UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC
Form 10-QSB
 
 
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2007

OR

o 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
  
(I.R.S. Employer
incorporation)
  
Identification No.)
     
2200 Norcross Parkway, Suite 255
  
Norcross, Georgia 30071
  
(770) 242-7566
(Address of principal executive offices)
  
(Issuer's telephone number)
 
Check whether the issuer (1) 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 o
 
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).

YES o NO x
 
State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date. As of November 13, 2007, the issuer had 6,743,531 shares of common stock, $0.001 par value, outstanding.

Transitional Small Business Disclosure Format (check one): Yes o No x
 
 
SIMTROL, INC. AND SUBSIDIARIES
Form 10-QSB
Quarter Ended September 30, 2007

Index

 
 
Page
 
 
 
PART I.
FINANCIAL INFORMATION
 
 
 
 
 
Item 1. Financial Statements (Unaudited):
 
 
 
 
   
Condensed Consolidated Balance Sheet as of September 30, 2007
  3
 
 
 
   
Condensed Consolidated Statements of Operations for the  Three and Nine Months Ended September 30, 2007 and 2006
  4
 
 
 
   
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2007 and 2006
  5
 
 
 
 
Notes to Condensed Consolidated Financial Statements
6
 
 
 
   
Item 2. Management's Discussion and Analysis  Or Plan of Operation
  15
     
 
Item 3. Controls and Procedures
19
 
 
 
PART II.
OTHER INFORMATION
 
 
 
 
 
Item 4. Submission of Matters to a Vote of Security Holders
20
 
 
 
 
Item 6. Exhibits
20

2

SIMTROL, INC.
PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

SIMTROL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
 
ASSETS
  
  September 30,  
  
Current assets:
  
  2007  
  
Cash and cash equivalents
  
$
1,020,684
 
Certificate of deposit
    
100,000
  
Accounts receivable, net
    
61,433
 
Prepaid  expenses and other assets
    
28,099
  
  Total current assets
    
1,210,216
 
   
      
Long-term assets:
      
Property and equipment, net
    
92,754
 
Right to license intellectual property
    
118,857
  
Other assets
    
19,887
  
  Total assets
  
$
1,441,714
 
 
      
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
      
Current Liabilities:
      
Accounts payable
 
$
206,661
  
Accrued expenses
    
109,333
 
Shares to be issued
    
26,000
  
  Total current liabilities
    
341,994
 
   
      
Shares to be issued, less current portion
    
52,000
  
 
      
Total Liabilities
    
393,994
  
 
      
Commitments and contingencies
      
 
      
Stockholders' equity:
      
 Preferred stock, $.00025 par value; 800,000 shares authorized;770,000 shares of Series A Convertible Preferred Stock designated; 728,664 outstanding; liquidation value of $2,185,992;4,700 shares of Series B Convertible Preferred Stock designated and issued; liquidation value of $3,525,000
    
183
  
Common stock, authorized 100,000,000 shares of
      
$.001 par value; 6,716,831 issued and outstanding
    
6,717
 
Additional paid-in capital
    
71,641,853
 
Accumulated deficit
    
(70,601,033
)
Total stockholders' equity
    
1,047,720
  
  Total liabilities and stockholders’ equity
  
$
1,441,714
  
 
See notes to condensed consolidated financial statements.
 
3

SIMTROL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

     
  
    Three Months Ended
 September 30, 
  
Nine Months Ended
  September 30,
 
     
  
    2007
  
  2006  
  
  2007
  
  2006
  
Revenues:    
                  
Software licenses    
  
$
33,597
  
$
17,821
  
$
69,721
  
$
70,011
  
Service    
    
40,000
    
2,159
    
80,000
    
25,033
  
Total revenues    
    
73,597
    
19,980
    
149,721
   
95,044
 
Cost of revenues:
                  
Software licenses
    
930
    
-
    
1,872
    
-
  
Service
    
-
    
-
    
-
    
1,867
  
Total cost of revenues
    
930
    
-
    
1,872
    
1,867
  
Gross profit
    
72,667
    
19,980
    
147,849
    
93,177
  
 
                  
Operating expenses:
                  
Selling, general, and administrative
    
843,744
    
237,294
   
2,277,956
    
1,169,492
 
Research and development  
    
229,949
    
91,928
   
534,448
    
334,369
 
Total operating expenses    
    
1,073,693
    
329,222
    
2,812,404
    
1,503,861
  
     
                  
Loss from Operations
    
(1,001,026
)
  
(309,242
)
  
(2,664,555
)
  
(1,410,684
)
 
                  
Other income/(expenses)
                  
Sale of intellectual property
    
-
    
-
    
-
    
250,000
  
Finance expense on conversion of notes payable
    
-
    
-
    
(772,655
)
  
-
  
Increased fair value of warrants’ modification
    
(578,611
)
  
-
    
(578,611
)
  
-
  
Other income/(expense)
    
24,936
    
(2,275
)
  
33,264
    
(2,576
)
Total other income/(expenses)
    
(553,675
)
  
(2,275
)
  
(1,318,002
)
  
247,424
  
 
                  
Net Loss
    
(1,554,701
)
  
(311,517
)
  
(3,982,557
)
  
(1,163,260
)
 
                  
Deemed preferred dividend  
    
-
    
-
    
(939,118
)
  
-
  
Dividend on covenant default of convertible preferred stock  
    
-
    
(233,047
)
  
-
    
(800,613
)
Net loss attributable to common stockholders  
  
$
(1,554,701
)
$
(544,564
)
$
(4,921,675
)
$
(1,963,873
)
   
                  
Net loss per common share, basic and diluted:  
                  
Basic and diluted  
  
$
(0.24
)
$
(0.12
)
$
(0.82
)
$
(0.47
)
Weighted average shares outstanding:  
                  
Basic and diluted  
    
6,592,403
    
4,680,203
    
6,006,936
    
4,201,211
  
 
See notes to condensed consolidated financial statements.
 
