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, 2003
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.
(Exact Name of Small Business Issuer as Specified in its Charter)
Delaware 52-2258371
(State of Incorporation) (IRS Employer Identification No.)
3119 South Scenic
Springfield, Missouri 65807
(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number, Including Area Code: (417) 883-4549
N/A
------------------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required
to be filed by Section 12, 13 or 15(d) of the Exchange Act after the
distribution of securities under a plan confirmed by a court. N/A Yes |_| No |_|
On August 6, 2003, 24,114,528 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 3
Notes to Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 3. Controls and Procedures 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities and Use of Proceeds 16
Item 6. Exhibits and Reports on Form 8-K 16
Signature 17
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
SLS International, Inc.
Condensed Balance Sheet
June 30, December 31,
2003 2002
------------------ -----------------
(unaudited) (audited)
Assets
Current assets:
Cash $ 105,356 $ 4,240
Accounts receivable, less allowance for doubtful accounts of
$87,841 for June 30, 2003 and $132,396 for December 31, 2002 73,135 165,024
Inventory 431,025 261,573
Prepaid expenses and other current assets 3,857 6,936
------------------ -----------------
Total current assets 613,373 437,773
------------------ -----------------
Fixed assets:
Vehicles 31,026 31,026
Equipment 55,083 55,083
Leasehold improvements 3,376 3,376
------------------ -----------------
89,485 89,485
Less accumulated depreciation 68,668 63,261
------------------ -----------------
Net fixed assets 20,817 26,224
------------------ -----------------
$ 634,190 $ 463,997
================== =================
Liabilities and Shareholders' Deficit
Current liabilities:
Current maturities of long-term debt and notes payable $ 502,772 $ 414,720
Accounts payable 494,729 417,449
Due to shareholders 22,674 23,193
Accrued liabilities 193,723 170,897
------------------ -----------------
Total current liabilities 1,213,898 1,026,259
------------------ -----------------
Commitments and contingencies:
Shareholders' deficit:
Preferred stock not issued but owed to buyers, $.001 par,
5,000,000 shares authorized; 287,640 and 315,000 shares
at June 30, 2003 and December 31, 2002 288 315
Discount on preferred stock (173,306) (233,294)
Contributed capital - preferred 2,376,204 1,852,183
Common stock, $.001 par; 75,000,000 shares authorized;
23,193,528 shares and 21,453,528 shares issued at
June 30, 2003 and December 31, 2002 23,194 21,454
Common stock not issued but owed to buyers; 1,542,000 shares and
'1,222,000 shares at June 30, 2003 and December 31, 2002 1,542 1,222
Contributed capital - common 3,500,874 3,386,624
Unamortized cost of stock issued for services (174,448) (524,984)
Retained deficit (6,134,056) (5,065,782)
------------------ -----------------
Total shareholders' deficit (579,708) (562,262)
------------------ -----------------
$ 634,190 $ 463,997
================== =================
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,
--------------------------------------
2003 2002
------------------ -----------------
(unaudited)
Revenue $ 382,021 $ 324,516
Cost of sales 155,561 194,679
------------------ -----------------
Gross profit 226,460 129,837
General and administrative expenses 1,108,535 1,061,965
------------------ -----------------
Loss from operations (882,075) (932,128)
Other income (expense):
Interest expense (14,578) (13,263)
Interest and miscellaneous, net 40,938 38
------------------ -----------------
26,359 (13,225)
------------------ -----------------
Loss before income tax (855,716) (945,353)
Income tax provision - -
------------------ -----------------
Net loss (855,716) (945,353)
------------------ -----------------
Deemed dividend associated with beneficial conversion
of preferred stock (212,558) (205,226)
------------------ -----------------
Net loss availiable to common shareholders $ (1,068,274) $ (1,150,579)
================== =================
Basic and diluted earnings per share $ (0.04) $ (0.06)
================== =================
Weighted average shares outstanding 23,885,528 19,819,361
================== =================
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,
--------------------------------------
2003 2002
------------------ -----------------
(unaudited)
Revenue $ 277,244 $ 189,330
Cost of sales 98,125 109,568
------------------ -----------------
Gross profit 179,119 79,762
General and administrative expenses 606,386 563,468
------------------ -----------------
Loss from operations (427,267) (483,706)
Other income (expense):
Interest expense (6,941) (6,830)
Interest and miscellaneous, net 32,938 30
------------------ -----------------
25,996 (6,800)
------------------ -----------------
Loss before income tax (401,271) (490,506)
Income tax provision - -
------------------ -----------------
Net loss (401,271) (490,506)
------------------ -----------------
Deemed dividend associated with beneficial conversion
of preferred stock (79,280) (135,461)
------------------ -----------------
Net loss availiable to common shareholders $ (480,551) $ (625,967)
================== =================
Basic and diluted earnings per share $ (0.02) $ (0.03)
================== =================
Weighted average shares outstanding 24,535,528 20,047,195
================== =================
The accompanying notes are an integral part
of these condensed financial statements.
