UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 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 June 30, 2000
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 small business issuer 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)
(858) 551-1090
(Issuer's telephone number)
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 August 11,
2000, was 67,646,849.
Transitional Small Business Disclosure Format (Check one): [ ] Yes [X] No
<PAGE>
TABLE OF CONTENTS
FORM 10-QSB
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Operations 4
Condensed Consolidated Statement of Stockholders' Deficiency 5
Condensed Consolidated Statements of Cash Flows 6
Notes to Condensed Unaudited Consolidated Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Introductory Note 11
Results of Operations 12
Liquidity and Capital Resources 13
Accounting Pronouncements 15
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 15
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 15
ITEM 2. CHANGES IN SECURITIES 15
ITEM 3. DEFAULTS UPON SENIOR DEBT SECURITIES 16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 16
ITEM 5. OTHER INFORMATION 17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 17
PART III. SIGNATURES 18
SGI INTERNATIONAL
2
<PAGE>
SGI INTERNATIONAL AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
June 30, December 31,
2000 1999
(Unaudited)
====================================================================================================================
<S> <C> <C>
ASSETS
Current assets:
Cash $ 308,737 $ 278,391
Restricted time deposit - 402,500
Trade accounts receivable, less allowance for doubtful accounts
of $71,587 and $80,320 864,485 661,880
Costs and estimated earnings in excess of billings on contracts 117,746 99,580
Inventories 412,672 413,716
Prepaid expenses and other current assets 158,423 102,624
Total current assets 1,862,063 1,958,691
--------------------------------------------------------------------------------------------------------------------
LFC royalty rights, net 785,625 942,750
LFC cogeneration project, net 157,926 210,568
Investment in LFC Investees 244,733 266,813
LFC related notes receivable, net 150,000 150,000
LFC process equipment, net 525,618 355,886
Other LFC assets, net 25,641 26,757
Property, plant and equipment, net of accumulated
depreciation of $1,486,372 and $1,340,622 2,397,081 2,514,595
Goodwill, net of accumulated amortization of $216,619 and $192,653 263,625 287,591
Interest receivable on notes from stockholders 18,788 -
--------------------------------------------------------------------------------------------------------------------
$ 6,431,100 $ 6,713,651
====================================================================================================================
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Accounts payable $ 925,609 $ 849,140
Notes payable 996,408 881,408
Accrued salaries, benefits and related taxes 958,419 770,167
Billings in excess of costs and estimated earnings on contracts 627,844 500,407
Borrowings on line-of-credit - 400,000
Interest payable 210,823 182,492
Current maturities of long-term notes payable 27,375 7,125
Other accrued expenses 161,276 188,530
--------------------------------------------------------------------------------------------------------------------
Total current liabilities 3,907,754 3,779,269
Long-term debt, less current maturities 6,319,449 6,250,386
--------------------------------------------------------------------------------------------------------------------
Total liabilities 10,227,203 10,029,655
--------------------------------------------------------------------------------------------------------------------
Commitments and contingencies
Minority interest 461,762 471,000
--------------------------------------------------------------------------------------------------------------------
Stockholders' deficiency:
Convertible preferred stock 605 605
Common stock 52,471,503 49,890,623
Paid-in capital 6,994,978 7,021,879
Accumulated deficit (63,253,951) (60,229,111)
Less notes receivable from stockholders (471,000) (471,000)
--------------------------------------------------------------------------------------------------------------------
Total stockholders' deficiency (4,257,865) (3,787,004)
--------------------------------------------------------------------------------------------------------------------
$ 6,431,100 $ 6,713,651
====================================================================================================================
</TABLE>
See notes to condensed consolidated financial statements.
SGI INTERNATIONAL
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SGI INTERNATIONAL AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
Three months Six months
ended June 30, ended June 30,
2000 1999 2000 1999
================================================================================================================================
<S> <C> <C> <C> <C>
REVENUES:
Contract revenues $ 1,325,691 $ 767,976 $ 2,381,402 $ 1,451,484
--------------------------------------------------------------------------------------------------------------------------------
EXPENSES:
Cost of sales 1,002,463 438,619 1,812,178 914,837
Engineering, research and development 385,157 525,962 753,887 808,687
Selling, general and administrative 992,122 867,843 1,827,706 1,616,467
Loss on LFC Investees 3,226 - 22,079 -
Legal and accounting 85,482 167,474 182,957 326,145
Depreciation and amortization 218,320 231,028 444,429 542,506
-------------------------------------------------------------------------------------------------------------------------------
Total expenses 2,686,770 2,230,926 5,043,236 4,208,642
-------------------------------------------------------------------------------------------------------------------------------
Loss from operations (1,361,079) (1,462,950) (2,661,834) (2,757,158)
NON-OPERATING INCOME (EXPENSES):
Interest expense (203,489) (161,566) (413,716) (312,348)
Other income 22,449 13,157 41,472 30,889
--------------------------------------------------------------------------------------------------------------------------------
Loss before minority interest in consolidated subsidiary (1,542,119) (1,611,359) (3,034,078) (3,038,617)
Minority interest in loss of consolidated subsidiary 4,074 - 9,238 -
--------------------------------------------------------------------------------------------------------------------------------
Net loss $ (1,538,045) $ (1,611,359) $ (3,024,840) $ (3,038,617)
================================================================================================================================
PREFERRED STOCK DIVIDENDS:
Imputed preferred stock dividends and accretion on
convertible and mandatorily redeemable preferred stock $ - $ 36,382 $ - $ 36,382
--------------------------------------------------------------------------------------------------------------------------------
Net loss applicable to common stock $ (1,538,045) $ (1,647,741) $ (3,024,840) $ (3,074,999)
--------------------------------------------------------------------------------------------------------------------------------
Net loss per common share - basic $ (0.02) $ (0.05) $ (0.05) $ (0.10)
================================================================================================================================
Weighted average common shares outstanding 63,494,131 35,193,496 60,069,264 29,891,480
================================================================================================================================
</TABLE>
See notes to condensed consolidated financial statements.
