UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form
10-Q
x
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the quarterly period ended March 31, 2010
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 smaller reporting company as specified in its charter)
Delaware
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58-2028246
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(State
of
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(I.R.S.
Employer
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incorporation)
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Identification
No.)
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520
Guthridge Ct., Suite 250
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Norcross,
Georgia 30092
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(770)
242-7566
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(Address
of principal executive offices)
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(Issuer’s
telephone number)
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Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90
days.
Yes
x
No
¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
Yes
¨
No
¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
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Accelerated filer
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Non-accelerated filer (Do not check if a smaller reporting company)
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Smaller reporting company
x
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes No
x
As of May
14, 2010 registrant had 13,807,553 shares of $.001 par value Common Stock
outstanding.
SIMTROL,
INC. AND SUBSIDIARIES
Form
10-Q
Quarter
Ended March 31, 2010
Index
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Page
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PART
I.
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FINANCIAL
INFORMATION
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Item
1. Financial Statements:
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Condensed
Consolidated Balance Sheets as of March 31, 2010 (unaudited) and December
31, 2009
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3
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Condensed
Consolidated Statements of Operations for the Three Months Ended March 31,
2010 and 2009 (unaudited)
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4
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Condensed
Consolidated Statements of Cash Flows for the Three Months Ended March 31,
2010 and 2009 (unaudited)
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5
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Notes
to Condensed Consolidated Financial Statements (unaudited)
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6
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Item
2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
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14
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Item
3. Quantitative and Qualitative Disclosures about Market
Risk
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18
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Item
4T.Controls and Procedures
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18
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PART
II.
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OTHER
INFORMATION
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Item
6. Exhibits
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18
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SIMTROL,
INC.
PART
I – FINANCIAL INFORMATION
ITEM
1. FINANCIAL STATEMENTS
SIMTROL,
INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
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March 31,
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December 31,
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2010 (unaudited)
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2009
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ASSETS
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Current
assets
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Cash
and cash equivalents
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$
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20,017
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$
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18,596
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Accounts
receivable
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24,830
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30,549
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Inventory
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19,128
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19,128
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Prepaid
expenses and other assets
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18,412
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20,173
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Interest
receivable
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3,884
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4,603
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Total
current assets
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86,271
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93,049
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Certificate
of deposit-restricted
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29,974
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29,911
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Property
and equipment, net
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48,427
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60,176
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Right
to license intellectual property, net
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8,719
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8,719
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Note
receivable, net of deferred revenue of $393,789 and $400,000,
respectively
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-
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-
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Total
assets
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$
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173,391
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$
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191,855
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LIABILITIES
AND STOCKHOLDERS’DEFICIT
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Current
liabilities
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Accounts
payable
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$
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324,425
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$
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222,457
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Accrued
expenses
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57,697
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100,374
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Deferred
revenue
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27,800
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29,638
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Derivative
liabilities
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396,760
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518
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Notes
payable, net
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135,691
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562,250
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Total
current liabilities
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942,373
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915,237
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Derivative
liabilities
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1,746,670
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136,231
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Deferred
rent payable
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19,732
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20,459
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Total
liabilities
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2,708,775
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1,071,927
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Commitments
and contingencies
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Stockholders'
Deficit:
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Preferred
stock, $.00025 par value; 10,000,000 shares authorized;
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Series
A Convertible: 770,000 shares designated; 672,664 outstanding; liquidation
value of $2,017,992
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167
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167
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Series
B Convertible: 4,700 shares designated; 4,264 outstanding; liquidation
value of $3,198,000
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1
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1
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Series
C Convertible: 7,900 shares designated; 5,534 outstanding; liquidation
value of $4,150,000
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14
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14
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Common
stock, 400,000,000 shares authorized;
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$.001
par value; 13,807,553 and 13,725,921 issued and
outstanding
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13,807
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13,726
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Additional
paid-in capital
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80,552,748
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79,832,011
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Accumulated
deficit
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(83,102,121
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)
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(80,725,991
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)
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Total
stockholders' deficit
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(2,535,384
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)
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(880,072
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Total
liabilities and stockholders’ deficit
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$
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173,391
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$
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191,855
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The
accompanying notes are an integral part of these condensed consolidated
financial statements.
SIMTROL,
INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
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Three
Months Ended
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March
31,
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2010
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2009
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Revenues:
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Software
licenses
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$
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46,675
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$
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75,321
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Service
and hardware
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45,544
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175,966
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Total
revenues
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92,219
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251,287
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Cost
of revenues:
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Software
licenses
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-
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300
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Service
and hardware
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16,539
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107,970
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Total
cost of revenues
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16,539
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108,270
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Gross
profit
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75,680
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143,017
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Operating
expenses:
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Selling,
general, and administrative
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337,844
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778,651
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Research
and development
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102,101
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311,865
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Total
operating expenses
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439,945
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1,090,515
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Loss
from operations
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(364,265
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)
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(947,499
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)
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Other
income/(expense):
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Amortization
of debt discount-warrant fair value
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(135,691
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)
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-
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Finance
expense
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(956,960
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)
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-
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(Loss)/Gain
on derivative liabilities
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(303,426
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)
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59,200
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Interest
and other income
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5,852
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5,986
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Interest
expense
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(28,777
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)
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(420
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)
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Total
other income/(expense), net
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(1,419,002
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)
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64,766
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Net
loss
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(1,783,267
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)
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(882,733
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)
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Deemed
dividend on convertible preferred stock
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(592,863
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)
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-
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Net
loss attributable to common stockholders
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$
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(2,376,130
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)
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$
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(882,733
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)
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Net
loss per common share:
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Basic
and Diluted
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$
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(0.17
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)
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$
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(0.08
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)
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Weighted
average shares outstanding:
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Basic
and diluted
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13,776,805
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10,829,833
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The
accompanying notes are an integral part of these condensed consolidated
financial statements.
