UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
(Mark One)
/ / Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended September 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.
/ / Yes / / No
The number of shares of common stock, no par value, outstanding as of October
31, 2000, was 70,383,187.
Transitional Small Business Disclosure Format (Check one): / / Yes / / 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 Statement of Cash FLows 6
Notes to Condensed Unaudited Consolidated Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANAYLSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Introductory Note 12
Results of Operations 12
Liquidity and Capital Resources 14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 16
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 16
ITEM 2. CHANGES IN SECURITIES 16
ITEM 3. DEFAULTS UPON SENIOR DEBT SECURITIES 18
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 18
ITEM 5. OTHER INFORMATION 18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-k 18
PART III. SIGNATURES 19
2
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SGI INTERNATIONAL AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
September 30, December 31,
2000 1999
(Unaudited)
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 209,518 $ 278,391
Restricted time deposit - 402,500
Trade accounts receivable, less allowance for doubtful accounts
of $53,314 and $80,320 639,425 661,880
Costs and estimated earnings in excess of billings on contracts 439,319 99,580
Inventories 413,247 413,716
Prepaid expenses and other current assets 62,486 102,624
------------------------------------------------------------------------------------------------------------------------
Total current assets 1,763,995 1,958,691
------------------------------------------------------------------------------------------------------------------------
LFC royalty rights, net 707,063 942,750
LFC cogeneration project, net 131,605 210,568
Investment in LFC Investees 235,324 266,813
LFC related notes receivable, net 150,000 150,000
LFC process equipment, net 743,039 355,886
Other assets, net 25,940 26,757
Property, plant and equipment, net of accumulated
depreciation of $ 1,311,034 and $1,340,622 2,472,980 2,514,595
Goodwill, net of accumulated amortization of $228,602 and $192,653 251,642 287,591
Interest receivable on notes from stockholders 28,286 -
------------------------------------------------------------------------------------------------------------------------
$ 6,509,874 $ 6,713,651
------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Accounts payable $ 843,744 $ 849,140
Notes payable, net 1,194,607 881,408
Accrued salaries, benefits and related taxes 1,100,402 770,167
Billings in excess of costs and estimated earnings on contracts 432,427 500,407
Borrowings on line-of-credit - 400,000
Interest payable 250,121 182,492
Current maturities of long-term notes payable 4,170,386 7,125
Other accrued expenses 171,615 188,530
------------------------------------------------------------------------------------------------------------------------
Total current liabilities 8,163,302 3,779,269
Long-term debt, less current maturities 2,216,484 6,250,386
------------------------------------------------------------------------------------------------------------------------
Total liabilities 10,379,786 10,029,655
------------------------------------------------------------------------------------------------------------------------
Commitments and contingencies
Minority interest 458,616 471,000
------------------------------------------------------------------------------------------------------------------------
Stockholders' deficiency:
Convertible preferred stock 605 605
Common stock 52,982,986 49,890,623
Paid-in capital 7,920,418 7,021,879
Accumulated deficit (64,761,537) (60,229,111)
Less notes receivable from stockholders (471,000) (471,000)
------------------------------------------------------------------------------------------------------------------------
Total stockholders' deficiency (4,328,528) (3,787,004)
------------------------------------------------------------------------------------------------------------------------
$ 6,509,874 $ 6,713,651
------------------------------------------------------------------------------------------------------------------------
See notes to condensed consolidated financial statements.
