<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the period ended June 30, 1996
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 2-93124
SGI International
(Exact name of registrant as specified in its charter)
Utah 33-0119035
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1200 Prospect Street, Suite 325, La Jolla, California 92037
(Address of principal executive offices)
(619) 551-1090
Registrant's telephone number, including area code
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No
The number of shares of Common Stock, no par value, outstanding as of July 29,
1996 was 5,770,372.
<PAGE> 2
TABLE OF CONTENTS
FORM 10-Q
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Condensed Consolidated Balance Sheets 3 - 4
Condensed Consolidated Statements of Operations 5
Condensed Consolidated Statement of Stockholders' Equity (Deficit) 6
Condensed Consolidated Statements of Cash Flows 7
Notes to Condensed Consolidated Financial Statements 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS 9 - 11
PART II. OTHER INFORMATION 12
SIGNATURES 13
</TABLE>
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<PAGE> 3
SGI International
Consolidated Balance Sheets
<TABLE>
<CAPTION>
JUNE 30, December 31,
1996 1995
----------- ------------
(UNAUDITED)
<S> <C> <C>
Assets
Current assets:
Cash $ 782,781 $ 74,154
Trade accounts receivable 566,636 341,352
Costs and estimated earnings in excess of billings
on uncompleted contracts 156,767 271,448
Inventories 74,168 68,289
Prepaid expenses and other current assets 128,522 114,143
---------- ----------
Total current assets 1,708,874 869,386
LFC Process related assets:
Notes receivable 979,918 1,123,948
Royalty rights 2,042,625 2,199,750
LFC cogeneration project 579,063 631,705
Investment in TEK-KOL partnership 779,754 596,276
Australia LFC project 159,275 173,754
Other technological assets 26,440 26,440
Process demonstration equipment -- 153,781
---------- ----------
4,567,075 4,905,654
Property and equipment 350,972 249,328
Other assets -- 12,876
Goodwill 455,352 479,318
---------- ----------
$7,082,273 $6,516,562
========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
- 3 -
<PAGE> 4
SGI International
Consolidated Balance Sheets
<TABLE>
<CAPTION>
JUNE 30, December 31,
1996 1995
------------ ------------
(UNAUDITED)
<S> <C> <C>
Liabilities and stockholders' equity (deficit)
Current liabilities:
Accounts payable $ 483,712 $ 683,583
Billings in excess of costs and estimated earnings
on uncompleted contracts 175,064 175,745
Current maturities of long-term obligations 96,375 909,016
Notes payable to Director -- 304,000
Accrued salaries, benefits and related taxes 274,750 279,103
Royalties payable to related party -- 141,790
Contributions payable to TEK-KOL Partnership 99,109 336,476
Interest payable 18,036 139,663
Other accrued expenses 283,090 269,089
------------ ------------
Total current liabilities 1,430,136 3,238,465
Interest payable 422,332 276,425
Long-term notes payable, less current maturities 4,328,996 4,631,250
Commitments and contingencies
Stockholders' equity (deficit):
Convertible preferred stock 862 1,037
Common stock 35,240,097 32,255,357
Paid-in capital 5,725,434 4,582,215
Accumulated deficit (39,804,161) (38,159,764)
Notes receivable from employees for common stock (261,423) (308,423)
------------ ------------
Total stockholders' equity (deficit) 900,809 (1,629,578)
------------ ------------
$ 7,082,273 $ 6,516,562
============ ============
</TABLE>
See notes to condensed consolidated financial statements.