SLS International, Inc.
Condensed Statement Of Cash Flows
For The Six Months Ended
June 30,
--------------------------------------
2003 2002
------------------ -----------------
(unaudited)
Operating activities:
Net loss $ (855,716) $ (945,353)
Adjustments to reconcile net income to cash flows
from operating activities:
Depreciation and amortization 5,407 7,292
Amortization of cost of stock issued for services 443,536 314,019
Expenses of employee stock options granted 23,134 -
Change in assets and liabilities-
Accounts receivable, less allowance for doubtful accounts 91,889 (28,325)
Inventory (169,452) (47,937)
Prepaid expenses and other current assets 3,079 511
Accounts payable 77,280 71,841
Due to shareholders (519) (2,000)
Accrued liabilities 22,826 15,698
------------------ -----------------
Cash used in operating activities (358,536) (614,254)
------------------ -----------------
Financing activities:
Sale of stock 371,600 525,500
Borrowing of notes payable 102,000 50,000
Repayments of notes payable (13,948) (9,636)
------------------ -----------------
Cash provided by financing activities 459,652 565,864
------------------ -----------------
Increase (decrease) in cash 101,116 (48,390)
Cash, beginning of period 4,240 48,390
------------------ -----------------
Cash, end of period $ 105,356 $ -
================== =================
Supplemental cash flow information:
Interest paid $ 6,027 $ -
Income taxes paid (refunded) - -
Noncash investing activities:
Stock issued and options granted for services $ 93,000 $ 925,422
The accompanying notes are an integral part of
these condensed financial statements.
3
SLS INTERNATIONAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
Note 1 - Basis of Presentation
The accompanying unaudited condensed financial statements at June 30,
2003 have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-QSB and reflect all adjustments which, in the
opinion of management, are necessary for a fair presentation of
financial positions as of June 30, 2003 and results of operations and
cash flows for the six months ended June 30, 2003. 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 2002 financial statements have
been reclassified to conform to the 2003 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, 2002.
Note 2 - Commitments and Contingencies
Going Concern
The accompanying unaudited condensed financial statements at June 30,
2003 have been prepared in conformity with generally accepted
accounting principles which contemplate the continuance of the Company
as a going concern. The Company has suffered losses from operations
during the six months ended June 30, 2003 and the years ended December
31, 2002, 2001, 2000, and 1999. The Company's cash position may be
inadequate to pay all of the costs associated with establishing a
market for sales of its 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 range from 5% to 10% and all are
past due or 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, 2004 and are exercisable at a price of $.50 per share. The
Class B warrants expire on August 4, 2004 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.
4
From January 1, 2003 to June 30, 2003, no Class A warrants were
exercised. As of June 30, 2003, 2,000 shares of common stock purchased
through the exercise of the A warrants in the year ended December 31,
2002 had not been issued and therefore are shown on the balance sheet
as common stock not issued but owed to buyers. 3,111,000 Class A
warrants are outstanding as of June 30, 2003. No Class B warrants have
been exercised as of June 30, 2003.
In the six months ended June 30, 2003, the Company sold 148,640 shares
of preferred stock for $371,600. 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 $152,570 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. $212,558 was amortized to retained
earnings in the six months ended June 30, 2003. At June 30, 2003, the
unamortized beneficial conversion on preferred shares was $173,306.
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.
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 $1,388 for the six
months ended June 30, 2003. On June 30, 2003, there was $0 remaining in
unamortized cost of stock issued for services on the balance sheet.
