NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
(UNAUDITED)
Note
1 - Nature of Operations and Basis of Presentation
Simtrol,
Inc., formerly known as VSI Enterprises, Inc., was incorporated in Delaware
in
September 1988 and, together with its wholly-owned subsidiaries (the "Company"),
develops, markets, and supports software-based audiovisual control and digital
arraignment systems that operate on PC platforms.
The
accompanying unaudited condensed consolidated financial statements have been
prepared by the Company in conformity with accounting principles generally
accepted in the United States of America and the instructions to Form 10-QSB.
It
is management’s opinion that these statements include all adjustments,
consisting of only normal recurring adjustments, necessary to present fairly
the
condensed consolidated financial position as of September 30, 2007, and the
condensed consolidated results of operations, and cash flows for all periods
presented.
Certain
information and footnote disclosures normally included in the annual financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been condensed or omitted. It is suggested
that these unaudited condensed consolidated financial statements be read in
conjunction with the consolidated financial statements and notes thereto as
of
December 31, 2006 and for each of the two years ended December 31, 2006 and
2005, which are included in the Company’s Annual Report on Form 10-KSB for the
year ended December 31, 2006 filed with the Securities and Exchange Commission.
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date
of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Note
2 - Going Concern Uncertainty
As
of
September 30, 2007, the Company had cash and cash equivalents $1,020,684. Since
inception, the Company has not achieved a sufficient level of revenue to support
its business and has incurred recurring losses from operations, and has an
accumulated deficit of approximately $70.6 million as of September 30, 2007.
The
Company has relied on periodic investments in the form of common stock,
preferred stock, and convertible debt since the fourth quarter of 2001 to
sustain its operations. The Company currently requires substantial amounts
of
capital to fund current operations and the continued development and deployment
of its ONGOER
®
,
OnGuard, and Curiax
TM
product
lines. O
n
March
16, 2007, the Company
completed
the sale of $3,525,000 of securities in a private placement of 4,700 units
(at
$750 per unit) consisting of one share of Series B Convertible Preferred Stock
and one warrant to purchase 2,000 shares of our common stock at an exercise
price of $0.375 per share. Each share of Series B Convertible Preferred Stock
has a conversion price of $0.375 per share (one Series B Convertible Preferred
share equals 2,000 shares of common stock). The warrants originally had
three-year terms and were modified in September 2007 to extend the term to
five
years and include a cashless exercise provision. See Note 5. The Company intends
to use the proceeds of the private placement to hire additional sales and
software development personnel to expand its sales efforts for its audiovisual
control and monitoring and digital arraignment software, as well as to develop
new integrated software products for its Curiax platform. The Company also
issued notes payable of $331,000 to three investors, including one member of
the
Board of Directors during the nine months ended September 30, 2007. Principal
of
$13,500 on these notes and all applicable accrued interest were repaid to the
member of the Board of Directors in June 2007. Notes for $696,500 (representing
$379,000 of notes originated during 2006 and the $317,500 of notes originated
in
the nine months ended September 30, 2007) and $13,700 of accrued interest on
the
notes were exchanged in the convertible preferred stock offering above.
On
February 15, 2006, the Company sold various patents (see Note 7). On February
15, 2006, the Company also formed a joint venture, named Justice Digital
Solutions, LLC (“JDS”), with Integrated Digital Systems, LLC (“IDS”), an
integrator based in Livonia, Michigan, to develop and sell a judicial
arraignment software solution based on the success of a deployment in Oakland
County, Michigan.
On
November 28, 2006, the Company purchased the 50% of the joint venture owned
by
IDS (See Note 8). There can be no assurance that the Company will be successful
in its attempts to develop and deploy its ONGOER and OnGuard product lines,
or
that JDS will be successful in its attempts to sell its judicial arraignment
software, to generate positive cash flows or raise sufficient capital essential
to its survival. To the extent that the Company is unable to generate or
raise the necessary operating capital, it will become necessary to curtail
operations. Additionally, even if the Company does raise operating capital,
there can be no assurance that the net proceeds will be sufficient to enable
it
to develop its business to a level where it will generate profits and positive
cash flows.
These
matters raise substantial doubt about the Company’s ability to continue as a
going concern. The accompanying financial statements have been prepared on
a going concern basis, which contemplate the realization of assets and
satisfaction of liabilities in the normal course of business. The financial
statements do not include any adjustments relating to the recoverability of
the
recorded assets or the classification of the liabilities that might be necessary
should the Company be unable to continue as a going concern.