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<PAGE> 5
SGI International
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
1996 1995 1996 1995
--------------------------- ---------------------------
<S> <C> <C> <C> <C>
Revenues:
Net sales $ 1,190,267 $ -- $ 2,246,944 $ --
Other 80,584 21,721 222,520 33,577
----------- ----------- ----------- -----------
1,270,851 21,721 2,469,464 33,577
Income (loss) from Investment in TEK-KOL (23,125) -- 52,978 --
Expenses:
Cost of sales 952,133 -- 1,746,199 --
Engineering, research and consulting 102,560 449,416 257,334 1,115,071
Selling, general and administrative 407,325 310,348 997,704 586,925
Legal and accounting 157,951 145,094 613,165 352,259
Depreciation and amortization 143,318 251,496 309,052 502,606
Interest 91,607 233,167 243,385 474,683
----------- ----------- ----------- -----------
1,854,894 1,389,521 4,166,839 3,031,544
----------- ----------- ----------- -----------
Net loss $ (607,168) $(1,367,800) $(1,644,397) $(2,997,967)
=========== =========== =========== ===========
Net loss per share $ (.12) $ (.57) $ (.35) $ (1.32)
=========== =========== =========== ===========
Weighted average shares outstanding 5,239,863 2,413,114 4,755,235 2,276,624
=========== =========== =========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
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<PAGE> 6
SGI International
Consolidated Statement of Stockholders' Equity (Deficit)
(Unaudited)
<TABLE>
<CAPTION>
Convertible
preferred stock Common stock
---------------- ----------------------- Accumulated
Shares Amount Shares Amount Paid-in capital deficit
------- ------ --------- ----------- --------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1995 103,729 $1,037 3,859,671 $32,255,357 $4,582,215 $(38,159,764)
Issuance of common stock for cash 1,328,059 2,103,935
Issuance of common stock for notes payable,
interest and services 533,839 651,167
Conversion of convertible preferred stock into
common stock (17,566) (176) 25,726 229,638 (227,402)
Issuance of convertible preferred stock for notes
payable and interest 67 1 754,913
Warrants granted for accounts payable, notes
payable, interest and services 141,603
Collection of notes receivable
Compensation expense related to warrants exercised
for notes receivable 474,105
Net loss (1,644,397)
------- ------ --------- ----------- ---------- ------------
Balances at June 30, 1996 86,230 $ 862 5,747,295 $35,240,097 $5,725,434 $(39,804,161)
======= ====== ========= =========== ========== ============
</TABLE>
<TABLE>
<CAPTION>
Total
Notes stockholders'
receivable equity (deficit)
----------- ----------------
<S> <C> <C>
Balances at December 31, 1995 $ (308,423) $(1,629,578)
Issuance of common stock for cash 2,103,935
Issuance of common stock for notes payable,
interest and services 651,167
Conversion of convertible preferred stock into
common stock 2,060
Issuance of convertible preferred stock for notes
payable and interest 754,914
Warrants granted for accounts payable, notes
payable, interest and services 141,603
Collection of notes receivable 47,000 47,000
Compensation expense related to warrants exercised
for notes receivable 474,105
Net loss (1,644,397)
----------- -----------
Balances at June 30, 1996 $ (261,423) $ 900,809
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
- 6 -
<PAGE> 7
SGI International
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Six months ended June 30,
1996 1995
----------- -----------
<S> <C> <C>
Operating activities
Net loss $(1,644,397) $(2,997,967)
Adjustments to reconcile net loss to net cash flows used for
operating activities:
Depreciation and amortization 349,525 502,606
Amortization of note discounts -- 85,633
Stock and warrants issued for interest, services
and notes receivable 633,954 231,000
Changes in assets and liabilities:
Receivable from joint venture partner -- 45,823
Trade accounts receivable (110,603) --
Inventories (5,879) --
Receivable from officers and directors -- 151,653
Prepaid expenses and other current assets (14,379) (65,762)
Accounts payable (199,871) 218,406
Billings in excess of costs and estimated earnings
uncompleted contracts (681) --
Accrued salaries, benefits and related taxes (4,353) 57,623
Royalty payable to related party (141,790) (113,064)
Contribution payable to TEK-KOL (137,367) --
Interest payable 24,280 --
Other accrued expenses 14,001 78,342
----------- -----------
Net cash flows used for operating activities (1,237,560) (1,805,707)
Investing activities
LFC process related assets:
Collection of notes receivable and related interest 144,030 53,271
Additions to other technological assets -- (31,607)
Additions to process demonstration equipment -- (31,512)
Investment in TEK-KOL (183,478) (122,000)
Purchase of property and equipment (149,176) --
Other assets 12,876 (12,391)
----------- -----------
Net cash flows used for investing activities (175,748) (144,239)
Financing activities
Proceeds from issuance of notes payable 50,000 264,695
