UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended March 31, 2001
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)
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer 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 May 4, 2001, was 84,327,638.
Transitional Small Business Disclosure Format (Check one): [ ] Yes [X] No
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 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 | |
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 | 16 | |
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K | 17 | |
PART III. | SIGNATURES | 18 |
ASSETS | |||
Current assets: | |||
Cash | $ 472,630 | $ 410,352 | |
Restricted cash deposit | 200,000 | 200,000 | |
Trade accounts receivable, less allowance for doubtful accounts of $45,857 and $47,989 | 470,373 | 1,048,996 | |
Inventories | 414,064 | 414,268 | |
Costs and estimated earnings in excess of billings on contracts | 340,448 | 212,742 | |
Prepaid expenses and other current assets | 35,553 | 78,826 | |
Total current assets | 1,933,068 | 2,365,184 | |
LFC Royalty rights, net | 549,938 | 628,500 | |
LFC Process equipment, net | 198,810 | 230,225 | |
Investment in LFC Investees | 214,398 | 225,608 | |
LFC cogeneration project, net | 78,963 | 105,284 | |
LFC related notes receivable, net | 150,000 | 150,000 | |
Other assets, net | 26,656 | 26,337 | |
Property, plant and equipment, net of accumulated depreciation and amortization of $1,416,597 and $1,363,452 | 2,373,882 | 2,415,823 | |
Goodwill, net of accumulated amortization of $252,568 and $240,585 | 227,676 | 239,659 | |
Interest receivable on notes from stockholders | 46,971 | 37,680 | |
$ 5,800,362 | $ 6,424,300 | ||
LIABILITIES AND STOCKHOLDERS' DEFICIENCY | |||
Current liabilities: | |||
Accounts payable | $ 1,104,293 | $ 1,006,575 | |
Notes payable, net | 1,647,437 | 1,673,738 | |
Accrued salaries, benefits and related taxes | 1,390,989 | 1,271,155 | |
Billings in excess of costs and estimated earnings on contracts | 645,396 | 976,867 | |
Interest payable | 328,661 | 298,893 | |
Other accrued expenses | 253,885 | 284,470 | |
Current maturities of long-term debt | 4,170,386 | 4,170,386 | |
Total current liabilities | 9,541,047 | 9,682,084 | |
Long-term debt, less current maturities | 2,305,584 | 2,259,204 | |
Total liabilities | 11,846,631 | 11,941,288 | |
COMMITMENTS AND CONTINGENCIES | |||
Minority interest | 453,920 | 454,997 | |
Stockholders' deficiency: | |||
Convertible preferred stock | 605 | 605 | |
Common stock | 54,746,542 | 53,885,499 | |
Paid-in capital | 8,132,743 | 7,929,297 | |
Accumulated deficit | (68,909,079) | (67,316,386) | |
Notes receivable from stockholders | (471,000) | (471,000) | |
Total stockholders' deficiency | (6,500,189) | (5,971,985) | |
$ 5,800,362 | $ 6,424,300 | ||
See notes to condensed consolidated financial statements. |
Three months ended March 31, | |||||||
REVENUES: | |||||||
Contract revenues | $1,254,592 | $1,055,711 | |||||
EXPENSES: | |||||||
Cost of sales | 784,168 | 809,715 | |||||
Research and development | 463,887 | 368,730 | |||||
Loss on LFC investee | 11,210 | 18,853 | |||||
Selling, general and administrative | 858,189 | 835,584 | |||||
Legal and accounting | 98,003 | 97,475 | |||||
Depreciation and amortization | 201,819 | 226,109 | |||||
Total expenses | 2,417,276 | 2,356,466 | |||||
Loss from operations | (1,162,684) | (1,300,755) | |||||
NON-OPERATING INCOME (EXPENSES): | |||||||
Interest expense | (523,418) | (210,227) | |||||
Other income | 92,332 | 19,023 | |||||
Loss before minority interest in consolidated subsidiary | (1,593,770) | (1,491,959) | |||||
Minority interest in loss of consolidated subsidiary | 1,077 | 5,164 | |||||
Net loss | $ (1,592,693) | $ (1,486,795) | |||||
Loss per common share basic | $ (0.02) | $ (0.03) | |||||
Weighted average shares outstanding | 79,823,677 | 57,171,299 |
Stockholders' | ||||||||||||||||
Balances at December 31, 2000 | 60,518 | $ 605 | 77,049,377 | $ 53,885,499 | $ 7,929,297 | $ (67,316,386) | $ (471,000) | $ (5,971,985) | ||||||||
| 511,211 | 93,935 | 93,935 | |||||||||||||
4,460,751 | 444,410 | (13,133) | 431,277 | |||||||||||||
2,045,493 | 322,698 | 322,698 | ||||||||||||||
216,579 | 216,579 | |||||||||||||||
(1,592,693) | (1,592,693) | |||||||||||||||
Balances at March 31, 2001 | 60,518 | $ 605 | 84,066,832 | $ 54,746,542 | $ 8,132,743 | $ (68,909,079) | $ (471,000) | $ (6,500,189) |
See notes to condensed consolidated financial statements.
