SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB/A
AMENDMENT NO. 1
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the Quarterly Period Ended March 31, 2002
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the Transition Period from _________ to ___________
Commission File Number: 333-43770
SLS INTERNATIONAL, INC.
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(Exact Name of Small Business Issuer as Specified in its Charter)
Delaware 52-2258371
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(State of Incorporation) (IRS Employer Identification No.)
3119 South Scenic
Springfield, Missouri 65807
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(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number, Including Area Code: (417) 883-4549
N/A
----------------------------------------------------
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING
THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. N/A
Yes [ ] No [X]
On May 5, 2003, 23,196,528 shares of SLS International, Inc. common
stock were outstanding.
Transitional Small Business Disclosure Format (check one):
Yes _______ No ___x___
SLS INTERNATIONAL, INC.
INDEX
PART I. FINANCIAL INFORMATION
Page No.
Introductory Note 1
Item 1. Financial Statements
Condensed Balance Sheet 2
Condensed Statements of Operations 3
Condensed Statement of Cash Flows 4
Notes to Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 15
Item 6. Exhibits and Reports on Form 8-K 15
Signature 16
INTRODUCTORY NOTE
-----------------
This amendment to SLS International, Inc.'s Quarterly Report on Form 10-QSB
initially filed with the Securities and Exchange Commission on May 15, 2002, is
being filed to reflect the restatement of our unaudited condensed financial
statements for the quarter ended March 31, 2002. Certain items were also
reclassified within the financial statements. The restatements and
reclassifications include adjustments for:
o RESTATEMENTS - (a) Consulting Agreements. Consulting agreements entered
into in the quarter ended March 31, 2002 are reflected in the restatements,
recognizing the obligation to issue 350,000 shares of common stock under
such agreements. In addition, a consulting agreement entered into in August
2001 is now reflected in the restated financial statements, recognizing an
obligation to issue 100,000 shares of common stock under such agreement. We
determined that the failure to include such consulting agreement in prior
periods is not material to the prior periods' financial statements and
would not require a restatement of the financial statements for such
periods.
The total non-cash cost under such agreements is $318,000, $64,927 of which
is now reflected as amortized expenses in the quarter and the remainder of
which is to be amortized in subsequent periods over the respective terms of
such agreements. The non-cash cost under the consulting agreement entered
into in August 2001 is being amortized over a 12-month period beginning in
January 2002. The restated financial statements also recorded $3,000 of
cash and $27,000 of notes receivable received from such consultants. The
notes receivable were then written off as bad debt expense in the quarter
ended March 31, 2002.
(b) Bad Debt Expense. Bad debt expense was increased by $109,352 (which
includes the write-off of $27,000 of notes receivable discussed in (a)
above) and is reflected in the Consolidated Statement of Operations under
general and administrative expenses.
(c) Accounts Payable. Accounts payable were increased by $18,963 and the
related expenses are reflected in the Consolidated Statement of Operations
under general and administrative expenses.
(d) Cost of Sales. Cost of sales was increased by $29,650 and is reflected
in the Consolidated Statement of Operations under cost of sales.
o RECLASSIFICATIONS - (a) Notes Payable. The balance sheet now reflects an
additional $5,000 note payable that was previously classified as an account
payable.
(b) Stock Issuances. The balance sheet now reflects the obligation to issue
42,000 shares of common stock that were sold in the first quarter but were
not yet issued. These shares were previously reflected as issued on March
31, 2002.
1
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
SLS International, Inc.
