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
March 31, 1997
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
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 May 1,
1997 was 6,821,303.
TABLE OF CONTENTS
FORM 10-Q
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Operations 4
Condensed Consolidated Statement of Stockholders'
Equity (Deficit) 5
Condensed Consolidated Statements of Cash Flows 6
Notes to Condensed Consolidated Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Overview 8
Results of Operations 9
Liquidity and Capital Resources 9
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 10
ITEM 5. OTHER INFORMATION 10
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 10
PART III. SIGNATURES 11
SGI INTERNATIONAL
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
1997 1996
--------------------------------------
(Unaudited)
ASSETS
Current assets:
Cash $ 117,288 $ 740,018
Time deposit 402,500 402,500
Receivable from TEK-KOL Partnership 41,126 24,431
Trade accounts receivable 481,874 888,254
Costs and estimated earnings
in excess of billings on contracts 101,558 113,130
Inventories 63,289 68,289
Prepaid expenses and other current
assets 64,814 58,545
-------------------------------
Total current assets 1,272,449 2,295,167
LFC Process related assets:
Notes receivable 304,903 304,903
Royalty rights, net 1,806,938 1,885,500
LFC Cogeneration project, net 500,100 526,421
Investment in TEK-KOL Parnership 490,089 464,163
Australia LFC project, net 137,556 144,795
Other technological assets 27,742 27,742
-------------------------------
3,267,328 3,353,524
Property and equipment, net 594,911 548,601
Goodwill, net 419,403 431,386
-------------------------------
$5,554,091 $6,628,678
===============================
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 599,964 $ 444,436
Borrowings on line-of-credit 400,000 300,000
Billings in excess of costs
and estimated earnings on contracts 66,742 387,892
Current maturities of long-term notes
payable 4,212,875 4,216,500
Accrued salaries, benefits and related
taxes 133,170 124,942
Payable to TEK-KOL Partnership 133,252 83,252
Interest payable 533,183 529,183
Other accrued expenses 198,128 224,149
-------------------------------
Total current liabilities 6,277,314 6,310,354
Long-term notes payable, less
current maturities 119,000 123,750
Commitments
Stockholders' equity (deficit)
Convertible preferred stock 887 887
Common stock 36,228,176 36,118,231
Paid-in capital 6,491,388 6,494,585
Accumulated deficit (43,562,674) (42,419,129)
---------------------------------
Total stockholders' equity (deficit) (842,223) 194,574
---------------------------------
$ 5,554,091 $ 6,628,678
=================================
See notes to condensed consolidated financial statements.
SGI INTERNATIONAL
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three months
ended March 31,
--------------------------------
1997 1996
--------------------------------
Revenues:
Net sales $ 1,104,260 $ 1,056,677
Income from investment in TEK-KOL - 76,103
Other 9,655 141,936
--------------------------------
1,113,915 1,274,716
Cost and expenses:
Cost of sales 835,595 794,066
Research and development 301,881 154,774
Loss on investment in TEK-KOL 124,073 -
Selling, general and administrative 531,454 590,379
Legal and accounting 152,794 455,214
Depreciation and amortization 176,753 165,734
Interest 134,910 151,778
-------------------------------
2,257,460 2,311,945
-------------------------------
Net loss $(1,143,545) $(1,037,229)
===============================
Net loss per share $ (0.19) $ (0.24)
===============================
Weighted average common shares 6,175,482 4,270,607
===============================
See notes to condensed consolidated financial statements.
SGI INTERNATIONAL
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
(Unaudited)
Convertible preferred stock Common stock
Shares Amount Shares Amount
--------------------------------------------
Balances at December 31, 1996 88,732 $887 6,094,605 $36,118,231
Issuance of common stock
for cash - - 81,400 64,128
Issuance of common stock
for services - - 46,118 42,620
Conversion of preferred stock (7) - 280 3,197
Net loss - - - -
----------------------------------------------
Balances at March 31, 1997 88,725 $887 6,222,403 $36,228,176
==============================================
(Continued)
Total
Paid-in- Accumulated
capital deficit equity (deficit)
--------------------------------------------
Balances at December 31, 1996 $ 6,494,585 $(42,419,129) $ 194,574
Issuance of common stock
for cash - - 64,128
Issuance of common stock
for services - - 42,620
Conversion of preferred stock (3,197) - -
Net loss - (1,143,545) (1,143,545)
---------------------------------------------
Balances at March 31, 1997 $ 6,491,388 $(43,562,674) $ (842,223)
=============================================
See notes to consolidated financial statements.