SGI INTERNATIONAL AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three months ended March 31, | ||||
Operating activities: | ||||
Net loss | $ (1,486,795) | |||
Adjustments to reconcile net loss to net cash used | ||||
Depreciation and amortization | 201,819 | 226,109 | ||
Common stock issued for services and operating activities | 30,616 | 40,025 | ||
Common stock issued for interest | 2,569 | - | ||
Amortization of beneficial conversion feature on debt | 296,135 | - | ||
Accrued long-term interest expense | 46,380 | 51,804 | ||
Accrued interest income | (9,291) | (9,394) | ||
Minority interest in loss of consolidated subsidiary | (1,077) | (5,164) | ||
Equity in net loss of LFC investee | 11,210 | 18,853 | ||
Changes in operating assets and liabilities: | ||||
450,917 | (449,038) | |||
204 | (1,518) | |||
43,273 | 20,042 | |||
97,718 | 7,984 | |||
(331,471) | 290,279 | |||
119,834 | 23,001 | |||
47,639 | 17,513 | |||
32,734 | (11,540) | |||
Net cash used in operating activities | (553,484) | (1,267,839) | ||
Investing activities: | ||||
(11,203) | (2,721) | |||
- | (72,000) | |||
(713) | - | |||
Net cash used in investing activities | (11,916) | (74,721) | ||
Financing activities: | ||||
196,401 | 425,705 | |||
- | (2,375) | |||
431,277 | 1,209,028 | |||
Net cash provided by financing activities | 627,678 | 1,632,358 | ||
Net increase in cash | 62,278 | 289,798 | ||
Cash at beginning of period | 410,352 | 278,391 | ||
Cash at end of period | $ 472,630 | $ 568,189 | ||
Supplemental disclosure of cash flow information: | ||||
$ 126,138 | $ 131,304 | |||
Supplemental disclosure of non-cash activities: | ||||
- | 38,312 | |||
63,319 | - | |||
320,129 | 400,378 | |||
193,599 | - | |||
See notes to condensed consolidated financial statements. |
SGI INTERNATIONAL AND SUBSIDIARIES
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001
(1) Business
SGI International, a Utah corporation, (together with its subsidiaries, hereinafter referred to as the "Company"), has its principal 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 LFCÒ Process is designed to convert and upgrade low-rank coal into a higher Btu more efficient fuel to produce power and simultaneously produce a low temperature coal tar, which contains valuable 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 in the business of designing and manufacturing custom precision automated assembly equipment. The Company is also attempting to develop the Level Sensor ("LS") and Asphaltenes Processing Technology. The LS technology is designed to overcome a number of limitations presented by existing "off-the-shelf" equipment and sensors. The Company's sensor is characterized by a high degree of sensitivity, electrical stability and its small size. The Asphaltenes Processing Technology is intended to convert the unwanted asphaltene by-products of the OCET Process, as well as the existing solvent deasphalting processes, into a coal-like fuel.
(2) Basis of Presentation
The accompanying condensed consolidated financial statements of SGI International and subsidiaries for the three months ended March 31, 2001, and 2000, are unaudited and in the opinion of management have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the instructions to Form 10-QSB. Accordingly, they do not include all information and notes required by accounting principles generally accepted in the United States of America 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 March 31, 2001, and the consolidated results of operations and cash flows for the three months ended March 31, 2001, and 2000. The results of operations for the three months ended March 31, 2001, are not necessarily indicative of the results to be expected for the year ending December 31, 2001. 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, 2000, included in the Company's Form 10-KSB filed with the Securities and Exchange Commission.