SGI INTERNATIONAL
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SGI INTERNATIONAL AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIENCY
(Unaudited)
<TABLE>
Convertible
Preferred Stock Common Stock Total
----------------- ----------------------- Paid-In Accumulated Notes Stockholders'
Shares Amount Shares Amount Capital Deficit Receivable Deficiency
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1999 60,541 $ 605 54,053,293 $49,890,623 $7,021,879 $(60,229,111) $(471,000) $(3,787,004)
Issuance of common stock
for cash, net 9,794,655 2,043,195 2,043,195
Exercise of warrants to
purchase common stock for cash 20,000 2,500 2,500
Issuance of common stock for
notes payable and interest 1,620,809 401,172 401,172
Issuance of common stock
for services 459,717 95,700 95,700
Conversion of preferred stock (23) - 312,386 38,313 (38,313) -
Issuance of warrants to purchase
common stock to non-employees 11,412 11,412
Net loss (3,024,840) (3,024,840)
------------------------------------------------------------------------------------------------------------------------------------
Balances at June 30, 2000 60,518 $ 605 66,260,860 $52,471,503 $6,994,978 $(63,253,951) $(471,000) $(4,257,865)
====================================================================================================================================
</TABLE>
See notes to condensed consolidated financial statements.
SGI INTERNATIONAL
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<PAGE>
SGI INTERNATIONAL AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
Six months ended June 30, 2000 1999
==========================================================================================================
<S> <C> <C>
Operating activities:
Net loss $ (3,024,840) $ (3,038,617)
Adjustments to reconcile net loss to net
cash used in operating activities:
Equity in net loss of LFC Investees 22,080 -
Depreciation and amortization 444,429 542,506
Common stock issued for services 95,700 39,075
Non-employee compensation expense on issuance of warrants 11,412 18,765
Imputed and accrued interest on warrants issued to note holders - 21,107
Accrued long-term interest expense 94,063 -
Accrued interest income (18,788) -
Minority interest in loss of consolidated subsidiary (9,238) -
Changes in operating assets and liabilities:
Restricted time deposit 402,500 -
Trade accounts receivable (220,771) (49,786)
Inventories 1,044 1,250
Prepaid expenses and other current assets (55,799) 15,264
Accounts payable 76,469 519,327
Billings in excess of costs and estimated earnings on contracts 127,437 298,427
Accrued salaries, benefits and related taxes 188,252 282,500
Interest payable 43,798 12,760
Other accrued expenses (27,254) 89,652
----------------------------------------------------------------------------------------------------------
Net cash used in operating activities (1,849,506) (1,247,770)
----------------------------------------------------------------------------------------------------------
Investing activities:
Additions to LFC Process equipment (233,562) (85,419)
Investment in LFC Investees - (990)
Purchase of property and equipment (28,236) (18,400)
Other assets - (9,247)
----------------------------------------------------------------------------------------------------------
Net cash used in investing activities (261,798) (114,056)
----------------------------------------------------------------------------------------------------------
Financing activities:
Payments of notes payable (4,750) (4,750)
Payments on line-of-credit (400,000) -
Proceeds from issuance of debt 500,705 825,000
Proceeds from issuance of common stock 2,045,695 645,500
----------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 2,141,650 1,465,750
----------------------------------------------------------------------------------------------------------
Net increase in cash 30,346 103,924
Cash at beginning of period 278,391 239,885
----------------------------------------------------------------------------------------------------------
Cash at end of period $ 308,737 $ 343,809
==========================================================================================================
Supplemental disclosure of cash flow information:
Interest paid 261,873 $ 264,715
Supplemental disclosure of non-cash activities:
Conversion of preferred stock 38,313 1,029,205
Common stock issued for convertible debentures - 68,107
Common stock issued for debt and interest 401,172 -
Common stock issued for mandatorily redeemable preferred stock - 1,072,833
==========================================================================================================
</TABLE>
See notes to condensed consolidated financial statements.
SGI INTERNATIONAL
6
<PAGE>
SGI INTERNATIONAL AND SUBSIDIARIES
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000
(1) BUSINESS
SGI International, a Utah corporation, (together with its subsidiaries,
hereinafter referred to as the "Company"), has its corporate office in La Jolla,
California. The Company is primarily in the business of developing and marketing
energy-related technologies, which at the present include the Liquids From Coal
("LFC") Process and the Opti-Crude Enhancement Technology ("OCET") Process. The
LFC Process is designed to convert and upgrade low-rank coal to create a higher
Btu more efficient and less environmentally polluting fuel to produce power and
simultaneously produce low temperature coal tars, which contain valuable
specialty chemicals. The OCET Process is designed to increase the efficiency of
oil refineries by deasphalting crude oil as well as residual oil bottoms
("resid"), which is produced in oil refining. Through Assembly & Manufacturing
Systems, Inc. ("AMS"), a wholly-owned subsidiary, the Company is also in the
business of supplying custom precision automated assembly equipment.
