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, 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.
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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, 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 5, 2003, 27,011,128 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.
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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 14
Condition and Results of Operations
Item 3. Controls and Procedures 18
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 19
Item 6. Exhibits and Reports on Form 8-K 19
Signature 20
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
SLS International, Inc.
Condensed Balance Sheet
September 30, December 31,
2003 2002
----------- -----------
(unaudited) (audited)
Assets
Current assets:
Cash $ 2,048,281 $ 4,240
Accounts receivable, less allowance for doubtful accounts of
$87,841 for Sept. 30, 2003 and $132,396 for December 31, 2002 139,306 165,024
Inventory 599,286 261,573
Prepaid expenses and other current assets 2,317 6,936
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Total current assets 2,789,190 437,773
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Fixed assets:
Vehicles 73,376 31,026
Equipment 59,504 55,083
Leasehold improvements 3,376 3,376
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136,256 89,485
Less accumulated depreciation 74,879 63,261
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Net fixed assets 61,377 26,224
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$ 2,850,567 $ 463,997
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Liabilities and Shareholders' Equity (Deficit)
Current liabilities:
Current maturities of long-term debt and notes payable $ 25,000 $ 414,720
Accounts payable 354,109 417,449
Due to shareholders 2,674 23,193
Accrued liabilities 25,778 170,897
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Total current liabilities 407,561 1,026,259
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Commitments and contingencies:
Shareholders' deficit:
Preferred stock not issued but owed to buyers, $.001 par,
5,000,000 shares authorized; 1,541,300 and 315,000 shares
at September 30, 2003 and December 31, 2002 1,541 315
Discount on preferred stock (2,555,087) (233,294)
Contributed capital - preferred 8,893,361 1,852,183
Common stock, $.001 par; 75,000,000 shares authorized;
26,948,128 shares and 21,453,528 shares issued at
September 30, 2003 and December 31, 2002 26,949 21,454
Common stock not issued but owed to buyers; 302,000 shares and
'1,222,000 shares at September 30, 2003 and December 31, 2002 302 1,222
Contributed capital - common 5,038,014 3,386,624
Unamortized cost of stock issued for services (38,881) (524,984)
Retained deficit (8,923,194) (5,065,782)
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Total shareholders' equity (deficit) 2,443,006 (562,262)
----------- -----------
$ 2,850,567 $ 463,997
=========== ===========
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
September 30,
----------------------------
2003 2002
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(unaudited)
Revenue $ 268,023 $ 161,688
Cost of sales 128,801 123,952
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Gross profit 139,222 37,736
General and administrative expenses 2,123,685 605,885
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Loss from operations (1,984,463) (568,149)
Other income (expense):
Interest expense 14,360 (5,067)
Interest and miscellaneous, net 58,334 259
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72,694 (4,808)
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Loss before income tax (1,911,769) (572,957)
Income tax provision -- --
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Net loss (1,911,769) (572,957)
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Deemed dividend associated with beneficial conversion
of preferred stock (877,369) (180,892)
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Net loss availiable to common shareholders $ (2,789,138) $ (753,849)
============ ============
Basic and diluted earnings per share $ (0.11) $ (0.04)
============ ============
Weighted average shares outstanding 26,391,728 20,647,195
============ ============
2
SLS International, Inc.
Condensed Statement Of Operations
For The Nine Months Ended
September 30,
------------ ------------
2003 2002
------------ ------------
(unaudited)
Revenue $ 650,044 $ 486,204
Cost of sales 284,362 318,631
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Gross profit 365,682 167,573
General and administrative expenses 3,232,220 1,667,850
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Loss from operations (2,866,538) (1,500,277)
Other income (expense):
Interest expense (218) (18,330)
Interest and miscellaneous, net 99,272 298
------------ ------------
99,054 (18,032)
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Loss before income tax (2,767,484) (1,518,309)
Income tax provision -- --
------------ ------------
Net loss (2,767,484) (1,518,309)
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Deemed dividend associated with beneficial conversion
of preferred stock (1,089,927) (386,118)
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Net loss availiable to common shareholders $ (3,857,411) $ (1,904,427)
============ ============
Basic and diluted earnings per share $ (0.16) $ (0.09)
============ ============
Weighted average shares outstanding 24,720,928 20,095,306
============ ============
The accompanying notes are an integral part of these condensed financial
statements.
3
SLS International, Inc.