The accompanying condensed consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America, 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 and OCET Process assets are dependent upon the Company's ability to adequately fund its on-going development operations and any capital contributions that may be required for its joint venture "LFC Technologies, LLC" ("LFC Tech") with MLFC Corporation ("MLFC"), a wholly-owned subsidiary of Mitsubishi Corp. Furthermore, the ability to successfully bring both LFC 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 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 $7,608,000 and an accumulated deficit of $68,909,000 at March 31, 2001. 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 negotiations 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
During the quarter ended March 31, 2001, the Company, upon maturity, exchanged three notes payable aggregating $226,192 in principal and interest for 1,585,939 shares of common stock.
During the quarter ended March 31, 2001, the Company sold seven notes payable aggregating $196,401 for cash. The notes bear interest at 9% per annum, mature one year from the sale date and are unsecured. The notes and accrued interest are payable in cash or upon maturity, at the Company's option, by issuing 2,532,126 shares of restricted common stock. In conjunction with the sale of these notes the Company recorded a beneficial conversion feature of $193,599.
During the three month period ended March 31, 2001, the Company issued approximately 4,461,000 shares of restricted common stock to accredited investors for approximately $444,000 in cash. In connection therewith the Company paid approximately $13,000 in fees for services rendered.
In February 2001, the Board of Directors approved the 2001 Non-Qualified Stock Option Plan (the "2001 Stock Plan") pursuant to which a maximum aggregate of 4,000,000 shares was reserved for grant. Under the 2001 Stock Plan, employees may be granted as an incentive or bonus an opportunity to purchase common stock in the Company, by way of non-qualified (a) stock options or warrants, (b) stock purchase rights, (c) stock appreciation rights and (d) long term performance awards. The terms and conditions of each award are at the discretion of the Board of Directors or any duly authorized committee. During the quarter ended March 31, 2001, in accordance with the 2001 Stock Plan , the Company issued warrants at fair market value to employees of the Company. The exercise price was not lower than the closing bid price on the grant date. The warrants and incentive options are exercisable for a total of 1,215,000 shares of common stock at $0.26 per share, the closing bid prices on the grant dates. The warrants are exercisable one year from the date of grant and expire on December 31, 2005.
During the quarter ended March 31, 2001, the Company, as provided in their related consulting agreements, issued approximately 392,000 restricted common shares to consultants for services rendered, valued at approximately $69,500.
During the quarter ended March 31, 2001, the Company issued approximately 70,000 shares of restricted common stock valued at approximately $14,500. The shares were issued in full settlement of two contractual claims which arose in the ordinary course of business.
(4) Related Party Transactions
During the quarter ended March 31, 2001, two outside directors of the Company, upon maturity, exchanged their notes payable aggregating $96,506 in principal and interest for 459,554 shares of restricted common stock. On the day of the exchange the bid price of the Company's common stock was $0.21.
On December 10, 2000, as a condition for obtaining a $100,000 line-of-credit for AMS with a financial institution, an entity controlled by an outside director guaranteed the payment of the line-of-credit which expires on December 31, 2001. In return for this guarantee the Company during the quarter ended March 31, 2001, paid this entity 50,000 shares of restricted common stock valued at $10,000.
Effective March 23, 2001, the Company amended the terms of a $25,000 note payable to an outside director of the Company. Pursuant to the amendment the note is now due five days after the Company receives written notice of demand and may be paid by mutual consent in cash or restricted 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, Plant and Equipment
March 31, | December 31, | |
2001 | 2000 | |
$ 2,121,000 | $ 2,121,000 | |
1,036,000 | 1,036,000 | |
197,000 | 196,000 | |
267,000 | 266,000 | |
73,000 | 72,000 | |
54,000 | 54,000 | |
43,000 | 34,000 | |
3,791,000 | 3,779,000 | |
(1,417,000) | (1,363,000) | |
Net property, plant and equipment | $ 2,374,000 | $ 2,416,000 |
Notes Payable
The Company from time to time issues various notes payable which contain a beneficial conversion feature. The Company in accordance with accounting principles generally accepted in the United States of America 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. During the three month period ended March 31, 2001, the Company amortized approximately $296,000 of the beneficial conversion feature. Short-term notes payable are shown below net of the unamortized portion of the beneficial conversion feature.
March 31, | December 31, | |
2001 | 2000 | |
$ 2,201,611 | $ 2,307,468 | |
(554,174) | (633,730) | |
Notes payable, net | $1,647,437 | $ 1,673,738 |
(6) INFORMATION ON INDUSTRY SEGMENTS
The Company in the past has managed its segments based on business units that are in turn based along technological lines. These business units offer products and services to different markets in accordance with their underlying technology. Accordingly, the Company's three business segments were centered on the operations associated with the LFC Process, the OCET Process and the manufacturing of custom automated assembly systems.