4

SIMTROL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 
         
  
Nine Months Ended
  
         
  
September 30,
  
         
  
2007
  
2006
  
CASH FLOWS FROM OPERATING ACTIVITIES:  
          
Net cash used in operating activities
  $
(1,914,409
)
$
(962,194
)
         
          
CASH FLOWS FROM INVESTING ACTIVITIES:  
          
Purchases of property and equipment  
    
(79,949
)
  
-
 
Leasehold improvements        
    
(10,266
)
  
-
  
Deposit returned from cancelled offering        
    
-
   
(12,000
)
Proceeds from sale of intellectual property        
    
-
    
250,000
  
Net cash (used in)/provided by investing activities        
    
(90,215
)
  
238,000
  
         
          
CASH FLOWS FROM FINANCING ACTIVITIES:  
          
Increase in certificate of deposit    
    
(100,000
)
  
-
  
Net proceeds from stock option exercises    
    
-
    
250,000
  
Proceeds from notes payable issuance    
    
331,000
    
219,000
  
Repayment of note payable  
    
(14,286
)
  
(37,000
)
Net proceeds from stock issuances  
    
2,808,594
         
Net cash provided by financing activities  
    
3,025,308
    
432,000
  
         
          
         
          
Increase/(decrease) in cash and cash equivalents  
    
1,020,684
    
(292,194
)
Cash and cash equivalents, beginning of the period  
    
-
   
297,751
 
Cash and cash equivalents, end of the period 
   $ 
1,020,684
  
$
5,557
  
Supplemental schedule of non-cash investing and financing activities:
              
Issuance of Series A Preferred stock as dividend payment on covenant default
  
$
768,766
  
$
-
  
Issuance of warrants as dividend payment on covenant default
  
$
403,097
  
$
-
  
Issuance of stock warrants
  
$
-
  
$
498,731
  
Issuance of stock options to board members and employees
  
$
-
  
$
355,516
  
Beneficial conversion feature of preferred stock
  
$
-
  
$
624,918
  
Issuance of stock options to Board members
  
$
-
  
$
308,721
  
Issuance of common stock to board members
  
$
15,700
  
$
31,700
  
Common stock issued for services
 
$
426,301
  
$
-
  
Exchange of notes payable for Series B Preferred stock
  
$
710,200
  
$
-
  
Issuance of warrants in conversion of notes payable to preferred stock
  
$
772,655
  
$
-
  
Common stock dividend paid
  
$
300,936
  
$
-
  
 
$
-
  
$
800,613
  
Increased fair value of warrants’ modification
  
$
578,611
  
$
-
  
 
See notes to condensed consolidated financial statements.
 
5

SIMTROL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
(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 and digital arraignment systems 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 to 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 condensed consolidated financial position as of September 30, 2007, and the condensed consolidated results of operations, and cash flows 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, 2006 and for each of the two years ended December 31, 2006 and 2005, which are included in the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2006 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.

Note 2 - Going Concern Uncertainty

As of September 30, 2007, the Company had cash and cash equivalents $1,020,684. Since inception, the Company has not achieved a sufficient level of revenue to support its business and has incurred recurring losses from operations, and has an accumulated deficit of approximately $70.6 million as of September 30, 2007. The Company has relied on periodic investments in the form of common stock, preferred 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 the continued development and deployment of its ONGOER®, OnGuard, and CuriaxTM product lines. On March 16, 2007, the Company completed the sale of $3,525,000 of securities in a private placement of 4,700 units (at $750 per unit) consisting of one share of Series B Convertible Preferred Stock and one warrant to purchase 2,000 shares of our common stock at an exercise price of $0.375 per share. Each share of Series B Convertible Preferred Stock has a conversion price of $0.375 per share (one Series B Convertible Preferred share equals 2,000 shares of common stock). The warrants originally had three-year terms and were modified in September 2007 to extend the term to five years and include a cashless exercise provision. See Note 5. The Company intends to use the proceeds of the private placement to hire additional sales and software development personnel to expand its sales efforts for its audiovisual control and monitoring and digital arraignment software, as well as to develop new integrated software products for its Curiax platform. The Company also issued notes payable of $331,000 to three investors, including one member of the Board of Directors during the nine months ended September 30, 2007. Principal of $13,500 on these notes and all applicable accrued interest were repaid to the member of the Board of Directors in June 2007. Notes for $696,500 (representing $379,000 of notes originated during 2006 and the $317,500 of notes originated in the nine months ended September 30, 2007) and $13,700 of accrued interest on the notes were exchanged in the convertible preferred stock offering above.

On February 15, 2006, the Company sold various patents (see Note 7). On February 15, 2006, the Company also formed a joint venture, named Justice Digital Solutions, LLC (“JDS”), with Integrated Digital Systems, LLC (“IDS”), an integrator based in Livonia, Michigan, to develop and sell a judicial arraignment software solution based on the success of a deployment in Oakland County, Michigan. On November 28, 2006, the Company purchased the 50% of the joint venture owned by IDS (See Note 8). There can be no assurance that the Company will be successful in its attempts to develop and deploy its ONGOER and OnGuard product lines, or that JDS will be successful in its attempts to sell its judicial arraignment software, to generate positive cash flows or raise sufficient capital essential to its survival.  To the extent that the Company is unable to generate or raise the necessary operating capital, it will become necessary to curtail operations. Additionally, even if the Company does raise operating capital, there can be no assurance that the net proceeds will be sufficient to enable it to develop its business to a level where it will generate profits and positive cash flows.
 
6
 
These matters raise substantial doubt about the Company’s ability to continue as a going concern.  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.

Note 3 - Selected Significant Accounting Policies

Principles of Consolidation
 
The unaudited 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 the 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 earnings per share because their effects would be anti-dilutive.
 
   
September 30, 2007
  
September 30, 2006
  
Options
    
3,618,900
    
1,736,475
  
Warrants
    
16,435,774
    
4,937,737
  
Convertible preferred stock
    
12,314,656
    
1,538,664
  
Total
    
32,369,330
    
8,212,876
  
 
Accordingly, basic and diluted loss per share are identical.

Stock-Based Compensation

On August 31, 2007, the stockholders of the Company approved an amendment to the Company's 2002 Equity Incentive Plan (the "Plan") to increase the number of shares of common stock authorized for issuance under the Plan to 6,000,000 shares from the previously authorized amount of 4,000,000 shares. Option awards are granted with an exercise price equal to or greater than the market price of the Company’s stock on the date of the grant in accordance with the Plan. The options generally have five-year contractual terms for directors and 10 years for employees, and vest immediately for directors and over four years for employees.

The Company implemented FAS 123R in the first quarter of 2006. The statement requires companies to expense the value of employee stock options and similar awards. Under FAS 123R, share-based payment 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. Compensation costs for awards that vest will not be reversed if the awards expire without being exercised. Stock compensation expense under FAS 123R was $109,924 and $53,094 during the three months ended September 30, 2007 and 2006, respectively. Of these totals, $35,292 and $9,720 were classified as research and development expense and $74,632 and $43,374 were classified as selling, general, and administrative expense during 2007 and 2006, respectively. Stock compensation expense under FAS 123R was $288,934 and $475,822 during the nine months ended September 30, 2007 and 2006, respectively. Of these totals $80,428 and $32,575 were classified as research and development expense and $208,506 and $443,247 were classified as selling, general, and administrative expensed during 2007 and 2006, respectively.

