XNAS:SYMX Synthesis Energy Sys Inc Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 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 quarterly period ended March 31, 2012

 

¨ 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: 001-33522

 

 

SYNTHESIS ENERGY SYSTEMS, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   20-2110031
(State of Incorporation)  

(I.R.S. Employer

Identification No.)

Three Riverway, Suite 300, Houston, Texas   77056
(Address of principal executive offices)   (Zip code)

Registrant’s telephone number, including area code: (713) 579-0600

N/A

Former name, former address and former fiscal year, if changed since last report:

 

 

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.     Yes   x     No   ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).      Yes   x     No   ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   ¨      Smaller reporting company   x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    

Yes   ¨     No   x

As of May 11, 2012 there were 52,022,251 shares of the registrant’s common stock, par value $.01 per share, outstanding.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

     Page  

PART 1. Financial Information

  

Item 1. Financial Statements

     1   

Consolidated Balance Sheets as of March 31, 2012 and June 30, 2011 (unaudited)

     1   

Consolidated Statements of Operations for the Three Months Ended March 31, 2012 and 2011 (unaudited)

     2   

Consolidated Statements of Operations for the Nine Months Ended March  31, 2012 and 2011 and the period from November 4, 2003 (inception) to March 31, 2012 (unaudited)

     3   

Consolidated Statements of Cash Flows for the Nine Months Ended March  31, 2012 and 2011 and the period from November 4, 2003 (inception) to March 31, 2012 (unaudited)

     4   

Consolidated Statements of Equity for the period from November 4, 2003 (inception) to March  31, 2012 (unaudited)

     5   

Notes to the Consolidated Financial Statements (unaudited)

     6   

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     21   

Item 3. Quantitative and Qualitative Disclosure about Market Risk

     35   

Item 4. Controls and Procedures

     36   
PART II. Other Information   

Item 1. Legal Proceedings

     37   

Item 1A. Risk Factors

     38   

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

     39   

Item 3. Defaults Upon Senior Securities

     39   

Item 4. Mine Safety Disclosures

     39   

Item 5. Other Information

     39   

Item 6. Exhibits

     41   

i


Table of Contents

PART I

Item 1. Financial Statements

SYNTHESIS ENERGY SYSTEMS, INC.

(A Development Stage Enterprise)

Consolidated Balance Sheets

(In thousands, except per share amount)

(Unaudited)

 

     March 31,
2012
    June 30,
2011
 

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 19,846      $ 32,176   

Accounts receivable

     137        2,574   

Prepaid expenses and other currents assets

     2,151        1,382   

Inventory

     948        913   
  

 

 

   

 

 

 

Total current assets

     23,082        37,045   

Property, plant and equipment, net

     34,019        35,183   

Intangible asset, net

     1,145        1,226   

Investment in Yima joint ventures

     33,773        33,520   

Other long-term assets

     3,988        3,000   
  

 

 

   

 

 

 

Total assets

   $ 96,007      $ 109,974   
  

 

 

   

 

 

 

LIABILITIES AND EQUITY

    

Current liabilities:

    

Accrued expenses and accounts payable

   $ 6,586      $ 6,113   

Deferred revenue

     984        —     

Current portion of long-term bank loan

     2,447        2,380   
  

 

 

   

 

 

 

Total current liabilities

     10,017        8,493   

Long-term bank loan

     2,383        4,697   
  

 

 

   

 

 

 

Total liabilities

     12,400        13,190   

Equity:

    

Common stock, $0.01 par value: 200,000 shares authorized: 51,017 and 50,850 shares issued and outstanding, respectively

     510        509   

Additional paid-in capital

     205,776        205,055   

Deficit accumulated during development stage

     (126,858     (111,912

Accumulated other comprehensive income

     5,035        3,848   
  

 

 

   

 

 

 

Total stockholders’ equity

     84,463        97,500   

Noncontrolling interests in subsidiaries

     (856     (716
  

 

 

   

 

 

 

Total equity

     83,607        96,784   
  

 

 

   

 

 

 

Total liabilities and equity

   $ 96,007      $ 109,974   
  

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

1


Table of Contents

SYNTHESIS ENERGY SYSTEMS, INC.

(A Development Stage Enterprise)

Consolidated Statements of Operations

(In thousands, except per share amounts)

(Unaudited)

 

     Three Months Ended  
     March 31,  
     2012     2011  

Revenue:

    

Product sales and other — related parties

   $ —        $ 2,626   

Technology licensing and related services

     100        506   
  

 

 

   

 

 

 

Total revenue

     100        3,132   

Costs and Expenses:

    

Costs of sales and plant operating expenses

     246        2,384   

General and administrative expenses

     3,638        3,329   

Project and technical development expenses

     64        58   

Stock-based compensation expense

     348        312   

Depreciation and amortization

     622        653   
  

 

 

   

 

 

 

Total costs and expenses

     4,918        6,736   
  

 

 

   

 

 

 

Operating loss

     (4,818     (3,604

Non-operating (income) expense:

    

Equity in losses of joint ventures

     410        60   

Foreign currency gains

     (2     (223

Interest income

     (15     (41

Interest expense

     140        196   
  

 

 

   

 

 

 

Net loss

     (5,351     (3,596

Net (income) loss attributable to noncontrolling interests

     (9     37   
  

 

 

   

 

 

 

Net loss attributable to stockholders

   $ (5,360   $ (3,559
  

 

 

   

 

 

 

Net loss per share:

    

Basic and diluted

   $ (0.11   $ (0.07
  

 

 

   

 

 

 

Weighted average common shares outstanding:

    

Basic and diluted

     50,864        48,429   
  

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

2


Table of Contents

SYNTHESIS ENERGY SYSTEMS, INC.

(A Development Stage Enterprise)

Consolidated Statements of Operations

(In thousands, except per share amounts)

(Unaudited)

 

                 November 4, 2003  
     Nine Months Ended     (inception) to  
     March 31,     March 31,  
     2012     2011     2012  

Revenue:

      

Product sales and other — related parties

   $ 2,121      $ 6,622      $ 21,511   

Technology licensing and related services

     571        1,013        2,549   

Other

     86        —          607   
  

 

 

   

 

 

   

 

 

 

Total revenue

     2,778        7,635        24,667   

Costs and Expenses:

      

Costs of sales and plant operating expenses

     4,330        6,254        31,915   

General and administrative expenses

     9,709        9,646        71,849   

Project and technical development expenses

     192        187        11,475   

Asset impairment losses

     —          —          9,075   

Stock-based compensation expense

     707        577        21,701   

Depreciation and amortization

     1,903        1,983        11,534   
  

 

 

   

 

 

   

 

 

 

Total costs and expenses

     16,841        18,647        157,549   
  

 

 

   

 

 

   

 

 

 

Operating loss

     (14,063     (11,012     (132,882

Non-operating (income) expense:

      

Equity in losses of joint ventures

     1,244        286        1,647   

Foreign currency gains

     (617     (719     (2,422

Interest income

     (78     (132     (3,125

Interest expense

     466        512        3,183   
  

 

 

   

 

 

   

 

 

 

Net loss

     (15,078     (10,959     (132,165

Net loss attributable to noncontrolling interests

     132        96        5,307   
  

 

 

   

 

 

   

 

 

 

Net loss attributable to stockholders

   $ (14,946   $ (10,863   $ (126,858
  

 

 

   

 

 

   

 

 

 

Net loss per share:

      

Basic and diluted

   $ (0.29   $ (0.22   $ (3.35
  

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding:

      

Basic and diluted

     50,861        48,403        37,813   
  

 

 

   

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

3


Table of Contents

SYNTHESIS ENERGY SYSTEMS, INC.

(A Development Stage Enterprise)

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

                 November 4, 2003  
     Nine Months Ended     (inception) to  
     March 31,     March 31,  
     2012     2011     2011  

Cash flows from operating activities:

      

Net loss

   $ (15,078   $ (10,959   $ (132,165

Adjustments to reconcile net loss to net cash used in operating activities:

      

Stock-based compensation expense

     707        577        21,701   

Depreciation of property, plant and equipment

     1,737        1,818        10,301   

Amortization of intangible and other assets

     166        165        1,233   

Equity in losses of joint ventures

     1,244        286        1,647   

Foreign currency gains

     (617     (719     (2,422

(Gain) loss on disposal of property, plant and equipment

     (12     —          141   

Asset impairment losses

     —          —          9,075   

Changes in operating assets and liabilities:

      

Accounts receivable

     2,508        168        63   

Prepaid expenses and other current assets

     (737     254        (1,424

Inventory

     (8     (164     (866

Other long-term assets

     (580     (13     (1,220

Accrued expenses, accounts payable and deferred revenue

     1,360        (2,272     1,926   
  

 

 

   

 

 

   

 

 

 

Net cash used in operating activities

     (9,310     (10,859     (92,010
  

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

      

Capital expenditures

     (50     (55     (38,080

Equity investment in joint ventures

     (520     —          (31,308

Purchase of marketable securities

     —          —          (45,000

Redemption of marketable securities

     —          —          45,000   

GTI license royalty – Yima joint ventures

     —          —          (1,500

ExxonMobil license royalty

     —          —          (1,250

Proceeds from sale of fixed assets

     —          —          7   

Restricted cash – redemptions of certificates of deposit

     —          —          (50

Amendment to GTI license rights

     —          —          (500

Purchase of land use rights

     —          —          (1,896

Receipt of Chinese governmental grant

     —          —          556   

Project prepayments

     —          —          (3,210
  

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (570     (55     (77,231
  

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

      

Payments on long-term bank loan

     (2,435     (2,351     (9,307

Proceeds from long-term bank loan

     —          —          12,081   

Proceeds from exercise of (repurchase of) stock options, net

     (30     105        921   

Proceeds from issuance of common stock, net

     —          —          179,969   

Prepaid interest

     —          —          (276

Financing costs

     —          —          (143

Contributions from noncontrolling interest partners

     —          —          4,456   

Loans from shareholders

     —          —          11   
  

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     (2,465     (2,246     187,712   
  

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash

     (12,345     (13,160     18,471   

Cash and cash equivalents, beginning of period

     32,176        42,573        —     

Effect of exchange rates on cash

     15        10        1,375   
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 19,846      $ 29,423      $ 19,846   
  

 

 

   

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

4


Table of Contents

SYNTHESIS ENERGY SYSTEMS, INC.

(A Development Stage Enterprise)

Consolidated Statement of Equity

(In thousands)

 

     Common Stock          

Deficit

Accumulated

During the

   

Accumulated

Other

     Non-        
     Shares     Common
Stock
    Additional
Paid-in Capital
    Development
Stage
    Comprehensive
Income
     controlling
Interest
    Total  

Balance at November 4, 2003 (inception)

     100,000      $ —        $ —        $ —        $ —         $ —        $ —     

Net loss for the period November 4, 2003 to June 30, 2004

     —          —          —          —          —           —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Balance at June 30, 2004

     100,000        —          —          —          —           —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Shares Forfeited in Merger

     (94,000     —          —          —          —           —          —     

Shares Issued in Merger

     21,000        —          —          —          —           —          —     

Net loss

     —          —          —          (358     —           —          (358

Investor contributions

     —          264        236        —          —           —          500   

Conversion of debt to equity

     —          6        5        —          —           —          11   

Net proceeds from private placement offering

     1,030        10        2,474        —          —           —          2,484   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Balance at June 30, 2005

     28,030        280        2,715        (358     —           —          2,637   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Net loss

     —          —          —          (5,183     —           —          (5,183

Net proceeds from private placement offering

     970        10        2,378        —          —           —          2,388   

Stock-based compensation

     —          —          3,043        —          —           —          3,043   

Adjustment related to return of shares

     (4,353     (44     44        —          —           —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Balance at June 30, 2006

     24,647        246        8,180        (5,541     —           —          2,885   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Net loss

     —          —          —          (13,142     —           (37     (13,179

Currency translation adjustment

     —          —          —          —          175         —          175   
               

 

 

 

Comprehensive loss

     —          —          —          —          —           —          (13,004

Contributions from noncontrolling interest partners

     —          —          —          —          —           492        492   

Net proceeds from private placement offering

     3,346        34        16,126        —          —           —          16,160   

Stock-based compensation

     —          —          6,608        —          —           —          6,608   

Shares issued for amended GTI license

     191        2        1,374        —          —           —          1,376   

Shares issued upon option exercise by Union Charter Financial

     2,000        20        4,980        —          —           —          5,000   

Stock grants to employees

     4        —          33        —          —           —          33   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Balance at June 30, 2007

     30,188        302        37,301        (18,683     175         455        19,550   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Net loss

     —          —          —          (27,442     —           (610     (28,052

Currency translation adjustment

     —          —          —          —          1,390         —          1,390   
               

 

 

 

Comprehensive loss

     —          —          —          —          —           —          (26,662

Contributions from noncontrolling interest partners

     —          —          —          —          —           3,124        3,124   

Stock-based compensation

     —          —          6,010        —          —           —          6,010   

Exercise of stock options

     92        1        564        —          —           —          565   

Shares issued for GTI reservation use fee

     278        3        2,497        —          —           —          2,500   

Shares issued in public offerings

     17,451        174        148,226        —          —           —          148,400   

Stock grants to employees

     2        —          19        —          —           —          19   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Balance at June 30, 2008

     48,011        480        194,617        (46,125     1,565         2,969        153,506   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Net loss

     —          —          —          (28,576     —           (703     (29,279

Currency translation adjustment

     —          —          —          —          33         11        44   
               

 

 

 

Comprehensive loss

     —          —          —          —          —           —          (29,235

Public offering costs

     —          —          (107     —          —           —          (107

Stock-based compensation

     —          —          1,869        —          —           —          1,869   

Exercise of stock options

     107        1        62        —          —           —          63   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Balance at June 30, 2009

     48,118        481        196,441        (74,701     1,598         2,277        126,096   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Net loss

     —          —          —          (21,748     —           (3,667     (25,415

Currency translation adjustment

     —          —          —          —          237         1        238   
               

 

 

 

Comprehensive loss

     —          —          —          —          —           —          (25,177

Contributions from noncontrolling interest partners

     —          —          —          —          —           839        839   

Stock-based compensation

     —          —          2,179        —          —           —          2,179   

Exercise of stock options

     219        2        100        —          —           —          102   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Balance at June 30, 2010

     48,337        483        198,720        (96,449     1,835         (550     104,039   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Net loss

     —          —          —          (15,463     —           (157     (15,620

Currency translation adjustment

     —          —          —          —          2,013         (9     2,004   
               

 

 

 

Comprehensive loss

     —          —          —          —          —           —          (13,616

Stock-based compensation

     —          —          1,203        —          —           —          1,203   

Exercise of stock options

     291        4        166        —          —           —          170   

Net proceeds from issurance of common stock

     2,222        22        4,966        —          —           —          4,988   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Balance at June 30, 2011

     50,850        509        205,055        (111,912     3,848         (716     96,784   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Net loss

     —          —          —          (14,946     —           (132     (15,078

Currency translation adjustment

     —          —          —          —          1,187         (8     1,179   
               

 

 

 

Comprehensive loss

     —          —          —          —          —           —          (13,899

Stock-based compensation

     147        —          707        —          —           —          707   

Exercise of stock options

     20        1        14        —          —           —          15   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Balance at March 31, 2012

     51,017      $ 510      $ 205,776      $ (126,858   $ 5,035       $ (856   $ 83,607   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

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SYNTHESIS ENERGY SYSTEMS, INC.