(2) BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements of SGI
International and subsidiaries (the "Company") for the three and six month
periods ended June 30, 2000, and 1999, are unaudited and have been prepared in
accordance with generally accepted accounting principles for interim financial
information and the instructions to Form 10-QSB. Accordingly, they do not
include all information and footnotes required by generally accepted accounting
principles for complete financial statements. 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, 2000, and the consolidated results of
operations for the three and six month periods ended June 30, 2000, and 1999,
and cash flows for the six month periods ended June 30, 2000, and 1999. The
results of operations for the six months ended June 30, 2000, are not
necessarily indicative of the results to be expected for the year ending
December 31, 2000. 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, 1999,
included in the Company's Form 10-KSB filed with the Securities and Exchange
Commission.
The accompanying consolidated financial statements are prepared on a going
concern basis and in conformity with generally accepted accounting principles,
which contemplates continuation of the Company as a going concern and
realization of assets and settlement of liabilities and commitments in the
normal course of business. The recovery of amounts invested in the Company's
principal assets, the LFC Process and OCET Process assets, is dependent upon the
Company's ability to adequately fund its on-going development operations and
eventual commercialization of these technologies. Furthermore, the ability to
successfully bring both the LFC Process and OCET Process technologies to
commercialization will ultimately depend on the Company's ability to attract
sufficient additional equity, debt or other third-party financing.
Success in commercialization of the LFC Process and OCET Process is dependent in
large part upon the ability to enter into satisfactory arrangements with other
partners, financiers or customers and upon the ability of these third parties to
perform their responsibilities. The resources required to profitably develop,
construct and operate an LFC plant are likely to include hundreds of millions of
dollars, and expertise in major plant development and operations. There can be
no assurance any licenses, joint venture agreements or other arrangements will
be available on acceptable terms, if at all; that any revenue will be derived
from such arrangements; or that, if revenue is generated, any of said
arrangements will be profitable to the Company. If the Company is unsuccessful
in its attempts to license the LFC Process or
SGI INTERNATIONAL
7
<PAGE>
OCET Process, or if such third parties are unsuccessful in profitably developing
and operating LFC plants, the planned business and operations of the Company
will likely not succeed and the Company would not be able to recover the
carrying value of the long-lived assets related to either the LFC Process or
OCET Process.
The Company had negative working capital of approximately $2.0 million and an
accumulated deficit of $63.3 million at June 30, 2000. These factors and the
Company's recurring losses from continuing operations, among others, raise
substantial doubt about the Company's ability to continue as a going concern.
The Company is currently seeking additional financing through public or private
sales of its securities to fund working capital requirements.
The Company will also seek funding through additional strategic partnerships,
joint ventures or similar arrangements to commercialize the technologies. There
can be no assurance that any collaborative financing arrangements through a
joint venture, and/or with strategic partners, will be available when needed, or
on terms acceptable to the Company. If adequate funds are not available, the
Company may be required to curtail or terminate one or more of its operating
activities. The Company is engaged in continuing negotiation to secure
additional capital and financing, and while management believes funds can be
raised, there is no assurance that their efforts will be successful. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
(3) FINANCING TRANSACTIONS
On June 8, 2000, the Company as provided in a related consulting agreement,
granted one warrant to purchase an aggregate of 48,000 common shares, to one
consultant for services rendered. The warrants were issued pursuant to the
exemptions provided by Section 4(2) of the Securities Act and Regulation D and
investment representations were obtained and legends were placed on the
certificate. In connection therewith, the Company recorded compensation expense
of approximately $7,000. The exercise price was not lower than the closing bid
price on the grant date. The warrant is exercisable one year from the grant date
at $0.225 per share and expires on December 31, 2005.
During the three month period ended June 30, 2000, the Company raised
approximately $834,000 through the issuance of approximately 4,457,000
restricted common shares to accredited investors. These securities were issued
pursuant to the exemptions provided by Section 4(2) of the Securities Act and
Regulation D. Investment representations were obtained and legends placed on the
certificates.
During the three month period ended June 30, 2000, the Company in conjunction
with its private placements, paid cash of approximately $16,000, issued 182,271
shares of restricted common stock valued at $46,000 and accrued a liability of
approximately $27,000 to be paid through the issuance of approximately 144,000
shares of restricted common stock, as compensation for placement agent services.
On June 30, 2000, the Company exchanged one unsecured 9% note payable with a
face value of $31,000 due on demand but no sooner than June 15, 2000, for a new
note payable of equal value. The new note is payable upon 30 days written demand
but no sooner than January 25, 2001. Both the principal and accrued interest
thereon may be paid in cash or at the option of the Company on January 25, 2001,
by issuing 366,482 shares of restricted common stock. The security was issued
pursuant to the exemptions provided by Section 4(2) of the Securities Act and
Regulation D. Investment representations were obtained from the accredited
investor.