The Company uses historical data to estimate option exercise and employee termination within the valuation model and historical stock prices to estimate volatility. The fair values for options issued during the nine months ended September 30, 2007 and 2006 were estimated at the date of grant using a Black-Scholes option-pricing model to be $1,219,713 and $355,516, respectively, with the following weighted-average assumptions:

Assumptions
  
2007
  
2006
  
Risk-free rate
    
4.92
%
  
5.21
%
Annual rate of dividends
    
0
    
0
  
Volatility
   
145-175
%
  
90-92
%

Average life
    
5 years
    
2.9 years
  

7

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.

A summary of option activity under the Company’s 1991 Stock Option Plan and the Plan as of September 30, 2007 and changes during the nine months then ended is presented below:

       
Weighted- Average
  
Weighted-Average Remaining
  
Options
  
Shares
  
Exercise Price
  
Term
  
Outstanding January 1, 2007
    
1,775,025
 
$
1.40
        
Granted
    
2,065,000
  
$
0.66
        
Exercised
    
-
  
$
-
        
Terminated
    
(221,125
)
$
0.49
        
Outstanding at September 30, 2007
    
3,618,900
  
$
1.04
    
7.5
  
Exercisable at September 30, 2007
    
1,361,650
  
$
1.64
    
4.6
  

The weighted-average grant-date fair value of options granted during the nine months ended September 30, 2007 was $0.59. No options were exercised during the nine months ended September 30, 2007. The total intrinsic value of options exercised during the nine months ended September 30, 2006 was $106,007.

As of September 30, 2007, there was $1,130,814 of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the Plan. That cost is expected to be recognized over a weighted average period of 2.6 years. The total fair value of shares vested during the nine months ended September 30, 2006 was $$475,822.

At September 30, 2007, 2,424,800 options remain available for grant under the Plan.
 
New Accounting Pronouncements

In February 2006, the FASB issued Statement of Financial Accounting Standard 155 - Accounting for Certain Hybrid Financial Instruments (“SFAS 155”), which eliminates the exemption from applying SFAS 133 to interests in securitized financial assets so that similar instruments are accounted for similarly regardless of the form of the instruments. SFAS 155 also allows the election of fair value measurement at acquisition, at issuance, or when a previously recognized financial instrument is subject to a remeasurement event. Adoption is effective for all financial instruments acquired or issued after the beginning of the first fiscal year that begins after September 15, 2006. The adoption of SFAS did not have a material effect on the Company's consolidated financial position, results of operations or cash flows. 
 
In March 2006, the FASB issued Statement of Financial Accounting Standard 156 - Accounting for Servicing of Financial Assets (“SFAS 156”), which requires all separately recognized servicing assets and servicing liabilities be initially measured at fair value. SFAS 156 permits, but does not require, the subsequent measurement of servicing assets and servicing liabilities at fair value. Adoption is required as of the beginning of the first fiscal year that begins after September 15, 2006. The adoption of SFAS 156 did not have a material effect on the Company's consolidated financial position, results of operations or cash flows.
 
8
 
In June 2006, the FASB issued FASB Interpretation No. 48 ("FIN 48"), Accounting for Uncertainty in Income Taxes.  FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.  FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition.  FIN 48 is effective for fiscal years beginning after December 15, 2006.  The adoption of FIN 48 did not have a material effect on the Company's consolidated financial position, results of operations or cash flows.

In December 2006, FASB issued FASB Staff Position EITF 00-19-2 “Accounting for Registration Payment Arrangements,” which specifies that the contingent obligation to make future payments or otherwise transfer consideration under a registration payment arrangement should be separately recognized and measured in accordance with SFAS No. 5, “Accounting for Contingencies.” Adoption of EITF 00-19-02 is required for fiscal years beginning after December 15, 2006. The adoption of EITF 00-19-2 did not have a material effect on the Company's consolidated financial position, results of operations or cash flows.
 
In February 2007, the FASB issued SFAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 provides companies with an option to report selected financial assets and liabilities at fair value and establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. SFAS 159 is effective for fiscal years beginning after November 15, 2007. The Company is in the process of evaluating the impact of the adoption of this statement on the Company’s results of operations and financial condition.
 
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 2007 and 2006: its PC-based software products, ONGOER®, OnGuard, and CuriaxTM, and its older proprietary hardware and software product, Omega. Revenues from the sale of hardware and software are recognized upon the transfer of title when shipped. Revenues on maintenance contracts are recognized ratably over the term of the related sales contract. As of September 30, 2007, there were $0 of deferred revenues as all maintenance contracts on the Company’s older Omega products have terminated.

Note 4 - Income Taxes

The Company filed its federal and state tax returns for the years ended December 31, 2004, 2005, and 2006, respectively, during the three months ended September 30, 2007.

Effective January 1, 2007, the Company adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities.

In many cases the Company’s tax positions are related to tax years that remain subject to examination by relevant tax authorities. The Company files income tax returns in the United States (federal) and in various state and local jurisdictions. In most instances, the Company is no longer subject to federal, state and local income tax examinations by tax authorities for years prior to 2003.

The adoption of the provisions of FIN 48 did not have a material impact on the company’s consolidated financial position and results of operations. As of September 30, 2007 no liability for unrecognized tax benefits was required to be recorded.

The Company recognized a deferred tax asset of approximately $18.0 million as of September 30, 2007, primarily relating to net operating loss carry forwards of approximately $46.8 million. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. The Company considers projected future taxable income and tax planning strategies in making this assessment. At present, the Company does not have a history of income to conclude that it is more likely than not that the Company will be able to realize all of its tax benefits; therefore, a valuation allowance of $18.0 million was established for the full value of the deferred tax asset. A valuation allowance will be maintained until sufficient positive evidence exists to support the reversal of any portion or all of the valuation allowance net of appropriate reserves. Should the Company be profitable in future periods with supportable trends, the valuation allowance will be reversed accordingly.
 
9
 
Note 5 - Stockholders’ Equity

On February 22, 2006, two holders of Series A Preferred Stock of the Company elected to convert an aggregate of 65,334 shares of Series A Preferred Stock to common stock of the Company, pursuant to the conversion terms of the Series A Preferred Stock. On February 22, 2006, the Company issued an aggregate of 261,336 shares of its common stock to the two stockholders upon the surrender of their Series A Preferred Stock for conversion.

On June 26, 2006, the non-employee directors of Simtrol approved an amendment to the Company’s 2002 Equity Incentive Plan to increase the authorized common stock available for the Plan to 2,500,000 shares from the previously authorized amount of 1,250,000.