During 2000, the Company's focus of its OCET lab and technical facilities slowly shifted from being primarily devoted to the OCET Process, to more of a general research and development facility capable of assisting the Company on its various research and development projects. These various research and development projects include (a) enhancing the value of the various CDL by-products, (b) advancing the Level Sensor Technology, (c) further developing the Asphaltenes to Coal Process and (d) advancing the development of the OCET Process. In keeping with this changing focus the Company effective February 28, 2001, combined the OCET lab and the SGI Technical Center ("SGITC") into one corporate wide research facility which will now be known solely as SGITC. Accordingly, all assets not solely devoted to the OCET Process and the OCET lab's lease have been transferred to SGITC, a division of SGI International. This combination will not result in any change in business segment reporting as the Company will continue to report the operations of its technical facilities as one segment by combining OCET's operations and those of SGITC.
The Company evaluates performance of each segment based on profit or loss from operations before income taxes. The Company has no significant intersegment sales and intersegment transfers are done at cost.
Three months ended | ||||||||||
March 31, | ||||||||||
2001 | ||||||||||
Revenues | $ 1,255,000 | $ - | $ - | $ - | $ 1,255,000 | |||||
Net income (loss) | 232,000 | (736,000) | (36,000) | (1,053,000) | (1,593,000) | |||||
Equity in operations of investee | - | (11,000) | - | - | (11,000) | |||||
Identifiable assets, net | 1,644,000 | 3,706,000 | 120,000 | 330,000 | 5,800,000 | |||||
Depreciation and amortization | 31,000 | 137,000 | 31,000 | 3,000 | 202,000 | |||||
R&D expenditures | - | 327,000 | 82,000 | 55,000 | 464,000 | |||||
Interest expense | - | - | - | 523,000 | 523,000 | |||||
2000 | ||||||||||
Revenues | $ 1,054,000 | $ - | $ 2,000 | $ - | $ 1,056,000 | |||||
Net income (loss) | 35,000 | (679,000) | (172,000) | (671,000) | (1,487,000) | |||||
Equity in operations of investee | - | (19,000) | - | - | (19,000) | |||||
Identifiable assets, net | 1,777,000 | 4,316,000 | 186,000 | 994,000 | 7,273,000 | |||||
Depreciation and amortization | 31,000 | 138,000 | 53,000 | 4,000 | 226,000 | |||||
R&D expenditures | - | 235,000 | 134,000 | - | 369,000 | |||||
Interest expense | 1,000 | - | - | 209,000 | 210,000 |
(7) 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 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, all of which 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. Historical results and percentage relationships will not necessarily be indicative of the operating results of any future period.
Results of Operations
THREE MONTHS ENDED MARCH 31, 2001, COMPARED TO THREE MONTHS ENDED MARCH 31, 2000.
Net Loss per Common Share. Basic net loss per common share for the period ended March 31, 2001, decreased approximately $0.01 per share over the prior year period. The decrease in basic net loss per share for the current three month period is attributable to an increase in the weighted average number of common shares outstanding as the net loss for the quarter increased approximately $106,000 over the prior year.
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 and gross margin at AMS for the three months ended March 31, 2001, increased 19% and 14%, respectively, over 2000. 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. It is expected that gross margins on future revenues will be at or below normal levels of approximately 24% of sales.
The Company attributes the increase in revenues primarily to strong sales to the medical industry which continued from the prior year. Future sales to all sectors for the remainder of 2001 are anticipated to be below prior year levels. This projection is based on the slowing U. S. economy and order activity.
Loss on Investment in LFC Investee. The Company's share of the losses for its LFC joint venture (LFC Tech) for the three months ended March 31, 2001, decreased 41% over the same prior year period. The decrease is primarily attributable to a decrease in legal and accounting fees for the quarter.
Research and Development Expenses. Research and development expenses for the three months ended March 31, 2001, increased 26% over the same prior year period. The increase is primarily attributable to a reduction in capitalizable engineering and development work related to the ENCOAL LFC plant.
Selling, General and Administrative Expenses. Selling, general and administrative expenses for the three months ended March 31, 2001, increased 3% over the same prior year period. The increase is primarily attributable to the carrying costs associated with the ENCOAL LFC plant. Selling, general and administrative expenses for AMS increased approximately $24,000 or 13% over the same prior year period due to increased selling expenses.