Condensed Balance Sheet
March 31, December 31,
2002 2001
----------- -----------
(unaudited) (audited)
Assets
Current assets:
Cash $ -- $ 48,390
Accounts receivable, less allowance for doubtful accounts
of $37,917 for March 31, 2002 and $0 for December 31, 2001 67,054 69,185
Inventory 215,554 250,998
Prepaid expenses and other current assets 1,569 2,081
----------- -----------
Total current assets 284,177 370,654
----------- -----------
Fixed assets:
Vehicles 47,376 47,376
Equipment 50,731 50,731
Leasehold improvements 3,376 3,376
----------- -----------
101,483 101,483
Less accumulated depreciation 68,240 64,594
----------- -----------
Net fixed assets 33,243 36,889
----------- -----------
$ 317,420 $ 407,543
=========== ===========
Liabilities and Shareholders' Deficit
Current liabilities:
Current maturities of long-term debt and notes payable $ 374,597 $ 371,640
Accounts payable 243,161 196,833
Due to shareholders 29,886 31,886
Accrued liabilities 78,364 67,029
----------- -----------
Total current liabilities 726,008 667,388
----------- -----------
Long-term debt, less current maturities -- 2,321
----------- -----------
Commitments and contingencies:
Shareholders' deficit:
Preferred stock not issued but owed to buyers, $.001 par,
5,000,000 shares authorized; 168,000 and 102,000 shares
at March 31, 2002 and December 31, 2001 168 102
Discount on preferred stock (262,129) (166,694)
Contributed capital - preferred 776,432 446,298
Common stock, $.001 par; 75,000,000 shares authorized;
19,114,528 shares and 19,019,528 shares issued at
March 31, 2002 and December 31, 2001 19,115 19,020
Common stock not issued but owed to buyers; 492,000
shares and 40,000 shares at December 31, 2002 and 2001 492 40
Contributed capital - common 2,106,378 1,710,425
Unamortized cost of stock issued for services (253,073) --
Retained deficit (2,795,971) (2,271,357)
----------- -----------
Total shareholders' deficit (408,588) (262,166)
----------- -----------
$ 317,420 $ 407,543
=========== ===========
The accompanying notes are an integral part of these condensed financial
statements
2
SLS International, Inc.
Condensed Statement Of Operations
For The Three Months Ended
March 31,
-----------------------------
2002 2001
------------ ------------
(unaudited)
Revenue $ 135,186 $ 39,748
Cost of sales 85,111 21,321
------------ ------------
Gross profit 50,075 18,427
General and administrative expenses 498,497 209,929
------------ ------------
Loss from operations (448,422) (191,502)
Other income (expense):
Interest expense (6,433) (14,621)
Interest and miscellaneous, net 7 6
------------ ------------
(6,426) (14,615)
------------ ------------
Loss before income tax (454,848) (206,117)
Income tax provision -- --
------------ ------------
Net loss (454,848) (206,117)
------------ ------------
Deemed dividend associated with beneficial conversion
of preferred stock (69,765) --
------------ ------------
Net loss availiable to common shareholders $ (524,613) $ (206,117)
============ ============
Basic and diluted earnings per share $ (0.03) $ (0.01)
============ ============
Weighted average shares outstanding 20,892,278 14,152,009
============ ============
The accompanying notes are an integral part of these condensed financial
statements.
3
SLS International, Inc.
Condensed Statement Of Cash Flows
For The Three Months Ended
March 31,
-----------------------
2002 2001
---------- ---------
(unaudited)
Operating activities:
Net loss $(454,848) $(206,117)
Adjustments to reconcile net income to cash flows
from operating activities:
Depreciation and amortization 3,646 3,602
Amortization of cost of stock issued for services 64,927 --
Change in assets and liabilities-
Accounts receivable, less allowance for doubtful accounts 2,131 (14,430)
Inventory 35,444 5,937
Prepaid expenses and other current assets 512 (573)
Accounts payable 46,328 59,684
Due to shareholders (2,000) 2,038
Deferred revenue -- 5,000
Accrued liabilities 11,334 21,958
--------- ---------
Cash used in operating activities (292,526) (122,901)
--------- ---------
Investing activities:
Additions to fixed assets -- (240)
--------- ---------
Cash used in investing activities -- (240)
--------- ---------
Financing activities:
Sale of common stock 78,500 --
Sale of preferred stock 165,000 --
Borrowing of notes payable 5,000 115,000
Repayments of notes payable (4,364) (7,940)
--------- ---------
Cash provided by financing activities 244,136 107,060
--------- ---------
(Decrease) increase in cash (48,390) (16,081)
Cash, beginning of year 48,390 17,657
--------- ---------
Cash, end of year $ -- $ 1,576
========= =========
Supplemental cash flow information:
Interest paid $ -- $ 1,143
Income taxes paid (refunded) -- --
Noncash investing activities:
Stock issued for services $ 318,000 $ --
The accompanying notes are an integral part of these condensed financial
statements.
