SYNTHESIS ENERGY SYSTEMS INC - Annual Report: 2010 (Form 10-K)
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
| þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended June 30, 2010
| o | 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: 01-33522
SYNTHESIS ENERGY SYSTEMS, INC.
(Exact Name of Registrant as Specified in Its Charter)
| Delaware (State or Other Jurisdiction of Incorporation or Organization) |
20-2110031 (I.R.S. Employer Identification No.) |
|
| Three Riverway, Suite 300, Houston, Texas (Address of Principal Executive Offices) |
77056 (Zip Code) |
Registrant’s telephone number, including area code (713) 579-0600
Securities registered pursuant to Section 12(b) of the Exchange Act:
| Common Stock, $.01 par value (Title of Class) |
NASDAQ Stock Market (Name of Exchange on Which Registered) |
Securities registered pursuant to Section 12(g) of the Exchange Act: None
Indicate by check mark whether the registrant is a well-known seasoned issuer as defined in
Rule 405 of the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section
13 of 15(d) of the Exchange Act. Yes o No þ
Indicate by check mark whether the registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate website, 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 o No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the
best of registrant’s knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
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 o | Accelerated filer o | Non-accelerated filer o | Smaller reporting company þ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
The aggregate market value of the voting stock held by non-affiliates of the registrant was
$36.7 million on December 31, 2009. The registrant had 48,386,512 shares of common stock
outstanding on September 21, 2010.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information required to be disclosed in Part III of this report is incorporated by
reference from the registrant’s definitive Proxy Statement for the 2010 Annual Meeting of
Stockholders, which will be filed not later than 120 days after the end of the fiscal year covered
by this report.
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Forward-Looking Statements
This Annual Report on Form 10-K includes “forward-looking statements” within the meaning of
Section 27A of the Securities Act 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, our ability to reduce operating costs, the
limited history and viability of our technology, the effect of the current international financial
crisis on our business, commodity prices and the availability and terms of financing opportunities,
our results of operations in foreign countries and our ability to diversify, our ability to
maintain production from our first plant in the Zao Zhuang joint venture, our ability to complete
the expansion of the Zao Zhuang project, our ability to obtain the necessary approvals and permits
for our Yima project and other future projects, our estimated timetables for achieving mechanical
completion and commencing commercial operations for the Yima project, our ability to negotiate the
terms of the conversion of the Yima project from methanol to glycol and the sufficiency of internal
controls and procedures. 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.
When used in this Form 10-K, 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,” “Management’s Discussion and Analysis of
Financial Condition and Results of Operations,” and elsewhere in this Form 10-K.
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-K 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-K after the date hereof.
PART I
Item 1. Description of Business
We are an alternative energy technology company that provides technology, equipment and engineering
services for the conversion of low rank, low cost coal and biomass feedstocks into energy and
chemical products. Our strategy is to create value through 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 transfer package and provide
proprietary equipment components to customers who plan 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, synthetic
gasoline, steam, and other byproducts (e.g., sulphur, carbon dioxide or ash).
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Our principal operating activities are currently in China, however, we are developing
opportunities in other countries including the U.S., India, Europe, Australia and Vietnam, as well
as other parts of Europe and Asia to provide our U-GAS® technology package. Our Zao
Zhuang project is our first commercial scale coal gasification plant located in Shandong Province,
China and has been in operation since February 2008 and in commercial operation since December
2008. Our Yima project is currently under construction in Henan Province, China.
Overview of U-GAS®
We have an exclusive license to the U-GAS® gasification technology from the Gas
Technology Institute, or GTI, a leading not-for-profit research and development organization
located near Chicago, Illinois. Since 1975, GTI has developed a fluidized bed
gasification technology trademarked as U-GAS®. Our U-GAS® license grants us
the worldwide exclusive right to manufacture, make, use and sell both U-GAS® coal
gasification systems and coal and biomass mixture (with coal content exceeding 60%) gasification
systems, and a non-exclusive right to manufacture 100% biomass gasification systems and coal and
biomass mixture (with biomass content exceeding 40%) gasification systems. We also have rights to
sublicense U-GAS® systems to third parties for coal, coal and biomass mixtures and for
100% biomass projects (subject to the approval of GTI, which approval shall not be unreasonably
withheld), with GTI and us to share the revenue from such third party licensing fees based on an
agreed percentage split. Our license has an initial term expiring in August 2016, with two
additional 10-year extensions exercisable at our option.
The primary advantage of U-GAS® relative to other leading gasification technologies
is its ability to produce syngas from all ranks of coal (including low rank, high ash and high
moisture coals, and lignite), many coal waste products and biomass feed stocks. This process is
highly efficient at separating carbon from waste ash, which allows for the efficient processing of
certain low rank coal and many coal waste products that cannot otherwise be utilized in the
entrained flow and fixed bed gasifiers offered by our competitors. The ability to gasify these
lower quality feedstocks unlocks economic advantages by allowing the use of lower cost, abundant, local
feedstocks while maintaining high carbon conversion and clean syngas outputs.
The U-GAS® gasification process is based on a single-stage, fluidized-bed
technology for production of low-to-medium heating value syngas from a wide array of biomass
feedstocks and coals using oxygen, oxygen enriched air, or air in the gasification reaction. Our
Zao Zhuang and Yima projects utilize oxygen in the gasification reaction. U-GAS®
technology was developed for gasification of all ranks of coal as well as coal and biomass blends.
In
the
U-GAS®
gasification process, the feedstock is processed and conveyed into the
gasifier vessel. Within the fluidized bed, the feedstock reacts with steam, air and/or oxygen and the
temperature is controlled to maintain high carbon conversion and non-slagging conditions for the
ash. The U-GAS® process accomplishes four important functions in a single-stage,
fluidized-bed gasifier: it decakes, devolatilizes and gasifies the feedstock, and if necessary, agglomerates
and separates ash from the reacting coal. The operating pressure of the gasifier depends on the end
use for the syngas and may vary from 3 to 40 bars (45 to 585 psia) or more. After cleaning, the
syngas can
be used for many applications such as power, SNG, methanol, DME, glycol, ammonia, DRI,
synthetic gasoline, and steam. Other byproducts such as sulphur, carbon dioxide or ash can also be
sold.
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During operation, the feedstock is gasified rapidly within the fluidized bed and produces a gaseous
mixture of hydrogen, carbon monoxide, carbon dioxide, water vapor and methane, in addition to small
amounts of hydrogen sulfide and other trace impurities. The char material is removed from the
bottom of the gasifier. Reactant gases, including steam, air, and/or oxygen are introduced into
the gasifier and are used to fluidize the feedstock inside the reactor. Ash is removed by gravity
from the fluidized bed and discharged into a system for depressurization and disposal. The gasifier
maintains a low level of carbon in the bottom ash discharge stream, making overall carbon
conversion of 90% or higher. Cold gas efficiencies of over 80% and carbon conversion of over 95%
have been repeatedly demonstrated.
Fines carried over from the fluidized bed are separated from the product syngas prior to heat
recovery and syngas cleanup. The product syngas is essentially free of tars and oils due to the
temperature and residence time of the gases in the fluidized bed, simplifying downstream heat
recovery and gas cleaning operations.
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
(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.
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 sub licensee 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 (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 with the
year ended 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.
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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.
Other Services
GTI also offers various technical services including but not limited to laboratory testing of
coal samples and plant design review. While we have no obligations to do so, we have requested GTI
to provide various services including: (i) developing an industry-standard process model for
performance and cost evaluations of U-GAS®, (ii) replenishing and enlarging the
intellectual property portfolio for U-GAS® technology and (iii) assisting us with
appropriate design support for gasification opportunities that would include fuel feeder, gasifier,
solids separation and solids handling systems sizing and configuration.
Business Strategy
The key elements of our business strategy include:
| • | Executing on existing projects in China. We are continuing to implement operational
measures to improve the financial performance of our Zao Zhuang project in the near term, while also continuing to evaluate alternatives to better position the project to be commercially and financially successful in the future.
These alternatives include the possible expansion of the plant to produce other
products for other customers. We also intend to continue to leverage our 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, from China, India, Australia, Vietnam and the United States.
We are also continuing the ongoing
construction of our Yima project, and are working to restructure our joint venture
agreements to change the scope of the project from methanol to glycol production. |
| • | 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 transfer package and provide proprietary equipment
components to customers who plan 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 SNG, 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 plan 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, developing new relationships with
strategic partners and developing new downstream coal-to-chemicals and coal-to-energy
products which may expand our initial focus to include facilities producing SNG, methanol to
gasoline, or MTG, glycol, power and reducing gas for the steel
industry. We are exploring new markets for entry such as the U.S., India, Australia, Vietnam, and other parts of Europe
and Asia. 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. |
| • | Developing value where we have a competitive advantage and have access or 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 India, the
U.S., China, Turkey and Australia. We are working to develop structured transactions that include
securing options to these feedstock resources. For example, we are currently in discussions
regarding several projects in Inner Mongolia, China 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 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 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.
|
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| • | Continue to develop and improve U-GAS® technology. We are continually seeking
to improve the overall plant availability, plant efficiency rates and fuel handling
capabilities of the existing
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 our proprietary coal characterization testing
as well as selective commercial scale testing in our Zao Zhuang
facility. In addition, 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 well as through
patenting improvements tested at our Zao Zhuang facility, and improvements resulting from
integration of our technology with downstream processes. To date, we have filed 13 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. 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 on projects until we
have assurances that acceptable financing is available to complete the project. Until the
capital markets improve, our strategy will be to operate using our current capital resources
and to leverage the resources of financing partners. |
Target Markets
China
We believe that China offers immediate opportunities to develop U-GAS®-based coal
gasification projects. Coal is China’s most abundant indigenous energy resource, including a ready
supply of low rank coal. According to the BP Statistical Review of World Energy report, as of
yearend 2009, China’s recoverable coal reserves amounted to 114.5 billion tonnes, including 52.3
billion tonnes of lower grade sub-bituminous and lignite coals. In addition, the Chinese government
is promoting the expansion of the domestic supply of chemical products and transportation fuels
derived from coal. Methanol derived from coal is used primarily as a commodity chemical used in
manufacturing a wide range of products from formaldehyde and acetic acid to pharmaceuticals and
plastics and is also used to a lesser extent as a natural gas substitute in power generation, to
further process into DME as well as an oxygenate for blending into automotive gasoline. China’s
methanol consumption has grown from 2.6 million tonnes in 1999 to 16.3 million tonnes in 2009.
China has put in place standards that control the use of methanol as a fuel at 100% and 85%. In
April 2009, China approved the national standard which regulates the quality, transportation,
packaging and storage of methanol to be used as fuel for motor vehicles. In July 2009, China
released the standard that controls the use of methanol as a fuel at 85% concentration with
gasoline and is expected to put in place standards that control the use of methanol as a fuel at
15% concentration with gasoline. Although these standards do not mandate the use of methanol, we
expect that they will act as a catalyst for further growth in the development of infrastructure,
fuelling stations, and vehicles in China which can accommodate higher proportion methanol blends.
We believe that methanol as a blending agent at 15% concentration with gasoline is positive for the
long-term outlook for methanol demand. With China demonstrating the viability of methanol blending
in gasoline, we believe this will accelerate methanol consumption and increase methanol prices.
This should also increase the potential for methanol blending to be adopted in other countries.
DME consumption in China was approximately 2.3 million tonnes per year in 2009 and is expected
to increase as DME becomes more widely used as a fuel substitute for liquefied petroleum gas, or
LPG, and diesel. Currently, 95% of the DME produced in China is used as LPG and less than 1% is
used as diesel. The growth in the DME to diesel market is expected to outpace DME in LPG and become
the primary use of DME in the future due to DME’s favorable physical properties. Due to the
long-term growth prospects of the methanol and DME markets in China,
we plan to provide technology to projects in these markets.
We believe coal to SNG will grow in China due to China’s limited natural gas resources.
According to the 2010 International Energy Outlook from the U.S. Energy Information Administration,
China’s natural gas consumption is estimated to reach 6.28 trillion cubic feet in 2020 but domestic
production of natural gas is estimated to be 3 trillion cubic feet in 2020. Today, coal to SNG
projects are beginning to progress and the Chinese government supports these types of coal to
energy projects. Due to this estimated shortfall in natural gas, combined with the
current encouragement from the Chinese government for these projects, we believe there is potential
in China for several of these SNG projects which are anticipated to be very large scale as compared
to previous coal-to-chemical projects that have been built in China. In addition, we believe many
of these projects will be located in regions such as Inner Mongolia where very low cost lignite
coals can be made available and are necessary to reduce the production cost of SNG.
Our technology is well suited for this location due to its ability to process these low quality coals and to meet local requirements for clean production of
syngas, without tars and oils produced by other technologies, and very low water usage for the overall process. In addition, Inner Mongolia government regulations
permit higher quality coals to be made available to those companies that can cleanly gasify the low quality lignite coals. This creates the potential to sell the high
quality coals directly to the market while operating the project on low cost lignite, further enhancing the overall financial performance and value created
by the project.
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In addition to these applications, new technologies such as coal-to-glycol are encouraged.
Glycol is mainly used for making polyester and, to a lesser extent, coolant and unsaturated
polyester resins. China’s glycol demand exceeded 7 million tonnes in 2009 and more than 70% of
China’s glycol demand is satisfied through imports. We may provide technology or develop projects
that integrate coal-to-glycol technology with our U-GAS® coal gasification systems.
United States
We believe that chemicals and fuels such as methanol, synthetic gasoline, synthetic diesel,
DME and SNG made from coal, biomass, and coal/biomass blends can cleanly and economically
supplement petroleum and natural gas based products in the United States when utilizing very low
cost coal or biomass feedstocks. For example, we have licensed our technology in the U.S. for a
project that plans to convert cellulosic biomass to ethanol and we are exploring additional
opportunities where potential project partners may desire to apply the biomass capability of
U-GAS® for generating carbon neutral syngas that can be used for a variety of purposes.
Concerns over greenhouse gas emissions, such as carbon dioxide, continue to increase, particularly
with respect to coal-based consumption. For example, the U.S. House of Representatives has approved
adoption of the American Clean Energy and Security Act of 2009, also known as the “Waxman-Markey
cap-and-trade legislation,” for the purposes of controlling and reducing emissions of greenhouse
gases in the United States by establishing an economy-wide cap on emissions of these gases in the
United States and requiring most sources of emissions to obtain emission “allowances” corresponding
to their annual emissions of such gases, although the U.S. Senate has still not considered this
legislation. We believe that coal gasification which enables the successful utilization or
sequestration of these gases and biomass gasification which could produce a carbon neutral syngas
that can be converted into chemicals, transportation fuels, and power generation fuels could enable
us to avoid incurring significant costs associated with new legislation, thereby becoming a low
cost producer.
India
We believe that India appears poised for coal-based gasification growth. Historically, there
has been limited coal gasification in India due to the cost of competing alternatives derived from
oil and natural gas and due to the challenging nature of the high ash Indian coals to be gasified
in competing gasification technologies. India has substantial low rank coal resources. Our recent
business development activities in India indicate that coal gasification is poised for growth due
to increasing natural gas prices, sustained economic growth and China’s aggressive adoption of coal
gasification. We believe that there are significant opportunities in India and that
U-GAS® has competitive advantages due to India’s high ash coals that other more
established technologies are not as suitable for. India also offers a base for high quality
engineering technical resources at low cost.
