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 June 30, 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 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities and Use of Proceeds 17
Item 6. Exhibits and Reports on Form 8-K 18
Signature 19
INTRODUCTORY NOTE
This amendment to SLS International, Inc.'s Quarterly Report on Form 10-QSB
initially filed with the Securities and Exchange Commission on August 14, 2002,
is being filed to reflect the restatement of our unaudited condensed financial
statements for the quarter and six months ended June 30, 2002. Certain items
were also reclassified within the financial statements. The restatements and
reclassifications in the six-month period ended June 30, 2002 include
adjustments for:
o RESTATEMENTS - (a) Consulting Agreements. Consulting agreements entered
into in the six months ended June 30, 2002 are reflected in the
restatements, recognizing the issuance of (or the obligation to issue)
1,220,000 shares of common stock and the grant of options to purchase
100,000 shares of Class A preferred stock at an exercise price of $2.50 per
share (each such share of preferred stock converts into 10 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 $925,422, $314,019 of
which is now reflected as amortized expenses in the six-month period 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 $144,352 (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 $44,887 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 $68,000 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
6,000 shares of common stock that were sold in the first six months of 2002
but were not yet issued. These shares were previously reflected as issued
on June 30, 2002.
1
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
SLS International, Inc.
Condensed Balance Sheet
June 30, December 31,
2002 2001
------------- ------------
(unaudited) (audited)
Assets
Current assets:
Cash $ -- $ 48,390
Accounts receivable, less allowance for doubtful accounts
of $72,917 and $0 for June 30, 2002 and December 31, 2001 97,510 69,185
Inventory 298,935 250,998
Prepaid expenses and other current assets 1,570 2,081
------------ -----------
Total current assets 398,015 370,654
------------ -----------
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 71,886 64,594
----------- -----------
Net fixed assets 29,597 36,889
----------- -----------
$ 427,612 $ 407,543
=========== ===========
Liabilities and Shareholders' Deficit
Current liabilities:
Current maturities of long-term debt and notes payable $ 419,325 $ 371,640
Accounts payable 268,675 196,833
Due to shareholders 29,886 31,886
Accrued liabilities 82,726 67,029
----------- -----------
Total current liabilities 800,612 667,388
----------- -----------
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; 278,000 and 102,000 shares
at June 30, 2002 and December 31, 2001 278 102
Discount on preferred stock (467,668) (166,694)
Contributed capital - preferred 1,392,322 446,298
Common stock, $.001 par; 75,000,000 shares authorized;
19,924,528 shares and 19,019,528 shares issued at
June 30, 2002 and December 31, 2001 19,925 19,020
Common stock not issued but owed to buyers; 456,000 shares
and 40,000 shares at June 30, 2002 and December 31, 2001 456 40
Contributed capital - common 2,715,026 1,710,425
Unamortized cost of stock issued for services (611,403) --
Retained deficit (3,421,936) (2,271,357)
----------- ------------
Total shareholders' deficit (373,000) (262,166)
----------- ------------
$ 427,612 $ 407,543
=========== ============
The accompanying notes are an integral part of these condensed financial
statements
2
SLS International, Inc.
Condensed Statement Of Operations
For The Six Months Ended
June 30,
-------------------------------
2002 2001
------------ ------------
(unaudited)
Revenue $ 324,516 $ 110,523
Cost of sales 194,679 69,883
------------ ------------
Gross profit 129,837 40,640
General and administrative expenses 1,061,965 512,115
------------ ------------
Loss from operations (932,128) (471,475)
Other income (expense):
Interest expense (13,263) (27,299)
Interest and miscellaneous, net 38 1,548
------------ ------------
(13,225) (25,751)
------------ ------------
Loss before income tax (945,353) (497,226)
Income tax provision -- --
------------ ------------
Net loss (945,353) (497,226)
Deemed dividend associated with Beneficial
conversion feature of preferred stock (205,226) --
------------ ------------
Net loss available to common shareholders $ (1,150,579) $ (497,226)
============ ============
Basic and diluted earnings per share $ (0.06) $ (0.03)
============ ============
Weighted average shares outstanding 19,819,361 15,677,000
============ ============
The accompanying notes are an integral part of these condensed financial
statements.