(A Development Stage Enterprise)

Notes to Consolidated Financial Statements

(Unaudited)

Note 1 — Summary of Significant Accounting Policies

 

(a) Organization and description of business

Synthesis Energy Systems, Inc. (“SES”), together with its wholly-owned and majority-owned controlled subsidiaries (collectively, the “Company”) is a development stage enterprise. The Company is a global energy and gasification technology company that provides products and solutions to the energy and chemical industries. The Company builds, owns and operates coal gasification plants that utilize its proprietary U-GAS® fluidized bed gasification technology to convert low rank coal and coal wastes into higher value energy products. The Company provides licenses, equipment components, engineering services and product offerings related to the U-GAS® technology. The Company’s headquarters are located in Houston, Texas.

 

(b) Basis of presentation and principles of consolidation

The consolidated financial statements for the periods presented are unaudited and reflect all adjustments, consisting of normal recurring items, which management considers necessary for a fair statement. Operating results for the nine months ended March 31, 2012 are not necessarily indicative of results to be expected for the fiscal year ending June 30, 2012.

The consolidated financial statements are in U.S. dollars. Noncontrolling interests in consolidated subsidiaries in the consolidated balance sheets represents minority stockholders’ proportionate share of the equity in such subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto reported in the Company’s Annual Report on Form 10-K for the year ended June 30, 2011. Significant accounting policies that are new or updated from those presented in the Company’s Annual Report on Form 10-K for the year ended June 30, 2011 are included below. The consolidated financial statements have been prepared in accordance with the rules of the United States Securities and Exchange Commission (“SEC”) for interim financial statements and do not include all annual disclosures required by generally accepted accounting principles in the United States.

 

(c) Accounting for Variable Interest Entities (“VIEs”) and Financial Statement Consolidation Criteria

The joint ventures which the Company enters into may be considered VIEs. The Company consolidates all VIEs where it is the primary beneficiary. This determination is made at the inception of the Company’s involvement with the VIE and is continuously assessed. The Company considers qualitative factors and forms a conclusion that the Company, or another interest holder, has a controlling financial interest in the VIE and, if so, whether it is the primary beneficiary. In order to determine the primary beneficiary, the Company considers who has the power to direct activities of the VIE that most significantly impacts the VIE’s performance and has an obligation to absorb losses from or the right to receive benefits of the VIE that could be significant to the VIE. The Company does not consolidate VIEs where it is not the primary beneficiary. The Company accounts for these unconsolidated VIEs under the equity method of accounting and includes its net investment on its consolidated balance sheets. The Company’s equity interest in the net income or loss from its unconsolidated VIEs is recorded in non-operating (income) expense on a net basis on its consolidated statement of operations.

 

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The Company has determined that the ZZ Joint Venture is a VIE and has determined that it is the primary beneficiary. In making the initial determination, the Company considered, among other items, the change in profit distribution between the Company and Hai Hua after 20 years. The expected negative variability in the fair value of the ZZ Joint Venture’s net assets was considered to be greater during the first 20 years of the ZZ Joint Venture’s life, which coincided with our original 95% profit/loss allocation, versus the latter 30 years in which the Company’s profit/loss allocation would be reduced to 10%. As the result of an amendment to the ZZ Joint Venture agreement in 2010, the profit distribution percentages will remain in place after the first 20 years, providing further support to the determination that the Company is the primary beneficiary. In addition, the Company considered whether the terms of the syngas purchase and sale agreement with Hai Hua contained a lease. The factors considered included (i) the Company’s ability to operate and control the plant during the initial 20 years; and (ii) whether it was more than remote that one or more parties other than Hai Hua would purchase more than a minor amount (considered to be 10%) of the plant’s output during the term of the syngas purchase and sale agreement. Because the Company determined that the syngas purchase and sale agreement did not contain a lease, the Company accounts for the revenues from that agreement in accordance with the Company’s revenue recognition policy for product sales.

The following tables provide additional information on the ZZ Joint Venture’s assets and liabilities as of March 31, 2012 and June 30, 2011 which are consolidated within the Company’s consolidated balance sheets (in thousands):

 

     March 31, 2012  
     Consolidated      ZZ Joint Venture (1)      % (2)  

Current assets

   $ 23,082       $ 1,687         7

Long-term assets

     72,925         37,063         51
  

 

 

    

 

 

    

 

 

 

Total assets

   $ 96,007       $ 38,750         40
  

 

 

    

 

 

    

 

 

 

Current liabilities

   $ 10,017       $ 3,800         38

Long-term liabilities

     2,383         2,383         100

Equity

     83,607         32,567         39
  

 

 

    

 

 

    

 

 

 

Total liabilities and equity

   $ 96,007       $ 38,750         40
  

 

 

    

 

 

    

 

 

 
     June 30, 2011  
     Consolidated      ZZ Joint Venture (1)      % (2)  

Current assets

   $ 37,045       $ 3,767         10

Long-term assets

     72,929         36,936         51
  

 

 

    

 

 

    

 

 

 

Total assets

   $ 109,974       $ 40,703         37
  

 

 

    

 

 

    

 

 

 

Current liabilities

   $ 8,493       $ 3,486         41

Long-term liabilities

     4,697         4,697         100

Equity

     96,784         32,520         34
  

 

 

    

 

 

    

 

 

 

Total liabilities and equity

   $ 109,974       $ 40,703         37
  

 

 

    

 

 

    

 

 

 

 

  (1) Amounts reflect information for ZZ Joint Venture and exclude intercompany items.
  (2) ZZ Joint Venture’s percentage of the amount on the Company’s consolidated balance sheets.

The Company has determined that the Yima Joint Ventures are VIEs and that Yima, the joint venture partner, is the primary beneficiary since Yima has a 75% ownership interest in the Yima Joint Ventures and has the power to direct the activities of the VIE that most significantly influence the VIE’s performance.

The Company has determined that the GC Joint Venture is a VIE and has determined that it is the primary beneficiary since the Company has a 51% ownership interest in the GC Joint Venture and since there are no qualitative factors that would preclude the Company from being deemed the primary beneficiary. The Company consolidates the GC Joint Venture in its consolidated financial statements; however, as of March 31, 2012 and June 30, 2011, there were no significant assets or liabilities within the GC Joint Venture.

 

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The Company has determined that SES Resource Solutions, Ltd. (“SRS”) that was formed in June 2011 is a VIE and that neither the Company nor Midas Resources AG control SRS since each have a 50% ownership interest in SRS and the control, risks and benefits of SRS are shared equally. SRS had no assets or liabilities as of March 31, 2012 or June 30, 2011.

 

(d) Revenue Recognition

Revenue from sales of products, which includes the capacity fee and energy fee earned by the ZZ Joint Venture, and byproducts are recognized when the following elements are satisfied: (i) there are no uncertainties regarding customer acceptance; (ii) there is persuasive evidence that an agreement exists; (iii) delivery has occurred; (iv) the sales price is fixed or determinable; and (v) collectability is reasonably assured.

Technology licensing revenue is typically received and earned over the course of a project’s development. The Company may receive upfront licensing fee payments in addition to fees for engineering services that are integral to the initial transfer of its technology to a customer’s project. Typically, the majority of a license fee is received once project financing and equipment installation occur. Recognition of upfront licensing fee payments is deferred and recognized as a percentage of completion of the engineering services associated with the initial technology transfer. Further, such revenues are deferred until performance guarantee provisions have been met or until the license agreement is terminated. The Company recognizes revenue from engineering services under the percentage-of-completion method.

 

(e) Fair value measurements

Accounting standards require that fair value measurements be classified and disclosed in one of the following categories:

 

  Level 1     Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

 

  Level 2     Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability; and

 

  Level 3     Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).

 

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The Company’s financial assets and liabilities are classified based on the lowest level of input that is significant for the fair value measurement. The following table summarizes the valuation of the Company’s financial assets and liabilities by pricing levels, as of March 31, 2012 and June 30, 2011 (in thousands):

 

     March 31, 2012  
     Level 1      Level 2     Level 3      Total  

Assets:

          

Certificates of deposit

   $ —         $ 50 (1)    $ —         $ 50   

Money market funds

     —           18,946 (2)      —           18,946   

Liabilities:

          

Long-term bank loan

     —           4,830 (3)    $ —           4,830   

 

     June 30, 2011  
     Level 1      Level 2     Level 3      Total  

Assets:

          

Certificates of Deposit

   $ —         $ 50 (1)    $ —         $ 50   

Money Market Funds

     —           29,372 (2)      —           29,372   

Liabilities:

          

Long-term bank loan

     —           7,077 (3)      —           7,077   

 

(1) Amount included in current assets on the Company’s consolidated balance sheets.
(2) Amount included in cash and cash equivalents on the Company’s consolidated balance sheets.
(3) Amount comprised of current and long-term portion of bank loan on the Company’s consolidated balance sheets.

The carrying values of the certificates of deposit, money market funds and long-term debt approximate fair value, which was estimated using quoted market prices for those or similar investments. The carrying value of the Company’s other financial instruments, including accounts receivable and accounts payable, approximate their fair values.

 

(f) Comprehensive income (loss)

The Company’s comprehensive income (loss) was as follows (in thousands):

 

     Three Months Ended
March  31,
    Nine Months Ended
March 31,
 
     2012     2011     2012     2011  

Net loss, as reported

   $ (5,351   $ (3,596   $ (15,078   $ (10,959

Unrealized foreign currency translation adjustment

     62        404        1,179        1,448   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive loss

     (5,289     (3,192     (13,899     (9,511

Less comprehensive (gain) loss attributable to noncontrolling interests

     (8     37        140        96   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive loss attributable to the Company

   $ (5,297   $ (3,155   $ (13,759   $ (9,415
  

 

 

   

 

 

   

 

 

   

 

 

 

Note 2 – Recently Issued Accounting Standards

In June 2011, the FASB issued new guidance on the presentation of comprehensive income. The new guidance allows an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The new guidance eliminates the current option to report other comprehensive income and its components in the statement of changes in stockholders equity. This new guidance is effective for fiscal years beginning after December 15, 2011, however the provision of the new guidance which requires reclassifications out of comprehensive income be shown separately in the financial statements has been deferred to allow the FASB to reconsider alternatives. The Company plans to adopt these requirements effective July 1, 2012.

 

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Effective as of January 1, 2012, the Company adopted the revised fair value disclosure requirements. The impact to the Company’s fair value disclosures was not significant.

Note 3 – Current Projects

Zao Zhuang Joint Venture

Joint Venture Agreement

On July 6, 2006, the Company entered into a cooperative joint venture contract with Shandong Hai Hua Coal & Chemical Company Ltd. (“Hai Hua”), which established Synthesis Energy Systems (Zao Zhuang) New Gas Company Ltd. (the “ZZ Joint Venture”), a joint venture company that has the primary purposes of (i) developing, constructing and operating a syngas production plant utilizing the U-GAS® technology in Zao Zhuang City, Shandong Province, China and (ii) producing and selling syngas and the various byproducts of the plant, including ash and elemental sulphur. The Company owns 96.9% of the ZZ Joint Venture and Hai Hua owns the remaining 3.1%. The Company consolidates the results of the ZZ Joint Venture in its consolidated financial statements.

Syngas Purchase and Sale Agreement

The ZZ Joint Venture is also party to a purchase and sale agreement with Hai Hua for syngas produced by the plant, whereby Hai Hua will pay the ZZ Joint Venture an energy fee and capacity fee, as described below, based on the syngas production. The syngas to be purchased by Hai Hua is subject to certain quality component requirements set forth in the contract. In late December 2008, the plant declared commercial operations status for purposes of the purchase and sale agreement. The energy fee is a per normal cubic meters, or Ncum, of syngas calculation based on a formula which factors in the monthly averages of the prices of design base coal, coke, coke oven gas, power, steam and water, all of which are components used in the production of syngas. The capacity fee is paid based on the capacity of the plant to produce syngas, factoring in the number of hours (i) of production and (ii) of capability of production as compared to the guaranteed capacity of the plant, which for purposes of the contract is 22,000 Ncum per hour of net syngas. Hai Hua is obligated to pay the capacity fee regardless of whether they use the gasification capacity, subject only to availability of the plant, quality of the syngas and exceptions for certain events of force majeure. Due to worldwide reductions in methanol prices, as well as reliability issues with respect to Hai Hua’s plant, Hai Hua has operated at a reduced rate of syngas consumption. Hai Hua has used approximately 35% to 45% of the syngas guarantee capacity since 2009.

In April 2009, the ZZ Joint Venture entered into a Supplementary Agreement with Hai Hua, amending the terms of the purchase and sale agreement. The Supplementary Agreement was entered into to provide more clarity regarding the required syngas quality and volume to be delivered, recovery of the energy fee during turndown periods and operations coordination during unscheduled outages. Under the Supplementary Agreement, the syngas quality specification was amended to provide more clarity as to the minor constituents allowable in the syngas. For purposes of the Supplemental Agreement, syngas that meets these specifications is deemed “compliant gas” and syngas that does not meet these specifications is deemed “non-compliant gas.” The Supplementary Agreement also added a requirement for Hai Hua to pay the ZZ Joint Venture the capacity fee and 70% of the energy fee for all non-compliant gas which is taken by Hai Hua. However, if more than 50% of the syngas taken by Hai Hua during any operating day is non-compliant gas, all of the syngas for that day is deemed to be non-compliant gas for purposes of calculating the energy fee. In addition, the Supplementary Agreement accommodates periods of turndown operation by Hai Hua by establishing a minimum threshold gas off take volume of 7,500 Ncum per hour of net syngas for the purpose of calculating the energy fee during such periods. The Supplementary Agreement also provides that, to the extent Hai Hua has an unscheduled shutdown, and the plant continues to operate on standby during such period, Hai Hua is still required to pay the energy fee to the ZZ Joint Venture. In the event that the plant has an unscheduled shutdown and does not provide at least three hours prior notice to Hai Hua, the ZZ Joint Venture may be required to provide certain compensation to Hai Hua.

 

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Since May 2011, Hai Hua has not paid the capacity fees owed to the ZZ Joint Venture. The unpaid amount totaled approximately $3.6 million as of March 31, 2012. The plant continued to operate and provide syngas to Hai Hua through September 2011 with the expectation that Hai Hua would pay the capacity fee. Hai Hua has paid other contractual obligations such as the energy fees and by-product sales due under the contract. The Company is continuing to work with Hai Hua on alternatives to resolve this issue. The Company did not recognize these capacity fee revenues and will not recognize any capacity fees until collection is reasonably assured. In late September 2011, both the Hai Hua methanol plant and the ZZ Joint Venture plant were shut down for scheduled maintenance and the ZZ Joint Venture plant has been kept idle while the ZZ Joint Venture develops its revised commercial arrangement with Hai Hua.