Payments of notes payable (79,000) (452,125)
Proceeds from issuance of preferred stock -- 1,113,942
Proceeds from issuance of common stock 2,103,935 563,743
Collection of notes receivable 47,000 --
----------- -----------
Net cash flows provided by financing activities 2,121,935 1,490,255
----------- -----------
Net increase (decrease) in cash 708,627 (459,691)
Cash at beginning of the period 74,154 551,299
----------- -----------
Cash at end of the period $ 782,781 $ 91,608
=========== ===========
Supplemental disclosure of non-cash activities:
Series 96 convertible preferred stock issued for notes payable $ 670,000 $ --
=========== ===========
Warrants granted for accounts payable, notes
payable, interest and services $ 141,603 $ --
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
- 7 -
<PAGE> 8
SGI International
Notes to Condensed Consolidated Financial Statements
June 30, 1996
(Unaudited)
(1) BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements of SGI
International (the Company) for the three and six months ended June
30, 1996 and 1995 are unaudited. These financial statements reflect
all adjustments, consisting of only normal recurring adjustments
which, in the opinion of management, are necessary for a fair
statement of the consolidated financial position as of June 30, 1996,
and the consolidated results of operations for the three and six
months ended June 30, 1996 and 1995. The results of operations for
the six months ended June 30, 1996 are not necessarily indicative of
the results to be expected for the year ending December 31, 1996. For
more complete financial information, these financial statements, and
the notes thereto, should be read in conjunction with the
consolidated audited financial statements for the year ended December
31, 1995 included in the Company's Form 10-K filed with the
Securities and Exchange Commission.
(2) ORGANIZATION AND BUSINESS
The principal businesses of the Company are developing,
commercializing, and licensing new energy technologies; and
manufacturing automated assembly equipment.
The Company's principal assets are related to the LFC (Liquid From
Coal) Process. The recovery of these assets is dependent upon future
events, including the Company's ability to attract sufficient
additional equity and/or financing needed to fund its portion of the
TEK-KOL Partnership, which is responsible for completion and
commercialization of the LFC Process. The Company is engaged in
continuing negotiations to secure additional capital and financing,
and while management believes these negotiations will be successful,
there is no assurance thereof.
(3) EQUITY TRANSACTION
Certain employees exercised warrants to purchase common stock in 1995
in exchange for non-recourse notes payable. The Company accrued
non-cash compensation expense totaling $474,105 related to these
transactions during the three months ended March 31, 1996. The
employees exchanged recourse notes for the non-recourse notes during
the three months ended June 30, 1996. Accordingly, the accrued
compensation was converted to equity during the second quarter.
- 8 -
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
PROJECTIONS AND ESTIMATES
The projections, estimates and opinions of management contained
herein relative to the LFC and OCET Processes and to the business of Company are
forward looking statements of management's belief; thus, there can be no
assurance that these projections, estimates, or opinions of management will
ultimately be correct or that actual results or events will not differ
materially from those discussed herein. Further, until agreements are actually
executed, LFC plants actually begin construction, the OCET Process is actually
commercialized and operating revenues are actually earned, there can be no
assurance that such events will occur. The Company undertakes no obligation to
publicly release the results of any revisions to these forward-looking
statements, which are made herein, to reflect events or circumstances after the
date hereof or to reflect the occurrence of unanticipated events.
OVERVIEW
The Company reported stockholders' deficits at December 31, 1995 and
March 31, 1996 of $ 1.6 million and $1.0 million, respectively. The Company
reported stockholders' equity of $901,000 at June 30, 1996. The improvement of
stockholders' equity results from equity sales for cash, and conversion of notes
payable and accrued expenses into equity. After excluding AMS's operations, the
Company's net loss on a comparative basis for the three and six month periods
ended June 30, 1996 has decreased 50% and 40%, respectively, compared to the
same prior year periods. Management believes the financial condition of the
Company has improved and will continue to improve in the coming months. Many
challenges are ahead as TEK-KOL, Mitsubishi Heavy Industries, Mitsui, Ziegler
and the Company commercialize the LFC process. Expenditures for OCET process
development are continuing and are expected to increase.
