SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(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 Offic (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 [_]
On August 1, 2002, 19,160,528 shares of SLS International, Inc. common stock
were outstanding.
Transitional Small Business Disclosure Format (check one):
Yes No x
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SLS INTERNATIONAL, INC.
INDEX
PART I. FINANCIAL INFORMATION
Page No.
Item 1. Financial Statements
Condensed Balance Sheet 1
Condensed Statements of Operations 2
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 7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 11
Item 2. Changes in Securities and Use of Proceeds 11
Item 6. Exhibits and Reports on Form 8-K 12
Signature 13
i
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
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SLS International, Inc.
Condensed Balance Sheet
June 30, December 31,
2002 2001
----------- -----------
(unaudited) (audited)
Assets
Current assets:
Cash $ 0 $ 48,390
Accounts receivable 214,862 69,185
Inventory 366,935 250,998
Prepaid expenses and other current assets 1,570 2,081
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Total current assets 583,367 370,654
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Fixed assets:
Vehicles 47,376 47,376
Equipment 50,731 50,731
Leasehold improvements 3,376 3,376
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101,483 101,483
Less accumulated depreciation 71,886 64,594
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Net fixed assets 29,597 36,889
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$ 612,964 $ 407,543
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Liabilities and Shareholders' Deficit
Current liabilities:
Current maturities of long-term debt and notes payable $ 414,325 $ 371,640
Accounts payable 231,788 196,833
Due to shareholders 29,886 31,886
Accrued liabilities 82,726 67,029
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Total current liabilities 758,725 667,388
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Long-term debt, less current maturities 0 2,321
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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, $.001 par; 75,000,000 shares authorized;
19,160,528 shares and 19,019,528 shares issued at
June 30, 2002 and December 31, 2001 19,161 19,020
Common stock not issued but owed to buyers; 40,000
shares at December 31, 2001 0 40
Contributed capital - common 1,760,824 1,710,425
Retained deficit (2,850,678) (2,271,357)
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Total shareholders' deficit (145,761) (262,166)
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$ 612,964 $ 407,543
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The accompanying notes are an integral part of these condensed financial
statements.
1
SLS International, Inc.
Condensed Statement Of Operations
For The Six Months Ended
June 30,
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2002 2001
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(unaudited)
Revenue $ 324,516 $ 110,523
Cost of sales 115,638 69,883
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Gross profit 208,878 40,640
General and administrative expenses 569,748 512,115
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Loss from operations (360,870) (471,475)
Other income (expense):
Interest expense (13,263) (27,299)
Interest and miscellaneous, net 38 1,548
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(13,225) (25,751)
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Loss before income tax (374,095) (497,226)
Income tax provision 0 0
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Net loss (374,095) (497,226)
Deemed dividend associated with beneficial
conversion feature of preferred stock (205,226) 0
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Net loss available to common shareholders $ (579,321) $ (497,226)
============ ============
Basic and diluted earnings per share $ (0.03) $ (0.03)
============ ============
Weighted average shares outstanding 19,151,000 15,677,000
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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
June 30,
-----------------------------
2002 2001
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(unaudited)
Revenue $ 189,330 $ 70,775
Cost of sales 64,262 48,562
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Gross profit 125,068 22,213
General and administrative expenses 260,407 302,186
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Loss from operations (135,339) (279,973)
Other income (expense):
Interest expense (6,830) (12,678)
Interest and miscellaneous, net 30 1,542
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(6,800) (11,136)
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Loss before income tax (142,139) (291,109)
Income tax provision 0 0
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Net loss (142,139) (291,109)
Deemed dividend associated with beneficial
conversion feature of preferred stock (136,461) 0
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Net loss available to common shareholders $ (278,600) $ (291,109)
============ ============
Basic and diluted earnings per share $ (0.01) $ (0.02)
============ ============
Weighted average shares outstanding 19,160,000 17,082,000
============ ============
The accompanying notes are an integral part of these condensed financial
statements.
3
SLS International, Inc.