To date, Hai Hua has been unable to offtake the volume of syngas originally expected for the original plant design and as a result the plant has incurred operating losses. Because of these circumstances, the ZZ Joint Venture is working on various arrangements to increase the syngas offtake volume. Such arrangements involve a combination of technical improvements to Hai Hua’s methanol unit, as well as restructuring the current business arrangement to create an integrated syngas to methanol operation. In December 2011, the Company entered into a framework agreement with Hai Hua pursuant to which the Company and Hai Hua are working to complete a definitive agreement that will provide the basis for a fully integrated syngas to methanol operation. The Company has yet to close this definitive agreement with Hai Hua primarily due to 50% of Hai Hua now being acquired by another Chinese state-owned enterprise. Hai Hua has indicated that they are still committed to close the definitive agreement with the Company in the next two months after the investment by that state-owned company is concluded by executing a signed memorandum of understanding with the Company in early May 2012.

As currently planned, this will require approximately $6 million of additional capital, which the Company plans to fund from its ongoing financing initiatives in China. Once the definitive agreement is signed and the additional capital is received, the commerical work and physical integration work will begin. This work is expected to take about six months to complete and the Company will continue to keep the plant idle until this work is completed. In March 2012, Hai Hua advanced approximately $1.0 million to the ZZ Joint Venture towards future costs of the revised commercial arrangement.

The Company is also evaluating alternative products and partnership structures for a possible expansion of the ZZ Joint Venture plant. In February 2010, the Company received the necessary government approval for the expansion. This approval, along with the previously received environmental approvals, are the key approvals required to commence execution of the expansion and also describe certain terms of the expansion project, including but not limited to, its use of land, the main additional facilities required and the use of the existing facilities. The scope of the expansion is still under evaluation. The local government has expressed strong support for this expansion project and has executed a letter of intent allowing a new state-owned local coal mine to be used as a debt guarantee. The letter of intent also contemplates providing discounted coal to the project from this local coal mine. The Company is in discussions with several potential partners on this expansion.

Loan Agreement

On March 22, 2007, the ZZ Joint Venture entered into a seven-year loan agreement and received $12.6 million of loan proceeds pursuant to the terms of a Fixed Asset Loan Contract with the Industrial and Commercial Bank of China (“ICBC”) to complete the project financing for the ZZ Joint Venture. Key terms of the Fixed Asset Loan Contract with ICBC are as follows:

 

   

Term of the loan is seven years from the commencement date (March 22, 2007) of the loan;

 

   

Interest is adjusted annually based upon the standard rate announced each year by the People’s Bank of China, and as of March 31, 2012, the applicable interest rate was 6.6% and is payable monthly;

 

   

Principal payments of RMB 7.7 million (approximately $1.2 million based on current currency exchange rates) are due in March and September of each year ending on March 31, 2014;

 

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Hai Hua is the guarantor of the entire loan;

 

   

Assets of the ZZ Joint Venture are pledged as collateral for the loan;

 

   

Covenants include, among other things, prohibiting pre-payment without the consent of ICBC and permitting ICBC to be involved in the review and inspection of the ZZ Joint Venture plant; and

 

   

Subject to customary events of default which, should one or more of them occur and be continuing, would permit ICBC to declare all amounts owing under the contract to be due and payable immediately.

As of March 31, 2012, the ZZ Joint Venture was in compliance with all covenants and obligations under the Fixed Asset Loan Contract.

Impairment Assessment

Due to the economic trends that have significantly affected commodity prices including methanol, Hai Hua’s refusal to pay capacity fees owed to the ZZ Joint Venture and the ZZ Joint Venture plant’s operating losses to-date, the Company believed an impairment assessment of the ZZ Joint Venture plant was warranted as of March 31, 2012. The Company performed an analysis of the ZZ Joint Venture plant and determined that these assets were not impaired based upon management’s estimated cash flow projections for the plant. Such estimated cash flow projections were based on the completion of the ongoing negotiations between the Company and Hai Hua to restructure the current business arrangement to create an integrated syngas to methanol operation. This restructuring would include a combination of technical improvements being made to Hai Hua’s methanol unit allowing for increased syngas off-take and other repairs and improvements being made to the plant enabling more efficient joint production of methanol. Additionally, the Company has assumed that the profits from sales of methanol would first be used to reimburse the ZZ Joint Venture’s costs to make these repairs and improvements during the fiscal years ending June 30, 2013 and 2014, and profits would then be shared equally between the parties starting in fiscal year 2014. If the Company is not successful in restructuring the joint venture or otherwise improving the ZZ Joint Venture’s profitability, or if management’s estimated cash flow projections for these assets decrease, the ZZ Joint Venture plant could become impaired.

Yima Joint Ventures

In August 2009, the Company entered into amended joint venture contracts with Yima Coal Industry (Group) Co., Ltd. (“Yima”), replacing the prior joint venture contracts entered into in October 2008 and April 2009. The joint ventures were formed for each of the gasification, methanol/methanol protein production, and utility island components of the plant (collectively, the “Yima Joint Ventures”). The parties obtained government approvals for the project’s feasibility study during the three months ended December 31, 2008 and for the project’s environmental impact assessment during the three months ended March 31, 2009, which were the two key approvals required to proceed with the project. The amended joint venture contracts provide that: (i) the Company and Yima contribute equity of 25% and 75%, respectively, to the Yima Joint Ventures; (ii) Yima will guarantee the repayment of loans from third party lenders for 50% of the project’s cost and, if debt financing is not available, Yima is obligated to provide debt financing via shareholder loans to the project until the project is able to secure third-party debt financing; and (iii) Yima will supply coal to the project from a mine located in close proximity to the project at a preferential price subject to a definitive agreement to be subsequently negotiated. In connection with entering into the amended contracts, the Company and Yima contributed their remaining cash equity contributions of $29.3 million and $90.8 million, respectively, to the Yima Joint Ventures during the three months ended September 30, 2009. The Company will also be responsible for its share of any cost overruns on the project.

In exchange for their capital contributions, the Company owns a 25% interest in each joint venture and Yima owns a 75% interest. Notwithstanding this, in connection with an expansion of the project, the Company has the option to contribute a greater percentage of capital for the expansion, such that as a result, the Company would have up to a 49% ownership interest in the Yima Joint Ventures. The investment in the Yima Joint Ventures is accounted for using the equity method.

 

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Construction of the Yima Joint Venture plant is ongoing and construction of the syngas production portion of the plant is expected to be complete during calendar 2012. Yima is planning to produce methanol as its first product as the methanol market in China continues to strengthen. Yima’s project management team believes that the project’s syngas production facilities will be ready to start-up during the third quarter of calendar 2012 and that methanol production will be ready to start-up in the fourth quarter of calendar 2012. In addition, the Yima Joint Ventures are in discussions with a potential fuel gas off-take customer for the sale of the initial syngas production from the project. This would provide syngas sales until the syngas conversion to methanol is completed. The Yima Joint Ventures are no longer considering a modification to the plant to produce glycol.

Based on the project’s current scope of methanol only, the current estimate of the total required capital of the project is approximately $250 million. The remaining capital for the project is to be provided by project debt to be obtained by the Yima Joint Ventures. Yima has agreed to guarantee the project debt in order to secure debt financing from domestic Chinese banking sources. The Company has agreed to pledge to Yima its ownership interests in the joint ventures as security for its obligations under any project guarantee. In the event that the necessary additional debt financing is not obtained, Yima has agreed to provide a loan to the joint ventures to satisfy the remaining capital needs of the project with terms comparable to current market rates at the time of the loan.

The Yima Joint Ventures are governed by a board of directors consisting of eight directors, two of whom were appointed by the Company and six of whom were appointed by Yima. The joint ventures also have officers that are nominated by the Company, Yima and/or the board of directors pursuant to the terms of the joint venture contracts. The Company and Yima shall share the profits, and bear the risks and losses, of the joint ventures in proportion to our respective ownership interests. The term of the joint venture shall commence upon each joint venture company obtaining its business license and shall end 30 years after commercial operation of the plant.

The Company has included the $1.5 million payment paid to the Gas Technology Institute (“GTI”) in June 2009 toward future royalties due to GTI for the Yima Joint Ventures’ project as part of the Company’s investment in the Yima project. An additional future royalty payment of approximately $1.5 million will be due to GTI upon the commissioning of the gasifier equipment for the Yima project which is expected in early fiscal 2013.

The following table presents summarized unconsolidated financial information for the Yima Joint Ventures (in thousands):

 

     Three Months Ended
March 31,
    Nine Months Ended
March 31,
 

Income statement data:

   2012     2011     2012     2011  

Revenue

   $ —        $ —        $ —        $ —     

Operating loss

     (988     (497     (3,061     (1,533

Net loss

     (870     (241     (2,581     (1,144

 

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Balance sheet data:

   March 31,
2012
     June 30,
2011
 

Current assets

   $ 64,485       $ 64,120   

Noncurrent assets

     152,044         75,096   

Current liabilities

     28,802         10,916   

Noncurrent liabilities

     58,414         —     

SES Resource Solutions

SES Resource Solutions (“SRS”) is a joint venture owned 50% by us and 50% by Midas Resources AG (“Midas”), that was formed in June 2011 to provide additional avenues of commercialization for the Company’s U-GAS® technology. Key objectives of the joint venture are to identify and procure low cost, low rank coal resources for which the Company’s technology and the SRS’ know-how represent the best route to commercialization; to provide investment opportunities in both gasification facilities and coal resources; and to facilitate the establishment of gasification projects globally based on the Company’s technology. Terms of the SRS joint venture agreement include:

 

   

SRS has the exclusive right to promote our gasification technology for the purpose of securing low-cost coal resources in projects worldwide that have been approved by the board of directors of SRS;

 

   

Midas provides expertise to originate and execute the above projects;

 

   

the Company provides SRS with technology licenses and engineering development support for use in developing the joint integrated coal resource projects; and

 

   

SRS being managed by a four person board of directors, two of which are appointed by the Company and two of which are appointed by Midas;

 

   

the Company agreeing to provide up to $2.0 million in funding to SRS, although it has the ability to discontinue funding at any point in time – as of March 31, 2012, the Company had funded approximately $0.6 million to SRS; and

 

   

revenue and profits are equally divided between the joint venture partners.

The Company’s investment in SRS is accounted for using the equity method. SRS has no assets or liabilities as amounts are funded by the Company as costs are incurred. The following table presents summarized unconsolidated income statement data for SRS (in thousands):

 

     Three Months Ended
March 31,
     Nine Months Ended
March 31,
 

Income statement data:

   2012     2010      2012     2010  

Revenue

   $ —        $ —         $ —        $ —     

Operating loss

     (386     —           (1,202     —     

Net loss

     (386     —           (1,202     —     

Note 4 – GTI License Agreement

On November 5, 2009, the Company entered into an Amended and Restated License Agreement (the “New Agreement”) with GTI, replacing the Amended and Restated License Agreement between the Company and GTI dated August 31, 2006, as amended, or the Original Agreement. Under the New Agreement, the Company maintains its exclusive worldwide right to license the U-GAS® technology for all types of coals and coal/biomass mixtures with coal content exceeding 60%, as well as the non-exclusive right to license the U-GAS® technology for 100% biomass and coal/biomass blends exceeding 40% biomass. The New Agreement differs from the Old Agreement most critically by allowing the Company to sublicense U-GAS® to third parties for coal, coal and biomass mixtures or 100% biomass projects (subject to the approval of GTI, which approval shall not be unreasonably withheld), with GTI to share the revenue from such third party licensing fees based on an agreed percentage split (the “Agreed Percentage”). In addition, the prior obligation to fabricate and put into operation at least one U-GAS® system for each calendar year of the Original Agreement in order to maintain the license has been eliminated in the New Agreement.

 

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In order to sublicense any U-GAS® system, the Company is required to comply with certain requirements set forth in the New Agreement. In the preliminary stage of developing a potential sublicense, the Company is required to provide notice and certain information regarding the potential sublicense to GTI and GTI is required to provide notice of approval or non-approval within ten business days of the date of the notice from the Company, provided that GTI is required to not unreasonably withhold their approval. If GTI does not respond within that ten business day period, they are deemed to have approved of the sublicense. The Company is required to provide updates on any potential sublicenses once every three months during the term of the New Agreement. The Company is also restricted from offering a competing gasification technology during the term of the New Agreement.

For each U-GAS® unit which the Company licenses, designs, builds or operates for itself or for a party other than a sublicensee and which uses coal or a coal and biomass mixture or biomass as the feed stock, the Company must pay a royalty based upon a calculation using the MMBtu per hour of dry syngas production of a rated design capacity, payable in installments at the beginning and at the completion of the construction of a project (the “Standard Royalty”). Although it is calculated using a different unit of measurement, the Standard Royalty is effectively the same as the royalty payable to GTI under the Original Agreement. If the Company invests, or has the option to invest, in a specified percentage of the equity of a third party, and the royalty payable by such third party for their sublicense exceeds the Standard Royalty, the Company is required to pay to GTI the Agreed Percentage of such royalty payable by such third party. However, if the royalty payable by such third party for their sublicense is less than the Standard Royalty, the Company is required to pay to GTI, in addition to the Agreed Percentage of such royalty payable by such third party, the Agreed Percentage of its dividends and liquidation proceeds from its equity investment in the third party. In addition, if the Company receives a carried interest in a third party, and the carried interest is less than a specified percentage of the equity of such third party, the Company is required to pay to GTI, in its sole discretion, either (i) the Standard Royalty or (ii) the Agreed Percentage of the royalty payable to such third party for their sublicense, as well as the Agreed Percentage of the carried interest. The Company will be required to pay the Standard Royalty to GTI if the percentage of the equity of a third party that the Company (a) invests in, (b) has an option to invest in, or (c) receives a carried interest in, exceeds the percentage of the third party specified in the preceding sentence.

The Company is required to make an annual payment to GTI for each year of the term beginning December 31, 2010, with such annual payment due by the last day of January of the following year; provided, however, that the Company is entitled to deduct all royalties paid to GTI in a given year under the New Agreement from this amount, and if such royalties exceed the annual payment amount in a given year, the Company is not required to make the annual payment. The Company accrues the annual royalty expense ratably over the calendar year as adjusted for any royalties paid during year. The Company must also provide GTI with a copy of each contract that it enters into relating to a U-GAS® system and report to GTI with its progress on development of the technology every six months.

For a period of ten years, the Company and GTI are restricted from disclosing any confidential information (as defined in the New Agreement) to any person other than employees of affiliates or contractors who are required to deal with such information, and such persons will be bound by the confidentiality provisions of the New Agreement. The Company has further indemnified GTI and its affiliates from any liability or loss resulting from unauthorized disclosure or use of any confidential information that the Company receives.

 

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The term of the New Agreement is the same as the Original Agreement, expiring on August 31, 2016, but may be extended for two additional ten-year periods at the Company’s option.