SIMTROL,
INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
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Three
Months Ended
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March
31,
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2010
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2009
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CASH
FLOWS USED IN OPERATING ACTIVITIES:
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Net
loss
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$
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(1,783,267
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)
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$
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(882,733
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)
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Adjustments
to reconcile net loss to net cash used in operating
activities:
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Issuance
of common stock for services
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-
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3,255
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Depreciation
and amortization
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12,852
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19,328
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Impairment
of right to license intellectual property
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-
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18,499
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Amortization
of debt discounts
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135,691
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-
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Stock-based
compensation
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124,208
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223,660
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Loss/(gain)
on derivative liabilities
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303,426
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(59,200
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)
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Finance
expense
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956,960
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-
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Changes
in operating assets and liabilities
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152,654
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|
81,690
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Net
cash used in operating activities
|
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(97,476
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)
|
|
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(595,501
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)
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|
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CASH
FLOWS USED IN INVESTING ACTIVITIES:
|
|
|
|
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|
|
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Purchases
of property and equipment
|
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(1,103
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)
|
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|
(12,544
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)
|
|
|
|
|
|
|
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CASH
FLOWS FROM FINANCING ACTIVITIES:
|
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|
|
|
|
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Net
proceeds from notes payable issuance
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|
100,000
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|
|
|
-
|
|
|
|
|
|
|
|
|
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Increase/(decrease)
in cash and cash equivalents
|
|
|
1,421
|
|
|
|
(608,045
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)
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Cash
and cash equivalents, beginning of the period
|
|
|
18,596
|
|
|
|
997,048
|
|
|
|
|
|
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|
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Cash
and cash equivalents, end of the period
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$
|
20,017
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|
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$
|
389,003
|
|
|
|
|
|
|
|
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Cash
paid during the periods for interest
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$
|
713
|
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$
|
420
|
|
|
|
|
|
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Supplemental
schedule of non-cash investing and financing activities:
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|
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|
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|
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|
|
|
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Refinancing
of notes payable and accrued interest
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$
|
646,295
|
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|
$
|
-
|
|
Common
shares issued for notes payable extension
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|
$
|
3,748
|
|
|
$
|
-
|
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
SIMTROL,
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009
(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 Company
operates at a single facility in Norcross, Georgia and its sales are primarily
in the United States.
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-Q. 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 March 31,
2010, and the condensed consolidated results of operations, and cash flows for
all periods presented. Operating results for the three months ended
March 31, 2010, are not necessarily indicative of the results that may be
expected for the year ending December 31, 2010.
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, 2009 and for each of the two years ended December 31, 2009,
and 2008, which are included in the Company’s Annual Report on Form 10-K for the
year ended December 31, 2009 filed with the Securities and Exchange Commission
on March 26, 2010.
Note
2 – Going Concern Uncertainty
As of
March 31, 2010, the Company had cash and cash equivalents totaling $20,017 and
negative working capital of $856,102. Since inception, the Company
has not achieved a sufficient level of revenue to support its business and
incurred a net loss of $1,783,267 and used net cash of $97,476 in operating
activities during the three months ended March 31, 2010. While this cash used
from operations has decreased significantly from prior year, the Company will
require additional funding to fund its development and operating activities
during the second quarter of 2010 of at least $100,000. During
February 2010, the Company received $100,000 of net proceeds from the issuance
of notes payable and entered into an agreement whereby it exchanged outstanding
debt and unpaid interest in the amount of $562,250 and $84,045, respectively
(see Note 6), in a new convertible note offering. This offering was
principally used to fund first quarter operations. Historically, the
Company has relied on private placement issuances of equity and
debt. The Company has commenced efforts to raise additional capital
through a private placement of debt securities and warrants. No
assurance can be given that the Company will be successful in raising this
capital. If capital is successfully raised through the issuance of
debt, this will increase interest expense and the warrants will dilute existing
shareholders. If the Company is not successful in raising this
capital, the Company may not be able to continue as a going
concern. In that event, the Company may be forced to cease operations
and stockholders could lose their entire investment in the Company.
Also,
anti-dilution provisions of the existing Series A, B, and C Convertible
Preferred stock might result in additional dilution to existing common
shareholders if such financing results in adjustments to the conversion terms of
the convertible preferred stock. The issuance of the convertible
notes in February 2010 resulted in dilution to existing common shareholders as
terms of the convertible debt resulted in adjustments to the conversion terms of
the convertible preferred stock. (See note 6). However, if
the Company was unable to obtain this additional funding, its business,
financial condition and results of operations would be adversely
affected.
Even if
the Company obtains additional equity capital, the Company may not be able
to execute its current business plan and fund business operations for the period
necessary to achieve positive cash flow. In such case, the Company
might exhaust its capital and be forced to reduce expenses and cash burn to a
material extent, which would impair its ability to achieve its business
plan. If the Company runs out of available capital, it might be
required to pursue highly dilutive equity or debt issuances to finance its
business in a difficult and hostile market, including possible equity financings
at a price per share that might be much lower than the per share price invested
by current shareholders. No assurance can be given that any source of
additional cash would be available to the Company. If no source of
additional cash is available to the Company, then the Company would be forced to
significantly reduce the scope of its operations or possibly seek court
protection from creditors or cease business operations
altogether.
These
matters raise substantial doubt about the Company’s ability to continue as a
going concern. The accompanying condensed consolidated financial
statements have been prepared on a going concern basis, which contemplates the
realization of assets and satisfaction of liabilities in the normal course of
business. The condensed consolidated 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
Revenue
recognition
The
Company follows the guidance of the ASC 605-10-599, which provides for revenue
to be recognized when (i) persuasive evidence of an arrangement exists, (ii)
delivery or installation has been completed, (iii) the customer accepts and
verifies receipt, and (iv) collectability is reasonably
assured. Certain judgments affect the application of its revenue
policy. Revenue consists of the sale of device control software and
related maintenance contracts on these systems. Revenue on the sale
of hardware is recognized upon shipment. The Company generally
recognizes revenue from Device Manager
TM
software sales upon shipment as it sells the product to audiovisual integrators,
net of estimated returns and discounts. Revenue on maintenance
contracts is recognized over the term of the related contract.
