.................................... 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.......................................... 16
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 16
Item 6. Exhibits ....................... .......................... 17
2
SIMTROL, INC.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SIMTROL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
JUNE 30,
ASSETS 2005
------------
Current assets:
Cash $ 692,883
Accounts receivable, net 59,173
Prepaid expenses and other assets 25,152
------------
Total current assets 777,208
Property and equipment, net 25,707
Other assets:
Other long term assets 1,149
------------
Total assets $ 804,064
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable 175,320
Accrued expenses 36,162
Deferred revenues 31,667
------------
Total Current Liabilities 243,149
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.00025 par value; 800,000 shares authorized:
Series A Convertible Preferred Stock, 450,000 designated; 364,004
issued and outstanding, liquidation value $1,092,000 91
Common stock, authorized 40,000,000 shares of
$.001 par value; 3,733,163 issued and outstanding 3,733
Additional paid-in capital 63,752,830
Accumulated deficit (63,195,739)
------------
Total stockholders' equity 560,915
------------
Total liabilities and stockholders' equity $ 804,064
============
See notes to condensed consolidated financial statements
3
SIMTROL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
-------------------------- --------------------------
2005 2004 2005 2004
----------- ----------- ----------- -----------
Revenues:
Software licenses $ 20,988 $ 393,240 $ 53,849 $ 419,056
Service 14,484 18,428 34,818 43,470
----------- ----------- ----------- -----------
Total revenues 35,472 411,668 88,667 462,526
Cost of revenues:
Software licenses 584 7,427 584 77,949
Service -- 2,069 3,738 2,069
----------- ----------- ----------- -----------
Total cost of revenues 584 9,496 4,322 80,018
----------- ----------- ----------- -----------
Gross profit 34,888 402,172 84,345 382,508
Operating expenses:
Selling, general, and administrative 229,887 260,036 477,445 531,583
Research and development 120,441 110,358 253,182 217,707
----------- ----------- ----------- -----------
Total operating expenses 350,328 370,394 730,627 749,290
(Loss) income from operations (315,439) 31,778 (646,282) (366,782)
Other income/(expenses)
Other income/(expense), primarily finance charges 451 (284,587) 727 (447,336)
Debt conversion expense -- (164,155) -- (164,155)
Gain on debt extinguishment -- 394,309 -- 648,611
----------- ----------- ----------- -----------
Total other income/(expenses) 451 (54,433) 37,120 37,120
----------- ----------- ----------- -----------
Net loss (314,988) (22,655) (645,555) (329,662)
Preferred dividend 651,341 -- 651,341 --
----------- ----------- ----------- -----------
Net loss attributable to common stockholders $ (966,329) $ (22,655) $(1,296,896) $ (329,662)
=========== =========== =========== ===========
Net loss per common share, basic and diluted:
Net loss per share $ (0.26) $ (0.01) $ (0.35) $ (0.13)
=========== =========== =========== ===========
Weighted average shares outstanding
basic and diluted 3,723,026 2,600,208 3,721,920 2,468,351
=========== =========== =========== ===========
See notes to condensed consolidated financial statements.
4
SIMTROL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
--------------------------
2005 2004
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash used in operating activities (633,017) (904,619)
----------- -----------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchases of equipment (5,325) --
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on short-term credit facilities -- (156,654)
Payments on long-term debt -- (59,792)
Payments of convertible debt -- (60,000)
876 479,000
Net proceeds from convertible debt -4054
Net proceeds from stock issuances 917,174 1,058,607
----------- -----------
Net cash provided by financing activities 917,174 1,261,161
----------- -----------
Increase in cash 278,832 356,542
Cash beginning of the period 414,051 3,998
----------- -----------
Cash end of the period $ 692,883 $ 360,540
=========== ===========
Supplemental schedule of non-cash investing and financing activities:
Issuance of stock warrants $ 265,833 $ 91,202
----------- -----------
Capitalization of Financing Fees $ -- $ 101,400
----------- -----------
Beneficial conversion feature of convertible debt $ -- $ 127,242
----------- -----------
Beneficial conversion feature of preferred stock $ 651,341 $ --
----------- -----------
Issuance of common stock to board members $ 12,300 $ --
----------- -----------
Conversion of debt and accrued interest to common stock $ -- $ 542,825
----------- -----------
Common stock issued for investor relations performed $ 7,900 $ --
----------- -----------
See notes to condensed consolidated financial statements.
