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 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
(Address of Principal Executive Offices) (Zip Code)
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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 November 1, 2002, 19,160,528 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.
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
Item 3. Controls and Procedures 10
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 11
Signature 12
Certification 13
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 177,232 69,185
Inventory 439,301 250,998
Prepaid expenses and other current assets 1,570 2,081
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Total current assets 625,864 370,654
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Fixed assets:
Vehicles 47,376 47,376
Equipment 53,427 50,731
Leasehold improvements 3,376 3,376
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104,179 101,483
Less accumulated depreciation 75,733 64,594
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Net fixed assets 28,446 36,889
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$ 654,310 $ 407,543
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Liabilities and Shareholders' Deficit
Current liabilities:
Current maturities of long-term debt and notes payable $ 414,815 $ 371,640
Accounts payable 346,386 196,833
Due to shareholders 29,886 31,886
Accrued liabilities 95,749 67,029
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Total current liabilities 886,836 667,388
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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; 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, $.001 par; 75,000,000 shares authorized;
19,160,528 shares and 19,019,528 shares issued at
September 30, 2002 and December 31, 2001 19,161 19,020
Common stock not issued but owed to buyers; 40,000
shares at December 31, 2001 0 40
Contributed capital - common 1,760,824 1,710,425
Retained deficit (3,243,335) (2,271,357)
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Total shareholders' deficit (232,526) (262,166)
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$ 654,310 $ 407,543
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See notes to the condensed financial statements.
1
SLS International, Inc.
Condensed Statements Of Operations
For The Nine Months Ended
September 30,
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2002 2001
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(unaudited)
Revenue $ 486,204 $ 284,306
Cost of sales 193,185 182,512
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Gross profit 293,019 101,794
General and administrative expenses 860,847 792,686
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Loss from operations (567,828) (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 (585,860) (723,833)
Income tax provision -- --
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Net loss (585,860) (723,833)
Deemed dividend associated with beneficial
conversion feature of preferred stock (386,118) (52,000)
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Net loss available to common shareholders $ (971,978) $ (775,833)
============ ============
Basic and diluted earnings per share $ (0.05) $ (0.04)
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Weighted average shares outstanding 19,154,000 16,716,528
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See notes to the condensed financial statements.
2
SLS International, Inc.
Condensed Statement Of Operations
For The Three Months Ended
September 30,
--------------------------------
2002 2001
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(unaudited)
Revenue $ 161,688 $ 173,783
Cost of sales 77,547 112,629
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Gross profit 84,141 61,154
General and administrative expenses 291,099 280,571
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Loss from operations (206,958) (219,417)
Other income (expense):
Interest expense (5,067) (7,734)
Interest and miscellaneous, net 259 544
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(4,808) (7,190)
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Loss before income tax (211,766) (226,607)
Income tax provision -- --
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Net loss (211,766) (226,607)
Deemed dividend associated with beneficial
conversion feature of preferred stock (180,892) (52,000)
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Net loss available to common shareholders $ (392,658) $ (278,607)
============ ============
Basic and diluted earnings per share $ (0.02) $ (0.01)
============ ============
Weighted average shares outstanding 19,160,528 18,792,125
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See notes to the condensed financial statements.
3
SLS International, Inc.
Condensed Statement Of Cash Flows
For The Nine Months Ended
September 30,
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2002 2001
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(unaudited)
Operating activities:
Net loss $(585,860) $ (723,833)
Adjustments to reconcile net income to cash flows
from operating activities:
Depreciation and amortization 11,139 11,628
Change in assets and liabilities-
Accounts receivable (108,047) (86,676)
Inventory (188,303) (17,155)
Prepaid expenses and other current assets 511 79,168
Accounts payable 149,553 (123,387)
Deferred revenue 0 (70,270)
Due to shareholders (2,000) 4,639
Accrued liabilities 28,721 18,813
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Cash used in operating activities (694,286) (907,073)
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Investing activities:
Additions to fixed assets (2,697) (11,886)
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Cash used in investing activities (2,697) (11,886)
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Financing activities:
Sale of common stock 50,500 1,214,000
Sale of preferred stock 565,000 50,000
Borrowing of notes payable 50,000 135,000
Repayments of notes payable (9,146) (478,600)
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Cash provided by financing activities 656,354 920,400
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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 $ 0 $ 0
Income taxes paid (refunded) 0 0
See notes to the condensed financial statements.