Note 5 – Stock-Based Compensation

The Company has outstanding stock option and restricted stock awards granted under the Company’s Amended and Restated 2005 Incentive Plan, as amended (the “Plan”) exercisable for shares of common stock. As of March 31, 2012, 261,533 shares were authorized for future issuance pursuant to the Plan and $0.8 million of estimated expense with respect to unvested stock-based awards was yet to be recognized.

In March 2012, the Compensation Committee of the Company’s Board of Directors authorized the issuance of 146,668 shares of restricted stock to the Company’s independent non-employee directors as consideration for director fees. The restricted stock vests over calendar year 2012 and the fair value of the restricted stock was based on the market value as of the date of the awards. The amount of unnvested restricted stock outstanding was as follows:

 

     Shares of
Restricted Stock
 

Nonvested at June 30, 2011

     —     

Granted

     146,668   

Vested

     (36,668
  

 

 

 

Nonvested at March 31, 2012

     110,000   
  

 

 

 

Stock option activity during the nine months ended March 31, 2012 was as follows:

 

     Shares of Common
Stock Underlying
Stock Options
 

Outstanding at June 30, 2011

     6,563,344   

Granted

     323,982   

Exercised

     (20,312

Forfeited

     (41,813
  

 

 

 

Outstanding at March 31, 2012

     6,825,201   
  

 

 

 

Exercisable at March 31, 2012

     5,544,477   
  

 

 

 

The fair values for the stock options granted during the nine months ended March 31, 2012 were estimated at the date of grant using a Black-Scholes-Morton option-pricing model with the following weighted-average assumptions.

 

Risk-free rate of return

     1.35

Expected life of award

     6.25 years   

Expected dividend yield

     0.00

Expected volatility of stock

     107

Weighted-average grant date fair value

   $ 1.36   

Note 6 – Net Loss Per Share

Historical net loss per share of common stock is computed using the weighted average number of shares of common stock outstanding. Basic loss per share excludes dilution and is computed by dividing net loss available to common stockholders by the weighted average number of shares of common stock outstanding for the period. Stock options and unvested restricted stock are the only potential dilutive share equivalents the Company has outstanding for the periods presented. For the nine months ended March 31, 2012 and 2011 and the period from November 4, 2003 (inception) to March 31, 2012, options to purchase common stock and unvested restricted stock were excluded from the computation of diluted earnings per share as their effect would have been antidilutive as the Company incurred net losses during those periods.

 

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Note 7 – Risks and Uncertainties

Any future decrease in economic activity in China, India or in other regions of the world, in which the Company may in the future do business, could significantly and adversely affect its results of operations and financial condition in a number of other ways. Any decline in economic conditions may reduce the demand for prices from the products from our plants. In addition, the market for commodities such as methanol has been under significant pressure and the Company is unsure of how much longer this pressure will continue. As a direct result of these trends, the Company’s ability to finance and develop its existing projects, commence any new projects and sell its products could be adversely impacted.

The Company will limit the development of any further projects until worldwide capital and debt markets improve and it has assurances that acceptable financing is available to complete such projects. In addition, as of March 31, 2011, Hai Hua is the Company’s only customer for syngas sales and as such, it is exposed to significant customer credit risk due to this concentration. In addition, as described under Note 3, Hai Hua has not made the capacity fee payments to the ZZ Joint Venture since April 2011. The unpaid amount totals approximately $3.6 million as of March 31, 2012. Although the Company is continuing to work with Hai Hua on alternatives to resolve the issue, there can be no assurances that the Company will collect these amounts or that the joint venture will be restructured. The Company’s revenue and results of operations have been and would continue to be adversely affected if Hai Hua continues to not pay the capacity fee or if it is unable to retain Hai Hua as a customer or secure new customers. The Company has shut down the ZZ Joint Venture plant since late September 2011 and expects the plant to remain idle until it is able to restructure the joint venture with Hai Hua to jointly produce methanol, as contemplated by the framework agreement executed in December 2011 and the memorandum of understanding executed in May 2012 as described under Note 3, or find an alternative purchaser of its production or a different use for the plant. There have also been recent announcements of a constricting credit market in China. Even if the Company does obtain the necessary capital for its projects, the Company could face other delays in its projects due to additional approval requirements or due to unanticipated issues in the commissioning of such a project. These factors could lead to, among other things, the impairment of the Company’s significant assets, including its assets in the ZZ Joint Venture and its investment in the Yima Joint Ventures, and an inability to develop any further projects.

The Company expects to continue for a period of time to have negative operating cash flows until it can generate sufficient revenues from its China-centric business platform (which would include the the ZZ Joint Venture and the Yima Joint Ventures) or its technology licensing and related services projects, as well as from other projects which are under development, to cover its general and administrative expenses and other operating costs. In addition, if the Company is not able to develop the China-centric business platform in the near-term or complete the ZJX/China Energy transaction, it will need to aggressively pursue additional partners in China and may need to seek other equity financing or reduce its operating expenses. The Company will also limit the development of any further projects until it has assurances that acceptable financing is available to complete the project. Despite this, the Company will continue to pursue the development of selective projects with strong and credible partners or off-takers where the Company believes equity and debt can be raised or where the Company believes it can attract a financial partner to participate in the project.

The Company can make no assurances that its business operations will develop and provide it with significant cash to continue operations. The Company may need to raise additional capital through equity and debt financing for any new projects that are developed, to support its existing projects and possible expansions thereof and for its corporate general and administrative expenses. The Company cannot provide any assurance that any financing will be available to the Company in the future on acceptable terms or at all. Any such financing could be dilutive to the Company’s existing stockholders. If the Company cannot raise required funds on acceptable terms, it may not be able to, among other things, (i) maintain its general and administrative expenses at current levels; (ii) negotiate and enter into new gasification plant development contracts; (iii) expand its operations; (iv) hire and train new employees; or (v) respond to competitive pressures or unanticipated capital requirements.

 

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Note 8 – Litigation

On April 26, 2012, the Company along with Timothy E. Vail (the Company’s former CEO and a former director), David Eichinger (the Company’s former CFO), and another one of the Company’s former directors (collectively, the Company, Mr. Vail, Mr. Eichinger and the director are referred to as the “SES Defendants”) entered into a Settlement and Mutual Release Agreement (the “Settlement”) with Igor Olenicoff and Olen Properties, Corp. The Settlement relates to the complaint filed on September 16, 2008 by Mr. Olenicoff and Olen Properties in the United States District Court for the Central District of California, Southern Division, Case No. SACV 0801029 AG (RNBx), stemming from a purchase of shares of common stock of the Company in a private placement. Although the SES Defendants denied the allegations asserted against them in the Action, and contended that the claims pending against them in the Action were without merit, they desired to resolve the Action without the expense and uncertainty of further litigation. In exchange for the settlement and mutual releases contemplated by the Settlement, the Company made an agreed payment of $525,000 to Mr. Olenicoff and Olen Properties. In exchange, all claims of Mr. Olenicoff and Olen against any of the SES Defendants, including without limitation any claims asserted or which could have been asserted in the Action, any claims arising out of the subject matter or prosecution of the Action, and any claims arising in any other way whatsoever, were released and all necessary papers were filed with the court to dismiss the Action, with prejudice, as against the SES Defendants. The agreed payment amount was paid by one of the Company’s insurers pursuant to the Company’s policy which was in effect at the time that the Action was filed.

At March 31, 2012, the Company incurred a charge of approximately $0.5 million to general and administrative expense to recognize the estimated loss related to resolution of a matter with a consulting firm. The matter was settled in May 2012 by the issuance of 350,000 shares of the Company’s common stock to the consulting firm.

Note 9 — Share Purchase Agreement with ZJX

On March 31, 2011, the Company entered into a Share Purchase Agreement (the “Agreement”) with China Energy Industry Holdings Group Co, Ltd. (“China Energy”) and Zhongjixuan Investment Management Company Ltd. (“ZJX”). The terms and conditions of the Agreement are summarized below.

Issuance of Shares

On the closing date for the Agreement, the Company will issue 37,254,475 shares of Common Stock (the “Closing Shares”) in exchange for the Consideration. Within 20 business days after the accomplishment of the Milestone (as defined below), the Company will issue to China Energy additional shares of Common Stock (the “Milestone Shares”) which, when combined with the Closing Shares, equals 60.0% of the issued and outstanding Common Stock on a fully-diluted basis, including shares reserved for future issuance pursuant to the Plan, as of the date that the Milestone is achieved.

For the purpose of the Agreement, the “Milestone” will be deemed to be achieved if the average closing price of the Common Stock for 20 consecutive trading days equals or exceeds $8.00 per share (the “Threshold Price”), provided that the 20 consecutive trading day period will begin upon the occurrence of both (i) ZJX/China Energy undertaking best endeavours to secure certain projects described in the Agreement; and (ii) the expiration of six months after the Closing Date.

 

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In the event that the Milestone is not achieved within a five year period commencing on the Closing Date (such five years plus any extensions granted under the Agreement is referred to as the “Deadline”), and no Target Projects (as defined below) are secured by ZJX for the Company by the Deadline, the Company shall then have the sole discretion to extend or not extend the Deadline. If ZJX has secured Target Projects for the Company prior to the Deadline, but the Milestone has not been achieved by the Deadline, the Company shall agree to extend the period to achieve the Milestone by one year for each Target Project secured by ZJX for the Company, provided that the Deadline will not be extended beyond 10 years from the Closing Date. If the Deadline is not extended, ZJX/China Energy’s rights to the Milestone Shares shall be relinquished.

For the purpose of the above, a “Target Project” shall mean either (i) the execution of a joint venture agreement, and other ancillary and necessary documents, related to the formation of a project joint venture, or (ii) securing for the Company a coal resource project that is already in operation, a new coal chemical project or any other project that is approved by the Company’s board of directors (the “Board”), each with a total investment of at least RMB1.5 billion (approximately $238 million based on the exchange rate as of March 31, 2012).

In the event that the Milestone is achieved but, pursuant to restriction or non-approval by any U.S. governmental agency or regulatory authority, (i) the issuance of the Milestone Shares to China Energy is prevented from occurring or (ii) the ownership of the Milestone Shares by China Energy is required to be divested, the Company shall be required to seek qualified third parties to purchase the right of China Energy to the Milestone Shares. If this does not occur within twelve (12) months of the date of the action of such U.S. governmental agency or competent regulatory authority, the Company shall compensate ZJX/China Energy for the Milestone Shares by making a payment in an amount equal to $2.00 per share for each Milestone Share, representing full satisfaction of any obligation of the Company to ZJX with respect to the Milestone Shares. Such payment may be made by the Company to China Energy in the form of cash or an equivalent amount of the Company’s assets in China.

Use of Proceeds

Subject to the discretion and approval of the Board, the Consideration, net of costs and expenses, is required to be applied to the following: (i) incorporation of a Company headquarters in China to consolidate the ownership of the Company’s investment projects in China and enhance the Company’s presence in China; (ii) investing in the expansion of the ZZ Joint Venture; (iii) investing in Phase I of the Company’s Yima Joint Ventures; (iv) acquiring an ownership interest in a coal mine that will provide coal to the Yima Joint Ventures; (v) investing in the GC Joint Venture; (vi) other Chinese projects that may be recommended to the Board from time to time; and (vii) other expenses of the operation and business of the Company in China.

ZJX will use reasonable endeavours to assist the Company to obtain third party funding (third party direct equity investment in projects or debt financing to the projects) to (a) cover funding needs of the above projects; (b) provide funding for the Company to invest in future phases of the Yima joint venture project; (c) invest in strategic coal resources in China connected to the Company’s projects; and (d) provide funding for the Company to invest in other projects in China not listed above and assist the Company to obtain third party investment in any of the Company’s other projects.

Other

Closing of the transaction with China Energy and ZJX is subject to approval by the Company’s stockholders and other customary closing conditions. In addition, ZJX notified the Company in August of its intent to complete its investment in partnership with Yima. ZJX has been working with Yima in order to complete Yima’s potential investment into China Energy. Although the Agreement was not extended at March 31, 2012, the Company agreed with ZJX to keep the Agreement in effect as long as the parties are making good progress toward meeting the objective of completing the Agreement in a reasonable amount of time.

 

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The estimated fair value resulting from China Energy’s contingent right to receive the Milestone Shares will be reported as a liability on its consolidated balance sheet at closing of the transaction. This liability will be adjusted prospectively to reflect the change in the estimated fair value of the contingent right. Changes in the liability will be recorded in earnings of the respective period. The financial statement reporting of this liability is expected to have a material impact on the Company’s consolidated financial position and potentially have a material impact on its consolidated results of operations depending on the outcome of future valuations of the contingent right.

In the event that the Milestone Shares are issued, all of the Company’s non-vested stock-based awards would become fully vested and immediately exercisable under the terms of the Plan.

Note 10 — Segment Information

The Company’s reportable operating segments have been determined in accordance with the Company’s internal management reporting structure and include the ZZ Joint Venture plant operations, technology licensing and related services, and corporate and other. The corporate and other segment includes the Company’s investment in the Yima Joint Ventures. The Company evaluates performance based upon several factors, of which a primary financial measure is segment operating income (loss).

The following table presents the revenue, operating loss and total assets by segment (in thousands):

 

     Three Months Ended
March 31,
    Nine Months Ended
March 31,
 
     2012     2011     2012     2011  

Revenue:

        

ZZ Joint Venture plant

   $ —        $ 2,626      $ 2,121      $ 6,622   

Technology licensing and related services

     100        506        571        1,013   

Corporate & other

     —          —          86        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

   $ 100      $ 3,132      $ 2,778      $ 7,635   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating loss:

        

ZZ Joint Venture plant

   $ (865   $ (553   $ (4,144   $ (1,268

Technology licensing and related services

     (468     (83     (1,232     (1,109

Corporate & other

     (3,485     (2,968     (8,687     (8,635
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating loss

   $ (4,818   $ (3,604   $ (14,063   $ (11,012
  

 

 

   

 

 

   

 

 

   

 

 

 

 

     March 31,
2012
     June 30,
2011
 

Assets:

     

ZZ Joint Venture plant

   $ 38,750       $ 40,703   

Technology licensing and related services

     1,114         1,196   

Corporate & other

     56,143         68,075   
  

 

 

    

 

 

 

Total assets

   $ 96,007       $ 109,974   
  

 

 

    

 

 

 

 

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and the related notes and other financial information included elsewhere in this quarterly report. Some of the information contained in this discussion and analysis or set forth elsewhere in this quarterly report, including information with respect to our plans and strategy for our business and related financing, include forward-looking statements that involve risks and uncertainties. You should review the “Risk Factors” section of our Annual Report on Form 10-K for the fiscal year ended June 30, 2011 for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

Business Overview

We are a global energy and gasification technology company that provides products and solutions to the energy and chemical industries. Our strategy is to create value by providing technology and equipment in regions where low rank coals and biomass feedstocks can be profitably converted into high value products through our proprietary U-GAS® fluidized bed gasification technology. We do this through providing a proprietary technology package whereby we license U-GAS® technology rights to third parties, deliver an engineered technology package and provide proprietary equipment components to customers who have contracted to own and operate projects. In addition, we may (i) integrate our U-GAS® technology package with downstream technologies to provide a fully integrated offering where we may invest in projects either directly or through an investment partner, (ii) partner with engineering, equipment and technology companies to provide our U-GAS® technology package into an integrated modular product offering, (iii) provide technology to enable coal resources to be integrated together with our U-GAS® technology where the coal resources may be of little value without our U-GAS® conversion technology, or (iv) acquire or partner with owners of these coal resources to create more value and opportunity for us through the integration of our technology with the coal resources.