</TABLE>
3
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<TABLE>
SGI INTERNATIONAL AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three months Nine months
ended September 30, ended September 30,
2000 1999 2000 1999
-------------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES:
Contract revenues $ 1,572,729 $ 1,338,860 $ 3,954,131 $ 2,790,344
-------------------------------------------------------------------------------------------------------------------------------
EXPENSES:
Cost of revenues 1,216,592 795,396 3,028,770 1,710,233
Engineering, research and development 199,127 456,443 953,014 1,265,130
Selling, general and administrative 996,798 714,211 2,824,505 2,330,678
Loss on LFC Investees 9,410 (4,198) 31,489 (4,198)
Legal and accounting 100,352 144,032 283,309 470,177
Depreciation and amortization 201,810 232,927 646,238 775,433
-------------------------------------------------------------------------------------------------------------------------------
Total expenses 2,724,089 2,338,811 7,767,325 6,547,453
-------------------------------------------------------------------------------------------------------------------------------
Loss from operations (1,151,360) (999,951) (3,813,194) (3,757,109)
NON-OPERATING INCOME (EXPENSES):
Interest expense (380,963) (162,440) (794,679) (474,788)
Other income 21,591 122,375 63,063 153,264
-------------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------------
Loss before minority interest in consolidated
subsidiary (1,510,732) (1,040,016) (4,544,810) (4,078,633)
Minority interest in loss of consolidated subsidiary 3,146 - 12,384 -
-------------------------------------------------------------------------------------------------------------------------------
Net loss $ (1,507,586) $(1,040,016) $(4,532,426) $(4,078,633)
-------------------------------------------------------------------------------------------------------------------------------
PREFERRED STOCK DIVIDENDS:
Imputed preferred stock dividends and
accretion on convertible and
mandatorily redeemable preferred stock $ - $ 36,922 $ - $ 36,922
-------------------------------------------------------------------------------------------------------------------------------
Net loss applicable to common stock $ (1,507,586) $(1,076,938) $(4,532,426) $(4,115,555)
-------------------------------------------------------------------------------------------------------------------------------
Net loss per common share - basic $ (0.02) $ (0.02) $ (0.07) $ (0.12)
-------------------------------------------------------------------------------------------------------------------------------
Weighted average common
shares outstanding 68,229,474 44,402,990 62,518,327 34,781,806
-------------------------------------------------------------------------------------------------------------------------------
See notes to condensed consolidated financial statements.
</TABLE>
4
<PAGE>
<TABLE>
SGI INTERNATIONAL AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIENCY
(Unaudited)
Convertible Total
Preferred Stock Common Stock 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 12,424,635 2,481,422 2,481,422
Exercise of warrants to purchase
common stock for cash 23,000 2,875 2,875
Issuance of common stock for
notes payable and interest 1,620,809 401,172 401,172
Issuance of common stock for services 877,269 168,581 168,581
Conversion of preferred stock (23) - 312,386 38,313 (38,313) -
Imputed discount on convertible debt 925,440 925,440
Issuance of warrants to purchase
common stock to non-employees 11,412 11,412
Net loss (4,532,426) (4,532,426)
------------------------------------------------------------------------------------------------------------------------------------
Balances at September 30, 2000 60,518 $ 605 69,311,392 $52,982,986 $7,920,418 $(64,761,537)$(471,000) $(4,328,528)
------------------------------------------------------------------------------------------------------------------------------------
See notes to condensed consolidated financial statements.