Inventory
The
Company purchases certain hardware connectivity devices to allow connectivity of
devices with different interfaces in classrooms. The inventory is
stated at the lower of cost or market value and is recorded at the actual cost
paid to third-party vendors. The Company accounts for the inventory
using the first-in, first-out (“FIFO”) method of accounting.
Loss Per
Share
ASC 260,
"Earnings per Share", requires the presentation of basic and diluted earnings
per share ("EPS"). Basic EPS is computed by dividing loss attributable 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:
|
|
March 31, 2010
|
|
|
March 31, 2009
|
|
Options
|
|
|
7,523,450
|
|
|
|
7,270,950
|
|
Warrants
|
|
|
61,051,795
|
|
|
|
26,548,014
|
|
Convertible
Preferred Stock
|
|
|
34,143,918
|
|
|
|
22,318,656
|
|
Convertible
Notes Payable
|
|
|
15,212,130
|
|
|
|
-
|
|
Totals
|
|
|
117,931,293
|
|
|
|
56,137,620
|
|
Accordingly,
basic and diluted net loss per share are identical.
Derivative Financial
Instruments
The
Company does not use derivative instruments to hedge exposures to cash flow,
market or foreign currency risks. The Company evaluates all of its
financial instruments to determine if such instruments are derivatives or
contain features that qualify as embedded derivatives. For derivative
financial instruments that are accounted for as liabilities, the derivative
instrument is initially recorded at its fair value and is then re-valued at each
reporting date, with changes in the fair value reported in the condensed
consolidated statements of operations. For stock-based derivative
financial instruments, the Company uses the Black-Scholes option pricing model
to value the derivative instruments at inception and on subsequent valuation
dates. The classification of derivative instruments, including
whether such instruments should be recorded as liabilities or as equity, is
evaluated at the end of each reporting period. Derivative instrument
liabilities are classified in the balance sheet as current or non-current based
on the term of the underlying derivative instrument. See note
10.
Recently Implemented
Accounting Pronouncements
The FASB
has issued Accounting Standards Update (ASU) No. 2010-06,
Fair Value Measurements and
Disclosures (Topic 820): Improving Disclosures about Fair Value
Measurements.
This ASU requires some new disclosures and clarifies some
existing disclosure requirements about fair value measurement as set forth in
Codification Subtopic 820-10. ASU 2010-06 amends Codification Subtopic 820-10
and now requires a reporting entity to use judgment in determining the
appropriate classes of assets and liabilities and to provide disclosures about
the valuation techniques and inputs used to measure fair value for both
recurring and nonrecurring fair value measurements.
ASU 2010-06 is effective
for interim and annual reporting periods beginning after December 15, 2009, As
this standard relates specifically to disclosures, the adoption did not have an
impact on the Company’s condensed consolidated
financial position and
results of operations.
Effective
June 30, 2009, the Company adopted a new accounting standard included in ASU No.
2010-09 (Topic 855):
Subsequent Events
that
establishes general standards of accounting for and disclosure of events that
occur after the balance sheet date but before the financial statements are
issued or are available to be issued. This new accounting standard provides
guidance on the period after the balance sheet date during which management of a
reporting entity should evaluate events or transactions that may occur for
potential recognition or disclosure in the financial statements, the
circumstances under which an entity should recognize events or transactions
occurring after the balance sheet date in its financial statements and the
disclosures that an entity should make about events or transactions that
occurred after the balance sheet date. The implementation of this standard did
not have a material impact on our consolidated financial statements. The Company
evaluated subsequent events through the date the accompanying financial
statements were issued.
Note
4 – Income Taxes
NOL
Limitations
The
Company’s utilization of NOL carryforwards may be subject to an annual
limitation due to ownership changes that have occurred previously or that could
occur in the future as provided in Section 382 of the Internal Revenue Code of
1986 (“Section 382”), as well as similar state and foreign
provisions. In general, an ownership change, as defined by Section
382, results from transactions increasing the ownership of certain stockholders
or public group in the stock of a corporation by more than fifty percentage
points over a three-year period. Since its formation, the Company has raised
capital through the issuance of capital stock and various convertible
instruments. The Company continually performs tests for ownership
change under Section 382 and believes no ownership change, as defined by Section
382, has taken place as a result of transactions that have increased the
ownership of certain stockholders.
The
Company has not utilized any of its NOL carryforwards as it has never reported
taxable income. The Company recognized deferred tax assets of
approximately $19.5 million, primarily relating to net operating loss carry
forwards of approximately $48.7 million at March 31, 2010. The losses
expire through 2030. 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 $19.5
million is established for the full value of the deferred tax assets at March
31, 2010. The valuation allowance decreased by $53,000 during the three
months ended March 31, 2010 due to certain previous losses expiring
unused. 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.
Note
5 – Stockholders’ Equity
During
the three months ended March 31, 2010 and 2009, respectively, the Company issued
6,666 and 28,125 shares of common stock valued at $400 and $4,500 to members of
the Board of Directors for attendance at meetings. These amounts were
recorded as selling, general, and administrative expense.
Note
6 – Notes Payable
In
February 2010, the Company completed the sale of $746,295 of Participation
Interests (“Participation Interests”) in a secured master promissory note
(“Master Note”) and five-year warrants to purchase 14,925,900 shares of common
stock at an exercise price of $0.05 per share to accredited private
investors. The Master Note includes $646,295 of interest and
principal exchanged from past due notes payable originated on May 29,
2009.
