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 September 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
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(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
Item 3. Controls and Procedures 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities and Use of Proceeds 18
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 November 14,
2002, is being filed to reflect the restatement of our unaudited condensed
financial statements for the quarter and nine months ended September 30, 2002.
Certain items were also reclassified within the financial statements. The
restatements and reclassifications in the nine-month period ended September 30,
2002 include adjustments for:
o RESTATEMENTS - (a) Consulting Agreements. Consulting agreements entered
into in the nine months ended September 30, 2002 are reflected in the
restatements, recognizing the issuance of (or the obligation to issue)
1,595,000 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 $1,073,172, $635,352 of
which is now reflected as amortized expenses in the nine-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 $169,305 (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. (i) Accounts payable were increased by $49,492 and
the related expenses are reflected in the Consolidated Statement of
Operations under general and administrative expenses. (ii) Accounts payable
were decreased by $36,000, reflecting the entry fee for tradeshows that the
Company entered but later canceled.
(d) Cost of Sales. Cost of sales was increased by $114,300 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
2,000 shares of common stock that were sold in the first nine months of
2002 but were not yet issued. These shares were previously reflected as
issued on September 30, 2002.
1
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
SLS International, Inc.
Condensed Balance Sheet
September 30, December 31,
2002 2001
----------- ----------
(unaudited) (audited)
Assets
Current assets:
Cash $ 7,761 $ 48,390
Accounts receivable, less allowance for doubtful accounts of
$97,870 for September 30, 2002 and $0 for December 31, 2001 34,927 69,185
Inventory 325,001 250,998
Prepaid expenses and other current assets 1,570 2,081
----------- -----------
Total current assets 369,259 370,654
----------- -----------
Fixed assets:
Vehicles 47,376 47,376
Equipment 53,427 50,731
Leasehold improvements 3,376 3,376
----------- -----------
104,179 101,483
Less accumulated depreciation 75,733 64,594
----------- -----------
Net fixed assets 28,446 36,889
----------- -----------
$ 397,705 $ 407,543
=========== ===========
Liabilities and Shareholders' Deficit
Current liabilities:
Current maturities of long-term debt and notes payable $ 419,815 $ 371,640
Accounts payable 359,352 196,833
Due to shareholders 29,886 31,886
Accrued liabilities 88,276 67,029
----------- -----------
Total current liabilities 897,328 667,388
----------- -----------
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; 328,000 and 102,000 shares
at September 30, 2002 and December 31, 2001 328 102
Discount on preferred stock (330,776) (166,694)
Contributed capital - preferred 1,561,272 446,298
Common stock, $.001 par; 75,000,000 shares authorized;
20,403,528 shares and 19,019,528 shares issued at
September 30, 2002 and December 31, 2001 20,404 19,020
Common stock not issued but owed to buyers; 452,000 shares
and 40,000 shares at September 30, 2002 and December 31, 2001 452 40
Contributed capital - common 2,862,301 1,710,425
Unamortized cost of stock issued for services (437,820) --
Retained deficit (4,175,784) (2,271,357)
----------- -----------
Total shareholders' deficit (499,624) (262,166)
----------- -----------
$ 397,705 $ 407,543
=========== ===========
See notes to the condensed financial statements.
2
SLS International, Inc.
Condensed Statement Of Operations
For The Nine Months Ended
September 30,
-------------------------------
2002 2001
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(unaudited)
Revenue $ 486,204 $ 284,306
Cost of sales 318,631 182,512
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Gross profit 167,573 101,794
General and administrative expenses 1,667,850 792,686
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Loss from operations (1,500,277) (690,892)
Other income (expense):
Interest expense (18,330) (35,033)
Interest and miscellaneous, net 298 2,092
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(18,032) (32,941)
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Loss before income tax (1,518,309) (723,833)
Income tax provision -- --
------------ ------------
Net loss (1,518,309) (723,833)
Deemed dividend associated with beneficial
conversion feature of preferred stock (386,118) (52,000)
------------ ------------
Net loss available to common shareholders $ (1,904,427) $ (775,833)
============ ===============
Basic and diluted earnings per share $ (0.09) $ (0.05)
============ ===============
Weighted average shares outstanding 20,095,306 16,716,528
============ ===============
See notes to the condensed financial statements.
