UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
  FORM
10-K
 [Mark
One]
 x
                  ANNUAL
      REPORT UNDER SECTION 13 OR 15(d) OF THESECURITIES
      EXCHANGE ACT OF 1934
  For
the fiscal year ended December 31, 2009
  OR
  o
                      TRANSITION
      REPORT UNDER SECTION 13 OR 15(d) OF THESECURITIES
      EXCHANGE ACT OF 1934
  For
the transition period from ____________ to ____________
 
 Commission
File Number: 001-10927
 
 Simtrol,
Inc.
 (Name of
small business issuer in its charter)
 
 Delaware
                
                58-2028246(State
      or other jurisdiction of incorporation or organization)
                
                (I.R.S.
      EmployerIdentification
      No.)
 
 520
Guthridge Court, Suite 250, Norcross, Georgia  30092
 (Address
of principal executive offices) (Zip Code)
 
 Issuer’s
telephone number:  (770) 242-7566
 
 Securities
registered pursuant to section 12(b) of the Exchange Act:
 None
  Securities
registered pursuant to section 12(g) of the Exchange Act:
 Common
Stock, $.001 par value per share
 Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes o No x
 
 Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes o No x
 
 Indicate by check mark
whether the registrant(1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes x No o
 
 Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, 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 o No x
 
 Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. o
 
 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
                  
                  Accelerated
      filerNon-accelerated
      filer (Do not check if a smaller reporting company)
                  
                  Smaller
      reporting company  x
 
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).  Yes o No x
  The
aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was
last sold, or the average bid and asked price of such common equity, on June 30,
2009 as reported on the Over the Counter Bulletin Board was approximately
$3,364,369.
  As of
March 25, 2010, there were 13,800,887 shares of common stock, par value of
$0.001 per share, outstanding.
 
 DOCUMENTS
INCORPORATED BY REFERENCE
 
 The
Registrant incorporates by reference portions of its Definitive Proxy Statement
for the 2010 Annual Meeting of Stockholders, which is expected to be filed no
later than April 30, 2010, into Part III of this Form 10-K to the extent stated
herein.
  
  PART
I
 
 FORWARD-LOOKING
STATEMENTS
 
 This
annual report on Form 10-K (this “Annual Report”), including “Management’s
Discussion and Analysis or Plan of Operation,” contains certain “forward-looking
statements” within the meaning of Section 27A of the Securities Act of 1933
and Section 21E of the Securities Exchange Act of 1934, that represent our
expectations, anticipations or beliefs about future events, including our
operating results financial condition, liquidity, expenditures, and compliance
with legal and regulatory requirements. For this purpose, any statements that
are not statements of historical fact may be deemed to be forward-looking
statements. These statements involve risks and uncertainties that could cause
actual results to differ materially depending on a variety of important
factors.  Factors that might cause or contribute to such differences
include, but are not limited to, those set forth in the “Factors Affecting
Future Performance” section below and elsewhere in this Annual Report and in our
other reports on Forms 8-K, 10-Q and 10-K that we file with the Securities
Exchange Commission (“SEC”) from time to time.  With respect to such
forward-looking statements, we claim protection under the Private Securities
Litigation Reform Act of 1995. Our SEC filings are available from us, and also
may be examined at public reference facilities maintained by the SEC or, to the
extent filed via EDGAR, accessed through the website of the SEC
(http://www.sec.gov). In addition, factors that we are not currently aware of
could harm our future operating results.  You are cautioned not to
place undue reliance on forward-looking statements, which speak only as of the
date of this Annual Report.  We undertake no obligation to make any
revisions to the forward-looking statements or reflect events or circumstances
after the date of this Annual Report.  References to “Simtrol,” the
“Company,” “we,” “us” or “our” made herein from time to time shall mean
“Simtrol, Inc.”
  Part IItem
      1.
                                                                
                                                                Business
                                                                
                                                                3Item
      2.
                                                                
                                                                Description
      of Property
                                                                
                                                                7Item
      3.
                                                                
                                                                Legal
      Proceedings
                                                                
                                                                7Item
      4.
                                                                
                                                                Submission
      of Matters to a Vote of Security Holders
                                                                
                                                                7Part IIItem
      5.
                                                                
                                                                Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
                                                                
                                                                8Item
      7.
                                                                
                                                                Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations
                                                                
                                                                10Item
      8.
                                                                
                                                                Financial
      Statements and Supplementary Data
                                                                
                                                                16Item
      9.
                                                                
                                                                Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
                                                                
                                                                16Item
      9A(T).
                                                                
                                                                Controls
      and Procedures
                                                                
                                                                16Item
      9B.
                                                                
                                                                Other
      Information
                                                                
                                                                17Part IIIItem
      10.
                                                                
                                                                Directors,
      Executive Officers and Corporate Governance
                                                                
                                                                17Item
      11.
                                                                
                                                                Executive
      Compensation
                                                                
                                                                17Item
      12.
                                                                
                                                                Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
                                                                
                                                                17Item
      13.
                                                                
                                                                Certain
      Relationships and Related Transactions and Director
      Independence
                                                                
                                                                18Item
      14.
                                                                
                                                                Principal
      Accounting Fees and Services
                                                                
                                                                18Part IVItem
      15.
                                                                
                                                                Exhibits
      and Financial Statement Schedules
                                                                
                                                                18Signatures
  2
  ITEM
1.  DESCRIPTION OF BUSINESS.
 
 History
 
 We were
incorporated under the laws of the State of Delaware on September 19, 1988. From
1990 to 2001, we primarily designed, manufactured, marketed and supported
hardware-based command and control systems, including videoconferencing
systems.  In September 2001 we changed our name from VSI Enterprises,
Inc. to Simtrol, Inc.
 
 General
 
 We
develop, market and sell software that centrally manages otherwise incompatible
electronic devices in education, government and corporations.  These
markets share several characteristics that make them suitable targets for our
solution.  They have large installed bases of unmanaged devices, the
number of devices being installed is growing rapidly, and there is mounting
pressure within these markets to reduce the cost to operate, support and
maintain these devices.  Organizations in these three markets segments
use our software to:
 
 ·
              Decrease
      the cost to operate, support and maintain these
  devices
 ·
              Improve
      the effective use of these devices
 ·
              Increase
      useful asset life of devices
 ·
              Decrease
      the energy costs associated with powering these
  devices
 
 We are
concentrating our sales efforts on the education market.  In
education, our classroom control software manages devices that drive learning in
the classroom: projectors, interactive whiteboards, document cameras, DVRs and
video cameras.  Our software resides on a PC in the classroom and can
be addressed either from the PC or an interactive whiteboard.  In
addition, our software can be installed at the school and district administrator
level to monitor, manage, and report on devices in individual
classrooms.
 
 The
education market is well-defined, under extreme pressure to reduce costs and is
experiencing rapid adoption of interactive whiteboard technology.  The
mass adoption of interactive whiteboards presents an opportunity for us to gain
access to school district buying cycles.  Additionally, we have
established an exclusive partnership with Promethean, Inc., a rapidly growing,
interactive whiteboard company that specializes in the education
market.
 
 Government
(local, state and Federal) markets share several of the same characteristics
with education. Some of the other devices our software can manage that are more
prevalent in government are: videoconferencing systems, security cameras,
digital and analog displays, digital kiosks and digital signage.  We
also have well-defined vertical applications for the corrections market focused
on the emerging digital video visitation and arraignment markets.
 
 For the
corporate market, we have primarily focused on providing comprehensive digital
signage device management.  As retail businesses are pressured to
reduce store costs they are increasingly turning to digital signage and kiosks
to provide customer service, support, consumer education and
advertising.  The company’s Device ManagerTM
solution is well-suited to provide central management of these devices across
large retail chains.  Our solution provides centralized, remote
monitoring, control and asset management of devices to reduce maintenance costs,
energy costs and assure display uptime.
 
 Our
principal executive offices are located at 520 Guthridge Court, Suite 250,
Norcross, Georgia 30092 and our telephone number is (770)
242-7566.
  3
  Recent
Developments
 
 Funding
of Operations
 
 We
require substantial amounts of capital to fund current operations and the
continued development and deployment of our Device ManagerTM
(formerly named ONGOER®) product line.  On January 23, 2008, we
completed the sale of $1,500,000 of convertible notes payable in a private
placement. These notes and $72,750 of accrued interest were exchanged into
Series C Convertible Preferred Stock in connection with a private placement on
June 30, 2008.  We raised an additional $1,027,264 from the equity
offering on that date and an additional $1,373,570 (net of offering costs) on
September 26, 2008. We used the proceeds of the convertible notes and
convertible preferred stock private placements for working capital
purposes.  We also raised an additional $562,250 from a private
placement of convertible notes payable and warrants on May 29, 2009, and
$100,000 during the first quarter of 2010.  We will require additional
funding to fund our development and operating activities during the second
quarter 2010 and are currently attempting to raise an additional $1.0 million to
$2.0 million in debt and/or equity financing to continue our efforts to gain end
user acceptance of our software. 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 we
have not been profitable during any year in our history and have not generated
positive cash flows from operations, these matters raise substantial doubt about
our ability to continue as a going concern.  The accompanying
consolidated 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 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 we be
unable to continue as a going concern.
 
 Products
 
 Historically,
device control and monitoring solutions have been driven by closed-architecture
hardware-based solutions. Based on open software architecture and standard
hardware platforms, our products provide the market better pricing, more choices
and are simpler to deploy without sacrificing functionality. With several years
of software development, a growing track record of clients, and an increasing
number of industry alliances, we are positioned to lead the paradigm shift away
from proprietary hardware solutions towards open architecture
software.
 
 Current
market solutions use expensive proprietary hardware. Our device management and
control software is based on an open platform that allows control of devices
with an industry standard platform – the PC – that is easily understood by IT
professionals. The breadth and depth of our software gives our products the
scalability and flexibility to control thousands of dissimilar devices – each
with varying control protocols – in virtually an unlimited number of
locations.
 
 Product
Summary: Device Manager
 
 Device
Manager is Simtrol’s device management and control software. The software allows
any PC or server running Windows to network and communicate with thousands of
proprietary AV and IT devices built by hundreds of
manufacturers.  Specifically, Device Manager can control, manage,
monitor, diagnose and schedule any device.
 
 IT
professionals have long managed corporate assets such as PCs, servers and
routers.  During the past few years, most AV products became IP
addressable – a requirement from IT professionals that wish to manage the AV
devices with the same power and flexibility they use to manage IT assets. IT
departments demand that these devices tie into their existing IT network and
wish to use global IT tools such as IBM’s NetView, HP’s OpenView, or Computer
Associates’ Unicenter to monitor and manage them.  Device Manager
complements OpenView, NetView and Unicenter by passing valuable health/status
information to them.  IT professionals need a product to control the
devices locally and remotely and a product to monitor/manage/diagnose the
devices remotely.  Our products support these needs while using
industry standard PC technology.
 
 The
hardware supported by our software is based on the open PC market and comes from
a variety of companies.  Our integration and OEM partners choose from
many familiar brands to receive high quality and competitive pricing and our
approach takes advantage of this high-quality, low-price, and easily available
hardware.  PC equipment vendors are able to offer tremendous value
because of the enormous economies of scale inherent in the PC
marketplace.  Our partners are not locked into expensive, proprietary
controllers, touch panels and connectivity hardware from industry leading
control system providers.
 
 Device
Manager is computer-based general-purpose device control middleware running as a
system service on a Windows 2000 and onward platform. It can control any device
using a variety of interfaces, including TCP/IP, IR, IO, Relays, Serial (RS232,
RS422 and RS485), Lanc, and USB. With Device Manager, users can leverage
commodity, off-the-shelf PC hardware to create high-quality, affordable
solutions.
  4
 
 Device
Manager control software communicates with the devices in the meeting room as
well as monitoring assets from the server.  Devices are controlled
locally as part of the room application or remotely as a help desk
application.  Health and status information of all devices is tracked
real time and proactive alarms (email or text pages to wireless devices such as
pagers or cell phones) are sent to service personnel.
 
 Our
software-based approach allows flexibility regarding hardware and development
environment. Architecturally, application developers have the capability to
write their graphical user interfaces or applications in various programming
environments such as .NET, Visual Basic, C++, C#, Flash 8, Java, or Builder
(Simtrol’s development environment for simple solutions). The application or GUI
is then displayed on a commodity touch screen and/or mobile device for end-user
use. Because Device Manager uses TCP/IP for command and control signaling,
administrative and diagnostic functions are available via network-based
diagnostics tools.
 
 Device
Manager connects via standard TCP/IP networking and monitors devices at remote
locations and displays information about device health and status via a standard
browser interface. Technicians may log in from any place at any time using
standard web browsers to view the entire device control network at a
glance.
 
 Product
Summary: Digital Arraignment and Video Visitation
 
 Current
video arraignment solutions are highly fragmented with a focus mainly on the
audiovisual AV component of the application, separate from the considerable
workflow, record tracking, and document retrieval requirements of the
courts.  Other software systems address the court workflow but lack
two essential or critical items: the video arraignment and court recording
functionality.  We believe that CuriaxTM is the
first product to provide a unified documentation and AV
solution.  Following extensive end user research, the OakVideo
solution (from which Curiax is derived) was designed, developed, and implemented
by law enforcement and judicial experts from Oakland County,
Michigan.  The result is a robust, fully implemented system that has
garnered attention from counties around the United States as well as from legal
systems around the world.
 
 Curiax
ArraignerTM is a
web-based client-server, document management system tailored for law enforcement
and judicial system users, with a unique videoconferencing and device control
and monitoring element. Overcrowded courts create dangerous, costly logistical
problems for transporting prisoners and inefficient systems prevent police from
being on the street protecting citizens.  Curiax Arraigner allows
jurisdictions to avoid the need to transport prisoners to courthouse for
arraignment by integrating multipoint videoconferencing, court recording, and
data workflow and document management into a unified platform.  We
released additional integrated software products during 2008 including Curiax
Video VisitationTM and
Curiax Court RecordingTM.  Video
Visitation automates the prisoner visitation process in correctional facilities
and reduces the personnel resources required to facilitate the visitation
process.
 
 On
October 23, 2009, we assigned ownership of our Simtrol VisitorTM and Simtrol
SchedulerTM 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.
 
 Upon
payment in full of the note, the royalty will be 10% in perpetuity of net
software revenues and will be classified as software license revenue by
Simtrol.  Per terms of the agreement, payments on the note/royalties
are due on a quarterly basis.
 