The net
proceeds of this offering will be used for working capital and general corporate
purposes. Important terms of the Master Note include:
|
·
|
The
Master Note bears interest at the rate of 12% per annum, is payable
December 31, 2010 (“Maturity Date”) and can be pre-paid at any
time. Accrued interest is payable in cash on the Maturity
Date.
|
|
·
|
The
Maturity Date of the Master Note may be extended by the Company for two
30-day periods. If the Company elects to extend the Maturity
Date, the Company will pay a 5% Extension Fee at the conclusion of each
such 30-day Extension Period, payable at the option of the Company in cash
or the Company’s common stock. If the Extension fee is paid in
common stock, the common stock will be deemed to have a value per share
equal to the greater of $0.375 or the 10-day simple average of closing
prices on the Over The Counter Bulletin Board (“OTCBB”) for the 10 trading
days preceding the date the payment is
due.
|
|
·
|
The
Master Note is secured by all of the Company’s cash and cash equivalents,
accounts and notes receivable, prepaid assets, and
equipment. The Master Note and Participation Interests will be
convertible into equity securities on the following
terms:
|
|
·
|
If
the Company closes a “Qualifying Next Equity Financing” before the
Maturity Date, the then-outstanding balance of principal and accrued
interest on the Master Note will automatically convert into shares of the
“Next Equity Financing Securities” the Company issues. “Next
Equity Financing Securities” means the type and class of equity securities
that the Company sells in a Qualifying Next Equity Financing or a
Non-Qualifying Next Equity Financing. If the Company sells a
unit comprising a combination of equity securities, then the Next Equity
Financing Securities shall be deemed to constitute that
unit. Upon conversion, the Company would issue that number of
shares of Next Equity Financing Securities equal the quotient obtained by
dividing the then-outstanding balance of principal and accrued interest on
the Master Note by the price per share of the Next Equity Financing
Securities.
|
|
·
|
If
the Company closes a “Non-Qualifying Next Equity Financing” before the
Maturity Date, the then-outstanding balance of principal and accrued
interest represented by a Participation Interest can be converted, at the
option and election of the investor, into shares of the “Next Equity
Financing Securities” the Company
issues.
|
|
·
|
A
“Qualifying Next Equity Financing” means the first bona fide equity
financing (or series of related equity financing transactions) occurring
subsequent to the date of issue of the Master Note in which the Company
sells and issues any securities for total consideration totaling not less
than $2.0 million in the aggregate (including the principal balance and
accrued but unpaid interest to be converted on all our outstanding
Participation Interests in the Master Note) at a price per share for
equivalent shares of common stock that is not greater than $0.05 per
share.
|
|
·
|
A
“Non-Qualifying Next Equity Financing” means that the Company completes a
bona fide equity financing but fails to raise total consideration of at
least $2.0 million,
or
the price per share for equivalent shares of common stock is greater than
$0.05 per share.
|
|
·
|
At
any time prior to payment in full of this Note, an Investor may convert
all, but not less than all, of such Investors interest in this Note (as
represented by such Investor’s Participation Interest) into that number of
shares of the Company’s common stock equal to (A) the principal balance
plus accrued but unpaid interest hereunder due and payable to the investor
in accordance with such Investor’s Participation Interest, divided by
$0.05.
|
The
Investor Warrants have a term ending on the earlier to occur of (i) the
fifth anniversary of the Investor Warrant issue date; or (ii) the closing
of a change of control event. The Investor Warrants will have a
cashless exercise feature and anti-dilution provisions that adjust both the
exercise price and quantity if subsequent equity offerings are completed where
the Company issues common stock at a lower effective price per share than the
exercise price. The Investor Warrants were valued using the
Black-Scholes option pricing model and the following
assumptions:
Assumptions
|
|
|
|
|
|
|
|
Risk-free
rate
|
|
|
2.38
|
%
|
Annual
rate of dividends
|
|
|
0
|
|
Volatility
|
|
|
110.8
|
%
|
Average
life
|
|
5
years
|
|
The fair
value of the warrants, $594,918, was classified as a discount on the notes
payable issued during February 2010, and are classified as derivative
liabilities due to their re-pricing provisions. The amount will be
amortized over the life of the notes and $108,167 was amortized as finance
expense during the three months ended March 31, 2010. See Note
10.
The fair
value of the conversion feature of the notes payable, $302,356, was also
determined using Black-Scholes option pricing model and the following
assumptions:
Assumptions
|
|
|
|
|
|
|
|
Risk-free
rate
|
|
|
0.33
|
%
|
Annual
rate of dividends
|
|
|
0
|
|
Volatility
|
|
|
110.8
|
%
|
Term
of notes
|
|
11
months
|
|
The fair
value of the conversion feature of the notes payable was recorded as a
derivative liability due to the re-pricing provision and $151,377 of the fair
value was classified as a debt discount and will be amortized over the life of
the notes. Amortization totaling $27,524 was charged as additional
finance expense in the three months ended March 31, 2010 for the conversion
feature option of the debt. The balance of the fair value of $150,979
was recorded as an additional finance expense because the fair value of the
conversion feature and the warrants exceeded the face value of the notes
payable. See Note 10.
Pursuant
to the terms of the Certificates of Designation of Preferences, Rights, and
Limitations (the “Certificates”) of the Series A Convertible Preferred Stock,
Series B Convertible Preferred Stock, and Series C Convertible Preferred Stock
of the Company, the issuance of the convertible notes payable with $0.05
conversion price represents a Dilutive Issuance and adjusts the Conversion
Shares of each class of Convertible Preferred Stock as follows:
|
·
|
Series
A changes from 4 shares common per one share of preferred to 6.1 shares
common
|
|
·
|
Series
B changes from 2,000 shares common per one share of preferred to 3,066
shares common
|
|
·
|
Series
C changes from 2,000 shares common per one share of preferred to 3,066
shares common
|
The
common share equivalents represented by the three Series of Convertible
Preferred Stock as of March 31, 2010, therefore, increased as
follows:
|
·
|
Series
A from 2,690,656 to 4,103,250
|
|
·
|
Series
B from 8,528,000 to 13,073,424
|
|
·
|
Series
C from 11,068,000 to 16,967,244
|
The fair
value of the increased number of common shares resulting from the change in
conversion rates of $592,863 was recorded as a deemed preferred dividend in the
three months ended March 31, 2010.
Note
7 - Stock Based Compensation
On
January 1, 2006, the Company adopted, using the modified prospective
application, ASC 718, “Compensation-Stock Compensation” (“ASC 718”), which
requires all share-based payments to employees, including grants of employee
stock options, to be recognized in the financial statements based on their fair
values. Under ASC 718, 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.
