UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the period ended September 30, 1997
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number 2-93124
SGI International
(Exact name of registrant as specified in its charter)
Utah 33-0119035
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1200 Prospect Street, Suite 325, La Jolla, California 92037
(Address of principal executive offices)
(619) 551-1090
Registrant's telephone number, including area code
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[ X ] Yes [ ] No
The number of shares of Common Stock, no par value, outstanding as of October
31, 1997, was 8,087,163.
TABLE OF CONTENTS
FORM 10-Q
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Operations 4
Condensed Consolidated Statement of Stockholders' Equity 5
Condensed Consolidated Statements of Cash Flows 6
Notes to Condensed Consolidated Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview 9
Results of Operations 10
Liquidity and Capital Resources 12
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 13
ITEM 2. CHANGES IN SECURITIES 13
ITEM 5. OTHER INFORMATION 13
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 14
PART III. SIGNATURES 15
SGI INTERNATIONAL
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
1997 1996
____________________________________
(Unaudited)
ASSETS
Current assets:
Cash $ 147,813 $ 740,018
Time deposit 402,500 402,500
Receivable from
TEK-KOL Partnership 53,960 24,431
Trade accounts receivable 952,977 888,254
Costs and estimated earnings in
excess of billings on contracts 87,406 113,130
Inventories 66,459 68,289
Prepaid expenses and other
current assets 338,319 58,545
___________________________________
Total current assets 2,049,434 2,295,167
LFC Process related assets:
Notes receivable 304,903 304,903
Royalty rights, net 1,649,813 1,885,500
LFC Cogeneration project, net 447,458 526,421
Investment in TEK-KOL Partnership 456,203 464,163
Australia LFC project, net 123,076 144,795
Other technological assets 32,507 27,742
___________________________________
3,013,960 3,353,524
Property and equipment, net 719,142 548,601
Goodwill, net 395,437 431,386
___________________________________
$ 6,177,973 $ 6,628,678
===================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 610,338 $ 444,436
Borrowings on line-of-credit 400,000 300,000
Billings in excess of costs and
estimated earnings on contracts 201,220 387,892
Current maturities of long-term
notes payable 4,194,875 4,216,500
Accrued salaries, benefits
and related taxes 343,256 124,942
Payable to TEK-KOL Partnership 200,000 83,252
Interest payable 654,212 529,183
Other accrued expenses 422,284 224,149
___________________________________
Total current liabilities 7,026,185 6,310,354
Long-term notes payable,
less current maturities 116,625 123,750
Stockholders' equity
Convertible preferred stock 893 887
Common stock 38,770,056 36,118,231
Paid-in capital 7,011,360 6,494,585
Imputed dividend (381,073) -
Accumulated deficit (46,366,073) (42,419,129)
___________________________________
Total stockholders' equity (964,837) 194,574
___________________________________
$ 6,177,973 $ 6,628,678
===================================
See notes to condensed consolidated financial statements.
SGI INTERNATIONAL
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three months Nine months
ended September 30, ended September 30,
________________________ _________________________
1997 1996 1997 1996
________________________ _________________________
Revenues:
Net sales $ 1,195,745 $ 659,471 $ 3,779,897 $ 2,906,415
Other 10,239 55,714 29,753 278,234
________________________ _________________________
1,205,984 715,185 3,809,650 3,184,649
Income (loss) from
investment in TEK-KOL (326,212) (272,098) (657,960) (219,120)
Cost and expenses:
Cost of sales 888,226 805,086 2,893,349 2,551,285
Research and development 388,178 273,720 939,479 531,054
Selling, general and
administrative 719,698 499,661 1,874,244 1,497,365
Legal and accounting 106,064 147,557 411,137 760,722
Depreciation and
amortization 198,943 127,803 550,624 436,855
Interest 160,858 154,374 429,801 397,759
________________________ _________________________
2,461,967 2,008,201 7,098,634 6,175,040
________________________ _________________________
Net loss $(1,582,195) $(1,565,114) $(3,946,944) $(3,209,511)
Preferred stock dividends:
Imputed dividends for
Series 97B 8%
Convertible Preferred
Stock 236,419 - 236,419 -
Imputed dividends for
Series 97D 7%
Convertible Preferred
Stock 144,654 - 144,654 -
________________________ _________________________
Net loss applicable to
common stock $(1,963,268) - (4,328,017) -
======================== =========================
Net loss per share $ (0.26) $ (0.27) $ (0.63) $ (0.63)
________________________ _________________________
Weighted average common
shares outstanding 7,472,958 5,829,019 6,851,470 5,115,776
======================== =========================
See notes to condensed consolidated financial statements.