5
SIMTROL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2005 AND 2004
(UNAUDITED)
NOTE 1 - NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Simtrol, Inc., formerly known as VSI Enterprises, Inc., was incorporated in
Delaware in September 1988 and, together with its wholly-owned subsidiaries (the
"Company"), develops, markets, and supports software-based audiovisual control
systems and videoconferencing products that operate on PC platforms.
The accompanying unaudited condensed consolidated financial statements have been
prepared by the Company in conformity with accounting principles generally
accepted in the United States of America and the instructions of Form 10-QSB. It
is management's opinion that these statements include all adjustments,
consisting of only normal recurring adjustments necessary to present fairly the
financial position, results of operations, and cash flows as of June 30, 2005
and for all periods presented.
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 unaudited condensed consolidated financial statements be
read in conjunction with the consolidated financial statements and notes thereto
as of December 31, 2004 and for each of the two years ended December 31, 2004
and 2003, which are included in the Company's Annual Report on Form 10-KSB for
the year ended December 31, 2004 filed with the Securities and Exchange
Commission.
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.
On May 7, 2004, the Company effected a 1:10 reverse split of the Company's
common stock. All share totals have been adjusted to reflect the 1:10 reverse
split for all periods presented.
NOTE 2 - GOING CONCERN UNCERTAINTY
As of June 30, 2005, the Company had cash of $692,883. The Company does not have
sufficient funds for the next twelve (12) months and has relied on periodic
investments in the form of common stock and convertible debt since the fourth
quarter of 2001 to sustain its operations. The Company currently requires
substantial amounts of capital to fund current operations and for the payment of
past due obligations including operating expenses and the continued development
and deployment of its ONGOER and OnGuard product lines. During the quarter ended
June 30, 2005, the Company issued $1,092,000 of convertible preferred stock.
(see Note 6). On February 4, 2004, the Company issued $575,000 of convertible
debt (see Note 5) and on June 4, 2004, the Company issued $1,250,000 of equity
securities (see Note 6) in a private placement. However, there can be no
assurance that the Company will be successful in its attempts to develop and
deploy its ONGOER and OnGuard product lines, generate positive cash flows or
raise sufficient capital essential to its survival. To the extent that the
Company is unable to generate or raise the necessary operating capital, it will
become necessary to curtail operations. Additionally, even if the Company does
raise operating capital, there can be no assurance that the net proceeds will be
sufficient to enable it to develop its business to a level where it will
generate profits and positive cash flows.
These matters raise substantial doubt about the Company's ability to continue as
a going concern. However, the accompanying financial statements have been
prepared on a going concern basis, which contemplate the realization of assets
and satisfaction of liabilities in the normal course of business. The financial
statements do not include any adjustments relating to the recoverability of the
recorded assets or the classification of the liabilities that might be necessary
should the Company be unable to continue as a going concern.
6
NOTE 3 - SELECTED SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The condensed consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant intercompany
transactions and balances have been eliminated in consolidation.
Loss Per Share
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share", requires the presentation of basic and diluted earnings per share
("EPS"). Basic EPS is computed by dividing loss available to common stockholders
by the weighted-average number of common shares outstanding for the period.
Diluted EPS includes the potential dilution that could occur if options or other
contracts to issue common stock were exercised or converted. The following
equity securities are not reflected in diluted loss per share because their
effects would be anti-dilutive:
June 30, 2005 June 30, 2004
------------- -------------
Options 435,875 347,525
Warrants 3,782,527 2,190,741
Convertible Debt -- 194,217
Convertible preferred stock 1,456,016 --
------------- -------------
Total 5,647,418 2,732,483
------------- -------------
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 the Financial Accounting Standards Board ("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 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 as if the
Company had applied the fair value recognition provisions of SFAS No. 123 to
stock-based employee compensation:
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------------------------------
2005 2004 2005 2004
--------------------------------------------------------
Net loss ($ 314,988) ($ 22,655) ($ 645,555) ($ 329,662)
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 (27,851) (14,924) (80,884) (22,712)
--------------------------------------------------------
Pro forma net loss ($ 342,839) ($ 37,579) ($ 726,439) ($ 352,374)
========================================================
Net loss per share as reported-basic and diluted ($ 0.26) ($ 0.01) ($ 0.35) ($ 0.13)
Pro forma net loss per share-basic and diluted ($ 0.27) ($ 0.01) ($ 0.37) ($ 0.14)
7
Pro forma Information
The fair value for options issued during the six months ended June 30, 2005 and
2004 were estimated at the date of grant using a Black-Scholes option-pricing
model, to be $25,000 and $256,864, respectively, with the following
weighted-average assumptions:
Assumptions 2005 2004
----------- -----------
Risk-free rate 4.75% 4.00%
Annual rate of dividends 0 0
Volatility 77% 85%
Average life 5 years 7 years
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options, which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. The
Company's employee stock options have characteristics significantly different
from those of traded options, and changes in the subjective input assumptions
can materially affect the fair value estimate.