We believe that we have several advantages over commercially available competing gasification technologies, such as entrained flow, fixed and moving bed gasification technologies, including our ability to use all ranks of coals (including low rank, high ash and high moisture coals, which are significantly cheaper than higher grade coals), many coal waste products and biomass feed stocks. In addition, U-GAS® technology’s advanced fluidized bed design is tolerant to changes in feedstock. These factors enable us to be a lower cost producer of synthesis gas, or syngas, a mixture of primarily hydrogen and carbon monoxide, which can then be used to produce other products. Depending on local market need and fuel sources, syngas can be used as a fuel gas in industrial applications or can be used to produce many products including power, synthetic natural gas, or SNG, methanol, dimethyl ether, or DME, glycol, ammonia, direct reduction iron, or DRI, gasoline and other transportation fuels, steam, and other byproducts (e.g., sulphur, carbon dioxide or ash).

Our principal operating activities are currently in China. However, we are developing opportunities in other countries including India, the U.S. and Australia, as well as other parts of Asia and Europe. Our ZZ Joint Venture project is our first commercial scale coal gasification plant and is located in Shandong Province, China. It has been in operation since February 2008 and was in commercial operation from December 2008 until late September 2011 when it was shut down as described below under “ –Liquidity and Capital Resources – Zao Zhuang Joint Venture.” Our Yima project is currently under construction in Henan Province, China.

 

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The key elements of our business strategy include:

 

   

Develop China Business Platform. We have recently developed a new, China-centric business platform (“SES China”) which is intended to be a stand-alone, self-funding business platform that will encompass all of our current and future business activities and initiatives in China, including our Yima Joint Venture. We have also engaged Crystal Vision Energy Limited to provide management support functions to SES China. We believe that the creation of SES China will better enable us to raise capital in China, work effectively with our existing partners to advance our current projects, as well as efficiently develop large business verticals, such as the recently announced ammonia retro-fit business opportunity with Beijing Zhonghuan Engineering & Project Management Co., Ltd. Other business verticals that we can address through SES China include clean coal-to-chemicals projects, clean renewable fuels and power businesses, direct reduced iron for the steel industry, and for longer term value creation, larger scale SNG projects utilizing our low rank coal resources and biomass.

 

   

Execute on Existing Projects. We are continuing to implement operational measures to improve the financial performance of our ZZ Joint Venture plant in the near term, while also continuing to evaluate alternatives to better position the project to be commercially and financially successful in the future including the possible expansion of the plant to produce other products for other customers. We also intend to continue to leverage our technological success to date at the ZZ Joint Venture in our ongoing business development efforts. Additionally, the Yima Joint Ventures are nearing completion of the plant’s construction which will provide demonstration of our technology on a much larger scale.

 

   

Leveraging our proprietary technology through licensing, equipment sales and related services to increase revenues and position us for future growth. We provide a proprietary technology package whereby we license U-GAS® technology rights to third parties, deliver an engineered technology package and provide proprietary equipment components to customers who have contracted to own and operate projects. We intend to focus on developing opportunities for our proprietary technology package whereby we may (i) integrate our U-GAS® technology package with downstream technologies to provide a fully integrated offering where we may invest in projects either directly or through an investment partner or (ii) may partner with engineering, equipment and technology companies to provide our U-GAS® technology package into an integrated modular product offering, which may include coal or biomass feedstocks for units producing power and fuels such as ammonia, SNG, methanol to gasoline, or MTG, diesel and ethanol as well as methanol for gasoline blending. We anticipate that we can increase revenues through collecting technology licensing fees and royalties, engineering and technical service fees, as well as equipment product sales sold to customers who have contracted to own and operate projects and desire to incorporate our proprietary technology. We also believe that our licensing activities will provide additional insight into project development activities, which may allow us to make selective equity investments in such projects in the future, develop integrated, modular product offerings, or take options in projects for which we provide a license.

 

   

Expanding our relationships with strong strategic partners. Our efforts have been initially focused on facilities producing syngas, methanol and DME in China. We are expanding our relationships with our current partners and developing new relationships, including through our potential transaction with ZJX and China Energy, through our engagement of Crystal Vision Energy and through strategic joint venture initiatives in specific markets that will enable us to expand our business. Such strategic relationships may include an investment in projects either directly by us or through an investment partner where U-GAS® plants may supply syngas to strategic customers via long-term offtake agreements. For example, through our joint venture SES Resource Solutions, we are working with Midas Resource Partners AG, a coal resource consulting and project development firm, to collaborate on project origination and project development activities for integrated coal resource-gasification projects to incentivize third party investors to commit to providing financing for such projects. We are exploring new markets for entry such as India, Australia, and other parts of Asia and Europe.

 

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Developing value where we have a competitive advantage and have access of rights to feedstock resources. We believe that we have the greatest competitive advantage using our U-GAS® technology in situations where there is a ready source of low rank, low cost coal, coal waste or biomass to utilize as a feedstock. We are focusing our efforts in countries with large low rank coal resources such as China, India, Australia and South Africa. We are working to develop transactions that include securing options to these feedstock resources. For example, we are currently in discussions regarding development opportunities in Inner Mongolia, China where provincial authorities are willing to make available coal resources to the project owners, which adds protection from future coal cost increases, and can potentially lead to increased project revenue. In these cases, we may provide technology to add value to coal resources which may be of little value without our U-GAS® conversion technology, or may acquire or partner with owners of these resources to create more value and opportunity for us through the integration of our technology with the resources. Additionally, where strategic relationships and capital and/or financing is available, we may acquire an interest in such resources, including existing facilities or coal mines, where we could create value with our U-GAS® technology by securing direct access to feedstock. We are also actively pursuing business verticals in the segments of transportation fuels, steel and fertilizers where our technology is specifically well suited and developing new downstream coal-to-chemicals and coal-to-energy projects which may expand our initial focus to include facilities producing SNG, MTG, glycol, and power and reducing gas for the steel industry.

 

   

Continue to develop and improve U-GAS® technology. We are continually seeking to improve overall plant availability, plant efficiency rates and fuel handling capabilities of our U-GAS ® gasification technology. We are continuing to work with our prospective customers to determine the suitability of their low rank coals for our U-GAS® technology through proprietary coal characterization testing as well as selective commercial scale testing in our ZZ Joint Venture plant. Additionally, we are growing our technology base through continued development of know-how with our engineering and technical staff, growing and protecting our trade secrets as a result of patenting improvements tested at our ZZ Joint Venture plant, and improvements resulting from integration of our technology with downstream processes. One example includes the development of our Fines Management System, or FMS, which we believe can maximize the utilization of low rank coal in our U-GAS® -based gasifiers, resulting in improved cost advantages. We have filed several patent applications relating to our improvements to the U-GAS® technology.

 

   

Grow earnings through increased revenues and control of expenses. We remain intently focused on control of our expenses while we grow revenues from our technology business and develop our projects. We believe our strategy will allow us to grow near term revenues to position us for sustainable long term growth. We intend to minimize project development expense until we have assurances that acceptable financing is available to complete our projects. Until we have such assurances, our strategy will be to operate using our current capital resources and to leverage the resources of strategic relationship or financing partners.

Results of Operations

We are in our development stage and therefore have had limited operations. We generated revenues of $2.8 million for the nine months ended March 31, 2012 and $24.7 million since our inception in November 2003. We have primarily financed our operations to date through private placements and two public offerings of our common stock.

Three Months Ended March 31, 2012 Compared to the Three Months Ended March 31, 2011

Revenue. Total revenue was $100,000 for the three months ended March 31, 2012 compared to $3.1 million for the three months ended March 31, 2011.

 

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There were no product sales for the three months ended March 31, 2012 and product sales for the three months ended March 31, 2011 were $2.6 million which were derived from the sale of syngas and byproducts produced at the ZZ Joint Venture plant to Hai Hua. There have been no product sales since the suspension of syngas production at the ZZ Joint Venture plant in late September 2011. In May 2011, Hai Hua notified the ZZ Joint Venture plant that it will not continue payment of capacity fees beyond April 2011. The unpaid amount totaled $3.6 million cumulatively as of March 31, 2012. The plant continued to operate and provide syngas to Hai Hua until operations were suspended in late September 2011, and Hai Hua has paid other contractual obligations such as the energy fees and by-product sales due under the contract. We are continuing to work with Hai Hua on alternatives to resolve this issue and recover these fees including restructuring the current business arrangement to create an integrated syngas to methanol operation.

Technology licensing and related services revenues for the three months ended March 31, 2012 and 2011 were $100,000 and $506,000, respectively. For the three months ended March 31, 2012, the revenues related primarily to coal testing for a potential power project in Turkey. For the three months ended March 31, 2011, the revenues related primarily to the recognition of previously deferred revenues received under a license agreement entered into in April 2010 which has since been terminated due to the licensee’s inability to obtain financing for its project.

Costs of product sales and plant operating expenses. Costs of product sales and plant operating expenses were $0.2 and $2.4 million for the three month periods ended March 31, 2012 and 2011, respectively. The decrease was due primarily to the suspension of syngas production at the ZZ Joint Venture plant in late September 2011.

General and administrative expenses. General and administrative expenses were $3.6 million for the three months ended March 31, 2012 compared to $3.3 million for the three months ended March 31, 2011. The increase was due primarily to non-recurring consulting related costs of $0.8 million, including a $0.5 million charge to recognize the loss related to a matter with a consulting firm which was settled in May 2012 and fees associated with collecting a payment from Hai Hua, offset, in part, by a reduction in compensation and other expenses. Recurring general and administrative expenses consist primarily of compensation, professional fees, travel and other costs of our corporate, development and administrative functions in Houston and Shanghai.

Project and technical development expenses. Project and technical development expenses were $64,000 and $58,000 for the three months ended March 31, 2012 and 2011, respectively, and consisted primarily of third-party technology related costs.

Stock-based compensation expense. Stock-based compensation expense was $348,000 and $312,000 for the three months ended March 31, 2012 and 2011, respectively, and related to the expensing of the estimated fair values of awarded stock options and restricted stock. The increase was principally due to the issuance of restricted stock to our independent non-employee directors in March 2012.

Depreciation and amortization. Depreciation and amortization expense was $0.6 million and $0.7 million for the three months ended March 31, 2012 and 2011, respectively, and was primarily related to depreciation of our ZZ Joint Venture plant’s and our corporate assets.

Equity in losses of Joint Ventures. The equity in losses of joint ventures for the three months ended March 31, 2012 relates to our 25% share of the losses incurred by the Yima Joint Ventures and our 50% share of the losses incurred by the SRS joint venture. The losses of the Yima Joint Ventures related to non-capitalizable costs incurred during the design and construction phase. The losses of the SRS joint venture related to development costs including the value of Midas’ contributed services, consulting and travel expenses.

Foreign currency gain. Foreign currency gains were $2,000 and $223,000 for three months ended March 31, 2012 and 2011, respectively. The foreign currency gains have resulted from the appreciation of the Renminbi Yuan relative to the U.S. dollar and are generated on U.S. dollar denominated shareholder loans payable by the ZZ Joint Venture.

 

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Interest expense. Interest expense was $140,000 and $196,000 for the three month periods ended March 31, 2012 and 2011, respectively. Our interest expense relates primarily to the ZZ Joint Venture’s outstanding principal balance on its loan with the Industrial and Commercial Bank of China, or ICBC.

Nine Months Ended March 31, 2012 Compared to the Nine Months Ended March 31, 2011

Revenue. Total revenue was $2.8 million for the nine months ended March 31, 2012 compared to $7.6 million for the nine months ended March 31, 2011.

Product sales were $2.1 million for the nine months ended March 31, 2012 compared to $6.6 million for the nine months ended March 31, 2011 and were derived from the sale of syngas and byproducts produced at the ZZ Joint Venture plant to Hai Hua. The decrease in product sales was due primarily to no capacity fee revenue being received during the nine months ended March 31, 2012 and the suspension of syngas production at the ZZ Joint Venture plant in late September 2011. In May 2011, Hai Hua notified the ZZ Joint Venture plant that it will not continue payment of capacity fees beyond April 2011. The unpaid amount totaled $3.6 million cumulatively as of March 31, 2012. The plant continued to operate and provide syngas to Hai Hua until operations were suspended in late September 2011, and Hai Hua has paid other contractual obligations such as the energy fees and by-product sales due under the contract. We are continuing to work with Hai Hua on alternatives to resolve this issue and recover these fees including restructuring the current business arrangement to create an integrated syngas to methanol operation.

Technology licensing and related services revenues were $571,000 for the nine months ended March 31, 2012 compared to $1.0 million for the nine months ended March 31, 2011 and were generated from the testing of coal at the ZZ Joint Venture plant, and other coal testing, feasibility studies and other technical services provided in association with our technology licensing business.

Costs of product sales and plant operating expenses. Costs of product sales and plant operating expenses were $4.3 million for the nine months ended March 31, 2012 compared to $6.3 million for the nine months ended March 31, 2011. The decrease was due primarily to the suspension of syngas production at the ZZ Joint Venture plant in late September 2011.

General and administrative expenses. General and administrative expenses were $9.7 million for the nine months ended March 31, 2012 compared to $9.6 million during the nine months ended March 31, 2011 and consisted primarily of compensation, professional and consulting fees, travel and other costs of our corporate, development and administrative functions in Houston and Shanghai.

Project and technical development expenses. Project and technical development expenses were $192,000 for the nine months ended March 31, 2012 compared to $187,000 for the nine months ended March 31, 2011, and consisted primarily of third-party technology related costs.

Stock-based compensation expense. Stock-based compensation expense was $707,000 for the nine months ended March 31, 2012 compared to $577,000 for the nine months ended March 31, 2011 and related to the expensing of the estimated fair values of awarded stock options and restricted stock. The increase was principally due to the issuance of restricted stock to our independent non-employee directors in March 2012.

Depreciation and amortization. Depreciation and amortization expense was $1.9 million and $2.0 million for the nine months ended March 31, 2012 and 2011, respectively, and was primarily related to depreciation of our ZZ Joint Venture plant’s and our corporate assets.

Equity in losses of joint ventures. The equity in losses of joint ventures for the nine months ended March 31, 2012 relates to our 25% share of the losses incurred by the Yima Joint Ventures and our 50% share of the losses incurred by the SRS joint venture. The losses of the Yima Joint Ventures related to non-capitalizable costs incurred during the design and construction phase. The losses of the SRS joint venture related to development costs including the value of Midas’ contributed services, consulting and travel expenses.

