SMRL Simtrol Inc (CE)

The fair value of the warrants, $450,770, was classified as a discount on the notes payable issued on May 29, 2009.  This amount will be amortized over the life of the convertible notes and $224,167 and $304,575 was amortized as a financing expense during the three and nine months ended September 30, 2009.  $31,177 and $42,361 of interest payable was accrued during the three and nine months ended September 30, 2009.

 

Note 12 – Subsequent Event

 

On October 23, 2009, the Company assigned ownership of its Simtrol Visitor™ and Simtrol Scheduler™ software (“Software”) to Strike Industries, Inc., a Florida corporation, (“Strike”) granting Strike the right to modify, advertise, promote, market, and license the software in exchange for $100,000 cash and a $400,000 note payable with the following terms:

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60 month-term

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6% simple interest calculated on an annual basis

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Minimum payment of $6,000 per quarter

·

Note secured by the Software

Simtrol will be due a software royalty for sales of Visitor and Scheduler as follows:

Until the note is fully paid, the royalty will be 45% of net Software revenues earned by Strike.  Upon payment in full of the note, the royalty will be 10% of net Software revenues.

In the event that the Strike sells, assigns or otherwise liquidates the Software, derivative works or other applications utilizing the Company’s Device Manager TM software, the Company will receive 10% of the proceeds resulting from such an event.

On November 6, 2009, the Company received notification of a compliant draw on its standby letter of credit from its landlord on its office space lease totaling $53,476, representing the past due rent on the office space for the four months of August through November 2009, including late fees.  The funds were withdrawn, without penalty, from the restricted certificate of deposit collateralizing the standby letter of credit on November 9, 2009.

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, 2008 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:

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Revenue recognition . We follow the guidance ASC 605-10-599 for revenue recognition.  We adhere strictly to the criteria outlined in 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 our 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.  We recognize revenue from Device Manager TM software sales upon shipment as we sell the product to audiovisual integrators, net of estimated returns and discounts.  Revenue on maintenance contracts is recognized over the term of the related contract.

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Capitalized software and research and development costs . Our policy on capitalized software and research and 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 2009 or 2008 and all assets were fully amortized by December 31, 2006.  Our research and development efforts during 2008 and 2009 primarily involved product improvements to our Device Manager and Video Visitation products to improve their functionality and ease of use for end users.

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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 nine months ended September 30, 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 nine months ended September 30, 2008.  See Note 8 to our condensed consolidated financial statements.

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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 9 to our condensed consolidated financial statements .

FINANCIAL CONDITION

During the nine months ended September 30, 2009, total current assets decreased approximately 84% to $191,650 from $1,235,841 at December 31, 2008.  The decrease in assets was primarily due to the approximate $1,424,000 cash used to fund operations during the period.

 

Total current liabilities increased $566,474 or 204%, due primarily to the issuance of convertible notes payable on May 29, 2009 in a financing transaction as well as increases in accounts payable and accrued expenses during the period.

 

See Note 2 to the unaudited condensed consolidated financial statements regarding the Company’s going concern uncertainty. The Company needs to raise additional working capital during the fourth quarter 2009 or early in 2010 to fund ongoing operations and growth and has commenced efforts to raise additional capital through a private placement of debt securities and warrants and issued $562,250 of convertible notes on May 29, 2009.   The Company can raise up to $1.5 million in the private placement under the current terms if market conditions allow.  No assurance can be given that the Company will be successful in raising this capital and, in order to reduce cash used from operations, the Company has terminated and furloughed employees as well as reducing salaries of all personnel by 50% effective August 14, 2009.

 

The Company does not have any material off-balance sheet arrangements.

 

RESULTS OF OPERATIONS

 

During the three months ended September 30, 2009 and 2008, respectively, stock-based compensation of $26,158 and $41,801was 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 income/(expense) of $11,446 during the three months ended September 30, 2009 consisted primarily of a $282,571 gain on our derivative liabilities during the period, offset primarily by $224,167 to record amortization of the fair value of warrants issued to noteholders in our May 29, 2009 private placement of convertible notes payable and warrants.  The gain on derivative liabilities during the period was due primarily to the decrease in our stock price from $0.28 at June 30, 2009 to $0.20 at September 30, 2009 as well as the expiration of the remaining 2004 Placement Agent Warrants during the period, as well as the shorter remaining outstanding term for the 2005 and 2009 Warrants.

Other expense during the nine months ended September 30, 2009 of $179,032 consisted primarily $304,575 recorded to amortize the fair value of warrants issued to convertible noteholders in a financing transaction on May 29, 2009, partially offset by a gain of $181,245 recorded on our derivative liabilities.

Other expense during the Nine months ended September 30, 2008 of $619,379 consisted primarily of $532,076 to amortize debt discount and the value of warrants granted to the convertible note holders in January 2008, $78,894 to record the interest accrued on the convertible notes prior to their exchange into the Series C convertible stock offering, and debt offering costs of $21,579 amortized over the term of the notes.