3
SLS International, Inc.
Condensed Statement Of Operations
For The Three Months Ended
September 30,
-------------------------------
2002 2001
------------ ------------
(unaudited)
Revenue $ 161,688 $ 173,783
Cost of sales 123,952 112,629
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Gross profit 37,736 61,154
General and administrative expenses 605,885 280,571
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Loss from operations (568,149) (219,417)
Other income (expense):
Interest expense (5,067) (7,734)
Interest and miscellaneous, net 259 544
------------ ------------
(4,808) (7,190)
------------ ------------
Loss before income tax (572,957) (226,607)
Income tax provision -- --
------------ ------------
Net loss (572,957) (226,607)
Deemed dividend associated with beneficial
conversion feature of preferred stock (180,892) (52,000)
------------ ------------
Net loss available to common shareholders $ (753,849) $ (278,607)
============ ============
Basic and diluted earnings per share $ (0.04) $ (0.01)
============ ============
Weighted average shares outstanding 20,647,195 18,792,125
============ ============
See notes to the condensed financial statements.
4
SLS International, Inc.
Condensed Statement Of Cash Flows
For The Nine Months Ended
September 30,
------------------------------
2002 2001
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(unaudited)
Operating activities:
Net loss $(1,518,309) $ (723,833)
Adjustments to reconcile net income to cash flows
from operating activities:
Depreciation and amortization 11,139 11,628
Amortization of cost of stock issued for services 635,352 --
Change in assets and liabilities-
Accounts receivable, less allowance for doubtful accounts 34,258 (86,676)
Inventory (74,003) (17,155)
Prepaid expenses and other current assets 511 79,168
Accounts payable 162,519 (123,387)
Deferred revenue -- (70,270)
Due to shareholders (2,000) 4,639
Accrued liabilities 21,247 18,813
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Cash used in operating activities (729,286) (907,073)
----------- -----------
Investing activities:
Additions to fixed assets (2,697) (11,886)
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Cash used in investing activities (2,697) (11,886)
----------- -----------
Financing activities:
Sale of common stock 80,500 1,214,000
Sale of preferred stock 565,000 50,000
Borrowing of notes payable 55,000 135,000
Repayments of notes payable (9,146) (478,600)
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Cash provided by financing activities 691,354 920,400
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(Decrease) increase in cash (40,629) 1,441
Cash, beginning of period 48,390 17,658
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Cash, end of period $ 7,761 $ 19,099
=========== ===========
Supplemental cash flow information:
Interest paid $ -- $ --
Income taxes paid (refunded) -- --
Noncash investing activities:
Stock issued and options granted for services $ 1,073,172 $ --
See notes to the condensed financial statements.
5
SLS INTERNATIONAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements at September
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 September 30, 2002 and results of operations
and cash flows for the nine months ended September 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 September
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 nine months ended September 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 September 30, 2002, 101,000 Class A warrants
were exercised for 101,000 shares of common stock for a total of
$50,500. As of September 30, 2002, 2,000 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 September 30, 2002. No Class B warrants have been
exercised as of September 30, 2002.
In the nine months ended September 30, 2002, the Company issued 226,000
shares of preferred stock for $565,000. 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 $550,200 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. $386,118 was amortized to retained
earnings in the nine months ended September 30, 2002. At September 30,
2002, the unamortized beneficial conversion on preferred shares was
$330,776.
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 September 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 $81,862 for the nine months ended September 30, 2002. On September
30, 2002, there was $29,138 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 September 30, 2002 the
shares had not been issued and are therefore recorded 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
7
the date the agreements were signed, the shares were valued at
$237,000. Value of 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 $142,065 for the nine months ended September 30, 2002.