4
SLS INTERNATIONAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements at March 31,
2002 have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-QSB and reflect all adjustments which, in the
opinion of management, are necessary for a fair presentation of
financial positions as of March 31, 2002 and results of operations and
cash flows for the three months ended March 31, 2002. All such
adjustments are of a normal recurring nature. The results of operations
for the interim period are not necessarily indicative of the results
expected for a full year. Certain amounts in the 2001 financial
statements have been reclassified to conform to the 2002 presentations.
The statements should be read in conjunction with the financial
statements and footnotes thereto included in the Company's Form 10-KSB
for the year ended December 31, 2001.
NOTE 2 - COMMITMENTS AND CONTINGENCIES
Going Concern
The accompanying unaudited condensed financial statements at March 31,
2002 have been prepared in conformity with generally accepted
accounting principles which contemplate the continuance of the Company
as a going concern. The Company has suffered losses from operations
during the three months ended March 31, 2002 and the years ended
December 31 2001, 2000, and 1999. The Company's cash position may be
inadequate to pay all of the costs associated with the introduction of
its new loudspeakers. Management intends to use borrowings and security
sales to mitigate the effects of its cash position, however no
assurance can be given that debt or equity financing , if and when
required, will be available. The unaudited condensed financial
statements do not include any adjustments relating to the
recoverability and classification of recorded assets and classification
of liabilities that might be necessary should the Company be unable to
continue in existence.
NOTE 3 - NOTES PAYABLE
The interest rate on the current notes are 7% and the maturity date is
six months from the date of each note.
NOTE 4 - STOCK TRANSACTIONS
In May, 2001, the Company completed a public offering. The number of
shares sold was 4,000,000. Included with the purchase of the shares was
a Class A warrant and a Class B warrant. The Class A warrants expire on
August4, 2003 and are exercisable at a price of $.50 per share. The
Class B warrant has a term of 2 years and are exercisable at a price of
$3.00 per
5
share. The warrants are detachable from the common stock but are not
separable from each other until the Class A warrant is exercised.
From January 1, 2002 to March 31, 2002, 97,000 Class A warrants were
exercised for 97,000 shares of common stock for a total of $48,500. As
of March 31, 2002, 42,000 shares of common stock had not been issued
and therefore are shown on the balance sheet as common stock not issued
but owed to buyers. 3,115,000 Class A warrants are outstanding as of
March 31, 2002. No Class B warrants have been exercised as of March 31,
2002.
In the three months ended March 31, 2002, the Company issued 66,000
shares of preferred stock for $165,000. This preferred stock contained
beneficial conversion features. The features allows the holder to
convert the preferred to 10 shares of common stock after a one year
period. A discount on preferred shares of $165,200 relating to the
beneficial conversion feature was recorded on these sales which will be
amortized over a one year period beginning with the date the
shareholders purchased their shares. $69,765 was amortized to retained
earnings in the three months ended March 31, 2002. At March 31, 2002,
the unamortized beneficial conversion on preferred shares was $262,129.
In January of 2002, an agreement was signed with Office Radio Network
for consulting services to be performed from January 5, 2002 to January
5, 2003. As compensation for consulting services, the Company gave
Office Radio Network $15,000 and issued 150,000 shares of common stock.
As of March 31, 2002 the shares had not been issued and are therefore
show as common stock not issued but owed to buyers in these financial
statements. The shares of common stock were issued on November 19,
2002. Using the market value on the date the agreement was signed, the
shares were valued at $111,000 and recorded as a debit in the equity
section of the balance sheet as unamortized cost of stock issued for
services. The expense will be amortized over the one year period of the
agreement. Consulting expense relating to this agreement was $26,362
for the three months ended March 31, 2002. On March 31, 2002, there was
$84,638 remaining in unamortized cost of stock issued for services on
the balance sheet.