3
SLS International, Inc.
Condensed Statement Of Operations
For The Three Months Ended
June 30,
------------------------------
2002 2001
------------ ------------
(unaudited)
Revenue $ 189,330 $ 70,775
Cost of sales 109,568 48,562
------------ ------------
Gross profit 79,763 22,213
General and administrative expenses 563,468 302,186
------------ ------------
Loss from operations (483,706) (279,973)
Other income (expense):
Interest expense (6,830) (12,678)
Interest and miscellaneous, net 30 1,542
------------ ------------
(6,800) (11,136)
------------ ------------
Loss before income tax (490,506) (291,109)
Income tax provision -- --
------------ ------------
Net loss (490,506) (291,109)
Deemed dividend associated with Beneficial
conversion feature of preferred stock (135,461) --
------------ ------------
Net loss available to common shareholders $ (625,967) $ (291,109)
============ ============
Basic and diluted earnings per share $ (0.03) $ (0.02)
============ ============
Weighted average shares outstanding 20,047,195 17,082,000
============ ============
The accompanying notes are an integral part of these condensed financial
statements.
4
SLS International, Inc.
Condensed Statement Of Cash Flows
For The Six Months Ended
June 30,
-----------------------------
2002 2001
----------- -----------
(unaudited)
Operating activities:
Net loss $ (945,353) $ (497,226)
Adjustments to reconcile net income to cash flows
from operating activities:
Depreciation and amortization 7,292 7,621
Amortization of cost of stock issued for services 314,019 --
Change in assets and liabilities-
Accounts receivable, less allowance for doubtful accounts (28,325) (44,645)
Inventory (47,937) (2,614)
Prepaid expenses and other current assets 511 79,168
Accounts payable 71,841 (93,329)
Due to shareholders (2,000) 3,820
Accrued liabilities 15,698 8,945
----------- -----------
Cash used in operating activities (614,254) (538,260)
----------- -----------
Investing activities:
Additions to fixed assets -- (9,257)
----------- -----------
Cash used in investing activities -- (9,257)
----------- -----------
Financing activities:
Sale of common stock 80,500 1,052,000
Sale of preferred stock 445,000 --
Borrowing of notes payable 50,000 135,000
Repayments of notes payable (9,636) (422,325)
----------- -----------
Cash provided by financing activities 565,864 764,675
----------- -----------
(Decrease) increase in cash (48,390) 217,158
Cash, beginning of year 48,390 17,657
----------- -----------
Cash, end of year $ -- $ 234,815
=========== ===========
Supplemental cash flow information:
Interest paid $ -- $ --
Income taxes paid (refunded) -- --
Noncash investing activities
Stock issued and options granted for services $ 925,422 $ --
The accompanying notes are an integral part of these condensed financial
statements.
5
SLS INTERNATIONAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements at June 30,
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 June 30, 2002 and results of operations and
cash flows for the six months ended June 30, 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 June 30,
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 six months ended June 30, 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
August 4, 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
6
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 June 30, 2002, 101,000 Class A warrants were
exercised for 101,000 shares of common stock for a total of $50,500. As
of June 30, 2002, 6,000 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. 3,111,000 Class A warrants are outstanding as of June
30, 2002. No Class B warrants have been exercised as of June 30, 2002.
In the six months ended June 30, 2002, the Company issued 176,000
shares of preferred stock for $440,000. 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 $506,200 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. $205,226 was amortized to retained
earnings in the six months ended June 30, 2002. At June 30, 2002, the
unamortized beneficial conversion on preferred shares was $467,668.