Business Development, Engineering and Project Management
Business Development Staff
We currently employ a staff of experienced business development professionals in China and the
U.S. The business development team is focused on the disciplined development of new business for
gasification projects, licensing opportunities and other technology products and services that
maximize the advantages of U-GAS® technology. Members of the team have either led or
participated in the development of multiple coal and natural gas power projects, coal gasification
projects, chemical and nuclear projects and gasification licensing transactions in China and other
countries over the past two decades. In addition, we utilize consultants to supplement our staff
in developing relationships with strategic partners and potential customers.
Technology Engineering and Project Management Staff
Our operations in China have given us the opportunity to build a leading gasification
engineering team. Coal has been an important part of the Chinese economy for many decades. This has
spawned a large community of engineers with experience in coal gasification and industrial process
design and implementation. During the last few decades, China has developed an entire university
program dedicated to coal energy and process engineering, resulting in a ready source of high
quality, experienced engineers to work on advanced gasification technologies such as
U-GAS®. During fiscal 2010, we strengthened our technology team and engineering
execution expertise to advance our technology and to support additional licensing and joint venture
opportunities. We are also enhancing in-house technology development, intellectual property
patenting opportunities, and design improvement capabilities through structured technology
evaluation procedures.
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Additionally, we have built an experienced project management team which includes several
members with international engineering, procurement and construction experience. We intend to use
this engineering and project management team to conceptualize, design and build gasification
projects in our target markets and to develop and protect the development of our technology. We
believe that this capability represents a key advantage for marketing to multi-national firms
throughout the project development cycle and enables pre-development engineering work to be done
with a faster cycle time and at a substantially lower cost. In addition to our technology
engineering team, we leverage our resource capability through partnering with international
engineering and procurement companies in China and other regions.
Technology Licensing and Related Services
In April 2010, we executed our first third party technology licensing agreement. Under this
agreement, we are providing U-GAS® technology for a commercial scale biomass-to-biofuels
project in the U.S. In addition we and the licensee entered into a separate multi-site agreement
whereby the licensee has the option to license our biomass gasification technology for five
additional commercial scale biomass-to-biofuels projects within North America. As part of the
license agreement, we are providing the biomass gasification process design package, and may
provide some key proprietary gasification system equipment components and technical services. We
intend to place increased focus on development of licensing opportunities for our proprietary
U-GAS® technology on a global basis with a focus on India, China, Turkey, the U.S.,
Australia and Vietnam, as well as other parts of Europe and Asia, due to their large low rank coal
resources. In December 2009, we entered into a strategic alliance agreement with Coalworks
Limited, an emerging Australian energy developer, to develop the first coal gasification and
liquefaction plant for Coalworks at Oaklands, New South Wales, Australia utilizing our
U-GAS® technology. Pursuant to the strategic alliance agreement, we have recently
delivered our feasibility study for this project and plan to discuss next steps with Coalworks. We
also have recently signed an agreement with another Australian company that is in the process of
shipping coal to our Zao Zhuang facility for testing.
In the U.S., we believe there may be a significant near term opportunity for us to leverage
the capability of U-GAS® to efficiently gasify biomass to make renewable fuels. Today’s
regulatory environment in the U.S. is favorable for these types of projects because increased
environmental concerns are creating a market demand for renewable fuels and companies are under
increasing pressure to reduce their carbon footprint. 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
provide additional insight into project development activities, which may allow us to make
selective equity investments in such projects in the future and also the development of integrated,
modular product offerings. We have also initiated discussions with companies that have expressed
interest in partnering with us on a strategic basis. 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.
Current Operations and Projects
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. (which was acquired by China National Offshore Oil Corporation in
September 2009), or Hai Hua, which established Synthesis Energy Systems (Zao Zhuang) New Gas
Company Ltd., or 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 95.5% of the ZZ
Joint Venture and Hai Hua owns the remaining 4.5%. We have contributed approximately $27.0 million
in equity capital to the ZZ Joint Venture and Hai Hua has contributed approximately $1.3 million in
equity capital. The remainder of the ZZ Joint Venture’s capital has been funded by intercompany
loans from us. For the first 20 years after the commercial operation date of the plant, the net
profits and losses of the ZZ Joint Venture will be distributed to us and to Hai Hua based on our
ownership interest. After the initial 20 years, the profit distribution percentages will be
changed, with us receiving 10% of the net profits/losses of the ZZ Joint Venture and Hai Hua
receiving 90%. We consolidate the results of the ZZ Joint Venture in our consolidated financial
statements.
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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, Hai
Hua has operated at a reduced rate of syngas consumption. Hai Hua used approximately 35% to 45% of
the syngas guarantee capacity during 2009 and has forecasted the same level of syngas consumption
through December 2010.
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 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.
In order to make up for the reduced energy fee, the ZZ Joint Venture entered into an
additional agreement with Hai Hua whereby the cost of operating the plant’s air separation unit, or
ASU, can be shared between the two parties based on the oxygen consumption of the respective
parties over the relevant period. The ZZ Joint Venture began to provide oxygen to Hai Hua in
September 2009. This cost sharing arrangement has increased the ZZ Joint Venture’s byproduct
revenues and has reduced the operating costs of Hai Hua by allowing the parties to operate only one
ASU instead of both parties operating their respective ASU’s at low capacity.
To date, Hai Hua has been unable to offtake the volume of syngas originally expected for the
original plant design and the plant has incurred operating losses. We do not foresee Hai Hua’s
volume offtake changing significantly in the near term. In an effort to improve the return on our
investment in this plant, we are evaluating alternative products and partnership structures for a
possible expansion of the ZZ Joint Venture plant to produce products such as glycol. We have
entered into an investment cooperation framework agreement with a
local Zao Zhuang area coal mining
company which outlines proposed terms for a structure to expand the plant. We do not expect any
additional equity for an expansion would be required from us as we continue to expect to
contribute our 95.5% equity interest toward the expansion with third parties contributing all the
additional required equity to expand the 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 for us 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. We are also continuing to evaluate
alternatives to improve the financial performance of the ZZ Joint Venture. 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. In addition, a
provincial level coal company has also expressed interest in becoming our partner on this
expansion. We are working with local government entities and prospective partners to finalize the
partnership and project structure.
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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 their 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.
During this first quarter of fiscal 2011, Yima expressed their intent to convert the existing
project from methanol production to glycol production. Yima has communicated their belief that the
prospect for strong economic performance of the plant can be improved by modifying the backend of
the project to make glycol. This is due to the relatively low margins on methanol today versus
the more robust margins that could be achieved from glycol production. In addition, Yima has
recently acquired a nearby coal to methanol facility and is looking to diversify and sees glycol as
a potentially more profitable alternative. We have indicated to Yima that we would be willing to
support this scope change if both parties can agree upon appropriate modifications to the joint
venture contracts that can improve our overall risk and return without requiring any additional
capital investment from us. Yima’s project management team believes that this change can be
executed without delaying the original schedule for commercial operation. We have agreed to work
diligently with Yima to restructure the agreements as necessary to achieve these goals.
Construction activities for site preparation are currently underway and a Chinese engineering
company has been selected for the project’s engineering work. The remaining construction and
commissioning of the project is expected to take approximately two years. Yima is the project
management leader for the project and has indicated their belief that the change in the scope of
the project would not delay this schedule. 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 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.
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.
Golden Concord Joint Venture
Our joint venture with Golden Concord, or the GC Joint Venture, was formed to (i) develop,
construct and operate a coal gasification, methanol and DME production plant utilizing
U-GAS® technology in the Xilinghote Economic and Technology Development Zone, Inner
Mongolia Autonomous Region, China and (ii) produce and sell methanol, DME and the various
byproducts of the plant, including fly ash, steam, sulphur, hydrogen, xenon and argon. At the time
of the formation of the GC Joint Venture, we agreed to contribute approximately $16.3 million in
cash in exchange for a 51% ownership interest in the GC Joint Venture, and Golden Concord agreed to
contribute approximately $16.0 million in cash for the remaining 49% ownership interest in the GC
Joint Venture. We consolidate the results of the GC Joint Venture in our consolidated financial
statements. We have funded a total of $3.4 million of our required equity contribution and Golden
Concord has additionally funded approximately $3.1 million of its equity contribution as of June
30, 2010. These funds were used for engineering and initial construction work for this project,
land use rights, and for its development expenses.
We are continuing to develop this project and have shifted our focus to include end products
such as SNG, glycol, olefins, methanol and DME that can be economically produced from local low
rank coal when utilizing the U-GAS® technology and which are of strategic interest to
possible partners in China, including state owned, private and publicly traded gas companies. We
have entered
into a cooperation agreement with a local Chinese company who is assisting with obtaining
certain necessary government approvals and who may desire to continue the development of the
project.
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Business Concentration
Hai Hua is currently our sole customer for syngas. In addition, our noncurrent assets in China
accounted for $69.1 million of the $72.5 million of consolidated total noncurrent assets which
includes property, plant and equipment, our investment in the Yima Joint Ventures and other assets.
Competition
The primary competition for the U-GAS® gasification technology are the fixed bed
and moving bed technologies, which were developed and implemented commercially in the 1960’s. The
Lurgi fixed bed slagging and non-slagging gasification technology can operate on more difficult
coals containing high ash and high moisture content, however, the gasifiers require lump-size
non-caking coals for their feed, which results in a significant portion of the coal being rejected
during preparation. Additionally, fixed bed gasifiers of Lurgi produce a large amount of tars and
oils that must be removed from the syngas. These two inefficiencies result in increased capital and
operating costs compared to the U-GAS® technology. The U-GAS® fluidized bed
technology operates efficiently with high ash and high moisture coals without any coal rejection
and without the formation of tars and oils. Older technology, such as the Winkler and High
Temperature Winkler fluidized bed gasifiers, are being marketed in specific regions like China,
Russia, and North Korea, but the Winkler technology has not been advanced in the last 30 years.
The Winkler technology has lower cold gas efficiencies and lower operating pressure capabilities
compared to U-GAS®. Additionally, several companies, including KBR, are developing
gasification technologies targeted for low quality coals which are still in the research and
development phase and have no commercially operating gasifiers.
In the rest of the global gasification market, the largest technology providers are General
Electric, Shell, Siemens and ConocoPhillips. These entrained flow slagging gasifier technologies
operate efficiently on more expensive high grade bituminous or sub-bituminous coals as feedstocks,
but lack experience or capability with the more difficult high ash and high moisture coals and with
biomass. Although we do not directly compete with the multi-national industrial corporations, their
activities in the marketplace may negatively impact our operations and our ability to attract
quality projects. In addition, there are several Chinese companies that utilize similar entrained
flow slagging gasification technologies that have built commercial scale plants in China.
Increased competition could result in a loss of contracts and market share. Either of these results
could seriously harm our business and operating results. In addition, there are a number of
gasification and conventional, non-gasification, coal-based alternatives for producing heat and
power that could compete with our technology in specific situations.
Suppliers
We are in the process of developing an internal capability that allows for the cost effective
and timely sourcing of equipment for our current projects in China. China has rapidly expanded its
industrial manufacturing and construction capabilities which has reduced the cost and build time of
traditional sources of supply. We have been successful in locating and contracting with a number of
key suppliers of major equipment and services.
Research and Development
We may incur internal and third-party research and development costs related to the
advancement of our U-GAS® technology and related processes. We plan to continue certain
research and development initiatives that support our strategies and project development activities
with a goal of offering our customers the best and most efficient clean coal solutions. Generally,
our internal costs are included in general and administrative expenses and third-party costs are
included in project and technical development expenses on our consolidated statements of
operations.
Governmental and Environmental Regulation
Our operations are subject to stringent federal, state and local laws and regulations
governing the discharge of materials into the environment or otherwise relating to environmental
protection. Numerous governmental agencies, such as the U.S. Environmental Protection Agency, or
the EPA, and various Chinese authorities, issue regulations to implement and enforce such laws,
which often require difficult and costly compliance measures that carry substantial administrative,
civil and criminal penalties or may result in injunctive relief for failure to comply. These laws
and regulations may require the acquisition of a permit before operations at a
facility commence, restrict the types, quantities and concentrations of various substances
that can be released into the environment in connection with such activities, limit or prohibit
construction activities on certain lands lying within wilderness, wetlands, ecologically sensitive
and other protected areas, and impose substantial liabilities for pollution resulting from our
operations. We believe that we are in substantial compliance with current applicable environmental
laws and regulations and we have not experienced any material adverse effect from compliance with
these environmental requirements.
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China
In China, the development and construction of gasification facilities is highly regulated. In
the development stage of a project, the key government approvals relate to the project’s
environmental impact assessment report, feasibility study (also known as the project application
report) and, in the case of a Sino-foreign joint venture, approval of the joint venture company’s
joint venture contract and articles of association. Approvals in China are required at the
municipal, provincial and/or central government levels depending on the total investment in the
project and subject to industry specified criteria. Due to the global economic recession, China’s
State Council issued guidance related to the pace of new project approvals including wind power,
polysilicon, steel cement, glass and coal to methanol and DME. At the same time, the government
continues to encourage newer technologies for coal to SNG, glycol, polypropylene, olefins and
liquid fuels. Although we do not believe that China’s project approval requirements and slowing of
approvals for new coal to methanol and DME projects will invalidate any of our existing permits,
our future joint ventures will have to abide by these guidelines.
In April 2009, the Chinese government approved a new national standard for methanol to be used
in motor vehicle fuel to become effective on November 1, 2009. The standard includes the technical
properties, testing methods, examination procedures as well as identification, packaging,
transportation, storage and safety requirements for methanol that is to be used in motor vehicle
fuel. Further, in May 2009, the Chinese government approved a new national standard, effective
December 1, 2009, for M85 methanol gasoline, which specifies, among other things, the technical
requirements, testing methods, examination procedures, identification, packaging, transportation,
storage and safety requirements for methanol gasoline that comprises between 84%-86% of methanol
and between 14%-16% of gasoline in terms of volume and other performance enhancing additives, for
use in motor vehicles. According to the China Petroleum and Chemical Industry Association, it is
likely that in 2010 national standards for M15 — 15% percent methanol and 85% gasoline — will be
promulgated. We are monitoring this development closely. Although these standards do not mandate
the use of methanol, we expect that they will act as a catalyst for further growth in the
development of infrastructure, fueling stations, and vehicles which can accommodate higher
proportion methanol blends. These recent developments are positive for the long term outlook for
methanol demand, and with China demonstrating the viability of methanol blending in gasoline, this
should also increase the potential for methanol blending to be adopted in other countries. This
could lead to expanded syngas application in methanol production as well as in the licensing
business of coal gasification technologies, for which we believe that we are uniquely positioned to
benefit from.
United States
In the United States, carbon dioxide may be regulated in the future by the EPA as an air
pollutant requiring us to obtain additional permits, meet additional control requirements, and
install additional environmental mitigation equipment, which could adversely affect our financial
performance. The United States Supreme Court recently decided a case in which it ruled that carbon
dioxide is an air pollutant under the Clean Air Act for the purposes of motor vehicle emissions.