Note
3 - Selected Significant Accounting Policies
Principles
of Consolidation
The
unaudited condensed consolidated financial statements include the accounts
of
the Company and its wholly-owned subsidiaries. All significant intercompany
transactions and balances have been eliminated in consolidation.
Loss
Per Share
Statement
of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share",
requires the presentation of basic and diluted earnings per share ("EPS").
Basic
EPS is computed by dividing the loss available to common stockholders by the
weighted-average number of common shares outstanding for the period. Diluted
EPS
includes the potential dilution that could occur if options or other contracts
to issue common stock were exercised or converted. The following equity
securities are not reflected in diluted earnings per share because their effects
would be anti-dilutive.
|
|
|
September
30, 2007
|
|
September
30, 2006
|
|
|
Options
|
|
|
3,618,900
|
|
|
1,736,475
|
|
|
Warrants
|
|
|
16,435,774
|
|
|
4,937,737
|
|
|
Convertible
preferred stock
|
|
|
12,314,656
|
|
|
1,538,664
|
|
|
Total
|
|
|
32,369,330
|
|
|
8,212,876
|
|
Accordingly,
basic and diluted loss per share are identical.
Stock-Based
Compensation
On
August
31, 2007, the stockholders of the Company approved an amendment to the Company's
2002 Equity Incentive Plan (the "Plan") to increase the number of shares of
common stock authorized for issuance under the Plan to 6,000,000 shares from
the
previously authorized amount of 4,000,000 shares. Option awards are granted
with
an exercise price equal to or greater than the market price of the Company’s
stock on the date of the grant in accordance with the Plan. The options
generally have five-year contractual terms for directors and 10 years for
employees, and vest immediately for directors and over four years for
employees.
The
Company implemented FAS 123R in the first quarter of 2006. The statement
requires companies to expense the value of employee stock options and similar
awards. Under FAS 123R, share-based payment awards result in a cost that will
be
measured at fair value on the awards’ grant date based on the estimated number
of awards that are expected to vest. Compensation costs for awards that vest
will not be reversed if the awards expire without being exercised. Stock
compensation expense under FAS 123R was $109,924 and $53,094 during the three
months ended September 30, 2007 and 2006, respectively. Of these totals, $35,292
and $9,720 were classified as research and development expense and $74,632
and
$43,374 were classified as selling, general, and administrative expense during
2007 and 2006, respectively. Stock compensation expense under FAS 123R was
$288,934 and $475,822 during the nine months ended September 30, 2007 and 2006,
respectively. Of these totals $80,428 and $32,575 were classified as research
and development expense and $208,506 and $443,247 were classified as selling,
general, and administrative expensed during 2007 and 2006,
respectively.
The
Company uses historical data to estimate option exercise and employee
termination within the valuation model and historical stock prices to estimate
volatility. The fair values for options issued during the nine months ended
September 30, 2007 and 2006 were estimated at the date of grant using a
Black-Scholes option-pricing model to be $1,219,713 and $355,516, respectively,
with the following weighted-average assumptions:
|
Assumptions
|
|
2007
|
|
2006
|
|
|
Risk-free
rate
|
|
|
4.92
|
%
|
|
5.21
|
%
|
|
Annual
rate of dividends
|
|
|
0
|
|
|
0
|
|
|
Volatility
|
|
|
145-175
|
%
|
|
90-92
|
%
|
|
Average
life
|
|
|
5
years
|
|
|
2.9
years
|
|
The
Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options, which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected stock price volatility. The
Company’s employee stock options have characteristics significantly different
from those of traded options, and changes in the subjective input assumptions
can materially affect the fair value estimate.