</TABLE>
5
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<TABLE>
SGI INTERNATIONAL AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine months ended September 30, 2000 1999
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operating activities:
Net loss $(4,532,426) $(4,078,633)
Adjustments to reconcile net loss to net
cash used in operating activities:
Equity in net (income) loss of LFC Investees 31,489 (4,213)
Depreciation and amortization 646,238 775,433
Common stock issued for services 168,581 39,075
Non-employee compensation expense on issuance of warrants 11,412 24,166
Imputed and accrued interest on warrants issued to note holders - 21,107
Amortization of beneficial conversion feature on debt 172,079 -
Accrued long-term interest expense 136,484 -
Accrued interest income (28,286) -
Minority interest in loss of consolidated subsidiary (12,384) -
Changes in operating assets and liabilities:
Restricted time deposit 402,500 -
Trade accounts receivable (317,284) (67,228)
Inventories 469 (749)
Prepaid expenses and other current assets 40,138 49,714
Accounts payable 62,829 676,487
Billings in excess of costs and estimated
earnings on contracts (67,980) 65,668
Accrued salaries, benefits and related taxes 330,235 532,931
Interest payable 83,096 39,304
Other accrued expenses (16,915) 228,909
-----------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (2,889,725) (1,698,029)
-----------------------------------------------------------------------------------------------------------------------
Investing activities:
Additions to LFC Process equipment (482,399) (85,419)
Investment in LFC Investees - (985)
Purchase of property and equipment (157,269) (36,643)
Other assets (692) (9,247)
-----------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (640,360) (132,294)
-----------------------------------------------------------------------------------------------------------------------
Financing activities:
Payments of notes payable (7,125) (7,125)
Payments on line-of-credit (400,000) -
Proceeds from issuance of debt 1,384,040 825,000
Proceeds from issuance of common stock 2,484,297 984,565
-----------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 3,461,212 1,802,440
-----------------------------------------------------------------------------------------------------------------------
Net decrease in cash (68,873) (27,883)
Cash at beginning of period 278,391 239,885
-----------------------------------------------------------------------------------------------------------------------
Cash at end of period $ 209,518 $ 212,002
-----------------------------------------------------------------------------------------------------------------------
Supplemental disclosure of cash flow information:
Interest paid $ 384,301 $ 393,728
Supplemental disclosure of non-cash activities:
Conversion of preferred stock 38,313 1,182,958
Common stock issued for convertible debentures - 68,107
Common stock issued for debt and interest 401,172 -
Note Payable issued for current obligation 68,225 -
Common stock issued for mandatorily redeemable preferred stock - 1,253,250
-----------------------------------------------------------------------------------------------------------------------
See notes to condensed consolidated financial statements.
</TABLE>
6
<PAGE>
SGI INTERNATIONAL AND SUBSIDIARIES
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 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 includes the Liquids From Coal ("LFC")
Process, the Opti-Crude Enhancement Technology ("OCET") Process and the
Asphaltenes Processing technology. The LFC Process is designed to convert and
upgrade low-rank coal to create a higher Btu more efficient fuel to produce
power and simultaneously produce low temperature coal tars, which contain
valuable specialty chemicals. The OCET Process is designed to increase the
resulting product value of oil refineries by deasphalting crude oil as well as
residual oil bottoms ("resid"), which is produced in oil refineries. The
Asphaltenes Processing technology converts unwanted asphaltene by-products of
the OCET Process, as well as the existing solvent deasphalting processes, into
a coal-like fuel. 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") as of September 30, 2000, and for
the three and nine month periods ended September 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
September 30, 2000, and the consolidated results of operations for the three and
nine month periods ended September 30, 2000, and 1999, and cash flows for the
nine month periods ended September 30, 2000, and 1999. The results of operations
for the nine months ended September 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
7
<PAGE>
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 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 $6.4 million and an
accumulated deficit of $64.8 million at September 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 July 11, 2000, the Company in accordance with its related service agreements
issued three warrants to purchase an aggregate of 225,000 common shares at
$0.22 per share to three officer/directors of the Company. The exercise price
was not lower than the closing bid price on the grant date. The warrants are
exercisable one year from the date of grant and expire on December 31, 2005.
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.
During the three month period ended September 30, 2000, the Company raised
approximately $438,000 through the issuance of approximately 2,630,000
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 September 30, 2000, the Company in
accordance with two agreements for consulting and private placement services,
paid cash of approximately $28,000 and issued 417,552 shares of restricted
common stock valued at approximately $73,000, for services rendered. The
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.
Effective August 1, 2000, the Company exchanged for current obligations an
unsecured 9% note payable with a face value of $68,225 due on demand after
September 30, 2000, for equal value. Interest on the note accrues from April 1,
2000 and shall continue until paid in full. As of September 30, 2000 demand on
the note had not been made.
During the month of July, 2000, the Company issued for cash three unsecured 9%
notes payable with an aggregate face value of $196,235. Both the principal and
interest on the notes are due one year from the date of issuance and may only be
paid off through the issuance of 1,195,043 shares of restricted common stock.