On June 30, 2000, the Company exchanged one unsecured 9% note payable with a
face value of $9,000 due on demand but no sooner than June 15, 2000, for a new
note payable of equal value. The new note is payable upon 30 days written demand
but no sooner than November 30, 2000. Both the principal and accrued interest
thereon may be paid in cash or at the option of the Company on November 30,
2000, by
SGI INTERNATIONAL
8
<PAGE>
issuing 94,737 shares of restricted common stock. The security was
issued pursuant to the exemptions provided by Section 4(2) of the Securities Act
and Regulation D. Investment representations were obtained from the accredited
investor.
On June 30, 2000, the Company issued for cash a $75,000 unsecured 9% note
payable to one accredited investor. The note is payable upon 30 days written
demand but no sooner than December 15, 2000. Both the principal and accrued
interest thereon may be paid in cash or at the option of the Company, on
December 15, 2000, by issuing 882,331 shares of restricted common stock. The
security was issued pursuant to the exemptions provided by Section 4(2) of the
Securities Act and Regulation D. Investment representations were obtained from
the accredited investor.
During the three month period ended June 30, 2000, the Company as provided in
their related consulting agreements issued approximately 50,000 restricted
common shares to two consultants for services rendered, valued by the parties at
approximately $10,000. These securities were issued pursuant to the exemptions
provided by Section 4(2) of the Securities Act and Regulation D. Investment
representations were obtained and legends were placed on the certificates.
(4) NET LOSS PER SHARE
Basic net loss per share is computed based on the weighted average number of
common shares outstanding and includes preferred stock dividends. Diluted net
loss per share is not presented since the effect of shares issuable upon the
assumed conversion of preferred stock and convertible debentures and the assumed
exercise of outstanding stock options and warrants would be anti-dilutive. For
purposes of computing net loss per share, preferred stock dividends include
"imputed dividends" for preferred stock issued with a non-detachable beneficial
conversion feature near the date of issuance. Imputed dividends represent the
aggregate difference between conversion price and the fair market value of the
common stock as of the date of issuance of the preferred stock.
(5) COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS
Inventories
Inventories are stated at the lower of cost or market, using the first-in,
first-out cost method. Substantially, all inventories represent finished goods
held for use in operations.
Property and Equipment
<TABLE>
June 30, December 31,
2000 1999
====================================================================
<S> <C> <C>
ENCOAL LFC Plant $ 2,121,000 $ 2,121,000
Laboratory equipment 1,030,000 1,020,000
Machinery and equipment 137,000 136,000
Computer equipment 416,000 400,000
Office furniture and fixtures 125,000 125,000
Leasehold improvements 54,000 54,000
--------------------------------------------------------------------
3,883,000 3,856,000
Less accumulated depreciation (1,486,000) (1,341,000)
--------------------------------------------------------------------
Net property and equipment $ 2,397,000 $ 2,515,000
====================================================================
</TABLE>
(6) SEGMENT REPORTING
The Company manages its segments based on strategic business units that are in
turn based along technological lines. These strategic business units offer
products and services to different markets in
SGI INTERNATIONAL
9
<PAGE>
accordance with their underlying technology. Accordingly, the Company's three
business segments are centered on the operations associated with the LFC
Process, the OCET Process and automated assembly and manufacturing systems. The
Company's operations are primarily centered in the United States, however,
through its joint venture with MLFC, a subsidiary of Mitsubishi Corp., the
Company's LFC Process technology will continue to be marketed on an
international basis. The Company evaluates performance of each segment based on
profit or loss from operations before income taxes. The Company has no
significant intersegment sales. Reclassification of certain items has been made
to the 1999 schedule to conform to the 2000 presentation.