SGI INTERNATIONAL
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
Convertible
preferred stock Common stock
Shares Amount Shares Amount
__________________________________________________
Balances at
December 31, 1996 88,732 $ 887 6,094,605 $ 36,118,231
Issuance of common
stock for cash - - 552,328 1,029,735
Exercise of warrants
for cash - - 145,000 136,235
Issuance of common
stock for services - - 176,207 249,401
Conversion of
preferred stock (1,029) (10) 1,033,902 1,236,454
Issuance of preferred
stock for cash 1,550 16 - -
Issuance of preferred
stock for debt 1 - - -
Imputed dividend - - - -
Net loss - - - -
__________________________________________________
Balances at
September 30, 1997 89,254 $ 893 8,002,042 $ 38,770,056
==================================================
Total
Accumulated stockholders'
Paid-in capital deficit equity
__________________________________________________
Balances at
December 31, 1996 $ 6,494,585 $ (42,419,129) $ 194,574
Issuance of common
stock for cash - - 1,029,735
Exercise of warrants
for cash - - 136,235
Issuance of common
stock for services - - 249,401
Conversion of
preferred stock (1,236,444) - -
Issuance of preferred
stock for cash 1,359,398 - 1,359,414
Issuance of preferred
stock for debt 12,748 - 12,748
Imputed dividend 381,073 (381,073) -
Net loss - (3,946,944) (3,946,944)
__________________________________________________
Balances at
September 30, 1997 $ 7,011,360 $ (46,747,146) $ (964,837)
==================================================
See notes to condensed consolidated financial statements.
SGI INTERNATIONAL
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine months
ended September 30,
1997 1996
______________________________
Operating activities
Net loss $ (3,946,944) $ (3,209,511)
Adjustments to reconcile net loss to net
cash flows used for operating activities:
Depreciation and amortization 570,885 511,189
Stock and warrants issued for interest,
services, and notes receivable 249,401 710,800
Changes in assets and liabilities:
Receivable from TEK-KOL Partnership (29,529) -
Trade accounts receivable (38,999) (221,811)
Inventories 1,830 (13,718)
Other current assets (279,774) 48,768
Accounts payable 165,902 2,152
Billings in excess of costs and
estimated earnings on contracts (186,672) 139,285
Accrued salaries, benefits and
related taxes 218,314 (42,371)
Royalty payable to related party - (141,790)
Payable to TEK-KOL Partnership 116,748 (236,476)
Interest payable 125,029 127,845
Other accrued expenses 198,135 651
______________________________
Net cash flows used for
operating activities (2,835,674) (2,324,987)
Investing activities
LFC Process related assets:
Collection of notes receivable
and interest - 400,000
Other technical assets (4,765) (1,302)
Investment in TEK-KOL Partnership 7,960 88,620
Purchase of property and equipment (369,108) (134,710)
Other assets - 12,876
Redemption of preferred stock - (41,222)
______________________________
Net cash flows used for
investing activities (365,913) 324,262
Financing activities Borrowings
on line-of-credit 100,000 -
Proceeds from issuance of notes payable - 215,000
Payments of notes payable (28,750) (96,875)
Proceeds from issuance of common stock 1,165,970 2,836,220
Proceeds from issuance of preferred stock 1,372,162 -
Collection of notes receivable - 194,517
______________________________
Net cash flows provided by
financing activities 2,609,381 3,148,862
______________________________
Net increase (decrease) in cash (592,205) 1,148,137
Cash at beginning of period 740,018 74,154
______________________________
Cash at end of period $ 147,813 $ 1,222,291
==============================
See notes to condensed consolidated financial statements.