A
summary
of option activity under the Company’s 1991 Stock Option Plan and the Plan as of
September 30, 2007 and changes during the nine months then ended is presented
below:
|
|
|
|
|
Weighted-
Average
|
|
Weighted-Average
Remaining
|
|
|
Options
|
|
Shares
|
|
Exercise
Price
|
|
Term
|
|
|
Outstanding
January 1, 2007
|
|
|
1,775,025
|
|
$
|
1.40
|
|
|
|
|
|
Granted
|
|
|
2,065,000
|
|
$
|
0.66
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
$
|
-
|
|
|
|
|
|
Terminated
|
|
|
(221,125
|
)
|
$
|
0.49
|
|
|
|
|
|
Outstanding
at September 30, 2007
|
|
|
3,618,900
|
|
$
|
1.04
|
|
|
7.5
|
|
|
Exercisable
at September 30, 2007
|
|
|
1,361,650
|
|
$
|
1.64
|
|
|
4.6
|
|
The
weighted-average grant-date fair value of options granted during the nine months
ended September 30, 2007 was $0.59. No options were exercised during the nine
months ended September 30, 2007. The total intrinsic value of options exercised
during the nine months ended September 30, 2006 was $106,007.
As
of
September 30, 2007, there was $1,130,814 of total unrecognized compensation
cost
related to nonvested share-based compensation arrangements granted under the
Plan. That cost is expected to be recognized over a weighted average period
of
2.6 years. The total fair value of shares vested during the nine months ended
September 30, 2006 was $$475,822.
At
September 30, 2007, 2,424,800 options remain available for grant under the
Plan.
New
Accounting Pronouncements
In
February 2006, the FASB issued Statement of Financial Accounting Standard
155 - Accounting for Certain Hybrid Financial Instruments (“SFAS 155”), which
eliminates the exemption from applying SFAS 133 to interests in securitized
financial assets so that similar instruments are accounted for similarly
regardless of the form of the instruments. SFAS 155 also allows the election
of
fair value measurement at acquisition, at issuance, or when a previously
recognized financial instrument is subject to a remeasurement event. Adoption
is
effective for all financial instruments acquired or issued after the beginning
of the first fiscal year that begins after September 15, 2006.
The
adoption of SFAS did not have a material effect on
the
Company's
consolidated
financial position, results of operations or cash flows.
In
March 2006, the FASB issued Statement of Financial Accounting Standard 156
- Accounting for Servicing of Financial Assets (“SFAS 156”), which requires all
separately recognized servicing assets and servicing liabilities be initially
measured at fair value. SFAS 156 permits, but does not require, the subsequent
measurement of servicing assets and servicing liabilities at fair value.
Adoption is required as of the beginning of the first fiscal year that begins
after September 15, 2006.
The
adoption of SFAS 156 did not have a material effect on the Company's
consolidated
financial position, results of operations or cash flows.
In
June
2006, the FASB issued FASB Interpretation No. 48 ("FIN 48"), Accounting for
Uncertainty in Income Taxes. FIN 48 prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement
of
a tax position taken or expected to be taken in a tax return. FIN 48 also
provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure, and transition. FIN 48 is
effective for fiscal years beginning after December 15, 2006.
The
adoption of FIN 48 did not have a material effect on the Company's
consolidated
financial position, results of operations or cash flows.
In
December 2006, FASB issued FASB Staff Position EITF 00-19-2 “Accounting for
Registration Payment Arrangements,” which specifies that the contingent
obligation to make future payments or otherwise transfer consideration under
a
registration payment arrangement should be separately recognized and measured
in
accordance with SFAS No. 5, “Accounting for Contingencies.” Adoption of EITF
00-19-02 is required for fiscal years beginning after December 15, 2006.
The
adoption of EITF 00-19-2 did not have a material effect on the
Company's
consolidated
financial position, results of operations or cash flows.
In
February 2007, the FASB issued SFAS 159, “The Fair Value Option for Financial
Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 provides companies
with an option to report selected financial assets and liabilities at fair
value
and establishes presentation and disclosure requirements designed to facilitate
comparisons between companies that choose different measurement attributes
for
similar types of assets and liabilities. SFAS 159 is effective for fiscal years
beginning after November 15, 2007. The Company is in the process of
evaluating the impact of the adoption of this statement on the Company’s results
of operations and financial condition.
Revenue
Recognition
Revenues
consist of the sale of software control devices, videoconferencing systems
and
related maintenance contracts on these systems. The Company sold two different
products during 2007 and 2006: its PC-based software products, ONGOER®, OnGuard,
and Curiax
TM
,
and its
older proprietary hardware and software product, Omega. Revenues from the sale
of hardware and software are recognized upon the transfer of title when shipped.
Revenues on maintenance contracts are recognized ratably over the term of the
related sales contract. As of September 30, 2007, there were $0 of deferred
revenues as all maintenance contracts on the Company’s older Omega products have
terminated.