In January of 2002, three agreements were signed for consulting
services to be performed. The agreements paid 300,000 shares to the
consultants in exchange for $3,000, an executed note receivable for
$27,000, and services to be rendered. As of March 31, 2003, 200,000 of
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. Using
the market value on 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 $8,790 for the six months ended June
30, 2003. On June 30, 2003 there was $0 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
5
100,000 shares on April 9, 2002. Using the market value on the date the
agreement was signed, the shares were valued at $51,000 and recorded as
a debit in the equity section of the balance sheet as unamortized cost
of stock given for services. On May 2, 2002, the Company terminated the
agreement. Upon termination of the agreement all unamortized costs were
amortized as consulting expense.
In April of 2002, an agreement was signed with Muir, Crane, & Co. for
consulting services to be performed April 2, 2002 to April 2, 2003. As
compensation for consulting services the Company agreed to pay a
retainer of $4,000 per month and issue 200,000 shares of common stock.
100,000 shares were issued on April 9, 2002 and 100,000 shares were
issued on July 18, 2002. Using the market value on the date the
agreement was signed, the shares were valued at $95,000 and recorded as
a debit in the equity section of the balance sheet as unamortized cost
of stock issued for services. At December 31, 2002, the consulting
agreement had been terminated and all costs were amortized.
In April of 2002, an agreement was signed with Sam Hamra for consulting
services to be performed April 18, 2002 to April 18, 2003. As
compensation for consulting services the Company agreed to issue 70,000
shares of common stock. 70,000 shares of common stock were issued on
April 18, 2002. Using the market value on the date the agreement was
signed, the shares were valued at $39,200 and recorded as a debit in
the equity section 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
6
$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.
In June of 2002, an agreement was signed with Liquid Solutions Corp.
for consulting services to be performed June 10, 2002 to September 10,
2002. As compensation for consulting services the Company agreed to
issue 500,000 shares of common stock. 500,000 shares of common stock
were issued on June 19, 2002. Using the market value on the date the
agreement was signed, the shares were valued at $155,000 and recorded
as a debit in the equity section of the balance sheet as unamortized
cost of stock issued for services. The expense will be amortized over
the three months of the agreement.
In August of 2002, an agreement was signed with Atlantic Services,
Ltd., a foreign corporation based in Costa Rica, for consulting
services to be performed August 15, 2002 to August 15, 2003. As
compensation for consulting services the Company agreed to issue
125,000 shares of common stock. 125,000 shares of common stock were
issued on August 15, 2002. Using the market value on the date the
agreement was signed, the shares were valued at $43,750 and recorded as
a debit in the equity section of the balance sheet as unamortized cost
of stock issued for services. The expense will be amortized over the
one year period of the agreement. Consulting expense relating to this
agreement was $21,874 for the six months ended June 30, 2003. On June
30, 2003, there was $5,251 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,
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 March
31, 2003 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 $22,800 for the six
months ended June 30, 2003. On June 30, 2003, there was $0 remaining in
unamortized cost of stock issued for services on the balance sheet.
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
7
balance sheet as unamortized cost of stock issued for services. Using
the Black-Scholes pricing model, the options were valued at $57,471 and
recorded as a debit in the equity section of the balance sheet as
unamortized cost of stock issued for services. All costs will be
amortized over the one year period of the agreement. Consulting expense
relating to this agreement was $48,236 for the six months ended June
30, 2003. On June 30, 2003, there was $31,225 remaining in unamortized
cost of stock issued for services on the balance sheet.
In October of 2002, an agreement was signed with Larry Stessel of Titan
Entertainment Group for consulting services to be performed November 5,
2002 to November 5, 2003. As compensation for consulting services the
Company agreed to issue 100,000 shares of common stock and 250,000
options for 250,000 shares of common stock. The options have a strike
price of $.30 and expire ten years from date of issuance. 100,000
shares of common stock were issued on November 5, 2002. Using the
market value on the date the agreement was signed, the shares were
valued at $39,000 and recorded as a debit in the equity section of the
balance sheet as unamortized cost of stock issued for services. Using
the Black-Scholes pricing model, the options were valued at $57,471 and
recorded as a debit in the equity section of the balance sheet as
unamortized cost of stock issued for services. All costs will be
amortized over the one year period of the agreement. Consulting expense
relating to this agreement was $48,236 for the six months ended June
30, 2003. On June 30, 2003, there was $31,225 remaining in unamortized
cost of stock issued for services on the balance sheet.