The underlying shares of common stock do not have any registration rights.
These securities were
8
<PAGE>
issued pursuant to the exemptions provided by Section 4(2) of the Securities
Act and Regulation D. Investment representations were obtained from the
accredited investors.
On August 16, 2000, the Company issued for cash an unsecured 9% note payable
with a face value of $136,000. Both the principal and interest on the note are
due on February 16, 2001 and may only be paid off through the issuance of
967,457 shares of restricted common stock. Pursuant to the terms of the note,
the Company granted the investor piggy back registration rights for the
underlying common shares. These securities were 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 late July and September of 2000, the Company issued for cash three
unsecured 9% notes payable with an aggregate face value of $270,100. Both the
principal and interest on the notes are due one year from the date of issuance
and may only be paid off through the issuance of 2,153,464 shares of restricted
common stock. Pursuant to the terms of the note the Company granted the
investors piggy back registration rights for the underlying common shares. These
securities were issued pursuant to the exemptions provided by Section 4(2) of
the Securities Act and Regulation D. Investment representations were obtained
from the accredited investors.
During the three month period ended September 30, 2000, the Company issued for
cash three unsecured 9% notes payable with an aggregate face value of $256,000
to one accredited investor. The notes are payable upon 30 days written demand
beginning one year following their issuance date. Both the principal and accrued
interest thereon may be paid in cash or, at the option of the Company, on the
first anniversary by issuing 2,728,097 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.
In conjunction with the issuance of the various convertible notes issued during
the three months ended September 30, 2000, the Company recorded the issuance of
the notes payable net of a $913,512 beneficial conversion feature (see note 5).
This beneficial conversion feature will be amortized over the life of each note
and result in a non-cash interest charge. As of September 30, 2000, the Company
had amortized approximately $160,000 of the beneficial conversion feature.
(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.
9
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<TABLE>
Property and Equipment
September 30, December 31,
2000 1999
-------------------------------------------------------------------------------------
<S> <C> <C>
ENCOAL LFC Plant $ 2,121,000 $ 2,121,000
Laboratory equipment 1,032,000 1,020,000
Machinery and equipment 140,000 136,000
Computer equipment 254,000 400,000
ENCOAL projects under construction 113,000 -
Office furniture and fixtures 70,000 125,000
Leasehold improvements 54,000 54,000
-------------------------------------------------------------------------------------
3,784,000 3,856,000
Less accumulated depreciation (1,311,000) (1,341,000)
-------------------------------------------------------------------------------------
Net property and equipment $ 2,473,000 $ 2,515,000
-------------------------------------------------------------------------------------
</TABLE>
Notes Payable
During the period ended September 30, 2000, the Company issued various notes
payable (as more fully described in Note 3) which contained a beneficial
conversion feature. The Company in accordance with generally accepted accounting
principles has recognized this beneficial conversion feature by allocating a
portion of the proceeds to additional-paid-in-capital and as an offset to the
notes payable. Furthermore, the recorded beneficial conversion
feature resulting from the allocation of the proceeds, will be recognized by the
Company as interest expense over the period ending on the note's earliest
conversion date, which in this case is primarily over a one year period. The
beneficial conversion feature on these notes represents the aggregate difference
between the conversion price and the fair market value of the common stock as of
the date of issuance of the notes payable. During the three month period ended
September 30, 2000, the Company amortized approximately $160,000 of the
beneficial conversion feature. The Company also recorded an additional $12,000
of interest expense related to the beneficial conversion feature associated with
the payment of the stated interest on the notes payable.
<TABLE>
September 30, December 31,
2000 1999
-----------------------------------------------------------------------------
<S> <C> <C>
Notes payable $ 1,947,968 $ 881,408
Beneficial coversion feature (753,361) -
-----------------------------------------------------------------------------
Notes payable, net $1,194,607 $ 881,408
-----------------------------------------------------------------------------
</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 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
located 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.
