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 March 31, 2002
or
|_| Transition Report Pursuant to Section 13 or 15(d) of The
Securities Exchange Act of 1934
For the Transition Period from _________ to ___________
Commission File Number: 333-43770
SLS INTERNATIONAL, INC.
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(Exact Name of Small Business Issuer as Specified in its Charter)
Delaware 52-2258371
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(State of Incorporation) (IRS Employer Identification No.)
3119 South Scenic
Springfield, Missouri 65807
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(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number, Including Area Code: (417) 883-4549
N/A
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS
Check whether the registrant filed all documents and
reports required to be filed by Section 12, 13or 15(d) of the Exchange Act
after the distribution of securities under a plan confirmed by a court. N/A
Yes |_| No |_|
On May 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 Statement 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 6
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 10
Item 6. Exhibits and Reports on Form 8-K 10
Signature 11
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
SLS International, Inc.
Condensed Balance Sheet
March 31, December 31,
2002 2001
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(unaudited) (audited)
Assets
Current assets:
Cash $ 0 $ 48,390
Accounts receivable 149,406 69,185
Inventory 245,204 250,998
Prepaid expenses and other current asset 1,570 2,081
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Total current assets 396,180 370,654
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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 68,240 64,594
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Net fixed assets 33,243 36,889
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$ 429,423 $ 407,543
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Liabilities and Shareholders' Deficit
Current liabilities:
Current maturities of long-term debt
and notes payable $ 369,597 $ 371,640
Accounts payable 232,198 196,833
Due to shareholders 29,886 31,886
Accrued liabilities 78,364 67,029
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Total current liabilities 710,045 667,388
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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; 168,000 and 102,000 shares
at March 31, 2002 and December 31, 2001 168 102
Discount on preferred stock (262,129) (166,694)
Contributed capital - preferred 776,432 446,298
Common stock, $.001 par; 75,000,000 shares authorized;
19,156,528 shares and 19,019,528 shares issued at
March 31, 2002 and December 31, 2001 19,157 19,020
Common stock not issued but owed to buyers; 40,000
shares at December 31, 2001 0 40
Contributed capital - common 1,758,828 1,710,425
Retained deficit (2,573,078) (2,271,357)
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Total shareholders' deficit (280,622) (262,166)
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$ 429,423 $ 407,543
=========== ===========
The accompanying notes are an integral part of these condensed financial
statements.
1
SLS International, Inc.
Condensed Statement Of Operations
For The Three Months Ended
March 31,
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2002 2001
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(unaudited)
Revenue $ 135,186 $ 39,748
Cost of sales 51,375 21,321
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Gross profit 83,811 18,427
General and administrative expenses 309,341 209,929
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Loss from operations (225,530) (191,502)
Other income (expense):
Interest expense (6,433) (14,621)
Interest and miscellaneous, net 7 6
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(6,426) (14,615)
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Loss before income tax (231,956) (206,117)
Income tax provision 0 0
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Net loss $ (231,956) $ (206,117)
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Deemed dividend associated with
beneficial conversion of
preferred stock (68,765) 0
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Net loss available to common
shareholders $ (300,721) $ (206,117)
============ ============
Basic and diluted earnings per share $ (0.01) $ (0.01)
============ ============
Weighted average shares outstanding 20,728,195 14,152,009
============ ============
The accompanying notes are an integral part of these condensed financial
statements.
2
SLS International, Inc.
Condensed Statement Of Cash Flows
For The Three Months Ended
March 31,
-----------------------
2002 2001
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(unaudited)
Operating activities:
Net loss $(231,956) $(206,117)
Adjustments to reconcile net income to cash flows
from operating activities:
Depreciation and amortization 3,646 3,602
Change in assets and liabilities-
Accounts receivable (80,221) (14,430)
Inventory 5,794 5,937
Prepaid expenses and other current asset 511 (573)
Accounts payable 35,365 59,684
Due to shareholders (2,000) 2,038
Deferred revenue 0 5,000
Accrued liabilities 11,335 21,958
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Cash used in operating activities (257,526) (122,901)
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Investing activities:
Additions to fixed assets 0 (240)
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Cash used in investing activities 0 (240)
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Financing activities:
Sale of common stock 48,500 0
Sale of preferred stock 165,000 0
Borrowing of notes payable 0 115,000
Repayments of notes payable (4,364) (7,940)
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Cash provided by financing activities 209,136 107,060
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(Decrease) increase in cash (48,390) (16,081)
Cash, beginning of quarter 48,390 17,657
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Cash, end of quarter $ 0 $ 1,576
========= =========
Supplemental cash flow information:
Interest paid $ 0 $ 1,143
Income taxes paid (refunded) 0 0
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 March 31,
2002 have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-QSB and reflect all adjustments which, in the
opinion of management, are necessary for a fair presentation of
financial positions as of March 31, 2002 and results of operations and
cash flows for the three months ended March 31, 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 March 31,
2002 have been prepared in conformity with generally accepted
accounting principles which contemplate the continuance of the Company
as a going concern. The Company has suffered losses from operations
during the three months ended March 31, 2002 and the years ended
December 31 2001, 2000, and 1999. The Company's cash position may be
inadequate to pay all of the costs associated with the introduction of
its new loudspeakers. Management intends to use borrowings and security
sales to mitigate the effects of its cash position, however no
assurance can be given that debt or equity financing , if and when
required, will be available. The unaudited condensed financial
statements do not include any adjustments relating to the
recoverability and classification of recorded assets and classification
of liabilities that might be necessary should the Company be unable to
continue in existence.