In January of 2002, three agreements were signed for consulting
services to be performed. The agreements paid 300,000 shares to the
consultants in exchange for $3,000, an executed note receivable for
$27,000, and services to be rendered. As of March 31, 2002 the shares
had not been issued and are therefore shown as common stock not issued
but owed to buyers on these financial statements. 100,000 of the common
shares were issued on November 19, 2002. The remaining 200,000 shares
have not been issued as of December 31, 2002. Using the market value on
the date the agreements were signed, the shares were valued at
$237,000. Value of
6
the shares over consideration given is $207,000 and is recorded as a
debit in the equity section of the balance sheet as unamortized cost of
stock issued for services. The expense will be amortized over a one
year period. Consulting expense relating to these agreements was
$38,565 for the three months ended March 31, 2002. On March 31, 2002
there was $168,435 remaining in unamortized cost of stock issued for
services on the balance sheet. A valuation allowance of $27,000 has
been used to offset the resulting note receivable from the transaction
and therefore $0 is reflected in the asset section of the balance sheet
for the note receivables.
NOTE 5 - SUBSEQUENT EVENTS
From April to December of 2002, the Company issued 249,000 shares of
preferred stock for $622,500.
In February and March of 2003, the Company issued 32,940 shares of
preferred stock for $82,350.
In April of 2002, an agreement was signed with The Equitable Group, LLC
for consulting services to be performed from March 26, 2002 to
September 26, 2002. As compensation for consulting services, the
Company agreed to issue 600,000 shares of common stock, of which
100,000 were nonrefundable, to the consultant. The Company issued
100,000 shares on April 9, 2002. Using the market value on the date the
agreement was signed, the shares were valued at $51,000 and recorded as
a debit in the equity section of the balance sheet as unamortized cost
of stock given for services. On May 2, 2002, the Company terminated the
agreement. Upon termination of the agreement all unamortized costs were
amortized as consulting expense.
In April of 2002, an agreement was signed with Muir, Crane, & Co. for
consulting services to be performed April 2, 2002 to April 2, 2003. As
compensation for consulting services the Company agreed to pay a
retainer of $4,000 per month and issue 200,000 shares of common stock.
100,000 shares were issued on April 9, 2002 and 100,000 shares were
issued on July 18, 2002. Using the market value on the date the
agreement was signed, the shares were valued at $95,000 and recorded as
a debit in the equity section of the balance sheet as unamortized cost
of stock issued for services. At December 31, 2002, the consulting
agreement had been terminated and all costs were amortized.
In April of 2002, an agreement was signed with Sam Hamra for consulting
services to be performed April 18, 2002 to April 18, 2003. As
compensation for consulting services the Company agreed to issue 70,000
shares of common stock. 70,000 shares of common stock were issued on
April 18, 2002. Using the market value on the date the agreement was
signed, the shares were valued at $39,200 and recorded as a debit in the
equity section
7
of the balance sheet as unamortized cost of stock issued for services.
As compensation, Mr. Hamra was also issued options to purchase 100,000
shares of preferred stock at a strike price of $2.50 per share. This
preferred stock was convertible into 1,000,000 shares of common stock
after a period of one year. The options expire when the preferred stock
offering closes. The closing date has been extended to July 31, 2003.
Using the Black-Scholes pricing model, the options were valued at
$311,222 and recorded as a debit in the equity section of the balance
sheet as unamortized cost of stock issued for services. At December 31,
2002, the consulting agreement had been terminated and all costs were
amortized.
In June of 2002, an agreement was signed with Liquid Solutions Corp. for
consulting services to be performed June 10, 2002 to September 10, 2002.
As compensation for consulting services the Company agreed to issue
500,000 shares of common stock. 500,000 shares of common stock were
issued on June 19, 2002. Using the market value on the date the
agreement was signed, the shares were valued at $155,000 and recorded as
a debit in the equity section of the balance sheet as unamortized cost
of stock issued for services. The expense will be amortized over the
three months of the agreement.
In August of 2002, an agreement was signed with Atlantic Services, Ltd.,
a foreign corporation based in Costa Rica, for consulting services to be
performed August 15, 2002 to August 15, 2003. As compensation for
consulting services the Company agreed to issue 125,000 shares of common
stock. 125,000 shares of common stock were issued on August 15, 2002.