<TABLE>
Three months ended Automated LFC OCET
June 30 Assembly Process Process Corporate Total
================================================================================================================
<S> <C> <C> <C> <C> <C>
2000
Revenues $ 1,322,000 $ - $ 4,000 $ - $ 1,326,000
Net income (loss) 122,000 (676,000) (136,000) (848,000) (1,538,000)
Equity in operations of investee - (3,000) - - (3,000)
Depreciation & Amortization 32,000 137,000 46,000 3,000 218,000
Engineering, research and
consulting expenditures - 242,000 103,000 40,000 385,000
Interest expense - - - 203,000 203,000
----------------------------------------------------------------------------------------------------------------
1999
Revenues $ 374,000 $ 375,000 $ 19,000 $ - $ 768,000
Net loss (322,000) (4,000) (330,000) (955,000) (1,611,000)
Equity in operations of investee - - - - -
Depreciation & Amortization 29,000 112,000 87,000 3,000 231,000
Engineering, research and
consulting expenditures - 268,000 258,000 - 526,000
Interest expense - - - 162,000 162,000
================================================================================================================
</TABLE>
<TABLE>
Six months ended Automated LFC OCET
June 30 Assembly Process Process Corporate Total
================================================================================================================
<S> <C> <C> <C> <C> <C>
2000
Revenues $ 2,376,000 $ - $ 5,000 $ - $ 2,381,000
Net income (loss) 157,000 (1,355,000) (308,000) (1,519,000) (3,025,000)
Equity in operations of investee - (22,000) - - (22,000)
Depreciation & Amortization 63,000 275,000 99,000 7,000 444,000
Engineering, research and
consulting expenditures - 477,000 237,000 40,000 754,000
Interest expense 1,000 - - 413,000 414,000
----------------------------------------------------------------------------------------------------------------
1999
Revenues $ 933,000 $ 500,000 $ 18,000 $ - $ 1,451,000
Net loss (489,000) (94,000) (677,000) (1,779,000) (3,039,000)
Equity in operations of investee - - - - -
Depreciation & Amortization 58,000 303,000 174,000 8,000 543,000
Engineering, research and
consulting expenditures - 291,000 518,000 - 809,000
Interest expense 1,000 - - 311,000 312,000
================================================================================================================
</TABLE>
SGI INTERNATIONAL
10
<PAGE>
<TABLE>
June 30, December 31,
Total Assets by Segment 2000 1999
============================================================
<S> <C> <C>
Identifiable assets, net
Automated Assembly $ 1,684,000 $ 1,414,000
LFC Process 4,373,000 4,425,000
OCET Process 192,000 281,000
Corporate 182,000 594,000
------------------------------------------------------------
Total $ 6,431,000 $ 6,714,000
============================================================
</TABLE>
(7) LINE-OF-CREDIT
In May 2000 the Company, upon maturity of a $402,500 certificate of deposit
securing its borrowings under a $400,000 line-of-credit, used the proceeds to
pay-off the borrowing and closed the line.
(8) LEASES
During the period ended June 30, 2000, the Company renewed its operating leases
for its corporate offices and its OCET facilities. The Company leases its
corporate offices under an operating lease agreement which provides for annual
escalation of rental payments which now expires in December 2005. The Company's
OCET subsidiary leases its laboratory facilities under an operating lease
agreement which expires in May 2003. AMS leases its manufacturing facility under
an operating lease agreement which expired in October 1998 and is currently on a
monthly basis. Under the terms of these lease agreements, the lessee pays taxes,
maintenance and insurance. As of June 30, 2000, the Company had no other
significant commitments under capital or operating leases. Future minimum annual
operating lease commitments, by fiscal year and in the aggregate, under
noncancelable operating leases with initial or remaining terms of one year or
more, consisted of the following as of June 30, 2000.
<TABLE>
Fiscal Year End Amount
===============================
<S> <C>
2000 $ 254,000
2001 307,000
2002 314,000
2003 252,000
2004 189,000
Thereafter 192,000
-------------------------------
$ 1,508,000
===============================
</TABLE>
(9) RECLASSIFICATION
Certain prior period amounts have been reclassified to conform to the current
period presentation. These changes had no impact on previously reported results
of operations, cash flows or stockholders' deficiency.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
INTRODUCTORY NOTE
This Quarterly Report on Form 10-QSB contains statements relative to (i)
projections, (ii) estimates, (iii) future research plans and expenditures, (iv)
potential collaborative arrangements, (v) opinions of management and (vi) the
need for and availability of additional financing which may be considered
"forward looking statements."
SGI INTERNATIONAL
11
<PAGE>
The forward-looking statements included herein are based on current expectations
that involve a number of risks and uncertainties. These forward-looking
statements are based on assumptions regarding the Company's business and
technology, which involve judgments with respect to, among other things, future
scientific, economic and competitive conditions, and future business decisions,
as well as risk factors detailed from time to time in the Company's Securities
and Exchange Commission reports (including this Form 10-QSB) and are difficult
or impossible to predict accurately and many of which are beyond the control of
the Company. Although the Company believes that the assumptions underlying the
forward-looking statements are reasonable, any of the assumptions could prove
inaccurate and, therefore, there can be no assurance that the results
contemplated will be realized and actual results may differ materially.
Readers are urged to carefully review and consider the various disclosures made
by the Company in this report and in the Company's other reports filed with the
Securities and Exchange Commission that attempt to advise interested parties of
the risks and factors that may affect the Company's business. Therefore,
historical results and percentage relationships will not necessarily be
indicative of the operating results of any future period.
RESULTS OF OPERATIONS
Net Loss per Common Share. Basic net loss per common share for the three and six
month periods ended June 30, 2000, decreased approximately $0.03 per share and
$0.05 per share, respectively, over the same prior year periods. The decrease in
basic net loss per share for both the three and six month periods is primarily
attributable to an increase in the weighted average number of common shares
outstanding. The net loss for the three and six month periods ended June 30,
2000 declined approximately 5% and remained essentially unchanged, respectively,
over the same prior year periods.
Revenues and Gross Margin. Revenues and cost of sales are primarily attributable
to Assembly and Manufacturing Systems, Inc. (AMS) and are recorded using the
percentage of completion method. Revenues at AMS for the three and six month
periods ended June 30, 2000, increased 253% and 155% respectively over the same
prior year periods. Gross margin as a percentage of sales for both the three and
six month periods ended June 30, 2000 returned to normal operating levels and
are anticipated to remain at these levels throughout the remainder of the fiscal
year. Gross margin as a percentage of sales for the three month period ended
June 30, 2000 was 24%, compared to a negative 16% over the same prior year
period. Gross margins for the six month period ended June 30, 2000, was 24%
compared to 3% over the same prior year period. Gross margins may vary in any
given period as a result of the variations in profitability of contracts for
large orders of automated production systems or specialty machines, as well as
efficiencies related to the overall utilization of AMS' manufacturing resources.