Note
4 - Income Taxes
The
Company filed its federal and state tax returns for the years ended December
31,
2004, 2005, and 2006, respectively, during the three months ended September
30,
2007.
Effective
January 1, 2007, the Company adopted the provisions of FASB Interpretation
No. 48, “Accounting for Uncertainty in Income Taxes - an interpretation of
FASB Statement No. 109” (“FIN 48”). FIN 48 prescribes a recognition
threshold and a measurement attribute for the financial statement recognition
and measurement of tax positions taken or expected to be taken in a tax return.
For those benefits to be recognized, a tax position must be more-likely-than-not
to be sustained upon examination by taxing authorities.
In
many
cases the Company’s tax positions are related to tax years that remain subject
to examination by relevant tax authorities. The Company files income tax returns
in the United States (federal) and in various state and local jurisdictions.
In
most instances, the Company is no longer subject to federal, state and local
income tax examinations by tax authorities for years prior to 2003.
The
adoption of the provisions of FIN 48 did not have a material impact on the
company’s consolidated financial position and results of operations. As of
September 30, 2007 no liability for unrecognized tax benefits was required
to be
recorded.
The
Company recognized a deferred tax asset of approximately $18.0 million as of
September 30, 2007, primarily relating to net operating loss carry forwards
of
approximately $46.8 million. The ultimate realization of deferred tax assets
is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. The Company considers
projected future taxable income and tax planning strategies in making this
assessment. At present, the Company does not have a history of income to
conclude that it is more likely than not that the Company will be able to
realize all of its tax benefits; therefore, a valuation allowance of $18.0
million was established for the full value of the deferred tax asset. A
valuation allowance will be maintained until sufficient positive evidence exists
to support the reversal of any portion or all of the valuation allowance net
of
appropriate reserves. Should the Company be profitable in future periods with
supportable trends, the valuation allowance will be reversed accordingly.
Note
5 - Stockholders’ Equity
On
February 22, 2006, two holders of Series A Preferred Stock of the Company
elected to convert an aggregate of 65,334 shares of Series A Preferred Stock
to
common stock of the Company, pursuant to the conversion terms of the Series
A
Preferred Stock. On February 22, 2006, the Company issued an aggregate of
261,336 shares of its common stock to the two stockholders upon the surrender
of
their Series A Preferred Stock for conversion.
On
June
26, 2006, the non-employee directors of Simtrol approved an amendment to the
Company’s 2002 Equity Incentive Plan to increase the authorized common stock
available for the Plan to 2,500,000 shares from the previously authorized amount
of 1,250,000.
In
June
2006, two directors of the Company exercised 625,000 stock options for total
proceeds to the Company of $250,000.
During
the nine months ended September 30, 2007, the Company issued 10,555 shares
of
common stock valued at $15,700 to members of the Board of Directors for
attendance at meetings. These amounts were recorded as selling, general, and
administrative expenses. During the nine months ended September 30, 2006, the
Company issued 22,154 shares of stock valued at $19,800 to Board Members for
attendance at meetings. These amounts were recorded as selling, general, and
administrative expense.
On
January 31, 2007, the Company granted options to purchase 1,400,000 shares
of
stock to employees. The options have a three-year vesting period and were
granted at an exercise price greater than the fair value of the Company’s common
stock on that date. On March 15, 2007, the Company granted options to purchase
200,000 shares of stock to an employee. The options have a three-year vesting
period and were granted at an exercise price equal to the fair value of the
Company’s common stock on that date. On April 10, 2007, May 30, 2007, and June
25, 2007, three employees were each granted options to purchase 75,000 shares
of
stock. The options have a three-year vesting period and were granted at an
exercise price equal to the fair value of the Company’s common stock on that
date.
On
January 31, 2007, the Company issued 480,000 shares of its common stock to
Triton Business Development Services (“Triton”), an Atlanta-based provider of
critical business planning, resource, and development services, in conjunction
with an agreement dated October 18, 2006.
On
February 1, 2007, the Company signed an advisory services agreement (the
"Agreement") with Triton. As a part of the Agreement, Triton will provide the
Company with financial and strategic planning services that include capital
formation, structure and funding strategies, investor relations consultation,
human resources assessment and development, and an organizational review of
the
Company’s processes, practices, and procedures. The term of the Agreement is 24
months.