10
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<TABLE>
Three months ended Automated LFC OCET
September 30 Assembly Process Process Corporate Total
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
2000
Revenues $ 1,572,000 $ - $ 1,000 $ - $ 1,573,000
Net income (loss) 131,000 (608,000) (105,000) (926,000) (1,508,000)
Equity in operations of investee - (9,000) - - (9,000)
Depreciation & Amortization 22,000 136,000 39,000 5,000 202,000
Engineering, research and
consulting expenditures - 106,000 79,000 14,000 199,000
Interest expense - - - 381,000 381,000
-----------------------------------------------------------------------------------------------------------------------
1999
Revenues $ 1,086,000 $ 250,000 $ 1,000 $ 2,000 $ 1,339,000
Net income (loss) (87,000) (322,000) (792,000) (1,040,000)
Equity in operations of investee - 4,000 - - 4,000
Depreciation & Amortization 29,000 112,000 88,000 3,000 232,000
Engineering, research and
consulting expenditures - 224,000 232,000 - 456,000
Interest expense - - - 162,000 162,000
-----------------------------------------------------------------------------------------------------------------------
Nine months ended Automated LFC OCET
September 30 Assembly Process Process Corporate Total
-----------------------------------------------------------------------------------------------------------------------
2000
Revenues $3,949,000 $ - $ 5,000 $ - $3,954,000
Net income (loss) 288,000 (1,963,000) (413,000) (2,444,000) (4,532,000)
Equity in operations of investee - (31,000) - - (31,000)
Depreciation & Amortization 85,000 411,000 138,000 12,000 646,000
Engineering, research and
consulting expenditures - 583,000 316,000 54,000 953,000
Interest expense 1,000 - - 794,000 795,000
-----------------------------------------------------------------------------------------------------------------------
1999
Revenues $2,019,000 $ 750,000 $ 21,000 $ - $ 2,790,000
Net loss (328,000) (181,000) (999,000) (2,571,000) (4,079,000)
Equity in operations of investee - 4,000 - - 4,000
Depreciation & Amortization 87,000 415,000 262,000 11,000 775,000
Engineering, research and
consulting expenditures - 515,000 750,000 - 1,265,000
Interest expense 1,000 - - 474,000 475,000
-----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
September 30, December 31,
Total Assets by Segment 2000 1999
----------------------------- ---------- ---------------- --- -----------------
<S> <C> <C>
Identifiable assets, net
Automated Assembly $ 1,649,000 $1,414,000
LFC Process 4,552,000 4,425,000
OCET Process 165,000 281,000
Corporate 144,000 594,000
----------------------------- ---------- ---------------- --- -----------------
Total $ 6,510,000 $6,714,000
----------------------------- ---------- ---------------- --- -----------------
</TABLE>
11
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(7) RELATED PARTY TRANSACTIONS
On July 14, 2000, the Company issued for cash a $25,000 unsecured 9% note
payable to one outside director. The note is payable upon 30 days written demand
after January 14, 2001. Both the principal and accrued interest thereon may be
paid in cash or at the option of the Company, on January 14, 2001, by issuing
147,059 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.
(8) 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."
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
technologies, 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
nine month periods ended September 30, 2000, remained the same and decreased
approximately $0.05 per share, respectively, over the same prior year periods.
The decrease in basic net loss per share for the nine month period ended
September 30, 2000 is primarily attributable to an increase in the weighted
average number of common shares outstanding as the net loss for both the three
and nine month periods increased. The net loss for the three and nine month
periods ended September 30, 2000, increased approximately 45% and 11%,
respectively, over the same prior year periods.
