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 September 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
(State or other jurisdiction of incorporation or
organization (I.R.S. Employer Identification No.)
33-0119035
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 October 29,1996 was 6,081,827.
TABLE OF CONTENTS
FORM 10-Q
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets
Condensed Consolidated Statements of Operations
Condensed Consolidated Statement of Stockholders'
Equity (Deficit)
Condensed Consolidated Statements of Cash Flows
Notes to Condensed Consolidated Financial
Statements
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
PART II. OTHER INFORMATION
SIGNATURES
<TABLE>
SGI INTERNATIONAL
CONSOLIDATED BALANCE SHEETS
<CAPTION>
September 30, December 31,
1996 1995
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash $ 1,222,291 $ 74,154
Trade accounts receivable 772,443 341,352
Costs and estimated earnings
in excess of billings on
uncompleted contracts 62,168 271,448
Inventories 82,007 68,289
Other current assets 65,375 114,143
Total current assets 2,204,284 869,386
LFC Process related assets:
Notes receivable 1,429,903 1,123,948
Royalty rights 1,964,063 2,199,750
LFC Cogeneration project 552,742 631,705
Investment in TEK-KOL Partnership 507,656 596,276
Australia LFC project 152,035 173,754
Other technological assets 27,742 26,440
Process demonstration equipment - 153,781
4,634,141 4,905,654
Property and equipment 298,948 249,328
Goodwil 443,369 479,318
Other assets 12,876
$ 7,580,742 $ 6,516,562
See notes to condensed consolidated financial statements.
</TABLE>
<TABLE>
SGI INTERNATIONAL CONSOLIDATED BALANCE SHEETS
<CAPTION>
September 30, December 31, ,
1996 1995
(Unaudited)
<S> <C> <C>
Liabilities and stockholders' equity (deficit)
Currentliabilities:
Accounts payable $ 685,735 $ 683,583
Billings in excess of cost and
estimated earnings on
uncompleted contracts 315,030 175,745
Current maturities of long-term
notes payable 4,442,500 909,016
Notes payable to Director - 304,000
Accrued salaries, benefits and
related taxes 236,732 279,103
Royalties payable to related party - 141,790
Contributions payable to TEK-KOL - 336,476
Interest payable 543,933 139,663
Other accrued expenses 269,740 269,089
Total current liabilities 6,493,670 3,238,465
Interest payable - 276,425
Long-term notes payable, less
current maturities 126,125 4,631,250
Commitments and contingencies
Stockholders' equity (deficit)
Covertible preferred stock 862 1,037
Common stock 35,978,748 32,255,357
Paid-in capital 6,464,518 4,582,215
Acccumulated deficit (41,369,275) (38,159,764)
Notes receivable from employees (113,906) (308,423)
Total stockholders' equity (deficit) 960,947 (1,629,578)
$ 7,580,742 $ 6,516,562
See notes to condensed consolidated financial statements.
</TABLE>
<TABLE>
SGIINTERNATIONAL
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
Three months ended September 30, Nine months ended September 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Revenues:
Net sales 659,471 - 2,906,415 -
Other 55,714 242 278,234 33,819
715,185 242 3,184,649 33,819
Cost and expenses:
Cost of sales 805,086 -- 2,551,285 --
Research and development 273,720 179,439 531,054 1,294,508
Loss on investment in TEK-KOL 272,098 -- 219,120 --
Selling, general
and administrative 499,661 637,647 1,497,365 1,224,573
Legal and accounting 147,557 131,600 760,722 483,859
Depreciation and amortization 127,803 1,820,971 436,855 2,323,577
Interest 154,374 293,890 397,759 768,573
2,280,299 3,063,547 6,394,160 6,095,090
Net loss $(1,565,114)$(3,063,305) $(3,209,511) $(6,061,271)
Net loss per share $ (0.27) $ (1.03) $ (0.63) $ (2.41)
Average common shares 5,829,019 2,969,233 5,115,776 2,510,031
See notes to condensed consolidated financial statements.