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
8
of the balance sheet as unamortized cost of stock issued for services.
Using the Black-Scholes pricing model, the options were valued at
$99,099 and recorded as a credit to additional paid in capital - common
stock and a debit in the equity section of the balance sheet as
unamortized cost of stock issued for services. The cost will be
amortized over the six month period of the agreement. Consulting
expense relating to this agreement was $191,292 for the six months
ended June 30, 2003. On June 30, 2003, there was $0 remaining in
unamortized cost of stock issued for services on the balance sheet.
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. Consulting
expense relating to this agreement was $60,000 for the six months ended
June 30, 2003. On June 30, 2003, there was $54,667 remaining in
unamortized cost of stock issued for services on the balance sheet.
In February 2003, an agreement was signed with Tom Puccio for
consulting services to be performed February 25, 2003 to August 25,
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 February 25, 2003. Using the market value of the date
the agreement was signed, the shares were valued at $93,000 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 six month period of the agreement. Consulting
expense relating to this agreement was $40,920 for the six months ended
June 30, 2003. On June 30, 2003, there was $52,080 remaining in
unamortized cost of stock issued for services on the balance sheet.
In the six months ended June 30, 2003, 176,000 shares of preferred
stock were converted into 1,760,000 shares of common stock. 420,000
shares were issued in February of 2003. The remaining 1,340,000 shares
were unissued at June 30, 2003 and are therefore shown in common stock
not issued but owed to buyers.
Note 5 - Subsequent Events
In July 2003, 24,000 shares of preferred stock were converted into
240,000 shares of common stock.
In August 2003, the expiration dates on the Class A and Class B
warrants were extended to February 4, 2004.
9
From July 1 through August 13, 2003, 1,082,000 Class A warrants were
exercised for 1,082,000 shares of common stock for a total of $541,000.
In July 2003, 1,221,660 shares of preferred stock were sold for
$3,054,150.
On July 31, 2003 the preferred stock offering was closed.
In July 2003, the Company entered into an endorsement agreement with
Steerpike Ltd. The agreement grants 1,000,000 options in exchange for
future endorsements of SLS products. Each option is convertible into
one share of common stock at a strike price of $0.25. Expense
associated with the options will be recorded over the two year period
of the agreement beginning July 31, 2003 and ending July 31, 2005.
Expense will be recorded at fair market value on an accelerated method
in accordance with Interpretation 28.
Note 6 - Unamortized Cost of Stock issued for Services
As detailed in Note 4, the Company issued or agreed to issue 2,795,000
shares of common stock and 1,500,000 options as part of consulting
agreements in the year ended December 31, 2002 and the six months ended
June 30, 2003. The value of stock issued and options granted totaled
$1,692,213 for the period of January 1, 2002 through June 30, 2003.
This cost is recorded as a debit in the equity section of the balance
sheet as unamortized cost of stock issued for services. The balance
will be amortized into consulting expense over the lives of the various
consulting agreements. $1,074,229 for the year ended December 31, 2002
and $443,536 for the six months ended June 30, 2003, was amortized into
consulting expense for those periods. Unamortized cost of stock issued
for services was $174,448 as of June 30, 2003.
Note 7 - Related Party Transactions
On January 18, 2002, the Company borrowed $5,000 from a friend of the
president of the Company. The note is a demand note and bears interest
at 7%. Monthly interest payments totaling $175 have been paid in the
six months ended June 30, 2003. The note was paid in full on June 17,
2003. The note balance on June 30, 2003 was $0.
On November 13, 2002, the Company borrowed $50,000 from a friend of the
president of the Company. The note is a demand note and bears interest
at 10%. Monthly interest payments totaling $2,714 have been paid in the
six months ended June 30, 2003. The note balance on June 30, 2003 was
$50,000. The note was paid in full on July 18, 2003.
10
Note 8 - Employee Stock Options
During the second quarter of 2003, the Company adopted the fair value
recognition provisions of FASB Statement No. 123, Accounting for
Stock-Based Compensation, effective as of the beginning of the year.
There have been no previous granting of options to employees and
therefore this adoption has no effect on previous financial statements.