Equity-based
compensation expense is measured at the grant date, based on the fair value of
the award, and is recognized over the vesting periods. The expenses are included
in selling, general, and administrative or research and development expense
depending on the grant recipient.
Compensation
costs for awards that vest will not be reversed if the awards expire without
being exercised. Stock compensation expense under ASC 718 was
$124,208 and $223,660 during the three months ended March 31, 2010 and 2009,
respectively. Of these totals, $109,139 and $178,049 and $15,069 and
$45,611 were classified as selling, general, and administrative expense and
research and development expense during the three months ended March 31, 2010
and 2009, 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 value for options to purchase 785,000 and
150,000 shares issued during the three months ended March 31, 2010 and 2009,
respectively, were estimated at the date of grant using a Black-Scholes
option-pricing model to be $27,299 and $17,603, with the following
weighted-average assumptions.
|
|
For the three months ended March
31,
|
|
Assumptions
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
Risk-free
rate
|
|
|
1.44
|
%
|
|
|
1.90
|
%
|
Annual
rate of dividends
|
|
|
0
|
%
|
|
|
0
|
%
|
Volatility
|
|
|
113.4
|
%
|
|
|
107.8
|
%
|
Average life
|
|
3.6 years
|
|
|
5 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.
A summary
of option activity under the Company’s 1991 Stock Option Plan and the Company’s
2002 Equity Incentive Plan as of March 31, 2010 and changes during the three
months then ended are presented below:
|
|
|
|
|
Weighted-
Average
|
|
|
Weighted-Average
Remaining
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
Term (in years)
|
|
Outstanding
January 1, 2010
|
|
|
6,894,700
|
|
|
$
|
0.67
|
|
|
|
|
Granted
|
|
|
785,000
|
|
|
$
|
0.05
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
Terminated
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
Expired
|
|
|
(250
|
)
|
|
$
|
4.70
|
|
|
|
|
Forfeited
|
|
|
(156,000
|
)
|
|
$
|
0.53
|
|
|
|
|
Outstanding
at March 31, 2010
|
|
|
7,523,450
|
|
|
$
|
0.62
|
|
|
|
6.8
|
|
Exercisable
at March 31, 2010
|
|
|
5,210,112
|
|
|
$
|
0.68
|
|
|
|
6.1
|
|
The
weighted-average grant-date fair values of options granted during the three
months ended March 31, 2010 and 2009 were $0.04 and $0.12,
respectively. No options were exercised during the three months
ended March 31, 2010.
As of
March 31, 2010, there was $379,225 of total unrecognized compensation cost
related to non-vested share-based compensation arrangements granted under the
2002 Equity Incentive Plan. That cost is expected to be recognized
over a weighted average period of 1.25 years.
At March
31, 2010, 17,378,050 options remain available for grant under the 2002 Equity
Incentive Plan. No options are available to be issued under the 1991
Stock Option Plan.
On
January 18, 2010, the Company granted options to purchase 785,000 shares of
stock to six employees with an exercise price equal to the fair market value of
the stock on that date. The shares vest on the one-year anniversary
of the grant date.
Note
8- Major Customers
Revenue
from three customers comprised 95% of consolidated revenues for the three months
ended March 31, 2010. At March 31, 2010, related accounts receivable of $22,650
from one of these three customers comprised 91% of consolidated
receivables.
Revenue
from four customers comprised 91% of consolidated revenues for the three months
ended March 31, 2009.
Note
9 – Intangibles
In
conjunction with the purchase of the Integrated Digital Systems (“IDS”) interest
in Justice Digital Solutions, LLC (“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. Prior to December
31, 2008, the amount was being amortized over the estimated remaining life of
the license agreement for JDS’ use of the OakVideo software through October
2015. At December 31, 2008, the Company recorded an impairment charge
of $76,782 to reduce the value of the intangible to the amount of gross profit
anticipated from purchase orders previously received for the Company’s Curiax
Arraigner software. At March 31, 2009, the Company recorded an
impairment charge of $18,499 to reduce the value of the intangible to the amount
of gross profit anticipated for one remaining purchase order for sale of the
Company’s Curiax Arraigner software. This installation has not yet
been completed The charge during the three months ended March 31,
2009 equaled the approximate gross profit on the revenue recorded for a Curiax
Arraigner sale made during the three months ended March 31, 2009. Due
to difficulties in gaining end user acceptance of the product, the Company is
unable to estimate whether any additional future sales of the product will take
place.
Note
10 – Derivatives
In September 2008, the FASB finalized
Update ASC 815-40, “
Derivatives and
Hedging”, “Contracts in an Entity’s Own
Equity
”. Under the update,
instruments which do not have fixed settlement provisions are deemed to be
derivative instruments. The warrants issued to a placement agent and investors
in 2005 (“2005 Warrants”) do not have fixed settlement provisions because their
exercise prices, may be lowered if the Company issues securities at lower prices
in the future. Also, convertible notes and warrants issued to
investors in a private placement of convertible notes and warrants on May 29,
2009 (“2009 Warrants”) do not contain fixed settlement
provisions. (See Note 6). In accordance with the
update, the Placement Agent Warrants and 2005 Warrants were re-characterized as
derivative liabilities in 2009 and the 2009 Warrants were classified as
derivative liabilities. The update requires that the fair value of these
liabilities be re-measured at the end of every reporting period with the change
in value reported in the statement of operations.
On
February 1, 2010, in accordance with the anti-dilution provisions of the 2005
Warrants to purchase 1,233,691 shares of common stock, warrant holders had the
exercise prices of the warrants adjusted from $0.375 per share to $0.05 per
share. Also, in accordance with the anti-dilution provisions of
certain warrants to purchase 2,998,667 shares of common stock that were issued
on May 29, 2009, warrants to purchase an additional 19,491,336 shares
of common stock were issued to these holders and their exercise prices were
adjusted from $0.375 to $0.05 per share. A finance expense charges of
$17,168, was recorded on that date to reflect the fair value of the exercise
price adjustments to the 2005 Warrants. A finance expense charge of
$788,812 was recorded on that date to reflect the fair value of the quantity and
exercise price adjustments to the 2009 Warrants. In conjunction with
the notes payable issued during February 2010, the Company issued warrants to
purchase 14,925,900 shares of common stock with an exercise price of $0.05
(“2010 Warrants”). The exercise price of these warrants adjusts
downward if the Company issues any future convertible debt or equity instruments
with exercise prices lower than $0.05. See Note 6.
