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, 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 July 31,
1997, was 7,378,000.
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 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 10
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 10
ITEM 5. OTHER INFORMATION 10
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 11
PART III. SIGNATURES 11
<TABLE>
<CAPTION>
SGI INTERNATIONAL
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
1997 1996
---------------------------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash $ 375,580 $ 740,018
Time deposit 402,500 402,500
Receivable from TEK-KOL Partnership 18,066 24,431
Trade accounts receivable 1,017,287 888,254
Costs and estimated earnings in
excess of billings on contracts 331,917 113,130
Inventories 68,289 68,289
Prepaid expenses and other current assets 294,797 58,545
--------------------------------
Total current assets 2,508,436 2,295,167
LFC Process related assets:
Notes receivable 304,903 304,903
Royalty rights, net 1,728,375 1,885,500
LFC Cogeneration project, net 473,779 526,421
Investment in TEK-KOL Partnership 582,414 464,163
Australia LFC project, net 137,410 144,795
Other technological assets 30,195 27,742
--------------------------------
3,257,076 3,353,524
Property and equipment, net 681,148 548,601
Goodwill, net 407,420 431,386
--------------------------------
$ 6,854,080 $ 6,628,678
================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,028,272 $ 444,436
Borrowings on line-of-credit 400,000 300,000
Billings in excess of costs and
estimated earnings on contracts 60,228 387,892
Current maturities of long-term notes payable 4,204,500 4,216,500
Accrued salaries, benefits and related taxes 138,511 124,942
Payable to TEK-KOL Partnership - 83,252
Interest payable 533,183 529,183
Other accrued expenses 345,318 224,149
--------------------------------
Total current liabilities 6,710,012 6,310,354
Long-term notes payable, less
current maturities 119,000 123,750
Commitments
Stockholders' equity
Convertible preferred stock 897 887
Common stock 37,639,272 36,118,231
Paid-in capital 7,168,777 6,494,585
Accumulated deficit (44,783,878) (42,419,129)
--------------------------------
Total stockholders' equity 25,068 194,574
--------------------------------
$ 6,854,080 $ 6,628,678
================================
See notes to condensed consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
SGI INTERNATIONAL
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three months Six months
ended June 30, ended June 30,
------------------------- -------------------------
1997 1996 1997 1996
------------------------- -------------------------
<S> <C> <C> <C> <C>
Revenues:
Net sales $ 1,479,892 $ 1,190,267 $ 2,584,152 $ 2,246,944
Other 9,859 80,584 19,514 222,520
------------------------- -------------------------
1,489,751 1,270,851 2,603,666 2,469,464
Income (loss) from
investment in TEK-KOL (207,675) (23,125) (331,748) 52,978
Cost and expenses:
Cost of sales 1,169,528 952,133 2,005,123 1,746,199
Research and development 249,420 102,560 551,301 257,334
Selling, general and
administrative 623,092 407,325 1,154,546 997,704
Legal and accounting 152,279 157,951 305,073 613,165
Depreciation and
amortization 174,928 143,318 351,681 309,052
Interest 134,033 91,607 268,943 243,385
------------------------- -------------------------
2,503,280 1,854,894 4,636,667 4,166,839
------------------------- -------------------------
Net loss $(1,221,204) $ (607,168) $(2,364,749) $(1,644,397)
========================= =========================
Net loss per share $ (0.18) $ (0.12) $ (0.36) $ (0.35)
========================= =========================
Weighted average
common shares 6,891,713 5,239,863 6,535,576 4,755,235
========================= =========================
See notes to condensed consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
SGI INTERNATIONAL
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
Convertible
preferred stock Common stock
Shares Amount Shares Amount
-----------------------------------------------
<S> <C> <C> <C> <C>
Balances at December 31, 1996 88,732 $ 887 6,094,605 $ 36,118,231
Issuance of common stock
for cash - - 667,328 1,122,423
Issuance of common stock
for services - - 162,506 172,820
Conversion of preferred stock (8) - 300,280 225,798
Issuance of preferred stock
for cash 1,000 10 - -
Net loss - - - -
-----------------------------------------------
Balances at June 30, 1997 89,724 $ 897 7,224,719 $ 37,639,272
===============================================
</TABLE>
<TABLE>
<CAPTION>
Total
Paid-in- Accumulated stockholders'
capital deficit equity
-----------------------------------------------
<S> <C> <C> <C>
Balances at December 31, 1996 $ 6,494,585 $ (42,419,129) $ 194,574
Issuance of common stock
for cash - - 1,122,423
Issuance of common stock
for services - - 172,820
Conversion of preferred stock (225,798) - -
Issuance of preferred stock
for cash 899,990 - 900,000
Net loss - (2,364,749) (2,364,749)
-----------------------------------------------
Balances at June 30, 1997 $ 7,168,777 $ (44,783,878) $ 25,068
===============================================
See notes to condensed consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