Legal and Accounting Expenses. Legal and accounting expenses for the three months ended March 31, 2001, remained relatively unchanged over the same prior year period.
Depreciation and Amortization Expenses. Depreciation and amortization expense for the three months ended March 31, 2001, decreased 11% over the same prior year period due primarily to a significant portion of the Company's laboratory assets becoming fully depreciated.
Interest Expense. Interest expense for the three months ended March 31, 2001, increased 149% over the same prior year period. The increase is primarily due to a non-cash interest charge of approximately $296,000 related to the amortization of the imputed beneficial conversion feature of various convertible notes payable, primarily issued during the last half of 2000.
Other Income. Other income for the three months ended March 31, 2001, increased 385% due the Company's receipt of $75,000 in settlement of a lawsuit.
Liquidity and Capital Resources
As of March 31, 2001, the Company had assets totaling $5,800,000, including restricted cash of $200,000, and a working capital deficiency of $7,608,000. Current maturities of approximately $4,200,000 of long-term debt, along with current notes payable, accounts payable and accrued salaries primarily contribute to the working capital deficiency at March 31, 2001. This is compared to assets of $7,300,000 and a $1,475,000 working capital deficiency as of March 31, 2000. The Company anticipates continued operating losses over the next twelve months and has both short-term and long-term liquidity deficiencies as of March 31, 2001.
Other short-term liquidity requirements are expected to be satisfied from existing cash balances, proceeds from the sale of equity securities in the future 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 March 31, 2001. 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 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 operation of the ENCOAL Demonstration 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.
The use of cash in operating activities of approximately $553,000 and $1,268,000 for the quarters ended March 31, 2001, and 2000, respectively, are primarily related to the Company's general operating expenses and R&D activities. The decrease of approximately 56% or $715,000 over the previous years' quarter is essentially due to a decrease in accounts receivable which has been offset by an increase in billings in excess of costs.
The Company's investing activities amounted to a use of cash of approximately $12,000 and $75,000 for the quarters ended March 31, 2001, and 2000, respectively. The use of cash in the current year is primarily related to projects under construction for the acquisition of machinery and equipment at the ENCOAL Demonstration plant. AMS had no significant acquisitions of equipment during the three month period ended March 31, 2001.
In 2001, the Company is projecting no significant capital expenditures for equipment at OCET and that AMS may have to curtail or cut back on its approximately $300,000 capital improvements project which it started in 2000. Further, the Company, through collaboration with another larger and better capitalized company, intends to obtain financing estimated at $13,700,000 for the ENCOAL Demonstration plant. 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 improvements which the Company intends to make to the ENCOAL Demonstration plant, the Company as of March 31, 2001, does not have any material requirements or commitments for capital expenditures. The amount of cash used for investing activities in a given period are directly related to development requirements and cash availability.
The Company's net financing activities raised approximately $628,000 and $1,632,000 for the three month periods ended March 31, 2001, and 2000, respectively. These funds were raised primarily through the private placement of debt and equity securities for both periods. See Note 3 "Financing Transactions" to the Notes to the Condensed Consolidated Financial Statements included in this Form 10-QSB.
During the fourth quarter of 2000, the Company was successful in obtaining a new line-of-credit to provide short term working capital to AMS. The line allows maximum borrowings of $100,000 and bears interest at prime plus 1%. At March 31, 2001, AMS had no borrowings under this line of credit. The agreement expires November 5, 2001.
As stated earlier the Company intends to obtain financing primarily related to improvements for the ENCOAL Demonstration plant estimated at $13,700,000. 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 Demonstration plant's improvements will require that the Company sell or lease the 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 the supervision of the improvements. In this case the Company will most likely not be required to make any expenditures for 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, that its terms will be acceptable.
The Company has notes payable and associated accrued interest aggregating $4,170,000 required to be paid prior to October 31, 2001. In addition, as of March 31, 2001, the Company has approximately $1,702,000 of short-term notes payable which may be satisfied through the issuance of common stock.
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 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 sought 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. In January of 2001 the parties settled the case prior to going to trial. The Company is not party to any other pending legal proceeding.
ITEM 2. CHANGES IN SECURITIES
During the quarter ended March 31, 2001, the Company, upon maturity, exchanged three notes payable aggregating $226,192 in principal and interest for 1,585,939 shares of common stock. The 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 involved and restrictive legends were placed on the certificates.