 

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Foreign currency gain. Foreign currency gains were $0.6 million for the nine months ended March 31, 2012 compared to $0.7 million for the nine months ended March 31, 2011. The foreign currency gains have resulted from the appreciation of the Renminbi Yuan relative to the U.S. dollar and are generated on U.S. dollar denominated shareholder loans payable by the ZZ Joint Venture.

Interest expense. Interest expense was $466,000 and $512,000 for the nine month periods ended March 31, 2012 and 2011, respectively. Our interest expense relates primarily to the ZZ Joint Venture’s outstanding principal balance on its loan with ICBC.

Liquidity and Capital Resources

We are in our development stage and have financed our operations to date through private placements of our common stock in 2005 and 2006 and two public offerings, one in November 2007 and one in June 2008. We have used the proceeds of these offerings primarily for the development of and investments in our joint ventures in China and to pay other development and general and administrative expenses. In addition, we entered into a loan agreement with ICBC in 2007 to fund a portion of the ZZ Joint Venture plant’s construction.

As of March 31, 2012, we had approximately $19.8 million in cash and cash equivalents and approximately $13.1 million of working capital available to us. During the nine months ended March 31, 2012, we used approximately $9.3 million in operating activities, $0.6 million in investing activities, and $2.5 million in financing activities primarily for the scheduled semi-annual principal payment on the ZZ Joint Venture’s loan with ICBC. During the nine months ended March 31, 2011, we used approximately $10.9 million in operating activities, $55,000 in investing activities, and $2.3 million in financing activities primarily for the scheduled semi-annual principal payment on the ZZ Joint Venture’s loan.

Share Purchase Agreement with ZJX

On March 31, 2011, we entered into a Share Purchase Agreement, or the Agreement, with China Energy Industry Holdings Group Co, Ltd., or China Energy, and Zhongjixuan Investment Management Company Ltd., or ZJX, pursuant to which we will issue on the closing date to China Energy 37,254,475 shares of our common stock, in exchange for approximately $83.8 million, or the Consideration. Within 20 business days after the accomplishment of the Milestone (as defined below), we shall further issue directly to China Energy an amount of shares of common stock which, when combined with the shares issued on the closing date, equals 60.0% of the outstanding common stock on a fully-diluted basis. The terms and conditions of the Agreement are summarized in Note 9 to the consolidated financial statements included herein.

Use of Proceeds

Subject to the discretion and approval of the Board, the Consideration, net of costs and expenses, is required to be applied to the following: (i) incorporation of a Company headquarters in China to consolidate the ownership of our investment projects in China and enhance our presence in China; (ii) investing in the expansion of our ZZ Joint Venture; (iii) investing in Phase I of our Yima Joint Ventures; (iv) acquiring an ownership interest in a coal mine that will provide coal to the Yima Joint Venture project; (v) investing in our Golden Concord Joint Venture; (vi) other Chinese projects that may be recommended to the Board from time to time; and (vii) other expenses of the operation and business of us in China.

 

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ZJX will use reasonable endeavours to assist us to obtain third party funding (third party direct equity investment in projects or debt financing to the projects) to (a) cover funding needs of the above projects; (b) provide funding for us to invest in future phases of the Yima Joint Venture project; (c) invest in strategic coal resources in China connected to our projects; and (d) provide funding for us to invest in other projects in China not listed above and assist us to obtain third party investment in any of our other projects.

Project Development

ZJX will use reasonable endeavours to create at least four project joint ventures, or the MJVs, in the areas of synthetic natural gas, methanol to gasoline; fertilizer; and electric power. Funding for each MJV is expected to be approximately RMB20 billion (approximately $3.2 billion based on the exchange rate as of December 31, 2011). Each MJV is expected to be funded with equity from a strategic investor plus project debt. We are anticipated to be part owner of each MJV through a targeted 35% carry provided by the strategic investor as part of our development of and provision of technology for the particular projects. ZJX will help us work with the strategic investors to obtain long term purchase commitments for each of the MJVs prior to the start of construction of each such project.

Closing of the transaction with China Energy and ZJX is subject to approval by our stockholders and other customary closing conditions. In addition, ZJX notified us in August of its intent to complete its investment in partnership with Yima. ZJX has been working with Yima in order to complete Yima’s potential investment into China Energy. Although the Agreement was not extended at March 31, 2012, we agreed with ZJX to keep the Agreement in effect as long as the parties are making good progress toward meeting the objective of completing the Agreement in a reasonable amount of time.

Other

We have included the $1.5 million payment paid to GTI in June 2009 toward future royalties due to GTI for the Yima Joint Ventures’ project as part of our investment in the Yima project. An additional future royalty payment of approximately $1.5 million will be due to GTI upon the commissioning of the gasifier equipment for the Yima project which is expected in early fiscal 2013.

Zao Zhuang Joint Venture

Joint Venture Agreement

On July 6, 2006, we entered into a cooperative joint venture contract with Shandong Hai Hua Coal & Chemical Company Ltd. (“Hai Hua”), which established Synthesis Energy Systems (Zao Zhuang) New Gas Company Ltd. (the “ZZ Joint Venture”), a joint venture company that has the primary purposes of (i) developing, constructing and operating a syngas production plant utilizing the U-GAS® technology in Zao Zhuang City, Shandong Province, China and (ii) producing and selling syngas and the various byproducts of the plant, including ash and elemental sulphur. We own 96.9% of the ZZ Joint Venture and Hai Hua owns the remaining 3.1%. We consolidate the results of the ZZ Joint Venture in our consolidated financial statements.

Syngas Purchase and Sale Agreement

The ZZ Joint Venture is also party to a purchase and sale agreement with Hai Hua for syngas produced by the plant, whereby Hai Hua will pay the ZZ Joint Venture an energy fee and capacity fee, as described below, based on the syngas production. The syngas to be purchased by Hai Hua is subject to certain quality component requirements set forth in the contract. In late December 2008, the plant declared commercial operations status for purposes of the purchase and sale agreement. The energy fee is a per normal cubic meters, or Ncum, of syngas calculation based on a formula which factors in the monthly averages of the prices of design base coal, coke, coke oven gas, power, steam and water, all of which are components used in the production of syngas. The capacity fee is paid based on the capacity of the plant to produce syngas, factoring in the number of hours (i) of production and (ii) of capability of production as compared to the guaranteed capacity of the plant, which for purposes of the contract is 22,000 Ncum per hour of net syngas. Hai Hua is obligated to pay the capacity fee regardless of whether they use the gasification capacity, subject only to availability of the plant, quality of the syngas and exceptions for certain events of force majeure. Due to worldwide reductions in methanol prices, as well as reliability issues with respect to Hai Hua’s plant, Hai Hua has operated at a reduced rate of syngas consumption. Hai Hua has used approximately 35% to 45% of the syngas guarantee capacity since 2009.

 

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In April 2009, the ZZ Joint Venture entered into a Supplementary Agreement with Hai Hua, amending the terms of the purchase and sale agreement. The Supplementary Agreement was entered into to provide more clarity regarding the required syngas quality and volume to be delivered, recovery of the energy fee during turndown periods and operations coordination during unscheduled outages. Under the Supplementary Agreement, the syngas quality specification was amended to provide more clarity as to the minor constituents allowable in the syngas. For purposes of the Supplementary Agreement, syngas that meets these specifications is deemed “compliant gas” and syngas that does not meet these specifications is deemed “non-compliant gas.” The Supplementary Agreement also added a requirement for Hai Hua to pay the ZZ Joint Venture the capacity fee and 70% of the energy fee for all non-compliant gas which is taken by Hai Hua. However, if more than 50% of the syngas taken by Hai Hua during any operating day is non-compliant gas, all of the syngas for that day is deemed to be non-compliant gas for purposes of calculating the energy fee. In addition, the Supplementary Agreement accommodates periods of turndown operation by Hai Hua by establishing a minimum threshold gas off take volume of 7,500 Ncum per hour of net syngas for the purpose of calculating the energy fee during such periods. The Supplementary Agreement also provides that, to the extent Hai Hua has an unscheduled shutdown, and the plant continues to operate on standby during such period, Hai Hua is still required to pay the energy fee to the ZZ Joint Venture. In the event that the plant has an unscheduled shutdown and does not provide at least three hours prior notice to Hai Hua, the ZZ Joint Venture may be required to provide certain compensation to Hai Hua.

Since May 2011, Hai Hua has not paid the capacity fees owed to the ZZ Joint Venture. The unpaid amount totaled approximately $3.6 million as of March 31, 2012. The plant continued to operate and provide syngas to Hai Hua through September 2011 with the expectation that Hai Hua would pay the capacity fee. Hai Hua has paid other contractual obligations such as the energy fees and by-product sales due under the contract. We are continuing to work with Hai Hua on alternatives to resolve this issue. We did not recognize these capacity fee revenues and will not recognize any capacity fees until collection is reasonably assured. In late September 2011, both the Hai Hua methanol plant and the ZZ Joint Venture plant were shut down for scheduled maintenance and the ZZ Joint Venture plant has been kept idle while the ZZ Joint Venture develops its revised commercial arrangement with Hai Hua.

To date, Hai Hua has been unable to offtake the volume of syngas originally expected for the original plant design and as a result the plant has incurred operating losses. Because of these circumstances, the ZZ Joint Venture is working on various arrangements to increase the syngas offtake volume. Such arrangements involve a combination of technical improvements to Hai Hua’s methanol unit, as well as restructuring the current business arrangement to create an integrated syngas to methanol operation. In December 2011, we entered into a framework agreement with Hai Hua pursuant to which we and Hai Hua are working to complete a definitive agreement that will provide the basis for a fully integrated syngas to methanol operation. We have yet to close this definitive agreement with Hai Hua primarily due to 50% of Hai Hua now being acquired by another Chinese state-owned enterprise. Hai Hua has indicated that they are still committed to close the definitive agreement with us in the next two months after the investment by that state-owned company is concluded by executing a signed memorandum of understanding with us in early May 2012.

As currently planned, this will require approximately $6 million of additional capital, which we plan to fund from our ongoing financing initiatives in China. Once the definitive agreement is signed and the additional capital is received, the commerical work and physical integration work will begin. This work is expected to take about six months to complete and we will continue to keep the plant idle until this work is completed. In March 2012, Hai Hua advanced approximately $1.0 million to the ZZ Joint Venture towards future costs of the revised commercial arrangement.

 

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We are also evaluating alternative products and partnership structures for a possible expansion of the ZZ Joint Venture plant. In February 2010, we received the necessary government approval for the expansion. This approval, along with the previously received environmental approvals, are the key approvals required to commence execution of the expansion and also describe certain terms of the expansion project, including but not limited to, its use of land, the main additional facilities required and the use of the existing facilities. The scope of the expansion is still under evaluation. The local government has expressed strong support for this expansion project and has executed a letter of intent allowing a new state-owned local coal mine to be used as a debt guarantee. The letter of intent also contemplates providing discounted coal to the project from this local coal mine. We are in discussions with several potential partners on this expansion.

Yima Joint Ventures

In August 2009, we entered into amended joint venture contracts with Yima Coal Industry (Group) Co., Ltd., or Yima, replacing the prior joint venture contracts entered into in October 2008 and April 2009. The joint ventures were formed for each of the gasification, methanol/methanol protein production, and utility island components of the plant, or collectively, the Yima Joint Ventures. We obtained government approvals for the project’s feasibility study during the three months ended December 31, 2008 and for the project’s environmental impact assessment during the three months ended March 31, 2009, which were the two key approvals required to proceed with the project. The amended joint venture contracts provide that: (i) we and Yima contribute equity of 25% and 75%, respectively, to the Yima Joint Ventures; (ii) Yima will guarantee the repayment of loans from third party lenders for 50% of the project’s cost and, if debt financing is not available, Yima is obligated to provide debt financing via shareholder loans to the project until the project is able to secure third-party debt financing; and (iii) Yima will supply coal to the project from a mine located in close proximity to the project at a preferential price subject to a definitive agreement to be subsequently negotiated. In connection with entering into the amended contracts, we and Yima have contributed our remaining cash equity contributions of $29.3 million and $90.8 million, respectively, to the Yima Joint Ventures during the three months ended September 30, 2009. We will also be responsible for our share of any cost overruns on the project. During the three months ended September 30, 2009, we incurred a charge of $0.9 million relating to consulting fees paid in connection with the closing and funding of the Yima project.

In exchange for the capital contributions, we own a 25% interest in each joint venture and Yima owns a 75% interest. Notwithstanding this, in connection with an expansion of the project, we have the option to contribute a greater percentage of capital for the expansion, such that as a result, we would have up to a 49% ownership interest in the Yima Joint Ventures. The investment in the Yima Joint Ventures is accounted for using the equity method.

Construction of the Yima Joint Venture plant is ongoing and construction of the syngas production portion of the plant is expected to be complete during calendar 2012. Yima is planning to produce methanol as its first product as the methanol market in China continues to strengthen. Yima’s project management team believes that the project’s syngas production facilities will be ready to start-up during the third quarter of calendar 2012 and that methanol production will be ready to start-up in the fourth quarter of calendar 2012. In addition, the Yima Joint Ventures are in discussions with a potential fuel gas off-take customer for the sale of the initial syngas production from the project. This would provide syngas sales until the syngas conversion to methanol is completed. The Yima Joint Ventures are no longer considering a modification to the plant to produce glycol.

Based on the project’s current scope, the current estimate of the total required capital of the project is approximately $250 million. The remaining capital for the project is to be provided by project debt to be obtained by the Yima Joint Ventures. Yima has agreed to guarantee the project debt and we expect this guarantee will allow debt financing to be obtained from domestic Chinese banking sources. We have agreed to pledge to Yima our ownership interests in the joint ventures as security for its obligations under any project guarantee. In the event that the debt financing is not obtained, Yima has agreed to provide a loan to the joint ventures to satisfy the remaining capital needs of the project with terms comparable to current market rates at the time of the loan.

 

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The Yima Joint Ventures are governed by a board of directors consisting of eight directors, two of whom were appointed by us and six of whom were appointed by Yima. The joint ventures also have officers that are nominated by us, Yima and/or the board of directors pursuant to the terms of the joint venture contracts. We and Yima shall share the profits, and bear the risks and losses, of the joint ventures in proportion to our respective ownership interests. The term of the joint venture shall commence upon each joint venture company obtaining its business license and shall end 30 years after commercial operation of the plant.

SES Resource Solutions

SES Resource Solutions, Ltd., or SRS, is a joint venture owned 50% by us and 50% by Midas Resources AG, or Midas, that was created during fiscal 2011 to provide additional avenues of commercialization for our U-GAS® technology. Key objectives of the joint venture are to identify and procure low cost, low rank coal resources for which our technology and the SRS’ know-how represent the best route to commercialization; to provide investment opportunities in both gasification facilities and coal resources; and to facilitate the establishment of gasification projects globally based on our technology. In pursuing these objectives, the joint venture will seek to minimize the requirement for joint venture shareholder capital and maximize the use of third party financing.