Triton’s
compensation will consist of cash and restricted shares of the Company's common
stock over the term of the Agreement. A monthly cash retainer of $10,000 will
be
paid by the Company. Additionally, 640,000 shares of common stock will be
deposited to a restricted account. The 640,000 shares of the Company's common
stock will be earned ratably over the 24-month term of the Agreement by Triton.
The Company issued restricted shares of common stock pursuant to the Agreement
as follows:
|
Date
|
|
Number
of
shares
|
|
|
January
31, 2007
|
|
|
11,200
|
|
|
February
28, 2007
|
|
|
26,700
|
|
|
March
31, 2007
|
|
|
26,700
|
|
|
April
30, 2007
|
|
|
26,700
|
|
|
May
31, 2007
|
|
|
26,700
|
|
|
June
30, 2007
|
|
|
26,700
|
|
|
July
31, 2007
|
|
|
26,700
|
|
|
August
31, 2007
|
|
|
26,700
|
|
|
September
30, 2007
|
|
|
26,700
|
|
The
offer
and sale of the shares issued in connection with the Agreement were exempt
from
the registration requirements of the Securities Act of 1933, as amended (the
"Act"), pursuant to Rule 506 and Section 4(2) of the Act. In connection with
the
sales, the Company did not conduct any general solicitation or advertising,
and
the Company complied with the requirements of Regulation D relating to the
restrictions on the transferability of the shares issued.
On
January 30, 2007, the Company received a notice of effectiveness from the State
of Delaware regarding the Certificate of Amendment of Certificate of
Incorporation of the Company (the "Amendment"), which modified the rights of
the
holders of the Company's Series A Convertible Preferred Stock. The Amendment
provides for, among other things: (i) each holder of the Company's Series A
Convertible Preferred Stock to receive one additional share of Series A
Convertible Preferred Stock for each share owned; (ii) the addition of an 8%
face value noncumulative coupon, payable semi-annually in cash or common stock
of the Company; (iii) pre-emptive rights for holders of the Company's Series
A
Convertible Preferred Stock; (iv) the addition of a redemption feature whereby
the Series A Convertible Preferred Stock is callable at $3.75 per share at
the
option of the Company; (v) the addition of a mandatory conversion feature
whereby the Series A Convertible Preferred Stock is automatically converted
to common stock of the Company in the event that the bid price of the
Company's common stock closes at or above $1.00 for 20 consecutive trading
days
and the average daily trading volume of the Company's common stock is equal
to
or greater than $150,000; and (vi) the amendment of the provision requiring
unanimous approval for an increase in the number of shares designated as Series
A Convertible Preferred Stock to require a majority approval for an increase
in
the number of shares designated as Series A Convertible Preferred Stock. The
Amendment also eliminated the working capital test that previously occurred
at
quarter end per the previous Series A Convertible Preferred Stock terms and
increased the authorized number of Series A Convertible Preferred shares from
the previous 450,000 to 770,000. On June 30, 2007, in accordance with the terms
of the Certificate, the Company paid a dividend to the Series A shareholders
of
58,035 shares of its common stock. The price of the stock on that date was
$1.54.
In
accordance with the receipt of a notice of effectiveness from the State of
Delaware regarding the Amendment, which modified the rights of the holders
of
the Company's Series A Convertible Preferred Stock, the Company issued 384,666
shares of Series A Convertible Preferred stock on January 31, 2007 to the
existing Series A Convertible Preferred stockholders. Each stockholder also
received warrants to purchase two shares of common stock for each share of
Series A Convertible Preferred Stock issued on January 31, 2007 at an exercise
price of $0.375 per share. This issue of Series A Preferred stock and warrants
to purchase common stock settled the liability for dividend payable on
default of convertible preferred stock of $1,171,863. On January 31, 2007,
in
accordance with the anti-dilution provisions of certain warrants to purchase
388,000 shares of common stock that were issued during 2004, thirteen warrant
holders had the exercise prices of the warrants adjusted from $2.00 per share
to
$0.375 per share and warrants to purchase an additional 1,681,333
shares of common stock were issued. On January 31, 2007, in accordance with
the
anti-dilution provisions of certain warrants to purchase 2,145,444 shares of
common stock that were issued during 2005, warrant holders having the right
to
purchase 345,444 shares of stock had their exercise prices of the warrants
adjusted from $0.75 per share to $0.375 per share, warrant holders having the
right to purchase 900,000 shares of stock had their exercise prices of the
warrants adjusted from $1.25 per share to $0.375 per share, and warrant holders
having the right to purchase 900,000 shares of stock had their exercise prices
of the warrants adjusted from $1.00 per share to $0.375 per share. The
expiration dates of the 2004 and 2005 warrants were not changed.