Condensed Statement Of Cash Flows
For The Nine Months Ended
September 30,
--------------------------
2003 2002
----------- -----------
(unaudited)
Operating activities:
Net loss $(2,767,484) $(1,518,309)
Adjustments to reconcile net income to cash flows
from operating activities:
Depreciation and amortization 11,618 11,139
Amortization of cost of stock issued for services 779,103 635,352
Expenses of employee stock options granted 552,739 --
Change in assets and liabilities-
Accounts receivable, less allowance for doubtful accounts 25,718 34,258
Inventory (337,713) (74,003)
Prepaid expenses and other current assets 4,619 511
Accounts payable (63,340) 162,519
Due to shareholders (20,519) (2,000)
Accrued liabilities (145,119) 21,247
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Cash used in operating activities (1,960,378) (729,286)
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Investing activities:
Additions of fixed assets (46,771) (2,697)
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Cash used in investing activities (46,771) (2,697)
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Financing activities:
Sale of stock 4,440,750 645,500
Borrowing of notes payable 102,000 55,000
Repayments of notes payable (491,560) (9,146)
----------- -----------
Cash provided by financing activities 4,051,190 691,354
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Increase (decrease) in cash 2,044,041 (40,629)
Cash, beginning of period 4,240 48,390
----------- -----------
Cash, end of period $ 2,048,281 $ 7,761
=========== ===========
Supplemental cash flow information:
Interest paid $ 43,345 $ --
Income taxes paid (refunded) -- --
Noncash investing activities:
Stock issued and options granted for services $ 822,605 $ 1,073,172
The accompanying notes are an integral part of these condensed financial
statements.
4
SLS INTERNATIONAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
Note 1 - Basis of Presentation
The accompanying unaudited condensed financial statements at September
30, 2003 have been prepared in accordance with U.S. generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-QSB and reflect all adjustments which, in the
opinion of management, are necessary for a fair presentation of
financial positions as of September 30, 2003 and results of operations
and cash flows for the nine months ended September 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 September
30, 2003 have been prepared in conformity with U.S. generally accepted
accounting principles which contemplate the continuance of the Company
as a going concern. The Company has suffered losses from operations
during the nine months ended September 30, 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 is 7% and all are past due.
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.
5
From January 1, 2003 to September 30, 2003, 1,620,000 Class A warrants
were exercised for 1,620,000 shares of common stock for a total of
$810,000. As of September 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. 1,096,400
Class A warrants are outstanding as of September 30, 2003. No Class B
warrants have been exercised as of September 30, 2003.
In September of 2003, 394,600 Class A warrants were exercised for
394,600 shares of common stock for $200,000 in services in lieu of cash
payment.
In the nine months ended September 30, 2003, the Company sold 1,452,300
shares of preferred stock for $3,630,750. The preferred stock offering
was closed on July 31, 2003. 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 $3,411,720 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. $1,089,927 was amortized to retained earnings
in the nine months ended September 30, 2003. At September 30, 2003, the
unamortized beneficial conversion on preferred shares was $2,555,088.
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 nine
months ended September 30, 2003. On September 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
6
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 nine months ended
September 30, 2003. On September 30, 2003 there was $0 remaining in
unamortized cost of stock issued for services on the balance sheet. As
of September 30, 2003, $18,000 has been paid on the note receivable. A
valuation allowance of $9,000 has been used to offset the remaining
note receivable from the transaction and therefore $0 is reflected in
the asset section of the balance sheet for the note receivables.
In April of 2002, an agreement was signed with The Equitable Group, LLC
for consulting services to be performed from March 26, 2002 to
September 26, 2002. As compensation for consulting services, the
Company agreed to issue 600,000 shares of common stock, of which
100,000 were nonrefundable, to the consultant. The Company issued
100,000 shares on April 9, 2002. Using the market value on the date the
agreement was signed, the shares were valued at $51,000 and recorded as
a debit in the equity section of the balance sheet as unamortized cost
of stock given for services. On May 2, 2002, the Company terminated the
agreement. Upon termination of the agreement all unamortized costs were
amortized as consulting expense.
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
$2.50 per share. This preferred stock was convertible into 1,000,000
7
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 $27,125 for the nine months ended September 30, 2003. On
September 30, 2003, there was $0 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 nine
months ended September 30, 2003. On September 30, 2003, there was $0
remaining in unamortized cost of stock issued for services on the
balance sheet.
8
In October of 2002, an agreement was signed with Patrick Armstrong of
Titan Entertainment Group for consulting services to be performed
November 5, 2002 to November 5, 2003. As compensation for consulting
services the Company agreed to issue 100,000 shares of common stock and
250,000 options for 250,000 shares of common stock. The options have a
strike price of $.30 and expire ten years from date of issuance.