SGI INTERNATIONAL
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(Unaudited)
(1) Basis of Presentation
The accompanying condensed consolidated financial statements of SGI
International (the "Company") for the three and nine months ended September 30,
1997, and 1996, are unaudited and have been prepared in accordance with
generally accepted accounting principles for interim financial information and
the instructions to Form 10-Q. 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, 1997, and the consolidated results of
operations for the three and nine months ended September 30, 1997, and 1996.
The results of operations for the three and nine months ended September 30,
1997, are not necessarily indicative of the results to be expected for the year
ending December 31, 1997. For more complete financial information, these
financial statements, and the notes thereto, should be read in conjunction with
the consolidated audited financial statements for the year ended December 31,
1996, included in the Company's Form 10-K filed with the Securities and
Exchange Commission.
(2) Organization and Business
The principal businesses of the Company are developing, commercializing, and
licensing new energy technologies; and manufacturing automated assembly
equipment.
The recovery of amounts invested in the Company's principal assets, the LFC
Process related assets, is dependent upon the Company's ability to adequately
fund its capital contributions to the TEK-KOL Partnership and TEK-KOL's ability
to successfully attract sufficient additional equity, debt or other third party
financing to complete the commercialization of the LFC Process technology.
The Company is engaged in continuing negotiations to secure additional capital
and financing, and while management believes these negotiations will be
successful, there is no assurance thereof.
(3) Equity Transactions
On July 15, 1997, the Company converted one $10,000 note payable with accrued
interest of $2,748 by issuing one share of Series 97C convertible preferred
stock. The convertible preferred share has no voting rights, has a preference
in liquidation of $10,000 and is convertible into 13,500 shares of common stock
on or after August 30, 1998, without further payment.
On August 12, 1997, the Company issued 550 shares of $.01 par value, 7%
Preferred Series 97D and six warrants for an aggregate value of $550,000.
These shares have a liquidation preference of $1,000 per share. The number of
common shares to be issued upon conversion of the preferred shares will be
determined by dividing the amount invested by the lesser of (a) the average of
closing bid price for the five trading days preceding the closing date or (b)
the product of 77.5% multiplied by the average of the closing bid price for the
five trading days preceding the conversion date. The six warrants can be
exercised at the average of the closing bid price for the five trading days
preceding the closing date. Three warrants representing 205,128 each of common
stock expiring respectively 60 days, 120 days and 180 days subsequent to the
effective date of registration with the Securities and Exchange Commission, but
no later than 545 days from closing date. Another three warrants representing
20,513 shares each of common stock, expiring respectively 60 days, 120 days and
180 days subsequent to the effective date of registration with the Securities
and Exchange Commission, but no later than 545 days from closing date.
On September 11, 1997, the Company issued 236,000 stock options to employees
pursuant to its 1996 Omnibus Stock Plan. The exercise price was not lower
than the closing bid price on the grant date.
(4) Net Loss per Share
Net loss per share is computed based on the weighted average number of common
shares outstanding and includes preferred stock dividends. Shares issuable
upon conversion of preferred stock and upon exercise of outstanding stock
options and warrants are not included since the effects 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, without regard
to the actual date on which the preferred stock may be converted.
(5) Recent Accounting Pronouncements
Recent pronouncements of the Financial Accounting Standards Board ("FASB"),
which are not required to be adopted at this date include, Statement of
Financial Accounting Standards ("SFAS") No. 131, "Disclosures about Segments
of an Enterprise and Related Information"; SFAS No. 130, "Reporting
Comprehensive Income"; and SFAS No. 128, "Earnings per Share".
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share" is effective for financial statements issued for periods ending after
December 15, 1997. SFAS No. 128 replaces Accounting Principles Board Opinion
("APB") No. 15 and simplifies the computation of earnings per share ("EPS") by
replacing the presentation of primary EPS with a presentation of basic EPS.