On September 30, 2002 there was $64,935 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 nine months ended September 30, 2002. On
September 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 $34,740 for the nine months
ended September 30, 2002. On September 30, 2002, there was $60,260
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
8
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 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 shown 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 $157,798 for the nine months ended September 30,
2002. On September 30, 2002, there was $192,624 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 $155,000 for the nine months ended September 30, 2002. On
September 30, 2002, there was $0 remaining in unamortized cost of stock
issued for services on the balance sheet.
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. Consulting expense relating to this
agreement was $5,687 for the nine months ended September 30, 2002. On
September 30, 2002, there was $38,063 remaining in unamortized cost of
stock issued for services on the balance sheet.
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. Consulting expense relating to this agreement was $7,200
for the nine months ended September 30, 2002. On September 30, 2002,
there was $52,800 remaining in unamortized cost of stock issued for
services on the balance sheet.
NOTE 5 - SUBSEQUENT EVENTS
From October to December of 2002, the Company issued 89,000 shares of
preferred stock for $222,500.
In February and March of 2003, the Company issued 32,940 shares of
preferred stock for $82,350.
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
shown 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
10
unamortized cost of stock issued for services. Using the Black-Scholes
pricing model, the options were valued at $57,471 and shown 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 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 stock
was 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.
11
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 1,695,000
shares of common stock and 1,000,000 options as part of consulting
agreements. The value of stock issued and options granted totaled
$1,073,172 for the nine months ended September 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 nine months ended September 30, 2002,
$635,352 was amortized into consulting expense. Unamortized cost of
stock issued for Services was $437,820 as of September 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 and other
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 be read together with the financial statements, the
accompanying notes to the financial statements and other sections included in
this report.
13
RESULTS OF OPERATIONS
Quarter ended September 30, 2002 as compared to the quarter ended
September 30, 2001. For the quarter ended September 30, 2002, revenue decreased
to $161,688 from $173,783 in 2001, a 7% decrease. The decrease resulted
primarily from approximately $70,000 in orders that were originally scheduled
for shipment in September being delayed until October. Our gross profit
percentage decreased to approximately 23% in the 2002 period from approximately
35% in the 2001 period, as discussed below. Primarily as a result of an increase
in general and administrative expenses discussed below, our net loss increased
to $572,957 in the third quarter of 2002 as compared to a net loss of $226,607
in the comparable quarter of 2001.
Gross profit percentage worsened compared to the prior-year period,
primarily due to discounted introductory sales that gave us favorable publicity,
and the sale at discounted prices of models that had been used for trade show
demonstrations. We expect to continue to make sales at discounted prices as
similar special circumstances arise, but we expect such sales to constitute a
smaller portion of our sales in most future periods, thereby having less of an
impact on our gross profit percentage.
General and administrative expenses for the 2002 third quarter
increased to $605,885 from $280,571 in the 2001 third quarter, primarily as a
result of $24,953 of bad debt expense (compared to $0 in the 2001 quarter) and
$321,333 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, as well as additional trade shows and travel
expense in the 2002 quarter. During the 2002 third quarter, we also increased
the size of our leased facility, thereby increasing our monthly lease costs,
which will increase our capacity to satisfy the expected growth in revenue.
Interest expense decreased to $5,067 in the 2002 third quarter as
compared to $7,734 in the 2001 third quarter, due to the repayment of loans
resulting in decreased borrowings.
Nine months ended September 30, 2002 as compared to the nine months
ended September 30, 2001. For the first nine months of 2002, revenue increased
to $486,204 from $284,306 in the 2001 period, a 71% increase, resulting
primarily from the expansion of our loudspeaker product line and the growth in
sales of our loudspeakers. Our gross profit percentage decreased to
approximately 34% in the 2002 period from approximately 36% in the 2001 period,
primarily as a result of discounted introductory sales and the sale of
demonstration models, as discussed above, partially offset by our conversion to
in-house manufacturing of our ribbon drivers from our previous outsourcing of
such components. As a result of the increase in general and administrative
expenses, our net loss increased to $1,518,309 in the first nine months of 2002
as compared to a net loss of $723,833 in the first nine months of 2001.