 In the
event that the Strike sells, assigns or otherwise liquidates the Software,
derivative works or other applications utilizing the Company’s Device
ManagerTM
software, the Company will receive 10% of the proceeds resulting from such an
event.
  5
  Protection
of Intellectual Property Rights
 
 We have
implemented both legal (copyright) and practical protective measures to protect
our intellectual property rights in our Device Manager, Curiax Arraigner, Curiax
Video Visitation, and Curiax Court Recording software.  We claim
copyright protection in all software and manuals that we create.  We
also derive considerable practical protection by supplying and licensing only a
non-modifiable run-time version to our customers and keeping confidential all
versions that can be modified.  By licensing the software rather than
transferring title we, in most cases, have been able to incorporate restrictions
in the licensing agreements, which impose limitations on the disclosure and
transferability of the software.  No determination has been made as to
the legal or practical enforceability of these restrictions, or the extent of
customer liability for violations.
 
 Product
Development Strategies
 
 The AV
world and the IT world are converging, with more and more devices becoming
network enabled. Like PCs and servers, we believe IT departments will demand AV
products (projectors, audio processors, video codecs, video switchers, cameras,
electronic whiteboards, etc.) be accessible on a corporate network, where they
can be controlled, managed and monitored from centralized and/or remote
locations. Device Manager installs on PCs and servers, and supports a product
architecture that allows them to control, monitor and manage any device
connected to them via the network.
 
 Markets
 
 As
connected devices proliferate and become more functional, the issue of
controlling, monitoring and maintaining them becomes increasingly complex and
costly.  These devices include interactive whiteboards, projectors,
document cameras, videoconferencing systems and PCs. Currently there are no
comprehensive, software-based systems in place to manage these devices at an
enterprise level across school districts. The addressable U.S. market in K-12
education is approximately three million classrooms across 15,000 school
districts.  The typical classroom has from one to four disparate
digital devices.
 
 In the
healthcare sector, Simtrol’s core value to operating room companies is the
replacement of proprietary architecture with open PC architecture to control and
monitor all operating room (OR) devices.  This provides more technical
flexibility, better scalability and a simpler design while lowering
costs.
 
 Pre-trial
proceedings involve the costly and dangerous logistical problems of transporting
prisoners and moving documents across multiple agencies using antiquated methods
that can result in lost documentation, risk to public safety, and inefficiency
at taxpayer expense. Curiax Arraigner helps law enforcement officials avoid
transporting prisoners to the courthouse for arraignment by integrating
multipoint videoconferencing, court recording, data workflow, and document
management into a unified platform.
 
 Our Video
Visitation product allows corrections facilities to reduce the personnel
requirements required to staff visitation areas and lower the potential for
dangerous logistical problems resulting from the transport of
prisoners.
 
 Competition
 
 We
primarily compete with two companies in the AV control and monitory market, both
of which have significantly greater resources and market share. Both companies
offer control solutions based on proprietary hardware and software. We offer
control solutions utilizing open PC technology.  Our two major
competitors in the AV control systems market are AMX and Crestron, who combined
currently have close to 100% of the sales in this market.
  AMX,
headquartered in Richardson, Texas, offers control applications such as control
and automation systems for corporate boardrooms, meeting facilities,
professional sporting arenas, museums, hospital operating rooms, transportation
systems, schools and residences.  Headquartered in Rockleigh, New
Jersey, Crestron designs and manufactures control and automation systems for
corporate, industrial, educational, and residential markets.
  Both
Crestron and AMX offer hardware-based control systems, the cores of which are
proprietary controllers fitted with proprietary cards and connectors
manufactured by or for them, and running proprietary software
systems.  These proprietary controllers communicate with controlled
devices by means of code written in proprietary software languages (each company
has developed its own).  Integrators who re-sell systems from each of
these companies must send their technical personnel to training courses offered
by the companies themselves and by several independent
organizations.
  6
  Because
Device Manager is a software-based control system designed to run on commodity
PC hardware, we believe we have several advantages over AMX and
Crestron.  The PC industry is a vast marketplace with enormous
economies of scale.  Computer hardware including touch screens,
interactive whiteboards, wireless smart displays, and serial ports are extremely
powerful and inexpensive.  Innovative and wireless network-enabled
devices are regularly introduced into the mass PC market.  There are
advantages for end customers in familiarity and cost compared to proprietary,
hardware-based control systems.
 
 End
customers are also demanding a new breed of proactively monitored control
solutions.  Traditional control systems companies are reacting by
introducing PC-like services and interfaces to PCs and innovative PC wireless
smart displays.  These PC-like services cannot compete in terms of
price and performance with the much larger PC marketplace.
 
 Traditional
control systems position themselves to be the central technology and view the PC
as an "important device."  We believe the PC is the central technology
and view traditional hardware control boxes as a declining
technology.
 
 Research
and Development
 
 Our
product engineering, including our costs associated with design and
configuration of fully developed systems for particular customer applications,
is accounted for in our financial statements as research and development
expenses. During the year ended December 31, 2009 our expenditures for research
and development of new products or new components for our Device Manager and
Curiax products totaled $909,329, a decrease of 27% from the total expenditures
of $1,250,209 in 2008.  Our decreased expenses from 2008 to 2009
resulted primarily from personnel and salary reductions incurred during 2009 to
reduce our cash used from operations.  Our research and development
efforts have concentrated on expanding the control and monitoring aspects of our
software as well as improving user interfaces to facilitate ease of use of our
software.  Due to current capital resource constraints and
concentration of our efforts on gaining wider adoption of our software by end
users, we anticipate these expenses decreasing further in 2010.
 
 Employees
 
 As of
December 31, 2009, we employed eleven persons full time, including two executive
officers. Of the full-time employees who were not executive officers, four were
engaged in research and development and operations, four in sales and service,
and one in information systems. Employee relations are considered good and we
have no collective bargaining contracts covering any of our
employees.
 
 ITEM
2.  DESCRIPTION OF PROPERTY.
 
 We
maintain our executive and sales offices in 10,000 square feet of leased office
space in Norcross, Georgia, under a 60-month lease which expires in October
2012.  Current monthly rent is approximately $12,200 including common
area maintenance charges, taxes, and insurance.
 
 We
believe that our current facilities are adequate for our current
requirements.
 
 ITEM
3.  LEGAL PROCEEDINGS.
 
 We are
not party to any pending legal proceedings.
 
 ITEM
4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
 
 On
December 30, 2009, the stockholders of Company held an annual meeting of
stockholders.  The following items were voted upon at the
meeting:
 
 1)       Elect
three directors to serve for a term of one year and until their successors are
elected and qualified:
 
 The
nominees and their vote totals:
 For
                                
                                
                                WithheldDallas
      S. Clement
                                
                                19,302,621
                                
                                
                                58,247Lee
      D. Wilder
                                
                                19,302,621
                                
                                
                                58,247Oliver
      M. Cooper III
                                
                                19,302,606
                                
                                
                                58,262
 
  7
  
 2)       To
approve an increase in the authorized number of common shares from 100,000,000
to 400,000,000:
 
 For
                          
                          
                          20,830,477Against
                          
                          
                          171,069Abstain
                          
                          
                          26
 
 3)       To
approve an increase in the authorized number of preferred shares from 800,000 to
10,000,000:
 
 For
                        
                        
                        20,725,751Against
                        
                        
                        275,821
 
 4)       To
approve an amendment to the Company’s 2002 equity incentive plan to increase the
number of shares of common stock that may be issued under the plan, to a maximum
of 25,000,000 shares:
 
 For
                        
                        
                        17,686,735Against
                        
                        
                        210,388Abstain
                        
                        
                        3,104,449
 
 5)       To
ratify the appointment of Marcum LLP as the Company’s independent registered
public accounting firm for the fiscal year ending December 31,
2009:
 
 For
                        
                        
                        20,952,023Against
                        
                        
                        33,739Abstain
                        
                        
                        15,810
 
 PART
II
 
 ITEM
5.  MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES.
 
 From
January 1, 2002 to May 21, 2003, our Common Stock traded on the OTC Bulletin
Board under the symbol “SMOL.”  Our Common Stock traded on the Pink
Sheets under the symbol “SMOL” from May 22, 2003 to May 6, 2004.  From
May 7, 2004 to June 17, 2004, our Common Stock traded on the Pink Sheets under
the symbol “SMRL.”  On June 18, 2004, our Common Stock began trading
on the OTC Bulletin Board under the symbol “SMRL,” where it currently
trades.
  The
following table sets forth the quarterly high and low bid quotations per share
of Common Stock on the OTC Bulletin Board and the Pink Sheets as reported for
the periods indicated. These prices also represent inter-dealer quotations
without retail mark-ups, markdowns, or commissions and may not necessarily
represent actual transactions.
  HIGH
                    
                    
                    LOWFISCAL
      YEAR ENDED DECEMBER 31, 2008First
      Quarter
                    
                    $
                    0.95
                    
                    
                    $
                    0.60Second
      Quarter
                    
                    
                    0.65
                    
                    
                    
                    0.21Third
      Quarter
                    
                    
                    0.65
                    
                    
                    
                    0.36Fourth
      Quarter
                    
                    
                    0.43
                    
                    
                    
                    0.18FISCAL
      YEAR ENDED DECEMBER 31, 2009First
      Quarter
                    
                    $
                    0.25
                    
                    
                    $
                    0.12Second
      Quarter
                    
                    
                    0.29
                    
                    
                    
                    0.14Third
      Quarter
                    
                    
                    0.28
                    
                    
                    
                    0.10Fourth
      Quarter
                    
                    
                    0.20
                    
                    
                    
                    0.07
  8
 
 As of
March 25, 2010, there were approximately 293 holders of record and approximately
2,500 beneficial holders of our Common Stock.
 
 We have
never paid cash dividends on our Common Stock and have no plans to pay cash
dividends in the foreseeable future.  The policy of our Board of
Directors is to retain all available earnings for use in the operation and
expansion of our business.  Whether dividends may be paid in the
future will depend upon our earnings, capital requirements, financial condition,
prior rights of any preferred stockholders, and other relevant
factors.
  The
following table provides information as of December 31, 2009 regarding the
Company’s compensation plans and arrangements:
 
 Equity
Compensation Plan Information
 
 Plan category
                  
                  Number of
                    securities to be
                    issued upon exercise
                    of outstanding
                    options, warrants
                    and rights
                    (a)
                  
                  
                  Weighted-
                    average exercise
                    price of
                    outstanding
                    options, warrants
                    and rights
                    (b)
                  
                  
                  Number of securities
                    remaining available for
                    future issuance under equity
                    compensation plans
                    (excluding securities
                    reflected in column (a)
                    (c)Equity
      compensation plans approved by security holders
                  
                  
                  6,984,700
                  
                  
                  $
                  0.67
                  
                  
                  
                  18,007,050Equity
      compensation plans not approved by security holders
                  
                  
                  27,403,891
                  
                  
                  $
                  0.38
                  
                  
                  
                  -Total
                  
                  
                  34,388,591
                  
                  
                  $
                  0.44
                  
                  
                  
                  18,007,050
 
 See
Note 12 to the consolidated financial statements for a description of the
Company's 2002 Equity Incentive Plan.
 
 Recent
Sales of Unregistered Securities
  On
December 31, 2009, we issued 26,250 shares of Common Stock to three members of
our Board of Directors in lieu of cash fees for attendance at Board meetings
during the three months ended December 31, 2009.  The offer and sale
of the shares were exempt from the registration requirements of the Securities
Act of 1933 (the “Act”) pursuant to Rule 506 and Section 4(2) of the
Act.  In connection with the sales, we did not conduct any general
solicitation or advertising, and we complied with the requirements of Regulation
D relating to the restrictions on the transferability of the shares
issued.
  9
  ITEM
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
 
 The
following discussion and analysis should be read in conjunction with the
consolidated financial statements and notes thereto included elsewhere in this
Form 10-K.
 
 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.
 
 Overview
 
 Due to
continuing losses 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.  As of December 31, 2009, we had cash and cash equivalents
totaling $18,596 and negative working capital of $822,188.  Since
inception, we have not achieved a sufficient level of revenue to support our
business and incurred a net loss of $2,674,165 and used net cash of $1,551,226
in operating activities during 2009. We will require additional funding to fund
our development and operating activities during the first quarter 2010 and we
issued an additional $100,000 of notes payable during February 2010, in addition
to exchanging all outstanding notes payable and accrued and unpaid interest
totaling $646,295 previously issued on May 29, 2009.  See note
16.  We have reduced headcount and reduced the salaries of all
employees by 50% effective August 14, 2009 in order to reduce cash used in
operations.  We raised additional capital through a private placement
of debt securities and warrants and issued $562,250 of these securities on May
29, 2009 (see Note 6).  The private placement memorandum allows us to
raise a maximum of $1.5 million at the current terms.  No assurance
can be given that we 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 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 stockholders could lose their entire
investment in our company.
 
 Even if
we obtain additional equity capital, we may not be able to execute our current
business plan and fund business operations for the period necessary to achieve
positive cash flow.  In such case, we might exhaust our capital and be
forced to reduce expenses and cash burn to a material extent, which would impair
our ability to achieve our business plan.  If we run 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 us.  If
no source of additional cash is available to us, then we would be forced to
significantly reduce the scope of our operations or possibly seek court
protection from creditors or cease business operations altogether.
  These
matters raise substantial doubt about our ability to continue as a going
concern.  The accompanying consolidated 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
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 we be unable to continue as a going
concern.
  10
  LIQUIDITY
AND SOURCES OF CAPITAL
 
 We used
$1,551,226 in cash from operating activities in 2009, primarily due to our loss
of $2,674,165 during 2009, and we used $3,143,747 in cash from operating
activities in 2008, primarily due to our loss of $4,879,582 during
2008.  Our cash used from operations decreased during 2009 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.  Until we significantly increase revenues,
we anticipate that we will continue to operate with reduced salaries for
employees and minimal headcount.
 
 During
2009 we received $35,444 from investing activities, as we used $18,267 to
purchase new computer equipment while we received proceeds of $53,711 from the
partial redemption of a certificate of deposit in order to satisfy past due rent
obligations under our office lease.  During 2008 we used $11,418 in
investing activities, primarily due to purchases of new computer equipment of
$35,924, offset partially by proceeds from the partial redemption of a
certificate of deposit of $24,506.  During 2007, we 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.  Also, we were required
to collateralize the letter of credit with a $100,000 one-year certificate of
deposit.  In 2008, the letter of credit amount was reduced to $80,000
per the terms of the lease and we collateralized the letter of credit with an
$80,000 certificate of deposit. We also issued $26,000 and $26,000 in 2009 and
2008, respectively, (100,000 shares each period) of our common stock in
conjunction with the acquisition of the remaining 50% interest in a joint
venture that we did not previously own (see Note 11 to the consolidated
financial statements).  No additional shares are due under the
purchase agreement.  Cash received from financing activities during
2009 included the sale of $562,250 of convertible notes payable in a private
placement. These notes were then exchanged for new notes payable and an
additional $100,000 of notes payable were issued in February
2010.  See note 17 to our financial statements.  Cash
received from financing activities during 2008 included the sale of $1,500,000
of convertible notes payable in a private placement. These notes and $72,750 of
accrued interest were exchanged into Series C Convertible Preferred Stock in
connection with a private placement on June 30, 2008.  We raised an
additional $1,027,264 (net of offering costs) from the equity offering on that
date and an additional $1,373,570 (net of offering costs) on September 26,
2008.  See Notes 6 and 7 to our consolidated financial
statements.
 