The following summarizes the stock option transactions for the six months ended
June 30, 2005 and 2004:
Weighted
Average
Exercise
Options Price
----------- -----------
Options outstanding at January 1, 2005 410,275 $ 5.66
Granted 50,000 $ 0.77
Exercised --
Terminated (24,400) $ 5.95
-----------
Options outstanding at June 30, 2005 435,875 $ 5.08
===========
Options outstanding at January 1, 2004 137,525 $ 13.20
Granted 210,000 2.00
Exercised -- --
Terminated -- --
----------- -----------
Options outstanding at June 30, 2004 347,525 $ 6.43
===========
New Accounting Pronouncements
In December 2004, the FASB issued SFAS No. 123R, "Share Based Payment." This
statement is a revision of SFAS Statement No. 123, "Accounting for Stock-Based
Compensation" and supersedes APB Opinion No. 25, Accounting for Stock Issued to
Employees, and its related implementation guidance. SFAS No. 123R addresses all
forms of share based payment ("SBP") awards including shares issued under
employee stock purchase plans, stock options, restricted stock and stock
appreciation rights. Under SFAS No. 123R, SBP awards result in a cost that will
be measured at fair value on the awards' grant date, based on the estimated
number of awards that are expected to vest. Upon issuance, SFAS No. 123R
required public companies that file as small business issuers to apply SFAS No.
123R as of the beginning of the first interim or annual reporting period that
begins after December 15, 2005. In April 2005, the Securities and Exchange
Commission approved a new rule that delays the effective date, requiring small
business issuers to apply SFAS No. 123R in the first annual period after
December 15, 2005. Except for the deferral of the effective date, the guidance
in SFAS No. 123R is unchanged.
The adoption of this pronouncement is not expected to have a material effect on
the Company's financial statements.
8
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets." This Statement amends APB Opinion 29 to eliminate the exception for
nonmonetary exchanges of similar productive assets and replaces it with a
general exception for exchanges of nonmonetary assets that do not have
commercial substance. A nonmonetary exchange has commercial substance if the
future cash flows of the entity are expected to change significantly as a result
of the exchange. The provisions of SFAS No. 153 are effective for nonmonetary
asset exchanges occurring in fiscal periods beginning after June 15, 2005.
Earlier application is permitted for nonmonetary asset exchanges occurring in
fiscal periods beginning after December 16, 2004. The provisions of SFAS No. 153
should be applied prospectively.
The adoption of this pronouncement is not expected to have a material effect on
the Company's financial statements.
Revenue Recognition
Revenues consist of the sale of software control devices, videoconferencing
systems and related maintenance contracts on these systems. The Company sold two
different products during 2005 and 2004: its PC-based software products, ONGOER
and OnGuard, and its 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 ratably
over the term of the related sales contract. As of June 30, 2005, there was
$31,667 of deferred revenues.
NOTE 4 - COMMITMENTS AND CONTINGENCIES
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's financial position or results of operations.
NOTE 5 - CONVERTIBLE DEBT
On February 4, 2004, the Company completed the sale of convertible notes with 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 Company raised net proceeds of $479,000 from the sale (net fee of
$96,000), and the proceeds of the offering were used to fund current operational
and overhead expenses. The interest rate of the notes was 10% per annum and the
conversion price of the notes was $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.
In conjunction with the issuance of the 2004 Debt, 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 (fair value of the warrants was
$91,202). Each warrant enabled the holder to purchase the same number of shares
as the holder would receive upon conversion of such holder's notes. The Company
also issued 169,000 warrants to Westminster Securities as a placement fee for
the financing (fair value of the Westminster warrants was $101,400). Noteholders
received additional warrants to purchase an aggregate of 575,000 shares of stock
(fair value of $179,789), which 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.