</TABLE>
<TABLE>
SGI INTERNATIONAL
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
(Unaudited)
<CAPTION>
Convertible preferred stock Common stock
Shares Amount Shares Amount
<S> <C> <C> <C> <C>
Balances at December 31, 1995 103,729 $1,037 3,859,671 $32,255,357
Issuance of common stock for cash 1,579,059 2,834,160
Issuance of common stock for notes
payable interest and services 566,489 651,166
Conversion of convertible preferred
stock into common stock (17,581) (176) 26,120 238,065
Issuance of convertible preferred
stock for notes payable, interest
and other liabilities 102 1
Redemption of convertible preferred stock (1) --
Warrants granted for accounts payable, notes
payable, interest and services
Compensation expense related to warrants
exercised for notes receivable
Collection of notes receivable
Net loss
Balances at September 30, 1996 $ 86,249 $ 862 6,031,339 $ 35,978,748
Total
Paid-in Accumulated Notes stockholders
capital deficit receivable equity
(deficit)
<S> <C> <C> <C> <C>
Balances at December 31, 1995 $4,582,215 $(38,159,764) $(308,423) $(1,629,578)
Issuance of common stock
for cash 2,834,160
Issuance of common stock for
notes payable, interest
and services 651,166
Conversion of convertible preferred
stock into common stock (235,829) 2,060
Issuance of convertible preferred
stock for notes payable, interest
and other liabilities 1,543,646 1,543,647
Redemption of convertible
preferred stock (41,222) (41,222)
Warrants granted for accounts
payable, notes payable,
interest and services 141,603 141,603
Compensation expense related to
warrants exercised for notes
receivable 474,105 474,105
Collection of notes receivable 194,517 194,517
Net loss (3,209,511) (3,209,511)
Balances at September 30, 1996 $6,464,518 $(41,369,275) $(113,906) $960,947
See notes to condensed consolidated financial statements.
</TABLE>
<TABLE>
SGI INTERNATIONAL
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Nine months ended September 30,
1996 1995
<S> <C> <C>
Operating activities
Net loss (3,209,511) (6,061,271)
Adjustments to reconcile net loss to net
cash flows used for operating activities:
Depreciation and amortization 511,189 755,556
Write-down of LFC Process related assets - 1,568,021
Amortiztion of note discounts - 119,011
Equity issued for interest, services and
notes receivable 710,800 231,000
Changes in assets and liabilities:
Receivable from joint venture partner - 45,823
Trade accounts receivable (221,811) -
Inventories (13,718) -
Receivable from officers and directors - 396,961
Other current assets 48,768 84,451
Accounts payable 2,152 (21,852)
Billings in excess of costs and estimated
earnings uncompleted contracts 139,285 -
Accrued salaries, benefits and related taxes (42,371) (35,634)
Royalty payable to related party (141,790) (100,564)
Contribution payable to TEK-KOL (236,476) -
Interest payable n 127,845 142,856
Other accrued expenses 651 222,395
Net cash flows used for operating activities (2,324,987) (2,653,247)
Investing activities
LFC process related assets:
Collectin of notes receivable and interest 400,000 137,561
Additions to other technological assets (1,302) (33,183)
Additions to process demonstration equipment - (31,512)
Investment in TEK-KOL 88,620 (122,000)
Purchase of property and equipment (134,710) 48,930
Other assets 12,876 -
Redemption of preferred stock (41,222) -
Net cash flows provided by (used for) investing
activities 324,262 (204)
Financing activities
Proceeds from issuance of note payable 215,000 699,286
Payments of notes payable (96,875) (536,025)
Proceeds from issuance of preferred stock - 1,113,942
Proceeds from issuance of common stock 2,836,220 893,990
Collection of notes receivable 194,517 -
Net cash flows provided by financing activities 3,148,862 2,171,193
Net increase (decrease) in cash 1,148,137 (482,258)
Cash at beginning of period 74,154 551,299
Cash at end of period 1,222,291 69,041
See notes to condensed consolidated financial statements.
</TABLE>
SGI International
Notes to Condensed Consolidated
Financial Statements September 30, 1996
(Unaudited)
(1) BASIS OF PRESENTATION
The accompanying condensed consolidated financial
statements of SGI International (the Company) for
the three and nine months ended September 30, 1996
and 1995 are unaudited. These financialstatements
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 September 30, 1996, and the
consolidated results of operations for the three and
nine months ended September 30, 1996 and 1995. The
results of operations for the nine months ended September
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 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.
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 the
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
forwardlooking 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 $1.0
million at September 30, 1996. The improvement
of stockholders' equity results from equity sales
for cash, and conversion of notes payable,
accrued expenses and other liabilities into
equity. After excluding AMS's operations, the
Company's net loss on a comparative basis for the
three and nine month periods ended September 30,
1996 has decreased 58% and 49%, 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 has been demonstrated in
laboratory experiments for a variety of
California resids, showing how the distillate
yield depends on the resid properties. Venezuelan
material is also being tested to determine its
separation characteristics.
Laboratory work is underway to optimize the
process steps for resid derived from the larger
petroleum fields, as well as to characterize the
OCET products as a function of the processing
parameters. This information will be necessary
to design a refinery-scale system, capable of
processing resids from various crude sources
while generating the most valuable final products
from the resid.