Basic EPS includes no dilution and is computed by dividing income available to
common stockholders by the weighted-average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution from securities
that could share in the earnings of the Company, similar to fully diluted EPS
under APB No. 15. The Statement requires dual presentation of basic and
diluted EPS by entities with complex capital structures. The Company will
adopt SFAS No. 128 effective January 1, 1998.
SFAS No. 130, "Reporting Comprehensive Income" is effective for fiscal years
beginning after December 15, 1997. SFAS No. 130 establishes standards for the
reporting and display of comprehensive income and its components (revenues,
expenses, gains and losses) in a full set of general-purpose financial
statements. The Statement requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. The Company is evaluating the Statement's
provisions to conclude how it will present comprehensive income in its
financial statements, and has not yet determined the amounts to be disclosed.
The Company will adopt SFAS No. 130 effective January 1, 1998.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" is effective for financial statements for periods beginning after
December 15, 1997. SFAS No. 131 establishes standards for the way that public
business enterprises report financial and descriptive information about
reportable operating segments in annual financial statements and interim
financial reports issued to stockholders. SFAS No. 131 supersedes SFAS No. 14,
"Financial Reporting for Segments of a Business Enterprise," but retains the
requirement to report information about major customers. The Company is
evaluating the new Statement's provisions to determine the additional
disclosures required in its financial statements, if any. The Company will
adopt SFAS No. 131 for the fiscal year ended December 31, 1998.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTORY NOTE
This Quarterly Report on form 10-Q 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" within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
These forward-looking statements are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995.
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-Q, 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. Therefore,
historical results and percentage relationships will not necessarily be
indicative of the operating results of any future period.
The Company undertakes no obligation to publicly update or revise any forward-
looking statements, to reflect new information, events or circumstances,
reflect the occurrence or non-occurrence of unanticipated events after the date
hereof.
Overview
The development of the first commercial LFC Plant in the Powder River Basin of
Wyoming continues to progress. The project is currently in the permitting
phase with the land quality permit being the only major permit not yet issued.
The engineers at NuCoal, a wholly owned subsidiary of Zeigler, have reduced the
estimated cost of the project from approximately $460,000,000 to approximately
$406,000,000. While the Engineering, Procurement, and Construction contract
(the "EPCC"), which was signed on December 30, 1996, by a Zeigler subsidiary
and Mitsubishi International, has been terminated, work continues with
Mitsubishi Heavy Industries to further optimize the cost estimate for the
project.
A Memorandum of Understanding ("MOU") between TEK-KOL (a partnership between
the Company and a unit of Zeigler Coal Holding Company) and a group of Russian
private and public entities was executed in the second quarter of 1997. The
Russian Central government and the regional government in Kemerovo have
approved a Phase II study to analyze the economic and technical feasibility
of an LFC project in Russia's Kuzbass Region. Under the protocol issued by the
Russian parties, should the Phase II feasibility study results prove positive,
the protocol agreement states that the project will be included in the Central
Government's 1998 Coal Renovation Program for the Kuzbass Region. The Phase II
study is underway and is expected to be complete and delivered in January of
1998 in Russia to representatives of the public and private consortium.
A MOU was executed between TEK-KOL and PTBA (the Indonesian state owned coal
company) to perform additional tasks necessary to develop and finance an LFC
project at PTBA's coal reserve in the Tanjung Enim area of South Sumatra. The
United States Trade and Development Agency (the "USTDA") provided funding for
the Phase II study, and the USTDA has completed its due diligence relative to
another grant for the additional tasks necessary to develop and finance an LFC
project. The USTDA has indicated that it is willing to make the $200,000 grant
conditional on PTBA doing some additional work on their coal reserves. TEK-KOL
and PTBA continue to discuss as to when that additional work can be scheduled.
TEK-KOL continues to look for other potential projects in Indonesia and is in
discussion with approximately six separate Indonesian entities about performing
feasibility studies with respect to their coal properties.
The OCET process's capability to remove asphaltenes and substantially reduce
catalyst-fouling nickel and vanadium metal content from a variety of oil field
crudes and resids has been successfully demonstrated using bench-scale
continuous processing equipment. Samples of several types of heavy crudes and
resids have been processed to produce high yields of deasphalted oil and
substantial reductions of catalyst-fouling metals.