The Company attributes the increase in revenues and improved gross margins
primarily to strong sales to the medical industry which continues from the prior
year and renewed sales to the automotive industry. The Company anticipates sales
to both these industries to exceed prior year levels based on current order
activity. The Company is continuing to experience weak sales to the high-tech
industry (electronics and communications) which negatively impacted overall
revenues in the prior year. The Company anticipates that sales to this sector
will continue to be slow throughout 2000. The projected length and severity of
the slowdown to this sector is unknown at this time.
For the three and six month periods ended June 30, 1999, the Company received
net revenues of $375,000 and $500,000, respectively, from its services agreement
with LFC Tech, it's joint venture with MLFC. No additional revenues are
anticipated from the services agreement in 2000 offsetting the increase in
revenues from AMS.
Engineering, Research and Development Expenses. Engineering, research and
development expenses for the three and six month periods ended June 30, 2000,
decreased 27% and 7%, respectively, over the
SGI INTERNATIONAL
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same prior year periods. The decrease for both the three and six month periods
is primarily attributable to a 60% decrease in expenses on the OCET Process as
the Company has shifted its laboratory resources towards increasing the value
of CDL produced from the LFC Process. Work on increasing the value of CDL is
expected to continue throughout most of the year.
Selling, General and Administrative Expenses. Selling, general and
administrative expense for the three and six month periods ended June 30, 2000,
increased 14% and 13%, respectively, over the same prior year periods. The
increase is primarily attributable to the carrying costs associated with the
ENCOAL LFC plant which the Company acquired in late 1999. Selling, general and
administrative expenses for AMS remained relatively unchanged over the same
prior year periods.
Loss on Investment in LFC Investee. The Company's share of the losses for its
LFC joint venture (LFC Tech) for the three and six months ended June 30, 2000,
increased 100% over the same prior year period. The increase is primarily
attributable to the amortization of assets which LFC Tech acquired in late 1999.
Legal and Accounting Expenses. Legal and accounting expenses for the three and
six month periods ended June 30, 2000, decreased 49% and 44%, respectively, over
the same prior year periods. The decrease is related primarily to a reduction in
legal and accounting salaries and the settlement of various lawsuits to which
the Company and AMS were parties.
Depreciation and Amortization Expenses. Depreciation and amortization expense
for the three and six month periods ended June 30, 2000, decreased 6% and 18%,
respectively over the same prior year periods due primarily to a non-recurring
charge of approximately $80,000 related primarily to the write-off of the
Company's Australian LFC project costs in 1999 which occurred in the first
quarter of the year. Partially offsetting this decrease is the Company's
acquisition of various LFC related assets late in 1999.
Interest Expense. Interest expense for the three and six month periods ended
June 30, 2000, increased 26% and 32%, respectively, over the same prior year
periods. The increase is primarily due to the addition of approximately $2.0
million in long-term debt associated with the purchase of the ENCOAL LFC plant
and various LFC assets in late 1999.
Other Income. Other income for the three and six month periods ended June 30,
2000, remained substantially unchanged over the same prior year periods.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2000, the Company had assets totaling $6.4 and a working capital
deficiency of $2.0 million. This is compared to assets of $4.6 million and a
$6.1 million working capital deficiency as of June 30, 1999. Current notes
payable, accounts payable and accrued salaries primarily contribute to the
working capital deficiency at June 30, 2000. 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, 2000.
Other short-term liquidity requirements are expected to be satisfied from
existing cash balances, proceeds from the sale of future equity securities or
other collaborative arrangements. Negotiations are on-going for the public and
private placement of equity securities, the proceeds of which are intended to be
used to satisfy the short-term liquidity deficiency. In the event that the
Company is unable to finance operations at the current level, various
administrative activities would be curtailed and certain research and
development 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 had long-term liquidity deficiencies at June 30, 2000. Over the
long-term, the Company will require substantial additional funds to maintain and
expand its research and development activities
SGI INTERNATIONAL
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<PAGE>
and ultimately to commercialize, with or without the assistance of corporate
partners, any of its proposed technologies. Although there are no commitments,
the Company believes the long-term liquidity deficiency will be satisfied
through a combination of future equity sales, increased positive cash flows
from operations, and research or other collaborative agreements, until such
time, if ever, as the commercialization of the LFC and OCET Processes result in
positive cash flows. The Company is seeking additional funds through the
financing, sale and operations of the ENCOAL LFC plant and through collaborative
or other arrangements with larger well capitalized companies, under which such
companies may provide additional capital to the Company in exchange for
exclusive or non-exclusive licenses or other rights to certain commercial
projects, technologies and products the Company is developing. Although the
Company is presently engaged in discussions with a number of suitable candidate
companies, there can be no assurance that an agreement or agreements will arise
from these discussions in a timely manner, or at all, or that revenues that may
be generated thereby will offset operating expenses sufficiently to reduce the
Company's short-term or long-term funding requirements.