On
February 20, 2007, the Certificate of Designation establishing the terms of
a
Series B Preferred Stock was filed. Certain terms of the Series B Preferred
Stock are as follows:
|
|
·
|
The
Series B Preferred Stock stated value is $750.00 and each share converts
into common stock at the conversion price of $0.375 at any time and
without limitation.
|
|
|
·
|
Without
approval of a majority of the Series B Preferred Stock Holders, the
Company shall not incur debt (other than debt collateralized by accounts
receivable of the Company) in excess of an aggregate of $1.5 million
outside of trade debt in the normal course of business. The terms
of such
debt shall not encumber any copyrights, marketing materials, software
code
or any other proprietary technology, software or product processes,
patents or patent licenses.
|
|
|
·
|
The
Series B Preferred Stock will pay a 12% (based on stated value)
noncumulative coupon, payable semi-annually (June 30, December 31)
in cash
or common stock (common stock value deemed $0.375 for purpose of
dividend
payment if closing price of common stock on payment date is less
than
$0.375).
|
|
|
·
|
If
the Company has a current registration statement on file covering
those
common shares represented by Series B Preferred Stock and the Company’s
common stock bid price closes at or above $1.00 for 20 consecutive
trading
days and the average daily trading volume of the common stock is
equal to
or greater than $150,000, then Series B Preferred Stock will automatically
convert to common at $0.375 per common
share.
|
|
|
·
|
Series
B Preferred Stock Holders receive pre-emptive right to participate
in
subsequent equity rounds at the same pro rata percentage of ownership
they
currently own in Company on an as-converted basis
today.
|
|
|
·
|
Series
B Preferred Stock callable at $1,875 per share at option of
Company.
|
|
|
·
|
A
total of 4,700 shares of Series B Preferred Stock were
designated.
|
|
|
·
|
In
the event that the registration statement to be filed by the Company
is
not declared effective by the Securities and Exchange Commission,
hereafter referred to as the SEC, within the earlier of one hundred
and
twenty (120) days from the date of the sale of the Securities or
five (5)
days of clearance by the SEC to request effectiveness, then the Company
will pay the investor (pro rated on a daily basis), as partial
compensation for such failure and not as a penalty, one and one-half
percent (1.5%) of the purchase price of the registrable securities
purchased from the Company and held by the investor for each month
(or
portion thereof) until such registration statement has been filed
or
declared effective. Such compensatory payments shall be made to the
investor in cash, within five (5) calendar days of demand.
|
On
March
16, 2007, three note holders, including one member of the Board of Directors,
exchanged $696,500 principal and $13,700 interest due from the Company (totaling
$710,200) under their notes payable for units in the private placement. In
conjunction with the exchange, the Company issued the holders additional
warrants to purchase an aggregate of 710,200 shares of the Company’s common
stock at an exercise price of $0.375 per share. The warrants have five-year
terms. The Company recorded a finance expense of $772,655 to recognize the
fair
value of the warrants granted to the noteholders. See Note 9.
Additionally,
on March 16, 2007, the Company completed the sale of $3,525,000 of securities
in
a private placement of 4,700 units (at $750 per unit) consisting of one share
of
Series B Convertible Preferred Stock and one warrant to purchase 2,000 shares
of
our common stock at an exercise price of $0.375 per share. Each share of Series
B Convertible Preferred Stock has a conversion price of $0.375 per share (one
Series B Convertible Preferred share equals 2,000 shares of common stock).
The
warrants had three-year terms. In connection with the issuance of the securities
above, a deemed dividend of $939,118 was recorded to reflect the beneficial
conversion feature on the common shares that would result from the
conversion of the Series B Preferred Stock. On September 12, 2007, Company
amended the terms of its stock purchase warrants. The Warrants were revised
to
include a cashless exercise provision and to extend the term of the Warrants
from three years to five years. In conjunction with the amendment, the Company
recorded an expense of $578,611 to record the increased fair value of the
warrants due to the modification.