The lawsuit sought to require the EPA to regulate carbon dioxide in vehicle emissions. If the EPA
regulates carbon dioxide emissions by plants such as ours, we may have to apply for additional
permits or we may be required to install carbon dioxide mitigation equipment or take other as yet
unknown steps to comply with these potential regulations. Compliance with any future regulation of
carbon dioxide, if it occurs, could be costly and may delay our development of projects in the U.S.
Even if we obtain all of our necessary permits, the air quality standards or the interpretation of
those standards may change, thus requiring additional control equipment or more stringent
permitting requirements. Such requirements could significantly increase the operating costs and
capital costs associated with any future development, expansion or modification of a plant.
New environmental laws and regulations may be adopted, such as the imposition of a carbon tax,
a cap and trade program requiring us to purchase carbon credits, or measures that would require
reductions in emissions, raw materials, fuel use or production rates. In particular, the U.S. House
of Representatives recently approved adoption of the American Clean Energy and Security Act of
2009, also known as the “Waxman-Markey cap-and-trade legislation,” for the purposes of controlling
and reducing emissions of greenhouse gases in the United States by establishing an economy-wide cap
on emissions of these gases in the United States and requiring most sources of emissions to obtain
emission “allowances” corresponding to their annual emissions of such gases, with the number of
emission allowances issued each year declining as necessary to meet the overall emission reduction
goals.
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In addition, in the United States, certain environmental permits that are required for new
facilities must be issued prior to the commencement of construction, but issuance of these permits
is subject to unpredictable delays, contests and even, in some cases, denial. Our facilities will
require permits for air emissions and wastewater discharges, as well as other authorizations, some
which must be issued before construction commences. Although we believe that there will be public
support for our projects, the permitting process is complex and time consuming and the issuance of
permits is subject to the potential for contest and other regulatory uncertainties that may result
in unpredictable delays.
Although we have been successful in obtaining the permits that are required at a given stage
with respect to the ZZ Joint Venture, the GC Joint Venture and the Yima Joint Ventures, any
retroactive change in policy guidelines or regulations or an opinion that the approvals that have
been obtained are inadequate, either at the federal or state level in the United States, or the
municipal, provincial or central government levels in China, could require us to obtain additional
or new permits or spend considerable resources on complying with such regulations. Other
developments, such as the enactment of more stringent environmental requirements, changes in
enforcement policies or discovery of previously unknown conditions, could require us to incur
significant capital expenditures or suspend operations.
Employees
As of June 30, 2010, we had 197 employees, including 142 employees of the ZZ Joint Venture.
None of our employees are represented by any collective bargaining unit. We have not experienced
any work stoppages, work slowdowns or other labor unrest. We believe that our relations with our
employees are good.
Item 1A. Risk Factors
Risks Related to Our Business
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 June 30, 2010, we had $42.6 million of cash and cash equivalents. We expect to continue
to have negative cash flows until we can generate sufficient revenues from our licensing and
related service projects, as well as from the ZZ Joint Venture, the Yima Joint Ventures and other
projects which are under development, to cover our general and administrative expenses and other
operating costs. 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; and |
| • | general corporate purposes. |
The actual allocation of and the timing of the 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, including potential acquisitions of
existing plants, facilities or mines. Depending on the expenditures required for our joint
ventures, feasibility and engineering design work for these or other projects and any of the above
factors, our expenditures could exceed our current cash balance.
We will need to raise additional capital through equity and debt financing for any new
projects that are developed, to support our existing projects and any possible expansions thereof
and for general and administrative expenses resulting from our existing operations. We may also
need to raise additional funds sooner than expected in order to fund more rapid expansion, cover
unexpected construction costs or delays, respond to competitive pressures or acquire complementary
energy related products, services, businesses and/or technologies. In addition, we may attempt to
secure project financing in order to construct additional plant facilities. Such financing may be
used to reduce the amount of equity capital required to complete the project.
We cannot assure you that any financing will be available to us in the future on acceptable
terms or at all. 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)
negotiate and enter into new gasification plant development contracts; (iii) develop licensing and
related service or
technology products; (iv) expand our operations; (v) hire and train new employees; or (vi)
respond to competitive pressures or unanticipated capital requirements.
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We are in an early stage of our development and our business strategies may not be accepted in
the marketplace and may not help us to achieve profitability.
We are in an early stage of our development and our lack of operating history or meaningful
revenue precludes us from forecasting operating results based on historical results. Our proposed
business strategies described in this annual report incorporate our senior management’s current
best analysis of potential markets, opportunities and difficulties that face us. No assurance can
be given that the underlying assumptions accurately reflect current trends in our industry or our
customers’ reaction to our products and services or that such products or services will be
successful. Our business strategies may and likely will change substantially from time to time
(such as our recent emphasis on licensing and related product offerings) as our senior management
reassesses its opportunities and reallocates its resources, and any such strategies may be changed
or abandoned at any time. If we are unable to develop or implement these strategies through our
projects and our U-GAS® technology, we may never achieve profitability which could
impair our ability to continue as a going concern. Even if we do achieve profitability, it may not
be sustainable, and we cannot predict the level of such profitability.
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. In addition, our results
of operation in the near future will be largely affected by the level of licensing and related
service revenues and syngas production levels at our Zao Zhuang plant. Under the syngas purchase
and sale contract, Hai Hua is only required to pay the energy and capacity fee payments (described
in “Description of Business — Current Operations and
Projects — Zao Zhuang Joint Venture — Syngas Purchase and
Sale Agreement”) if the syngas produced by the plant meets certain minimum specifications once the
plant is in commercial operation. Any failure of this plant to meet these requirements would mean
that Hai Hua would not be required to make the energy and capacity fee payments which could in turn
have a material adverse effect on our results of operations.
We may not be successful developing opportunities to license the U-GAS® technology.
Under the terms of the New Agreement with GTI, we are permitted to sell U-GAS®
technology licenses, components and services to third parties and we have already identified
potential opportunities in the U.S., India, Australia and Vietnam, as well as other parts of Europe
and Asia. We are only recently begun to develop our licensing and related service business and many
of the relationships with potential customers are still being cultivated. Our ability to
successfully develop licensing opportunities for the U-GAS® technology is uncertain and
depends upon the strength of global markets as well as our continued capability to deliver
technology licenses, components and services primarily through our China operations center. In
addition, as with our other projects, we will be exposed to the risk of financial non-performance
by our customers. Although 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, there can be no assurances that we will be able to do
so and our inability to do so could have a material adverse effect on our business and results of
operation.
We have performance guarantees under our third party licensing agreements.
Under our license agreements, we typically provide a guarantee of the performance of the plant
which is using the U-GAS® technology. Should we become liable under the performance
guarantee, we could be held liable for the customer’s damages and we may be required to re-perform
certain affected work and services. Although our liability for the performance guarantee is
typically capped at 50% of the fees that we receive under the license
agreement, our liability for damages or re-performance of our work could still have a material adverse effect on our
business, financial condition and results of operations.
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Limited continuing rights of prior licensees of U-GAS® technology could limit the
exclusivity of our license and materially adversely affect our business and results of operations.
Prior to granting us an exclusive license, GTI licensed U-GAS® technology to five
other entities, all of which have been terminated. We rely on our exclusive license with GTI for
U-GAS® technology to negotiate, enter into and implement contracts with partners and
customers and to further develop our business and operations. Certain predecessor licensees may
have limited continuing rights under their license agreements with GTI or may have sublicensed the
technology. Although neither we nor GTI are aware of any continued use or development of
U-GAS® technology by any of these prior licensees or sublicensees, it is possible that
the exclusivity of our license of U-GAS® technology may be restricted in certain areas
of the world. If such rights do in fact exist, GTI does not intend to provide technical or any
other support to such licensees. Despite GTI’s intentions, any such limitations on the exclusivity
of the license could have a materially adverse effect on our business and results of operations.
We face the potential inability to protect our intellectual property rights which could have a
material adverse effect on our business.
We rely on proprietary technology licensed from GTI. Our license agreement with GTI for
U-GAS®
technology (described under “Description of Business—GTI Agreements—License Agreement”) is a
critical component of our business. All of the prior patents granted around U-GAS®
technology have expired. We are improving the technology and we plan to create new technologies
around the core U-GAS® technology and have applied for new patents for these
improvements and new technologies. Proprietary rights relating to U-GAS® technology are
protected from unauthorized use by third parties only to the extent that they are covered by valid
and enforceable patents, maintained within trade secrets or maintained in confidence through
legally binding agreements. There can be no assurance that patents will be issued from any pending
or future patent applications owned by or licensed to us or that the claims allowed under any
issued patents will be sufficiently broad to protect our technology. In addition, our ability to
obtain patent protection may be affected by the terms of the New Agreement. In the absence of
patent protection, we may be vulnerable to competitors who attempt to copy our technology or gain
access to our proprietary information and technical know-how. In addition, we rely on proprietary
information and technical know-how that we seek to protect, in part, by entering into
confidentiality agreements with our collaborators, employees, and consultants. We cannot assure you
that these agreements will not be breached, that we would have adequate remedies for any breach or
that our trade secrets will not otherwise become known or be independently developed by
competitors.
Proceedings initiated by us to protect our proprietary rights could result in substantial
costs to us. We cannot assure you that our competitors will not initiate litigation to challenge
the validity of our patents, or that they will not use their resources to design comparable
products that do not infringe upon our patents. Pending or issued patents held by parties not
affiliated with us may relate to our products or technologies. We may need to acquire licenses to,
or contest the validity of, any such patents. We cannot assure you that any license required under
any such patent would be made available on acceptable terms or that we would prevail in any such
contest. We could incur substantial costs in defending ourselves in suits brought against us or in
suits in which we may assert our patent rights against others. If the outcome of any such
litigation is unfavorable to us, our business and results of operations could be materially and
adversely affected.
Continued disruption in U.S. and international economic conditions and in the commodity and
credit markets may adversely affect our business, financial condition and results of operation.
The global economy has experienced a significant contraction, with an almost unprecedented
lack of availability of business and consumer credit, which has seriously impeded our ability to
obtain financing for our projects. This current decrease and any future decrease in economic
activity in the United States, 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 in a number of other ways. Any decline in economic conditions may reduce the demand or
prices for the production from our plants or the terms of licensing agreements. Our industry
partners and potential customers and suppliers may also experience insolvencies, bankruptcies or
similar events. In particular, the market for commodities such as methanol is under significant
pressure and we are unsure of how much longer this will continue. As a direct result of these
trends, our ability to finance and develop our existing projects, commence any new projects and
sell our products and negotiate licensing opportunities may continue to be adversely impacted. In
addition, the increased currency volatility could significantly and adversely affect our results of
operations and financial condition. Any of the above factors could also adversely affect our
ability to access credit or raise capital even if the capital markets improve.
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The U.S. government’s current plans to address the financial crises may not be effective to
stabilize the financial markets or to increase the availability of credit.
In response to the financial crises affecting the banking system and financial markets and
going concern threats to investment banks and other financial institutions, legislation was enacted
that provides the U.S. Treasury the authority to, among other things, purchase mortgage-backed and
other securities from financial institutions for the purpose of stabilizing the financial markets.
Additional legislation has been adopted to expand this power. Despite these plans, the
capital markets have continued to experience extreme levels of volatility. There can be no
assurance what impact these plans ultimately will have on the financial markets. If the actions
taken by the U.S. Treasury are not successful in stabilizing the financial markets and increasing
the availability of credit, it could have a material adverse effect on our business, financial
condition and results of operations or the trading price of our common stock.
The termination of our license agreement with GTI or any of our joint venture agreements or
licensing agreements would materially adversely affect our business and results of operations.
The New Agreement, our joint ventures in China and our licensing and related service business
are essential to us and our future development. The New Agreement terminates on August 31, 2016,
but may be terminated by GTI upon certain events of default if not cured by us within specified
time periods. In addition, after the two ten year extension periods provided under the License
Agreement, which are exercisable at our option, we cannot assure you that we will succeed in
obtaining an extension of the term of the license at a royalty rate that we believe to be
reasonable or at all. Our joint venture agreements do not terminate for many years, but may be
terminated earlier due to certain events of bankruptcy or default, or, in the case of Zao Zhuang,
if the purchase and sale contract for syngas is terminated. Termination of any of our joint
ventures would require us to seek another collaborative relationship in that territory. We cannot
assure you that a suitable alternative third party would be identified, and even if identified, we
cannot assure you that the terms of any new relationship would be commercially acceptable to us.
In addition, any of our license agreements could be terminated by our customer if we default under
the terms of the agreement and any such termination could have a material adverse affect on our
business and results of operations.
Our projects and projects of our customers are subject to an extensive governmental approval
process which could delay the implementation of our business strategy.
Selling syngas, methanol, glycol and other commodities is highly regulated in many markets around the
world. We believe these projects will be supported by the governmental agencies in the areas where
the projects will operate because coal-based technologies, which are less burdensome on the
environment, are generally encouraged by most governments. However, in China and other developing
markets, the regulatory environment is often uncertain and can change quickly, often with
contradictory regulations or policy guidelines being issued. In some cases, government officials
have different interpretations of such regulations and policy guidelines and project approvals that
are obtained could later be deemed to be inadequate. Furthermore, new policy guidelines or
regulations could alter applicable requirements or require that additional levels of approval be
obtained. If we or our customers and partners are unable to effectively complete the government
approval process in China and other markets in which we intend to operate, our business prospects
and operating results could be seriously harmed.
For example, China’s State Council has recently issued an opinion further restricting new
project approvals for wind power, polysilicon, steel cement, glass and coal to methanol and DME
projects. At the same time, the government continues to encourage newer technologies for coal to
SNG, glycol, polypropylene, olefins and liquid fuels. Although we do not believe that China’s
project approval requirements and slowing of approvals for new coal to methanol and DME projects
will invalidate any of our existing permits, our future joint ventures will have to abide by these
guidelines.
We utilize a technology with a limited commercial history. If the U-GAS® technology
fails to gain or loses market acceptance, our business will suffer.
Although GTI is one of the world’s leading energy research and development organizations with
well-equipped research facilities, it does not have marketing resources to fully commercialize its
U-GAS® technology. To date, U-GAS® technology has not been used in a large
number of commercial facilities. U-GAS® technology may not meet reliability or
efficiency targets. If U-GAS® technology is not generally accepted as a low cost energy
alternative and we are unable to effectively manage the implementation of U-GAS®
technology, our business and operating results could be seriously harmed.
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We are dependent on our relationships with our strategic partners for project development.
We are dependent on our relationships with our strategic partners to accelerate our expansion,
fund our development efforts, better understand market practices and regulatory issues and more
effectively handle challenges that may arise. Our future success will depend on these relationships
and any other strategic relationships that we may enter into. We cannot assure you that we will
satisfy the conditions required to maintain these relationships under existing agreements or that
we can prevent the termination of these agreements. We also cannot assure you that we will be able
to enter into relationships with future strategic partners on acceptable terms. The termination of
any relationship with an existing strategic partner or the inability to establish additional such
relationships may limit our ability to develop our U-GAS® projects and may have a
material adverse effect on our business and financial condition.
We may never be able to reach agreements regarding the completion of future projects.