No method of reporting the change in accounting principle has been
used.
The board of directors approved 145,000 options for employees and
directors in the quarter ended June 30, 2003. The options vested
immediately. 10,000 options were approved for each of three board
members for their roles as directors of the company. 115,000 options
were approved for employees of the Company for services rendered. Using
the black-scholes pricing model, in accordance with the fair value
recognition provision of FASB Statement No. 123, the options were
valued at $23,134 and recorded as compensation expense in the six
months ended June 30, 2003.
11
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 new
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 of 2001 we finished the development of
our PRD1000 Ribbon Driver and began implementing them into our Professional
Line. Our PRD drivers upgraded the previous drivers that we purchased from
third-party manufacturers and the cost to us is approximately one-sixth of the
price that we had been paying for the previous drivers.
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.
12
RESULTS OF OPERATIONS
Quarter ended June 30, 2003 as compared to the quarter ended June 30,
2002. For the quarter ended June 30, 2003, revenue increased to $277,244 from
$189,330 in 2002, a 46% 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 65% in the 2003 period
from approximately 42% in the 2002 period, primarily as a result of continued
improvement in efficiency as we increase revenue and increased sales of our
higher-margin Line Array models. Due to the revenue increase and the improvement
in gross profits, partially offset by an increase in general and administrative
expenses, our net loss decreased to $401,271 in the second quarter of 2003 as
compared to a net loss of $490,506 in the comparable quarter of 2002.
General and administrative expenses for the 2003 second quarter
increased to $606,386 from $563,468 in the 2002 second quarter, primarily as a
result of a non-cash charge of $23,134 related to the issuance of employee stock
options.
Other income increased to $25,996 in the 2003 second quarter as
compared to other expense of $6,800 in the 2002 second quarter, primarily due to
old account payable written off in the period.
Six months ended June 30, 2003 as compared to the six months ended June
30, 2002. For the first six months of 2003, revenue increased to $382,021 from
$324,516 in 2002, an 18% 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 59% in the 2003 period
from approximately 40% in the 2002 period, primarily as a result of continued
improvement in efficiency as we increase revenue and increased sales of our
higher-margin Line Array models. Due primarily to the revenue increase and the
improvement in gross profits, our net loss decreased to $855,716 in the first
half of 2003 as compared to a net loss of $945,353 in the first half of 2002.
General and administrative expenses for the first six months of 2003
increased to $1,108,535 from $1,061,965 in 2002, primarily as a result of a
non-cash charge of $23,134 related to the issuance of employee stock options.
Other income increased to $26,359 in the 2003 period as compared to
other expense of $13,225 in the 2002 period, primarily due to old account
payable written off in the period.
FINANCIAL CONDITION
On June 30, 2003, our current liabilities exceeded current assets by
$600,525, compared to $588,486, on December 31, 2002. Total liabilities exceeded
total assets by $579,708, compared to $562,262 on December 31, 2002. The
increased working capital deficit was primarily due to a reduction in accounts
receivable of $91,889, a $77,280 increase in accounts payable and an increase of
$88,052 in current maturities of long-term debt and notes payable, partially
offset by increases of $169,452 in inventory and $101,116 in cash. On June 30,
2003, we had a backlog of orders of approximately $80,000.
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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 had been experiencing significant cash shortages; we had $105,356 in
cash on June 30, 2003. In order to continue operations, we have been dependent
on raising additional funds and have continued to sell preferred stock in the
beginning of 2003 to raise capital. In the second quarter of 2003 we sold
preferred stock for $289,250. In July 2003, we sold 1,221,660 shares of
preferred stock for a total of $3,054,150. These sales completed our preferred
stock private placement that commenced in September 2001 and substantially
alleviated our cash shortages in the near-term.
Long-term debt and notes payable increased to $502,772 on June 30,
2003. One note totaling $1,517 that was secured with equipment has been repaid;
and most of the remaining borrowings are from individuals, are unsecured and
matured in the first quarter of 2002 or are demand notes. However, these notes
are payable to existing shareholders that are not making a demand on the notes
and will continue to accrue interest at 5% or 7%, as applicable (10% in the case
of one note with a principal amount of $50,000) 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 we have been able to raise money buy
the issuance of preferred stock and common stock. We intend to continue to do so
as needed. However, we cannot be certain that we will continue to be able to
successfully obtain such financing. If we fail to do so, we may be unable to
continue as a viable business.