In June 2006, two directors of the Company exercised 625,000 stock options for total proceeds to the Company of $250,000.

During the nine months ended September 30, 2007, the Company issued 10,555 shares of common stock valued at $15,700 to members of the Board of Directors for attendance at meetings. These amounts were recorded as selling, general, and administrative expenses. During the nine months ended September 30, 2006, the Company issued 22,154 shares of stock valued at $19,800 to Board Members for attendance at meetings. These amounts were recorded as selling, general, and administrative expense.

On January 31, 2007, the Company granted options to purchase 1,400,000 shares of stock to employees. The options have a three-year vesting period and were granted at an exercise price greater than the fair value of the Company’s common stock on that date. On March 15, 2007, the Company granted options to purchase 200,000 shares of stock to an employee. The options have a three-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 April 10, 2007, May 30, 2007, and June 25, 2007, three employees were each granted options to purchase 75,000 shares of stock. The options have a three-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 January 31, 2007, the Company issued 480,000 shares of its common stock to Triton Business Development Services (“Triton”), an Atlanta-based provider of critical business planning, resource, and development services, in conjunction with an agreement dated October 18, 2006.

On February 1, 2007, the Company signed an advisory services agreement (the "Agreement") with Triton. As a part of the Agreement, Triton will provide the Company with financial and strategic planning services that include capital formation, structure and funding strategies, investor relations consultation, human resources assessment and development, and an organizational review of the Company’s processes, practices, and procedures. The term of the Agreement is 24 months.

Triton’s compensation will consist of cash and restricted shares of the Company's common stock over the term of the Agreement. A monthly cash retainer of $10,000 will be paid by the Company. Additionally, 640,000 shares of common stock will be deposited to a restricted account. The 640,000 shares of the Company's common stock will be earned ratably over the 24-month term of the Agreement by Triton. The Company issued restricted shares of common stock pursuant to the Agreement as follows:

Date
  
Number of
shares
  
January 31, 2007
    
11,200
  
February 28, 2007
    
26,700
  
March 31, 2007
    
26,700
  
April 30, 2007
    
26,700
  
May 31, 2007
    
26,700
  
June 30, 2007
    
26,700
  
July 31, 2007
    
26,700
  
August 31, 2007
    
26,700
  
September 30, 2007
    
26,700
  
 
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The offer and sale of the shares issued in connection with the Agreement were exempt from the registration requirements of the Securities Act of 1933, as amended (the "Act"), pursuant to Rule 506 and Section 4(2) of the Act. In connection with the sales, the Company did not conduct any general solicitation or advertising, and the Company complied with the requirements of Regulation D relating to the restrictions on the transferability of the shares issued.

On January 30, 2007, the Company received a notice of effectiveness from the State of Delaware regarding the Certificate of Amendment of Certificate of Incorporation of the Company (the "Amendment"), which modified the rights of the holders of the Company's Series A Convertible Preferred Stock. The Amendment provides for, among other things: (i) each holder of the Company's Series A Convertible Preferred Stock to receive one additional share of Series A Convertible Preferred Stock for each share owned; (ii) the addition of an 8% face value noncumulative coupon, payable semi-annually in cash or common stock of the Company; (iii) pre-emptive rights for holders of the Company's Series A Convertible Preferred Stock; (iv) the addition of a redemption feature whereby the Series A Convertible Preferred Stock is callable at $3.75 per share at the option of the Company; (v) the addition of a mandatory conversion feature whereby the Series A Convertible Preferred Stock is automatically converted to common stock of the Company in the event that the bid price of the Company's common stock closes at or above $1.00 for 20 consecutive trading days and the average daily trading volume of the Company's common stock is equal to or greater than $150,000; and (vi) the amendment of the provision requiring unanimous approval for an increase in the number of shares designated as Series A Convertible Preferred Stock to require a majority approval for an increase in the number of shares designated as Series A Convertible Preferred Stock. The Amendment also eliminated the working capital test that previously occurred at quarter end per the previous Series A Convertible Preferred Stock terms and increased the authorized number of Series A Convertible Preferred shares from the previous 450,000 to 770,000. On June 30, 2007, in accordance with the terms of the Certificate, the Company paid a dividend to the Series A shareholders of 58,035 shares of its common stock. The price of the stock on that date was $1.54.

In accordance with the receipt of a notice of effectiveness from the State of Delaware regarding the Amendment, which modified the rights of the holders of the Company's Series A Convertible Preferred Stock, the Company issued 384,666 shares of Series A Convertible Preferred stock on January 31, 2007 to the existing Series A Convertible Preferred stockholders. Each stockholder also received warrants to purchase two shares of common stock for each share of Series A Convertible Preferred Stock issued on January 31, 2007 at an exercise price of $0.375 per share. This issue of Series A Preferred stock and warrants to purchase common stock settled the liability for dividend payable on default of convertible preferred stock of $1,171,863. On January 31, 2007, in accordance with the anti-dilution provisions of certain warrants to purchase 388,000 shares of common stock that were issued during 2004, thirteen warrant holders had the exercise prices of the warrants adjusted from $2.00 per share to $0.375 per share and warrants to purchase an additional 1,681,333 shares of common stock were issued. On January 31, 2007, in accordance with the anti-dilution provisions of certain warrants to purchase 2,145,444 shares of common stock that were issued during 2005, warrant holders having the right to purchase 345,444 shares of stock had their exercise prices of the warrants adjusted from $0.75 per share to $0.375 per share, warrant holders having the right to purchase 900,000 shares of stock had their exercise prices of the warrants adjusted from $1.25 per share to $0.375 per share, and warrant holders having the right to purchase 900,000 shares of stock had their exercise prices of the warrants adjusted from $1.00 per share to $0.375 per share. The expiration dates of the 2004 and 2005 warrants were not changed.

On February 20, 2007, the Certificate of Designation establishing the terms of a Series B Preferred Stock was filed. Certain terms of the Series B Preferred Stock are as follows:

 
·
The Series B Preferred Stock stated value is $750.00 and each share converts into common stock at the conversion price of $0.375 at any time and without limitation.

 
·
Without approval of a majority of the Series B Preferred Stock Holders, the Company shall not incur debt (other than debt collateralized by accounts receivable of the Company) in excess of an aggregate of $1.5 million outside of trade debt in the normal course of business. The terms of such debt shall not encumber any copyrights, marketing materials, software code or any other proprietary technology, software or product processes, patents or patent licenses.

 
·
The Series B Preferred Stock will pay a 12% (based on stated value) noncumulative coupon, payable semi-annually (June 30, December 31) in cash or common stock (common stock value deemed $0.375 for purpose of dividend payment if closing price of common stock on payment date is less than $0.375).