100,000 shares of common stock were issued on November 5, 2002. Using
the market value on the date the agreement was signed, the shares were
valued at $39,000 and recorded as a debit in the equity section of the
balance sheet as unamortized cost of stock issued for services. Using
the Black-Scholes pricing model, the options were valued at $57,471 and
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 $72,354 for the nine months ended
September 30, 2003. On September 30, 2003, there was $7,107 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 $72,354 for the nine months ended
September 30, 2003. On September 30, 2003, there was $7,107 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
9
owned by him personally. The options have a strike price of $.05 and
expire 30 days after the current lock-up period ends on the president's
shares. 300,000 shares of common stock were issued on December 9, 2002.
Using the market value on the date the agreement was signed, the shares
were valued at $114,000 and recorded as a debit in the equity section
of the balance sheet as unamortized cost of stock issued for services.
Using the Black-Scholes pricing model, the options were valued at
$99,099 and 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 nine months
ended September 30, 2003. On September 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 $90,000 for the nine months
ended September 30, 2003. On September 30, 2003, there was $24,667
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 $93,000 for the nine months
ended September 30, 2003. On September 30, 2003, there was $0 remaining
in unamortized cost of stock issued for services on the balance sheet.
In the nine months ended September 30, 2003, 226,000 shares of
preferred stock were converted into 2,260,000 shares of common stock.
2,160,000 shares have been issued. The remaining 100,000 shares were
unissued at September 30, 2003 and are therefore shown in common stock
not issued but owed to buyers.
10
In July 2003, the Company entered into an endorsement agreement with
Steerpike Ltd. The agreement grants 1,100,000 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 and is exercisable
for a period of five years. 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, using the Black-Scholes pricing model, on an accelerated method,
thereby recording a larger portion of the costs in the earlier months
of the two year period. Consulting expense recorded for the period July
31, 2003 to September 30, 2003 was $529,605.
Note 5 - Consulting, Promotional and Investor Relations Services
During the quarter ended September 30, 2003 SLS utilized the following
services:
Ronald Gee contracted with SLS for promotional services and was paid
$235,000 to disseminate information pursuant to SLS's obligation under
the Exchange Act. All services were rendered by September 30, 2003.
Atlantic Services Ltda, DBA Atlantic Services and Phantasma Holding
Corp/Red Sea Mgt. located in Costa Rica contracted with SLS and was
paid $100,000 to provide SLS consultation and to identify and introduce
companies/individuals that may be potential agents, partners,
distributors, spokespeople and/or investors. All services were rendered
by September 30, 2003.
Berkshire International LLC DBA Phantasma Holding Corp/Berkshire
located in Costa Rica contracted with SLS to provide the services of
business development to identify and introduce companies that may be
potential partners, support in the implementation of a marketing
program and to promote the image of the Company and was paid $150,000.
The term of the agreement was from August 11 to November 11, 2003.
Fitzgerald Galloway contracted with SLS to identify private or public
companies for merger and/or acquisition with or by SLS for a period
completed by September 30, 2003 and was paid a fee of $20,000.
Wall Street Investor Relations Corp contracted with SLS for public
relations, investor relations and capital raising for a period
completed by September 30, 2003 and received a fee of $8,000.
G. Ghecko Enterprises DBA Red Sea Management, located in Costa Rica,
contracted with SLS and was paid $50,000 to provide SLS consultation
and the service of business development to identify and introduce
companies that may be potential partners. The services were completed
by September 30, 2003.
11
Art Malone, Jr. provided services for the purpose of securing the
appropriate mechanisms to market SLS's products for a fee of $15,000.
The services were completed by September 30, 2003.
Various individuals and corporations performed consulting services for
SLS during the quarter and were paid $152,058. All services were
substantially completed by September 30, 2003.
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 nine months
ended September 30, 2003. The value of stock issued and options granted
totaled $1,692,213 for the period of January 1, 2002 through September
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 $579,103 for the nine months ended September 30, 2003, was
amortized into consulting expense for those periods. Unamortized cost
of stock issued for services was $38,881 as of September 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
nine months ended September 30, 2003. The note was paid in full on June
17, 2003. The note balance on September 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
nine months ended September 30, 2003. The note was paid in full on July
18, 2003. The note balance on September 30, 2003 was $0.
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.
12
The board of directors approved 145,000 options for employees and
directors in the nine months ended September 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 nine
months ended September 30, 2003.