To reach the commercialization stage, a series of
demonstration unitsof increasing scale
are under development.
The continuing need to fund Company operations
with equity based financing is causing 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.
The report of the Company's independent auditors
for the year ended December 31, 1995 contains an
emphasis paragraph as to the Company's ability to
continue as a going concern. As discussed in
Liquidity and Capital Resources, the Company has
short-term and long-term liquidity deficiencies.
The Company's ability to continue as a going
concern is dependent upon successful financing of
its immediate working capital requirements and
successful commercialization of the LFC and OCET
technologies. The Company is engaged in license
marketing activities and negotiations to secure
additional financing. If immediate working
capital requirements are not successfully
financed and/or the LFC and OCET technologies
cannot be successfully commercialized, then the
adverse impact on the business and operations of
the Company could be material.
Results of Operations
Three months ended September 30, 1996 compared to
Three months ended September 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 $659,000, $805,000,$160,000 and
$34,000, respectively, for the three months ended
September 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
September 30, 1996 decreased 58% ($1.8 million)
compared to the same prior year period.
Components of the decrease in net loss are
discussed below.
Research and development expenses for the three
months ended September 30, 1996 increased 53%
($94,000) from the same prior year period. The
increase relates to efforts expended to develop
the OCET process.
General and administrative expense for the three
months ended September 30, 1996 decreased 47%
($298,000) 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 September 30, 1996 decreased
93% ($1.7 million) 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 for the three months ended
September 30, 1996 decreased 47% ($138,000) 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.
Nine months ended September 30, 1996 compared to
Nine months ended September 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 $2.9 million, $2.6 million, $564,000
and $110,000, respectively, for the nine months
ended September 30, 1996. The following
discussion does not include AMS's results of
operations for that period.
The Company's net loss for the nine months ended
September 30, 1996 decreased 49% ($2.9 million)
compared to the same prior year period.
Components of the decrease in net loss are
discussed below.
Research and development expenses for the nine
months ended September 30, 1996 decreased 59%
($763,000) 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 nine
months ended September 30, 1996 decreased 24%
($291,000) 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 37%
($449,000). Personnel and overhead reductions,
instituted during the last two quarters of 1995,
have caused on-going general and administrative
expenses to decrease.
Legal and accounting expense for the nine months
ended September 30, 1996 increased 57% ($277,000)
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 nine months ended September 30, 1996
decreased 8% ($39,000).
Depreciation and amortization expense for the
nine months ended September 30, 1996 decreased
81% ($1.9 million) 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 for the nine months ended
September 30, 1996 decreased 48% ($370,000) 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.
As of September 30, 1996, the Company had current
assets totaling $2.2 million, including cash of
$1.2 million, and a working capital deficit of
$4.3 million. The Company anticipates continued
operating losses over at least the next twelve
months and has both short-term and long-term
liquidity deficiencies as of September 30, 1996.
Short-term liquidity requirements are expected to
be satisfied from existing cash balances,
proceeds from the sale of equity securities and
proceeds from joint venture agreements. In the
event that the Company is unable to finance
operations at the current level, various
administrative activities would be curtailed and
certain research efforts would be reduced. The
Company will not be able to sustain operations if
it is unsuccessful in securing sufficient
financing and/or generating revenues from
operations.
The Company's financing activities raised
approximately $3.2 million and $2.7 million
during the nine months ended September 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.
During the nine months ended September 30, 1996,
the Company collected $400,000 of the notes
receivable obtained in 1988 from the sale of the
Colstrip Project to the Rosebud Energy
shareholders. The Company's investing activities
were minimal during the nine months ended
September 30, 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 does not have material commitments
for capital expenditures as of September 30, 1996.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On August 8, 1996, SGI and OCET filed a Complaint
For Declaratory Relief To Determine Rights And
Obligations Under A Written Contract, in the
Superior Court of The State of California, County
of San Diego, seeking to obtain a judicial
determination that Asian Investment Advisors, a
Caymans Corporation, breached a certain joint
venture agreement between the parties, resulting
in a discharge of SGI/OCET's obligations under
the agreement. As of the date hereof, no answer
to the Complaint has been filed.
ITEM 5. EXHIBITS AND REPORTS
ON FORM 8-K 1. Exhibits
None
2. Reports on Form 8-K
None
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 November 13, 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
/s/ JOSEPH A. SAVOCA November 13, 1996
Joseph A. Savoca
Chief Executive Officer and Chairman of the
Board