Cash used in operating activities for the six month period ended June 30, 2000,
increased 48% over the same prior year period. This increase is primarily
attributable to an increase in accounts receivable and decrease in billings in
excess of costs and estimated earnings at AMS, due to a significant increase in
sales. The use of funds from operating activities is essentially attributable to
the Company's net loss of approximately $3.0 million for both the six month
periods ended June 30, 2000, and 1999, respectively. These losses were incurred
primarily as a result of the Company's administrative and technology development
activities.
In the fourth quarter of 1999 the Company acquired various LFC related assets,
including the ENCOAL Demonstration Plant. As a result of this acquisition, the
Company originally anticipated operating expenses associated with maintaining
the ENCOAL LFC plant in idle condition at approximately $350,000 in 2000. As of
June 30, 2000, the Company had incurred approximately $360,000 and anticipates
incurring an additional $100,000 each month until an investor for the facility
is obtained.
The Company's investing activities amounted to a use of funds of approximately
$262,000 a 130% increase over the same prior year period. This use of funds is
primarily related to the acquisition of LFC Process related equipment.
In January of 1999 the Company and MLFC a wholly-owned subsidiary of Mitsubishi
Corporation formed LFC Technologies, LLC ("LFC Tech"). Accordingly, the Company
may be required from time to time to make capital contributions to LFC Tech. The
Company is required to contribute one-half of any such required capital
contributions. In the prior year, in accordance with the Amended Services
Agreement between the Company and LFC Tech, the Company received approximately
$500,000 of net revenues under this agreement through the six month period ended
June 30. This agreement was amended subsequent to October 1999, and the Company
will not be receiving any additional funds pursuant thereto through the year
2000.
In 2000 the Company is projecting capital expenditures for equipment at OCET to
remain consistent with the prior year and an increase in capital expenditures at
AMS of approximately $300,000 to improve manufacturing capabilities and
efficiencies. Further, the Company intends to obtain project financing for the
ENCOAL LFC plant estimated at $10.1 million. The financing is for improvements
which are necessary to set the plant on more of a commercial footing and to
position it as a reference plant for potential future commercial LFC facilities.
Other than the improvements to the ENCOAL LFC plant, the Company as of June 30,
2000, does not have any material requirements or commitments for capital
expenditures. The amount of funds used for investing activities in a given
period are directly related to development requirements of the Company's
technologies and funds availability.
SGI INTERNATIONAL
14
<PAGE>
The Company's net financing activities raised approximately $2.1 million and
$1.5 million for the six month period ended June 30, 2000, and 1999,
respectively. These funds were raised primarily through the private placement of
debt and equity securities. Offsetting the $2.5 million of funds raised during
the six month period was the pay-off and termination of the Company's $400,000
line-of-credit which was secured by a $402,500 certificate of deposit which
matured in May 2000. The Company is actively seeking a new line-of-credit to
provide working capital to AMS and support its current and anticipated growth in
business activity.
As stated earlier the Company intends to obtain project financing related to the
ENCOAL LFC plant estimated at $10.1 million. The Company believes, due to the
plant's special nature, that financing for these improvements will not likely be
obtained through conventional methods and that a strategic partner or financier
capable of utilizing Internal Revenue Code section 29 tax credits will be
required. There is no assurance that the Company will be able to obtain this
financing, or if available, the terms will be acceptable.
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. While the Company is engaged in continuing
negotiations to secure additional capital and financing, there is no assurance
such funding will be available or if received will be adequate.
ACCOUNTING PRONOUNCEMENTS
In March 2000, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 44 ("FIN 44"), Accounting For Certain Transactions involving
Stock Compensation, an interpretation of APB Opinion No. 25. FIN 44 clarifies
the application of Opinion 25 for (a) the definition of employee for purposes of
applying Opinion 25, (b) the criteria for determining whether a plan qualifies
as a noncompensatory plan, (c) the accounting consequence of various
modifications to the terms of a previously fixed stock option or award, and (d)
the accounting for an exchange of stock compensation awards in a business
combination.
FIN 44 is effective July 1, 2000, but certain conclusions cover specific events
that occur after either December 15, 1998, or January 12, 2000. Management
believes that the impact of FIN 44 will not have a material effect on the
financial position or results of operations of the Company.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
[NONE]
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company and its subsidiaries are from time to time involved in litigation
arising in the ordinary course of their respective businesses. As of June 30,
2000, the Company is not party to any pending legal proceeding.
ITEM 2. CHANGES IN SECURITIES
On June 8, 2000, the Company as provided in a related consulting agreement,
granted one warrant to purchase an aggregate of 48,000 common shares, to one
consultant for services rendered. The warrants were issued pursuant to the
exemptions provided by Section 4(2) of the Securities Act and Regulation D and
investment representations were obtained and legends were placed on the
certificate. In connection
SGI INTERNATIONAL
15
<PAGE>
therewith, the Company recorded compensation expense of approximately $7,000.
The exercise price was not lower than the closing bid price on the grant date.
The warrant is exercisable one year from the grant date at $0.225 per share and
expires on December 31, 2005.
During the three month period ended June 30, 2000, the Company raised
approximately $834,000 through the issuance of approximately 4,457,000
restricted common shares to accredited investors. These securities were issued
pursuant to the exemptions provided by Section 4(2) of the Securities Act and
Regulation D. Investment representations were obtained and legends placed on the
certificates.