Note 9 - Subsequent Events
In October 2003, 40,000 shares of preferred stock were converted into
400,000 shares of common stock.
From October 1 to November 6, 2003, 20,000 Class A warrants were
exercised for 20,000 shares of common stock for a total of $10,000.
13
Item 2. Management's Discussion And Analysis
------------------------------------
Of Financial Condition And Results Of Operations
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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.
14
RESULTS OF OPERATIONS
Quarter ended September 30, 2003 as compared to the quarter ended
September 30, 2002. For the quarter ended September 30, 2003, revenue increased
to $268,023 from $161,688 in 2002, a 66% 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 52% in
the 2003 period from approximately 23% in the 2002 period, primarily as a result
of continued improvement in efficiency as we increase revenue and increased
sales of our higher-margin models.
General and administrative expenses for the 2003 third quarter
increased to $2,123,685 from $605,885 in the 2002 third quarter, an increase of
$1,517,800. The increase resulted primarily from an aggregate of $810,730 in
cash fees paid to consultants for services including investor relations,
corporate awareness and offering fees, a non-cash charge of $529,605 in the 2003
third quarter related to the issuance of options pursuant to an endorsement
agreement (compared to $0 in the 2002 third quarter), and a $200,000 non-cash
charge related to the exercise of warrants by a consultant without payment of
the exercise price, which was provided as compensation to such consultant. These
increases were partially offset by a reduction in the non-cash cost amortized in
the 2003 quarter, compared to the 2002 quarter, reflecting a portion of the fair
value of stock issued under consulting agreements entered into during the
quarter and in prior periods.
Due to the increase in general and administrative expenses, partially
offset by the revenue increase and the improvement in gross profits, our net
loss increased to $1,911,769 in the third quarter of 2003 as compared to a net
loss of $572,957 in the comparable quarter of 2002.
Other income (expense) decreased to a net other income of $72,694 in
the 2003 third quarter as compared to net other expense of $4,808 in the 2002
third quarter, primarily due to interest on cash retained upon completion of our
preferred stock private placement in July 2003 and miscellaneous income related
to the collection of accounts receivable that had been written off in prior
periods.
Nine months ended September 30, 2003 as compared to the nine months
ended September 30, 2002. For the first nine months of 2003, revenue increased
to $650,044 from $486,204 in 2002, a 34% 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 56% in
the 2003 period from approximately 34% in the 2002 period, primarily as a result
of continued improvement in efficiency as we increase revenue and increased
sales of our higher-margin models.
General and administrative expenses for the nine months ended September
30, 2003 increased to $3,232,220 from $1,667,850 in the 2002 period, an increase
of $1,564,370. The increase resulted primarily from an aggregate of $830,730
in cash fees paid to consultants for services including investor relations,
corporate awareness and offering fees, a non-cash charge of $529,605 in the 2003
period related to the issuance of options pursuant to an endorsement agreement
(compared to $0 in the 2002 period), and a $200,000 non-cash charge related to
15
the exercise of warrants by a consultant without payment of the exercise price,
which was provided as compensation to such consultant. These increases were
partially offset by a reduction in the non-cash cost amortized in the 2003
period, compared to the 2002 portion, reflecting a portion of the fair value of
stock issued under consulting agreements entered into during the quarter and in
prior periods.
Due to the increase in general and administrative expenses, partially
offset by the revenue increase and the improvement in gross profits, our net
loss increased to $2,767,484 in the first nine months of 2003 as compared to a
net loss of $1,518,309 in the 2002 period.
Other income (expense) increased to net other income $99,054 in the
2003 period as compared to a net other expense of $18,032 in the 2002 period,
primarily due to interest on cash retained upon completion of our preferred
stock private placement in July 2003 and miscellaneous income related to the
collection of accounts receivable that had been written off in prior periods.
FINANCIAL CONDITION
On September 30, 2003, our current assets exceeded current liabilities
by $2,381,629, compared to an excess of current liabilities over current assets
of $588,486, on December 31, 2002. Total assets exceeded total liabilities by
$2,443,006, compared to an excess of total liabilities over total assets of
$562,262 on December 31, 2002. The increased working capital was primarily due
to the sale of 1,452,300 shares of preferred stock for $3,630,750 in the first
nine months of 2003. In addition to funding operations, the proceeds from such
sales of stock allowed us to increase cash by $2,044,041, increase inventory by
$337,713, decrease long-term debt and notes payable by $389,720, decrease
accounts payable by $63,340, decrease amounts due to shareholders by $20,519,
and decrease accrued liabilities by $145,119. On September 30, 2003, we had a
backlog of orders of approximately $90,000.