Associated with this debt, 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. For the three
months ended June 30, 2004, $54,427 was expensed as financing costs relating to
the amortization of the beneficial conversion feature and warrant value. For the
six months ended June 30, 2004, $219,144 of financing costs of this type were
expensed.
All the above 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 in June 2004. A total of $50,000 plus all applicable accrued interest
was repaid during June 2004 with proceeds from the sale of common stock.
Additionally, the $101,400 capitalized as a financing fee for the warrants
granted to Westminster Securities was amortized over the life of the 2004 Debt.
Approximately $67,600 of this amount was amortized as a financing expense in the
three months ended June 30, 2004.
9
During 2001, the Company issued $400,000 of convertible debt to two stockholders
("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 the
assets of the Company. 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.
NOTE 6 - STOCKHOLDERS' EQUITY
During the three months ended March 31, 2004, the Company issued 2,604 shares of
its common stock for gross proceeds of $5,000 ($1.92 per share). Offering costs
were de minimis.
On June 4, 2004, the Company issued 625,000 shares of its common stock for gross
proceeds of $1,250,000 in a private placement of equity to a limited number of
accredited investors. The Company also issued warrants to purchase a total of
625,000 shares of stock to these investors. The exercise price of the warrants
is $2.00 per share.
During the six months ended June 30, 2005, the Company issued 10,000 shares of
restricted common stock valued at $7,900 in exchange for investor relations
services performed for the Company by an investor relations consultant. The
Company also issued 10,249 shares of stock valued at $12,300 to Board Members as
compensation.
During the six months ended June 30, 2005, the Company issued 364,004 units of
securities, with each unit consisting of: one share of Series A Convertible
Preferred Stock, one warrant with an exercise price of $1.00 per common share
expiring in five years, and one warrant with an exercise price of $1.25 per
common share expiring in five years, for total gross proceeds of $1,092,000 (net
proceeds of $917,174). The Certificate of Designation establishing the terms of
the Series A Convertible Preferred Stock included the following terms:
o the Holder may convert one share of the preferred stock into four shares
of common stock at any time and without limitation; and
o without approval of a majority of the Series A Preferred Stock Holders,
the Company cannot incur debt in excess of an aggregate of $1.0 million
outside of trade debt in the normal course of business. Such debt may only
be secured by accounts receivables and shall not encumber any copyrights,
marketing materials, software code or any other proprietary technology,
software or product processes, patents or patent licenses of the Company;
and
o beginning the quarter ending December 31, 2005 and for every subsequent
quarter the Series A Preferred Stock is outstanding, if the Company's net
working capital (defined as current assets less current liabilities) is
less than twenty five per cent (25%) of the total amount of gross proceeds
raised in the Offering (defined as a "Quarterly Default"), then for each
Quarterly Default, the Holders of the Series A Preferred Stock will
receive additional shares of Series A Preferred Stock equal to 25% of the
number of shares of Series A Preferred Stock held by the Holder at the
time of the Quarterly Default. The net working capital will be tested on a
quarterly basis, based on the Company's most recent Form 10-QSB or Form
10-KSB or other appropriate filing; and
o Series A Convertible Preferred shares have full voting rights on an "as
converted" basis; and
o the liquidation value of the Series A Preferred Stock is $3.00 per share,
and if the Company at any time while the Series A Preferred Stock is
outstanding, shall offer, sell, grant any option to purchase or offer,
sell or grant any right to reprice its securities, or otherwise dispose of
or issue (or announce any offer, sale, grant or any option to purchase or
other disposition) any common stock or common stock equivalents entitling
any person to acquire shares of common stock, at an effective price per
share less than the then conversion price of $0.75, then the conversion
price shall be reduced to equal the subsequent price. Exempt transactions
for purposes of the repricing provision include the issuance of (a) shares
of common stock or options to employees, officers or directors of the
Company pursuant to any stock or option plan duly adopted by a majority of
the non-employee members of the Board of Directors of the Company or a
majority of the members of a committee of non-employee directors
10
established for such purpose, and (b) securities issued pursuant to
acquisitions or strategic transactions, provided any such issuance shall
only be to a person which is, itself or through its subsidiaries, an
operating company in a business synergistic with the business of the
Company and in which the Company receives benefits in addition to the
investment of funds, but shall not include a transaction in which the
Company is issuing securities primarily for the purpose of raising capital
or to an entity whose primary business is investing in securities.