Using the market value on the date the agreement was signed, the shares
were valued at $43,750 and recorded as a debit in the equity section of
the balance sheet as unamortized cost of stock issued for services. The
expense will be amortized over the one year period of the agreement.
In September of 2002, an agreement was signed with Art Malone, Jr. for
consulting services to be performed September 10, 2002 to March 10,
2003. As compensation for consulting services the Company agreed to
issue 250,000 shares of common stock upon signing of the agreement and
another 250,000 shares upon the consummation or signing of a celebrity
brought directly or indirectly by Mr. Malone as an endorser. 250,000
shares of common stock were issued on September 17, 2002. As of December
31, 2002 no other shares have been issued in regards to this agreement.
Using the market value on the date the agreement was signed, the shares
were valued at $60,000 and recorded as a debit in the equity section of
the balance sheet as unamortized cost of stock issued for services. The
expense will be amortized over the six month period of the agreement.
8
In October of 2002, an agreement was signed with Patrick Armstrong of
Titan Entertainment Group for consulting services to be performed
November 5, 2002 to November 5, 2003. As compensation for consulting
services the Company agreed to issue 100,000 shares of common stock and
250,000 options for 250,000 shares of common stock. The options have a
strike price of $.30 and expire ten years from date of issuance. 100,000
shares of common stock were issued on November 5, 2002. Using the market
value on the date the agreement was signed, the shares were valued at
$39,000 and recorded as a debit in the equity section of the balance
sheet as unamortized cost of stock issued for services. Using the
Black-Scholes pricing model, the options were valued at $57,471 and
recorded as a debit in the equity section of the balance sheet as
unamortized cost of stock issued for services. All costs will be
amortized over the one year period of the agreement.
In October of 2002, an agreement was signed with Larry Stessel of Titan
Entertainment Group for consulting services to be performed November 5,
2002 to November 5, 2003. As compensation for consulting services the
Company agreed to issue 100,000 shares of common stock and 250,000
options for 250,000 shares of common stock. The options have a strike
price of $.30 and expire ten years from date of issuance. 100,000 shares
of common stock were issued on November 5, 2002. Using the market value
on the date the agreement was signed, the shares were valued at $39,000
and recorded as a debit in the equity section of the balance sheet as
unamortized cost of stock issued for services. Using the Black-Scholes
pricing model, the options were valued at $57,471 and recorded as a
debit in the equity section of the balance sheet as unamortized cost of
stock issued for services. All costs will be amortized over the one year
period of the agreement.
In December of 2002, an agreement was signed with Atlantic Services,
Ltd., a foreign corporation based in Costa Rica, for consulting services
to be performed December 2, 2002 to June 2, 2003. As compensation for
consulting services the Company agreed to issue 300,000 shares of common
stock and the president of the Company agreed to issue 300,000 options
to purchase 300,000 shares of common stock owned by him personally. The
options have a strike price of $.05 and expire 30 days after the current
lock-up period ends on the president's shares. 300,000 shares of common
stock were issued on December 9, 2002. Using the market value on the
date the agreement was signed, the shares were valued at $114,000 and
recorded as a debit in the equity section of the balance sheet as
unamortized cost of stock issued for services. Using the Black-Scholes
pricing model, the options were valued at $99,099 and recorded as a
credit to additional paid in capital - common stock and a debit in the
equity section of the balance sheet as unamortized cost of stock issued
for services. The cost will be amortized over the six month period of
the agreement.
9
In December 2002, an agreement was signed with Worldwide Financial
Marketing, Inc. for consulting services to be performed December 15,
2002 to December 15, 2003. As compensation for consulting services the
Company agreed to issue 300,000 shares of common stock. 300,000 shares
of common stock were issued on December 13, 2002. Using the market value
of the date the agreement was signed, the shares were valued at $120,000
and recorded as a debit in the equity section of the balance sheet as
unamortized cost of stock issued for services. The cost will be
amortized over the one year period of the agreement.
In February of 2003, the Company signed a consulting agreement with Tom
Puccio for a period of six months. On February 25, 2003, the Company
issued 300,000 shares of common stock in fulfillment of this agreement.
Using the market value on the date the agreement was signed, the shares
were valued at $93,000.