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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 nine month
periods ended September 30, 2000, increased 45% and 96% respectively over the
same prior year periods. Gross margin as a percentage of sales for both the
three and nine month periods ended September 30, 2000, remained near 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 September 30, 2000, was 23%, compared to 27% over the
same prior year period. Gross margins for the nine month period ended September
30, 2000, was 23% compared to 16% 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 anticipates that sales to the high-tech industry
(electronics and communications) sector will continue to be approximately equal
to the prior year. AMS tries to maintain a steady growth in revenues by
marketing to at least three different industries, specifically, medical,
automotive and high-tech. However, it cannot guarantee securing sufficient
contracts from the industries to maintain its growth. Consequently, AMS may
experience significant fluctuations in its future annual and quarterly
operating results.
For the three and nine month periods ended September 30, 1999, the Company
received net revenues of $250,000 and $750,000, 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, thereby offsetting the
increase in revenues from AMS.
Engineering, Research and Development Expenses. Engineering, research and
development expenses for the three and nine month periods ended September 30,
2000, decreased 56% and 25%, respectively, over the same prior year periods. The
decrease for both the three and nine month periods is primarily attributable to
a decrease of 66% and 58% respectively, 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 the remainder of the year.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the three and nine month periods ended September 30,
2000, increased 40% and 21%, 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 for both the three and nine month periods
remained relatively unchanged over the same prior year periods.
Loss on Investment in LFC Investee. The Company's share of the losses for its
joint venture in LFC Technologies (LFC Tech) for the three and nine months ended
September 30, 2000, increased over the same prior year period. The increase is
primarily attributable to the amortization of assets which LFC Tech acquired in
late 1999.
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<PAGE>
Legal and Accounting Expenses. Legal and accounting expenses for the three and
nine month periods ended September 30, 2000, decreased 30% and 40%,
respectively, over the same prior year periods. The decrease for both the three
and nine month periods 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 in 1999.
Depreciation and Amortization Expenses. Depreciation and amortization expense
for the three and nine month periods ended September 30, 2000, decreased 13% and
17%, respectively over the same prior year periods due primarily to a
non-recurring charge of approximately $80,000 which occurred in the first
quarter of 1999 and a significant portion of OCET Corporation's fixed assets
becoming fully depreciated. Partially offsetting this decrease is the Company's
acquisition of various LFC related assets late in 1999. AMS' depreciation
expense for both the three and nine month periods remained relatively unchanged
over the same prior year periods.
Interest Expense. Interest expense for the three and nine month periods ended
September 30, 2000, increased 135% and 67%, respectively, over the same prior
year periods. The increase is 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 and a non-cash interest charge of approximately
$172,000 related to the beneficial conversion feature of various convertible
notes payable primarily issued during the three month period ended September 30,
2000.
Other Income. Other income for the three and nine month periods ended September
30, 2000, decreased 82% and 59% respectively, over the same prior year periods.
The decrease for both the three and nine month periods is related to the receipt
of a payment in 1999 in settlement of a lawsuit.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2000, the Company had assets totaling $6.5 million and a
working capital deficiency of $6.4 million. This is compared to total assets of
$6.7 million and a working capital deficiency of $1.8 million as of December 31,
1999. The current maturities of long-term debt of approximately $4.2 million due
September 30, 2001 and current notes payable primarily contribute to the change
in the working capital deficiency between September 30, 2000 and December 31,
1999. The Company anticipates continued operating losses over the next twelve
months and has both short-term and long-term liquidity deficiencies as of
September 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 September 30, 2000. Over the
long-term, the Company will require substantial additional funds to maintain and
expand its research and development activities 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 Company's technologies result in positive cash
flows. The Company is seeking additional funds through the financing, sale and
operations of the ENCOAL LFC plant and through
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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.
The use of cash from operating activities is essentially attributable to the
Company's net loss of approximately $4.5 million and $4.1 million for the nine
month periods ended September 30, 2000, and 1999, respectively. These losses
were incurred primarily as a result of the Company's administrative and
technology development activities.
Cash used in operating activities for the nine month period ended September 30,
2000, increased 70% over the same prior year period. The Company's activities
associated with the holding costs of the ENCOAL LFC Plant are the primary reason
for this increase. In the fourth quarter of 1999 the Company acquired various
LFC related assets, including the ENCOAL LFC 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 September 30, 2000, the Company had incurred
approximately $650,000 of expenses and anticipates incurring an additional
$100,000 of expenses each month until it concludes a financing/sale as described
below.