The OCET process is designed to convert refinery Resid into higher
value petroleum distillate products and a synthetic coal. OCET Corporation, a
wholly-owned SGI subsidiary, entered into an agreement in 1995 to test a series
of crude oil and Resid oil samples provided by Maraven, a Venezuelan state-owned
oil company. Laboratory data is currently being extrapolated to a larger bench
scale continuous process design in order to complete this testing. Favorable
results could lead to licensing and royalty agreements with Maraven and its
affiliates. The Company also continued discussions in the second quarter of 1996
with the Department of Energy regarding a cooperative agreement and funding for
OCET's research and development efforts. The Company is drafting a program plan
to submit to the DOE, which management expects will form the basis for a
cooperative research and development agreement.
The continuing need to fund Company operations with equity-based
financing is causing significant dilution. Management is committed to
accelerating commercialization of the LFC and OCET technologies and increasing
cash flows from AMS's operations so that equity-based financing can be
minimized.
- 9 -
<PAGE> 10
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1996 COMPARED TO THREE MONTHS ENDED JUNE 30, 1995.
The Company acquired AMS effective October 30, 1995. AMS recorded net
sales, cost of sales, selling, general and administrative expense and other
income of $1.2 million, $952,000, $195,000 and $76,000, respectively, for the
three months ended June 30, 1996. The following discussion does not include
AMS's results of operations for that period.
The Company's net loss for the three months ended June 30, 1996
decreased 47% ($642,000) compared to the same prior year period. Components of
the change in net loss are discussed below.
Engineering, research and development expenses for the three months
ended June 30, 1996 decreased 77% ($347,000) from the same prior year period.
SGI previously incurred LFC process marketing and candidate coal testing
expenditures which are now TEK-KOL's responsibility. On-going research and
development expenses relate to OCET process development.
General and administrative expense for the three months ended June
30, 1996 decreased 32% ($98,000) from the same prior year period. Personnel and
overhead reductions, instituted during the last two quarters of 1995, have
caused on-going general and administrative expenses to decrease.
Depreciation and amortization expense for the three months ended June
30, 1996 decreased 43% ($108,000) from the same prior year period. Certain LFC
process related assets were written down in 1995 based on management's net
realizable value estimates. The 1995 write-downs cause depreciation and
amortization expense to be lower in future periods.
Interest expense decreased 61% ($142,000) from the same prior year
period. The conversion of debt into equity during 1995 and 1996, and prior
recognition of note discount amortization, have caused interest expense to
decrease.
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995.
The Company acquired AMS effective October 30, 1995. AMS recorded net
sales, cost of sales, selling, general and administrative expense and other
income of $2.2 million, $1.7 million, $443,000 and $76,000, respectively, for
the six months ended June 30, 1996. The following discussion does not include
AMS's results of operations for that period.
The Company's net loss for the six months ended June 30, 1996
decreased 39% ($1.2 million) compared to the same prior year period. Components
of the change in net loss are discussed below.
Engineering, research and development expenses for the six months
ended June 30, 1996 decreased 77% ($858,000) from the same prior year period.
SGI previously incurred LFC process marketing and candidate coal testing
expenditures which are now TEK-KOL's responsibility. On-going research and
development expenses relate to OCET process development.
General and administrative expense for the six months ended June 30,
1996 increased 1% ($7,000) from the same prior year period. After adjusting for
a 1996 non-cash stock compensation charge of $158,000, on-going general and
administrative expense decreased 20% ($151,000). Personnel and overhead
reductions, instituted during the last two quarters of 1995, have caused
on-going general and administrative expenses to decrease.
- 10 -
<PAGE> 11
Legal and accounting expense for the six months ended June 30, 1996
increased 74% ($260,000) over the same prior year period. After adjusting for a
1996 non-cash stock compensation charge of $316,000, on-going legal and
accounting expense for the six months ended June 30, 1996 decreased 16%
($55,000).