The notes
payable issued by the Company in February 2010 are classified as short-term
derivative liabilities due to the re-pricing mechanism in the note terms and the
December 31, 2010 due date of the notes.
The
Derivative Warrants and Notes Payable conversion feature were valued using the
Black-Scholes option pricing model and the following assumptions:
|
|
|
|
|
Dec.
31,
|
|
|
|
March 31, 2010
|
|
|
2009
|
|
2005 Warrants
:
|
|
|
|
|
|
|
Risk-free
rate
|
|
|
0.16
|
%
|
|
|
0.20
|
%
|
Annual
rate of dividends
|
|
|
0
|
|
|
|
0
|
|
Volatility
|
|
|
107.7
|
%
|
|
|
113.4
|
%
|
Weighted
Average life (years)
|
|
|
0.25
|
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
2009
Warrants
:
|
|
|
|
|
|
|
|
|
Risk-free
rate
|
|
|
2.55
|
%
|
|
|
2.69
|
%
|
Annual
rate of dividends
|
|
|
0
|
|
|
|
0
|
|
Volatility
|
|
|
107.7
|
%
|
|
|
113.4
|
%
|
Weighted
Average life (years)
|
|
|
4.2
|
|
|
|
4.4
|
|
|
|
|
|
|
|
|
|
|
2010
Warrants
:
|
|
|
|
|
|
|
|
|
Risk-free
rate
|
|
|
2.55
|
%
|
|
|
-
|
|
Annual
rate of dividends
|
|
|
0
|
|
|
|
-
|
|
Volatility
|
|
|
107.7
|
%
|
|
|
-
|
|
Weighted
Average life (years)
|
|
|
4.8
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
2010
Convertible Notes Payable
|
|
|
|
|
|
|
|
|
Risk-free
rate
|
|
|
0.40
|
|
|
|
-
|
|
Annual
rate of dividends
|
|
|
0
|
|
|
|
-
|
|
Volatility
|
|
|
107.7
|
%
|
|
|
-
|
|
Weighted
Average life (years)
|
|
|
0.75
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Fair
Value
|
|
$
|
2,143,430
|
|
|
$
|
136,749
|
|
ASC
815-40 was implemented in the first quarter of 2009 and is reported as the
cumulative effect of a change in accounting principles. At January 1, 2009, the
cumulative effect on the accounting for the warrants was recorded as decrease in
additional accumulated deficit by $1,599,708. The difference was recorded as
derivative liability for $110,663. At March 31, 2009, derivative liability
associated with the Placement Agent and 2005 Warrants were revalued, the $59,200
decrease in the derivative liability at March 31, 2009 is included as other
income in the Company’s condensed consolidated statement of operations for the
quarter ended March 31, 2009.
At March
31, 2010, the derivative liability associated with the 2005 Warrants, 2009
Warrants, 2010 Warrants and the conversion feature of the notes payable were
revalued, and the $303,426 increase in the derivative liability at March 31,
2010 is included as other expense in the Company’s condensed consolidated
statement of operations for the quarter ended March 31, 2010.
Note
11 - Fair Value Measurement
Valuation
Hierarchy
ASC 820
establishes a valuation hierarchy for disclosure of the inputs to valuation used
to measure fair value. This hierarchy prioritizes the inputs into three broad
levels as follows. Level 1 inputs are quoted prices (unadjusted) in
active markets for identical assets or liabilities. Level 2 inputs
are quoted prices for similar assets and liabilities in active markets or inputs
that are observable for the asset or liability, either directly or indirectly
through market corroboration, for substantially the full term of the financial
instrument. Level 3 inputs are unobservable inputs based on the
Company’s own assumptions used to measure assets and liabilities at fair
value. A financial asset or liability’s classification within the
hierarchy is determined based on the lowest level input that is significant to
the fair value measurement.
The
following table provides the assets and liabilities carried at fair value
measured on a recurring basis as of March 31, 2010:
|
|
|
|
|
Fair Value Measurements at March 31, 2010
|
|
|
|
Total Carrying
Value at
March 31, 2010
|
|
|
Quoted prices
in active
markets
(Level 1)
|
|
|
Significant
other
observable
inputs (Level 2)
|
|
|
Significant
unobservable
inputs (Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
liabilities
|
|
$
|
2,143,430
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,143,430
|
|
The
derivative liabilities are measured at fair value using quoted market prices and
estimated volatility factors based on historical quoted market prices for the
Company’s common stock, and are classified within Level 3 of the valuation
hierarchy.
The
following table sets forth a summary of the changes in the fair value of our
Level 3 financial liabilities that are measured at fair value on a recurring
basis:
|
|
Three
Months Ended
March
31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
Beginning
balance
|
|
$
|
(136,749
|
)
|
|
$
|
(110,663
|
)
|
Net
unrealized (loss)/gain on derivative
financial instruments
|
|
|
(303,426
|
)
|
|
|
59,200
|
|
New
derivative liabilities issued
|
|
|
(1,703,255
|
)
|
|
|
-
|
|
Ending
balance
|
|
$
|
(2,143,430
|
)
|
|
$
|
(51,463
|
)
|
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The
following discussion highlights the material factors affecting our results of
operations and the significant changes in the balance sheet items. The notes to
our condensed consolidated financial statements included in this report and the
notes to our consolidated financial statements included in our Form 10-K for the
year ended December 31, 2009 should be read in conjunction with this discussion
and our consolidated financial statements.
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
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
.