 We
currently require substantial amounts of capital to fund current operations,
continue product development, and to try to gain market acceptance of our Device
ManagerTM and
CuriaxTM product
lines.  We will likely require additional funding to fund our
development and operating activities during the 2010 and are currently
attempting to raise up to $1.5 million in debt and/or equity financing to
continue our efforts to gain end user acceptance of our software. 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.  Also, anti-dilution provisions of our
existing Series A, B, and C Convertible Preferred stock resulted in dilution to
existing common shareholders in conjunction with the transaction.  If
we are unable to obtain additional funding, our business, financial condition
and results of operations would be adversely affected. We used the proceeds of
our private placements primarily for operating activities.  See note
17 to our financial statements.
 
 Our total
assets decreased approximately 87% to $191,855 at December 31, 2009 from
$1,457,152 at December 31, 2008. The decrease in assets was primarily due to the
cash used to fund operations during the period.
  Current
liabilities increased $638,150, or 230%, due primarily to the issuance of
$562,250 in convertible notes payable on May 29, 2009, to fund
operations.  See note 6 to our consolidated financial
statements.
  We expect
to spend less than $50,000 on capital expenditures in 2010.
 
 Critical
Accounting Estimates
 
 We
prepare our 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 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
      ManagerTM
      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.
  11
 
 ·
              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
      previously fully amortized.  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.
 
 ·
              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 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.  An impairment of approximately
      $77,000 was recorded in 2008.  See Note 11 to our 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 9to our consolidated financial
      statements.
 
 ·
              Stock-Based
      Compensation.  Stock
      option awards are granted with an exercise price equal to or greater than
      the market price of our stock on the date of the grant in accordance with
      the our 2002 Equity Incentive 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. We
      implemented ASC 718, “Compensation-Stock
      Compensation.”   The statement requires companies to
      expense the value of employee stock options and similar awards. 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.  We use historical data to estimate option exercise
      and employee termination within the valuation model and historical stock
      prices to estimate volatility.
  12
  New
Accounting Pronouncements
 
 In
December 2007, the FASB issued ASC 805, Business Combinations(formerly SFAS No. 141 (revised 2007), Business Combinations). ASC
805 establishes principles and requirements for how companies recognize and
measure identifiable assets acquired, liabilities assumed, and any
noncontrolling interest in connection with a business combination; recognize and
measure the goodwill acquired in a business combination or a gain from a bargain
purchase; and determine what information to disclose to enable users of the
financial statements to evaluate the nature and financial effects of the
business combination. The Company adopted ASC 805 on January 1, 2009. ASC 805
will have an impact on the Company’s accounting for future business combinations
but the effect is dependent upon acquisitions that are made in the
future.
 
 In
December 2007, the FASB issued ASC 810, "Consolidations.”  ASC
810 establishes accounting and reporting standards for the noncontrolling
interest in a subsidiary (previously referred to as minority
interests).  ASC 810 also requires that a retained noncontrolling
interest upon the deconsolidation of a subsidiary be initially measured at its
fair value. Under ASC 810, noncontrolling interests are reported as a separate
component of consolidated stockholders’ equity. In addition, net income
allocable to noncontrolling interests and net income attributable to  
stockholders are reported separately in the consolidated statements of
operations. ASC 810 became effective beginning January 1, 2009.  ASC
810 would have an impact on the presentation and disclosure of the
noncontrolling interests of any non-wholly owned businesses acquired in the
future.
 
 In
February 2008, the FASB issued an update to ASC 820, Fair Value Measurements and
Disclosures (formerly FSP No. FAS 157-2, Effective Date of FASB Statement
No. 157). This update amended ASC
820 to delay the effective date for the fair valuation of non-financial assets
and liabilities, except for items that are recognized or disclosed at fair value
in the financial statements on a recurring basis. The Company has assessed the
impact of this update for its non-financial assets and liabilities and
determined that there was no material impact on the Company’s consolidated
financial statements.
 
 In
August 2009, the FASB issued an Update to ASC 820, Fair Value Measurements and
Disclosures 2009-05 Measuring Liabilities at Fair Valueto provide guidance on measuring the fair value of liabilities under ASC
820. This update clarifies the fair value measurements for a liability in an
active market and the valuation techniques in the absence of a Level 1
measurement. This update is effective for the interim period beginning
October 1, 2009. The adoption of this update did not have a material impact
on the Company’s consolidated financial statements.
 
 In April
2008, the FASB issued updates to ASC 350-30-35, General Intangibles Other Than
Goodwill-Subsequent Measurement(formerly FSP No. 142-3, Determination of the Useful Life of
Intangible Assets), which amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of
a recognized intangible asset. The Company’s adoption of these updates, on
January 1, 2009, is effective prospectively for intangible assets acquired or
received after January 1, 2009.
 
 In June
2008, the FASB issued updates to ASC 815-40, Derivatives and Hedging, Contracts
in Entity’s Own Equity (ASC 815-40) (formerly EITF Bulletin
No. 07-5, Determining
Whether an Instrument (or Embedded Feature) is Indexed to an Entity’s Own
Stock). ASC 815-40 provides guidance on how a company should determine if
certain financial instruments (or embedded features) are considered indexed to
its own stock, including instruments similar to the conversion option of the
Notes, convertible note hedges, and warrants to purchase Company stock. This
update requires that a two-step approach be used to evaluate an instrument’s
contingent exercise provisions and settlement provisions in determining whether
the instrument is considered to be indexed to its own stock, and exempt from the
application of ASC 815, Derivatives and Hedging (ASC
815) (formerly SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities).The Company adopted the updates to
ASC 815-40 effective January 1, 2009. The Company evaluated its financial
instruments and embedded instrument features and determined that the accounting
for certain previously issued financial instruments are impacted by the
provisions of this update to ASC 815. Accordingly, the adoption of this new
update had a material effect on the Company’s consolidated results of operations
and financial position. (See Note 14 “Derivatives” for further
details)
 
 In June
2009, the FASB issued ASC 810 “Amendments to FASB Interpretation
No. 46(R)”. This standard changes how a company determines when an
entity that is insufficiently capitalized or is not controlled through voting
(or similar rights) should be consolidated. The determination of whether a
company is required to consolidate an entity is based on, among other things, an
entity’s purpose and design and a company’s ability to direct the activities of
the entity that most significantly impact the entity’s economic performance. The
statement is effective for us on December 31, 2010. The Company is
currently evaluating the impact this statement may have on its consolidated
results of operations and financial condition and does not expect the impact, if
any, to be material.
  13
 
 Effective
June 30, 2009, the Company adopted a new accounting standard included in
ASC  855 Subsequent
Eventsthat 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.
 
 In August
2009, the FASB issued new accounting guidance to provide clarification on
measuring liabilities at fair value when a quoted price in an active market is
not available. This guidance is effective for the Company on October 1, 2009 and
did not have a significant impact on the Company’s consolidated financial
position or results of operations.
 
 In
October 2009, the FASB issued ASU No. 2009-13, Multiple-Deliverable Revenue
Arrangements (ASU 2009-13) (formerly EITF 08-1, Revenue Arrangements with Multiple
Deliverables) which amends ASC Topic 605, Revenue
Recognition. This accounting update establishes a hierarchy for
determining the value of each element within a multiple deliverable
arrangement. ASU 2009-13 is effective for the Company beginning
July 1, 2010 and applies to arrangements entered into on or after this
date. The Company is currently evaluating the impact that ASU 2009-13 may
have on its financial position and results of operations, and does not expect
the impact, if any, to be material.
 
 In
October 2009, the FASB issued ASU No. 2009-14, Certain Revenue Arrangements That
Include Software Elements (ASU 2009-14) (formerly EITF 09-3, Applicability of AICPA Statement of
Position 97-2 to Certain Arrangements That Include Software Elements),
which updates ASC Topic 985,Software. ASU 2009-14 clarifies which accounting guidance should be
used for purposes of measuring and allocating revenue for arrangements that
contain both tangible products and software, and where the software is more than
incidental to the tangible product as a whole. ASU 2009-14 is effective for the
Company’s fiscal year beginning July 1, 2010 and applies to arrangements
entered into on or after this date. The Company is currently evaluating the
impact that ASU 2009-14 may have on its financial position and results of
operations, and does not expect the impact, if any, to be material.
 
 Comparison
of Year Ended December 31, 2009 to Year Ended December 31, 2008
 
 Results
of Operations
 
 Revenues
 
 Revenues
were $590,685 and $294,695 in 2009 and 2008, respectively. The 100% increase in
revenues from 2008 to 2009 was primarily due to increased programming service
revenues to multiple customers and hardware revenues in conjunction with a sale
of our judicial software at one county.  2009 revenues also included
$100,000 cash received from the assignment of our Visitor software to Strike
Industries in the sale of this technology.  See note 16 to our
accompanying consolidated financial statements.  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.
 
 We
anticipate significantly increased revenues during 2010 due to our sales and
product development efforts in 2009 that resulted in our partnership with
Promethean in 2008 and installation of our software in classrooms in
2009.  Also, we anticipate higher revenues during 2010 from
installation of our software in a customer’s hospital operating room technology
product.
 
 Cost
of Revenues and Gross Profit
 
 Gross
profit as a percentage of revenues was approximately 68% and 81% in 2009 and
2008, respectively.  Lower margins during the current period resulted
primarily from a higher mix of lower margin hardware and programming service
sales during the current year.  We began earning revenue during the
current year from outsourced software development that we provided for new
customers, in order to reduce our cash used from operations, and these revenues
carry lower margins than software license revenues.
 14
  Selling,
General & Administrative Expenses
 
 Selling,
general and administrative expenses were $2,041,064 and $3,257,486 for 2009 and
2008, respectively. The decrease in 2009 compared to 2008 resulted primarily
from lower headcount and lower payroll expenses due to salary reductions,
reduced stock-based compensation of approximately $230,000 during the current
year due to lower vesting options during the year.  We also reduced
other selling, general, and administrative expenses in our efforts to reduce
cash used from operations in 2009, and incurred separation costs of
approximately $53,000 accrued in conjunction with the termination of our former
Chief Executive Officer in 2008.  Lower stock payments of
approximately $136,000 resulted from the expiration of the 24-month consulting
agreement with Triton Value Partners in January 2009.  We anticipate
that we will continue to attempt to reduce selling, general, and administrative
costs due to cash constraints and the inability to raise sufficient
capital.
 
 Research
and Development Expenses
 
 We charge
research and development costs to expense as incurred until technological
feasibility of a software product has been established. Software development
costs incurred after technological feasibility has been established are
capitalized and amortized, 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. These expensed costs were $909,329 and $1,250,209 for 2009 and
2008, respectively.  The decrease in expense was due primarily to
salary and personnel reductions as well as lower use of third-party development
personnel and outsourced software development services during the current
period.  Due to current capital resource constraints and concentration
of our efforts on gaining wider adoption of our software by end users, we do not
anticipate an increase in research and development expenses during
2010.
 
 Other
income/(expense)
 Other
expense during, 2009 of $124,598 consisted primarily $532,608 recorded to
amortize the fair value of warrants issued to convertible noteholders in a
financing transaction on May 29, 2009, $73,539 in accrued interest on the
convertible notes, and amortized note offering costs of $31,533, partially
offset by a gain of $506,522 recorded on our derivative
liabilities.
 
 Other
expense during 2008 of $611,262 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
repayment, and debt offering costs of $21,579 amortized over the term of the
notes, partially offset by interest earned on our cash balances during the
year.
 
 Net
Loss and Net Loss Attributable to Common Stockholders
 
 Net loss
for 2009 was $2,674,165 compared to a net loss of $4,879,582 for
2008.  Operating expenses decreased by $1,557,302 during the current
year due primarily to lower payroll costs of approximately $516,000, lower
stock-based compensation of approximately $269,000 due to the lower number of
options vesting during the current year, and lower stock based payment for
services during the current year.  Additionally, we recorded
approximately $507,000 in derivative gains during the current year due to the
lower outstanding number of warrants classified as derivative liabilities at
December 31, 2009, as well as the drop in our stock price from $0.28 at the
beginning of the year to $0.08 at year end.
 
 Net loss
attributable to common stockholders of $3,136,171 and $7,366,588 for 2009 and
2008, respectively, included $462,006 and $511,408 to record the value of
preferred stock dividends paid in the form of common stock on June 30 and
December 31 each year to Convertible Preferred Stock holders and $1,975,598 to
record the deemed preferred dividend on the Series C Convertible Preferred Stock
issued in 2008.
 15


Off
Balance Sheet Arrangements
 
 We do not
have any off-balance sheet arrangements.
 
 ITEM 8.
              FINANCIAL STATEMENTS AND
      SUPPLEMENTARY DATA.
 
 The
information required by this Item 8 is hereby incorporated by reference to our
Consolidated Financial Statements beginning on page 30 of this Annual Report on
Form 10-K.
  ITEM 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
 
 Not
applicable.
 
 ITEM
9A(T). CONTROLS
AND PROCEDURES
 
 Evaluation
of Disclosure 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 December 31, 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 December 31, 2009.
  16
  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.
  Management’s
Annual Report on Internal Control over Financial Reporting
 
 Management
is responsible for establishing and maintaining adequate internal control over
financial reporting (as defined in Rules 13a-15(f) and 15d(15(f)) under the
Securities Exchange Act of 1934, as amended).  Our management
including the Company’s Chief Executive Officer and Chief Financial Officer,
evaluated as of December 31, 2009 the effectiveness of our internal control over
financial reporting using the framework in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission.  Based on that evaluation, the Company’s Chief
Executive Officer and Chief Financial Officer concluded that our internal
controls, as of December 31, 2009, were effective in providing reasonable
assurances regarding reliability of financial reporting, for the reasons set
forth above in “- Evaluation of Disclosure Controls and
Procedures.”
 