In October, November, and December of 2002, 102,000 shares of preferred
stock were converted into 1,020,000 shares of common stock. The shares
were issued in February of 2003.
In February of 2003, 42,000 shares of preferred stock were converted
into 420,000 shares of common stock.
On April 19, 2003, the board of directors approved and ratified all the
consulting agreements detailed in Note 4 and Note 5.
NOTE 6 - UNAMORTIZED COST OF STOCK ISSUED FOR SERVICES
As detailed in Note 4, the Company issued or agreed to issue 450,000
shares of common stock as part of consulting agreements. The value of
stock issued totaled $318,000 for the three months ended March 31, 2002.
This cost is recorded as a debit in the equity section of the balance
sheet as unamortized cost of stock issued for services. The balance will
be amortized into consulting expense over the lives of the various
consulting agreements. For the three months ended March 31, 2002,
$64,927 was amortized into consulting expense. Unamortized cost of stock
issued for Services was $253,073 as of March 31, 2002.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
We manufacture premium-quality loudspeakers and sell them through our
dealer networks. The speakers use our proprietary ribbon-driver technology and
are generally recognized in the industry as high-quality systems. We sell a
Professional Line of loudspeakers, a Commercial Line of loudspeakers, and Home
Theatre systems.
From the early 1970's through 1999 we derived substantially all of our
revenue from marketing, renting, selling and installing sound and lighting
systems. In June 1999, due to the favorable customer acceptance of our recently
custom designed loudspeaker systems, we ceased these historical operations and
began focusing all efforts towards becoming a loudspeaker manufacturer and
selling to dealers and contractors on a wholesale basis. As a result, we have
been essentially in a development stage, as we are bringing to market products
that we introduced in 2000 and 2001 and designing and bringing to market
additional products.
In June 2000, we asked dealers and distributors to sell our
Professional Line of products. These dealers and distributors started to form
our current network of approximately 50 dealers and 7 foreign distributors and
we began shipping to them. However, most of the Professional Line required new
ribbon drivers that we completed and implemented into the product line in early
2001.
In September 2000, we introduced our Home Theatre systems and sales for
those systems began immediately. From September through December 2000, we added
20 new Home Theatre dealers in the US and began marketing efforts to establish
distributors and dealers outside the US.
In June 2001, we introduced a Commercial Line of loudspeakers that
utilize our PRD500 Ribbon Driver and in September of 2001 we finished the
development of our PRD1000 Ribbon Driver and began implementing them into our
Professional Line. Our PRD drivers upgraded the previous drivers that we
purchased from third-party manufacturers and the cost to us is one-sixth of the
price that we had been paying for the previous drivers.
SLS International, Inc. was formed on July 25, 2000 and had no previous
operations. On the same date, this corporation merged with Sound and Lighting
Specialist Inc., its sole shareholder. All of the financial information reported
for periods prior to the merger are the results of operations of Sound and
Lighting Specialist, Inc. All of the operating activity reported for periods
after the merger are the results of operations of SLS International, Inc. After
effectiveness of the merger, Sound and Lighting Specialist, Inc. ceased to exist
as a separate corporate entity. The information in this section should
11
be read together with the financial statements, the accompanying notes to the
financial statements and other sections included in this report.
RESULTS OF OPERATIONS
Quarter ended March 31, 2002 as compared to the quarter ended March 31,
2001. For the quarter ended March 31, 2002, revenue increased to $135,186 from
$39,748 in 2001, a 240% increase, resulting primarily from the expansion of our
loudspeaker product line and the continued growth in sales of our loudspeakers.
Our gross profit percentage decreased to approximately 37% in the 2002 period
from approximately 46% in the 2001 period, primarily as a result of sales made
to representatives and dealers at introductory and sales sample prices. Also,
certain products were given to industry professionals for their use and for
later promotions using their comments and names. Despite the revenue increase of
$95,438, our net loss increased by $256,920, to $454,848 in the first quarter of
2002 as compared to a net loss of $206,117 in the comparable quarter of 2001.
The greater net loss was the result of increased general and administrative
expenses, discussed below.