We follow the guidance of the ASC 605-10-599 which provides for
revenue to be recognized when (i) persuasive evidence of an arrangement
exists, (ii) delivery or installation has been completed, (iii) the
customer accepts and verifies receipt, and (iv) collectability is
reasonably assured. Certain judgments affect the application of
its revenue policy. Revenue consists of the sale of device
control software and related maintenance contracts on these
systems. Revenue on the sale of hardware is recognized upon
shipment. The Company generally recognizes revenue from Device
Manager
TM
software sales upon shipment as it sells the product to audiovisual
integrators, net of estimated returns and discounts. Revenue on
maintenance contracts is recognized over the term of the related
contract.
|
|
·
|
Capitalized
software development costs
.
Our policy on
capitalized software development 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 research
and development costs meet the criteria for immediate expense or
capitalization. We did not capitalize any software and research and
development costs during either 2010 or 2009 and all assets were fully
amortized by December 31, 2006. Our research and development
efforts during 2009 and 2010 primarily involved product improvements to
our Device Manager and Video Visitation products to improve their
functionality and ease of use for end
users.
|
|
·
|
Impairment
of Long-Lived Assets
. We record impairment losses on assets 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. We recorded an impairment of
approximately $18,000 in the three months ended March 31, 2009 to lower
the carrying value of our right to license intellectual property based on
estimated future gross profit from sales of our Curiax Arraigner software
product and due to sales that occurred during the period. No
impairment was recorded in the three months ended March 31,
2010. See Note 9 to our condensed consolidated financial
statements.
|
|
·
|
Derivative
Financial Instruments
.
We do not use derivative
instruments to hedge exposures to cash flow, market or foreign currency
risks and we evaluates all of our financial instruments to determine if
such instruments are derivatives or contain features that qualify as
embedded derivatives. For derivative financial instruments that
are accounted for as liabilities, the derivative instrument is initially
recorded at its fair value and is then re-valued at each reporting date,
with changes in the fair value reported in the condensed consolidated
statements of operations. For stock-based derivative financial
instruments, we use the Black-Scholes option pricing model to value the
derivative instruments at inception and on subsequent valuation
dates. The classification of derivative instruments, including
whether such instruments should be recorded as liabilities or as equity,
is evaluated at the end of each reporting period. Derivative
instrument liabilities are classified in the balance sheet as current or
non-current based on the term of the underlying derivative
instrument. See Note 10
to our condensed consolidated
financial statements
.
|
FINANCIAL
CONDITION
During
the three months ended March 31, 2010, total current assets decreased
approximately 7% to $86,271 from $93,049 at December 31, 2009. The
decrease in assets was primarily due to the approximately $97,000 of cash used
to fund operations during the period.
Total
liabilities increased $1,636,848 during the three months ended March 31, 2010
due primarily to the classification of investor warrants issued during the
quarter as long-term derivative liabilities.
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
Revenues
were $92,219 and $251,287 for the three months ended March 31, 2010 and 2009,
respectively. The 63% decrease for the three months ended March 31, 2010 was due
primarily to two large sales of Curiax Arraigner and Curiax Court Recording
software and hardware revenues in conjunction with a sale at one county last
year, as well as two larger installations in the education market. Both sales
involved significant amounts of lower margin hardware. The effects of
inflation and changing prices on revenues and loss from operations during the
periods presented have been de minimus. Due to our small customer base, we face
the risk of fluctuating revenues should any of our customers discontinue using
our products.
Cost
of Revenues and Gross Profit
Cost of
revenues decreased $91,731, or 85%, for the three months ended March 31, 2010
compared to the three months ended March 31, 2009 due primarily to hardware
costs associated with the Curiax Arraigner and Court Recording sales above as
these sales involved a high mix of hardware revenues. We anticipate
that gross profit as a percentage of revenues will increase in the future as our
mix of software licenses versus hardware and service revenues
increases. Higher current year margins were due to a greater mix of
software sales and increased service revenues.
Gross
margins were approximately 82% and 57% for the three months ended March 31, 2010
and 2009. The current period margins are more indicative of our
expected mix of software and service revenues versus the higher hardware sales
experienced in the prior year.
Selling,
General, and Administrative Expenses
Selling,
general, and administrative expenses were $337,844 and $778,651 for the three
months ended March 31, 2010 and 2009, respectively. The 57% decrease in the
expenses for three-month period ended March 31, 2010 resulted primarily from a
decrease in headcount which occurred during the second half of 2009 and
continued during the three months ended March 31, 2010, as well as reduced
salaries for certain personnel in order to reduce cash used from
operations. These ongoing efforts to reduce cash used from operations
have reduced cash usage significantly, but have not resulted in positive cash
flow from operations, and we require additional fundraising to fund
operations. Decreased stock-based compensation of approximately
$69,000 was due to lower stock option fair values for grants made to employees
during the current period, as well as decreases in the number of options that
vested during the period due to full vesting of prior grants.
Research
and Development Expenses
Research
and development costs were $102,101 and $311,685 for the three months ended
March 31, 2010 and 2009, respectively. During the three months ended
March 31, 2010 and 2009, we did not capitalize any software development costs
related to new products under development as our research and development
efforts during 2009 and 2010 primarily involved product improvements to our
Device Manager
TM
and
Video Visitation products to improve their functionality and ease of use for end
users.
The 67%
decrease in expense during the current period resulted primarily from lower
salary costs due to the personnel reductions, as well as lower stock-based
compensation of approximately $31,000 due to the lower number of options that
vested during the period and the lower fair value of grants made during the
three months ended March 31, 2010. Also, in order to reduce cash used
from operations, we have discontinued the use of outsourced software development
services, for which we incurred approximately $17,000 in the three months ended
March 31, 2009.
Other
expense of $1,419,002 for the three months ended March 31, 2010 consisted
primarily of $956,960 to record the finance expense associated with the issuance
of certain warrants in conjunction with the February 2010 financing as well as
the excess of the fair value of the warrants and the conversion feature of the
notes payable versus the actual proceeds received from the
offering. Additionally, we recorded $135,691 expense to record
amortization of the fair value of the warrants granted to noteholders as
part of the convertible notes we issued in February 2010, and $303,426 to record
the loss on derivative liabilities during the current period for the increase in
estimated fair value of warrants and the conversion feature of our notes
payable. The value of the derivative liabilities increased
significantly during the quarter due to the issuance of approximately 19 million
additional warrants to holders of warrants issued in 2009 that contained both
quantity and price re-set provisions, as well as approximately 14 million
warrants issued to noteholders in the 2010 note financing. See notes
6 and 10 to our condensed consolidated financial statements.