 Changes
in Internal Control Over Financial Reporting
 
 Other
than what has been disclosed above, there have been no significant changes in
internal controls over financial reporting that occurred during the quarter
ended December 31, 2009 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
 
 ITEM
      9B.
              OTHER
      INFORMATION
 
 None.
 PART
III
 
 ITEM
      10.
              DIRECTORS,
      EXECUTIVE OFFICERS, AND CORPORATE
GOVERNANACE
  The
information required by this Item is contained in our definitive proxy statement
for the 2010 Annual Meeting of Stockholders, which is expected to be filed with
the SEC on or about April 30, 2010, and is incorporated herein by
reference.
  ITEM
      11.
              EXECUTIVE
      COMPENSATION.
  The
information required by this Item will be presented in our definitive proxy
statement for the 2010 Annual Meeting of Stockholders, which is expected to be
filed with the SEC on or about April 30, 2010, and is incorporated herein by
reference.
  ITEM
12. SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS.
  The
information required by this Item will be presented in our definitive proxy
statement for the 2010 Annual Meeting of Stockholders, which is expected to be
filed with the SEC on or about April 30, 2010, and is incorporated herein by
reference.
  17
  ITEM
      13.
              CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE.
  The
information required by this Item will be presented in our definitive proxy
statement for the 2010 Annual Meeting of Stockholders, which is expected to be
filed with the SEC on or about April 30, 2010, and is incorporated herein by
reference.
  ITEM
      14.
              PRINCIPAL
      ACCOUNTING FEES AND SERVICES.
 
 The
Company has engaged Marcum LLP as the Company’s independent registered public
accounting firm to review and audit the Company’s financial statements for the
year ended December 31, 2009.
 
 Audit Fees.  The
aggregate fees billed by Marcum LLP for professional services amounted to
$140,958 and $108,707 for the audits of the Company’s annual financial
statements for the years ended December 31, 2009 and 2008, respectively, which
services includes the cost of the reviews of the Company’s condensed
consolidated financial statements included in the Company’s Forms 10-Q for 2009
and 2008.
 
 Audit-Related
Fees.  There were no fees charged during 2009 and 2008 for
audit-related services.
 
 Tax Fees.  No tax
compliance, tax advice, or tax planning services were provided to the Company by
Marcum LLP during 2009 or 2008.
 
 All Other
Fees.  There were no fees charged during 2009 and 2008 for
other services.
 
 All fees
paid to Marcum LLP were, and will continue to be, approved by the audit
committee in accordance with our audit committee charter prior to commencement
of work.
  PART
IV
 
 ITEM
      15.
              EXHIBITS,
      FINANCIAL STATEMENT SCHEDULES.
 
 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 Company’s
Registration Statement on Form SB-2 (File No. 333-128420) filed with the
Securities and Exchange Commission on September 19, 2005, (referred to as “2005
SB-2”), (ii) 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. 2”),
(iii) Post-Effective Amendment No. 2 to the Company's Registration Statement on
Form S-18 (File No. 33-27040-D) (referred to as “S-18 No. 3”), (iv) the
Company's Registration Statement Form S-1 (File No. 33-85754) (referred to as
“S-1”); (v) the Company's Annual Report on Form 10-K for the year ended December
31, 1993 (referred to as “1993 10-K”); (vi) the Company's Annual Report on Form
10-K for the year ended December 31, 1994 (referred to as “1994 10-K”); (vii)
the Company’s Annual Report on Form 10-K for the year ended December 31, 1998,
as amended (referred to as “1998 10-K/A”) filed on April 30, 1999 , (viii) the
Company's Form S-8 Registration Statement (File No. 333-148890), (referred to as
“Option Plan S-8”) filed on January 28, 2008, (ix) the Company's Registration
Statement on Form S-3 amended January 31, 1999 (“1999 S-3”), (x) the Company's
Report on Form 8-K filed March 12, 2009 (referred to as “March 12, 2009 8-K”),
(xi) the Company’s Annual Report on Form 10-KSB for the year ended December 31,
2006 (“2006 10-KSB”) filed April 17, 2007, or (xii) the Company’s 2002 proxy
statement on Schedule 14A (referred to as “2002 Proxy Statement”) filed on April
24, 2002.
 
 Exhibit No.
                        
                        Description of Exhibit*3.1
                        
                        Certificate
      of Incorporation of the Company, as amended through March 8, 2007 (2006
      10-KSB)*3.2
                        
                        Amended
      Bylaws of the Company as presently in use (S-18 No. 2, Exhibit
      3.2)4.1
                        
                        Certificate
      of Incorporation of the Company, as amended (filed herewith as Exhibit
      3.1)
  18
 
 4.2
                      
                      Amended
      Bylaws of the Company as presently in use (filed herewith as Exhibit
      3.2)*10.3
                      
                      1991
      Stock Option Plan (S-18 No. 3, Exhibit 10.1(a))*10.3.1
                      
                      Amendment
      No. 1 to 1991 Stock Option Plan (1993 10-K)*10.3.2
                      
                      Amendment
      No. 2 to 1991 Stock Option Plan (S-1)*10.3.3
                      
                      Amendment
      No. 3 to 1991 Stock Option Plan (S-1)*10.3.4
                      
                      Amendment
      No. 4 to 1991 Stock Option Plan (Option Plan S-8, Exhibit
    4.5)*10.3.5
                      
                      Amendment
      No. 5 to 1991 Stock Option Plan (1998 10-K/A, Exhibit
    10.3.5)*10.4
                      
                      2002
      Equity Incentive Plan (2002 Proxy Statement)*10.5
                      
                      2002
      Equity Incentive Plan Form S-8 (Option Plan S-8)*
      10.6
                      
                      Technology
      License Agreement between ACIS, Inc. and the Company dated March 5, 2009
      (March 12, 2009 8-K)*10.9
                      
                      Triton
      Value Partners Engagement Agreement dated January 31, 2007 (2006
      10-KSB)21.1
                      
                      Subsidiaries
      of the Company23.1
                      
                      Consent
      of Marcum LLP31.1
                      
                      Rule
      13a-14(a)/15d-14(a) Certification of Principal Executive
      Officer31.2
                      
                      Rule
      13a-14(a)/15d-14(a) Certification of Principal Financial
      Officer32.1(1)
                      
                      Section
      1350
Certifications
 
 *
Previously filed
 (1)  In
accordance with Item 601(B)32 of Regulation S-K, this Exhibit is not deemed
“filed” for purposes of Section 18 of the Exchange Act or otherwise subject to
the liabilities of that section.  Such certifications will not be
deemed incorporated by reference into any filing under the Securities Act or the
Exchange Act, except to the extent that the registrant specifically incorporates
it by reference.
 
 SIGNATURES
 
 Pursuant
to the requirements of Section 13 or 15(d) 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.By:
                        /s/ Oliver M. Cooper,
      IIIDate:  March
      26, 2010
                        
                        Oliver
      M. Cooper, III, Chief Executive
Officer
 
 Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
  19
 
 Signature
                  
                  Title
                  
                  Date/s/ Dallas S. Clement
                  
                  Chairman
      of the Board
                  
                  March
      26, 2010Dallas
      S. Clement/s/ Oliver M. Cooper, III
                  
                  Chief
      Executive Officer
                  
                  March
      26, 2010Oliver
      M. Cooper, III
                  
                  (Principal
      Executive Officer)/s/ Stephen N. Samp
                  
                  Chief
      Financial Officer
                  
                  March
      26, 2010Stephen
      N. Samp
                  
                  (Principal
      Financial andAccounting
      Officer)/s/ Lee D. Wilder
                  
                  Director
                  
                  March
      26, 2010Lee
      D. Wilder
  20
  INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 Report
      of Independent Registered Public Accounting Firm
                  
                  22Consolidated
      Balance Sheets as of December 31, 2009 and 2008
                  
                  23Consolidated
      Statements of Operations for the Years Ended December 31, 2009 and
      2008
                  
                  24Consolidated
      Statements of Stockholders' Equity/(Deficiency) for the Years Ended
      December 31, 2009 and 2008.
                  
                  25Consolidated
      Statements of Cash Flows for the Years Ended December 31, 2009 and
      2008
                  
                  26Notes
      to Consolidated Financial Statements
                  
                  27
  21
  REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
 
 To the
Audit Committee of the
 Board of
Directors and Shareholders
 of
Simtrol, Inc. and Subsidiaries
 
 We have
audited the accompanying consolidated balance sheets of Simtrol, Inc. and
Subsidiaries (the “Company”) as of December 31, 2009 and 2008, and the related
consolidated statements of operations, stockholders’ equity/(deficiency) and
cash flows for the years then ended.  These consolidated financial
statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
 
 We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement.  The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion.  An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation.  We believe that our audits provide a
reasonable basis for our opinion.
 
 In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Simtrol, Inc. and
Subsidiaries, as of December 31, 2009 and 2008, and the consolidated results of
their operations and their cash flows for the years then ended, in conformity
with United States generally accepted accounting principles.
 
 The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern.  As discussed in Note 2
to the consolidated financial statements, at December 31, 2009, the Company has
not achieved a sufficient level of revenues to support its business and has
suffered recurring losses from operations.  These factors raise
substantial doubt about the Company’s ability to continue as a going
concern.  Management’s plans regarding those matters are also
described in Note 2.  The consolidated financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.
 
 As
discussed in Note 3 to the consolidated financial statements, the Company
changed the manner in which it accounts for certain convertible debt and equity
instruments (Note 14) effective January 1, 2009.
 
 /s/
Marcum LLP
 
 New York,
New York
 March 26,
2010
  22
 
 SIMTROL,
INC. AND SUBSIDIARIES
 CONSOLIDATED
BALANCE SHEETS
 
 December 31,2009
                          
                          
                          2008ASSETSCurrent
      assetsCash
      and cash equivalents
                          
                          $
                          18,596
                          
                          
                          $
                          997,048Accounts
      receivable
                          
                          
                          30,549
                          
                          
                          
                          80,015Inventory
                          
                          
                          19,128
                          
                          
                          
                          28,905Prepaid
      expenses and other assets
                          
                          
                          20,173
                          
                          
                          
                          129,873Interest
      receivable
                          
                          
                          4,603
                          
                          
                          
                          -Total
      current assets
                          
                          
                          93,049
                          
                          
                          
                          1,235,841Certificate
      of deposit-restricted
                          
                          
                          29,911
                          
                          
                          
                          81,126Property
      and equipment, net
                          
                          
                          60,176
                          
                          
                          
                          101,509Right
      to license intellectual property, net
                          
                          
                          8,719
                          
                          
                          
                          27,218Note
      receivable, net of $400,000 deferred in 2009
                          
                          
                          -
                          
                          
                          
                          -Other
      assets
                          
                          
                          -
                          
                          
                          
                          11,458Total
      assets
                          
                          $
                          191,855
                          
                          
                          $
                          1,457,152LIABILITIES
      AND STOCKHOLDERS’(DEFICIT)/EQUITYCurrent
      liabilitiesAccounts
      payable
                          
                          $
                          222,457
                          
                          
                          $
                          188,064Accrued
      expenses
                          
                          
                          100,374
                          
                          
                          
                          43,505Deferred
      revenue
                          
                          
                          29,638
                          
                          
                          
                          19,518Common
      stock to be issued
                          
                          
                          -
                          
                          
                          
                          26,000Derivative
      liabilities
                          
                          
                          518
                          
                          
                          
                          -Notes
      payable, net
                          
                          
                          562,250
                          
                          
                          
                          -Total
      current liabilities
                          
                          
                          915,237
                          
                          
                          
                          277,087Derivative
      liabilities
                          
                          
                          136,231
                          
                          
                          
                          -Deferred
      rent payable
                          
                          
                          20,459
                          
                          
                          
                          20,551Total
      liabilities
                          
                          
                          1,071,927
                          
                          
                          
                          297,638Commitments
      and contingenciesStockholders'
      (Deficit)/Equity:Preferred
      stock, $.00025 par value; 10,000,000 shares authorized;Series
      A Convertible: 770,000 shares designated; 672,664 and  688,664
      outstanding; liquidation values of $2,017,992 and
    $2,065,992
                          
                          
                          167
                          
                          
                          
                          171Series
      B Convertible: 4,700 shares designated; 4,264 and 4,285 outstanding;
      liquidation values of $3,198,000 and $3,213,750
                          
                          
                          1
                          
                          
                          
                          1Series
      C Convertible: 7,900 shares designated; 5,534 outstanding; liquidation
      value of $4,150,000
                          
                          
                          14
                          
                          
                          
                          14Common
      stock, 400,000,000 shares authorized; $.001 par value; 13,725,921 and
      10,783,882 issued and outstanding
                          
                          
                          13,726
                          
                          
                          
                          10,784Additional
      paid-in capital
                          
                          
                          79,832,011
                          
                          
                          
                          80,338,073Accumulated
      deficit
                          
                          
                          (80,725,991
                          )
                          
                          
                          (79,189,529
                          )Total
      stockholders' (deficit)/equity
                          
                          
                          (880,072
                          )
                          
                          
                          1,159,514Total
      liabilities and stockholders’ (deficit)/ equity
                          
                          $
                          191,855
                          
                          
                          $
                          1,457,152
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
  23
  SIMTROL,
INC. AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF OPERATIONS
 
 For the Years Ended December 31,2009
                      
                      
                      2008RevenuesSoftware
      licenses
                      
                      $
                      210,567
                      
                      
                      $
                      161,983Service
      and hardware
                      
                      
                      380,118
                      
                      
                      
                      132,712Total
      revenues
                      
                      
                      590,685
                      
                      
                      
                      294,695Cost
      of revenuesSoftware
      licenses
                      
                      
                      3,800
                      
                      
                      
                      2,895Service
      and hardware
                      
                      
                      186,059
                      
                      
                      
                      52,425Total
      cost of revenues
                      
                      
                      189,859
                      
                      
                      
                      55,320Gross
      profit
                      
                      
                      400,826
                      
                      
                      
                      239,375Operating
      expensesSelling,
      general and administrative
                      
                      
                      2,041,064
                      
                      
                      
                      3,257,486Research
      and development
                      
                      
                      909,329
                      
                      
                      
                      1,250,209Total
      operating expenses
                      
                      
                      2,950,393
                      
                      
                      
                      4,507,695Loss
      from operations
                      
                      
                      (2,549,567
                      )
                      
                      
                      (4,268,320
                      )Other
      income/(expenses)Amortization
      of debt discount-warrant fair value
                      
                      
                      (532,608
                      )
                      
                      
                      (266,038
                      )Amortization
      of beneficial conversion of notes payable
                      
                      
                      -
                      
                      
                      
                      (266,038
                      )Amortization
      of debt issuance costs
                      
                      
                      (31,533
                      )
                      
                      
                      (21,579
                      )Interest
      income
                      
                      
                      15,602
                      
                      
                      
                      23,439Interest
      expense
                      
                      
                      (82,581
                      )
                      