The Company shall use its best efforts to cause a registration statement to
become effective within one hundred and twenty (120) days from the final closing
date or, if earlier, within five (5) days of Commission clearance to request
acceleration of effectiveness. The number of shares designated in the
Registration Statement to be registered shall include all of the Registrable
Securities and shall include appropriate language regarding reliance upon Rule
416 to the extent permitted by the Commission. The Company will notify the
holders of the Series A Preferred Stock of the effectiveness of the registration
statement within five (5) trading days of such event. In the event that this
effectiveness requirement is not met, the Company will pay the Investor (pro
rated on a daily basis), as partial compensation for such failure and not as a
penalty one and one half percent (1.5%) of the purchase price of the Registrable
Securities purchased from the Company and held by the Investor for each month
(or portion thereof) until such Registration Statement has been filed. Upon
effectiveness of the registration statement for the common shares that result
from conversion of Series A Preferred Stock, if the Company fails to deliver to
the holder the common shares resulting from the conversion within three trading
days, the Company shall pay to such holder, in cash, as liquidated damages and
not as penalty, for each $3,000 of stated value of Series A Preferred Stock
being converted, $30 per trading day (increasing to $100 per trading day after
three trading days and increasing to $120 per trading day six trading days after
such damages begin to accrue).
In connection with the issuance of the securities above, $265,833 of the net
proceeds received was allocated to the fair value of the warrants granted to
purchase 728,008 shares of common stock, and a beneficial conversion feature of
$651,241 was recorded to reflect the discount on the common shares that would
result from the conversion of the Series A Preferred Stock, based on the
relative fair values of the warrants and conversion feature of the Series A
Preferred Stock. This beneficial conversion feature is recorded as a dividend to
the preferred stockholders in the condensed consolidated statement of
operations.
On July 15, 2005, the Company issued 262,083 warrants to Westminster Securities
as a placement fee for the above financing. The exercise price of the warrants
is $0.75 per share of common stock.
NOTE 7- MAJOR CUSTOMERS
Revenue from four major customers of $75,700 comprised 85% of consolidated
revenues for the six months ended June 30, 2005. At June 30, 2005, related
accounts receivable from these companies comprised $58,882 (99%) of consolidated
receivables.
Revenue from a customer of $424,461 comprised approximately 92% of consolidated
revenues for the six months ended June 30, 2004. At June 30, 2004, related
accounts receivable from this company comprised $427,430 (96%) of consolidated
receivables.
NOTE 8 - GAIN ON DEBT EXTINGUISHMENT
Gains of $394,309 and $648,611 were recorded during the three months and six
months ended June 30, 2004 as a result of the Company entering into various
settlement agreements with vendors. The gains were recorded at the time of the
final payments under the various agreements. The Company had no similar
transactions during the six months ended June 30, 2005.
NOTE 9 - SUBSEQUENT EVENTS
On July 15, 2005, the Company issued 262,083 warrants to Westminster Securities
as a placement fee for the offering that closed on that date. The exercise price
of the warrants is $0.75 per share of common stock.
On July 21, 2005, the Company granted a total of 275,000 stock options to
employees. The options have a four-year vesting period and were granted at an
exercise price equal to the fair value of the Company's common stock on that
date.
On August 15, 2005, the Company completed the sale of 85,996 units consisting of
one share of Series A Convertible Preferred Stock, a warrant to purchase one
share of common stock at an exercise price of $1.00 per share, and a warrant to
purchase one share of common stock at an exercise price of $1.25 per share. Net
proceeds to the Company were approximately $255,000 (offering costs of
approximately $3,000).
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
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 unaudited 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, 2004 should be read in conjunction
with this discussion and our consolidated financial statements.
CRITICAL ACCOUNTING POLICIES
We prepare our unaudited 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 products ONGOER and OnGuard and our older proprietary
hardware and software product, Omega. Revenue on the sale of software and
hardware is recognized upon shipment. Revenue on maintenance contracts is
recognized ratably over the term of the related contract.
o Capitalized software research and development costs. Our policy on
capitalized software costs determines the timing of our recognition of
certain development costs. In addition, this policy determines whether the
cost is classified as development expense or capitalized. Software
development costs incurred after technological feasibility has been
established are capitalized and amortized, commencing with product
release, using the greater of the income forecast method or on a
straight-line basis over the useful life of the product. Management is
required to use professional judgment in determining whether development
costs meet the criteria for immediate expense or capitalization.