Based on these results and progress in developing methods to monitor, control
process yields and product quality, in response to continually changing
feedstocks, OCET has commenced construction of the second generation,
continuous process, stainless steel Process Development Unit (the "PDU"), which
is expected to be operational prior to year end.
A Cooperative Research and Development Agreement was executed with the U.S.
Department of Energy ("DOE") in support of the OCET development program. A
report of work to date in the development of the process will be
submitted to the DOE in the fourth quarter, which describes the status of the
process and potential joint objectives. Additionally, contacts have been made
with several potential strategic partners capable of further accelerating the
Company's commercialization efforts.
Additional resources are being deployed to increase sales at AMS, SGI's
automated assembly subsidiary. Sales for 1997 are expected to exceed 1996
levels. AMS assisted in designing and constructing certain portions of OCET's
second generation PDU.
The continuing need to fund Company operations with equity-based financing is
causing dilution. However, Management is committed to accelerating
commercialization of the LFC and OCET technologies and increasing cash flows
from AMS's operations so that equity-based financing can be minimized. The
Company is also analyzing other strategies to reduce the effects of dilution
while continuing to fund the Company's operations.
The report of the Company's independent auditors for the year ended December
31, 1996, contains an emphasis paragraph as to the Company's ability to
continue as a going concern. As discussed in Liquidity and Capital Resources,
the Company has short-term and long-term liquidity deficiencies. The Company's
ability to continue as a going concern is dependent upon successful financing
of its immediate working capital requirements and successful commercialization
of the LFC and OCET technologies. The Company is engaged in license marketing
activities and negotiations to secure additional financing. If immediate
working capital requirements are not successfully financed and/or the LFC and
OCET technologies cannot be successfully commercialized, then the adverse
impact on the business and operations of the Company could be material.
Results of Operations
Sales and Cost of Sales
Sales and cost of sales for the three months ended September 30, 1997,
increased 81% ($536,000) and 10% ($83,000), respectively, over the same prior
year period. Sales and cost of sales are primarily attributable to AMS and are
recorded using the percentage of completion method. Sales and Cost of Sales
increased 30% ($873,000) and 13% ($342,000) for the nine month period ended
September 30, 1997, compared to the same prior year period. The Company
attributes the increase in sales to increased marketing and sales activities.
Cost of sales as a percentage of sales, compared to the prior year period
decreased approximately 48% as a result of a job overrun in the prior year
period.
Other Income
Other income for the three months ended September 30, 1997, decreased 82%
($45,000) from the same prior year period. The prior year period included the
reversal of certain accrued expenses totaling $35,000. Other income for the
nine months ended September 30, 1997, decreased 89% ($248,000) from the same
prior year period. The decrease is related to the forgiveness of certain
royalty obligations by a related party totaling $142,000 and the reversal of
certain accrued expenses totaling $110,000.
Loss on Investment in TEK-KOL
The Company's share of the TEK-KOL loss for the three months ended September
30, 1997, increased 20% ($54,000) over the same prior year period. The
increase is the result of TEK-KOL's efforts to increase the economic
value of CDL and thereby improve the entire economics of an LFC plant.
Management believes current results of the CDL enhancement program are positive
and work continues to optimize the CDL process. The Company's share of the
TEK-KOL loss for the nine months ended September 30, 1997, increased 200%
($439,000) compared to the same prior year period. In addition to the CDL
enhancement program costs TEK-KOL received certain non-recurring payments under
an agreement with Mitsubishi Heavy Industries during the prior year period.
Research and Development Expenses
The Company's Research and development expenses for the three months ended
September 30, 1997, increased 42% ($114,000) over the same prior year period.
For the nine months ended September 30, 1997, research and development costs
increased 77% ($408,000) from the same prior year period. The increase for
both the three and nine month periods relates to the Company's heightened
efforts to develop the OCET process.
Selling, General and Administrative Expenses
Selling, general and administrative expense for the three months ended
September 30, 1997, increased 44% ($220,000) from the same prior year period.