                      
                      (81,046
                      )Gain
      on derivative liabilities
                      
                      
                      506,522
                      
                      
                      
                      -Total
      other expense
                      
                      
                      (124,598
                      )
                      
                      
                      (611,262
                      )Net
      loss
                      
                      
                      (2,674,165
                      )
                      
                      
                      (4,879,582
                      )Dividends
      on convertible preferred stock paid in common stock
                      
                      
                      (462,006
                      )
                      
                      
                      (511,408
                      )Deemed
      preferred dividend on convertible preferred stock
                      
                      
                      -
                      
                      
                      
                      (1,975,598
                      )Net
      loss attributable to common stockholders
                      
                      $
                      (3,136,171
                      )
                      
                      $
                      (7,366,588
                      )Net
      loss per common share attributable to common stockholders-basic and
      diluted
                      
                      $
                      (0.27
                      )
                      
                      $
                      (0.85
                      )Weighted
      average number of common shares outstanding
                      
                      
                      11,578,517
                      
                      
                      
                      8,696,718
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
  24
  SIMTROL,
INC. AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY/(DEFICIENCY)
 For the
Years Ended December 31, 2009 and 2008
 
 Preferred Stock
                              
                              
                              Common stock
                              
                              
                              AdditionalNumber of
                              
                              
                              
                              
                              
                              Number of
                              
                              
                              
                              
                              
                              Paid-in
                              
                              
                              AccumulatedShares
                              
                              
                              Par value
                              
                              
                              Shares
                              
                              
                              Par value
                              
                              
                              capital
                              
                              
                              deficit
                              
                              
                              TotalBalance,
      January 1, 2008
                              
                              
                              733,364
                              
                              
                              
                              183
                              
                              
                              
                              7,314,371
                              
                              
                              
                              7,314
                              
                              
                              
                              72,119,986
                              
                              
                              
                              (71,822,940
                              )
                              
                              
                              304,543Net
      Loss
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              (4,879,582
                              )
                              
                              
                              (4,879,582
                              )Issuance
      of Series C Preferred Stock
                              
                              
                              5,534
                              
                              
                              
                              14
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              3,973,571
                              
                              
                              
                              
                              
                              
                              
                              3,973,585Conversion
      of Series A Preferred Stock
                              
                              
                              (40,000
                              )
                              
                              
                              (10
                              )
                              
                              
                              160,000
                              
                              
                              
                              160
                              
                              
                              
                              (150
                              )
                              
                              
                              
                              
                              
                              
                              -Conversion
      of Series B Preferred Stock
                              
                              
                              (415
                              )
                              
                              
                              (1
                              )
                              
                              
                              830,000
                              
                              
                              
                              830
                              
                              
                              
                              (829
                              )
                              
                              
                              
                              
                              
                              
                              -Issuance
      of common stock to directors
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              17,376
                              
                              
                              
                              18
                              
                              
                              
                              5,832
                              
                              
                              
                              
                              
                              
                              
                              5,850Stock-based
      compensation amortization
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              969,686
                              
                              
                              
                              
                              
                              
                              
                              969,686Issuance
      of common stock for purchase of license agreement
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              100,000
                              
                              
                              
                              100
                              
                              
                              
                              25,900
                              
                              
                              
                              
                              
                              
                              
                              26,000Amortization
      of debt discount and beneficial conversion feature of convertible notes
      payable
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              532,076
                              
                              
                              
                              
                              
                              
                              
                              532,076Common
      stock dividend on Series A, B, and C Convertible Preferred
      shares
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              1,926,735
                              
                              
                              
                              1,927
                              
                              
                              
                              509,481
                              
                              
                              
                              (511,408
                              )
                              
                              
                              -Issuance
      of common stock for services
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              320,400
                              
                              
                              
                              320
                              
                              
                              
                              138,787
                              
                              
                              
                              
                              
                              
                              
                              139,107Issuance
      of common stock for consulting services
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              115,000
                              
                              
                              
                              115
                              
                              
                              
                              88,135
                              
                              
                              
                              
                              
                              
                              
                              88,250Deemed
      preferred dividend
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              1,975,598
                              
                              
                              
                              (1,975,598
                              )
                              
                              
                              -Balance,
      December 31, 2008
                              
                              
                              698,483
                              
                              
                              $
                              186
                              
                              
                              
                              10,783,882
                              
                              
                              $
                              10,784
                              
                              
                              $
                              80,338,073
                              
                              
                              $
                              (79,189,528
                              )
                              
                              $
                              1,159,515Net
      Loss
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              (2,674,165
                              )
                              
                              
                              (2,674,165
                              )Cumulative
      effect of change in accounting principle-January 1, 2009 reclassification
      of equity-linked financial instruments to derivative
      liabilities
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              (1,710,371
                              )
                              
                              
                              1,599,708
                              
                              
                              
                              (110,663
                              )Conversion
      of Series A Preferred Stock
                              
                              
                              (16,000
                              )
                              
                              
                              (4
                              )
                              
                              
                              64,000
                              
                              
                              
                              64
                              
                              
                              
                              (60
                              )
                              
                              
                              
                              
                              
                              
                              -Conversion
      of Series B Preferred Stock
                              
                              
                              (21
                              )
                              
                              
                              -
                              
                              
                              
                              42,000
                              
                              
                              
                              42
                              
                              
                              
                              (42
                              )
                              
                              
                              
                              
                              
                              
                              -Issuance
      of common stock to directors
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              78,875
                              
                              
                              
                              79
                              
                              
                              
                              12,021
                              
                              
                              
                              
                              
                              
                              
                              12,100Stock-based
      compensation amortization
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              697,889
                              
                              
                              
                              
                              
                              
                              
                              697,889Issuance
      of common stock for purchase of licensing agreement
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              100,000
                              
                              
                              
                              100
                              
                              
                              
                              25,900
                              
                              
                              
                              
                              
                              
                              
                              26,000Common
      stock dividend on Series A, B, and C Convertible Preferred
      shares
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              2,566,698
                              
                              
                              
                              2,567
                              
                              
                              
                              459,439
                              
                              
                              
                              (462,006
                              )
                              
                              
                              -Issuance
      of common stock for services
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              15,500
                              
                              
                              
                              15
                              
                              
                              
                              3,240
                              
                              
                              
                              
                              
                              
                              
                              3,255Issuance
      of common stock for notes payable extension fee
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              74,966
                              
                              
                              
                              75
                              
                              
                              
                              5,922
                              
                              
                              
                              
                              
                              
                              
                              5,997Balance,
      December 31, 2009
                              
                              
                              682,462
                              
                              
                              $
                              182
                              
                              
                              
                              13,725,921
                              
                              
                              $
                              13,726
                              
                              
                              $
                              79,832,011
                              
                              
                              $
                              (80,725,991
                              )
                              
                              $
                              (880,072
                              )
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
  25
  SIMTROL,
INC. AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 
 For the Years Ended December 31,2009
                                  
                                  
                                  2008Cash
      flows from operating activitiesNet
      loss
                                  
                                  $
                                  (2,674,165
                                  )
                                  
                                  $
                                  (4,879,582
                                  )Adjustments
      to reconcile net loss to net cash used in operating
    activitiesImpairment
      of right to license intellectual property
                                  
                                  
                                  18,499
                                  
                                  
                                  
                                  76,782Depreciation
      and amortization
                                  
                                  
                                  53,087
                                  
                                  
                                  
                                  62,843Stock-based
      compensation
                                  
                                  
                                  709,989
                                  
                                  
                                  
                                  975,536Issuance
      of stock for services
                                  
                                  
                                  3,255
                                  
                                  
                                  
                                  139,107Amortization
      of capitalized stock for services
                                  
                                  
                                  6,563
                                  
                                  
                                  
                                  81,687Amortization
      of deferred financing costs
                                  
                                  
                                  31,533
                                  
                                  
                                  
                                  21,579Accrued
      interest converted to convertible preferred stock
                                  
                                  
                                  -
                                  
                                  
                                  
                                  72,750Amortization
      of debt discount-warrant fair value
                                  
                                  
                                  532,608
                                  
                                  
                                  
                                  266,038Amortization
      of beneficial conversion of notes payable
                                  
                                  
                                  -
                                  
                                  
                                  
                                  266,038Gain
      on derivative liabilities
                                  
                                  
                                  (506,522
                                  )
                                  
                                  
                                  -Loss
      on disposal of property
                                  
                                  
                                  6,513
                                  
                                  
                                  
                                  -Changes
      in operating assets and liabilitiesAccounts
      receivable
                                  
                                  
                                  49,466
                                  
                                  
                                  
                                  (52,783
                                  )Inventory
                                  
                                  
                                  9,777
                                  
                                  
                                  
                                  (28,905
                                  )Prepaid
      expenses and other current assets
                                  
                                  
                                  96,525
                                  
                                  
                                  
                                  (104,131
                                  )Interest
      receivable
                                  
                                  
                                  (4,603
                                  )
                                  
                                  
                                  -Interest
      on certificate of deposit- restricted
                                  
                                  
                                  (2,496
                                  )
                                  
                                  
                                  (3,770
                                  )Other
      long-term assets
                                  
                                  
                                  11,458
                                  
                                  
                                  
                                  -Accounts
      payable
                                  
                                  
                                  34,393
                                  
                                  
                                  
                                  18,821Accrued
      expenses
                                  
                                  
                                  62,866
                                  
                                  
                                  
                                  (78,876
                                  )Deferred
      revenue
                                  
                                  
                                  10,120
                                  
                                  
                                  
                                  19,056Deferred
      rent payable
                                  
                                  
                                  (92
                                  )
                                  
                                  
                                  4,063Net
      cash used in operating activities
                                  
                                  
                                  (1,551,226
                                  )
                                  
                                  
                                  (3,143,747
                                  )Cash
      flows from investing activitiesPurchases
      of property and equipment
                                  
                                  
                                  (18,267
                                  )
                                  
                                  
                                  (35,924
                                  )Partial
      redemption of certificates of deposit
                                  
                                  
                                  53,711
                                  
                                  
                                  
                                  24,506Net
      cash provided by/(used in) investing activities
                                  
                                  
                                  35,444
                                  
                                  
                                  
                                  (11,418
                                  )Cash
      flows from  financing activitiesNet
      proceeds from note payable issuance
                                  
                                  
                                  562,250
                                  
                                  
                                  
                                  1,500,000Net
      proceeds from stock issuances
                                  
                                  
                                  -
                                  
                                  
                                  
                                  2,400,834Capitalized
      offering costs
                                  
                                  
                                  (24,920
                                  )
                                  
                                  
                                  (4,979
                                  )Net
      cash provided by financing activities
                                  
                                  
                                  537,330
                                  
                                  
                                  
                                  3,895,855(Decrease)/increase
      in cash and cash equivalents
                                  
                                  
                                  (978,452
                                  )
                                  
                                  
                                  740,690Cash
      and cash equivalents, beginning of the year
                                  
                                  
                                  997,048
                                  
                                  
                                  
                                  256,358Cash
      and cash equivalents, end of the year
                                  
                                  $
                                  18,596
                                  
                                  
                                  $
                                  997,048Supplementary
      disclosure:Cash
      paid during the year for interest
                                  
                                  $
                                  2,204
                                  
                                  
                                  $
                                  8,326Supplemental
      schedule of non-cash investing and financing activitiesIssuance
      of common stock for right to license intellectual property
                                  
                                  $
                                  26,000
                                  
                                  
                                  $
                                  26,000Capitalized
      issuance of common stock for consulting services
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  88,250Exchange
      of convertible notes payable for Series C Preferred stock
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  1,572,750Dividend
      on Convertible Preferred Stock paid in common stock
                                  
                                  $
                                  462,006
                                  
                                  
                                  $
                                  511,408Deemed
      preferred dividend
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  1,975,598Note
      receivable issuance in technology assignment
                                  
                                  $
                                  400,000
                                  
                                  
                                  $
                                  -Common
      shares issued for notes payable extension
                                  
                                  $
                                  5,997
                                  
                                  
                                  $
                                  -
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
  26
  SIMTROL,
INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 For the
Years Ended December 31, 2009 and 2008
 
 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.
 
 Certain
amounts in the 2008 consolidated financial statements have been reclassified for
comparative purposes to conform to the presentation in the 2009 consolidated
financial statements.  These reclassifications have no effect on
previously reported net loss.
 
 NOTE
2 – Liquidity and Going Concern
 
 As of
December 31, 2009, the Company had cash and cash equivalents totaling $18,596
and negative working capital of $822,188.  Since inception, the
Company has not achieved a sufficient level of revenue to support its business
and incurred a net loss of $2,674,165 and used net cash of $1,551,226 in
operating activities during 2009. The Company anticipates it will require at
least $125,000 of funding to fund its operating activities during the first
quarter 2010.   During February 2010, the Company received
$100,000 of proceeds from the issuance of notes payable and entered into an
agreement whereby it will exchange outstanding debt and unpaid interest in the
amount of $562,250 and $84,045, respectively (See Note 16) in a new convertible
note offering.  The Company reduced headcount from 20 at December 31,
2008 to 11 at December 31, 2009 and reduced the salaries of all employees by 50%
effective August 14, 2009 in order to reduce cash used in
operations.  Historically, the Company has relied on private placement
issuances of equity and debt.  The Company raised additional capital
through a private placement of debt securities and warrants and issued $562,250
of these securities on May 29, 2009 (see Note 6).  The private
placement memorandum allows the Company to raise a maximum of $1.5 million at
the current terms.  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 16.  If the
Company is 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 contemplate 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.
  27





NOTE
3 – Significant Accounting Policies





Principles of
Consolidation


The
consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiaries.  All intercompany transactions and balances
have been eliminated in consolidation.





Accounting Standards
Codification





The
Accounting Standards Codification (“ASC”) has become the source of authoritative
U.S. generally accepted accounting principles (U.S. GAAP). The ASC only changes
the referencing of financial accounting standards and does not change or alter
existing U.S. GAAP.





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 ManagerTM
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.





Cash and Cash
Equivalents





For
financial reporting purposes, the Company considers all highly liquid
investments with a maturity of twelve months or less when purchased to be cash
equivalents.  The Company places its cash deposits and cash
investments with financial institutions. At times, the Company’s cash and cash
equivalents may be uninsured or in deposit accounts that exceed the Federal
Deposit Insurance Corporation (“FDIC”) insurance limits.





Allowance for Doubtful
Accounts





The
allowance for doubtful accounts reflects management’s best estimate of the
probable losses inherent in the account receivable
balance.  Management determines the allowance based on known troubled
accounts, historical experience, and other currently available
evidence.





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.