Depreciation and amortization expense for the six months ended June
30, 1996 decreased 39% ($194,000) from the same prior year period. Certain LFC
process related assets were written down in 1995 based on management's net
realizable value estimates. The 1995 write-downs cause depreciation and
amortization expense to be lower in future periods.
Interest expense decreased 49% ($232,000) from the same prior year
period. The conversion of debt into equity during 1995 and 1996, and prior
recognition of note discount amortization, have caused interest expense to
decrease.
LIQUIDITY AND CAPITAL RESOURCES
The Company acquired AMS effective October 30, 1995. The discussion
on Liquidity and Capital Resources includes the effect of this transaction
unless otherwise indicated.
The Company had positive working capital of $279,000 at June 30, 1996
and negative working capital of $3.9 million at June 30, 1995. The improvement
was achieved primarily through equity sales and conversion of notes payable and
accrued expenses into equity. The funds raised through equity sales have been
used to finance current obligations and to satisfy current operating
requirements. The Company plans to finance future activities through the sale of
equity securities and the collection of receivables.
The Company has notes payable ($4.3 million) and interest payable
($0.4 million) which are due September 30, 1997. The Company expects these
liabilities to be satisfied by equity sales and increased positive cash flows
from AMS's operations.
The Company's financing activities raised approximately $1.2 million
and $1.9 million during the six months ended June 30, 1996 and 1995,
respectively. These funds were raised primarily through the private placement of
debt and equity securities. The amount of money raised during a given period is
dependent upon financial market conditions, technological progress, and the
Company's projected funding requirements. The Company anticipates that future
financing activities will be influenced by the aforementioned factors.
Significant future financing activities will be required to fund future
operating and investing activities and to maintain debt service. The Company is
engaged in continuing negotiations to secure additional capital and financing,
and while management believes these negotiations will be successful, there is no
assurance thereof.
The Company's investing activities were minimal during the six months
ended June 30, 1996 and 1995.
Additional capital contributions to the TEK-KOL Partnership are
expected to be required from time to time prior to profitable operations. The
Company is required to contribute one-half of any such required capital
contributions. The Company has recorded contributions payable to TEK-KOL of
$99,000 at June 30, 1996. Management believes substantially all of the 1996
funding requirements for TEK-KOL will be paid by third parties with whom TEK-KOL
has, or expects to have, agreements. The Company will be required to contribute
approximately $750,000 towards the 1996 TEK-KOL operating budget if none of
these agreements are consummated.
The Company does not have material commitments for capital
expenditures as of June 30, 1996.
- 11 -
<PAGE> 12
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 5. EXHIBITS AND REPORTS ON FORM 8-K
1. EXHIBITS
None
2. REPORTS ON FORM 8-K
None
- 12 -
<PAGE> 13
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
SGI INTERNATIONAL
By: /s/ JOSEPH A. SAVOCA August 5, 1996
----------------------------------
Joseph A. Savoca,
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Name Title Date
---- ----- ----
Chief Executive Officer August 5, 1996
/s/ JOSEPH A. SAVOCA and Chairman of the Board
- --------------------
Joseph A. Savoca
- 13 -
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 782,781
<SECURITIES> 0
<RECEIVABLES> 723,403
<ALLOWANCES> 0
<INVENTORY> 74,168
<CURRENT-ASSETS> 1,708,874
<PP&E> 350,972
<DEPRECIATION> 300,064
<TOTAL-ASSETS> 7,082,273
<CURRENT-LIABILITIES> 1,430,136
<BONDS> 0
0
832
<COMMON> 35,240,097
<OTHER-SE> (39,804,161)
<TOTAL-LIABILITY-AND-EQUITY> 7,082,273
<SALES> 1,190,267
<TOTAL-REVENUES> 1,270,851
<CGS> 952,133
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 902,761
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 91,607
<INCOME-PRETAX> (607,168)
<INCOME-TAX> 0
<INCOME-CONTINUING> (607,168)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (607,168)
<EPS-PRIMARY> (.12)
<EPS-DILUTED> 0
</TABLE>