The
Company filed a resale registration statement on Form SB-2 on May 14, 2007
to
register the common stock underlying the Series B Convertible Preferred Stock,
the common stock underlying the warrants issued in conjunction with the exchange
of the notes payable, and the common stock underlying the warrants in the
private placement. As of November 13, 2007, the registration statement has
not
been declared effective by the SEC.
On
June
30, 2007, in accordance with the terms of the terms of the Series B Preferred
stock, the Company paid a dividend to the Series B shareholders of 137,378
shares of its common stock. The price of the stock on that date was
$1.54.
On
March
16, 2007, one stockholder converted 8,000 shares of the Company’s Series A
Convertible Preferred Stock to 32,000 shares of the Company’s common stock.
On
March
21, 2007, one warrant holder exercised warrants allowing the purchase of 130,668
shares of common stock via a cashless exercise provision. Per the terms of
the
warrant agreement, the Company issued the holder 87,685 shares of its common
stock on that date.
On
March
30, 2007, two warrant holders exercised warrants allowing the purchase of
128,000 shares of common stock via a cashless exercise provision. Per the terms
of the warrant agreements, the Company issued the holders 104,960 shares of
its
common stock on that date.
On
April
2, 2007, one warrant holder exercised warrants allowing the purchase of 32,000
shares of our common stock via a cashless exercise provision. Per the terms
of
the warrant agreement, the Company issued the holder 25,782 shares of its common
stock on that date.
On
April
9, 2007, two shareholders converted 8,334 shares of the Company’s Series A
Convertible Preferred Stock to 33,336 shares of the Company’s common stock.
On
April
17, 2007, three warrant holders exercised warrants allowing the purchase of
198,668 shares of common stock via a cashless exercise provision. Per the terms
of the warrant agreements, the Company issued the holders 158,613 shares of
its
common stock on that date.
On
April
17, 2007, one shareholder converted 8,334 shares of the Company’s Series A
Convertible Preferred Stock to 33,336 shares of the Company’s common stock.
On
April
24, 2007, one warrant holder exercised warrants allowing the purchase of 32,000
shares of our common stock via a cashless exercise provision. Per the terms
of
the warrant agreement, the Company issued the holder 25,617 shares of its common
stock on that date.
On
April
26, 2007, one warrant holder exercised warrants allowing the purchase of 75,668
shares of our common stock via a cashless exercise provision. Per the terms
of
the warrant agreement, the Company issued the holder 59,904 shares of its common
stock on that date.
On
May 2,
2007, two warrant holders exercised warrants allowing the purchase of 186,736
shares of common stock via a cashless exercise provision. Per the terms of
the
warrant agreements, the Company issued the holders 147,832 shares of its common
stock on that date.
On
May
15, 2007, one warrant holder exercised warrants allowing the purchase of 32,000
shares of our common stock via a cashless exercise provision. Per the terms
of
the warrant agreement, the Company issued the holder 22,551 shares of its common
stock on that date.
On
May
21, 2007, one warrant holder exercised warrants allowing the purchase of 16,092
shares of our common stock via a cashless exercise provision. Per the terms
of
the warrant agreement, the Company issued the holder 11,376 shares of its common
stock on that date.
On
July
27, 2007, one warrant holder exercised warrants allowing the purchase of 32,000
shares of our common stock via a cashless exercise provision. Per the terms
of
the warrant agreement, the Company issued the holder 22,977 shares of its common
stock on that date.
On
July
30, 2007, one warrant holder exercised warrants allowing the purchase of 64,000
shares of our common stock via a cashless exercise provision. Per the terms
of
the warrant agreement, the Company issued the holder 46,090 shares of its common
stock on that date.
On
September 5, 2007, one shareholder converted 16,000 shares of the Company’s
Series A Convertible Preferred Stock to 64,000 shares of the Company’s common
stock.
Note
6- Major Customers
Revenue
from four customers comprised 100% of consolidated revenues for the nine months
ended September 30, 2007. At September 30, 2007, related accounts receivable
of
$61,433 from three customers comprised 100% of consolidated receivables and
have
been collected subsequent to September 30, 2007.
Revenue
from five customers of $71,663 comprised approximately 75% of consolidated
revenues for the nine months ended September 30, 2006.
Note
7 - Sale of Intellectual Property
On
February 15, 2006, the Company and Acacia Research Corporation (“Acacia”)
entered into an agreement pursuant to which the Company sold to Acacia U.S.