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. However, many of the past-due amounts have now been paid
with the proceeds from sales of our preferred stock in the first nine months of
2003. 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.
In order to continue operations, we have been dependent on raising
additional funds, and we continued to sell preferred stock through July 31, 2003
to raise capital. In the third quarter of 2003 we sold 1,303,660 shares of
preferred stock for $3,259,150 in cash. These sales completed our preferred
stock private placement that commenced in September 2001 and substantially
alleviated our cash shortages in the near-term. In the nine months ended
September 30, 2003, we also received an aggregate of $810,000 in cash in payment
of the exercise price for the exercise of outstanding warrants.
16
Long-term debt and notes payable decreased to $25,000 on September 30,
2003, as we repaid all such debt and notes, except for one note. The remaining
note is from one individual, is unsecured and matured in the third quarter of
2001. However, the note is payable to an existing shareholder that is not making
a demand on the note and will continue to accrue interest at 7% for an
indefinite period of time. We expect that the shareholder will continue to
permit the note to remain outstanding, but the shareholder has the right to
demand full payment at any time and may do so.
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 by
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 as (a) storage space for additional inventory of the components
and cabinets needed for 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.
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
17
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 September 30, 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 September 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 such controls and procedures.
We have made no changes in our internal control over financial
reporting during the quarter ended September 30, 2003 that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
18
PART II - OTHER INFORMATION
Item 2. Changes in Securities.
------- ---------------------
In the quarter ended September 30, 2003, the Company sold 1,303,660
shares of preferred stock for $3,259,150 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.
In the quarter ended September 30, 2003, the Company issued 2,014,600
shares of common stock pursuant to the exercise of outstanding Class A warrants.
The Company received $810,000 upon the exercise of 1,620,000 of such warrants,
and charged $200,000 as an expense in lieu of payment for the remaining 394,600
shares, which was provided as compensation to a consultant holding the warrants
for such 394,600 shares.
The net proceeds from the sale of preferred stock in the third quarter
of 2003 and from the exercise of warrants in the first nine months of 2003 were
used for working capital purposes. We used one registered broker-dealer for the
sale of approximately 265,968 shares of preferred stock and paid commissions of
$33,246 for such sales. All of the foregoing uses of proceeds were direct or
indirect payments to nonaffiliates.
The preferred stock offering closed on July 31, 2003. Item 6. Exhibits
and Reports on Form 8-K.
(a) Exhibits. The following are being filed as exhibits to this
Report:
Exhibit Description of Exhibit
No.
10.1 Commercial Property Lease Agreement, dated as of
September 1, 2003, between Scenic Properties, Inc.
and SLS International, Inc.
10.2 Consulting Agreement, dated as of July 14, 2003,
between SLS International, Inc. and Atlantic Services
Ltda.
10.3 Consulting Agreement, dated as of July 22, 2003,
between SLS Loudspeakers and Atlantic Services Ltda.
10.4 Consulting Agreement, dated as of August 11, 2003,
between SLS International, Inc. and G. Ghecko
Enterprises
10.5 Contract for Promotional Services, dated July 14,
2003, between Ronald E. Gee and SLS International,
Inc.
10.6 Contract for Promotional Services, dated August 5,
2003, between Ronald E. Gee and SLS International,
Inc.
10.7 Contract for Promotional Services, dated September 5,
2003, between Ronald E. Gee and SLS International,
Inc.
10.8 Consulting Agreement, dated as of August 11, 2003,
between SLS Loudspeakers and Berkshire International,
LLC
10.9 Letter Agreement, dated August 29, 2003, between SLS
International and Art Malone, Jr.
10.10 Consulting Agreement, dated August 21, 2003, between
SLS International, Inc. and Grant Galloway
10.11 Agreement, dated July 31, 2003 between SLS
International, Inc. and Wall Street Investor
Relations Corp.
10.12 30 Days Public Relations Services Contracts, dated
July 23, 2003, between Fitzgerald Galloway Consulting
and SLS International, Inc.
31 Rule 13a-14(a) / 15d-14(a) Certifications
32 Section 1350 Certifications
(b) Reports on Form 8-K. We filed no Reports on Form 8-K during
the quarter ended September 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: November 18, 2003 By /s/ John Gott
------------------------
John Gott
President and
Chief Financial Officer
(Principal Financial Officer)
20