The Company's investing activities amounted to a use of funds of approximately
$640,000 a 384% increase over the same prior year period. This use of funds is
primarily related to the acquisition of LFC Process related equipment and
equipment under construction which is required for the ENCOAL LFC Plant to
resume operations once an investor, if any, is obtained.
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
$750,000 of net revenues through the nine month period ended September 30, 1999.
This agreement was amended subsequent to October 1999, and the Company will not
receive any additional funds pursuant thereto in 2000. The Company does not
anticipate that any significant contributions to LFC Tech will be required in
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. In addition, the Company is now anticipating that it will
additionally expend approximately $200,000 in LFC Process related equipment
through the end of 2000. Further, the Company intends to obtain financing for
the ENCOAL LFC Plant currently estimated at $13.7 million. The financing is for
capital improvements and start-up expenditures 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 capital
improvements previously discussed, the Company as of September 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.
The Company's net financing activities raised approximately $3.5 million and
$1.8 million for the nine month period ended September 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
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during the nine month period was the pay-off and termination of the Company's
$400,000 line-of-credit which was collateralized 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 financing related to the ENCOAL
LFC Plant estimated at $13.7 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. Due to the tax laws surrounding the realization of these tax credits
the financing of the ENCOAL LFC Plant's required improvements will mostly
likely require that the Company sell the ENCOAL LFC Plant directly to the
financier in order facilitate the transaction. Following any such transaction
the Company expects it will continue to be involved with various aspects of the
project, including in the supervision of the improvements. In this case the
Company will not be required to make any of the improvements discussed earlier
or assume the repayment of the financing associated with the improvements.
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.
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. On August 23,
2000, the Company filed a lawsuit against Earthco in San Diego County Superior
Court. The lawsuit seeks as yet to be determined damages for breach of an
agreement by which the Company acted as a finder for 10% of Earthco's interest
in a coal fines briquetting project. The Company alleges that it fulfilled its
obligation under the agreement and Earthco failed to compensate the Company for
services rendered pursuant thereto. Earthco has denied all allegations and the
parties are proceeding towards discovery.
ITEM 2. CHANGES IN SECURITIES
On July 11, 2000, the Company in accordance with its related service agreements
issued three warrant to purchase an aggregate of 225,000 common shares at $0.22
per share to three officer/directors of the Company. The exercise price was not
lower than the closing bid price on the grant date. The warrants are exercisable
one year from the date of grant and expire on December 31, 2005. 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.
During the three month period ended September 30, 2000, the Company raised
approximately $438,000 through the issuance of approximately 2,630,000
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.
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During the three month period ended September 30, 2000, the Company in
accordance with two agreements for consulting and private placement services,
paid cash of approximately $28,000 and issued 417,552 shares of restricted
common stock valued at approximately $73,000, for services rendered. The
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.
Effective August 1, 2000, the Company exchanged for current obligations an
unsecured 9% note payable with a face value of $68,225 due on demand after
September 30, 2000, for equal value. Interest on the note accrues from April 1,
2000 and shall continue until paid in full. As of September 30, 2000 demand on
the note had not been made.
During the month of July, 2000, the Company issued for cash three unsecured 9%
notes payable with an aggregate face value of $196,235. Both the principal and
interest on the notes are due one year from the date of issuance and may only be
paid off through the issuance of 1,195,043 shares of restricted common stock.
The underlying shares of common stock do not have any registration rights. These
securities were issued pursuant to the exemptions provided by Section 4(2) of
the Securities Act and Regulation D. Investment representations were obtained
from the accredited investors.