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General and administrative expenses for the first nine months of 2002
increased to $1,667,850 from $792,686 in 2001, primarily as a result of $169,305
of bad debt expense (compared to $0 in the 2001 period); $635,352 of non-cash
cost amortized in the nine-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.
Interest expense decreased to $18,330 in the 2002 period as compared to
$35,033 in the 2001 period, due to the repayment of loans resulting in decreased
borrowings.
FINANCIAL CONDITION
On September 30, 2002, our current liabilities exceeded current assets
by $528,069, compared to $296,734 on December 31, 2001. Total liabilities
exceeded total assets by $499,623, compared to $262,166 on December 31, 2001.
The increased working capital deficit was due primarily to increases in accounts
payable and other increased liabilities incurred from our expanding operations,
and decreases in cash and accounts receivable. These factors were partially
offset by an increase in inventory, funded in large part by the sales of equity
described below, as well as 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; we had $7,761 in cash
on September 30, 2002. However, in October 2002, we raised $100,000 through the
sale of 40,000 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 nine months of 2002 we
sold 226,000 shares of preferred stock for $565,000. In addition, we have
outstanding warrants, which, upon exercise, have provided additional funding of
$50,500 during the first nine months of 2002.
In the first nine months of 2002, we entered into consulting agreements
that required us to issue an aggregate of 1,595,000 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 $1,073,172, $635,352 of which is
reflected as amortized expenses in the first nine months of 2002 and the
remainder of which are to be amortized in subsequent periods over the respective
terms of such agreements. The difference between such total cost and the
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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.
Notes payable increased slightly to $419,815 on September 30, 2002. One
note totaling $7,181 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 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 and have sold our common stock to raise
capital. 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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ITEM 3. CONTROLS AND PROCEDURES.
------------------------
As of October 1, 2002, our Chief Executive Officer and Chief Financial
Officer evaluated the effectiveness of the design and operation of our
disclosure controls and procedures. Based on that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures were effective as of September 30, 2002.
Since October 1, 2002, our independent auditors completed their audit
of our financial statements for the year ended December 31, 2002. As a result of
such audit, we have been required to make restatements and reclassifications of
our unaudited financial statements filed for the quarters ended March 31, June
30 and September 30, 2002. Such restatements and reclassifications call into
question the effectiveness of our disclosure controls and procedures. We are
currently considering enhancements to our controls and procedures.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
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We refer you to Item 1 of our Quarterly Report on Form 10-Q for the
quarter ended June 30, 2002 for a discussion of a claim by Alfred V. Greco filed
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.
In the third quarter of 2002, the parties entered into a settlement agreement
with respect to this matter, and we believe our obligations under such agreement
are not material to the business.
Item 2. Changes in Securities.
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In the quarter ended September 30, 2002, the Company sold 50,000 shares
of preferred stock for $125,000 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 375,000 shares of common stock under consulting
agreements entered into during the quarter ended September 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 sale of stock in the third quarter of 2002
were used for working capital purposes. We did not use any registered securities
broker-dealers in connection with any 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:
Exhibit No. Description of Exhibit
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10.1 Letter Agreement, dated July 17, 2002, between SLS
International, Inc. and Alfred V. Greco PLLC regarding
settlement of Alfred V. Greco v. SLS International, Inc.
10.2 Letter Agreement, dated July 17, 2002, between SLS
International, Inc. and Alfred V. Greco PLLC regarding
services to be provided by Alfred V. Greco PLLC
10.3 Consulting Agreement, dated August 15, 2002, between SLS
International, Inc. and Atlantic Services Ltd.
10.4 Consulting Agreement, dated September 10, 2002, between SLS
International, Inc. and Art Malone Jr.
99.1 Chief Executive Officer and Chief Financial Officer
Certification of Periodic Report (filed as Exhibit 99.1 to
Form 10-QSB filed with the SEC on November 14, 2002)
(b) Reports on Form 8-K. We filed no Reports on Form 8-K during the
quarter ended September 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.
-----------------------
(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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