Net loss for the nine months ended September 30, 2009 was $2,461,112 compared to a net loss of $3,648,282 for the nine months ended September 30, 2008. The lower loss during the current period was due primarily to lower operating expenses during the current year due to attempts to lower our cash used from operations as well as greater financing costs incurred during the nine months ended September 30, 2008 in conjunction with our notes payable financing in January 2008.  Additionally, we recorded gains on derivative liabilities totaling $181,245 during the current year due primarily to the expiration of certain warrants classified as derivatives as well as due to lower remaining terms of our derivative liabilities.  Net loss attributable to common stockholders of $2,820,450 included $359,338 to record the value of common stock dividends paid to Series A, B, and C Convertible Preferred Stock holders on June 30, 2009.  Net loss attributable to common stockholders of $5,898,248 included $274,368 to record the value of common stock dividends paid on June 30, 2008 to Series A and Series B Convertible Preferred Stock holders and $1,975,598 to record the deemed preferred dividend on the Series C Convertible Preferred Stock issued on June 30 and  September 26, 2008.  See note 6 to the condensed consolidated financial statements.

LIQUIDITY AND CAPITAL RESOURCES

Due to continuing losses during the nine months ended September 30, 2009 of $2,461,112, cash used in operating activities amounted to $1,423,573 during the nine months ended September 30, 2009, and an accumulated deficit of $80.4 million at September 30, 2009, and our inability to date to obtain sufficient financing to support current and anticipated levels of operations, there is a substantial doubt about our ability to continue as a going concern. Our revenues since inception have not provided sufficient cash to fund our operations. Historically, we have relied on private placement issuances of equity and debt.  We need to raise additional working capital during the fourth quarter of 2009 or early 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 and issued $562,250 of convertible notes on May 29, 2009. We can raise up to $1.5 million in the private placement under the current terms if market conditions allow.  No assurance can be given that we will be successful in raising this capital and we have significantly reduced our cash used from operating activities by reducing salaries of all employees by 50% effective August 14, 2009.    Additionally, we began performing outsourced software development activities during the three months ended September 30, 2009 in order to further reduce our cash used from operations.  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.

We used $1,423,573 in cash from operating activities during the nine months ended September 30, 2009 due primarily to our net loss during the period of $2,461,112.  We used $2,139,456 in cash from operating activities during the nine months ended September 30, 2008 due primarily to our net loss during the period of $3,648,282.  The decrease in cash used during the current period was due primarily to the higher revenues and lower operating expenses during the current period as we attempted to reduce operating expenses to reduce cash use.  Cash used from operations totaled approximately $257,000 in the three months ended September 30, 2009, compared to approximately $596,000 and $571,000 used in the first two quarters of 2009, respectively.  Cash received during the nine months ended September 2009 included approximately $537,000 net proceeds from the issuance of convertible notes payable and warrants to purchase our common stock.  Cash received from financing activities during the nine months ended September 30, 2008 included the $1,500,000 of convertible notes payable issued less approximately $5,000 of deferred financing costs incurred during the period and we raised an additional $1,053,153 from the equity offering on June 30, 2008 and $1,373,000 (net of offering costs) on September 26, 2008.   During the nine months ended September 30, 2009 and 2008, respectively, we used $18,267 and $28,318 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.

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 September 30, 2009.

ITEM 4T. CONTROLS AND PROCEDURES

The Company maintains a system of internal controls designed to provide reasonable assurance that transactions are executed in accordance with management’s general or specific authorization; transactions are recorded as necessary to (1) permit preparation of financial statements in accordance with accounting principles generally accepting in the United States of America, and (2) maintain accountability for assets.  Access to assets is permitted only in accordance with management’s general or specific authorization.  In 2007, the Company adopted and implemented the control requirements of Section 404 of the Sarbanes-Oxley Act of 2002 (the “Act”).

It is the responsibility of the Company’s management to establish and maintain adequate internal control over financial reporting.  However, due to its limited financial resources, there is only limited segregation of duties within the accounting function, leaving most significant aspects of financial reporting in the hands of the Chief Financial Officer.

A significant deficiency is defined as a deficiency, or a combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of a registrant’s financial reporting.

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.

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.  The Company previously disclosed that it had difficulty in evaluating, applying, and documenting complex accounting principles, and in preparing a complete report without major errors, within our accounting function and reported that a material weakness existed within its system of controls.

Our management, including the Company’s Chief Executive Officer and Chief Financial Officer, evaluated as of September 30, 2009, the effectiveness of the design and operation of our disclosure controls and procedures. In their evaluation, our Chief Executive Officer and Chief Financial Officer identified the changes and enhancements in our control environment, as described below, that we have implemented prior to December 31, 2008, that remedied our previously disclosed material weaknesses.  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.

The Company implemented additional procedures at December 31, 2008, regarding the review and preparation of the accounting related to complex accounting principles and the Company’s reports.  On an as-needed basis, the Company will use outside consultants to assist in the preparation of the Company’s financial accounting records and financial reports.  No such assistance was deemed to be required as of September 30, 2009.

The Company’s significant deficiency involves a lack of segregation of duties within its internal control function. Due to the inherent issue of segregation of duties in a small company, we have relied heavily on entity or management review controls to lessen the issue of segregation of duties.

 

Management is aware that there is a lack of segregation of duties at the Company due to the small number of employees dealing with general, administrative and financial matters. This constitutes a significant deficiency in financial reporting. However, at this time, management has decided that considering the employees involved and the control procedures in place, the risks associated with such lack of segregation of duties are insignificant and the potential benefits of adding additional employees to clearly segregate duties do not justify the expenses associated with such increases. Management will periodically reevaluate this situation. If the volume of the business increases and sufficient capital is secured, it is the Company's intention to further increase staffing to mitigate the current lack of segregation of duties within the general, administrative and financial functions.

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 September 30, 2009 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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”).

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.