In July 2003, we agreed to lease an additional 7,500 square feet of
space for $2,000 per month. We are planning the build-out of this space, which
we intend to use for additional inventory space for the components and cabinets
needed for (a) planned increases in production, (b) additional engineering
testing space to perform critical tests and produce data for sound system
designers to provide specifications for products, and (c) on-site product
demonstrations. We anticipate that this additional space, together with our
existing space, will be sufficient to meet our needs for projected sales levels
for the next two to three years.
Effective as of May 2003, we orally agreed upon an endorsement
arrangement with Gordon Sumner, p/k/a Sting, one of the world's most popular
music entertainers. Our agreements with his companies, Steerpike Inc. and
Steerpike (Overseas) Ltd., signed in July 2003, provide that Sting will endorse
our products for a period of two years. The endorsement includes our use of his
photographs with our products, as well as his comments about our products. Our
products will be installed in his home and may be used in his upcoming world
tour. For the endorsement, we issued options to purchase 1,000,000 shares of our
common stock at $0.25 per share, the market value of our common stock when the
agreement was verbally made.
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FORWARD LOOKING INFORMATION
This report, as well as our other reports filed with the SEC and our
press releases and other communications, contain forward-looking statements made
pursuant to the safe harbor provisions of the Securities Litigation Reform Act
of 1995. Forward-looking statements include all statements regarding our
expected financial position, results of operations, cash flows, dividends,
financing plans, strategy, budgets, capital and other expenditures, competitive
positions, growth opportunities, benefits from new technology, plans and
objectives of management, and markets for stock. These forward-looking
statements are based largely on our expectations and, like any other business,
are subject to a number of risks and uncertainties, many of which are beyond our
control. The risks include those stated in the "Risk Factors" section of our
Annual Report on Form 10-KSB and economic, competitive and other factors
affecting our operations, markets, products and services, expansion strategies
and other factors discussed elsewhere in this report, our Annual Report on Form
10-KSB and the other documents we have filed with the Securities and Exchange
Commission. In light of these risks and uncertainties, there can be no assurance
that the forward-looking information contained in this report will in fact prove
accurate, and our actual results may differ materially from the forward-looking
statements.
ITEM 3. CONTROLS AND PROCEDURES.
As of July 1, 2003, 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 June 30, 2003.
As a result of the audit of our financial statements for the year ended
December 31, 2002, we were 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.
Please refer to Item 1 of our Form 10-QSB/A filed May 21, 2003 for the
quarter ended September 30, 2002 for a description of the settlement of certain
litigation with Alfred V. Greco PLLC. On July 10, 2003, the Company and Alfred
V. Greco PLLC amended the settlement agreement referred to in Item 1 of such
Form 10-QSB/A. We believe our obligations under such settlement agreement, as
amended, are not material to the business.
Item 2. Changes in Securities.
In the quarter ended June 30, 2003, the Company sold 115,700 shares of
preferred stock for $289,250 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.
The net proceeds from the sale of preferred stock in the first quarter
of 2003 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.
(a) Exhibits. The following are being filed as exhibits to this
Report: Exhibit No. Description of Exhibit
10.1 Option Agreement, dated as of May 19, 2003, between
the Company and Steerpike (Overseas) Ltd.
10.2 Letter Agreement, dated as of May 19, 2003, between
the Company and Steerpike (Overseas) Ltd.
10.3 Letter Agreement, dated as of May 19, 2003, between
the Company and Steerpike Inc.
10.4 Letter Agreement, dated as of July 10, 2003, between
the Company and Alfred V. Greco PLLC, amending prior
letter agreement, dated July 17, 2002, concerning the
settlement of certain litigation between such parties
31.1 Chief Executive Officer and Chief Financial Officer
Certification of Periodic Report pursuant to
Section 302
32.1 Chief Executive Officer and Chief Financial Officer
Certification of Periodic Report pursuant to
Section 906
(b) Reports on Form 8-K. We filed no Reports on Form 8-K during the
quarter ended June 30, 2003.
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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: August 14, 2003 By /s/ John Gott
---------------------------------
John Gott
President and
Chief Financial Officer
(Principal Financial Officer)
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