Other than the ZZ Joint Venture, the Yima Joint Ventures and the GC Joint Venture, all of our
other potential development opportunities are in the early stages of development and/or contract
negotiations. Our agreements with Hai Hua, Yima and Golden Concord, discussed under
“Description of Business—Current Operations and Projects,” are currently our only negotiated joint venture
contracts. We are in the process of developing alternative potential partners for our Golden
Concord project and are discussing a possible change in scope of the Yima Joint Ventures from
methanol to glycol. We must undertake the time consuming and costly process of fulfilling the
requirements of requests for proposals and negotiating contracts before offering our services to
industrial complexes. Additionally, we are only recently begun to develop our licensing and related
service business and many of the relationships with potential customers are still being cultivated.
We are unsure of when, if ever, many of these contracts will be negotiated, executed and
implemented. There are many reasons that we may fail in our efforts to negotiate, execute and
implement contracts with our target customers to provide cost efficient energy services, including
the possibilities that: (i) our products and services will be ineffective; (ii) our products and
services will be cost prohibitive or will not achieve broad market acceptance; (iii) competitors
will offer superior products and services; or (iv) competitors will offer their products and
services at a lower cost.
Joint ventures that we enter into present a number of challenges that could have a material
adverse effect on our business and results of operations.
Our ZZ Joint Venture represents a substantial portion of our expected revenue in the near
future. In addition, as part of our business strategy, we plan to enter into other joint ventures
or similar transactions, some of which may be material. These transactions typically involve a
number of risks and present financial, managerial and operational challenges, including the
existence of unknown potential disputes, liabilities or contingencies that arise after entering
into the joint venture related to the counterparties to such joint ventures, with whom we share
control. We could experience financial or other setbacks if transactions encounter unanticipated
problems due to challenges, including problems related to execution or integration. Any of these
risks could reduce our revenues or increase our expenses, which could adversely affect our results
of operations.
Additionally, we are now a minority owner in the Yima Joint Ventures and we will be relying on
Yima to provide the management and operational support for the project. As a result, the success
and timing of development activities on the Yima project will depend upon a number of factors that
will be largely outside of our control. At the request of Yima, we are also discussing a possible
change in the scope of the Yima Joint Ventures from methanol to glycol. Dependence on Yima, and
other owners of future projects in which we have a minority interest, or extended negotiations
regarding the scope of the projects, could delay or prevent the realization of targeted returns on
our capital invested in these projects.
We also include the financial statements of the ZZ Joint Venture and the GC Joint Venture in
our consolidated financial statements. We rely on personnel in China to compile this information
and deliver it to us in a timely fashion so that the information can be incorporated into our
consolidated financial statements prior to the due dates for our annual and quarterly reports. Any
difficulties or delays in receiving this information or incorporating it into our consolidated
financial statements could impair our ability to timely file our annual and quarterly reports.
We or our joint venture partners will manage the design, procurement and construction of our
plants. If our or their management of these issues fails, our business and operating results could
suffer.
For our ZZ Joint Venture, and possibly for other projects we may work on
in the future, we have or expect to manage plant design, procurement of equipment and supervise
construction. Most of this work has been or will be subcontracted to third parties. We are and will
be coordinating and supervising these tasks. Although we believe that this is the most time and
cost effective way to build gasification plants in China and elsewhere, we bear the risk of cost
and schedule overruns and quality control. If
we do not properly manage the design, procurement and construction of our plants, our business
and operating results could be seriously harmed. Furthermore, as we continue to improve
U-GAS® technology, we may decide to make changes to our equipment that could further
delay the construction of our plants. Additionally, for certain of our projects, including projects
for which we provide a license or related service, we will rely on our partners to manage the
design, procurement and construction of the plant. The success and timing of work on these projects
by others will depend upon a number of factors that will be largely outside of our control.
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A portion of our revenues will be derived from the merchant sales of commodities and our
inability to obtain satisfactory prices could have a material adverse effect on our business.
In certain circumstances, we or our partners plan to sell methanol, glycol, DME, synthetic
gasoline, SNG, ammonia, hydrogen, nitrogen, elemental sulphur, ash and other commodities into the
merchant market. These sales may not be subject to long term offtake agreements and the price will
be dictated by the then prevailing market price. Revenues from such sales may fluctuate and may not
be consistent or predictable. In particular, the market for commodities such as methanol is
currently under significant pressure and we are unsure of how much longer this will continue. Our
business and financial condition would be materially adversely affected if we are unable to obtain
satisfactory prices for these commodities or if prospective buyers do not purchase these
commodities.
We are dependent on the availability and cost of low rank coal and coal waste and our
inability to obtain a low cost source could have an impact on our business.
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 intend to locate projects in areas where low cost coal and coal
waste is available or where it can be moved to a project site easily without transportation issues
and we are working to develop structured transactions that include securing options to feedstock
resources including coal and biomass. For example, we currently are in discussions regarding
several projects in Inner Mongolia where the provincial government is making coal resources
available to the project owners, so that the availability of coal is integrated with the project
development and thereby adds protection for the project from future coal cost increases. The
success of our projects and those of our customers will depend on the supply of low rank coal and
coal waste. If a source of low cost coal or coal waste for these projects cannot be obtained
effectively, our business and operating results could be seriously affected.
We are dependent on key personnel who would be difficult to replace.
Our performance is substantially dependent on the continued services and on the performance of
our senior management and other key personnel. Our performance also depends on our ability to
retain and motivate our officers and key employees. The loss of the services of any of our
executive officers or other key employees could have a material adverse effect on our business,
results of operations and financial condition. Although we have employment agreements, which
include non-competition provisions, with Robert Rigdon, our President and Chief Executive Officer,
Kevin Kelly, our Controller and Chief Accounting Officer, Francis Lau our Chief Technology Officer
and certain other members of senior management, as a practical matter, those agreements will not
assure the retention of our employees and we may not be able to enforce all of the provisions in
any such employment agreement, including the non-competition provisions. Our future success also
depends on our ability to identify, attract, hire, train, retain and motivate other highly skilled
technical, managerial, marketing and customer service personnel. Competition for such personnel is
intense, and we cannot assure you that we will be able to successfully attract, integrate or retain
sufficiently qualified personnel. In addition, because substantially all of our operations are
currently in China, we will be required to retain personnel who reside in, or are willing to travel
to, and who speak the language and understand the customs of, China. Our inability to retain these
types of individuals could have a material adverse effect on our business, results of operations
and financial condition.
Payment of severance benefits could strain our cash flow.
During fiscal 2010, we made significant workforce reductions and may continue to do so in the
future. Certain members of our senior management have employment agreements that provide for
substantial severance payments. In the event we terminate the employment of any of these employees,
or in certain cases, if such employees terminate their employment with us, such employees will be
entitled to receive certain severance and related payments. The need to pay these severance
payments could put a strain on our financial resources.
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Our success will depend in part on our ability to grow and diversify, which in turn will
require that we manage and control our growth effectively.
Our business strategy contemplates growth and diversification. As we add to our services, our
number of customers, and our marketing and sales efforts, operating expenses and capital
requirements will increase. Our ability to manage growth effectively will require that we continue
to expend funds to improve our operational, financial and management controls, as well as reporting
systems and procedures. In addition, we must effectively recruit new employees, and once hired,
train and manage them. From time to time, we may also have discussions with respect to potential
acquisitions, some of which may be material, in order to further grow and diversify our business.
However, acquisitions are subject to a number of risks and challenges, including difficulty of
integrating the businesses, adverse effects on our earnings, existence of unknown liabilities or
contingencies and potential disputes with counterparties. We will be unable to manage our business
effectively if we are unable to alleviate the strain on resources caused by growth in a timely and
successful manner. We cannot assure you that we will be able to manage our growth and a failure to
do so could have a material adverse effect on our business.
We face intense competition. If we cannot gain market share among our competition, we may not
earn revenues and our business may be harmed.
The business of providing energy is highly competitive. In the gasification market, large
multi-national industrial corporations that are better capitalized, such as General Electric,
Shell, ConocoPhillips and Siemens (with entrained flow technologies), and smaller Chinese firms
(with atmospheric pressure technologies) offer coal gasification equipment and services. Although
we do not directly compete with the multi-national industrial corporations, their activities in the
marketplace may negatively impact our operations and our ability to attract quality projects. In
addition, new competitors, some of whom may have extensive experience in related fields or greater
financial resources, may enter the market. Increased competition could result in a loss of
contracts and market share. Either of these results could seriously harm our business and operating
results. In addition, there are a number of gasification and conventional, non-gasification,
coal-based alternatives for producing heat and power that could compete with our technology in
specific situations. If we are unable to effectively compete with other sources of energy, our
business and operating results could be seriously harmed.
In our areas of operation, the projects we and our customers intend to build are subject to
rigorous environmental regulations, review and approval. We cannot assure you that such approvals
will be obtained, applicable requirements will be satisfied or approvals, once granted, will be
maintained.
Our operations are subject to stringent laws and regulations governing the discharge of
materials into the environment, remediation of contaminated soil and groundwater, siting of
facilities or otherwise relating to environmental protection. Numerous governmental agencies, such
as the EPA and other state and local regulatory authorities in the United States, as well as
various Chinese authorities at the municipal, provincial or central government level, issue
regulations to implement and enforce such laws, which often require difficult and costly compliance
measures that carry substantial potential administrative, civil and criminal penalties or may
result in injunctive relief for failure to comply. These laws and regulations may require the
acquisition of a permit before construction and/or operations at a facility commence, restrict the
types, quantities and concentrations of various substances that can be released into the
environment in connection with such activities, limit or prohibit construction activities on
certain lands lying within wilderness, wetlands, ecologically sensitive and other protected areas
and impose substantial liabilities for pollution resulting from our operations. We believe that we
are in substantial compliance with current applicable environmental laws and regulations. Although
to date we have not experienced any material adverse effect from compliance with existing
environmental requirements, we cannot assure you that we will not suffer such effects in the future
or that projects developed by our partners or customers will not suffer such effects.
In China, developing, constructing and operating gasification facilities is highly regulated.
In the development stage of a project, the key government approvals are the project’s environmental
impact assessment report, or EIA, feasibility study (also known as the project application report)
and, in the case of a Sino-foreign joint venture, approval of the joint venture company’s joint
venture contract and articles of association. Approvals in China are required at the municipal,
provincial and/or central government levels depending on the total size of the investment in the
project. Prior to commencing full commercial operations, we also need additional environmental
approvals to ensure that the facility will comply with standards adopted in the EIA.
Although we have been successful in obtaining the permits that are required at this stage of
our development, any retroactive change in policy guidelines or regulations or an opinion that the
approvals that have been obtained are inadequate could require us to obtain additional or new
permits or spend considerable resources on complying with such requirements or delay commencement
of construction. For example, China has issued new project approval requirements for coal to
methanol and DME which could be applied to our existing permits. Other developments, such as the
enactment of more stringent environmental laws, regulations or policy guidelines or more rigorous
enforcement procedures, or newly discovered conditions, could require us to incur significant
capital expenditures.
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We may incur substantial liabilities to comply with climate control legislation and regulatory
initiatives.
Recent scientific studies have suggested that emissions of certain gases, commonly referred to
as “greenhouse gases,” may be contributing to warming of the Earth’s atmosphere. Carbon dioxide, a
byproduct of burning fossil fuels such as coal, is an example of a greenhouse gas. Our plants using
U-GAS® technology may release a significant amount of carbon dioxide. In response to
such studies, many countries are actively considering legislation, and many states in the United
States have already taken legal measures, to reduce emissions of greenhouse gases. For example, the
U.S. House of Representatives has approved adoption of the American Clean Energy and Security Act
of 2009, also known as the “Waxman-Markey cap-and-trade legislation,” for the purposes of
controlling and reducing emissions of greenhouse gases in the United States by establishing an
economy-wide cap on emissions of these gases in the United States and requiring most sources of
emissions to obtain emission “allowances” corresponding to their annual emissions of such gases,
with the number of emission allowances issued each year declining as necessary to meet the overall
emission reduction goals, although the U.S. Senate has still not considered the legislation.
Although we plan to use advanced technologies to actively utilize and sequester any greenhouse gas
emissions, new legislation or regulatory programs, such as the Waxman-Markey cap-and-trade
legislation, that restrict emissions of greenhouse gases in areas in which we conduct business
could have an adverse affect on our operations, costs and ability to operate our plants.
In the United States, carbon dioxide may be regulated in the future by the EPA as an air
pollutant requiring us to obtain additional permits, meet additional control requirements, and
install additional environmental mitigation equipment, which could adversely affect our financial
performance. The United States Supreme Court recently decided a case in which it ruled that carbon
dioxide is an air pollutant under the Clean Air Act for the purposes of motor vehicle emissions.
The lawsuit sought to require the EPA to regulate carbon dioxide in vehicle emissions. If the EPA
regulates carbon dioxide emissions by plants such as ours, we may have to apply for additional
permits or we may be required to install carbon dioxide mitigation equipment or take other as yet
unknown steps to comply with these potential regulations. Compliance with any future regulation of
carbon dioxide, if it occurs, could be costly and may delay our development of projects in the U.S.
Even if we obtain all of our necessary permits, the air quality standards or the interpretation of
those standards may change, thus requiring additional control equipment or more stringent
permitting requirements. Such requirements could significantly increase the operating costs and
capital costs associated with any future development, expansion or modification of a plant.
Our controls and procedures may fail or be circumvented.
Our management regularly reviews and updates our internal control over financial reporting,
disclosure controls and procedures, and corporate governance policies and procedures. Any system of
controls and procedures, however well designed and operated, is based in part on certain
assumptions and can provide only reasonable, not absolute, assurances that the objectives of the
system are met. Any failure or circumvention of our controls and procedures or failure to comply
with regulations related to controls and procedures could have a material adverse effect on our
business, results of operations and financial condition.
We are subject to the requirements of Section 404 of the Sarbanes-Oxley Act. If we are unable
to maintain compliance with Section 404 or if the costs related to compliance are significant, our
profitability, stock price and results of operations and financial condition could be materially
adversely affected.
We are required to comply with the provisions of Section 404 of the Sarbanes-Oxley Act of
2002. Section 404 and the related Securities and Exchange Commission’s implementing rules, require
that management disclose whether the CEO and CFO maintained internal control over financial
reporting that, among other things, provides reasonable assurance that material errors in our
external financial reports will be prevented or detected on a timely basis, and that we maintain
support for that disclosure that includes evidence of our evaluation of the design and operation of
our internal control. We are a small company with limited financial resources and our finance and
accounting staff is very limited.
Management has identified that our internal control over financial reporting was not effective
at ensuring that financial reporting risks arising from complex and non-routine transactions are
identified timely and that appropriate accounting policies for such transaction are selected and
applied. See “Item 9a. Controls and Procedures” for further discussion. We were not required to
obtain an auditor attestation on internal control over financial reporting for the year ended June
30, 2010 as our market capitalization was below the required threshold at the end of our second
quarter of fiscal 2010.
We cannot be certain that we will be able to successfully maintain the procedures,
certification and attestation requirements of Section 404 or that we or our auditors will not
identify material weaknesses in internal control over financial reporting in the future. If we are
unable to maintain compliance with Section 404, investors could lose confidence in our financial
statements, which in turn could harm our business and negatively impact the trading price of our
common stock.
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Risks Related to Our Chinese Operations
Foreign laws may not afford us sufficient protections for our intellectual property, and we
may not be able to obtain patent protection outside of the United States.