During the quarter ended March 31, 2001, two outside directors of the Company, upon maturity, exchanged their notes payable aggregating $96,506 in principal and interest for 459,554 shares of restricted common stock. On the day of the exchange the bid price of the Company's common stock was $0.21. The 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 involved and restrictive legends were placed on the certificates.
On December 10, 2000, as a condition for obtaining a $100,000 line-of-credit for AMS with a financial institution, an entity controlled by an outside director guaranteed the payment of the line-of-credit which expires on December 31, 2001. In return for this guarantee the Company during the quarter ended March 31, 2001, paid this entity 50,000 shares of restricted common stock valued at $10,000.
Effective March 23, 2001, the Company amended the terms of a $25,000 note payable to an outside director of the Company. Pursuant to the amendment the note is now due five days after the Company receives written notice of demand and may be paid by mutual consent in cash or restricted stock.
During the quarter ended March 31, 2001, the Company sold seven notes payable aggregating $196,401 for cash. The notes bear interest at 9% per annum mature one year from the sale date and are unsecured. The notes and accrued interest are payable in cash or upon maturity, at the Company's option, by issuing 2,532,126 shares of restricted common stock. The 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 March 31, 2001, the Company issued approximately 4,461,000 shares of restricted common stock to accredited investors for approximately $444,000 in cash. In connection therewith the Company paid approximately $13,000 in fees to J. Russo for services rendered. 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 and legends were placed on the certificates.
In February 2001, the Board of Directors approved the 2001 Non-Qualified Stock Option Plan (the "2001 Stock Plan") pursuant to which a maximum aggregate of 4,000,000 shares was reserved for grant. Under the 2001 Stock Plan, employees may be granted as an incentive or bonus an opportunity to purchase common stock in the Company, by way of non-qualified (a) stock options or warrants, (b) stock purchase rights, (c) stock appreciation rights and (d) long term performance awards. The terms and conditions of each award are at the discretion of the Board of Directors or any duly authorized committee. During the quarter ended March 31, 2001, in accordance with the 2001 Stock Plan , the Company issued warrants at fair market value to employees of the Company. The exercise price was not lower than the closing bid price on the grant date. The warrants and incentive options are exercisable for a total of 1,215,000 shares of common stock at $0.26 per share, the closing bid prices on the grant dates. The warrants were granted in reliance upon exemptions from registration pursuant to Section 4(2) of the Securities Act and Regulation D. Investment representations were obtained from each of the employees. The warrants are exercisable one year from the date of grant and expire on December 31, 2005.
During the quarter ended March 31, 2001, the Company, as provided in their related consulting agreements, issued approximately 392,000 restricted common shares to consultants for services rendered, valued at approximately $69,500. 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 quarter ended March 31, 2001, the Company issued approximately 70,000 shares of restricted common stock valued at approximately $14,500. The shares were issued in full settlement of two contractual claims which arose in the ordinary course of business. 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
The Company and subsidiaries of AEI, specifically, Bluegrass and Americoal, have amended effective April 30, 2001 (the "Ninth Amendment"), certain terms and conditions of the Amended Acquisition Agreement between the parties, dated December 9, 1999. The Ninth Amendment essentially provides the Company with an extension of the April 30, 2001, date to May 31, 2001, in which to satisfy various terms and conditions more fully described in the Amended Acquisition Agreement. The extension was granted under substantially similar terms and conditions as those agreed to in the previous extension. All other terms and conditions of the Amended Acquisition Agreement remain in full force and effect.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
4.1 Form of promissory note payable in cash or stock. (3)
4.2 Form of Restricted Stock Subscription Agreement. (2)
4.3 Note Extension Agreement. (1)
10.1 2001 Non-Qualified Stock Plan. (4)
10.2 Guarantee Agreement dated December 10, 2000. (3)
(1) Filed herewith.
(2) Incorporated by reference to Registrants report on Form 10QSB ending June 30, 1999.
(3) Incorporated by reference to Registrants report on Form 10KSB ending December 31,2000.
(4) Incorporated by reference to Registrants Registration Statement on Form S-8 filed February 15, 2001.
(b) Reports on Form 8-K
On March 16, 2001, the Company reported on its Current Report on form 8-K, filed with the Securities and Exchange Commission, that it had amended 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.
SGI INTERNATIONAL
/s/ MICHAEL L. ROSE May 11, 2001
Michael L. Rose
Chairman of the Board, President
and Chief Executive Officer
/s/ GEORGE E. DONLOU May 11, 2001
George E. Donlou
Vice President Finance/Controller