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 June 30, 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 $54,112
for the six months ended June 30, 2002. On June 30, 2002, there was
$56,888 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 June 30, 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
7
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
$90,315 for the six months ended June 30, 2002. On June 30, 2002 there
was $116,685 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.
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. Consulting expense relating to this
agreement was $51,000 for the six months ended June 30, 2002. On June
30, 2002, there was $0 remaining in unamortized cost of stock issued
for services on the balance sheet.
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. Consulting
expense relating to this agreement was $12,750 for the six months ended
June 30, 2002. On June 30, 2002, there was $38,250 remaining in
unamortized cost of stock issued for services on the balance sheet.
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 of the balance sheet as unamortized cost of stock
issued for services. As
8
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. Consulting expense relating to this agreement was $70,192
for the six months ended June 30, 2002. On June 30, 2002, there was
$280,230 remaining in unamortized cost of stock issued for services on
the balance sheet.
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. Consulting expense relating to this
agreement was $35,650 for the six months ended June 30, 2002. On June
30, 2002, there was $119,350 remaining in unamortized cost of stock
issued for services on the balance sheet.
NOTE 5 - SUBSEQUENT EVENTS
From July to December of 2002, the Company issued 139,000 shares of
preferred stock for $347,500.
In February and March of 2003, the Company issued 32,940 shares of
preferred stock for $82,350.
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,
9
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.
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
10
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
shown 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.
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.
11
NOTE 6 - UNAMORTIZED COST OF STOCK ISSUED FOR SERVICES
As detailed in Note 4, the Company issued or agreed to issue 1,320,000
shares of common stock and 1,000,000 options as part of consulting
agreements. The value of stock issued and options granted totaled
$925,422 for the six months ended June 30, 2002. This cost is shown 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 six months ended June 30, 2002, $314,019 was amortized into
consulting expense. Unamortized cost of stock issued for Services was
$611,403 as of June 30, 2002.
12
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
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 use
our PRD500 Ribbon Driver and, in September 2001, we finished the development of
our PRD1000 Ribbon Driver and began implementing it into our Professional Line.
Our PRD drivers upgraded the previous drivers that we purchased from third-party
manufacturers and the cost to us is approximately 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
13
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 June 30, 2002 as compared to the quarter ended June 30,
2001. For the quarter ended June 30, 2002, revenue increased to $189,330 from
$70,775 in 2001, a 268% increase, resulting primarily from the expansion of our
loudspeaker product line and the continued growth in sales of our loudspeakers.
Our gross profit percentage increased to approximately 42% in the 2002 period
from approximately 31% in the 2001 period, primarily as a result of our
conversion to in-house manufacturing of our ribbon drivers from our previous
outsourcing of such components. Despite the revenue increase and the improvement
in gross profits, our net loss increased to $490,506 in the second quarter of
2002 as compared to a net loss of $291,109 in the comparable quarter of 2001,
primarily as a result of a $261,282 increase in general and administrative
expenses.
General and administrative expenses for the 2002 second quarter
increased to $563,468 from $302,186 in the 2001 second quarter, primarily as a
result of $35,000 of bad debt expense (compared to $0 in the 2001 quarter) and
$249,092 of non-cash cost 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. These increases were partially offset by the
one-time expenses incurred in 2001 related to our initial public offering.
Interest expense decreased to $6,830 in the 2002 second quarter as
compared to $12,678 in the 2001 second quarter, due to decreased borrowings.
Six months ended June 30, 2002 as compared to the six months ended June
30, 2001. For the first six months of 2002, revenue increased to $324,516 from
$110,523 in 2001, a 294% increase, resulting primarily from the expansion of our
loudspeaker product line and the continued growth in sales of our loudspeakers.