o Impairments of Assets/Investments. We record impairment losses on assets
and investments when events and circumstances indicate that the assets
might be impaired and the undiscounted cash flows estimated to be
generated by those assets are less than the carrying amount of those
items. Our cash flow estimates are based on historical results adjusted to
reflect our best estimate of future market and operating conditions. The
net carrying value of assets not recoverable is reduced to fair value. Our
estimates of fair value represent our best estimate based on industry
trends and reference to market rates and transactions.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2005 AND 2004
REVENUES
Revenues were $35,472 and $411,668 for the three months ended June 30, 2005 and
2004, respectively. The 91% decrease for the three months ended June 30, 2005
was primarily due to decreased software revenues resulting from an approximate
$364,000 multi-site sale of ONGOER and OnGuard to one customer in June 2004.
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COST OF REVENUES AND GROSS PROFIT
Cost of revenues decreased $8,912, or 94%, for the three months ended June 30,
2005 compared to the three months ended June 30, 2004 due primarily to the lower
revenues during the current period described above.
Gross margins were approximately 98% for each of the three months ended June 30,
2005 and 2004.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES
Selling, general, and administrative expenses were $229,887 and $260,036 for the
three months ended June 30, 2005 and 2004, respectively. The decrease in the
three-month period ended June 30, 2005 compared to the similar period in 2004
resulted primarily from decreased legal expenses, including a $40,000 settlement
payment regarding certain litigation, during the prior 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 over the useful life of the product. Research and
development costs expensed were $120,441 and $110,358 for the three months ended
June 30, 2005 and 2004, respectively. During the three months ended June 30,
2005 and 2004, we did not capitalize any software development costs related to
new products under development.
OTHER (INCOME)/EXPENSE, PRIMARILY FINANCE CHARGES
Other (income) expense, primarily finance charges of ($451) and $284,587 for the
three months ended June 30, 2005 and 2004 consisted primarily of interest earned
on our cash balances during the three months ended June 30, 2005 and, during the
three months ended June 30, 2004, finance charges associated with our issuance
of convertible debt since the fourth quarter 2001 to fund our operations. See
note 5 to the unaudited condensed consolidated financial statements. The
interest expense in the prior year is due primarily to the issuance of an
additional $575,000 of convertible debt during 2004.
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 the Debt to common stock in June 2004. See note 5 to the
unaudited condensed consolidated financial statements.
GAIN ON DEBT EXTINGUISHMENTS
A gain of $394,309 was recorded during the three months ended June 30, 2004 to
reflect the payoffs of various liabilities for less than their previously
recorded balances. No similar debt extinguishments took place during the three
months ended June 30, 2005.
NET LOSS
Net loss for the three months ended June 30, 2005 was $314,988 compared to a net
loss of $22,655 for the three months ended June 30, 2004. The increase in net
loss for the period was due primarily to the higher software revenues during the
prior year as well as the gain on debt extinguishment during prior year, partly
offset by higher finance costs resulting from the issuance of an additional
$575,000 of convertible debt during 2004.
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SIX MONTHS ENDED JUNE 30, 2005 AND 2004
REVENUES
Revenues were $88,667 and $462,526 for the six months ended June 30, 2005 and
2004, respectively. The 81% decrease for the six months ended June 30, 2005 was
primarily due to decreased software revenues of $365,207 during the current
period, primarily resulting from an approximate $364,000 multi-site sale to an
integrator for implementation at one end user in 2004.
COST OF REVENUES AND GROSS PROFIT
Cost of revenues decreased $75,696, or 88%, for the six months ended June 30,
2005 compared to the six months ended June 30, 2004 due primarily to the
amortization of previously capitalized research and development costs to cost of
revenues in 2004 and the lower revenues in the current year above. Software
development costs incurred after technological feasibility has been established
are capitalized and amortized on a straight-line basis over the useful life of
the product. These expensed costs were $0 and $69,406 for the six months ended
June 30, 2005 and 2004, as we began to expense previously capitalized research
and development costs to cost of revenues in April 2001 and ended amortization
in March 2004.
Gross margins were approximately 95% and 83% for the six months ended June 30,
2005 and 2004, respectively.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES
Selling, general, and administrative expenses were $477,445 and $531,583 for the
six months ended June 30, 2005 and 2004, respectively. The decrease in the
six-month period ended June 30, 2005 compared to the similar period in 2004
resulted primarily from higher accounting and auditing expenses of approximately
$30,000 incurred during 2004 and approximately $45,000 of non-refundable
investment banking fees incurred in the prior year. The company filed all
required SEC filings for 2003 during 2004 and initially engaged Westminster
Securities to assist in raising capital during the prior 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. Research
and development expenses increased to $253,182 in the six months ended June 30,
2005 from $217,707 in the six months ended June 30, 2004 due primarily to higher
wage and employee benefit expenses during the current period.