 
·
If the Company has a current registration statement on file covering those common shares represented by Series B Preferred Stock and the Company’s common stock bid price closes at or above $1.00 for 20 consecutive trading days and the average daily trading volume of the common stock is equal to or greater than $150,000, then Series B Preferred Stock will automatically convert to common at $0.375 per common share.
 
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·
Series B Preferred Stock Holders receive pre-emptive right to participate in subsequent equity rounds at the same pro rata percentage of ownership they currently own in Company on an as-converted basis today.

 
·
Series B Preferred Stock callable at $1,875 per share at option of Company.

 
·
A total of 4,700 shares of Series B Preferred Stock were designated.

 
·
In the event that the registration statement to be filed by the Company is not declared effective by the Securities and Exchange Commission, hereafter referred to as the SEC, within the earlier of one hundred and twenty (120) days from the date of the sale of the Securities or five (5) days of clearance by the SEC to request effectiveness, then 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 or declared effective. Such compensatory payments shall be made to the investor in cash, within five (5) calendar days of demand.

On March 16, 2007, three note holders, including one member of the Board of Directors, exchanged $696,500 principal and $13,700 interest due from the Company (totaling $710,200) under their notes payable for units in the private placement. In conjunction with the exchange, the Company issued the holders additional warrants to purchase an aggregate of 710,200 shares of the Company’s common stock at an exercise price of $0.375 per share. The warrants have five-year terms. The Company recorded a finance expense of $772,655 to recognize the fair value of the warrants granted to the noteholders. See Note 9.

Additionally, on March 16, 2007, the Company completed the sale of $3,525,000 of securities in a private placement of 4,700 units (at $750 per unit) consisting of one share of Series B Convertible Preferred Stock and one warrant to purchase 2,000 shares of our common stock at an exercise price of $0.375 per share. Each share of Series B Convertible Preferred Stock has a conversion price of $0.375 per share (one Series B Convertible Preferred share equals 2,000 shares of common stock). The warrants had three-year terms. In connection with the issuance of the securities above, a deemed dividend of $939,118 was recorded to reflect the beneficial conversion feature on the common shares that would result from the conversion of the Series B Preferred Stock. On September 12, 2007, Company amended the terms of its stock purchase warrants. The Warrants were revised to include a cashless exercise provision and to extend the term of the Warrants from three years to five years. In conjunction with the amendment, the Company recorded an expense of $578,611 to record the increased fair value of the warrants due to the modification.

The Company filed a resale registration statement on Form SB-2 on May 14, 2007 to register the common stock underlying the Series B Convertible Preferred Stock, the common stock underlying the warrants issued in conjunction with the exchange of the notes payable, and the common stock underlying the warrants in the private placement. As of November 13, 2007, the registration statement has not been declared effective by the SEC.

On June 30, 2007, in accordance with the terms of the terms of the Series B Preferred stock, the Company paid a dividend to the Series B shareholders of 137,378 shares of its common stock. The price of the stock on that date was $1.54.

On March 16, 2007, one stockholder converted 8,000 shares of the Company’s Series A Convertible Preferred Stock to 32,000 shares of the Company’s common stock.

On March 21, 2007, one warrant holder exercised warrants allowing the purchase of 130,668 shares of common stock via a cashless exercise provision. Per the terms of the warrant agreement, the Company issued the holder 87,685 shares of its common stock on that date.

On March 30, 2007, two warrant holders exercised warrants allowing the purchase of 128,000 shares of common stock via a cashless exercise provision. Per the terms of the warrant agreements, the Company issued the holders 104,960 shares of its common stock on that date.
 
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On April 2, 2007, one warrant holder exercised warrants allowing the purchase of 32,000 shares of our common stock via a cashless exercise provision. Per the terms of the warrant agreement, the Company issued the holder 25,782 shares of its common stock on that date.

On April 9, 2007, two shareholders converted 8,334 shares of the Company’s Series A Convertible Preferred Stock to 33,336 shares of the Company’s common stock.

On April 17, 2007, three warrant holders exercised warrants allowing the purchase of 198,668 shares of common stock via a cashless exercise provision. Per the terms of the warrant agreements, the Company issued the holders 158,613 shares of its common stock on that date.

On April 17, 2007, one shareholder converted 8,334 shares of the Company’s Series A Convertible Preferred Stock to 33,336 shares of the Company’s common stock.

On April 24, 2007, one warrant holder exercised warrants allowing the purchase of 32,000 shares of our common stock via a cashless exercise provision. Per the terms of the warrant agreement, the Company issued the holder 25,617 shares of its common stock on that date.

On April 26, 2007, one warrant holder exercised warrants allowing the purchase of 75,668 shares of our common stock via a cashless exercise provision. Per the terms of the warrant agreement, the Company issued the holder 59,904 shares of its common stock on that date.

On May 2, 2007, two warrant holders exercised warrants allowing the purchase of 186,736 shares of common stock via a cashless exercise provision. Per the terms of the warrant agreements, the Company issued the holders 147,832 shares of its common stock on that date.

On May 15, 2007, one warrant holder exercised warrants allowing the purchase of 32,000 shares of our common stock via a cashless exercise provision. Per the terms of the warrant agreement, the Company issued the holder 22,551 shares of its common stock on that date.

On May 21, 2007, one warrant holder exercised warrants allowing the purchase of 16,092 shares of our common stock via a cashless exercise provision. Per the terms of the warrant agreement, the Company issued the holder 11,376 shares of its common stock on that date.

On July 27, 2007, one warrant holder exercised warrants allowing the purchase of 32,000 shares of our common stock via a cashless exercise provision. Per the terms of the warrant agreement, the Company issued the holder 22,977 shares of its common stock on that date.

On July 30, 2007, one warrant holder exercised warrants allowing the purchase of 64,000 shares of our common stock via a cashless exercise provision. Per the terms of the warrant agreement, the Company issued the holder 46,090 shares of its common stock on that date.

On September 5, 2007, one shareholder converted 16,000 shares of the Company’s Series A Convertible Preferred Stock to 64,000 shares of the Company’s common stock.

Note 6- Major Customers

Revenue from four customers comprised 100% of consolidated revenues for the nine months ended September 30, 2007. At September 30, 2007, related accounts receivable of $61,433 from three customers comprised 100% of consolidated receivables and have been collected subsequent to September 30, 2007.

Revenue from five customers of $71,663 comprised approximately 75% of consolidated revenues for the nine months ended September 30, 2006.