Our gross profit percentage increased to approximately 40% in the 2002 period
from approximately 37% in the 2001 period, primarily as a result of our
conversion to in-house manufacturing of our ribbon drivers from our previous
outsourcing of such components. Despite the revenue increase and the improvement
in gross profits, our net loss increased to $945,353 in the first half of 2002
as compared to a net loss of $497,226 in the first half of 2001, primarily as a
result of a $549,850 increase in general and administrative expenses.
General and administrative expenses for the first six months of 2002
increased to $1,061,965 from $512,115 in 2001, primarily as a result of $144,352
of bad debt expense (compared to $0 in the 2001 period); $314,019 of non-cash
cost amortized in the six-month period reflecting a portion of the fair value of
stock issued under consulting agreements entered into during the period and in
prior periods; the hiring of a sales manager; and consulting expenses incurred
for investor relations and public relations.
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Interest expense decreased to $13,263 in the 2002 period as compared to
$27,299 in the 2001 period, due to decreased borrowings.
FINANCIAL CONDITION
On June 30, 2002, our current liabilities exceeded current assets by
$402,597, compared to $296,734 on December 31, 2001. Total liabilities exceeded
total assets by $373,000, compared to $262,166 on December 31, 2001. The
increased working capital deficit was due primarily to increased accounts
payable and other increased liabilities incurred from our expanding operations.
These factors were partially offset by an increase in accounts receivable and
inventory, funded in large part by the sales of equity described below.
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 June 30, 2002. However, in July 2002, we raised $60,000 through the sale
of 24,000 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 2002 to raise capital. In the first half of 2002 we sold 176,000 shares
of preferred stock for $440,000. In addition, we have outstanding warrants,
which, upon exercise, have provided additional funding of $50,500 during the
first half of 2002.
In the first six months of 2002, we entered into consulting agreements
that required us to issue an aggregate of 1,220,000 shares of common stock and
options to purchase 100,000 shares of Class A preferred stock at an exercise
price of $2.50 per share (each such share of preferred stock converts into 10
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 $925,422, $314,019 of which is
reflected as amortized expenses in the first six months of 2002 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 notes payable increased slightly to $419,325 on June 30,
2002. One note totaling $6,691 is secured with equipment; and the remaining
borrowings are from individuals, are unsecured and matured in the first quarter
of 2002. However, these notes
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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
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, in our Annual Report on
Form 10-KSB and in 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 1. Legal Proceedings.
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On April 4, 2002, Alfred V. Greco filed a claim in the Supreme Court of
the State of New York, County of New York, for unpaid legal fees, seeking a
total of $50,772, plus interest, costs and disbursements. We have been in
settlement discussions with Mr. Greco, and we expect to settle the claim during
the third quarter of 2002.
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 June 30, 2002, holders of Class A Warrants issued as
part of the Units in the May 2, 2001 offering were exercised for an aggregate of
4,000 shares of our common stock. The total proceeds received upon exercise of
the warrants were $2,000.
In the quarter ended June 30, 2002, the Company sold 110,000 shares of
preferred stock for $275,000 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 870,000 shares of common stock and options to
purchase 100,000 shares of Class A preferred stock at an exercise price of $2.50
per share (each such share of preferred stock converts into 10 shares of common
stock) under consulting
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agreements entered into during the quarter ended June 30, 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
stock in the second 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 Consulting Agreement, dated April 9, 2002, between
SLS International, Inc. and The Equitable Group, LLC
10.2 Letter Agreement, dated April 2, 2002, between SLS
International, Inc. and Muir Crane & Co.
10.3 Letter Agreement, dated April 18, 2002, between SLS
International, Inc. and Sam F. Hamra
10.4 Consulting Services Agreement, dated June 10, 2002,
between SLS International, Inc. and Liquid Solutions
Corp.
(b) Reports on Form 8-K. We filed no Reports on Form 8-K during
the quarter ended June 30, 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.
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(Registrant)
Date: May 21, 2003 By /s/ John Gott
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John Gott
President and
Chief Financial Officer
(Principal Financial Officer)
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