On August 16, 2000, the Company issued for cash an unsecured 9% note payable
with a face value of $136,000. Both the principal and interest on the note are
due on February 16, 2001 and may only be paid off through the issuance of
967,457 shares of restricted common stock. Pursuant to the terms of the note,
the Company granted the investor piggy back registration rights for the
underlying common shares. These securities were 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 late July and September of 2000, the Company issued for cash three
unsecured 9% notes payable with an aggregate face value of $270,100. Both the
principal and interest on the notes are due one year from the date of issuance
and may only be paid off through the issuance of 2,153,464 shares of restricted
common stock. Pursuant to the terms of the note the Company granted the
investors piggy back registration rights for the underlying common shares. These
securities were issued pursuant to the exemptions provided by Section 4(2) of
the Securities Act and Regulation D. Investment representations were obtained
from the accredited investors.
During the three month period ended September 30, 2000, the Company issued for
cash three unsecured 9% notes payable with an aggregate face value of $256,000
to one accredited investor. The notes are payable upon 30 days written demand
beginning one year following their issuance date. Both the principal and accrued
interest thereon may be paid in cash or, at the option of the Company, on the
first anniversary by issuing 2,728,097 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.
In conjunction with the issuance of the various convertible notes issued during
the three months ended September 30, 2000, the Company recorded the issuance of
the notes payable net of a $913,512 beneficial conversion feature (see note 5).
This beneficial conversion feature will be amortized over the life of each note
and result in a non-cash interest charge. As of September 30, 2000, the Company
had amortized approximately $160,000 of the beneficial conversion feature.
ITEM 3. DEFAULTS UPON SENIOR DEBT SECURITIES
[NONE]
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
A Special Meeting of Stockholders was held on September 18, 2000. At the Special
Meeting stockholders of SGI International were asked to vote on an amendment to
the Articles of Incorporation to increase the number of authorized shares from
75,000,000 to 125,000,000. The vote on the amendment to the Articles of
Incorporation was as follows:
<TABLE>
Voting Results
----------------------------------------------------------
Votes Percent
-------------- ------ -------------- ------- -------------
<S> <C> <C>
For 53,581,309 97%
Against 1,376,393 3%
Abstain 47,487 *%
-------------- ------ -------------- ------- -------------
* Less than 1%
</TABLE>
ITEM 5. OTHER INFORMATION
SGI International ("SGI") and subsidiaries of AEI Resources, specifically,
Bluegrass Coal Development Company and Americoal Development Company have
amended effective October 31, 2000, (the "Fifth Amendment") certain terms and
conditions of the Amended and Restated Acquisition Agreement (the "Acquisition
Agreement") between the parties, dated December 9, 1999. The Fifth Amendment
essentially provides SGI with an extension of the October 31, 2000, date to
November 30, 2000, in which to satisfy various terms and conditions more fully
described in the Acquisition Agreement. All other terms and conditions of the
Acquisition Agreement remain in full force and effect. A copy of the Fifth
Amendment is attached hereto as Exhibit 4.6 and is incorporated herein by
reference.
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 with Registration Rights (2)
4.3 Form of Promissory Note without Registration Rights(2)
4.4 Form of Promissory Note payble in cash or stock(2)
4.5 Form of July 2000 Warrant(2)
4.6 Fifth Amendment to Amended and Restated Acquisition Agreement Among SGI
etal.(2)
27.1 Financial Data Schedule (2)
(1) Incorporated by reference to report on Form 10-Q (File No. 2-93124)
ending September 30, 1999.
(2) Filed herewith.
(b) Reports on 8-K
On October 10, 2000, the Company reported on its Current Report on form 8-K,
filed with the Securities and Exchange Commission, that it had amended effective
September 30, 2000 (the "Fourth 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
Fourth Amendment essentially provides SGI with an extension of the September 30,
2000, date to October 31, 2000, in which to satisfy various terms and conditions
more fully described in the Acquisition Agreement.
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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 November 10, 2000
------------------------------------
Michael L. Rose,
President and Chief Executive Officer
/s/ GEORGE E. DONLOU November 10, 2000
------------------------------------
George E. Donlou
Vice President Finance and Controller
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