SGI INTERNATIONAL
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six months
ended June 30,
-----------------------------
1997 1996
-----------------------------
<S> <C> <C>
Operating activities
Net loss $ (2,364,749) $ (1,644,397)
Adjustments to reconcile net loss to net
cash flows used for operating activities:
Depreciation and amortization 365,068 349,525
Stock and warrants issued for interest, services,
and notes receivable 172,820 633,954
Changes in assets and liabilities:
Receivable from TEK-KOL Partnership 6,365 -
Trade accounts receivable (347,820) (110,603)
Inventories - (5,879)
Other current assets (236,252) (14,379)
Accounts payable 583,836 (199,871)
Billings in excess of costs and estimated
earnings on contracts (327,664) (681)
Accrued salaries, benefits and related taxes 13,569 (4,353)
Royalty payable to related party - (141,790)
Payable to TEK-KOL Partnership (83,252) (137,367)
Interest payable 4,000 24,280
Other accrued expenses 121,169 14,001
-----------------------------
Net cash flows used for operating activities (2,092,910) (1,237,560)
Investing activities
LFC Process related assets:
Collection of notes receivable and interest - 144,030
Investment in TEK-KOL Partnership (118,251) (183,478)
Purchase of property and equipment (256,497) (149,176)
Other assets (2,453) 12,876
-----------------------------
Net cash flows used for investing activities (377,201) (175,748)
Financing activities
Borrowings on line-of-credit 100,000 -
Proceeds from issuance of notes payable - 50,000
Payments of notes payable (16,750) (79,000)
Proceeds from issuance of common stock 1,122,423 2,103,935
Proceeds from issuance of preferred stock 900,000 -
Collection of notes receivable - 47,000
-----------------------------
Net cash flows provided by financing activities 2,105,673 2,121,935
-----------------------------
Net increase (decrease) in cash (364,438) 708,627
Cash at beginning of period 740,018 74,154
-----------------------------
Cash at end of period $ 375,580 $ 782,781
=============================
See notes to condensed consolidated financial statements.
</TABLE>
SGI INTERNATIONAL
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(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, 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 June 30, 1997, and the consolidated results of operations for
the three and six months ended June 30, 1997, and 1996. The results of
operations for the three and six months ended June 30, 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
Development of the first commercial LFC Plant in the Powder River Basin of
Wyoming continues to progress as previously reported. The $460,000,000
Engineering, Procurement, and Construction contract was signed on December 30,
1996.
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 has been executed. The Russian Central government
and the regional government in Kemerovo have approved a Phase II study to
determine the economic and technical feasibility of an LFC project in Russia's
Kuzbass Region. This study is currently underway and is anticipated to be
completed prior to year end. Under the protocol established, should the Phase
II feasibility study results prove positive, the protocol agreement states that
the project will be included in the Central Government's Coal Renovation
Program for the Kuzbass Region.
A 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. The
United States Trade and Development Agency (the "USTDA") provided funding for
the Phase II study, and the USTDA has completed its due diligence relative to
another grant for the additional tasks necessary to develop and finance an LFC
project. A grant funding decision by the USTDA is expected during the fourth
quarter of this year.
OCET process effectiveness to remove asphaltenes and substantially reduce
catalyst-fouling nickel and vanadium metal content from a variety of oil field
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 substantial
reductions of catalyst-fouling metals.
Based on these results and progress in developing methods to monitor, control
process yields and product quality, in response to continually changing
feedstocks, OCET has commenced construction of the second generation,
continuous process, stainless steel Process Development Unit (the "PDU"), which
is expected to be operational prior to year end.
A Cooperative Research and Development Agreement has been executed with the
U.S. Department of Energy in support of the OCET development program.
Additionally, contacts have been made with several potential strategic partners
capable of further accelerating the Company's commercialization efforts.
Additional resources are being deployed to increase sales at Assembly and
Manufacturing Systems, Inc. ("AMS"), SGI's automated assembly subsidiary.
Sales for 1997 are expected to exceed 1996 levels. AMS assisted in designing
and constructing certain portions of OCET's second generation PDU.
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 June 30, 1997, compared to Three months ended June 30, 1996.
The Company's net loss for the three months ended June 30, 1997, increased 101%
($614,000) over the same prior year period. Components of the increase in net
loss are discussed below.