Despite continuing international pressure on the Chinese government, intellectual property
rights protection continues to present significant challenges to foreign investors and,
increasingly, Chinese companies. Chinese commercial law is relatively undeveloped compared to the
commercial law in our other major markets and limited protection of intellectual property is
available in China as a practical matter. Although we have taken precautions in the operations of
our Chinese subsidiaries to protect our intellectual property, any local design or manufacture of
products that we undertake in China could subject us to an increased risk that unauthorized parties
will be able to copy or otherwise obtain or use our intellectual property, which could harm our
business. We may also have limited legal recourse in the event we encounter patent or trademark
infringement. Uncertainties with respect to the Chinese legal system may adversely affect the
operations of our Chinese subsidiaries. China has put in place a comprehensive system of
intellectual property laws; however, incidents of infringement are common and enforcement of rights
can, in practice, be difficult. If we are unable to manage our intellectual property rights, our
business and operating results may be seriously harmed.
Our operations in China may be adversely affected by evolving economic, political and social
conditions.
Our operations are subject to risks inherent in doing business internationally. Such risks
include the adverse effects on operations from war, international terrorism, civil disturbances,
political instability, governmental activities and deprivation of contract and property rights. In
particular, since 1978, the Chinese government has been reforming its economic and political
systems, and we expect this to continue. Although we believe that these reforms have had a positive
effect on the economic development of China and have improved our ability to do business in China,
we cannot assure you that these reforms will continue or that the Chinese government will not take
actions that impair our operations or assets in China. In addition, periods of international unrest
may impede our ability to do business in other countries and could have a material adverse effect
on our business and results of operations.
Long term offtake agreements could be difficult to obtain and, if obtained, enforce because of
China’s underdeveloped legal system.
Historically, it has been difficult to enter into or otherwise obtain long term offtake
agreements in China. Even if we are able to enter into such agreements for syngas, power and other
commodities in the future, we may have difficulty seeking remedies under the agreements due to less
certainty under China’s legal system, as compared to Western countries. We will seek to mitigate
this risk by (i) dealing with reliable partners, (ii) obtaining all requisite government approvals,
(iii) developing projects with good underlying economics, (iv) developing modular plants that can
be moved away in an extreme circumstance, (v) using local banks to finance a majority of our
project costs, and (vi) including enforceable arbitration provisions in all project agreements. The
success of our business depends in part on our ability to successfully negotiate, implement and
manage the offtake agreements. As a result, our business and financial condition would be
materially adversely affected if we are unable to enter into these agreements, or if entered to, to
mitigate the risks associated with these agreements.
Our results of operations would be negatively affected by potential currency fluctuations in
exchange rates with foreign countries.
Currency fluctuations, devaluations and exchange restrictions may adversely affect our
liquidity and results of operations. Exchange rates are influenced by political or economic
developments in China, the United States or elsewhere and by macroeconomic factors and speculative
actions. In some countries, local currencies may not be readily converted into U.S. dollars or
other hard currencies or may only be converted at government controlled rates, and, in some
countries, the transfer of hard currencies offshore has been restricted from time to time. Very
limited hedging transactions are available in China to reduce our exposure to exchange rate
fluctuations. To date, we have not entered into any hedging transactions in an effort to reduce our
exposure to foreign currency exchange risk. While we may decide to enter into hedging transactions
in the future, the availability and effectiveness of these hedges may be limited and we may not be
able to successfully hedge our exposure, if at all.
Fluctuations in exchange rates can have a material impact on our costs of construction, our
operating expenses and the realization of revenue from the sale of commodities. We cannot assure
you that we will be able to offset any such fluctuations and any failure to do so could have a
material adverse effect on our business, financial condition and results of operations. In
addition, our financial statements are expressed in U.S. dollars and will be negatively affected if
foreign currencies, such as the Chinese 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.
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Chinese regulations of loans and direct investment by offshore entities to Chinese entities
may delay or prevent us from utilizing proceeds of funds to make loans or additional capital
contributions to our operations in China, which could materially and adversely affect our liquidity
and our ability to fund and expand our business.
We may make loans or additional capital contributions to our operations in China. Any loans to
our Chinese operations are subject to Chinese regulations and approvals. Such loans by us cannot
exceed statutory limits and must be registered with the Chinese State Administration of Foreign
Exchange or its local counterpart. We may also decide to finance our Chinese operations by means of
capital contributions. This capital contribution must be approved by the Chinese Ministry of
Commerce or its local counterpart. We cannot assure you that we will be able to obtain these
government registrations or approvals on a timely basis, if at all, with respect to future loans or
capital contributions by us to our Chinese operations or any of their subsidiaries. If we fail to
receive such registrations or approvals, our ability to capitalize our Chinese operations may be
negatively affected, which could adversely and materially affect our liquidity and ability to fund
and expand our business.
We could be adversely affected by violations of the U.S. Foreign Corrupt Practices Act and
similar worldwide anti-bribery laws.
The U.S. Foreign Corrupt Practices Act, or the FCPA, and similar worldwide anti-bribery laws
generally prohibit companies and their intermediaries from making improper payments to non-U.S.
officials for the purpose of obtaining or retaining business. Our policies mandate compliance with
these laws. We operate in many parts of the world that have experienced governmental corruption to
some degree and, in certain circumstances, strict compliance with anti-bribery laws may conflict
with local customs and practices. Despite our training and compliance program, we cannot assure you
that our internal control policies and procedures always will protect us from reckless or negligent
acts committed by our employees or agents. Violations of these laws, or allegations of such
violations, could disrupt our business and result in a material adverse effect on our business and
operations. We may be subject to competitive disadvantages to the extent that our competitors are
able to secure business, licenses or other preferential treatment by making payments to government
officials and others in positions of influence or using other methods that United States laws and
regulations prohibit us from using.
In order to effectively compete in some foreign jurisdictions, we utilize local agents and
seek to establish joint ventures with local operators or strategic partners. Although we have
procedures and controls in place to monitor internal and external compliance, if we are found to be
liable for FCPA violations (either due to our own acts or our inadvertence, or due to the acts or
inadvertence of others, including actions taken by our agents and our strategic or local partners,
even though our agents and partners are not subject to the FCPA), we could suffer from civil and
criminal penalties or other sanctions, which could have a material adverse effect on our business,
financial position, results of operations and cash flows.
Risks Related to our Common Stock
Our historic stock price has been volatile and the future market price for our common stock is
likely to continue to be volatile.
The public market for our common stock has historically been very volatile. Any future market
price for our shares is likely to continue to be very volatile. Since we began trading on The
NASDAQ Stock Market on November 2, 2007, our common stock has traded at prices as low as $0.41 per
share and as high as $15.92 per share. This price volatility may make it more difficult for our
stockholders to sell shares when they want at prices that they find attractive. We do not know of
any one particular factor that has caused volatility in our stock price. However, the stock market
in general has experienced extreme price and volume fluctuations that have often been unrelated or
disproportionate to the operating performance of companies. Broad market factors and the investing
public’s negative perception of our business may reduce our stock price, regardless of our
operating performance.
If we do not meet the NASDAQ continued listing requirements, our common stock may be delisted.
As of September 21, 2010, the closing bid price of our common stock on the NASDAQ Stock Market
was $0.91. In accordance with NASDAQ Marketplace Rule 4450(a)(5), if our stock price were to close
below $1.00 for a period of 30 consecutive business days, NASDAQ would provide written notification
that our securities may be delisted unless the bid price of our common stock closes at $1.00 per
share or more for a minimum of 10 consecutive business days within 180 calendar days from such
notification.
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There can be no assurance that the market price per share of our common stock will increase to
at least $1.00 and exceed $1.00 for the requisite time period. In addition, there can be no
assurance that our common stock will not be delisted due to a failure to meet other continued
listing requirements even if the bid price of our common stock exceeds $1.00 per share. Failure to
maintain the listing of our common stock on the NASDAQ Stock Market would have an adverse effect on
a stockholder’s ability to sell its shares of our common stock, which could result in the complete
loss of their investment.
Our common stock is thinly traded on The NASDAQ Stock Market.
Although our common stock is traded on The NASDAQ Stock Market, the trading volume has been
low and we cannot assure investors that this will increase the trading volume or decrease the
volatility of the trading price of our common stock. We cannot assure investors that a more active
trading market will develop even if we issue more equity in the future.
The market valuation of our business may fluctuate due to factors beyond our control and the
value of the investment of our stockholders may fluctuate correspondingly.
The market valuation of energy companies, such as us, frequently fluctuate due to factors
unrelated to the past or present operating performance of such companies. Our market valuation may
fluctuate significantly in response to a number of factors, many of which are beyond our control,
including:
| • | Changes in securities analysts’ estimates of our financial performance; |
| • | Fluctuations in stock market prices and volumes, particularly among securities of energy
companies; |
| • | Changes in market valuations of similar companies; |
| • | Announcements by us or our competitors of significant contracts, new technologies,
acquisitions, commercial relationships, joint ventures or capital commitments; |
| • | Variations in our quarterly operating results; |
| • | Fluctuations in coal, oil, natural gas, methanol and ammonia prices; |
| • | Loss of a major customer of failure to complete significant commercial contracts; |
| • | Loss of a relationship with a partner; and |
| • | Additions or departures of key personnel. |
As a result, the value of your investment in us may fluctuate.
Investors should not look to dividends as a source of income.
We do not intend to pay cash dividends in the foreseeable future. Consequently, any economic
return will initially be derived, if at all, from appreciation in the fair market value of our
stock, and not as a result of dividend payments.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Our corporate office occupies approximately 10,000 square feet of leased office space in
Houston, Texas. We also lease approximately 6,000 square feet of office spaces in Shanghai, China.
The ZZ Joint Venture plant is constructed on approximately 375,000 square feet of land under
50-year land use rights acquired from the Chinese government. The plant buildings and related
structures occupy approximately 198,000 square feet. The GC Joint Venture has also purchased
50-year land use rights from the Chinese government for approximately 2,580,000 square feet of
land. Over time, additional properties may be required if we develop new projects and add personnel
to advance our commercial and technical efforts.
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Item 3. Legal Proceedings
In September 2008, we were named as one of a number of defendants in a lawsuit filed in the
U.S. District Court for the Central District of California, Southern Division, by Igor Olenicoff,
one of our former stockholders, and a company he controls. Also named were Timothy E. Vail (our
former CEO and one of our directors), David Eichinger (our former CFO), and another one of our
directors (collectively, we, Mr. Vail, Mr. Eichinger and the director are referred to as the “SES
Defendants”), as well as UBS AG, Union
Charter Ltd., and other persons who allegedly managed Mr. Olenicoff’s investments outside the
U.S. The SES Defendants have been named in this lawsuit based primarily upon allegations that one
of our former stockholders, Teflomi Trade & Trust, Inc., was a shell company formed for the
purposes of holding Mr. Olenicoff’s assets overseas, and that the SES Defendants allegedly had
knowledge of this arrangement. The claims initially asserted against the SES Defendants included,
among others, securities fraud in violation of Rule 10b-5 under the Securities Act and the
California state law equivalent, violations of the Racketeer Influenced and Corrupt Organizations
Act, or RICO, common law fraud and negligent misrepresentation, breach of fiduciary duty,
conspiracy and unfair business practices. On the SES Defendants’ motion, on July 31, 2009, the
court issued an order dismissing the securities fraud claims as to each of the SES Defendants and
the common law fraud, negligent misrepresentation claim and breach of fiduciary duty claims as to
us, Mr. Vail and Mr. Eichinger. The court determined that certain other claims, including RICO,
conspiracy and unfair business practices, were sufficiently pled and could proceed at this stage.
Plaintiffs were given leave to amend and, on August 24, 2009, filed an amended complaint attempting
to replead their securities fraud claims, and alleged a new claim for violation of the Uniform
Commercial Code (the “UCC”). In response, on September 23, 2009, the SES Defendants filed a motion
to dismiss the securities fraud and UCC claims. The court heard oral argument on the SES
Defendants’ motion to dismiss, and on various other defendants’ motions to dismiss, on November 9,
2009. On March 16, 2010, the court issued an order on the pending motions to dismiss, dismissing
the securities fraud and UCC claims as to each of the SES Defendants. Thus, the claims that remain
as to the SES Defendants collectively include violations of RICO, RICO conspiracy, unfair business
practices, conversion and civil conspiracy; the claims that remain as to the individually named
director include fraudulent misrepresentation, constructive fraud, negligent misrepresentation and
breach of fiduciary duty. The SES Defendants filed their answer to these claims on April 22, 2010.
With the pleadings now resolved, the case is moving forward with respect to those claims the court
has allowed to remain in the case. The court has set a trial date of February 7, 2012. The SES
Defendants believe the claims alleged against them to be without merit and intend to continue to
vigorously defend all claims which are allowed to proceed in the court.
Item 4. [Removed and Reserved.]
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PART II
Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Price for Common Stock and Stockholders
Our common stock is traded on The NASDAQ Global Market. The following table sets forth the
range of the high and low sale prices for our common stock for the periods indicated.
| Sales Price | ||||||||
| High | Low | |||||||
Year Ending June 30, 2010: |
||||||||
First Quarter |
$ | 1.45 | $ | 0.76 | ||||
Second Quarter |
$ | 1.36 | $ | 0.84 | ||||
Third Quarter |
$ | 1.21 | $ | 0.91 | ||||
Fourth Quarter |
$ | 1.33 | $ | 0.95 | ||||
Year Ending June 30, 2009: |
||||||||
First Quarter |
$ | 11.05 | $ | 2.16 | ||||
Second Quarter |
$ | 4.92 | $ | 0.52 | ||||
Third Quarter |
$ | 0.80 | $ | 0.41 | ||||
Fourth Quarter |
$ | 1.69 | $ | 0.54 | ||||
As of September 8, 2010, our authorized capital stock consisted of 200,000,000 shares of
common stock, of which 48,386,512 shares of common stock were issued and outstanding. As of such
date, there were approximately 188 holders of record of our common stock.
Dividend Policy
We have not paid dividends on our common stock and do not anticipate paying cash dividends in
the immediate future as we contemplate that our cash flows will be used for continued growth of our
operations. The payment of future dividends, if any, will be determined by our Board of Directors
in light of conditions then existing, including our earnings, financial condition, capital
requirements, and restrictions in financing agreements, business conditions and other factors.
Securities Authorized For Issuance Under Equity Compensation Plans
The following table sets forth information regarding our existing equity compensation plans as
of June 30, 2010.
| Equity Compensation Plan Information | ||||||||||||
| Number of securities | ||||||||||||
| Weighted average | remaining available for | |||||||||||
| Number of securities to | exercise price of | future issuance under | ||||||||||
| be issued upon exercise | outstanding | equity compensation plans | ||||||||||
| of outstanding options, | options, warrants | (excluding securities | ||||||||||
| warrants and rights | and rights | reflected in column (a)) | ||||||||||
| Plan Category | (a) | (b) | (c) | |||||||||
Equity compensation
plans approved by
security holders (1) |
6,037,573 | (2) | $ | 0.74 | 1,507,627 | (2) | ||||||
Equity compensation
plans not approved by
security holders |
— | — | — | |||||||||
Total as of June 30, 2010 |
6,037,573 | $ | 0.74 | 1,507,627 | ||||||||
| (1) | Consists of the Amended and Restated 2005 Incentive Plan, as amended, or the Plan. |
|
| (2) | Of the total 8,000,000 shares under the Plan, options to acquire 6,037,573 shares of commons
stock were outstanding at June 30, 2010 and 5,800 shares of restricted stock had been granted
under the Plan. The shares issued for the restricted stock grants were vested immediately upon
grant. |
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Item 6. Selected Financial Data
The following table presents selected consolidated financial data as of the dates and for the
periods indicated. Such consolidated financial data has been derived from our audited consolidated
financial statements for such periods. The historical results are not necessarily indicative of the
operating results to be expected in the future. The selected financial data should be read in
conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of
Operations” and the consolidated financial statements and the accompanying notes included elsewhere
in this annual report. Among other things, those financial statements include more detailed
information regarding the basis of presentation for the following consolidated financial data.