General and administrative expenses for the 2002 first quarter
increased to $498,497 from $209,929 in the 2001 first quarter, primarily as a
result of $109,352 of bad debt expense (compared to $0 in the 2001 quarter) and
$64,927 of expenses amortized in the quarter reflecting a portion of the fair
value of stock issued under consulting agreements entered into during the
quarter and in prior periods. A total of $318,000 in non-cash costs were accrued
under these consulting agreements, and the remainder of such expenses will be
amortized in future periods. Other factors causing the increase in general and
administrative expenses include a new employee handling our development of a
transducer, a new controller for our financial operations, a new national sales
manager, increased trade show participation to promote our products, and
consultant expense targeted toward increased exposure and relations with top
musical artists.
Interest expense decreased to $6,433 in the 2002 first quarter as
compared to $14,621 in the 2001 first quarter, due to decreased borrowings.
Quarter ended March 31, 2001 as compared to the quarter ended March 31,
2000. Sales for the first quarter totaled $39,748 compared to $46,421 in 2000.
The decrease in revenue resulted from SLS restructuring the business to begin
producing loudspeakers with the ribbon drivers.
General and administrative expenses rose to $209,929 for the quarter
ended March 31, 2001 compared to $159,979 for the quarter ended March 31, 2000.
The increase was attributable to an increase in fees associated with the ribbon
driver, trade show participation and professional fees.
Interest expense was $14,621 in 2001 compared to $2,812 in 2000 because
of additional borrowings on notes payable.
12
The net loss for the quarter was $206,117 in 2001, an increase of
$55,221 from a loss of $150,896 in 2000.
FINANCIAL CONDITION
On March 31, 2002, our current liabilities exceeded current assets by
$441,831, compared to $296,734 on December 31, 2001. Total liabilities exceeded
total assets by $408,588, compared to $262,166 on December 31, 2001. The
increased working capital deficit was due to the decrease in cash, discussed
below, as well as the decrease in inventory and increases in accounts payable
and accrued liabilities.
We have experienced operating losses and negative cash flows from
operating activities in all recent years. The losses have been incurred due to
the development time and costs in bringing our products through engineering and
to the marketplace. In addition we have not paid notes payable and accounts
payable on due dates. The report of our accountants contains an explanatory
paragraph indicating that these factors raise substantial doubt about our
ability to continue as a going concern.
We are experiencing significant cash shortages; in fact, we had $0 in
cash on March 31, 2002. However, in April 2002, we raised $150,000 through the
sale of 60,000 shares of preferred stock. In order to continue operations, we
have been dependent on raising additional funds and have continued to sell
preferred stock in the beginning of 2002 to raise capital. In the first quarter
of 2002 we sold preferred stock for $165,000. In addition, we have outstanding
warrants, which, upon exercise, have provided additional funding of $48,500
during the first quarter of 2002.
In the first quarter of 2002, we entered into consulting agreements
that required us to issue an aggregate of 350,000 shares of common stock. In
addition, a consulting agreement entered into in August 2001 is now reflected in
the restated financial statements, recognizing an obligation to issue 100,000
shares of common stock under such agreement. Total non-cash cost under such
agreements is $318,000, $64,927 of which is reflected as amortized expenses in
the quarter and the remainder of which is to be amortized in subsequent periods
over the respective terms of such agreements. The difference between such total
cost and the amount amortized is reflected as unamortized cost of stock issued
for services on the balance sheet. The restated financial statements also
recorded $3,000 of cash and $27,000 of notes receivable received from such
consultants. The notes receivable were then written off as bad debt expense in
the quarter ended March 31, 2002.
Long-term debt and notes payable increased slightly to $374,597 on
March 31, 2002. One note totaling $11,964 is secured with equipment; and the
remaining borrowings are from individuals, are unsecured and matured in the
first quarter of 2002. However, these notes are payable to existing shareholders
that are not making a demand on the notes and will continue to accrue the 7%
interest for an indefinite period of time. We expect that these shareholders
will continue to permit these notes to remain
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outstanding, but they have the right to demand full payment at any time and they
may do so, which would have a material adverse effect on our financial
condition.