Condensed Statement Of Cash Flows
For The Six Months Ended
June 30,
--------------------------
2002 2001
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(unaudited)
Operating activities:
Net loss $ (374,095) $ (497,226)
Adjustments to reconcile net income to cash flows
from operating activities:
Depreciation and amortization 7,292 7,621
Change in assets and liabilities-
Accounts receivable (145,677) (44,645)
Inventory (115,937) (2,614)
Prepaid expenses and other current assets 511 79,168
Accounts payable 34,954 (93,329)
Due to shareholders (2,000) 3,820
Accrued liabilities 15,698 8,945
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Cash used in operating activities (579,254) (538,260)
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Investing activities:
Additions to fixed assets 0 (9,257)
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Cash used in investing activities 0 (9,257)
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Financing activities:
Sale of common stock 50,500 1,052,000
Sale of preferred stock 440,000 0
Borrowing of notes payable 50,000 135,000
Repayments of notes payable (9,636) (422,325)
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Cash provided by financing activities 530,864 764,675
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(Decrease) increase in cash (48,390) 217,158
Cash, beginning of period 48,390 17,657
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Cash, end of period $ 0 $ 234,815
=========== ===========
Supplemental cash flow information:
Interest paid $ 0 $ 0
Income taxes paid 0 0
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 June 30,
2002 have been prepared in accordance with generally accepted
accounting principles in the United States 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 in the United States 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% with maturity periods of
six months. The notes have matured and are now demand notes.
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, 2002 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 share. The warrants are detachable from the common stock but
are not separable from each other until the Class A warrant is
exercised.
5
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.
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.
NOTE 5 - SUBSEQUENT EVENTS
In July of 2002, the Company issued 24,000 shares of preferred stock
for $60,000.
6
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 be read
together with the financial statements, the accompanying notes to the financial
statements and other sections included in this report.
7
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 168% 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 66% 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. As a result of the revenue increase and the
improvement in gross profits, as well as a $41,779 decrease in general and
administrative expense, our net loss decreased to $142,139 in the first quarter
of 2002 as compared to a net loss of $291,109 in the comparable quarter of 2001.
General and administrative expense for the 2002 second quarter
decreased to $260,407 from $302,186 in the 2001 second quarter, primarily as a
result of expenses for trade shows and greater advertising expenses incurred in
2001.
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 194% 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 64% 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. As a result of the revenue increase and the
improvement in gross profits, our net loss decreased to $374,095 in the first
half of 2002 as compared to a net loss of $497,226 in the first half of 2001.
General and administrative expense for the first six months of 2002
increased to $569,748 from $512,115 in 2001, primarily as a result of the hiring
of a sales manager and consulting expenses incurred for investor relations and
public relations.
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
$175,358, compared to $296,734 on December 31, 2001. Total liabilities exceeded
total assets by $145,761, compared to $262,166 on December 31, 2001. The
decreased working capital deficit was due primarily to an increase in accounts
receivable and inventory, funded in large part by the sales of equity described
below and increased sales, as well as increases in accounts payable and accrued
liabilities, partially offset by a decrease in cash, increased accounts payable
and other increased liabilities incurred from our expanding operations.
8
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, and we had $214,862 in accounts receivable
on June 30,2002, which we have been collecting in the ordinary course of
business. 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.
Long-term notes payable increased slightly to $414,325 on March 31,
2002. Two notes totaling $16,328 are secured with equipment and borrowings from
individuals are unsecured and mature 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.
We expect our revenue to grow rapidly in the next few quarters, as our
marketing initiatives continue to take effect. In the second quarter of 2002, a
Korean distributor committed to purchase $1,000,000 in products over the next
twelve months. Also, our sales representatives are reporting exceptional
response from our customers, resulting in increases in product orders.
Accordingly, we have increased production to accommodate the anticipated growth.
Further, we expect that our profit margin, already at approximately 65%, will
improve as our revenue increases. Taking into account all of these factors, we
currently forecast to report a profit in the fourth quarter of 2002.
9
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.
10
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, we issued an aggregate of 4,000 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 $2,000.
In the quarter ended June 30, 2002, the Company issued 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 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 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 preferred stock. All of the
foregoing uses of proceeds were direct or indirect payments to nonaffiliates.
11
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:
99.1 Certification of Periodic Report
(b) Reports on Form 8-K.
We filed no Reports on Form 8-K during the quarter ended June
30, 2002.
12
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: August 14, 2002 By /s/ John Gott
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John Gott
President and
Chief Financial Officer
(Principal Financial Officer)
13