Property and
Equipment





Property
and equipment are stated at cost. Depreciation and amortization are provided for
in amounts sufficient to relate the cost of depreciable assets to operations
over their estimated useful lives, ranging from 3-10 years, on a straight-line
basis.  Leasehold improvements will be amortized over the shorter of
the estimated useful life of the asset or the term of the initial lease on the
Company’s facility.





Software Development
Costs





The
Company’s policy on capitalized software development costs determines the timing
of its recognition of certain development costs. In addition, this policy
determines whether the cost is classified as development expense or capitalized.
Software development costs incurred after technological feasibility has been
established are capitalized and amortized, commencing with product release,
using the greater of the income forecast method or on a straight-line basis over
the useful life of the product. Management is required to use professional
judgment in determining whether development costs meet the criteria for
immediate expense or capitalization.


28





The
Company did not capitalize any software development costs during either 2009 or
2008 and all assets were previously fully amortized.





Income
Taxes





Income
tax expense, income taxes payable and deferred tax assets and liabilities are
determined in accordance with SC 740. Under ASC 740, the deferred tax
liabilities and assets reflect the tax effect of temporary differences between
asset and liability amounts recognized for income tax purposes and the amounts
recognized for financial reporting purposes. Deferred tax assets and liabilities
are measured by applying enacted statutory tax rates applicable to future years
in which the deferred tax assets or liabilities are expected to be settled or
realized. Valuation allowances are established when necessary to reduce deferred
tax assets to the amount expected to be realized on a more likely than not
basis.





The
Company follows the guidance in ASC 740-10 which clarifies the accounting for
uncertainty in income taxes recognized in an entity’s financial statements in
accordance with ASC 740 and prescribes a recognition threshold and measurement
attributes for financial statement disclosures of tax positions taken or
expected to be taken on an income tax return. Under ASC 740-10, the impact of an
uncertain income tax position on the income tax return must be recognized at the
largest amount that is more-likely than not to be sustained upon audit by the
relevant taxing authority. An uncertain income tax position will not be
recognized if it has less than a 50% likelihood of being sustained.
Additionally, ASC 740-10 provides guidance on derecognition, classification,
interest, penalties and disclosures.





Deferred
Revenue





Deferred
revenue consists of payments made by customers in advance for which services are
yet to be performed.  As of December 31, 2009 and 2008, there were
$29,638 and $19,518, respectively, of deferred revenues.





Deferred Offering
Costs





The
Company capitalizes those costs directly associated with convertible debt and
equity offerings including legal costs, securities filing fees, and
miscellaneous offering related expenses.  These amounts are expensed
as finance costs over the term of associated debt and recorded as reductions of
additional paid in capital for equity offerings.





Right to License
Intellectual Property





The
Company evaluates intangible assets for potential impairment indicators whenever
events or changes in circumstances indicate that the carrying value may not be
recoverable. The Company records an impairment charge if the estimated fair
value of the intangible asset is less than the carrying value of the intangible
asset and the carrying value of the intangible asset is not deemed
recoverable.  See Note 11.





Fair Value of Financial
Instruments





In
January 2008, the Company adopted the provisions of ASC 820, “Fair Value
Measurements,” which defines fair value for accounting purposes, establishes a
framework for measuring fair value and expands disclosure requirements regarding
fair value measurements.  The Company’s adoption of ASC 820 did not have a
material impact on its consolidated financial statements.  Fair value is
defined as an exit price, which is the price that would be received upon sale of
an asset or paid upon transfer of a liability in an orderly transaction between
market participants at the measurement date.  The degree of judgment
utilized in measuring the fair value of assets and liabilities generally
correlates to the level of pricing observability.  Financial assets and
liabilities with readily available, actively quoted prices or for which fair
value can be measured from actively quoted prices in active markets generally
have more pricing observability and require less judgment in measuring fair
value.  Conversely, financial assets and liabilities that are rarely traded
or not quoted have less price observablility and are generally measured at fair
value using valuation models that require more judgment.  These valuation
techniques involve some level of management estimation and judgment, the degree
of which is dependent on the price transparency of the asset, liability or
market and the nature of the asset or liability.  The Company has
categorized its financial assets and liabilities measured at fair value into a
three-level hierarchy in accordance with ASC 820.  See Note 15 for a
further discussion regarding the Company’s measurement of financial assets and
liabilities at fair value.


29





Management
believes that the carrying amounts of certain financial instruments, including
cash and cash equivalents, certificates of deposit, accounts receivable,
accounts payable and accrued expenses approximate their fair values as of each
balance sheet date given the relatively short maturity of each of these
instruments.





Use of
Estimates


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 disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts
of revenue and expenses during the reporting period. Critical estimates include
management's judgments associated with: determination of an allowance for
doubtful accounts receivable, deferred income tax valuation allowance, the
capitalization, depreciation and amortization of certain long-term assets,
stock-based compensation, and impairment of assets.   Actual
results could differ from those estimates.





Impairment of Long-Lived
Assets





The
Company records 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. The Company’s cash flow estimates are based on historical results
adjusted to reflect its best estimate of future market and operating conditions.
The net carrying value of assets not recoverable is reduced to fair value. The
estimates of fair value represent the Company’s best estimate based on industry
trends and reference to market rates and transactions.  The Company
recorded an impairment of approximately $18,000 in 2009 to lower the carrying
value of its right to license intellectual property based on actual sales during
the year, and approximately $77,000 during 2008 based on estimated future gross
profit from purchase orders held at December 31, 2008 for its Curiax Arraigner
software product.  See note 11.





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:





December 31, 2009
                  
                  
                  December 31, 2008Options
                  
                  
                  6,984,700
                  
                  
                  
                  7,420,950Warrants
                  
                  
                  27,403,891
                  
                  
                  
                  28,002,774Convertible
      Preferred Stock
                  
                  
                  22,286,656
                  
                  
                  
                  22,392,656Convertible
      Debt
                  
                  
                  1,695,438
                  
                  
                  
                  -Total
                  
                  
                  58,370,685
                  
                  
                  
                  57,816,380





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 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
14.


30





Stock-Based
Compensation





Stock
option awards are granted with an exercise price equal to or greater than the
market price of our stock on the date of the grant in accordance with the our
2002 Equity Incentive 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. We implemented ASC 718,
“Compensation-Stock Compensation.”, which requires companies to expense the
value of employee stock options and similar awards. 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.  We use historical data to estimate
option exercise and employee termination within the valuation model and
historical stock prices to estimate volatility.





Recently Implemented
Accounting Pronouncements





ASC 805,
Business Combinations(formerly SFAS No. 141 (revised 2007), Business Combinations),
establishes principles and requirements for how companies recognize and measure
identifiable assets acquired, liabilities assumed, and any noncontrolling
interest in connection with a business combination; recognize and measure the
goodwill acquired in a business combination or a gain from a bargain purchase;
and determine what information to disclose to enable users of the financial
statements to evaluate the nature and financial effects of the business
combination. The Company adopted ASC 805 on January 1, 2009. ASC 805 will have
an impact on the Company’s accounting for future business combinations but the
effect is dependent upon acquisitions that are made in the future.





ASC 810,
"Consolidations.”
establishes accounting and reporting standards for the noncontrolling interest
in a subsidiary (previously referred to as minority interests).  ASC
810 also requires that a retained noncontrolling interest upon the
deconsolidation of a subsidiary be initially measured at its fair value. Under
ASC 810, noncontrolling interests are reported as a separate component of
consolidated stockholders’ equity. In addition, net income allocable to
noncontrolling interests and net income attributable to   stockholders
are reported separately in the consolidated statements of operations. ASC
810 became effective beginning January 1, 2009.  ASC 810 would have an
impact on the presentation and disclosure of the noncontrolling interests of any
non-wholly owned businesses acquired in the future.





In
February 2008, the FASB issued an update to ASC 820, Fair Value Measurements and
Disclosures (formerly FSP No. FAS 157-2, Effective Date of FASB Statement
No. 157). This update amended ASC
820 to delay the effective date for the fair valuation of non-financial assets
and liabilities, except for items that are recognized or disclosed at fair value
in the financial statements on a recurring basis. The Company has assessed the
impact of this update for its non-financial assets and liabilities and
determined that there was no material impact on the Company’s consolidated
financial statements.





In
August 2009, the FASB issued an Update to ASC 820, Fair Value Measurements and
Disclosures 2009-05 Measuring Liabilities at Fair Valueto provide guidance on measuring the fair value of liabilities under ASC
820. This update clarifies the fair value measurements for a liability in an
active market and the valuation techniques in the absence of a Level 1
measurement. This update is effective for the interim period beginning
October 1, 2009. The adoption of this update did not have a material impact
on the Company’s consolidated financial statements.





In April
2008, the FASB issued updates to ASC 350-30-35, General Intangibles Other Than
Goodwill-Subsequent Measurement(formerly FSP No. 142-3, Determination of the Useful Life of
Intangible Assets), which amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of
a recognized intangible asset. The Company’s adoption of these updates, on
January 1, 2009, is effective prospectively for intangible assets acquired or
received after January 1, 2009.





In June
2008, the FASB issued updates to ASC 815-40, Derivatives and Hedging, Contracts
in Entity’s Own Equity (ASC 815-40) (formerly EITF Bulletin
No. 07-5, Determining
Whether an Instrument (or Embedded Feature) is Indexed to an Entity’s Own
Stock). ASC 815-40 provides guidance on how a company should determine if
certain financial instruments (or embedded features) are considered indexed to
its own stock, including instruments similar to the conversion option of the
Notes, convertible note hedges, and warrants to purchase Company stock. This
update requires that a two-step approach be used to evaluate an instrument’s
contingent exercise provisions and settlement provisions in determining whether
the instrument is considered to be indexed to its own stock, and exempt from the
application of ASC 815, Derivatives and Hedging (ASC
815) (formerly SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities).The Company adopted the updates to
ASC 815-40 effective January 1, 2009. The Company evaluated its financial
instruments and embedded instrument features and determined that the accounting
for certain previously issued financial instruments are impacted by the
provisions of this update to ASC 815. Accordingly, the adoption of this new
update had a material effect on the Company’s consolidated results of operations
and financial position. (See Note 14 “Derivatives” for further
details)


31





In June
2009, the FASB issued ASC 810 “Amendments to FASB Interpretation
No. 46(R)”. This standard changes how a company determines when an
entity that is insufficiently capitalized or is not controlled through voting
(or similar rights) should be consolidated. The determination of whether a
company is required to consolidate an entity is based on, among other things, an
entity’s purpose and design and a company’s ability to direct the activities of
the entity that most significantly impact the entity’s economic performance. The
statement is effective for us on December 31, 2010. The Company is
currently evaluating the impact this statement may have on its consolidated
results of operations and financial condition and does not expect the impact, if
any, to be material.





Effective
June 30, 2009, the Company adopted a new accounting standard included in
ASC  855 Subsequent
Eventsthat 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.





In August
2009, the FASB issued new accounting guidance to provide clarification on
measuring liabilities at fair value when a quoted price in an active market is
not available. This guidance is effective for the Company on October 1, 2009 and
did not have a significant impact on the Company’s consolidated financial
position or results of operations.





In
October 2009, the FASB issued ASU No. 2009-13, Multiple-Deliverable Revenue
Arrangements (ASU 2009-13) (formerly EITF 08-1, Revenue Arrangements with Multiple
Deliverables) which amends ASC Topic 605, Revenue
Recognition. This accounting update establishes a hierarchy for
determining the value of each element within a multiple deliverable
arrangement. ASU 2009-13 is effective for the Company beginning
July 1, 2010 and applies to arrangements entered into on or after this
date. The Company is currently evaluating the impact that ASU 2009-13 may
have on its financial position and results of operations, and does not expect
the impact, if any, to be material.





In
October 2009, the FASB issued ASU No. 2009-14, Certain Revenue Arrangements That
Include Software Elements (ASU 2009-14) (formerly EITF 09-3, Applicability of AICPA Statement of
Position 97-2 to Certain Arrangements That Include Software Elements),
which updates ASC Topic 985,Software. ASU 2009-14 clarifies which accounting guidance should be
used for purposes of measuring and allocating revenue for arrangements that
contain both tangible products and software, and where the software is more than
incidental to the tangible product as a whole. ASU 2009-14 is effective for the
Company’s fiscal year beginning July 1, 2010 and applies to arrangements
entered into on or after this date. The Company is currently evaluating the
impact that ASU 2009-14 may have on its financial position and results of
operations, and does not expect the impact, if any, to be material.





NOTE
4 – Property and Equipment





Property
and equipment consists of the following as of December 31, 2009 and
2008:





2009
                  
                  
                  2008Machinery
      and equipment
                  
                  $
                  163,044
                  
                  
                  $
                  156,021Furniture
      and fixtures
                  
                  
                  16,599
                  
                  
                  
                  16,599Leasehold
      improvements
                  
                  
                  15,840
                  
                  
                  
                  15,840195,483
                  
                  
                  
                  188,460Less
      accumulated depreciation and amortization
                  
                  
                  (135,307
                  )
                  
                  
                  (86,951
                  )$
                  60,176
                  
                  
                  $
                  101,509




32





Depreciation
and amortization expense relating to property and equipment was $53,087 and
$51,700 for the years ended December 31, 2009 and 2008, respectively, and is
included in selling, general and administrative expense in the accompanying
consolidated statements of operations.





NOTE
5 – Related Party Transaction





On
January 23, 2008, one member of the Board of Directors purchased a $22,500
convertible note in the Company’s private placement (see Note 6).  On
June 30, 2008, this convertible note, along with $750 of accrued interest, was
exchanged into the Company’s Series C Convertible Preferred stock
offering.  The board member received 31 shares of Series C Convertible
Preferred stock and a warrant to purchase 62,000 shares of the Company’s common
stock at that time, in accordance with the terms of the Company’s private
placement.  The Company also paid $426 of accrued interest not
exchanged into the private placement. See Note 6.





Note
6 – Convertible Notes Payable





On May
29, 2009, the Company completed the sale of $562,250 of Participation Interests
(“Participation Interests”) in a secured master promissory note (“Master Note”)
and five-year investor warrants to purchase 2,998,667 shares of common stock at
an exercise price of $0.375 per share to accredited private
investors.





The
net proceeds of $537,330 from this offering were used for working capital and
general corporate purposes.  Important terms of the Master Note
include:





·
            The
      Master Note bears interest at the rate of 22% per annum, is payable six
      months from the issue date (“Maturity Date”) and can be pre-paid at any
      time.  The Master Note is secured by all of the Company’s cash
      and cash equivalents, accounts and notes receivable, prepaid assets, and
      equipment.