Selling, general and administrative expenses for the nine months ended
September 30, 1997, increased 40% ($535,000) from the same prior year period
after adjusting for non-recurring non-cash charge of $158,000. The increase
for both the three month and nine month periods relates primarily to the
continued expansion of the Company's sales and marketing efforts at AMS, as
well as public relations fees and financial consulting fees.
Legal and Accounting Expenses
The Company's legal and accounting expenses for the three month period ended
September 30, 1997, decreased 28% ($41,000) from the same prior year period.
The decrease is due to cost reduction activities in these areas. The Company's
legal and accounting expenses for the nine month period ended September 30,
1997, decreased 8% ($34,000) from the same prior year period after adjusting
for non-recurring non-cash charges of $316,000.
Depreciation and Amortization Expenses
Depreciation and amortization expenses for the three months ended September 30,
1997, increased by 56% ($71,000) from the same prior year period. Depreciation
and amortization expense for the nine months ended September 30, 1997,
increased 26% ($114,000) from the same prior year period. The increases for
both the three and nine month periods was due primarily to purchases and
construction of additional equipment at the Company's OCET laboratory.
Interest Expense
Interest expense for the three months ended September 30, 1997, increased 4%
($6,000) and as is materially consistent over the same prior year period.
Interest expense for the nine months ended September 30, 1997, increased 8%
($32,000) over the same prior year period. The increase is due primarily to
increased borrowing on the line of credit as compared to the prior year.
Liquidity and Capital Resources
As of September 30, 1997, the Company had assets totaling $6.2 million,
including cash of $148,000, and a working capital deficit of $5.0 million. The
Company anticipates continued operating losses over the next twelve months and
has both short-term and long-term liquidity deficiencies as of September 30,
1997. Short-term liquidity requirements are expected to be satisfied from
existing cash balances and proceeds from the sale of equity securities (See
Note 3 to the Financial Statements in Item 1 of Part 1 of this Quarterly Report
of Form 10-Q). 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's Form 10-K for the year ended December 31, 1996, disclosed the
execution of two funding agreements in April 1997 which provided gross proceeds
of $2 million through the sale of equity securities. As previously reported,
funding for an additional $2 million was subject to certain minimum levels of
price and trading volume of the Company's common stock. The contingencies were
not met and the additional funding did not close.
The Company's investing activities increased during the nine months ended
September 30, 1997, as equipment was purchased and built for the OCET
laboratory. The amount of funds used for investing activities in a given
period are directly related to development requirements and funds availability.
The Company does not have material commitments for capital expenditures as of
September 30, 1997.
The Company had notes payable and associated accrued interest of approximately
$4.8 million due September 30, 1997. The Company satisfied these liabilities
subsequent to September 30, 1997, by its 97E private placement offering which
extended the due date of these liabilities to September 30, 1998, in exchange
for primarily debt and equity securities.
The Company's financing activities raised approximately $2.7 million and $3.1
million during the nine months ended September 30, 1997, and 1996,
respectively. These funds were raised primarily through the private placement
of equity securities and borrowings on the line-of-credit. The amount of money
raised during a given period is dependent upon financial market conditions,
technological progress, and the Company's projected funding requirements. The
Company anticipates that future financing activities will be influenced by the
aforementioned factors. Significant future financing activities will be
required to fund future operating and investing activities and to maintain debt
service. The Company is engaged in continuing negotiations to secure
additional capital and financing, and while management believes these
negotiations will be successful, there is no assurance thereof.
Additional capital contributions to the TEK-KOL Partnership are expected to be
required from time to time prior to profitable operations. The Company is
required to contribute one-half of any such required capital contributions.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the ordinary course of business, various claims are asserted against the
Company and its subsidiaries. However, except for a complaint against AMS
relating to activities that occurred prior to its acquisition by the Company, no
claims asserted against the Company have resulted in litigation. Management's
opinion is that, based on the facts presently known to management, the ultimate
resolution of any and all claims, including the claim against AMS, will not
have a material effect on the Company's financial position, results of
operations or liquidity.