SGI INTERNATIONAL
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three months
ended March 31,
-------------------------------
1997 1996
-------------------------------
Operating activities
Net loss $(1,143,545) $(1,037,229)
Adjustments to reconcile net loss
to net cash flows used for
operating activities:
Depreciation and amortization 185,245 184,256
Common stock issued for services 42,620 -
Preferred stock issued for interest - 23,170
Changes in assets and
liabilities:
Receivable from TEK-KOL (16,695) -
Trade accounts receivable 417,952 (122,775)
Inventories 5,000 (1,003)
Other current assets (6,269) (3,797)
Accounts Payable 155,528 (117,122)
Billings in excess of costs and
estimated earnings on contracts (321,150) 8,658
Accrued salaries, benefits and
related taxes 8,228 511,872
Royalty payable to related party - (141,790)
Payable to TEK-KOL 50,000 -
Interest payable 4,000 100,162
Other accrued expenses (26,021) 68,152
-----------------------------
Net cash flows used for operating
activities (645,107) (527,446)
Investing activities
LFC Process related assets:
Collection of notes receivable
and interest - 56,016
Investment in TEK-KOL (25,927) (76,103)
Purchase of property and equipment (107,449) (24,954)
Other assets - 12,876
-----------------------------
Net cash flows used for investing
activities (133,376) (32,165)
Financing activities
Borrowings on line-of-credit 100,000 -
Proceeds from issuance of notes
payable - 50,000
Payments of notes payable (8,375) (18,000)
Proceeds from issuance of common stock 64,128 739,046
-------------------------------
Net cash flows provided by
financing activities 155,753 771,046
-------------------------------
Net increase (decrease) in cash (622,730) 211,435
Cash at beginning of period 740,018 74,154
-------------------------------
Cash at end of period $ 117,288 $ 285,589
===============================
See notes to condensed consolidated financial statements.
SGI INTERNATIONAL
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
(Unaudited)
(1) Basis of Presentation
The accompanying condensed consolidated financial statements of SGI
International (the "Company") for the three months ended March 31, 1997 and
1996 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 March 31, 1997, and the consolidated results of operations for
the three months ended March 31, 1997 and 1996. The results of operations
for the three months ended March 31, 1997 are not necessarily indicative of
the results to be expected for the year ending December 31, 1997. 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, 1996 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 recovery of amounts invested in the Company's principal assets, the LFC
Process related assets, is dependent upon the Company's ability to
adequately fund its capital contributions to the TEK-KOL Partnership and
TEK-KOL's ability to successfully attract sufficient additional equity,
debt or other third party financing to complete the commercialization of the
LFC Process technology. 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. 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 to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events.
Overview
The LFC Process is gaining greater market acceptance as development of the
first commercial LFC Plant continues in the Powder River Basin of Wyoming.
The $460,000,000 Engineering, Procurement, and Construction contract was
signed on December 30, 1996, with the first permit, the Industrial Siting
Permit, being issued in February. Additional permitting and design work
continues to progress satisfactorily.
A Memorandum of Understanding ("MOU") between TEK-KOL (a partnership between
the Company and a unit of Zeigler Coal Holding Company) and a group of
Russian private and public entities is being finalized. The Russian regional
government in Kemerovo has issued a protocol that directs the funding of the
feasibility study to be performed under the MOU and indicated that if the
results are positive the project will be included in the Central Government's
Coal Renovation Program for the Kuzbass Region.
Finally, an additional MOU has been executed between TEK-KOL and PTBA (the
Indonesian state owned coal company) to perform additional tasks necessary
to develop and finance an LFC project at PTBA's mine in the Tanjung Enim
area of South Sumatra.
OCET's ability to remove asphaltenes and substantially reduce catalyst-fouling
nickel and vanadium metal content from a variety of oilfield crudes has been
successfully demonstrated using bench-scale continuous processing equipment.