Terms of the SRS joint venture agreement include:

 

   

SRS having the exclusive right to promote our gasification technology for the purpose of securing low-cost coal resources in projects worldwide that have been approved by the board of directors of SRS;

 

   

Midas providing expertise to originate and execute the above projects;

 

   

us providing SRS with technology licenses and engineering development support for use in developing the joint integrated coal resource projects;

 

   

SRS being managed by a four person board of directors, two of which are appointed by us and two of which are appointed by Midas;

 

   

us agreeing to provide up to $2.0 million in funding to SRS, although it has the ability to discontinue funding at any point in time – as of March 31, 2012, we had funded approximately $0.6 million to SRS, and

 

   

revenue and profits are equally divided between the joint venture partners.

We and Midas intend to establish separate entities for specific projects to attract external funding for these entities and will derive revenue from licensing fees, service fees, equity participation and royalties.

GTI Agreements

License Agreement

On November 5, 2009, we entered into an Amended and Restated License Agreement, or the New Agreement, with GTI, replacing the Amended and Restated License Agreement between us and GTI dated August 31, 2006, as amended, or the Original Agreement. Under the New Agreement, we maintain our exclusive worldwide right to license the U-GAS® technology for all types of coals and coal/biomass mixtures with coal content exceeding 60%, as well as the non-exclusive right to license the U-GAS® technology for 100% biomass and coal/biomass blends exceeding 40% biomass. The New Agreement differs from the Old Agreement most critically by allowing us to sublicense U-GAS® to third parties for coal, coal and biomass mixtures or 100% biomass projects (subject to the approval of GTI, which approval shall not be unreasonably withheld), with GTI to share the revenue from such third party licensing fees based on an agreed percentage split, or the Agreed Percentage. In addition, the prior obligation to fabricate and put into operation at least one U-GAS® system for each calendar year of the Original Agreement in order to maintain the license has been eliminated in the New Agreement.

 

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In order to sublicense any U-GAS® system, we are required to comply with certain requirements set forth in the New Agreement. In the preliminary stage of developing a potential sublicense, we are required to provide notice and certain information regarding the potential sublicense to GTI and GTI is required to provide notice of approval or non-approval within ten business days of the date of the notice from us, provided that GTI is required to not unreasonably withhold their approval. If GTI does not respond within that ten business day period, they are deemed to have approved of the sublicense. We are required to provide updates on any potential sublicenses once every three months during the term of the New Agreement. We are also restricted from offering a competing gasification technology during the term of the New Agreement.

For each U-GAS® unit which we license, design, build or operate for ourself or for a party other than a sublicensee and which uses coal or a coal and biomass mixture or biomass as the feed stock, we must pay a royalty based upon a calculation using the MMBtu per hour of dry syngas production of a rated design capacity, payable in installments at the beginning and at the completion of the construction of a project, or the Standard Royalty. Although it is calculated using a different unit of measurement, the Standard Royalty is effectively the same as the royalty payable to GTI under the Original Agreement. If we invest, or have the option to invest, in a specified percentage of the equity of a third party, and the royalty payable by such third party for their sublicense exceeds the Standard Royalty, we are required to pay to GTI the Agreed Percentage of such royalty payable by such third party. However, if the royalty payable by such third party for their sublicense is less than the Standard Royalty, we are required to pay to GTI, in addition to the Agreed Percentage of such royalty payable by such third party, the Agreed Percentage of our dividends and liquidation proceeds from our equity investment in the third party. In addition, if we receive a carried interest in a third party, and the carried interest is less than a specified percentage of the equity of such third party, we are required to pay to GTI, in our sole discretion, either (i) the Standard Royalty or (ii) the Agreed Percentage of the royalty payable to such third party for their sublicense, as well as the Agreed Percentage of the carried interest. We will be required to pay the Standard Royalty to GTI if the percentage of the equity of a third party that we (a) invest in, (b) have an option to invest in, or (c) receive a carried interest in, exceeds the percentage of the third party specified in the preceding sentence.

We are required to make an annual payment to GTI for each year of the term beginning December 31, 2010, with such annual payment due by the last day of January of the following year; provided, however, that we are entitled to deduct all royalties paid to GTI in a given year under the New Agreement from this amount, and if such royalties exceed the annual payment amount in a given year, we are not required to make the annual payment. We must also provide GTI with a copy of each contract that we enter into relating to a U-GAS® system and report to GTI with our progress on development of the technology every six months.

For a period of ten years, we and GTI are restricted from disclosing any confidential information (as defined in the New Agreement) to any person other than employees of affiliates or contractors who are required to deal with such information, and such persons will be bound by the confidentiality provisions of the New Agreement. We have further indemnified GTI and its affiliates from any liability or loss resulting from unauthorized disclosure or use of any confidential information that we receive.

The term of the New Agreement is the same as the Original Agreement, expiring on August 31, 2016, but may be extended for two additional ten-year periods at our option.

 

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Outlook

Our strategy is to create value by providing technology and equipment in regions where low rank coals and biomass feedstocks can be profitably converted into high value products through our proprietary U-GAS® fluidized bed gasification technology. We do this by providing a proprietary technology package whereby we license U-GAS® technology rights to third parties, deliver an engineered technology package and provide proprietary equipment components to customers who have contracted to own and operate projects. We anticipate that we can generate revenues through engineering and technical service fees, as well as licensing fees and royalties on products sold by our licensees that incorporate our proprietary technology without incurring the significant capital costs required to develop a plant. We also believe that our licensing activities will help advance our project development activities, which may allow us to make selective equity investments in such projects in the future and afford opportunities to develop integrated, modular product offerings. Additionally, we are continuing to improve our technology in ways we believe will enhance our ability to further develop our licensing activities.

We currently plan to use our available cash for (i) our general and administrative expenses; (ii) debt service related to the ZZ Joint Venture; (iii) working capital; (iv) project and third-party licensing and technical development expenses; (v) operating expenses of SRS; and (vi) general corporate purposes. The actual allocation and timing of these expenditures will be dependent on various factors, including changes in our strategic relationships, commodity prices and industry conditions, and other factors that we cannot currently predict. In particular, any future decrease in economic activity in China or in other regions of the world in which we may in the future do business could significantly and adversely affect our results of operations and financial condition. Although demand for methanol is increasing is some regions, markets for commodities such as methanol have been under significant pressure and we are unsure of how much longer methanol prices may remain depressed. Accordingly, our ability to finance and develop our existing projects, commence any new projects and sell products from our current operations could be adversely impacted.

We are pursuing possible U-GAS® licensing opportunities with third parties allowing us to build on our experience at the ZZ Joint Venture and our overall technological and engineering capabilities. We intend to place increased focus on development of licensing opportunities for our proprietary U-GAS® technology on a global basis with a particular focus on India, China, Australia and Africa due to large low rank coal resources present in these areas. Our prospects are growing globally in numbers and quality. Having access to such resources may lead to new commercial opportunities and greater cost and operating efficiencies in existing or planned projects.

We may (i) integrate our U-GAS® technology package with downstream technologies to provide a fully integrated offering where we may invest in projects either directly or through an investment partner, (ii) partner with engineering, equipment and technology companies to provide our U-GAS® technology package into an integrated modular product offering, (iii) provide technology to enable coal resources to be integrated together with our U-GAS® technology where the coal resources may be of little commercial value without our U-GAS® conversion technology, or (iv) acquire or partner with owners of these coal resources to create more value and opportunity for us through the integration of our technology with the coal resource. We understand the need to partner in certain markets, and plan to do so with companies that we believe can help us accelerate our business. Our partnering approach in some cases is country specific and in some cases is industry or segment specific. Additionally, where capital and/or financing is available, we may acquire an interest in such resources, including existing facilities or coal mines, where we could create value with our U-GAS® technology through securing greater access to feedstock. We are also actively pursuing business verticals in the segments of transportation fuels, steel and fertilizers where our technology is specifically well suited and developing new downstream coal-to-chemicals and coal-to-energy projects which may expand our initial focus to include facilities producing SNG, MTG, glycol, and power and reducing gas for the steel industry.

 

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We have recently developed a new, China-centric business platform (“SES China”) which is intended to be a stand-alone, self-funding business platform that will encompass all current and future SES business activities and initiatives in China, including our Yima Joint Venture. We have also engaged Crystal Vision Energy Limited to provide management support functions to SES China. Colin S. Tam, Executive Chairman of Crystal Vision, will assume leadership of SES China as Managing Director. We believe that the creation of SES China will better enable us to raise capital in China, work effectively with our existing partners to advance our current projects, as well as efficiently develop large business verticals, such as the recently announced ammonia retro-fit business opportunity with Beijing Zhonghuan Engineering & Project Management Co., Ltd. (“ZEP”). Together with ZEP, we see an immediate business opportunity to replace the approximately 3,500 inefficient gasifiers that require expensive coal with our clean, lower cost gasifiers, which use low cost coal. Our gasifier will typically replace five of these old generation gasifiers which yields a total available market of about 700 gasifiers in China. Other business verticals that we can address through SES China include clean coal-to-chemicals projects, clean renewable fuels and power businesses, direct reduced iron for the steel industry, and for longer term value creation, larger scale SNG projects utilizing our low rank coal resources and biomass.

We are also actively pursuing new project partners to invest in our ongoing development efforts and are investigating possibly implementing a different project scope and end product for our Yima Joint Ventures and may possibly be expanding both the size and scope of our ZZ Joint Venture plant. Our Yima project is currently under construction and Yima is the project management leader for the project. Yima is planning to produce methanol as its first product as the methanol market in China continues to strengthen. Yima’s project management team continues to believe that the project’s syngas production facilities will be available in the third quarter of calendar 2012.

We agreed with ZJX to keep the Agreement in effect as long as the parties are making good progress toward meeting the objective of completing the Agreement in a reasonable amount of time. If closed, we believe this transaction will further our business and strategic interests and will allow us to leverage ZJX’s existing relationships with major Chinese companies, agencies, and institutions to raise additional capital and develop, permit, and construct additional projects. If closed, the transaction will also provide an immediate and substantial increase in our cash resources providing flexibility for SES China and the means to execute on portions of our business plan.

We believe that the ZZ Joint Venture plant has achieved significant success demonstrating U-GAS® technology as well as our technical and operating capabilities. We are of the view that by improving financial performance and reducing operating costs at the ZZ Joint Venture plant our overall financial performance can be improved. To date, Hai Hua has been unable to offtake the volume of syngas originally expected for the original plant design and as a result the plant has incurred operating losses. We do not foresee this situation changing significantly in the near term. Because of this, the ZZ Joint Venture is working on various arrangements to increase the syngas offtake volume. Such arrangements involve a combination of technical improvement to Hai Hua’s methanol unit, as well as restructuring the current business arrangement to create an integrated syngas to methanol operation. For example, . In December 2011, we entered into a framework agreement with Hai Hua pursuant to which we and Hai Hua are working to complete a definitive agreement that will provide the basis for a fully integrated syngas to methanol operation. As currently planned, this will require approximately $6 million of additional capital, which we plan to fund from our ongoing financing initiatives in China. Once the definitive agreement is signed and the additional capital is received, the commercial work and physical integration work will begin. This work is expected to take about six months to complete and we will continue to keep the plant idle until this commercial work is completed. We have yet to close this definitive agreement with Hai Hua primarily due to 50% of Hai Hua now being acquired by another Chinese state-owned enterprise. Hai Hua has indicated that they are still committee to close the definitive agreement with us in the next two months after the investment by that state-owned company is concluded by executing a signed memorandum of understanding with us in early May 2012.

 

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We are also evaluating alternative products and partnership structures for a possible expansion of the ZZ Joint Venture plant. The scope of the expansion is still under evaluation. We are in discussions with several potential partners on this expansion. Despite our work with Hai Hua on improving financial performance and reducing costs, Hai Hua has not made the capacity fee payments to the ZZ Joint Venture since April 2011 as described under “—Results of Operation.” The unpaid amount totals approximately $3.6 million as of March 31, 2012. Although we are continuing to work with Hai Hua on alternatives to resolve the issue, there can be no assurances that we will collect these amounts. In late September 2011, both the Hai Hua methanol plant and the ZZ Joint Venture plant were shut down for scheduled maintenance and, as noted above, the ZZ Joint Venture plant has been kept idle while we develop a revised commercial arrangement with Hai Hua. In March 2012, Hai Hua advanced approximately $1.0 million towards future costs of the revised commercial arrangement.

In addition, our successful commercial-scale demonstration at the ZZ Joint Venture plant using lignite coal from the Inner Mongolia region of China was a significant milestone for us and our U-GAS® technology as it demonstrated our ability to efficiently process lignite coal. We may utilize the ZZ Joint Venture plant in the future to perform more commercial scale coal testing for our customers. We intend to continue to leverage our technological success to date at the ZZ Joint Venture in our ongoing business development efforts, including through further visits from senior executives of possible customers and partners, as well as government officials.

We believe that there is currently a shift in the coal gasification business toward the use of low quality, and therefore low cost, coals for coal-to-energy and chemicals projects and we believe that China is a good example of this new direction in coal gasification. In China, coal prices for high quality coals have risen dramatically over the past few years and these high coal prices have had a very negative impact on the margins of current coal gasification projects. In order to fuel its energy needs, China today is moving toward even larger coal based projects, which include several large scale coal-to-methane or SNG projects, as compared to previous coal-to-chemical projects. Due to current encouragement from the Chinese government, we believe there is potential in China for several of these projects, some of which currently are in various stages of planning. We believe many of these projects will be located in regions where very low cost lignite coals can be made available reducing production costs of SNG and enhancing the profitability of these kinds of projects. As we have determined with testing at our ZZ Joint Venture plant, our technology has the unique ability to efficiently process lignite and thus we believe it is very desirable for projects of the type the Chinese government appears to support. As evidence of this, we are in discussions regarding several projects in Inner Mongolia where the provincial government is making coal resources available to the project owners which adds protection for the project from future coal cost increases, as well as potentially increasing project revenues.

In addition, we have been continuing to work with Midas in identifying other sources of low quality coals around the world, primarily in Asia, to develop additional projects for SRS utilizing our technology. Our primary focus for SRS is to acquire ownership positions in low quality coal resources that can then be used as fuel feedstock for high value products such as SNG, in projects using our technology, and to facilitate the development of these projects with industry partners in regions where gas prices are based on expensive LNG. For example, as noted above, SRS recently entered into an agreement with Ncondezi Coal Company Limited for a three month study to determine the feasibility of mining and exporting to the Asia Pacific region up to 15 million tons per year of low volatile coal, in addition to Ncondezi’s export thermal grade coal resources, from Mozambique. In all of these types of projects, we believe that we have the opportunity to create more value from the U-GAS® technology than licensing alone could bring us.

We expect to continue for a period of time to have negative operating cash flows until we can generate sufficient revenues from SES China (including the the ZZ Joint Venture and the Yima Joint Ventures) or our licensing and related service projects, as well as from other projects which are under development, to cover our general and administrative expenses and other operating costs. In addition, if we are not able to complete the ZJX/China Energy transaction, we will need to aggressively pursue additional partners in China and may need to seek other equity financing or cut our operating expenses. We will also limit the development of any further projects until we have assurances that acceptable financing is available to complete the project. Despite this, we will continue to pursue the development of selective projects with strong and credible partners or off-takers where we believe equity and debt can be raised or where we believe we can attract a financial partner to participate in the project.