ITEM 2. CHANGES IN SECURITIES
On July 15, 1997, the Company converted one $10,000 note payable and associated
accrued interest of $2,748 into equity by issuing one share of Series 97C
convertible preferred stock to a single Purchaser in reliance on the private
placement exemption of Section 4(2) of the Securities Act. The Purchaser
represented that it was an accredited investor, acquiring the share for its own
account for investment purposes as a principal and without a view towards
immediate resale on distribution. The shares were not offered to the Purchaser
through any general solicitation. The convertible preferred share is fully
paid and non assessable, has no voting rights, has a preference in liquidation
of $10,000 and is convertible into 13,500 shares of common stock on or after
August 30, 1998, without further payment.
On August 12, 1997, the Company issued 550 shares of $.01 par value, 7%
Convertible Preferred Stock Series 97D ("97D Preferred Shares") and six
warrants, to two Purchasers for $1,000 per share for an aggregate purchase
price of $550,000 in reliance on the private placement exemption of Section
3(b) or 4(2) of the Securities Act and Regulation D. The Purchasers
represented that they were accredited investors, acquiring the shares of 97D
Preferred Shares and warrants for their own account, for investment purposes,
as principals and without a view towards immediate resale or distribution. In
accordance with the conditions of sale the Company has the obligation to
register the actual number of shares of common stock underlying the warrants
and 230% of the common stock underlying the 97D Preferred Shares. The number
of shares to be registered shall be determined as the average closing bid price
for the five trading days preceding the closing date two days prior to the date
of filing the registration statement with the Securities and Exchange
Commission. The shares were not offered through any general solicitation.
In connection with the sale of the 97D Preferred Shares, the Company paid an
unaffiliated placement agent a cash fee of $27,500. Additionally, the Company
incurred approximately $18,000 in costs related to the issuance of the 97D
Preferred Shares. Also see Note 3 to the Financial Statements in Item 1 of
Part 1 of this Quarterly Report of Form 10-Q.
During the three month period ended September 30, 1997, all 1,000 shares of the
97B convertible preferred stock were converted into 756,006 shares of common
stock.
As provided in related service or consulting agreements, the Company granted
five warrants to purchase 150,000 common shares, to one employee and three
consultants for services rendered during the three month period ended September
30, 1997, pursuant to Reg. D. The exercise prices were not lower than the
closing bid price on the grant date and expire on December 31, 2001. The
warrants are exercisable one year from the grant date with two warrants for
100,000 shares of common stock exercisable at $1.03, and the other three
warrants for 50,000 shares of common stock exercisable at $2.34 per share.
During the quarter ended September 30, 1997, the Company issued 13,701
restricted common shares to three domestic individuals pursuant to Reg. D
for services rendered.
ITEM 5. OTHER INFORMATION
Subsequent to the quarter's end, the Company on November 6, 1997, issued 1,750
shares of $.01 par value 8% Convertible Preferred Stock Series 97F ("Preferred
Shares") to certain foreign investors and five warrants, to five Purchasers for
$1,000 per share at an aggregate purchase price of $1,750,000 in reliance on
the private placement exemption of Section 3(b) or Section 4(2), Regulation D
and Regulation S of the Securities Act of 1933. The Purchasers represented
that they were accredited investors, acquiring the shares of 8% Convertible
Preferred Stock Series 97F and warrants for their own account, for investment
purposes, as principals and without a view towards immediate resale or
distribution. In addition, the Purchasers have also represented, in the event
they elect the option provided after certain conditions precedent have
occurred, to rely upon a Regulation S exemption, that they are not U.S. persons
as defined by Regulation S of the Securities Act of 1933 and meet all
requirements as stated therein. The number of shares of common stock
underlying the 97F Preferred shares and warrants are subject to a Registration
Rights Agreement which entitles the Purchasers to demand registration upon
written notice to the Company. The Company is required to register 200% of the
number of shares that would be required if all of the 97F Preferred Shares were
converted, assuming a conversion date 5 days prior to the filing of the
registration statement with the Securities and Exchange Commission. The number
of common shares to be issued upon conversion of the 97F Preferred Shares will
be determined by dividing the amount invested by the lesser of (a) the average
closing bid price for the five trading days preceding the closing date or (b)
by the product of 75% multiplied by the average of the closing bid price for
the five trading days preceding the conversion date. The five warrants which
are convertible into 70,000 shares of common stock, contain a conversion price
equal to 110% of the average closing bid price for the five trading days
preceding the closing date. The warrants all expire on November 6, 2002.