Statements of Operations Data
(in thousands, except per share amounts)
| Years Ended June 30, | ||||||||||||||||||||
| 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
Revenue: |
||||||||||||||||||||
Product sales and other related parties |
$ | 8,423 | $ | 1,852 | $ | 203 | $ | — | $ | — | ||||||||||
Technology licensing and related services |
732 | — | — | — | — | |||||||||||||||
Other |
146 | 250 | 125 | — | — | |||||||||||||||
Total revenue |
9,301 | 2,102 | 328 | — | — | |||||||||||||||
Costs and Expenses: |
||||||||||||||||||||
Costs of sales and plant operating expenses |
8,621 | 7,449 | 2,396 | — | — | |||||||||||||||
General and administrative expenses |
12,220 | 16,395 | 13,147 | 5,644 | 1,018 | |||||||||||||||
Project and technical development expenses |
1,873 | 1,046 | 5,615 | 1,136 | 1,245 | |||||||||||||||
Asset impairment losses |
6,575 | 2,500 | — | — | — | |||||||||||||||
Stock-based compensation expense |
2,179 | 1,869 | 6,029 | 6,640 | 3,043 | |||||||||||||||
Depreciation and amortization |
2,674 | 2,905 | 1,202 | 222 | 5 | |||||||||||||||
Total costs and expenses |
34,142 | 32,164 | 28,389 | 13,642 | 5,311 | |||||||||||||||
Operating loss |
(24,841 | ) | (30,062 | ) | (28,061 | ) | (13,642 | ) | (5,311 | ) | ||||||||||
Non-operating (income) expense: |
||||||||||||||||||||
Equity in losses — Yima joint ventures |
39 | — | — | — | — | |||||||||||||||
Interest income |
(133 | ) | (1,742 | ) | (397 | ) | (463 | ) | (129 | ) | ||||||||||
Interest expense |
668 | 959 | 388 | — | — | |||||||||||||||
Net loss |
(25,415 | ) | (29,279 | ) | (28,052 | ) | (13,179 | ) | (5,182 | ) | ||||||||||
Less: net loss attributable to noncontrolling interests |
3,667 | 703 | 610 | 37 | — | |||||||||||||||
Net loss attributable to stockholders |
$ | (21,748 | ) | $ | (28,576 | ) | $ | (27,442 | ) | $ | (13,142 | ) | $ | (5,182 | ) | |||||
Net loss per share: |
||||||||||||||||||||
Basic and diluted |
$ | (0.45 | ) | $ | (0.60 | ) | $ | (0.80 | ) | $ | (0.47 | ) | $ | (0.19 | ) | |||||
Weighted average common shares outstanding
Basic and diluted |
48,230 | 48,017 | 34,385 | 27,852 | 27,754 | |||||||||||||||
Balance Sheet Data
(in thousands)
| June 30, | ||||||||||||||||||||
| 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
Total working capital |
$ | 38,305 | $ | 82,140 | $ | 117,646 | $ | (54 | ) | $ | 2,868 | |||||||||
Total assets |
120,581 | 146,136 | 177,747 | 38,472 | 3,213 | |||||||||||||||
Total liabilities |
16,542 | 20,040 | 24,241 | 18,922 | 328 | |||||||||||||||
Total equity |
104,039 | 126,096 | 153,506 | 19,550 | 2,885 | |||||||||||||||
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Item 7. 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 annual report. Some of the information contained
in this discussion and analysis or set forth elsewhere in this annual report, including information
with respect to our plans and strategy for our business and related financing, includes
forward-looking statements that involve risks and uncertainties. You should review the “Risk
Factors” section of this annual report 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 an alternative energy technology company that provides technology, equipment and engineering
services for the conversion of low rank, low cost coal and biomass feedstocks into energy and
chemical products. Our strategy is to create value through 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 transfer package and provide
proprietary equipment components to customers who plan 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,
synthetic gasoline, 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 the U.S., India, Europe, Australia and Vietnam, as well
as other parts of Europe and Asia to provide our U-GAS® technology package. Our Zao
Zhuang project is our first commercial scale coal gasification plant located in Shandong Province,
China and has been in operation since February 2008 and in commercial operation since December
2008. Our Yima project is currently under construction in Henan Province, China.
The key elements of our business strategy include:
| • | Executing on existing projects in China. We are continuing to implement operational
measures
to improve the financial performance of our Zao Zhuang project in the
near term, while also continuing to evaluate alternatives to better position
the project to be commercially and financially successful in the future.
These alternatives include
the possible expansion of the plant to produce other
products for other customers. We also intend to continue to leverage our 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, from China, India, Australia, Vietnam and the United States.
We are also continuing the ongoing
construction of our Yima project, and are working to restructure our joint venture
agreements to change the scope of the project from methanol to glycol production. |
| • | 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 transfer package and provide proprietary equipment
components to customers who plan 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 SNG, 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 plan 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. |
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| • | 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, developing new relationships with
strategic partners and developing new downstream coal-to-chemicals and coal-to-energy
products which may expand our initial focus to include facilities producing SNG, methanol to
gasoline, or MTG, glycol, power and reducing gas for the steel industry. We are exploring new markets for entry such as the U.S., India, Australia, Vietnam, and other parts of Europe
and Asia. 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. |
| • | 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 India, the
U.S., China, Turkey and Australia. We are working to develop structured transactions that include
securing options to these feedstock resources. For example, we are currently in discussions
regarding several projects in Inner Mongolia, China 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 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 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.
|
| • | Continue to develop and improve U-GAS® technology. We are continually seeking
to improve the overall plant availability, plant efficiency rates and fuel handling
capabilities of the existing 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 our proprietary coal characterization testing
as well as selective commercial scale testing in our Zao Zhuang facility. In addition, 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 well as through
patenting improvements tested at our Zao Zhuang facility, and improvements resulting from
integration of our technology with downstream processes. To date, we have filed 13 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. 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 on projects until we
have assurances that acceptable financing is available to complete the project. Until the
capital markets improve, our strategy will be to operate using our current capital resources
and to leverage the resources of financing partners. |
Results of Operations
We are in our development stage and therefore have had limited operations. We generated
revenues of $9.3 million for the year ended June 30, 2010. We have sustained net losses of
approximately $96.4 million from November 4, 2003, the date of our inception, to June 30, 2010. We
have primarily financed our operations to date through private placements and two public offerings
of our common stock.
Year Ended June 30, 2010 Compared to Year Ended June 30, 2009
Revenue. Total revenue increased $7.2 million to $9.3 million for the year ended June 30, 2010
compared to $2.1 million for the year ended June 30, 2009.
Product sales were $7.8 million for the year ended June 30, 2010 compared to $1.9 million for
the year ended June 30, 2009 and were derived primarily from the sale of syngas and other
byproducts produced at the ZZ Joint Venture plant in China. Product revenues have increased at the
plant due to the plant’s increased availability for production; increased syngas volume offtake by
our customer, Hai Hua; and increased byproduct sales, including sales of our excess oxygen to Hai
Hua under our ASU cost-sharing arrangement, which sales commenced in September 2009. For the year
ended June 30, 2010, the ZZ Joint Venture plant operated for 60% of the period and was available
for production for 93% of the period. Plant operations and syngas production has been limited
primarily due to extended shutdowns by Hai Hua. Although the syngas volume offtake by Hai Hua has
increased during fiscal 2010
compared to fiscal 2009, to date, Hai Hua has been unable to offtake the volume of syngas
originally expected for the original plant design and we do not foresee this situation changing
significantly in the near term. The ZZ Joint Venture plant was in its commissioning phase prior to
achieving commercial operations status in December 2008.
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Other related party revenue during the year ended June 30, 2010 of approximately $0.6 million
was generated for engineering services provided to the Yima Joint Ventures during the year ended
June 30, 2010. There was no other related party revenue during the year ended June 30, 2009.
Technology licensing and related services revenues were $0.7 million for the year ended June
30, 2010 and were generated from feasibility studies and other technical services provided in
association with our technology licensing business. There were no technology licensing and related
services revenues during the year ended June 30, 2009.
Other revenues were $0.1 million for the year ended June 30, 2010 and related to a sponsorship
grant for lignite testing at the ZZ Joint Venture plant. Other revenues were $0.3 million for the
year ended June 30, 2009 and were generated by a feasibility study for a project in the U.S. that
has since been cancelled.
Costs of sales and plant operating expenses. Costs of sales and plant operating expenses
increased $1.2 million to $8.6 million for the year ended June 30, 2010 compared to $7.4 million
for the year ended June 30, 2009 and were comprised principally of coal consumption, electricity,
and other operating costs at the ZZ Joint Venture plant. The increase is due to a significant
increase in syngas production during the year ended June 30, 2010. A majority of the costs during
the year ended June 30, 2009 were incurred prior to the plant achieving commercial operations
status in December 2008.
General and administrative expenses. General and administrative expenses decreased by $4.2
million to $12.2 million during the year ended June 30, 2010 compared to $16.4 million during the
year ended June 30, 2009. The decrease of $4.2 million was primarily due to a decrease in
compensation costs as a result of reduced staffing levels, and a decrease in consulting and
professional fees.
Project and technical development expenses. Project and technical development expenses
increased by $0.9 million to $1.9 million for the year ended June 30, 2010 compared to $1.0 million
for the year ended June 30, 2009. Project development expenses for the year ended June 30, 2010
included a $0.9 million charge for a consulting fee related to the financial closing of the Yima
project. Other expenses included costs for U-GAS® technology development which included
advanced analytical flow modeling and other technical support and development costs.
Asset impairment losses. An asset impairment loss of $6.6 million during the year ended June
30, 2010 related to the write-off of the long-lived assets of the GC Joint Venture. The 2009
period included a $1.25 million impairment loss on a royalty deposit paid to ExxonMobil during the
three months ended December 31, 2008 and a non-cash charge to write-off the $1.25 million remaining
carrying value of the reservation and use fee paid to GTI.
Stock-based compensation expense. Stock-based compensation expense increased by $0.3 million
to $2.2 million for the year ended June 30, 2010 compared to $1.9 million for the year ended June
30, 2009. The 2009 period included a credit of approximately $4.8 million due to the reversal of
previously recognized expense due to forfeitures related to cancellations of terminated employees’
stock option awards. Excluding the effect of this credit, stock-based compensation expense
decreased because the amount of stock-based compensation expense associated with recent grants of
stock option awards is lower than certain prior awards due to the decrease in the price of our
common stock.
Depreciation and amortization. Depreciation and amortization decreased by $0.2 million to $2.7
million during the year ended June 30, 2010 compared to $2.9 million during the year ended June 30,
2009. The decrease was due principally to the change in the estimated useful live of the production
equipment at the ZZ Joint Venture plant from a period of 15 years to 20 years effective October 1,
2008 and a reduction in equipment costs of approximately $0.5 million due to settlement with a
construction vendor.
Equity in losses of Yima Joint Ventures. The equity in losses of the Yima Joint Ventures for
the year ended June 30, 2010 relates to our 25% share of the loss incurred by the Yima Joint
Ventures. The loss is comprised of non-capitalizable costs incurred during the design and
construction phase, offset in part, by interest income earned on invested funds contributed by us
and Yima.
Interest income. Interest income decreased to $0.1 million for the year ended June 30, 2010
compared to $1.7 million for the year ended June 30, 2009. The decrease was primarily due to lower
yields earned on cash equivalent investments and lower invested principal balances.
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Interest expense. Interest expense decreased by $0.3 million to $0.7 million for the year
ended June 30, 2010 compared to $1.0 million during the year ended June 30, 2009. The decrease was
primarily due to the ZZ Joint Venture’s lower outstanding principal balance on its loan with the
Industrial and Commercial Bank of China and to a lower interest rate based on the annual adjustment
in March 2009 to 5.94%. This rate was not adjusted in 2010.
Net loss attributable to noncontrolling interests. Net loss attributable to noncontrolling
interests increased by $3.0 million to $3.7 million for the year ended June 30, 2010 compared to
$0.7 million during the year ended June 30, 2009. The increase resulted principally from Golden
Concord absorbing their interest in the asset impairment loss.
Year Ended June 30, 2009 Compared to Year Ended June 30, 2008
Revenue. Product sales increased by $1.7 million to $1.9 million for the year ended June 30,
2009 compared to $0.2 million for the year ended June 30, 2008 and were derived from the sale of
syngas and byproducts produced at the ZZ Joint Venture plant. The plant’s initial syngas sales
commenced during the three months ended March 31, 2008. Product sales of $1.2 million were
recognized during the three months ended June 30, 2009 as the plant operated for approximately 60%
of the period and was available for production for approximately 95% of the period. Although the
plant declared commercial operations in December 2008, Hai Hua did not begin paying the ZZ Joint
Venture for the energy and capacity fees until May 2009 due to differing interpretations between
Hai Hua and the ZZ Joint Venture regarding certain syngas quality components requirements under the
contract. During the three months ended March 31, 2009, the plant was only operating for
approximately 13% of the period due to an unscheduled maintenance outage, repairs related to a
power outage, a local area government industrial inspection, and scheduled maintenance by Hai Hua.
Other revenues were $0.3 million for the year ended June 30, 2009 and were generated by a
feasibility study for a project in the U.S. that has since been cancelled.
Cost of sales and plant operating expenses. Cost of sales and plant operating expenses
increased by $5.0 million to $7.4 million for the year ended June 30, 2009 compared to $2.4 million
for the year ended June 30, 2008 and were comprised principally of coal consumption, electricity,
maintenance and other operating costs at the ZZ Joint Venture plant. The plant’s initial operations
commenced during the three months ended March 31, 2008. Costs were higher during the year ended
June 30, 2009 due to the plant operating for a longer period of time and due to costs incurred to
enable the plant to declare commercial operations status in December 2008.
General and administrative expenses. General and administrative expenses increased by $3.3
million to $16.4 million for the year ended June 30, 2009 compared to $13.1 million for the year
ended June 30, 2008. The increase was primarily due to an increase in employee compensation as a
result of increased staffing levels during the first half of fiscal 2009, professional fees, travel
and other expenses. During the second half of fiscal 2009, we made significant workforce and other
cost reductions which reduced general and administrative expenses by 24% as compared to the first
half of fiscal 2009. General and administrative expenses included our internal project development
and engineering staffing costs which have supported development of our Yima project and other
projects.
Project and technical development expenses. Project and technical development expenses
decreased by $4.6 million to $1.0 million for the year ended June 30, 2009 compared to $5.6 million
for the year ended June 30, 2008 due primarily to a reduction in U.S. project and technical
development activities and a $0.6 million reimbursement from CONSOL Energy, Inc., or CONSOL, in
full settlement of its cost-sharing arrangement under our joint development agreement with CONSOL.