Note 7 - Sale of Intellectual Property

On February 15, 2006, the Company and Acacia Research Corporation (“Acacia”) entered into an agreement pursuant to which the Company sold to Acacia U.S. Patent No(s). 5515099, 5526037, 5528289, 5568183, 5583565, and 55998209 (the “Patents”). The patents relate primarily to remote control of video cameras and other devices used in areas such as videoconferencing and surveillance systems. The uses of the patented technology include improved remote management of video camera functions such as pan, tilt, and focus, and improved device control in a networked videoconferencing system.
 
13
 
Under the terms of the agreement, the Company received an initial payment of $250,000 in March 2006 and will receive ongoing royalty payments of twenty percent of the net proceeds received by Acacia in connection with (i) the licensing by Acacia of the patented technology to third parties and (ii) any successful patent infringement action commenced by Acacia with respect to the Patents, provided that Acacia shall be entitled to recoup the initial payment fully prior to making any royalty payments to the Company. This amount was recorded as other income during the nine months ended September 30, 2006.

Note 8 - Intangibles

In conjunction with the purchase of the IDS interest in JDS in November 2006, the Company recorded an intangible asset of $130,000 on November 28, 2006, representing the fair value of 500,000 shares of common stock paid and payable to IDS, to reflect the value of the license to use the OakVideo Software. This amount will be amortized over the estimated remaining life of the license agreement for JDS’ use of the OakVideo software (through October 2015-see Note 2). Amortization during the three months and nine months ended September 30, 2007 totaled $3,714 and $11,142, respectively.

The Company also recorded a customer list of $40,000 in conjunction with the purchase of the IDS interest in JDS in 2006. The $40,000 was amortized in the nine months ended September 30, 2007 as all applicable revenue with the customer was earned by September 30, 2007. Amortization during the three months and nine months ended September 30, 2007 totaled $20,000 and $40,000, respectively.
 
Note 9 - Related Person Transactions

In order to fund its operations, the Company issued additional notes payable to one member of the Board of Directors during the nine months ended September 30, 2007 totaling $117,500. The debt accrued interest at 12%, the notes were due on demand, and were uncollateralized. As of March 16, 2007, the member of the Board of Directors had a total of $510,000 notes payable outstanding and he exchanged $496,500 of the notes and accrued interest of $11,289 as part of the Series B Preferred Stock private placement. See Note 5. The remaining balance of $13,500 and accrued interest totaling $786 was paid in full at June 29, 2007. See Note 5.

In order to fund its operations, the Company issued a $37,000 note payable to one member of the Board of Directors on June 9, 2006. The debt accrued interest at 10% and was uncollateralized. The proceeds of this debt were utilized for working capital purposes. On June 30, 2006, the Company repaid the note plus the accrued interest of $213.

Note 10 - Office Lease

On July 20, 2007, the Company entered into a 60-month lease agreement with Narmada Partners, LLC to occupy new office space consisting of approximately 10,000 square feet in an office building in Norcross, Georgia. The Company occupied the space on October 11, 2007. The total amount of rent payable under the lease will be recognized on a straight-line basis over the term of the lease. Annual base rental amounts are as follows:
 
10/11/2007 - 10/10/2008
  $ 137,500  
10/11/2008 - 10/10/2009
  $ 141,625  
10/11/2009 - 10/10/2010
  $ 145,848  
10/11/2010 - 10/10/2011
  $ 150,200  
10/11/2011 - 10/10/2012
  $ 154,800  
 
In addition to the base rental, the Company will be obligated for a percentage of the increase in operating expenses after 2007. The Company delivered to the landlord a standby, irrevocable letter of credit for $100,000 as a security deposit with the letter of credit amount reducing $20,000 for each year of the lease as long as the lease is not in default. The Company collateralized the letter of credit with a $100,000 one-year certificate of deposit. An event of default occurs on the lease if the Company fails to pay any rental amounts within five days when due and such failure to pay continues for seven additional days following written notice from Narmada Partners, LLC of failure to pay. Upon an event of default, Narmada Partners, LLC may terminate the lease and demand payment of all remaining rent due and coming due under the remaining term of the lease.
 
14
 
Note 11- Subsequent Event

On October 31, 2007, the Company issued 26,700 restricted shares of common stock pursuant to its advisory services agreement with Triton Business Development Services. See note 5.

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, 2006 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:

·
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 hardware is recognized upon shipment. We recognize revenue from ONGOER software sales upon shipment as we sell the product to audiovisual integrators. Revenue on Omega maintenance contracts is recognized over the term of the related contract.

·
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 is 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.
   
· Impairment of Assets/Investments. We record impairment losses on assets and investments when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amount of those items. Our cash flow estimates are based on historical results adjusted to reflect our best estimate of future market and operating conditions. The net carrying value of assets not recoverable is reduced to fair value. Our estimates of fair value represent our best estimate based on industry trends and reference to market rates and transactions.
 
FINANCIAL CONDITION

During the nine months ended September 30, 2007, total assets increased approximately 404% to $1,441,714 from $285,908 at December 31, 2006. The increase in assets was primarily due to the proceeds from issuance of our Series B convertible preferred stock on March 16, 2007 in a private placement (see Note 5 to the unaudited condensed consolidated financial statements), partially offset by cash used to fund operations during the period.
 
15
 
Current liabilities decreased $1,618,796, or 83%, due primarily to the elimination of a dividend payable on the covenant default of the Company’s Series A convertible preferred stock of $1,171,863 as of December 31, 2006, as well as the exchange of notes payable in the offering ($387,351 principal and interest outstanding at December 31, 2006). See note 5 to the unaudited condensed consolidated financial statements.
 
See note 2 to the unaudited condensed consolidated financial statements regarding the Company’s going concern uncertainty.
 
The Company does not have any material off-balance sheet arrangements.
 
RESULTS OF OPERATIONS

Three Months Ended September 30, 2007 and 2006

Revenues

Revenues were $73,597and $19,980 for the three months ended September 30, 2007 and 2006, respectively. Increased service revenues of $37,841 during the current year and increased software license revenues of $15,776 resulted primarily from existing customers purchasing more software during the current year.

Cost of Revenues and Gross Profit

Cost of revenues increased $930 for the three months ended September 30, 2007 compared to the three months ended September 30, 2006.
 
Gross margins were approximately 99% and 100% for the three months ended September 30, 2007 and 2006, respectively.

Selling, General, and Administrative Expenses

Selling, general, and administrative expenses were $843,744 and $237,294 for the three months ended September 30, 2007 and 2006, respectively. The increase in the expenses for three-month period ended September 30, 2007 resulted primarily from increased headcount as we hired additional personnel after September 30, 2006, increased sales and marketing expenses as we hired a professional marketing firm during the current year, and professional fees related to the hiring of Triton Business Development Services and the payments made to them in cash and common stock (see Note 5 to the unaudited condensed consolidated financial statements).