4
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 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 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 in the United States 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% 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
February 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 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 September 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 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.
NOTE 5 -- SUBSEQUENT EVENTS
In October of 2002, the Company issued 40,000 shares of preferred stock
for $100,000.
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 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.
7
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 increased to approximately 52% in the 2002 period from approximately
35% 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 improvement in gross profits, partially offset by
an increase in general and administrative expense discussed below, our net loss
decreased to $211,766 in the third quarter of 2002 as compared to a net loss of
$226,607 in the comparable quarter of 2001.
Despite the improvement in gross profit percentage over the prior-year
period, the third quarter's gross profit percentage was lower than in the first
two quarters of the year, 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 expense for the 2002 third quarter increased
to $291,099 from $280,571 in the 2001 third quarter, primarily as a result of
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 2001, 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 increased to approximately 60% in the
2002 period from approximately 36% 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 $585,860 in the first
nine months of 2002 as compared to a net loss of $723,833 in the first nine
months of 2001.
General and administrative expense for the first nine months of 2002
increased to $860,847 from $792,686 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 $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.
8
FINANCIAL CONDITION
On September 30, 2002, our current liabilities exceeded current assets
by $260,972, compared to $296,734 on December 31, 2001. Total liabilities
exceeded total assets by $232,526, 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.
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.
Notes payable increased slightly to $414,815 on September 30, 2002. Two
notes totaling $7,181 are secured with equipment, and borrowings 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.
Our net loss in each quarter this year has been less than the net loss
in the comparable quarter of the prior year, due to improvements in gross profit
percentage and, in the first two quarters of the year, increases in revenue. The
net loss improvement continued in the third quarter of this year, compared to
the prior year, despite a 7% decrease in sales caused primarily by a delay in
shipment of certain orders as discussed above. We expect our revenue to grow
rapidly, as our marketing initiatives continue to take effect. Further, we
expect that our profit margin, already at approximately 60%, will improve as our
revenue increases. At the end of the second quarter of 2002, we forecasted to
report a profit in the fourth quarter of 2002. For the reasons stated above, we
expect significant improvements in both our revenue and our net loss in the
fourth quarter of 2002, but we now believe that a profit in the fourth quarter
of 2002 is unlikely, although we may be able to become profitable on a monthly
basis in December 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.
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. There have been
no significant changes in the Company's internal controls or in other factors
that could significantly affect internal controls subsequent to September 30,
2002.
10
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
---------------------------
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 issued 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 issuances were made in reliance on
Section 4(2) of the Securities Act of 1933, as amended.
The net proceeds from the sale of preferred 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 exercises of the Warrants or
sales of preferred 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
----------- ----------------------
99.1 Chief Executive Officer and Chief Financial
Officer Certification of Periodic Report
(b) Reports on Form 8-K. We filed no Reports on Form 8-K during the
quarter ended September 30, 2002.
11
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: November 14, 2002 By /s/ John Gott
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John Gott
President and
Chief Financial Officer
(Principal Financial Officer)
12
CERTIFICATIONS
I, John Gott, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of SLS
International, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a -14 and 15d-14)
for the registrant and have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior
to the filing date of this quarterly report (the
"Evaluation Date"); and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role
in the registrant's internal controls; and
13
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of
our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
/s/ John Gott
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John Gott, Chief Executive Officer and Chief Financial Officer
November 14, 2002
14