Other
income of $64,766 during the three months ended March 31, 2009 consisted of a
$59,200 gain on our derivative liabilities during the period as well as $5,566
interest earned on our cash balances during the current period. The
derivative liabilities decreased during that period due primarily to expirations
of warrants as well as decreases in the remaining term of the warrants, a lower
Company stock price, and lower interest rates at March 31, 2009 compared to
January 1, 2009.
Net
Loss and Net Loss Attributable to Common Stockholders
Net loss
for the three months ended March 31, 2010 was $1,783,267 compared to a net loss
of $882,733 for the three months ended March 31, 2009. The loss during the
current period was due primarily to derivative liability and financing costs
noted above associated with our February 2010 financing, as we decreased our
loss from operations by 62%, or approximately $583,000, due to our reductions in
expenses to reduce cash used from operations. Net loss attributable
to common shareholders included a charge of $592,863 to record the increased
fair value of the conversion feature of the preferred stock resulting from the
change in the conversion rate of our convertible preferred stock as a result of
our February 2010 financing.
LIQUIDITY
AND CAPITAL RESOURCES
Due to a
net loss during the three months ended March 31, 2010 of $1,783,267, cash used
in operating activities amounted to $97,476 during the three months ended March
31, 2010, and an accumulated deficit of $83.1 million at March 31, 2010, and our
inability to date to obtain sufficient financing to support current and
anticipated levels of operations, there is a substantial doubt about the
Company’s ability to continue as a going concern. Our revenues since inception
have not provided sufficient cash to fund our operations.
Our cash
used from operations decreased during 2010 primarily due to measures we
undertook to reduce our cash used from operations, including terminating
employees and reducing the salaries of all employees by 50% effective August 14,
2009. Certain personnel have had their salaries returned to their
original levels, but until we significantly increase revenues, we anticipate
that we will continue to operate with minimal headcount and reduced salaries for
certain employees.
Historically,
we have relied on private placement issuances of equity and debt. We
need to raise additional working capital during second quarter 2010 to fund our
ongoing operations and growth. We have commenced efforts to raise additional
capital through a private placement of debt securities and
warrants. No assurance can be given that we will be successful in
raising this capital. If we successfully raise additional capital
through the issuance of debt, this will increase our interest expense and the
warrants will dilute our existing shareholders. If we are not
successful in raising this capital, we may not be able to continue as a going
concern. In that event, we may be forced to cease operations and our
stockholders could lose their entire investment in our company.
As of
March 31, 2010, we had cash and cash equivalents of $20,017. We
currently require substantial amounts of capital to fund current operations and
the continued development and deployment of our Device Manager
TM
product
line. 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. As with our note issuance for approximately $746,000 during
February 2010 ($100,000 new notes issuance and approximately $646,000 of note
principal and interest contributed from our May 2009 financing), such financings
may trigger certain anti-dilution provisions of existing warrants and our
convertible preferred stock and be dilutive to existing common
shareholders. See notes 6 and 10 to our condensed consolidated
financial statements.
We used
$595,501 in cash from operating activities during the three months ended March
31, 2009 due primarily to our net loss during the period of
$882,733. During the three months ended March 31, 2010 and 2009,
respectively, we used $1,103 and $12,544 in investing activities primarily to
purchase new computer equipment.
In view
of the matters described in the preceding paragraph, recoverability of a major
portion of the recorded asset amounts shown in the accompanying condensed
consolidated 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
consolidated 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.
The
Company expects to spend less than $25,000 for capital expenditures for the
remainder of fiscal 2010.
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 Device Manager product line
and other uncertainties detailed from time to time in our Securities and
Exchange Commission (“the SEC”) filings, including our Annual Report on Form
10-K and our quarterly reports on Form 10-Q.
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The
Company had no material exposure to market risk from derivatives or other
financial instruments as of March 31, 2010.
ITEM
4T. CONTROLS AND PROCEDURES
Our
management, including the Company’s Chief Executive Officer and Chief Financial
Officer, evaluated as of March 31, 2010, the effectiveness of the design and
operation of our disclosure controls and procedures. Based upon that evaluation,
the Chief Executive Officer and Chief Financial Officer has concluded that the
Company's disclosure controls and procedures were effective as of the end of the
period covered by this report to provide reasonable assurance that information
required to be disclosed by the Company in reports that it files or submits
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the Securities and Exchange Commission's rules and
forms and that such information is accumulated and communicated to the Company's
management, including the Company's Chief Executive Officer and Chief Financial
Officer, to allow timely decisions regarding required disclosure.
Changes
in Internal Control Over Financial Reporting
There
have been no significant changes in internal controls over financial reporting
that occurred during the quarter ended March 31, 2010 that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
Part
II – OTHER INFORMATION
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”) or (ii) ) the Company’s
Annual Report on Form 10-KSB for the year ended December 31, 2006 (referred to
as “2006 10-KSB”).
Exhibit No.
|
|
Description
|
|
|
|
3.1*
|
|
Certificate
of Incorporation as amended through March 8, 2007 (2006
10-KSB)
|
|
|
|
3.2*
|
|
Amended
Bylaws of the Company as presently in use (S-18 No. 1, Exhibit
3.2)
|
|
|
|
10.9*
|
|
Triton
Business Development Services Engagement Agreement dated January 31, 2007
(2006 10-KSB)
|
|
|
|
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
of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
|
|
32.2
|
|
Certification
of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
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: May 17, 2010
|
/s/ Oliver M. Cooper III
|
|
Chief Executive Officer
|
|
(Principal executive officer)
|
|
|
|
/s/ Stephen N. Samp
|
|
Chief Financial Officer
|
|
(Principal financial and accounting officer)
|
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