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 $229,949 and $91,928 for the three months ended September 30, 2007 and 2006, respectively. The increase in expense during the current period was due primarily to an increase in headcount of our research and development personnel and outsourced software development services.

During the three months ended September 30, 2007 and 2006, respectively, stock-based compensation of $35,292 and $9,720 was included in research and development expense to record the amortization of the estimated fair value of the portion of options granted during the current period as well as previously granted stock options that vested during the current period.

Other income/(expense) 

Other income/(expense) of ($553,675) for the three months ended September 30, 2007 consisted primarily of $578,611 expense recorded due to the increased fair value of the warrants modified in September 2007. See note 5 to our unaudited condensed consolidated financial statements. This was partially offset by interest earned on our cash balances during the period of $24,936. Other expense during the three months ended September 30, 2006 consisted of finance charges and accrued interest on our notes payable originated during 2006.

16
 
Net Loss
 
Net loss for the three months ended September 30, 2007 was $1,554,701 compared to a net loss of $311,517 for the three months ended September 30, 2006. The increase in net loss was due primarily to the warrant modification expense recorded during the current year, increased operating expenses that resulted from our increased personnel costs during the current period, as well as expenses incurred in our engagement of Triton Business Development Services.

Nine Months Ended September 30, 2007 and 2006

Revenues

Revenues were $149,721 and $95,044 for the nine months ended September 30, 2007 and 2006, respectively. The increased service revenue earned during the nine months ended September 30, 2007 was due primarily to a development contract during the current year, while software license revenues were essentially unchanged from the prior year.

Cost of Revenues and Gross Profit

Cost of revenues increased $5, or 3%, for the nine months ended September 30, 2007 compared to the nine months ended September 30, 2006.

Gross margins were approximately 99% and 98% for the nine months ended September 30, 2007 and 2006, respectively.

Selling, General, and Administrative Expenses

Selling, general and administrative expenses were $2,277,956 and $1,169,492 for the nine months ended September 30, 2007 and 2006, respectively. The increase in the nine-month period ended September 30, 2007 compared to the similar period in 2006 resulted primarily from (i) higher payroll costs during the current period as the Company increased headcount during 2007 to expand its product development and sales efforts, and (ii) stock payments totaling $426,301 made to Triton Business Development Services as part of a strategic consulting agreement, partially offset by a decrease in stock based compensation of $267,316 as the Company recorded stock-based compensation of $475,822 during 2006, which included $308,721 recorded in June 2006 to reflect the fair value of the stock options granted to non-employee directors at that time. Current year stock-based compensation included in selling, general, and administrative expenses totaled $208,506.

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 $534,448 in the nine months ended September 30, 2007 from $334,369 in the nine months ended September 30, 2006. The increase in expense was due mainly to the hiring of additional software development personnel as well as the use of third-party development personnel and outsourced software development services during the current period.

During the nine months ended September 30, 2007 and 2006, respectively, stock-based compensation of $80,428 and $45,136 was included in research and development expense to record the amortization of the estimated fair value of the portion of previously granted stock options that vested during the current period.

Other income/(expense) 

Other expense of ($1,318,002) for the nine months ended September 30, 2007, consisted primarily of the $772,655 expense to record to value of warrants to purchase 710,200 shares of common stock granted to noteholders as an inducement for the conversion of their notes for Series B preferred stock, $578,611 of expense recorded due to the increased fair value of the warrants modified in September 2007, partially offset by interest earned on cash balances during the nine months ended September 30, 2007.

Other income of $247,424 for the nine months ended September 30, 2006 consisted primarily of the $250,000 we received from licensing our patent portfolio related to our older videoconferencing technology (see note 7 to the unaudited condensed consolidated financial statements).
 
17
 
Net Loss
 
Net loss for the nine months ended September 30, 2007 was $3,982,557 compared to a net loss of $1,163,260 for the nine months ended September 30, 2006. The greater loss during the current period was due primarily to the $426,301 recorded for share-based payments to Triton Business Development Services for consulting services, $772,655 recorded for the value of warrants issued in conjunction with the exchange of notes payable for Series B Preferred stock, the $578,611 warrant modification expense, offset partially by the $250,000 received from the licensing of our patent portfolio related to our older videoconferencing technology during the nine months ended September 30, 2006. See Note 7 to the unaudited condensed consolidated financial statements.

LIQUIDITY AND SOURCES OF CAPITAL

General

Due to recurring losses from operations, an accumulated deficit, negative working capital and the Company’s inability to date to obtain sufficient financing to support current and anticipated levels of operations, the Company’s independent registered public accountant’s audit opinion states that these matters have raised substantial doubt about the Company’s ability to continue as a going concern for the year ended December 31, 2006. As of September 30, 2007, the Company had cash and cash equivalents of $1,020,684. The Company has relied on periodic investments in the form of common stock, preferred 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 the continued development and deployment of its ONGOERTM, OnGuard, and CuriaxTM product lines. On March 16, 2007 the Company completed the sale of $3,525,000 of securities in a private placement of 4,700 units (at $750 per unit) consisting of one share of Series B Convertible Preferred Stock and one warrant to purchase 2,000 shares of our common stock at an exercise price of $0.375 per share. Each share of Series B Convertible Preferred Stock has a conversion price of $0.375 per share (one Series B Convertible Preferred share equals 2,000 shares of common stock). The warrants had three-year terms. On September 12, 2007, Company amended the terms of its stock purchase warrants. The Warrants were revised to include a cashless exercise provision and to extend the term of the Warrants from three years to five years. See Note 5 to the unaudited condensed consolidated financial statements. The Company intends to use and has begun using the proceeds of the private placement to hire additional sales and software development personnel to expand its sales efforts for its audiovisual control and monitoring and digital arraignment software, as well as to develop new integrated software products for its Curiax platform. The Company also issued notes payable of $331,000 to three investors, including one member of the Board of Directors during the six months ended June 30, 2007. During June 2007, $13,500 of these notes plus $786 of accrued interest were repaid in full (see Note 9 to the unaudited condensed consolidated financial statements). $696,500 of the notes originated in 2006 and in the six months ended June 30, 2007 were exchanged in the convertible preferred stock offering described above.