·
            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.  On December 30, 2009, at the
      conclusion of the first 30-day Extension Period of its notes payable
      originated on May 29, 2009, and originally due on November 29, 2009, the
      Company issued 74,966 shares of its common stock in payment of a 5%
      extension fee.  Per the terms of the notes, as the extension fee
      was paid in common stock, the common stock was deemed to have a value of
      $0.375 per share on that date for purposes of calculating the number of
      shares.




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 have a cashless
exercise feature and anti-dilution provisions that adjust both the exercise
price and quantity if subsequent equity offerings are completed where Simtrol
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:





AssumptionsRisk-free
      rate
                        
                        
                        2.34
                        %Annual
      rate of dividends
                        
                        
                        0Volatility
                        
                        
                        109.2
                        %Average
      life
                        
                        5
      years




The fair
value of the warrants, $532,608, was classified as a discount on the notes
payable issued on May 29, 2009.  This amount was amortized over the
original six-month term of the convertible notes.  $73,539 of interest
payable was accrued during 2009.




·
            In
      February 2010, the principal and all accrued and unpaid interest on these
      notes were exchanged into new convertible notes.  See note
      17.




33


On
January 23, 2008, the Company completed the sale of $1,500,000 of convertible
notes payable (“Convertible Notes”) in a private placement.





Important
terms of the Convertible Notes included:




·
            If
      the Company closed a “Qualifying Next Equity Financing” before the
      Maturity Date, the then-outstanding balance of principal and accrued
      interest on the Convertible Notes would automatically convert into shares
      of the “Next Equity Financing Securities” the Company issues.  A
      “Qualifying Next Equity Financing” meant the first bona fide equity
      financing (or series of related equity financing transactions) occurring
      subsequent to the date of issue of a Convertible Note in which the Company
      sells and issues any of the Company’s 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
      the outstanding Convertible Notes) at a price per share for equivalent
      shares of common stock that is not greater than $0.75 per
      share.




The
Company also issued investors warrants to acquire 500,000 shares of common stock
at an exercise price of $0.75 per Share.  The Warrants have a term
ending on the earlier to occur of (i) the fifth anniversary of the Warrant
issue date or (ii) the closing of a change of control event.




The
Company raised a net total of $1,479,000 from the sale (offering costs of
approximately $16,000 incurred in 2007 and $5,000 during 2008 were capitalized
as financing costs).  In conjunction with the issuance of the
Convertible Notes, the Company recorded debt discounts of $532,076 for the
estimated value of the warrants and a beneficial conversion
feature.  Amortization of the debt discounts included in finance
expense during 2008 totaled $532,076.  All debt discounts were fully
amortized as of December 31, 2008, due to the exchange of all the Convertible
Notes into Series C Convertible Preferred Stock as a result of a “Qualifying
Next Equity Financing” on June 30, 2008 per the above terms (see Note
7).  Accrued interest of $72,750 on the notes converted on that date
and $6,144 of accrued interest that remained outstanding on that date was repaid
to noteholders in July 2008.





Note
7 - Stockholders’ Equity





During
2009 and 2008, the Company issued 78,875 and 17,376 shares of common stock
valued at $12,100 and $5,850, respectively, to members of the Board of Directors
for attendance at meetings.  These amounts were included in selling,
general, and administrative expenses in the accompanying consolidated statement
of operations.





During
2009 and 2008, respectively, the Company issued 15,500 and 320,400 restricted
common shares to Triton Value Partners (“Triton”) valued at $3,255 and $139,107
as part of its 24-month engagement with the Company that commenced in January
2007.  Triton received 480,000 shares in January 2007 at the
conclusion of its initial engagement and received 640,000 shares of stock
ratably over the term of its 24-month engagement commenced in January
2007.  The expense was recorded at the fair value of the stock on the
days of issuances of the stock.





During
2009 and 2008, respectively, one and two Series A Convertible Preferred Stock
holders converted 16,000 and 40,000 shares of preferred stock and were issued
64,000 and 160,000 shares of common stock, respectively.





During
2009 and 2008, respectively, two and 13 Series B Convertible Preferred Stock
holders converted 21 and 415 shares of preferred stock and were issued 42,000
and 830,000 shares of common stock, respectively.





On
January 3, 2008 the Company issued 10,000 shares of common stock valued at
$9,500 in exchange for investor relations services performed for the Company by
an investor relations consulting company.  On February 5, 2008 the
Company issued 105,000 shares of common stock valued at $78,750 in exchange for
investor relations and consulting services performed for the Company by an
investor relations consultant.  These amounts were recorded as
selling, general, and administrative expenses over the terms of their respective
one-year agreements.


34


On June
30, 2008, the Company completed the sale of a total of $2,716,750 of securities
in a private placement of 3,622 units (at $750 per unit) consisting of one share
of Series C Convertible Preferred Stock and one warrant to purchase 2,000 shares
of the Company’s common stock at an exercise price of $0.375 per share. The sale
was comprised of $1,144,250 gross cash proceeds and the exchange of the
Convertible Notes (see note 6) from 21 note holders, including one member of the
board of directors, totaling $1,500,000 principal and $72,750 of accrued
interest.  The net proceeds were $1,053,153.  Each share of
Series C Convertible Preferred Stock has a conversion price of $0.375 per share
(one Series C Convertible Preferred share equals 2,000 shares of common stock).
In accordance with ASC 740-20, "Application of Issue No. 98-5 to Certain
Convertible Instruments" and Emerging Issues Task Force 98-5, "Accounting for
Convertible Securities with Beneficial Conversion Features or Contingently
Adjusted Conversion Ratios", the Company determined the relative fair value of
the warrants and the Series C convertible preferred stock and allocated the
proceeds received on a relative fair value basis. The fair value of the warrants
was calculated using the Black-Scholes option pricing model with the following
assumptions: dividend yield of 0%, expected volatility of 114.6%, risk-free
interest rate of 3.34% and a term of five years. In connection with the issuance
of the securities above, a deemed dividend of $1,299,838 was recorded to reflect
the beneficial conversion feature on the common shares that would result
from the conversion of the Series C Preferred Stock, due to the $0.19 per share
effective conversion price of the Series C Convertible Preferred Stock issued on
June 30, 2008.





On
September 26, 2008, the Company completed the sale of a total of $1,433,750 of
securities in a private placement of 1,912 units (at $750 per unit) consisting
of one share of Series C Convertible Preferred Stock and one warrant to purchase
2,000 shares of the Company’s common stock at an exercise price of $0.375 per
share. The net proceeds were $1,347,681.  Each share of Series C
Convertible Preferred Stock has a conversion price of $0.375 per share (one
Series C Convertible Preferred share equals 2,000 shares of common
stock).   The fair value of the warrants was calculated using the
Black-Scholes option pricing model with the following assumptions: dividend
yield of 0%, expected volatility of 110.5%, risk-free interest rate of 3.05% and
a term of five years. In connection with the issuance of the securities above, a
deemed dividend of $675,760 was recorded to reflect the beneficial conversion
feature on the common shares that would result from the conversion of the
Series C Preferred Stock, due to the $0.18 per share effective conversion price
of the Series C Convertible Preferred Stock issued on September 26,
2008.





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, Series C Convertible Preferred Stock of
Simtrol, Inc. (the “Company”), the Company is required to pay a 4% semi-annual
dividend to the holders of its outstanding shares of Series A Preferred
Stock and a 6% semi-annual dividend to holders of its Series B and Series C
Preferred Stock, respectively.  The Company has the option to pay
these dividends in cash or in shares of its common stock.




The
Company elected to pay the June 30 and December 31, 2009 dividends in the form
of common stock valued at $0.75 per common share for the Series A Preferred
Stock and $0.375 per common share for the Series B and Series C Preferred Stock,
per the terms of the Certificates.  Based on this value, the Company
issued




(i)
            107,629
      shares of common stock to the Series A shareholders (672,664 Series A
      shares issued and outstanding on that date);
and





(ii)
            511,680
      shares of common stock to the Series B shareholders (4,264 shares
      issued and outstanding on that
date).




(iii)
            664,040
      shares of common stock to the Series C shareholders (5,534 shares issued
      and outstanding on that date).




The
Company elected to pay the December 31, 2008, dividends in the form of common
stock valued at $0.375 per common share, in accordance with the terms of the
Series B and C Convertible Preferred stock:





(i)
            521,160
      shares of common stock to the Series B shareholders (4,285 shares
      issued and outstanding on that
date).




(ii)
            664,040
      shares of common stock to the Series C shareholders (5,534 shares issued
      and outstanding on that date).




The
Company elected to pay the June 30, 2008 dividends in the form of common stock
valued at $0.75 and 0.375 per common share, per the terms of the
Certificates.  Based on this value, the Company issued




(iii)
            220,375
      shares of common stock to the Series A shareholders (688,664 Series A
      shares issued and outstanding on that date).  The Company
      erroneously issued holders of Series A Preferred Stock common stock
      dividends on June 30, 2008 with a value of $0.375 per share.  As
      a result, the holders were issued twice the number of common shares to
      which they were entitled in payment of the June 30, 2008 dividend and,
      therefore, no additional shares were issued on December 31, 2008;
      and




35


(iv)
            521,160
      shares of common stock to the Series B shareholders (4,285 shares
      issued and outstanding on that
date).





On April
17, 2009, in conjunction with the termination of the Company’s private placement
of Series C Convertible Preferred Stock and warrants begun in 2008, the Company
issued Gilford Securities as a placement fee, as underwriter, warrants to
purchase 181 units represented by the offering.  The 181 units include
181 shares of Series C Convertible Preferred Stock and warrants to purchase
362,000 shares of common stock (2,000 shares of common stock for each share of
Series C Convertible Preferred stock) at an exercise price of $0.375 per
share.  The unit exercise price is $750 per unit and the warrants to
purchase the units have five-year terms.  The estimated fair value of
the warrants to purchase the 181 units is approximately $97,000 on the date of
issuance using the Black Scholes valuation model for the warrant.





On
November 22, 2009 and 2008, respectively, the Company issued 100,000 shares of
restricted common stock to Integrated Digital Systems (“IDS”) as partial
consideration for purchasing their membership interest Justice Digital Solutions
(“JDS”).  See Note 11.  No additional shares are payable
under the purchase agreement.  The amounts were previously recorded as
liabilities.





NOTE
8 – Stock Warrants





The
Company had stock purchase warrants for 27,403,891 and 28,002,774 shares of
common stock outstanding at December 31, 2009 and 2008,
respectively.  A roll forward of the warrant totals for 2009 and 2008
is as follows:





December 31,2009
                          
                          
                          2008Warrants
      outstanding at beginning of year
                          
                          
                          28,002,774
                          
                          
                          
                          16,434,774Granted
                          
                          
                          2,998,667
                          
                          
                          
                          11,568,000Exercised
                          
                          
                          -
                          
                          
                          
                          -Terminated
                          
                          
                          (3,597,550
                          )
                          
                          
                          -Warrants
      outstanding at December 31
                          
                          
                          27,403,891
                          
                          
                          
                          28,002,774





The
exercise prices of warrants granted in 2009 were $0.375 and in 2008 were $0.375
to $0.75.  The weighted average exercise prices were approximately
$0.38 and $0.51 at December 31, 2009 and 2008, respectively.





NOTE
9- Major Customers





Revenue
from three customers comprised 25%, 24%, and 19% of the Company’s consolidated
revenues for 2009.  Revenue from two customers comprised 71% and 16%
of the Company’s consolidated revenues for 2008.  At December 31,
2009, accounts receivable from three customers comprised approximately 71% of
accounts receivable.  As of March 13, 2010, 95% of these receivables
have been collected.  The Company anticipates collecting all of these
receivables and does not believe any allowance for credit loss is
necessary.





Management
believes that concentration of credit risk with respect to trade receivables is
minimal due to the composition of the customer base. Allowances are maintained
for potential credit losses, and there have been no losses from uncollected
accounts within the last five years.





NOTE
10 - Operating Leases





The
Company leases office space and equipment under noncancellable operating leases
expiring at various dates through 2012.  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.


36


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.  Due to scheduled annual rental increases of
approximately three percent during the term of the lease, the Company reduced
rent expense and deferred rent payable $92 in 2009 and recognized additional
rent expense of $4,063 in 2008.  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 was required to
collateralize the letter of credit with a $100,000 one-year certificate of
deposit.  In 2008, the letter of credit amount was reduced to $80,000
per the terms of the lease and the Company collateralized the letter of credit
with an $80,000 certificate of deposit.  Accrued interest of $4,506
and principal of $20,000 from the initial $100,000 certificate of deposit were
returned to the Company at that time.   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.





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, including a $250 processing fee, without penalty, from the restricted
certificate of deposit collateralizing the standby letter of credit on November
9, 2009.





The
Company also maintains several operating leases related to copiers, telephone,
equipment, and office furniture under various non-cancellable agreements
expiring through December 2013.





As of
December 31, 2009, the future minimum lease payments are as
follows:





2010
                  
                  $
                  177,7702011
                  
                  
                  182,1782012
                  
                  
                  140,5152013
                  
                  
                  7,436Total
                  
                  $
                  507,899





Rent
expense for all operating leases for the years ended December 31, 2009 and 2008
was $179,610 and $178,617, respectively.





NOTE
11 – 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.  In accordance with
the purchase agreement, 100,000 shares of the Company’s common stock were issued
to IDS on November 22, 2008 and the final issuance of 100,000 shares was made on
November 22, 2009.  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 in the year ending
December 31, 2009 from purchase orders previously received for the Company’s
Curiax Arraigner software.  During 2009, the Company recorded an
impairment charge of $18,499 to reduce the value of the intangible to the amount
of gross profit anticipated on sales of the Company’s Curiax Arraigner software
from previously received purchase orders.  The charge during 2009
equaled the approximate gross profit on the revenue recorded for a Curiax
Arraigner sale made during 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
12 – Stock-based Compensation





On
December 30, 2009, the stockholders of the Company approved an amendment to the
Company’s 2002 Equity Incentive Plan (“the Plan”) increasing the number of
shares of authorized common stock available for issuance under the Plan to
25,000,000 shares from the previously board approved number of 8,000,000 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 have five-year contractual terms for directors
and ten years for employees, and generally vest immediately for directors and
over four years for employees.   Different vesting periods may be
used at the discretion of the Company’s Compensation Committee, which
administers the Plan.  Option grants to employees with one year and
three year vesting periods were made during 2008.


37




The
Company uses the modified prospective application of ASC 718,”Compensation-Stock
Compensation”, 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.





Stock
compensation expense under ASC 718 was $709,989 and $975,536 during 2009 and
2008, respectively.  Of these totals, $138,989 and $174,179 were
classified as research and development expense and $571,000 and $801,357 were
classified as selling, general, and administrative expense in 2009 and 2008,
respectively.