There is intense competition in the speaker business with other
companies that are much larger and national in scope and have greater financial
resources than we have. We will require additional capital to continue our
growth in the wholesale speaker market. We are relying upon our ability to
obtain the necessary financing through the issuance of equity and upon our
relationships with our lenders to sustain our viability.
In the past, we have been able to privately borrow money from
individuals by the issuance of notes, preferred stock and common stock. We
intend to continue to do so as needed. However, we cannot be certain that we
will continue to be able to successfully obtain such financing. If we fail to do
so, we may be unable to continue as a viable business.
FORWARD LOOKING INFORMATION
This report, as well as our other reports filed with the SEC and our
press releases and other communications, contain forward-looking statements made
pursuant to the safe harbor provisions of the Securities Litigation Reform Act
of 1995. Forward-looking statements include all statements regarding our
expected financial position, results of operations, cash flows, dividends,
financing plans, strategy, budgets, capital and other expenditures, competitive
positions, growth opportunities, benefits from new technology, plans and
objectives of management, and markets for stock. These forward-looking
statements are based largely on our expectations and, like any other business,
are subject to a number of risks and uncertainties, many of which are beyond our
control. The risks include those stated in the "Risk Factors" section of our
Annual Report on Form 10-KSB and economic, competitive and other factors
affecting our operations, markets, products and services, expansion strategies
and other factors discussed elsewhere in this report, our Annual Report on Form
10-KSB and the other documents we have filed with the Securities and Exchange
Commission. In light of these risks and uncertainties, there can be no assurance
that the forward-looking information contained in this report will in fact prove
accurate, and our actual results may differ materially from the forward-looking
statements.
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PART II - OTHER INFORMATION
Item 2. Changes in Securities.
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Please refer to the section titled "Use of Proceeds" in Item 5 of our
Annual Report on Form 10-KSB for a description of our offering of Units that
closed on May 2, 2001 pursuant to a Registration Statement on Form SB-2,
registration number 333-43770, with an effective date of February 4, 2001.
During the quarter ended March 31, 2002, we sold an aggregate of 97,000 shares
of our common stock in connection with the exercise of Class A Warrants issued
as part of the Units in the May 2, 2001 offering. The total proceeds received
upon exercise of the warrants were $48,500.
In the quarter ended March 31, 2002, the Company sold 66,000 shares of
preferred stock for $165,000 in cash. All sales were made to accredited
investors. Each share of preferred stock is convertible into ten shares of
common stock after one year. The sales were made in reliance on Section 4(2) of
the Securities Act of 1933, as amended.
We also agreed to issue 350,000 shares of common stock under consulting
agreements entered into during the quarter ended March 31, 2002 and 100,000
shares of common stock under a consulting agreement entered into in August 2001.
We received $3,000 of cash and $27,000 of notes receivable from such
consultants. The notes receivable were then written off as bad debt expense in
the quarter ended March 31, 2002. The issuances were made in reliance on Section
4(2) of the Securities Act of 1933, as amended.
The net proceeds from the exercise of Class A Warrants and the sale of
preferred stock and common stock in the first quarter of 2002 were used for
working capital purposes. We did not use any registered securities
broker-dealers in connection with any exercises of the Warrants or sales of
stock. All of the foregoing uses of proceeds were direct or indirect payments to
nonaffiliates.
Item 6. Exhibits and Reports on Form 8-K.
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(a) Exhibits. The following are being filed as exhibits to this
Report:
10.1 Letter Agreement, dated January 5, 2002 between SLS
International, Inc. and Internet PR Group Inc.
10.2 Share Purchase Agreement, dated January 22, 2002 between SLS
International, Inc. and Herbie Herbert.
10.3 Share Purchase Agreement, dated January 22, 2002 between SLS
International, Inc. and Thomas Panos.
10.4 Share Purchase Agreement, dated August 8, 2001 between SLS
International, Inc. and Les Garland.
(b) Reports on Form 8-K. We filed no Reports on Form 8-K during
the quarter ended March 31, 2002.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SLS INTERNATIONAL, INC.
----------------------------
(Registrant)
Date: May 21, 2003 By /s/ John Gott
---------------------------------
John Gott
President and
Chief Financial Officer
(Principal Financial Officer)
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