Sales and cost of sales for the three months ended June 30, 1997, increased 24%
($290,000) and 23% ($217,000), respectively, over the same prior year period.
Sales and cost of sales are recorded using the percentage of completion method,
and vary based upon activity during the quarter.
Other income for the three months ended June 30, 1997, decreased 88% ($71,000)
from the same prior year period. The prior year period included the reversal
of certain accrued expenses totaling $75,000.
The Company's share of the TEK-KOL loss for the three months ended June 30,
1997, increased 798% ($185,000) over the same prior year period. TEK-KOL
received certain non-recurring payments under an agreement with Mitsubishi
Heavy Industries during the 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 June 30, 1997,
increased 143% ($147,000) over the same prior year period. The increase
relates to the Company's heightened efforts to develop the OCET process.
Selling, general and administrative expense for the three months ended June 30,
1997, increased 53% ($216,000) from the same prior year period. The increase
relates to the addition of sales and marketing personnel at AMS, public
relation fees, and financial consulting fees.
Interest expense for the three months ended June 30, 1997, increased 46%
($42,000) over the same prior year period. The prior year period included the
reversal of accrued interest payable totaling $43,000.
Six months ended June 30, 1997, compared to Six months ended June 30, 1996.
The Company's net loss for the six months ended June 30, 1997, increased 44%
($720,000) from the same prior year period. Components of the increase in net
loss are discussed below.
Sales and cost of sales for the six months ended June 30, 1997, increased 15%
($337,000) and 15% ($259,000), respectively, over the same prior year period.
Sales and cost of sales are recorded using the percentage of completion method,
and vary based upon activity during the quarter.
Other income for the six months ended June 30, 1997, decreased 91% ($203,000)
from the same prior year period. The decrease is related to the forgiveness of
certain royalty obligations by a related party totaling $142,000 and the
reversal of certain accrued expenses totaling $75,000, in the prior year.
The Company's share of the TEK-KOL loss for the six months ended June 30, 1997,
was $332,000 compared to income from operations of $53,000 for the same prior
year period. TEK-KOL received certain non-recurring payments under an
agreement with Mitsubishi Heavy Industries during the 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 six months ended June 30, 1997,
increased 114% ($294,000) from the same prior year period. The increase
relates to the Company's heightened efforts to develop the OCET process.
Selling, general and administrative expense for the six months ended June 30,
1997, increased 37% ($315,000) from the same prior year period after adjusting
for non-recurring charges of $158,000. The increase relates to the addition of
sales and marketing personnel at AMS, public relation fees, and financial
consulting fees.
Legal and accounting expense for the six months ended June 30, 1997, increased
2% ($8,000) over the same prior year period after adjusting for non-recurring
charges of $316,000.
Liquidity and Capital Resources
As of June 30, 1997, the Company had current assets totaling $6.8 million,
including cash of $376,000, and a working capital deficit of $4.2 million. The
Company anticipates continued operating losses over the next twelve months and
has both short-term and long-term liquidity deficiencies as of June 30, 1997.
Short-term liquidity requirements are expected to be satisfied from existing
cash balances and proceeds from the sale of equity securities. 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 Form 10-K for the year ended December 31, 1996, disclosed the
execution of two funding agreements in April 1997 which provided gross proceeds
of $2 million through the sale of equity securities. As previously reported,
funding for an additional $2 million was subject to certain minimum levels of
price and trading volume of the Company's common stock. The contingencies were
not met and the additional funding did not close.
The Company's investing activities increased during the six months ended June
30, 1997, as lab equipment was purchased and built for the OCET lab.
The Company's financing activities raised approximately $2.1 million and $2.2
million during the six months ended June 30, 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
June 30, 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
During April 1997, the Company raised $29,735, net of discounts aggregating
$24,329, through the issuance of 15,008 restricted common shares. These shares
were sold to one employee pursuant to Regulation D of the Securities Act of
1933, as amended ("Reg. D"). In April 1997, the Company issued 4,388
restricted common shares to two domestic individuals and one domestic entity
pursuant to Reg. D for services rendered. In May 1997, the Company issued
112,000 restricted common shares to a domestic entity pursuant to Reg. D for
services rendered.
As provided in related service agreements, the Company granted warrants to
purchase 325,250 common shares to thirty-four employees, three Board of
Director members, and one consultant in May 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 $2.00 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/
______________________ August 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/
_____________________ August 13, 1997
Joseph A. Savoca,
Chief Executive Officer and Chairman of the Board
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<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 375,580
<SECURITIES> 0
<RECEIVABLES> 1,367,270
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<INVENTORY> 68,289
<CURRENT-ASSETS> 2,508,436
<PP&E> 681,148
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