OTHER (INCOME)/EXPENSE, PRIMARILY FINANCE CHARGES
Other (income)/expense, primarily finance charges of ($727) and $447,336 for the
six months ended June 30, 2005 and 2004, respectively, consisted primarily of
finance charges associated with our issuance of convertible debt during previous
fiscal years as well as February 2004. See note 6 to the unaudited 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 the Debt to common stock in June 2004. See note 5 to the
unaudited condensed consolidated financial statements. No similar debt
conversion expense was incurred during the six months ended June 30, 2005.
GAIN ON DEBT EXTINGUISHMENTS
A gain of $648,611 was recorded during the six months ended June 30, 2004 to
reflect the payoffs of various liabilities for less than their previously
recorded balances. No similar debt extinguishments took place during the six
months ended June 30, 2005.
NET LOSS
Net loss for the six months ended June 30, 2005 was $645,555 compared to a net
loss of $329,662 for the six months ended June 30, 2004. The increase in net
loss for the period was due primarily to higher software revenues during the
prior year resulting from an approximate $364,000 multi-site sale of ONGOER and
OnGuard to one customer in June 2004.
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FINANCIAL CONDITION
During the six months ended June 30, 2005, total assets increased approximately
64% to $804,064 from $489,560 at December 31, 2004. The increase in assets was
primarily the result of the net proceeds received from the issuance of
$1,092,000 of Series A Convertible Preferred Stock (see note 6 to the unaudited
condensed consolidated financial statements), less cash used to fund operations
of the Company during the period.
Current liabilities increased $22,686 or 10%, due primarily to the increase in
deferred revenues at June 30, 2005 from December 31, 2004.
LIQUIDITY AND SOURCES OF CAPITAL
GENERAL
As of June 30, 2005, we had cash of $692,883. We do not have sufficient funds to
meet our cash flow requirements for the next twelve (12) months. We have relied
on periodic investments in the form of common stock and convertible debt by
certain of our existing stockholders since the fourth quarter of 2001 to sustain
our operations. We currently require substantial amounts of capital to fund
current operations and the continued development and deployment of our ONGOER
and OnGuard product lines. Due to recurring losses from operations, an
accumulated deficit, negative working capital and our inability to date to
obtain sufficient financing to support current and anticipated levels of
operations, our independent public accountant's audit opinion states that these
matters have raised substantial doubt about our ability to continue as a going
concern at December 31, 2004.
We used $633,017 in cash from operating activities in the six months ended June
30, 2005 compared to $904,619 during the six months ended June 30, 2004 due
primarily to retirements of various past due obligations with proceeds from the
2004 Debt in February 2004 and equity securities issued in June 2004. We used
$5,325 in investing activities during the six months ended June 30, 2005; there
was no cash used in investing activities for the six months ended June 30, 2004.
Cash provided by financing activities in the six months ended June 30, 2005
consisted of approximately $917,000 net proceeds from sales of Series A
Convertible Preferred Stock (see Note 6 to the unaudited condensed consolidated
financial statements). Cash provided by financing activities in the six months
ended June 30, 2004 consisted primarily of $575,000 of Convertible Debt issued
in February 2004 and $1,250,000 of equity securities issued in June 2004,
excluding issue costs. $60,000 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.
We have relied on a combination of investments of convertible debt and common
stock from private investors, including four members of the Board of Directors,
to fund operations since November 2001.
We will likely require additional funding during the remainder of fiscal 2005
and thereafter to fund our development and operating activities. This additional
funding could be in the form of the sale of assets, debt, equity, or a
combination of these financing methods. However, there can be no assurance that
we will be able to obtain such financing if and when needed, or that if
obtained, such financing will be sufficient or on terms and conditions
acceptable to us. If we are unable to obtain this additional funding, our
business, financial condition and results of operations would be adversely
affected. The accompanying financial statements contemplate our continuation as
a going concern. However, we have sustained substantial losses from operations
in recent years, and such losses have continued through June 30, 2005. We have
also used, rather than provided, cash in our operations for the six months ended
June 30, 2005.