Project and technical development expenses incurred during the period related principally to the
Yima project, the feasibility study with North American Coal, or NAC, for the development of a
coal-based gasification facility at NAC’s proposed Otter Creek Mine in North Dakota and our project
with CONSOL, both of which were cancelled.
Asset impairment losses. Asset impairment losses of $2.5 million during the year ended June
30, 2009 related a $1.25 million impairment loss on a royalty deposit paid to ExxonMobil during the
three months ended December 31, 2008 and a non-cash charge to write-off the $1.25 million remaining
carrying value of the reservation and use fee paid to GTI. The GTI reservation and use fee was paid
for with shares of our common stock during fiscal 2008 to reserve the facility for calendar 2008
and 2009.
Stock-based compensation expense. Stock-based compensation expense decreased by $4.1 million
to $1.9 million for the year ended June 30, 2009 compared to $6.0 million for the year ended June
30, 2008. For the year ended June 30, 2009, stock-based compensation expense included a reduction
of approximately $4.8 million due to the reversal of previously recognized expense due to
forfeitures related to cancellations of terminated employees’ stock option awards. This decrease
was offset, in part, with incremental
compensation cost related to modifications resulting from the stock option exchange program
and additional stock option awards granted during 2009.
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Depreciation and amortization. Depreciation and amortization increased by $1.7 million to $2.9
million for the year ended June 30, 2009 compared to $1.2 million for the year ended June 30, 2008.
The increase was due principally to commencing depreciation of the ZZ Joint Venture plant during
the quarter ended March 31, 2008.
Interest income. Interest income increased by $1.3 million to $1.7 million for the year ended
June 30, 2009 compared to $0.4 million for the year ended June 30, 2008. The increase was primarily
due to interest income earned on higher cash balances due to investment of the proceeds from an
equity offering completed in June 2008. The yields earned on our cash equivalent investments
decreased significantly over fiscal 2009 due to market conditions.
Interest expense. Interest expense increased by $0.6 million to $1.0 million for the year
ended June 30, 2009 compared to $0.4 million for the year ended June 30, 2008. Prior to the
commissioning of the ZZ Joint Venture plant in January 2008, the interest expense for the ZZ Joint
Venture loan was capitalized.
Net loss attributable to noncontrolling interests. Net loss attributable to noncontrolling
interests increased by $0.1 million to $0.7 million for the year ended June 30, 2009 compared to
$0.6 million for the year ended June 30, 2008. The increase was due to recognizing our joint
venture partners’ noncontrolling interests in the operating losses of the GC Joint Venture and the
ZZ Joint Venture during the period.
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 for the development of our joint
ventures in China and to pay other development and general and administrative expenses. In
addition, we have entered into a loan agreement with ICBC to fund certain of the costs of the ZZ
Joint Venture.
As of June 30, 2010, we had $42.6 million in cash and cash equivalents and $38.3 million of
working capital available to us. During the year ended June 30, 2010, cash flows used in operating
activities were $16.3 million. Additionally, we invested $29.3 million of our cash into the Yima
Joint Ventures and repaid $2.3 million of principal on the ZZ Joint Venture loan during the year
ended June 30, 2010. We are also funding the working capital and operating losses of the ZZ Joint
Venture.
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, or 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 June 30, 2010, the applicable interest rate was 5.94% and
is payable monthly; |
| • | Principal payments of $1.1 million are due in March and September of each year beginning
on September 22, 2008 and ending on March 31, 2014; |
| • | 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 Zao Zhuang
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. |
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As
of June 30, 2010, the ZZ Joint Venture was in compliance with all covenants and obligations
under the Fixed Asset Loan Contract.
Other
During the twelve months ended June 30, 2010, we recognized $0.6 million of related party
revenue for engineering services provided to the Yima Joint Ventures.
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. See Note 7 —Intangible Assets for
more information on the royalty payments.
In June 2009, we agreed to pay GTI a non-refundable payment of $1.5 million toward future
royalties due to GTI under the Original Agreement for the proposed Yima Joint Ventures project.
Outlook
We expect to continue to have negative cash flows until we can generate sufficient revenues
from our licensing and related service projects, as well as from the ZZ Joint Venture, the Yima
Joint Ventures and other projects which are under development, to cover our general and
administrative expenses and other operating costs.
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, third-party
licensing and technical development expenses; and (v) general corporate purposes. The actual
allocation of and the timing of the 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, since mid-2008, the global economy has experienced
a significant contraction, with an almost unprecedented lack of availability of business and
consumer credit, which has impeded, and could continue to impede, our ability to obtain financing
for our projects. Although we are seeing signs of improved economic activity, this decrease
and 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 in a number of other ways. In addition, the market for commodities such as
methanol has been under significant pressure and we are unsure of how much longer this pressure
will continue. As a direct result of these trends, our ability to finance and develop our existing
projects, commence any new projects and sell our products 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 technology and engineering
capability. In April 2010, we executed our first third party technology licensing agreement. Under
this agreement, we are providing U-GAS® technology for a commercial scale biomass to
biofuels project in the U.S. In addition we and the licensee entered into a separate multi-site
agreement whereby the licensee has the option to license our biomass gasification technology for
five additional commercial scale biomass to biofuels projects within North America. As part of the
license agreement, we are providing the biomass gasification process design package, and may
provide some key proprietary gasification system equipment components and technical services. We
intend to place increased focus on development of licensing opportunities for our proprietary
U-GAS® technology on a global basis with a focus on India, China, Turkey, the U.S.,
Australia and Vietnam, as well as other parts of Europe and Asia, due to their large low rank coal
resources. In December 2009, we entered into a strategic alliance agreement with Coalworks Limited,
an emerging Australian energy developer, to develop the first coal gasification and liquefaction
plant for Coalworks at Oaklands, New South Wales, Australia utilizing our U-GAS® technology.
Pursuant to the strategic alliance agreement, we have recently completed a feasibility study for
the plant and plan to discuss next steps with Coalworks. We also have recently signed an agreement
with another Australian company that is in the process of shipping coal to our Zao Zhuang facility
for testing.
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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 transfer package and provide proprietary equipment
components to customers who plan to own and operate projects. In the U.S., we believe there may be
a significant near-term opportunity for us to leverage the capability of U-GAS® to
efficiently gasify biomass to make renewable fuels. Today’s regulatory environment in the U.S. is
favorable for these types of projects
because increased environmental concerns are creating a market demand for renewable fuels and
companies are under increasing pressure to reduce their carbon footprint. 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 provide additional insight into project development activities, which may
allow us to make selective equity investments in such projects in the future and also the
development of integrated, modular product offerings.
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 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 actively pursuing project partners to invest in our projects’ development, including a
different project scope and end product for the GC Joint Venture and the YIMA Joint Ventures and
for the possible expansion of the ZZ Joint Venture plant. Our Yima project is under construction
and Yima is the project management leader for the project. During this first quarter of fiscal
2011, Yima has indicated their intent to convert the existing project from methanol production to
glycol production. Yima has expressed their belief that the prospect for strong economic
performance of the plant can be improved by modifying the backend of the project to make glycol.
This is due to the relatively low margins on methanol today versus the more robust margins that
could be achieved from glycol production. In addition, Yima has recently acquired a nearby coal to
methanol facility and is looking to diversify and sees glycol as a potentially more profitable
alternative. We have indicated to Yima that we would be willing to support this scope change if
both parties can agree upon appropriate modifications to the joint venture contracts that can
improve our overall risk and return without requiring any additional capital investment from us.
Yima’s project management team believes that this change can be executed without delaying the
original schedule for commercial operation. We have agreed to work diligently with Yima to
restructure the agreements as necessary to achieve these goals.
We believe that improving the financial performance and reducing the operating costs of the ZZ
Joint Venture plant are critical to improving our financial performance and we believe one method
to achieve this improvement is through the expansion of the plant to produce products such as
glycol and the sale of our excess oxygen capacity to Hai Hua. To date, Hai Hua has been unable to
offtake the volume of syngas originally expected for the original plant design and the plant has
incurred operating losses. We do not foresee this situation changing significantly in the near
term. In an effort to improve the return on our investment in this plant, we are evaluating
alternative products and partnership structures for a possible expansion of the ZZ Joint Venture
plant to produce products such as glycol.
Additionally, the ZZ Joint Venture began to provide oxygen to Hai Hua in
September 2009 under a cost sharing arrangement that has increased our byproduct revenues.
We have also entered into an investment cooperation
framework agreement with a local Zao Zhuang area coal mining company which outlines proposed terms
for a structure to expand the plant. We do not expect any additional equity for an expansion would
be required from us as we continue to expect to contribute our 95.5% equity interest toward the
expansion with third parties contributing all the additional required equity to expand the plant.
In addition, a provincial level coal company has also expressed an interest in becoming our partner
on this expansion. 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 for us to commence execution of the expansion and also describe certain terms of
the expansion project, including but not limiting 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. In addition, our successful commercial-scale demonstration at the Zao Zhuang 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. As
a result of the lignite demonstration, we have seen a large increase in visits to our Zao Zhuang
plant from potential customers and partners.
We intend to continue to leverage our 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,
from China, India, Australia, Vietnam and the United States.
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 has risen dramatically over the past few years and the
high coal prices have a very negative impact on the margins of its coal gasification projects.
Today, China is moving toward even larger coal based projects to fuel the country’s energy needs,
which includes several large scale coal to methane or SNG projects, as compared to previous
coal-to-chemical projects that have been build in China. Due to the current encouragement from the
Chinese government for these projects, we believe there is potential in China for several of these
projects, some of which are in various stages of planning. In addition, we believe many of these
projects will be located in regions where very low cost lignite coals can be made available and are
necessary to reduce the production cost of SNG and should make these projects more profitable. As
we have found with the tests at
our Zao Zhuang plant, our technology has the unique ability to be efficiently process this
lignite and thus we believe it is very desirable for these projects. 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 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.
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We will limit the development of any further projects until worldwide capital and debt markets
improve and we have assurances that acceptable financing is available to complete the project.
However, we will 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. As of June 30, 2010, we had $42.6 million in cash and cash equivalents and $38.3 million of
working capital available to us. During the year ended June 30, 2010, cash flows used in operating
activities were $16.3 million. Additionally, we invested $29.3 million of our cash into the Yima
Joint Ventures and repaid $2.3 million of principal on the ZZ Joint Venture loan during the year
ended June 30, 2010. 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
thereof and for our 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 business; (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.
Critical Accounting Policies
The preparation of financial statements in accordance with U.S. GAAP requires our management
to make certain estimates and assumptions which are inherently imprecise and may differ
significantly from actual results achieved. We believe the following are our critical accounting
policies due to the significance, subjectivity and judgment involved in determining our estimates
used in preparing our consolidated financial statements. We evaluate our estimates and assumptions
used in preparing our consolidated financial statements on an ongoing basis utilizing historic
experience, anticipated future events or trends and on various other assumptions that are believed
to be reasonable under the circumstances. The resulting effects of changes in our estimates are
recorded in our consolidated financial statements in the period in which the facts and
circumstances that give rise to the change in estimate become known.
We believe the following describes significant judgments and estimates used in the preparation
of our consolidated financial statements:
Revenue Recognition
Revenue from sales of products, which includes the capacity fee and energy fee earned at the
ZZ Joint Venture plant, 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. We may receive upfront licensing fee payments in addition to fees for
engineering services that are integral to the initial transfer of our 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 terms under the
licensing agreement are finalized with the licensee. We recognize revenue from
engineering services under the percentage-of-completion method.
Impairment Evaluation of Long-Lived Assets
We evaluate our long-lived assets, such as property, plant and equipment,
construction-in-progress, equity method investments and specifically identified intangibles, when
events or changes in circumstances indicate that the carrying value of such assets may not be
recoverable. When we believe an impairment condition may have occurred, we are required to estimate
the undiscounted future cash flows associated with a long-lived asset or group of long-lived assets
at the lowest level for which identifiable cash flows are largely
independent of the cash flows of other assets and liabilities for long-lived assets that are
expected to be held and used. We evaluate our operating plants as a whole. Production equipment at
each plant is not evaluated for impairment separately, as it is integral to the assumed future
operations of the plant. All construction and development projects are reviewed for impairment
whenever there is an indication of potential reduction in fair value. If it is determined that it
is no longer probable that the projects will be completed and all capitalized costs recovered
through future operations, the carrying values of the projects would be written down to the
recoverable value. If we determine that the undiscounted cash flows from an asset to be held and
used are less than the carrying amount of the asset, or if we have classified an asset as held for
sale, we estimate fair value to determine the amount of any impairment charge.
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The following summarizes some of the most significant estimates and assumptions used in
evaluating if we have an impairment charge.
Undiscounted Expected Future Cash Flows. In order to estimate future cash flows, we
consider historical cash flows and changes in the market environment and other factors that may
affect future cash flows. To the extent applicable, the assumptions we use are consistent with
forecasts that we are otherwise required to make (for example, in preparing our other earnings
forecasts). The use of this method involves inherent uncertainty. We use our best estimates in
making these evaluations and consider various factors, including forward price curves for energy,
fuel costs, and operating costs. However, actual future market prices and project costs could vary
from the assumptions used in our estimates, and the impact of such variations could be material.
Fair Value. Generally, fair value will be determined using valuation techniques such
as the present value of expected future cash flows. We will also discount the estimated future cash
flows associated with the asset using a single interest rate representative of the risk involved
with such an investment. We may also consider prices of similar assets, consult with brokers, or
employ other valuation techniques. We use our best estimates in making these evaluations; however,
actual future market prices and project costs could vary from the assumptions used in our
estimates, and the impact of such variations could be material.
The evaluation and measurement of impairments for equity method investments such as our equity
investment in the Yima Joint Ventures involve the same uncertainties as described for long-lived
assets that we own directly. Similarly, our estimates that we make with respect to our equity and
cost-method investments are subjective, and the impact of variations in these estimates could be
material.
ZZ Joint Venture Plant Impairment Analysis
We assessed the ZZ Joint Venture’s plant assets for impairment as of June 30, 2010 due to its
operating at reduced capacity and its operating losses to date. Significant assumptions we made in
determination of the projected cash flows for purposes of this impairment analysis included the
plant’s availability for production of compliant syngas and the plant’s coal consumption rate.
Variances in these assumptions could result in projected cash flows that do not support the assets’
carrying values. For example, if the plant’s availability to produce compliant syngas was reduced
from 95% to 85%, or if the plant’s coal consumption rate does not achieve the forecasted
improvement of approximately 10%, the projected cash flows would have been less than the assets’
carrying values resulting in an impairment of the assets.
The ZZ Joint Venture plant operated at limited capacity for a significant part of fiscal 2010
and 2009 and is expected to continue operating at reduced capacity due to the depressed methanol
market. The reduced capacity at the ZZ Joint Venture plant has contributed to the plant’s operating
losses. In addition to funding these operating losses, we are funding the working capital and debt
service for the ZZ Joint Venture. We are in the process of implementing operational measures,
pursuing additional customers and evaluating strategies to reduce the ZZ Joint Venture’s losses and
improve its financial performance including the possible expansion of the plant to produce other
products. If an expansion of the ZZ Joint Venture plant were to be developed, we would expect to
contribute our interest in the ZZ Joint Venture to the project without significant additional cash
investment by us. If we are not successful in improving the ZZ Joint Venture’s profitability, or if
management’s estimated cash flow projections for these assets decrease, or if Hai Hua does not make
its required payments, the plant’s assets could be impaired. As of June 30, 2010, we have
determined that these assets were not impaired.