The 97F Preferred Shares accrue dividends at a rate of 8% per annum and are
cumulative. The dividend is only payable in common stock of the Company. The
97F Preferred Shares have a liquidation preference of $1,000 per share and are
convertible at the earlier of (i) the date the registration statement is
declared effective or (ii) sixty one days from the closing date (November 6,
1997). If the registration statement is not declared effective by the
Securities and Exchange Commission by the 61st day following the date of the
demand registration, the Purchasers, at their option may either (a) convert up
to 50% of their investment in the 97F Preferred Shares, pursuant to Regulation
S or (b) if the Company qualifies to register the Securities under a S-3 form,
require the Company to pay certain specified damages in cash. Furthermore, if
the Company qualifies to file under a form S-2b and the registration statement
is not declared effective by the Securities and Exchange Commission by the
121st day following the date of the demand registration the Purchasers, at
their option may either (a) convert all or part of their remaining investment
in the 97F Preferred Shares, pursuant to Regulation S and/or (b) require the
Company to pay certain specified damages in cash. The 97F Preferred Shares are
callable by the Company at 130% of the Liquidation Value upon certain
conditions precedent.
In connection with the sale of the 97F Preferred Shares, the Company paid two
unaffiliated placement agents, Settendown Capital and Ganesh Asset Management,
Ltd., fees consisting of $70,000 in cash, 105 shares of 97F Preferred Shares
having a value of $105,000, and warrants to purchase 35,000 shares of common
stock as compensation for placement. The warrants contain a conversion price
equal to 110% of the average closing bid price for the five trading days
preceding Novemebr 6, 1997. The warrants all expire on November 6, 2002. In
addition, the Company paid $8,750 in cash for legal and escrow fees incurred in
connection with this transaction. The net proceeds to the Company of
$1,671,250 will be used for working capital and the continuous research and
development of its OCET and LFC processes.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
1. Exhibits
4.1 Form of 8% Convertible Preferred Stock - Series 97F(1)
4.2 Form of 7% Convertible Preferred Stock - Series 97D(1)
4.3 Form of Warrants - Series 97F(1)
4.4 Form of Warrants - Series 97D(1)
4.5 Form of Warrants - Placement Agents(1)
10.1 Form of Registration Rights Agreement - Series 97D(1)
10.2 Form of Registration Rights Agreement - Series 97F(1)
10.3 Form of Subscription Agreement - Series 97F(1)
10.4 Form of Stock Purchase Agreement - Series 97D(1)
10.5 1996 Omnibus Stock Plan(1)
27.0 Financial Data Schedule(1)
(1) Filed herewith.
2. Reports on Form 8-K - None
PART III. SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
SGI INTERNATIONAL
/s/ November 13, 1997
__________________________________________________
Joseph A. Savoca,
Chief Executive Officer and Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ November 13, 1997
__________________________________________________
Joseph A. Savoca,
Chief Executive Officer and Chairman of the Board
Index to Exhibits Page
4.1 Form of 8% Convertible Preferred Stock - Series 97F 1-3
4.2 Form of 7% Convertible Preferred Stock - Series 97D 4-6
4.3 Form of Warrants - Series 97F 7-14
4.4 Form of Warrants - Series 97D 15-22
4.5 Form of Warrants - Placement Agents 23-30
10.1 Form of Registration Rights Agreement - Series 97D 31-38
10.2 Form of Registration Rights Agreement - Series 97F 39-47
10.3 Form of Subscription Agreement - Series 97F 48-68
10.4 Form of Stock Purchase Agreement - Series 97D 69-80
10.5 1996 Omnibus Stock Plan 81-96
27.0 Financial Data Schedule 97