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 $25,000 for capital expenditures in the remainder
of 2005.
15
FORWARD-LOOKING STATEMENTS
Certain statements contained herein are "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995, such as
statements relating to financial results and plans for future sales and business
development activities, and are thus prospective. Such forward-looking
statements are subject to risks, uncertainties and other factors, which could
cause actual results to differ materially from future results expressed or
implied by such forward-looking statements. Potential risks and uncertainties
include, but are not limited to, economic conditions, competition, our ability
to complete the development and market our new ONGOER and OnGuard product lines
and other uncertainties detailed from time to time in our Securities and
Exchange Commission filings, including our Annual Report on Form 10-KSB and our
quarterly reports on Form 10-QSB.
ITEM 3. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our Securities Exchange Act reports is
recorded, processed, summarized, and reported within the time periods specified
in the SEC's rules and forms, and that such information is accumulated and
communicated to the Company's management, including its Chief Executive Officer
and Chief Financial Officer, as appropriate, to allow timely decisions regarding
required disclosure. In designing and evaluating the disclosure controls and
procedures, management recognized that any controls and procedures, no matter
how well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives, as ours are designed to do, and
management necessarily was required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures.
An evaluation was performed under the supervision and with the participation of
our Company's management, including the Chief Executive Officer and the Chief
Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures as of June 30, 2005. 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, 2004, 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. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the quarter ended June 30, 2005, we issued 364,004 shares of our Series A
Convertible Preferred Stock for gross proceeds of $1,092,000 (each Series A
Convertible Preferred shares may be converted into four shares of common stock),
in a private placement to a limited number of accredited investors. The Company
also issued warrants to purchase a total of 364,004 shares of common stock to
these investors, with an exercise price of the warrants of $1.00 per share, and
warrants to purchase a total of 364,004 shares of common stock at an exercise
price of $1.25 per share. In conjunction with the sale, we issued warrants to
Westminster Securities to purchase 262,083 shares of our common stock at a
purchase price of $0.75, as a placement fee. The proceeds of this offering were
used to fund working capital requirements.
In January 2005, we issued 10,000 shares of common stock in exchange for
investor relations services provided to us by an investor relations consultant.
16
In June 2005, we issued 12,249 shares of common stock to Board Members as
compensation for board meetings. 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 5. OTHER INFORMATION
Private Placement of Securities
In order to raise additional capital to support our operations, on August 15,
2005, the Company completed the sale of 85,996 units consisting of one share of
Series A Convertible Preferred Stock, a warrant to purchase one share of common
stock at an exercise price of $1.00 per share, and a warrant to purchase one
share of common stock at an exercise price of $1.25 per share. Each share of
preferred stock has a stated value of $3.00 and is convertible into shares of
common stock of the Company at a conversion price of $0.75 (resulting in each
share being convertible into four shares of common stock). Net proceeds to the
Company were approximately $255,000 (offering costs of approximately $3,000).
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.
Director Compensation
Effective June 30, 2005, the board of directors of the Company has authorized
the Company to pay fees to the members of the Company's board of directors for
their attendance at board and committee meetings, as follows: (i) $1,000 for
each board meeting attended in person, (ii) $500 for each board meeting attended
by telephone conference, and (iii) $200 for each committee meeting attended in
person or by telephone conference. These fees are paid as of the last day of
each fiscal quarter, in shares of the Company 's stock issued pursuant to the
Company's 2002 Equity Incentive Plan, with such shares valued based on the most
recent closing trading price of the Company's common stock on the
Over-the-Counter Bulletin Board as of the last day of each fiscal quarter.
ITEM 6. EXHIBITS
31.1 Certification of the Chief Executive Officer pursuant to Exchange
Act Rule 13a-14(a).
31.2 Certification of the Chief Financial Officer pursuant to Exchange
Act Rule 13a-14(a).
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SIMTROL, INC.
Date: August 15, 2005 /s/ Richard W. Egan
-------------------------------------------
Chief Executive Officer
(Principal executive officer)
/s/ Stephen N. Samp
-------------------------------------------
Chief Financial Officer
(Principal financial and accounting officer)
17
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
------- --------------------------------------------------------------------
31.1 Certification of the Chief Executive Officer pursuant to Exchange
Act Rule 13a-14(a).
31.2 Certification of the Chief Financial Officer pursuant to Exchange
Act Rule 13a-14(a).
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
18