We used $1,914,409 in cash from operating activities in the nine months ended September 30, 2007 due primarily to our net loss during the period of $3,982,557. We used $962,194 in cash from operating activities in the nine months ended September 30, 2006 primarily due to our loss of $1,163,260. The increase in cash used during the current period was due mainly to the hiring of additional personnel after September 30, 2006 as well as consulting services purchased from Triton Business Development Services. We used $90,215 in investing activities during the nine months ended September 30, 2007 primarily to purchase new computer equipment and leasehold improvements on our new office space. Leasehold improvements will be amortized over the life of our new office lease. Cash received from financing activities included $331,000 of notes payable originated by three investors, including one member of the Company’s board of directors, as well as net proceeds of approximately $2,809,000 from the Series B convertible preferred private placement that the Company closed on March 16, 2007. See Note 9 to the Company’s unaudited condensed consolidated financial statements. Cash used in financing activities in the nine months ended September 30, 2006 included $12,000 for the return of a deposit received from a potential investor in a cancelled offering at December 31, 2005. The Company received $250,000 from financing activities during the nine months ended September 30, 2006 for the sale of the Company’s patent technology related to the Company’s former videoconferencing business. See Note 7 to the unaudited condensed consolidated financial statements. We issued a $37,000 note payable to one member of the board of directors on June 9, 2006. The proceeds of this debt were utilized for working capital purposes. On June 30, 2006, the Company repaid the note plus the accrued interest of $213 (see note 9 to the unaudited condensed consolidated financial statements). We also received $250,000 from the exercise of stock options by two members of our Board of Directors (see note 5 to the unaudited condensed consolidated financial statements).
 
The Company may require additional funding 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 the Company 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 the Company is unable to obtain this additional funding, our business, financial condition and results of operations would be adversely affected. The accompanying unaudited condensed financial statements contemplate our continuation as a going concern. However, the Company has sustained substantial losses from operations in recent years, and such losses have continued through September 30, 2007.
 
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In view of the matters described in the preceding paragraph, recoverability of a major portion of the recorded asset amounts shown in the accompanying balance sheet is dependent upon our continued operations, which in turn is dependent upon our ability to meet our financing requirements on a continuing basis and attract additional financing. The unaudited condensed 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 the Company be unable to continue in existence.

The Company expects to spend less than $50,000 for capital expenditures in the remainder of fiscal 2007.

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 of 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.  The Company undertakes no obligation to update any forward-looking statements.

ITEM 3. CONTROLS AND PROCEDURES

The Company maintains 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 the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. As of March 31, 2007, 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 not effective.

In connection with its audit of our consolidated financial statements as of December 31, 2006 and for the years ended December 31, 2006 and 2005, Marcum & Kliegman LLP advised our management and Audit Committee of the Board of Directors that it had identified a deficiency in internal controls, which was designated a "material weakness", as defined below. The material weakness indicated that there was inadequate segregation of duties within our accounting function. The Company initially failed to properly record the beneficial conversion feature associated with the Series B Convertible Preferred Stock offering, and the financing expense for the conversion of notes payable for Series B Convertible Preferred Stock and correction of the financial recording for the transactions caused the filing of our report on Form 10-QSB to be delinquent for the three months ended March 31, 2007.
 
A material weakness is a significant deficiency (or a combination of significant deficiencies) that result in a more-than-remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected.
 
A significant deficiency is a control deficiency (or combination of internal control deficiencies) that adversely affects the Company's ability to initiate, authorize, record, process, or report external financial data reliably in accordance with GAAP such that there is a more-than-remote likelihood that a misstatement of the Company's annual or interim financial statements that is more than inconsequential will not be prevented or detected.  The standard specifies that a misstatement is inconsequential if a reasonable person would conclude, after considering the possibility of further undetected misstatements, that the misstatement, either individually or when combined with other misstatements, would clearly be immaterial to the financial statements.  If a reasonable person could not reach such a conclusion regarding a particular misstatement, that misstatement would be more than inconsequential.
 
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There was no change in internal control during the three months ending September 30, 2007.
 
Part II - OTHER INFORMATION

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

On September 30, 2007, we issued 4,724 shares of common stock to Board Members as compensation in lieu of cash fees for attendance at board meetings. The offer and sale of the shares were exempt from the registration requirements of the Securities Act of 1933 (the “Act”) pursuant to Rule 506 and Section 4(2) of the Act. In connection with the sales, we did not conduct any general solicitation or advertising, and we complied with the requirements of Regulation D relating to the restrictions on the transferability of the shares issued.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

On August 31, 2007, the stockholders of Company held an annual meeting of stockholders. The following items were voted upon at the meeting:

1) Elect six directors to serve for a term of one year and until their successors are elected and qualified:

The nominees and their vote totals:

   
For
  
Withheld
  
Dallas S. Clement
    
12,445,013
    
43,493
  
Larry M. Carr
    
12,444,736
    
43,770
  
Edward S. Redstone
    
12,443,625
    
44,881
  
Thomas J. Stallings
    
12,445,071
    
43,435
  
Adam D. Senter
    
12,445,013
    
43,493
  
Richard W. Egan
    
12,443,810
    
44,696
  
 
2) To approve an increase in the authorized number of common shares from 40,000,000 to 100,000,000:

For
    
12,459,576
  
Against
    
28,897
  
Abstain
    
31
  
 
3) To approve an amendment to the Company’s 2002 equity incentive plan to increase the number of shares of common stock that may be issued under the plan, to a maximum of 6,000,000 shares:
For
    
10,530,744
  
Against
    
18,214
  
Abstain
    
471
  
 
4) To ratify the appointment of Marcum & Kliegman LLP as the Company’s independent auditors for the fiscal year ending December 31, 2007.

For
    
12,479,502
  
Against
    
2,512
  
Abstain
    
6,492
  
 
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ITEM 6. 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) the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2006 (referred to as “2006 10-KSB”), (iii) the Company’s Current Report on Form 8-K filed September 18, 2007, (referred to as “8-K”), or (iv) the Company’s 2007 proxy statement on Schedule 14A (referred to as “2007 Proxy Statement”) .

Exhibit No.
  
Description
 
  
 
3.1*
 
Certificate of Incorporation as amended through March 8, 2007 (2006 10-KSB)
 
  
 
3.2*
  
Certificate of Amendment to Certificate of Incorporation (2007 Proxy Statement)
     
3.3*
  
Amended Bylaws of the Company as presently in use (S-18 No. 1, Exhibit 3.2)
 
  
 
10.1*
  
Form of Subscription Agreement (8-K)
 
  
 
10.2*
  
Amendment to 2002 Equity Incentive Plan (2007 Proxy Statement)
     
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.
 
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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
     
 
SIMTROL, INC.
 
 		  
 		  
 
Date:  November 14, 2007  /s/ Richard W. Egan 
 
Chief Executive Officer
(Principal executive officer)
 
     
Date:  November 14, 2007  /s/ Stephen N. Samp
 
Chief Financial Officer
 (Principal financial and accounting officer) 

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.
 
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