Patent No(s). 5515099, 5526037, 5528289, 5568183, 5583565, and 55998209 (the
“Patents”). The patents relate primarily to remote control of video cameras and
other devices used in areas such as videoconferencing and surveillance systems.
The uses of the patented technology include improved remote management of video
camera functions such as pan, tilt, and focus, and improved device control
in a
networked videoconferencing system.
Under
the
terms of the agreement, the Company received an initial payment of $250,000
in
March 2006 and will receive ongoing royalty payments of twenty percent of the
net proceeds received by Acacia in connection with (i) the licensing by Acacia
of the patented technology to third parties and (ii) any successful patent
infringement action commenced by Acacia with respect to the Patents, provided
that Acacia shall be entitled to recoup the initial payment fully prior to
making any royalty payments to the Company. This amount was recorded as other
income during the nine months ended September 30, 2006.
Note
8 - Intangibles
In
conjunction with the purchase of the IDS interest in JDS in November 2006,
the
Company recorded an intangible asset of $130,000 on November 28, 2006,
representing the fair value of 500,000 shares of common stock paid and payable
to IDS, to reflect the value of the license to use the OakVideo Software. This
amount will be amortized over the estimated remaining life of the license
agreement for JDS’ use of the OakVideo software (through October 2015-see Note
2). Amortization during the three months and nine months ended September 30,
2007 totaled $3,714 and $11,142, respectively.
The
Company also recorded a customer list of $40,000 in conjunction with the
purchase of the IDS interest in JDS in 2006. The $40,000 was amortized in the
nine months ended September 30, 2007 as all applicable revenue with the customer
was earned by September 30, 2007. Amortization during the three months and
nine
months ended September 30, 2007 totaled $20,000 and $40,000,
respectively.
Note
9 - Related Person Transactions
In
order
to fund its operations, the Company issued additional notes payable to one
member of the Board of Directors during the nine months ended September 30,
2007
totaling $117,500. The debt accrued interest at 12%, the notes were due on
demand, and were uncollateralized. As of March 16, 2007, the member of the
Board
of Directors had a total of $510,000 notes payable outstanding and he exchanged
$496,500 of the notes and accrued interest of $11,289 as part of the Series
B
Preferred Stock private placement. See Note 5. The remaining balance of $13,500
and accrued interest totaling $786 was paid in full at June 29, 2007. See Note
5.
In
order
to fund its operations, the Company issued a $37,000 note payable to one member
of the Board of Directors on June 9, 2006. The debt accrued interest at 10%
and
was uncollateralized. The proceeds of this debt were utilized for working
capital purposes. On June 30, 2006, the Company repaid the note plus the accrued
interest of $213.
Note
10 - Office Lease
On
July
20, 2007, the Company entered into a 60-month lease agreement with Narmada
Partners, LLC to occupy new office space consisting of approximately 10,000
square feet in an office building in Norcross, Georgia. The Company occupied
the
space on October 11, 2007. The total amount of rent payable under the lease
will
be recognized on a straight-line basis over the term of the lease. Annual base
rental amounts are as follows:
|
10/11/2007
- 10/10/2008
|
|
$
|
137,500
|
|
|
10/11/2008
- 10/10/2009
|
|
$
|
141,625
|
|
|
10/11/2009
- 10/10/2010
|
|
$
|
145,848
|
|
|
10/11/2010
- 10/10/2011
|
|
$
|
150,200
|
|
|
10/11/2011
- 10/10/2012
|
|
$
|
154,800
|
|
In
addition to the base rental, the Company will be obligated for a percentage
of
the increase in operating expenses after 2007. The Company delivered to the
landlord a standby, irrevocable letter of credit for $100,000 as a security
deposit with the letter of credit amount reducing $20,000 for each year of
the
lease as long as the lease is not in default. The Company collateralized the
letter of credit with a $100,000 one-year certificate of deposit. An event
of
default occurs on the lease if the Company fails to pay any rental amounts
within five days when due and such failure to pay continues for seven additional
days following written notice from Narmada Partners, LLC of failure to pay.
Upon
an event of default, Narmada Partners, LLC may terminate the lease and demand
payment of all remaining rent due and coming due under the remaining term of
the
lease.
Note
11- Subsequent Event
On
October 31, 2007, the Company issued 26,700 restricted shares of common stock
pursuant to its advisory services agreement with Triton Business Development
Services. See note 5.