During the three month period ended June 30, 2000, the Company in conjunction
with its private placements, paid cash of approximately $16,000, issued 182,271
shares of restricted common stock valued at $46,000 and accrued a liability of
approximately $27,000 to be paid through the issuance of approximately 144,000
shares of restricted common stock, as compensation for placement agent services.
On June 30, 2000, the Company exchanged one unsecured 9% note payable with a
face value of $31,000 due on demand but no sooner than June 15, 2000, for a new
note payable of equal value. The new note is payable upon 30 days written demand
but no sooner than January 25, 2001. Both the principal and accrued interest
thereon may be paid in cash or at the option of the Company on January 25, 2001,
by issuing 366,482 shares of restricted common stock. The security was issued
pursuant to the exemptions provided by Section 4(2) of the Securities Act and
Regulation D. Investment representations were obtained from the accredited
investor.
On June 30, 2000, the Company exchanged one unsecured 9% note payable with a
face value of $9,000 due on demand but no sooner than June 15, 2000, for a new
note payable of equal value. The new note is payable upon 30 days written demand
but no sooner than November 30, 2000. Both the principal and accrued interest
thereon may be paid in cash or at the option of the Company on November 30,
2000, by issuing 94,737 shares of restricted common stock. The security was
issued pursuant to the exemptions provided by Section 4(2) of the Securities Act
and Regulation D. Investment representations were obtained from the accredited
investor.
On June 30, 2000, the Company issued for cash a $75,000 unsecured 9% note
payable to one accredited investor. The note is payable upon 30 days written
demand but no sooner than December 15, 2000. Both the principal and accrued
interest thereon may be paid in cash or at the option of the Company, on
December 15, 2000, by issuing 882,331 shares of restricted common stock. The
security was issued pursuant to the exemptions provided by Section 4(2) of the
Securities Act and Regulation D. Investment representations were obtained from
the accredited investor.
During the three month period ended June 30, 2000, the Company as provided in
their related consulting agreements issued approximately 50,000 restricted
common shares to two consultants for services rendered, valued by the parties at
approximately $10,000. These securities were issued pursuant to the exemptions
provided by Section 4(2) of the Securities Act and Regulation D. Investment
representations were obtained and legends were placed on the certificates.
ITEM 3. DEFAULTS UPON SENIOR DEBT SECURITIES
[NONE]
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Annual Meeting of Stockholders was held on June 2, 2000. At that meeting the
following matters were submitted to a vote of the stockholders of SGI
International:
2000 SGI International Annual Meeting Final Voting Results
SGI INTERNATIONAL
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<PAGE>
Proposal
Item No. 1 Election of Directors
The following nominees for director received the number of votes set opposite
their respective names:
<TABLE>
Voting Results
----------------------------------------------------------
Votes Percent
==========================================================
<S> <C> <C> <C>
Richard B. Bein For 42,220,275 99%
Withhold 282,209 1%
Edward D. Doherty For 42,220,285 99%
Withhold 282,199 1%
William A. Kerr For 42,219,037 99%
Withhold 283,447 1%
Ben W. Reppond For 42,219,428 99%
Withhold 283,056 1%
==========================================================
</TABLE>
Directors: Michael L. Rose, James W. Mahler, Dr. Ernest P. Esztergar, Jeffrey
L. Smith and John R. Taylor whose terms of office had not expired, continued in
their respective capacities as directors.
Item No. 2 Ratification of Selection of J.H. Cohn LLP, as
Independent Public Accountants
<TABLE>
Voting Results
----------------------------------
Votes Percent
==================================
<S> <C> <C>
For 42,100,694 98%
Against 230,343 1%
Abstain 171,448 1%
==================================
</TABLE>
ITEM 5. OTHER INFORMATION
NONE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
4.1 Form of Restricted Stock Subscription Agreement (1)
4.2 Form of Promissory Note (2)
10.1 Lease agreement between OCET Corporation and Sorrento Square dated
May 10, 2000 (2)
10.2 Second Amendment to Lease between Registrant and La Jolla Financial dated
June 19, 2000 (2)
27.1 Financial Data Schedule (2)
------------
(1) Incorporated by reference to report on Form 10-Q (File No. 2-93124)
ending June 30, 1999.
(2) Filed herewith.
(b) Reports on 8-K
On July 14, 2000, the Company reported on its Current Report on form 8-K, filed
with the Securities and Exchange Commission, that it had amended effective June
30, 2000 (the "Second Amendment"), certain terms and conditions of the Amended
and Restated Acquisition Agreement (the "Acquisition Agreement") between itself
and certain subsidiaries of AEI Resources, dated December 9, 1999. The Second
Amendment essentially provides SGI with an extension of the June 30, 2000, date
to September 30, 2000, in which to satisfy various terms and conditions more
fully described in the Acquisition Agreement.
SGI INTERNATIONAL
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PART III. SIGNATURES
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.
SGI INTERNATIONAL
/s/ MICHAEL L. ROSE August 11, 2000
------------------------------------
Michael L. Rose,
President and Chief Executive Officer
/s/ GEORGE E. DONLOU August 11, 2000
------------------------------------
George E. Donlou
Vice President Finance and Controller
SGI INTERNATIONAL
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