The
Company uses historical data to estimate option exercise and employee
termination data within the valuation model and historical stock prices to
estimate volatility.  The fair value for options to purchase 185,000
and 3,984,000 shares issued during 2009 and 2008, respectively, were estimated
at the date of grant using a Black-Scholes option-pricing model to be $17,603
and $1,215,302, with the following weighted-average assumptions.





Assumptions
                      
                      2009
                      
                      
                      2008Risk-free
      rate
                      
                      1.90
                      %
                      
                      2.50%-3.67
                      %Annual
      rate of dividends
                      
                      0
                      %
                      
                      0Volatility
                      
                      107.8
                      %
                      
                      108-131
                      %Average
      life
                      
                      5 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 December 31, 2009 and changes during 2009 are
presented below:





Weighted-Average
                                
                                
                                Weighted-Average
                                  RemainingShares
                                
                                
                                Exercise Price
                                
                                
                                Term (in years)Outstanding
      January 1, 2009
                                
                                
                                7,420,950
                                
                                
                                $
                                0.67Granted
                                
                                
                                185,000
                                
                                
                                $
                                0.15Exercised
                                
                                
                                -
                                
                                
                                $
                                -Forfeited
                                
                                
                                (227,250
                                )
                                
                                $
                                0.51Terminated
                                
                                
                                (469,000
                                )
                                
                                $
                                0.32Expired
                                
                                
                                (15,000
                                )
                                
                                $
                                2.25Outstanding
      at December 31, 2009
                                
                                
                                6,984,700
                                
                                
                                $
                                0.68
                                
                                
                                
                                6.7Exercisable
      at December 31, 2009
                                
                                
                                4,844,245
                                
                                
                                $
                                0.69
                                
                                
                                
                                6.1


38


The
weighted-average grant-date fair values of options granted during 2009 and 2008
were $0.12 and $0.31, respectively.   No options were exercised
during 2009 and 2008. All grants of stock options during 2009 and 2008 were made
from the Company’s 2002 Equity Incentive Plan as grants can no longer be made
from the Company’s 1991 Stock Option Plan.





As of
December 31, 2009, there was $522,932 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 1.4 years.





At
December 31, 2009, 18,007,050 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 March
9, 2009, the Company executed a license agreement with ACIS, Inc. ("ACIS"), that
significantly expanded the scope of the Company's rights to certain ACIS
technology.  Pursuant to the agreement, ACIS granted to the Company the
right, in perpetuity, to use and modify the ACIS technology on a royalty-free
basis for all future Company products, without restrictions regarding the
underlying platform.  As consideration for the rights to the ACIS
technology, the Company granted to ACIS nonqualified options to purchase 150,000
shares of Company common stock at an exercise price of $0.15 per share, with
immediate vesting.  The Black Scholes option valuation model was used to
calculate the estimated fair value of $17,601, which was recorded as stock-based
compensation in selling, general, and administrative expense.  The
license agreement replaces and supersedes the license agreement dated September
27, 2001, under which the Company had been required to pay per-unit royalties
for use of the ACIS technology, which was restricted to a single specified
platform.





The
following table summarizes information about stock options outstanding at
December 31, 2009:





Options Outstanding
                          
                          
                          Options ExercisableWeightedAverage
                          
                          
                          Weighted
                          
                          
                          
                          
                          
                          WeightedRange of
                          
                          Number
                          
                          
                          Remaining
                          
                          
                          Average
                          
                          
                          Number
                          
                          
                          AverageExercise
                          
                          Outstanding at
                          
                          
                          Contractual
                          
                          
                          Exercise
                          
                          
                          Exercisable at
                          
                          
                          ExercisePrice
                          
                          December 31, 2009
                          
                          
                          Life (Years)
                          
                          
                          Price
                          
                          
                          December 31, 2009
                          
                          
                          Price$0.15-$0.38
                          
                          
                          2,659,000
                          
                          
                          
                          7.40
                          
                          
                          $
                          0.34
                          
                          
                          
                          1,700,375
                          
                          
                          $
                          0.34$0.40-$0.48
                          
                          
                          895,750
                          
                          
                          
                          2.99
                          
                          
                          $
                          0.41
                          
                          
                          
                          823,000
                          
                          
                          $
                          0.41$0.53-$0.90
                          
                          
                          2,158,500
                          
                          
                          
                          7.14
                          
                          
                          $
                          0.72
                          
                          
                          
                          1,576,170
                          
                          
                          $
                          0.72$1.04-$2.00
                          
                          
                          1,154,000
                          
                          
                          
                          7.53
                          
                          
                          $
                          1.37
                          
                          
                          
                          717,250
                          
                          
                          $
                          1.41$2.25-$40.00
                          
                          
                          27,450
                          
                          
                          
                          2.54
                          
                          
                          $
                          10.54
                          
                          
                          
                          27,450
                          
                          
                          $
                          10.546,984,700
                          
                          
                          
                          6.69
                          
                          
                          $
                          0.68
                          
                          
                          
                          4,844,245
                          
                          
                          $
                          0.69





During
2008, the Company granted options to purchase 3,077,500 shares of its common
stock employees with three-year vesting periods at exercise prices equal to or
greater than the fair value of the Company’s stock on their respective grant
dates.  The total fair value of these grants was $847,375 with a
weighted-average exercise price of $0.59.





During
2008, the Company granted options to purchase 630,000 shares of its common stock
to directors and consultants with immediate vesting periods at exercise prices
equal to or greater than the fair value of the Company’s stock on their
respective grant dates.  The total fair value of these grants was
$248,592 with a weighted-average exercise price of $0.48.





On April
11, 2008, the Company granted options to purchase 276,500 shares of its common
stock to employees with one year vesting periods at exercise prices of $0.27,
equal to the fair value of the Company’s stock on the date of the
grant.  The total fair value of these grants was
$119,335.


39





Note
13 – Income Taxes





The
Company files income tax returns for Simtrol, Inc. and its subsidiaries in the
United States with the Internal Revenue Service and with various state
jurisdictions.  As of December 31, 2009, the tax returns for Simtrol, Inc.
for the years 2006 through 2008 remain open to examination by the Internal
Revenue Service and various state authorities.





Accounting
for Uncertainty in Income Taxes





Effective
January 1, 2007, the Company adopted the FASB’s guidance on accounting for
uncertainty in income taxes.  In accordance with this guidance,
interest costs and related penalties related to unrecognized tax benefits are
required to be calculated, if applicable.  No interest and penalties
were recorded during the years ended December 31, 2009 and 2008,
respectively.  As of December 31, 2009 and 2008, no liability for
unrecognized tax benefits was required to be recorded.





Valuation
Allowance





In
assessing the realizability of deferred tax assets, the
Company has considered whether it is more likely than not that some
portion or all of the deferred tax assets will not be realized. 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. In making this determination, under the applicable financial
reporting standards, the Company is allowed to consider the scheduled
reversal of deferred tax liabilities, projected future taxable income, and tax
planning strategies. A full valuation allowance has been recorded for the
deferred tax asset balance as of December 31, 2009 and 2008. 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.





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 $19.6 million and $19.1 million, respectively as of December 31,
2009 and 2008, primarily relating to net operating loss carry forwards of
approximately $49.0 million and $49.4 million at those dates.  The
losses at December 31, 2009 expire through 2029.  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, valuation
allowances of $19.6 million and $19.1 million, respectively, were established
for the full value of the deferred tax assets at December 31, 2009 and
2008. The valuation allowances increased by $453,000 and $1,105,000 during
the years ended December 31, 2009 and 2008, respectively,.  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.





A
reconciliation of the expected federal statutory rate of 34% to the Company’s
actual rate as reported for each of the periods presented is as
follows:


40





Year
      Ended
                  
                  
                  Year
      EndedDecember 31, 2009
                  
                  
                  December 31, 2008Expected
      Statutory Rate
                  
                  
                  (34.00
                  )%
                  
                  
                  (34.00
                  )%State
      income tax rate, net of federal benefit
                  
                  
                  (3.96
                  )%
                  
                  
                  (3.96
                  )%(37.96
                  )%
                  
                  
                  (37.96
                  )%Permanent
      Difference
                  
                  
                  (6.85
                  )%
                  
                  
                  7.35
                  %Expiring
      Net Operating Losses
                  
                  
                  40.65
                  %
                  
                  
                  5.96
                  %Increase
      in Valuation Allowance
                  
                  
                  16.94
                  %
                  
                  
                  24.65
                  %Adjustment
      to prior period deferred tax asset
                  
                  
                  (12.78
                  )%
                  
                  
                  0.00
                  %Net
      Effective Income Tax Rate
                  
                  
                  0.00
                  %
                  
                  
                  0.00
                  %





Note
14 – 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 in 2004
(“Placement Agent Warrants”) and the 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.  The 2004 Placement Agent Warrants expired on various dates
during 2009 and none were outstanding at December 31, 2009.  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 7.   In
accordance with the update, the Placement Agent Warrants and 2005 Warrants have
been re-characterized as derivative liabilities and the 2009 Warrants 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.




The
Derivative Warrants were valued using the Black-Scholes option pricing model and
the following assumptions:





December
                          31, 2009
                        
                        
                        January 1,
                          2009
                        
                        
                        Date of
                          IssuancePlacement Agent Warrants:Risk-free
      rate
                        
                        
                        -
                        
                        
                        
                        0.37
                        %
                        
                        
                        3.38-3.97
                        %Annual
      rate of dividends
                        
                        
                        -
                        
                        
                        
                        0
                        
                        
                        
                        0Volatility
                        
                        
                        -
                        
                        
                        
                        109.9
                        %
                        
                        
                        169-171
                        %Weighted
      Average life (years)
                        
                        
                        -
                        
                        
                        
                        0.3
                        
                        
                        
                        52005 Warrants:Risk-free
      rate
                        
                        
                        0.20
                        %
                        
                        
                        0.76
                        %
                        
                        
                        3.98
                        %Annual
      rate of dividends
                        
                        
                        0
                        
                        
                        
                        0
                        
                        
                        
                        0Volatility
                        
                        
                        113.4
                        %
                        
                        
                        109.9
                        %
                        
                        
                        134.3
                        %Weighted
      Average life (years)
                        
                        
                        0.5
                        
                        
                        
                        1.5
                        
                        
                        
                        52009 Warrants:Risk-free
      rate
                        
                        
                        2.69
                        %
                        
                        
                        -
                        
                        
                        
                        2.34
                        %Annual
      rate of dividends
                        
                        
                        0
                        
                        
                        
                        -
                        
                        
                        
                        0Volatility
                        
                        
                        113.4
                        %
                        
                        
                        -
                        
                        
                        
                        109.2
                        %Weighted
      Average life (years)
                        
                        
                        4.4
                        
                        
                        
                        -
                        
                        
                        
                        5.0Fair
      Value
                        
                        $
                        136,749
                        
                        
                        $
                        110,663
                        
                        
                        $
                        2,242,979





The
derivative liability amounts reflect the fair value of each derivative
instrument as of the January 1, 2009 date of implementation.





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 a decrease
in additional accumulated deficit by $1,599,708. The difference was recorded as
a derivative liability for $110,663. At December 31, 2009, the derivative
liability associated with the Placement Agent Warrants and 2005 Warrants were
revalued, the $110,575 decrease in the derivative liability at December 31, 2009
is included as other income in the Company’s
consolidated statement of operations for the year ended December 31,
2009.  The fair value of the 2009 Warrants was estimated at $532,608
at the date of issuance and this amount was classified as a derivative
liability.  The 2009 Warrants were revalued as of December 31, 2009
and the $395,947 decrease in the value of the derivative liability is included
as other income in the Company’s consolidated statement of operations for the
year ended December 31, 2009.


41





Note
15 - 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 December 31, 2009:





Fair Value Measurements at December 31, 2009Total Carrying
                    Value at
                    December 31,
                    2009
                  
                  
                  Quoted prices
                    in active
                    markets
                    (Level 1)
                  
                  
                  Significant
                    other
                    observable
                    inputs (Level 2)
                  
                  
                  Significant
                    unobservable
                    inputs (Level 3)Derivative
      liabilities
                  
                  $
                  136,749
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  136,749





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:





Year Ended
                    December 31,2009
                  
                  
                  2008Beginning
      balance
                  
                  $
                  (110,663
                  )
                  
                  $
                  -Net
      unrealized gain on derivative financial instruments
                  
                  
                  506,522
                  
                  
                  
                  -New
      derivative liabilities issued
                  
                  
                  (532,608
                  )Ending
      balance
                  
                  $
                  (136,749
                  )
                  
                  $
                  -





Note
16 – Sale of Technology





On
October 23, 2009, the Company assigned ownership of its Simtrol VisitorTM and
Simtrol SchedulerTM 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:





·
            60
      month-term


·
            6%
      simple interest calculated on an annual
basis


·
            Minimum
      payment of $6,000 per quarter


·
            Note
      secured by the Software





Per terms
of the agreement, payments on the note/royalties are due on a quarterly
basis.


42





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





The
$100,000 cash was recorded as software license revenue during the year ended
December 31, 2009.   The $400,000 note receivable from Strike was
classified as a long-term note receivable, net of an equal amount of deferred
revenue.  Until the note is fully paid, the royalty will be 45% of net
software revenues earned by Strike and will be treated as payment of principal
on the note payable.  The Company will reduce the note receivable and
recognize revenues at the time payment is received for quarterly software sales
by Strike.  At December 31, 2009, royalty income on the $400,000 note
receivable earned for 2009 was not material.





Upon
payment in full of the note, the royalty will be 10% in perpetuity of net
software revenues and will be classified as software license revenue by
Simtrol.  Per terms of the agreement, payments on the note/royalties
are due on a quarterly basis.





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





All
accrued interest due at December 31, 2009, along with interest due through
January 23, 2010 was received on January 29, 2010.





NOTE
17 – Subsequent Events





On
January 18, 2010, the Company granted options to purchase 785,000 shares of its
common stock to employees with one year vesting periods at exercise prices of
$0.0.05, equal to the fair value of the Company’s stock on the date of the
grant.





On
January 30, 2010, at the conclusion of the second 30-day Extension Period of its
notes payable originated on May 29, 2009, and originally due on November 29,
2009, the Company issued 74,966 shares of its common stock in payment of a 5%
Extension fee.  Per the terms of the notes, as the Extension fee was
paid in common stock, the common stock was deemed to have a value of $0.375 per
share on that date.





On
February 1 and 5, 2010, Simtrol, Inc. (“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.  See note 6.





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 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.




43


·
            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 Simtrol issues common stock at a
      lower effective price per share than the exercise
  price.




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 the date of this report, therefore, increase 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





On
February 1, 2010, in accordance with the anti-dilution provisions of certain
warrants to purchase 1,233,691 shares of common stock that were issued during
2005, 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.


44