 

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We can make no assurances that our business operations will develop and provide us with significant cash to continue operations. We may need to raise additional capital through equity and debt financing for any new projects that are developed, to support our existing projects and possible expansions, and to meet corporate general and administrative expenses. We cannot provide any assurance that any financing will be available to us in the future on acceptable terms or at all. Any such financing could be dilutive to our existing stockholders. If we cannot raise required funds on acceptable terms, we may not be able to, among other things, (i) maintain our general and administrative expenses at current levels; (ii) successfully develop our licensing and related service businesses; (iii) negotiate and enter into new gasification plant development contracts and licensing agreements; (iv) expand our operations; (v) hire and train new employees; or (vi) respond to competitive pressures or unanticipated capital requirements.

Recently Issued Accounting Standards

In June 2011, the FASB issued new guidance on the presentation of comprehensive income. The new guidance allows an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The new guidance eliminates the current option to report other comprehensive income and its components in the statement of changes in stockholders equity. This new guidance is effective for fiscal years beginning after December 15, 2011, although the provision of the new guidance which requires reclassifications out of comprehensive income be shown separately in the financial statements has been deferred to allow the FASB to reconsider alternatives. We plan to adopt these requirements effective July 1, 2012.

Effective as of January 1, 2012, we adopted the revised fair value disclosure requirements. The impact to our fair value disclosures was not significant.

Item 3. Quantitative and Qualitative Disclosure About Market Risk

Qualitative disclosure about market risk.

We are exposed to certain qualitative market risks as part of our ongoing business operations, including risks from changes in foreign currency exchange rates and commodity prices that could impact our financial position, results of operations and cash flows. We manage our exposure to these risks through regular operating and financing activities, and may, in the future, use derivative financial instruments to manage this risk. We have not entered into any derivative financial instruments to date.

Foreign currency risk

We conduct operations in China and our functional currency in China is the Renminbi Yuan. Our financial statements are expressed in U.S. dollars and will be negatively affected if foreign currencies, such as the Renminbi Yuan, depreciate relative to the U.S. dollar. In addition, our currency exchange losses may be magnified by exchange control regulations in China or other countries that restrict our ability to convert into U.S. dollars. The People’s Bank of China, the monetary authority in China, sets the spot rate of the Renminbi Yuan, and may also use a variety of techniques, such as intervention by its central bank or imposition of regulatory controls or taxes, to affect the exchange rate relative to the U.S. dollar. In the future, the Chinese government may also issue a new currency to replace its existing currency or alter the exchange rate or relative exchange characteristics by devaluation or revaluation of the Renminbi Yuan in ways that may be adverse to our interests.

 

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Commodity price risk

Our business plan is to purchase coal and other consumables from suppliers and to sell commodities, such as syngas, methanol and other products. Coal is the largest component of our costs of product sales and in order to mitigate coal price fluctuation risk for future projects, we expect to enter into long-term contracts for coal supply or to acquire coal assets. For the sale of commodities from our projects, fixed price contracts will not be available to us in certain markets, such as China, which will require us to purchase some portion of our coal and other consumable needs, or sell some portion of our production, into spot commodity markets or under short term supply agreements. Hedging transactions may be available to reduce our exposure to these commodity price risks, but availability may be limited and we may not be able to successfully hedge this exposure at all. To date, we have not entered into any hedging transations.

Interest rate risk

We are exposed to interest rate risk through our loan with ICBC. Interest under this loan is adjusted annually based upon the standard rate announced each year by the People’s Bank of China. As of March 31, 2012, the applicable interest rate was 6.6%. We could also be exposed to the risk of rising interest rates through our future borrowing activities. This is an inherent risk as borrowings mature and are renewed at then current market rates. The extent of this risk as to our ICBC loan, or any future borrowings, is not quantifiable or predictable because of the variability of future interest rates.

Customer credit risk

When our projects other than the ZZ Joint Venture plant progress to commercial production, we will be exposed to the risk of financial non-performance by customers. To manage customer credit risk, we intend to monitor credit ratings of customers and seek to minimize exposure to any one customer where other customers are readily available. As of March 31, 2012, Hai Hua, a related party, is our only customer for syngas sales and as such, we are exposed to significant customer credit risk due to this concentration. In addition, as described under “—Results of Operation,” Hai Hua has not made the capacity fee payments to the ZZ Joint Venture since April 2011. The unpaid amount totals approximately $3.6 million as of March 31, 2012. Although we are continuing to work with Hai Hua on alternatives to resolve the issue, there can be no assurances that we will collect these amounts. Our revenue and results of operations would be adversely affected if Hai Hua continues to not pay the capacity fee or if we are otherwise unable to retain Hai Hua as a customer and secure new customers. Hai Hua’s failure to make capacity fee payments lead us to shut down the ZZ Joint Venture plant in late September 2011 and, as described above under “– Liquidity and Capital Resources – Zao Zhuang Joint Venture,” it will continue to be shut down for a period of time until we are able to either find an alternative purchaser of our production or a different use for the plant.

Item 4. Controls and Procedures

We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in our annual and periodic reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s, or the SEC, rules and forms. In addition, we designed these disclosure controls and procedures to ensure that this information is accumulated and communicated to our management, including the Chief Executive Officer and Chief Accounting Officer, to allow timely decisions regarding required disclosures.

Our management, with the participation of the Chief Executive Officer and the Chief Accounting Officer, assessed the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended, or the Exchange Act, as of March 31, 2012. Based upon that evaluation, our Chief Executive Officer and Chief Accounting Officer have concluded that our disclosure controls and procedures were effective as of March 31, 2012.

 

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Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements. Because of inherent limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Our management, with the participation of the Chief Executive Officer and the Chief Accounting Officer, evaluated the effectiveness of our internal control over financial reporting as of March 31, 2012 based on criteria set forth in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on our evaluation, management has concluded that we did maintain effective internal control over financial reporting as of March 31, 2012.

There were no changes in our internal control over financial reporting during the most recent fiscal quarter that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II

Item 1. Legal Proceedings.

On April 26, 2012, we along with Timothy E. Vail (our former CEO and a former director), David Eichinger (our former CFO), and another one of our former directors (collectively, we, Mr. Vail, Mr. Eichinger and the director are referred to as the “SES Defendants”) entered into a Settlement and Mutual Release Agreement (the “Settlement”) with Igor Olenicoff and Olen Properties, Corp. The Settlement relates to the complaint filed on September 16, 2008 by Mr. Olenicoff and Olen Properties in the United States District Court for the Central District of California, Southern Division, Case No. SACV 0801029 AG (RNBx), stemming from a purchase of shares of our common stock in a private placement. Although the SES Defendants denied the allegations asserted against them in the Action, and contended that the claims pending against them in the Action were without merit, they desired to resolve the Action without the expense and uncertainty of further litigation. In exchange for the settlement and mutual releases contemplated by the Settlement, we made an agreed payment to Mr. Olenicoff and Olen Properties. In exchange, all claims of Mr. Olenicoff and Olen against any of the SES Defendants, including without limitation any claims asserted or which could have been asserted in the Action, any claims arising out of the subject matter or prosecution of the Action, and any claims arising in any other way whatsoever, were released and all necessary papers were filed with the court to dismiss the Action, with prejudice, as against the SES Defendants. The agreed payment amount was paid by one of our insurers pursuant to our policy which was in effect at the time that the Action was filed.

 

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Item 1A. Risk Factors.

We will require substantial additional funding, and our failure to raise additional capital necessary to support and expand our operations could reduce our ability to compete and could harm our business.

As of March 31, 2012, we had approximately $19.8 million of cash and cash equivalents and approximately $13.1 million of working capital available to us. We plan to use our cash for:

 

   

general and administrative expenses;

 

   

debt service related to the ZZ Joint Venture;

 

   

working capital;

 

   

project, third party licensing and technical development expenses;

 

   

operating expenses of SRS; and

 

   

general corporate purposes.

The actual allocation and timing of these expenditures will be dependent on various factors, including changes in our strategic relationships, commodity prices and industry conditions, and other factors that we cannot currently predict. In particular, any future decrease in economic activity in China or in other regions of the world in which we may in the future do business could significantly and adversely affect our results of operations and financial condition. Although demand for methanol is increasing is some regions, markets for commodities such as methanol have been under significant pressure and we are unsure of how much longer methanol prices may remain depressed. Accordingly, our ability to finance and develop our existing projects, commence any new projects and sell products from our current operations could be adversely impacted.

We expect to continue for a period of time to have negative operating cash flows until we can generate sufficient revenues from SES China (including the the ZZ Joint Venture and the Yima Joint Ventures) or our licensing and related service projects, as well as from other projects which are under development, to cover our general and administrative expenses and other operating costs. In addition, if we are not able to complete the ZJX/China Energy transaction, we will need to aggressively pursue additional partners in China and may need to seek other equity financing or cut our operating expenses. We will also limit the development of any further projects until we have assurances that acceptable financing is available to complete the project. Despite this, we will continue to pursue the development of selective projects with strong and credible partners or off-takers where we believe equity and debt can be raised or where we believe we can attract a financial partner to participate in the project.

We can make no assurances that our business operations will develop and provide us with significant cash to continue operations. We may need to raise additional capital through equity and debt financing for any new projects that are developed, to support our existing projects and possible expansions, and to meet corporate general and administrative expenses. We cannot provide any assurance that any financing will be available to us in the future on acceptable terms or at all. Any such financing could be dilutive to our existing stockholders. If we cannot raise required funds on acceptable terms, we may not be able to, among other things, (i) maintain our general and administrative expenses at current levels; (ii) successfully develop our licensing and related service businesses; (iii) negotiate and enter into new gasification plant development contracts and licensing agreements; (iv) expand our operations; (v) hire and train new employees; or (vi) respond to competitive pressures or unanticipated capital requirements.

 

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Our results of operations may fluctuate.

Our operating results may fluctuate significantly as a result of a variety of factors, many of which are outside our control. Factors that may affect our operating results include: (i) our ability to obtain new customers and retain existing customers; (ii) the cost of coal and electricity; (iii) the success and acceptance of U-GAS® technology; (iv) our ability to successfully develop our licensing business and execute on our projects; (v) the ability to obtain financing for our projects; (vi) shortages of equipment, raw materials or feedstock; (vii) approvals by various government agencies; (viii) the inability to obtain land use rights for our projects; and (ix) general economic conditions as well as economic conditions specific to the energy industry. For example, our results of operation have been largely affected by the level of licensing and related service revenues and syngas production levels at our ZZ Joint Venture plant. Under the syngas purchase and sale contract, Hai Hua is required to pay the energy and capacity fee payments if the syngas produced by the plant meets certain minimum specifications. Hai Hua has not made the capacity fee payments to the ZZ Joint Venture since April 2011. The unpaid amount totals approximately $3.6 million as of March 31, 2012. Although we are continuing to work with Hai Hua on alternatives to resolve the issue, there can be no assurances that we will collect these amounts. In late September 2011, both the Hai Hua methanol plant and the ZZ Joint Venture plant were shut down for scheduled maintenance and the ZZ Joint Venture plant has been kept idle while we develop its revised commercial arrangement with Hai Hua. Once the definitive agreement is signed and the additional capital is received, the commercial work and physical integration work will begin. This work is expected to take about six months to complete and we will continue to keep the plant idle until this commercial work is completed. Although Hai Hua has indicated that they are committee to close a definitive agreement with us that will provide the basis for a fully integrated syngas to methanol operation in the next two months, we can have no assurances as to when or if this will be completed or when the plant will come back online.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

None.

Item 5. Other Information.

None.

Forward-Looking Statements

This Quarterly Report on Form 10-Q includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act. All statements other than statements of historical fact are forward-looking statements. Forward-looking statements are subject to certain risks, trends and uncertainties that could cause actual results to differ materially from those projected. Among those risks, trends and uncertainties are our early stage of development, our estimate of the sufficiency of existing capital sources, our ability to successfully develop our licensing business, our ability to raise additional capital to fund cash requirements for future investments and operations including SES China, our ability to reduce operating costs, the limited history and viability of our technology, commodity prices and the availability and terms of financing opportunities, our results of operations in foreign countries, our ability to diversify, our ability to complete the restructuring of the ZZ Joint Venture, our ability to obtain the necessary approvals and permits for our future projects, the estimated timetables for achieving mechanical completion and commencing commercial operations for the Yima project as well as the ability of the Yima project to produce revenues and earnings, the sufficiency of internal controls and procedures, and our ability to effect the ZJX/China Energy transaction, grow our business and generate revenues and earnings as a result of our proposed SES China and India platform initiatives, as well as our joint venture with Midas Resource Partners. Although we believe that in making such forward-looking statements our expectations are based upon reasonable assumptions, such statements may be influenced by factors that could cause actual outcomes and results to be materially different from those projected. We cannot assure you that the assumptions upon which these statements are based will prove to have been correct.

 

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When used in this Form 10-Q, the words “expect,” “anticipate,” “intend,” “plan,” “believe,” “seek,” “estimate” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. Because these forward-looking statements involve risks and uncertainties, actual results could differ materially from those expressed or implied by these forward-looking statements for a number of important reasons, including those discussed under “Risk Factors” in our Annual Report on Form 10-K for the year ended June 30, 2011, as well as in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and elsewhere in this Form 10-Q.

You should read these statements carefully because they discuss our expectations about our future performance, contain projections of our future operating results or our future financial condition, or state other “forward-looking” information. You should be aware that the occurrence of certain of the events described in this Form 10-Q could substantially harm our business, results of operations and financial condition and that upon the occurrence of any of these events, the trading price of our common stock could decline, and you could lose all or part of your investment.

We cannot guarantee any future results, levels of activity, performance or achievements. Except as required by law, we undertake no obligation to update any of the forward-looking statements in this Form 10-Q after the date hereof.

 

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Item 6. Exhibits

 

Number

  

Description of Exhibits

31.1*    Certification of Chief Executive Officer of Synthesis Energy Systems, Inc. pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended.
31.2*    Certification of Chief Financial Officer of Synthesis Energy Systems, Inc. pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended.
32.1*    Certification of Chief Executive Officer of Synthesis Energy Systems, Inc. pursuant to Rule 13a-14(b) promulgated under the Securities Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the United States Code.
32.2*    Certification of Chief Financial Officer of Synthesis Energy Systems, Inc. pursuant to Rule 13a-14(b) promulgated under the Securities Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the United States Code.

 

* Filed herewith.

 

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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.

 

    SYNTHESIS ENERGY SYSTEMS, INC.
Date: May 14, 2012     By:  

/s/ Robert Rigdon

      Robert Rigdon
      President and Chief Executive Officer
Date: May 14, 2012     By:  

/s/ Kevin Kelly

      Kevin Kelly
      Chief Accounting Officer,
      Controller and Secretary

 

42

XNAS:SYMX Synthesis Energy Sys Inc Quarterly Report 10-Q Filling

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