Samples of several types of heavy crudes and resids have been processed to
produce high yields of deasphalted oil and dramatic reductions of catalyst-
fouling metals.
Based on these results and progress in developing methods to monitor and
control process yield and product quality in response to continually changing
feedstocks, design of a second generation Process Development Unit has been
completed and construction is now underway.
A Cooperative Research and Development Agreement has been executed with the
U.S. Department of Energy in support of the OCET development program.
Additionally, initial contact has been made with several potential strategic
partners capable of further accelerating our commercialization efforts.
Additional resources are being deployed to increase sales at AMS, SGI's
automated assembly subsidiary. Sales for 1997 are expected to substantially
exceed 1996 levels. AMS has assisted in the design of the OCET second
generation PDU and is initiating its construction, which is expected to be
operational by the end of the third quarter of 1997.
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, 1996 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 March 31, 1997 compared to Three months ended March 31,
1996.
The Company's net loss for the three months ended March 31, 1997 increased
10% ($106,000) from the same prior year period. Components of the increase
in net loss are discussed below.
Other income for the three months ended March 31, 1997 decreased 93% ($132,000)
from the same prior year period. The prior year period included the
forgiveness of royalty obligations totaling $142,000 by a related party.
The Company's share of the TEK-KOL loss for the three months ended March 31,
1997 was $124,000 compared to income from this investment of $76,000 for the
same prior year period. The results of TEK-KOL's operations are influenced
by the number and timing of feasibility studies prepared for third parties.
Research and development expenses for the three months ended March 31, 1997
increased 95% ($147,000) 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 March 31, 1997
increased 23% ($99,000) from the same prior year period after adjusting for
non-recurring charges of $158,000. The increase relates to the timing of
certain recurring expenditures.
Legal and accounting expense for the three months ended March 31, 1997
increased 10% ($14,000) from the same prior year period after adjusting for
non-recurring charges of $316,000. The increase relates to on-going business
activities.
Liquidity and Capital Resources
As of March 31, 1997, the Company had current assets totaling $1.3 million,
including cash of $117,000, and a working capital deficit of $5.0 million.
The Company anticipates continued operating losses over the next twelve
months and has both short-term and long-term liquidity deficiencies as of
March 31, 1997. 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.
As described in the Company's Form 10-K for the year ended December 31, 1996,
the Company executed two funding agreements in April 1997 which could provide
proceeds of up to $4 million through the sale of equity securities. The
transactions will be completed in tranches, and the closing of future tranches
is subject certain minimum levels of price and trading volume of the Company's
common stock.
The Company's investing activities were minimal during the three months
ended March 31, 1997 and 1996.
The Company's financing activities raised approximately $164,000 and $789,000
during the three months ended March 31, 1997 and 1996, respectively. These
funds were raised primarily through the private placement of equity securities
and borrowings on the line-of-credit. 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.
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
March 31, 1997.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the ordinary course of business, various claims are asserted against the
Company and its subsidiaries. However, except for a cross complaint asserted
in a lawsuit filed by the Company for Declaratory Relief, no claims asserted
against the Company have resulted in litigation. Management's opinion is
that the ultimate resolution of any and all claims, including the cross
complaint against the Company, will not have material effect on the Company's
financial position, results of operations or liquidity.
ITEM 5. OTHER INFORMATION
In February 1997, the Company issued 8,618 common shares to five domestic
individuals pursuant to Regulation D of the Securities Act of 1933, as
amended ("Reg. D") for services rendered.
As provided in related service agreements, the Company granted warrants to
purchase 130,000 common shares to six employees in March 1997 pursuant to Reg.
D. The exercise prices were not lower than the closing bid price on the
grant date. The warrants are exercisable one year from the grant date at
$4.25 per share, and expire on December 31, 2001.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
1. Exhibits - None
2. Reports on Form 8-K - None
PART III. 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
/s/
____________________ May 13, 1997
Joseph A. Savoca,
Chief Executive Officer and Chairman of the Board
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.
/s/
___________________ May 13, 1997
Joseph A. Savoca,
Chief Executive Officer and Chairman of the Board
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