NOTE 3 - NOTES PAYABLE
The interest rate on the current notes are 7% and the maturity date is
six months from the date of each note.
NOTE 4 - STOCK TRANSACTIONS
In May, 2001, the Company completed a public offering. The number of
shares sold was 4,000,000. Included with the purchase of the shares was
a Class A warrant and a Class B warrant. The Class A warrants expire on
August 4, 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
4
share. The warrants are detachable from the common stock but are not
separable from each other until the Class A warrant is exercised.
From January 1, 2002 to March 31, 2002, 97,000 Class A warrants were
exercised for 97,000 shares of common stock for a total of $48,500.
3,115,000 Class A warrants are outstanding as of March 31, 2002. No
Class B warrants have been exercised as of March 31, 2002.
In the three months ended March 31, 2002, the Company issued 66,000
shares of preferred stock for $165,000. 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 $165,200 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. $69,765 was amortized to retained
earnings in the three months ended March 31, 2002. At March 31, 2002,
the unamortized beneficial conversion on preferred shares was $262,129.
NOTE 5 -- SUBSEQUENT EVENTS
In April of 2002, the Company issued 60,000 share of preferred stock
for $150,000.
5
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 recently
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
utilize 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 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.
6
RESULTS OF OPERATIONS
Quarter ended March 31, 2002 as compared to the quarter ended March 31,
2001. For the quarter ended March 31, 2002, revenue increased to $135,186 from
$39,748 in 2001, a 240% 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 62% in the 2002 period
from approximately 46% in the 2001 period, primarily as a result of our
conversion to in-house manufacturing of our ribbon drivers from our previous
outsourcing of such components. Despite the revenue increase of $95,438 and the
improvement in gross profits, our net loss increased by $25,839, to $231,956 in
the first quarter of 2002 as compared to a net loss of $206,117 in the
comparable quarter of 2001. The greater net loss was the result of increased
general and administrative expenses, discussed below.
General and administrative expense for the 2002 first quarter increased
to $309,341 from $209,929 in the 2001 first quarter, primarily as a result of a
new employee handling our development of a transducer, a new controller for our
financial operations, a new national sales manager, increased trade show
participation to promote our products, and consultant expense targeted toward
increased exposure and relations with top musical artists.
Interest expense decreased to $6,433 in the 2002 first quarter as
compared to $14,621 in the 2001 first quarter, due to decreased borrowings.
Quarter ended March 31, 2001 as compared to the quarter ended March 31,
2000. Sales for the first quarter totaled $39,748 compared to $46,421 in 2000.
The decrease in revenue resulted from SLS restructuring the business to begin
producing loudspeakers with the ribbon drivers.
General and administrative expense rose to $209,929 for the quarter
ended March 31, 2001 compared to $159,979 for the quarter ended March 31, 2000.
The increase was attributable to an increase in fees associated with the ribbon
driver, trade show participation and professional fees.
Interest expense was $14,621 in 2001 compared to $2,812 in 2000 because
of additional borrowings on notes payable.
The net loss for the quarter was $206,117 in 2001, an increase of
$55,221 from a loss of $150,896 in 2000.
7
FINANCIAL CONDITION
On March 31, 2002, our current liabilities exceeded current assets by
$313,865, compared to $296,734 on December 31, 2001. Total liabilities exceeded
total assets by $280,622, compared to $262,166 on December 31, 2001. The
increased working capital deficit was due to the decrease in cash, discussed
below, as well as increases in accounts payable and accrued liabilities,
partially offset by increased accounts receivable, as a result of the continued
expansion of our 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; in fact, we had $0 in
cash on March 31, 2002. However, in April 2002, we raised $150,000 through the
sale of 60,000 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 the beginning of 2002 to raise capital. In the first quarter
of 2002 we sold preferred stock for $165,000. In addition, we have outstanding
warrants, which, upon exercise, have provided additional funding of $48,500
during the first quarter of 2002.
Long-term notes payable decreased slightly to $369,597 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.
8
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 this
report and economic, competitive and other factors affecting our operations,
markets, products and services, expansion strategies and other factors discussed
elsewhere in this report 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.
9
PART II - OTHER INFORMATION
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 March 31, 2002, we issued an aggregate of 97,000 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 $48,500.
In the quarter ended March 31, 2002, the Company issued 66,000 shares
of preferred stock for $165,000 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 first 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.
(a) Exhibits. The following are being filed as exhibits to this
Report:
-- None
(b) Reports on Form 8-K. We filed no Reports on Form 8-K during
the quarter ended March 31, 2002.
10
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SLS INTERNATIONAL, INC.
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(Registrant)
Date: May 15, 2002 By /s/ John Gott
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John Gott
President and
Chief Financial Officer
(Principal Financial Officer)
11