Accounting for Variable Interest Entities (VIEs) and Financial Statement Consolidation Criteria
The joint ventures which we enter into may be considered VIEs. We consolidate all VIEs where
we are the primary beneficiary. This determination is made at the inception of our involvement with
the VIE. We consider both qualitative and quantitative factors and form a conclusion that we, or
another interest holder, absorb a majority of the entity’s risk for expected losses, receive a
majority of the entity’s potential for expected residual returns, or both. We do not consolidate
VIEs where we are not the primary beneficiary.
We account for these unconsolidated VIEs under the equity method of accounting and include our
net investment in investments on our consolidated balance sheets. Our equity interest in the net
income or loss from our unconsolidated VIEs is recorded in non-operating (income) expense on a net
basis on our consolidated statement of operations.
34
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We have determined that the ZZ Joint Venture is a VIE and we have determined that we are the
primary beneficiary. In making that determination, we considered, among other items, the change in
profit distribution between us 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 coincides with our original 95% profit/loss allocation,
versus the latter 30 years in which our profit/loss allocation is reduced to 10%. In addition, we
considered whether the terms of the syngas purchase and sale agreement with Hai Hua contained a
lease. The factors considered included (i) our 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 we determined that the syngas purchase and
sale agreement did not contain a lease, we account for the revenues from this agreement in
accordance with our revenue recognition policy for product sales.
Off Balance Sheet Arrangements
In January 2008, we entered into a 63 month lease agreement, with a 60 month optional renewal,
for our corporate offices in Houston, Texas. The lease commenced on March 27, 2008 with rental
payments of $20,308 per month for the first year and escalating thereafter annually. Our
obligations under the lease are secured by a letter of credit for $328,900, which is payable to the
landlord in the event of any uncured default by us under the lease. The letter of credit remains in
place until the third anniversary of the lease. We have a certificate of deposit pledged as
collateral for this letter of credit and pay an annual fee of 1.0% on this letter of credit.
Contractual
Obligations
Our material contractual obligations at June 30, 2010 were as follows (in thousands):
| Less than 1 | 1-3 | 4-5 | After 5 | |||||||||||||||||
| Contractual Obligations | Total | Year | Years | Years | Years | |||||||||||||||
ZZ Joint Venture long-term bank loan, including interest |
$ | 10,079 | $ | 2,739 | $ | 5,131 | $ | 2,209 | $ | — | ||||||||||
Operating leases |
919 | 390 | 529 | — | — | |||||||||||||||
Total |
$ | 10,998 | $ | 3,129 | $ | 5,660 | $ | 2,209 | $ | — | ||||||||||
Recently Issued Accounting Standards
In January 2010, the Financial Accounting Standards Board, or FASB, issued an amendment to the
disclosure requirement related to fair value measurements. The amendment requires new disclosures
related to transfers in and out of Levels 1 and 2 and activity in Level 3 fair value measurements.
A reporting entity is required to disclose separately the amounts of significant transfers in and
out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers.
Additionally, in the reconciliation for fair value measurements in Level 3, a reporting entity must
present separately information about purchases, sales, issuances and settlements (on a gross basis
rather than a net number). The new disclosures are effective for interim and annual reporting
periods beginning after December 15, 2009, except for the disclosures about purchases, sales,
issuances and settlements in the roll forward of activity in Level 3 fair value measurements.
Those disclosures are effective for fiscal years beginning after December 15, 2010 and for interim
periods within those fiscal years. We do not anticipate that our adoption of this amendment will
have a material effect on our financial position, results of operations or cash flows.
In June 2009, the FASB issued an amendment to the accounting and disclosure requirements for
transfers of financial assets. This amendment applies to the financial reporting of a transfer of
financial assets; the effects of a transfer on an entity’s financial position, financial
performance and cash flows; and a transferor’s continuing involvement, if any, in transferred
financial assets. It eliminates (1) the exceptions for qualifying special-purpose entities from
the consolidation guidance and (2) the exception that permitted sale accounting for certain
mortgage securitizations when a transferor has not surrendered control over the transferred
financial assets. The provisions of this amendment must be applied as of the beginning of each
reporting entity’s first annual reporting period that begins after November 15, 2009, for interim
periods within that first annual reporting period and for interim and annual reporting periods
thereafter. Earlier application is prohibited. The requirements in the amendment must be applied
to transfers occurring on or after the effective date. We are currently evaluating the impact, if
any, that such requirements may have on our financial statements once adopted.
In April 2010, the FASB issued
accounting guidance for the milestone method of revenue recognition. This
guidance allows entities to make a policy election to use the milestone method
of revenue recognition and provides guidance on defining a milestone and the
criteria that should be met for applying the milestone method. The scope of
this guidance is limited to transactions involving milestones relating to
research and development deliverables. The guidance includes enhanced
disclosure requirements about each arrangement, individual milestones and
related contingent consideration, information about substantive milestones and
factors considered in the determination. This guidance is effective
prospectively to milestones achieved in fiscal years, and interim periods
within those years, beginning after June 15, 2010. Early application and
retrospective application are permitted. We are currently evaluating
the impact, if any, that this new guidance will have on the
determination or reporting of our financial results.
The FASB issued new guidance
relating to revenue recognition for contractual arrangements with multiple
revenue-generating activities. The ASC Topic for revenue recognition includes
identification of a unit of accounting and how arrangement consideration should
be allocated to separate the units of accounting, when applicable. The new
guidance, including expanded disclosures, is applied on a prospective basis
beginning on or after June 15, 2010.
35
Table of Contents
In June 2009, the FASB also issued an amendment to the accounting and disclosure requirements
for the consolidation of VIEs. This amendment requires an enterprise
to perform a qualitative analysis when determining whether or not it must consolidate a VIE. The
amendment also requires an enterprise to continuously reassess whether it must consolidate a VIE.
Additionally, the amendment requires enhanced disclosures about an enterprise’s involvement with
VIEs and any significant change in risk exposure due to that involvement, as well as how its
involvement with VIEs impacts the enterprise’s financial statements. Finally, an enterprise will
be required to disclose significant judgments and assumptions used to determine whether or not to
consolidate a VIE. This amendment is effective for financial statements issued for fiscal years
beginning after November 15, 2009. Earlier application is prohibited. We are currently evaluating
the impact, if any, that this amendment may have on our financial statements once adopted.
Item 7A. 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 the 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.
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 transactions.
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 June 30, 2010, the applicable interest rate was 5.94%. 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 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 June 30, 2010, 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.
Our revenue and results of operations would be adversely affected if we are unable to retain Hai
Hua as a customer and secure new customers.
36
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Item 8. Financial Statements and Supplementary Data
INDEX TO FINANCIAL STATEMENTS
| Page | ||||
| 38 | ||||
| 40 | ||||
| 41 | ||||
| 42 | ||||
| 43 | ||||
| 44 | ||||
37
Table of Contents
Report of Independent Registered Accounting Firm
To Board of Directors and Stockholders
Synthesis Energy Systems, Inc.
Synthesis Energy Systems, Inc.
In our opinion, the accompanying consolidated balance sheets and the related consolidated
statements of operations, of equity and of cash flows present fairly, in all material respects, the
financial position of Synthesis Energy Systems, Inc. and its subsidiaries (a development stage
enterprise) at June 30, 2010 and June 30, 2009, and the results of their operations and their cash
flows for the years then ended and, cumulatively, for the period from July 1, 2008 to June 30, 2010
in conformity with accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of the Company’s management. Our responsibility is to
express an opinion on these financial statements based on our audits. We did not audit the
cumulative totals of the Company for the period from November 4, 2003 (date of inception) to June
30, 2008, which totals reflect a deficit of $46,124,646 accumulated during the development stage.
Those cumulative totals were audited by other auditors whose report, dated September 12, 2008,
expressed an unqualified opinion on the cumulative amounts. We conducted our audits of these
statements in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
As
discussed in Note 2 to the consolidated financial statements, the
Company changed its method of accounting for noncontrolling interests
beginning on July 1, 2009.
/s/ PricewaterhouseCoopers LLP
September 23, 2010
September 23, 2010
38
Table of Contents
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Synthesis Energy Systems, Inc.:
Synthesis Energy Systems, Inc.:
We have audited the accompanying consolidated statements of operations, equity, and cash flows of
Synthesis Energy Systems, Inc. and subsidiaries (a development stage enterprise) (the Company) for
the year ended June 30, 2008 and for the period from November 4, 2003 (inception) to June 30, 2008.
These consolidated financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated financial statements based on our
audits.
We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the results of operations and cash flows of Synthesis Energy Systems, Inc. and
subsidiaries for the year ended June 30, 2008 and for the period from November 4, 2003 (inception)
to June 30, 2008, in conformity with U.S. generally accepted accounting principles.
/s/ KPMG LLP
Houston, Texas
September 12, 2008
September 12, 2008
39
Table of Contents
SYNTHESIS ENERGY SYSTEMS, INC.
(A Development Stage Enterprise)
(A Development Stage Enterprise)
Consolidated Balance Sheets
(In thousands)
(In thousands)
| June 30, | June 30, | |||||||
| 2010 | 2009 | |||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 42,573 | $ | 90,420 | ||||
Accounts receivable |
2,672 | 1,333 | ||||||
Prepaid expenses and other currents assets |
1,875 | 689 | ||||||
Inventory |
983 | 780 | ||||||
Total current assets |
48,103 | 93,222 | ||||||
Construction-in-progress |
565 | 6,078 | ||||||
Property, plant and equipment, net |
35,316 | 37,713 | ||||||
Intangible asset, net |
1,272 | 1,386 | ||||||
Investment in Yima joint ventures |
32,430 | 1,500 | ||||||
Other long-term assets |
2,895 | 6,237 | ||||||
Total assets |
$ | 120,581 | $ | 146,136 | ||||
LIABILITIES AND EQUITY |
||||||||
Current liabilities: |
||||||||
Accrued expenses and accounts payable |
$ | 7,008 | $ | 8,828 | ||||
Deferred revenue |
522 | — | ||||||
Current portion of long-term bank loan |
2,268 | 2,254 | ||||||
Total current liabilities |
9,798 | 11,082 | ||||||
Long-term bank loan |
6,744 | 8,958 | ||||||
Total liabilities |
16,542 | 20,040 | ||||||
Equity: |
||||||||
Common stock, $0.01 par value: 200,000 and
100,000 shares authorized: 48,337 and
48,118 shares issued and outstanding,
respectively |
483 | 481 | ||||||
Additional paid-in capital |
198,720 | 196,441 | ||||||
Deficit accumulated during development stage |
(96,449 | ) | (74,701 | ) | ||||
Accumulated other comprehensive income |
1,836 | 1,598 | ||||||
Total stockholders’ equity |
104,590 | 123,819 | ||||||
Noncontrolling interests in subsidiaries |
(551 | ) | 2,277 | |||||
Total equity |
104,039 | 126,096 | ||||||
Total liabilities and equity |
$ | 120,581 | $ | 146,136 | ||||
See accompanying notes to the consolidated financial statements.
40
Table of Contents
SYNTHESIS ENERGY SYSTEMS, INC.
(A Development Stage Enterprise)
(A Development Stage Enterprise)
Consolidated Statements of Operations
(In thousands, except per share amounts)
(In thousands, except per share amounts)
| November 4, 2003 | ||||||||||||||||
| Year Ended June 30, | (inception) | |||||||||||||||
| 2010 | 2009 | 2008 | to June 30, 2010 | |||||||||||||
Revenue: |
||||||||||||||||
Product sales and other — related parties |
$ | 8,423 | $ | 1,852 | $ | 203 | $ | 10,477 | ||||||||
Technology licensing and related services |
732 | — | — | 732 | ||||||||||||
Other |
146 | 250 | 125 | 521 | ||||||||||||
Total revenue |
9,301 | 2,102 | 328 | 11,730 | ||||||||||||
Costs and Expenses: |
||||||||||||||||
Costs of sales and plant operating expenses |
8,621 | 7,449 | 2,396 | 18,464 | ||||||||||||
General and administrative expenses |
12,220 | 16,395 | 13,147 | 48,654 | ||||||||||||
Project and technical development expenses |
1,873 | 1,046 | 5,615 | 11,055 | ||||||||||||
Asset impairment losses |
6,575 | 2,500 | — | 9,075 | ||||||||||||
Stock-based compensation expense |
2,179 | 1,869 | 6,029 | 19,760 | ||||||||||||
Depreciation and amortization |
2,674 | 2,905 | 1,202 | 7,010 | ||||||||||||
Total costs and expenses |
34,142 | 32,164 | 28,389 | 114,018 | ||||||||||||
Operating loss |
(24,841 | ) | (30,062 | ) | (28,061 | ) | (102,288 | ) | ||||||||
Non-operating (income) expense: |
||||||||||||||||
Equity in losses of Yima joint ventures |
39 | — | — | 39 | ||||||||||||
Interest income |
(133 | ) | (1,742 | ) | (397 | ) | (2,878 | ) | ||||||||
Interest expense |
668 | 959 | 388 | 2,017 | ||||||||||||
Net loss |
(25,415 | ) | (29,279 | ) | (28,052 | ) | (101,466 | ) | ||||||||
Less: net loss attributable to noncontrolling interests |
3,667 | 703 | 610 | 5,017 | ||||||||||||
Net loss attributable to stockholders |
$ | (21,748 | ) | $ | (28,576 | ) | $ | (27,442 | ) | $ | (96,449 | ) | ||||
Net loss per share: |
||||||||||||||||
Basic and diluted |
$ | (0.45 | ) | $ | (0.60 | ) | $ | (0.80 | ) | $ | (2.78 | ) | ||||
Weighted average common shares outstanding: |
||||||||||||||||
Basic and diluted |
48,230 | 48,017 | 34,385 | 34,724 | ||||||||||||
See accompanying notes to the consolidated financial statements.
41
Table of Contents
SYNTHESIS ENERGY SYSTEMS, INC.
(A Development Stage Enterprise)
(A Development Stage Enterprise)
Consolidated Statement of Equity
(In thousands)
(In thousands)
| Deficit | ||||||||||||||||||||||||||||
| Accumulated | Accumulated | |||||||||||||||||||||||||||
| Common Stock | During the | Other | Non- | |||||||||||||||||||||||||
| Common | Additional | Development | Comprehensive | controlling | ||||||||||||||||||||||||
| Shares | Stock | Paid-in Capital | Stage | Income | 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 UCF option exercise |
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 |
— | — | — | — | 238 | — | 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 | ) | $ | 1,836 | $ | (551 | ) | $ | 104,039 | |||||||||||||
See accompanying notes to the consolidated financial statements.
42
Table of Contents
SYNTHESIS ENERGY SYSTEMS, INC.
(A Development Stage Enterprise)
(A Development Stage Enterprise)
Consolidated Statements of Cash Flows
(In thousands)
(In thousands)
| November 4, 2003 | ||||||||||||||||
| Year Ended June 30, | (inception) | |||||||||||||||
| 2010 | 2009 | 2008 | to June 30, 2010 | |||||||||||||
Cash flows from operating activities: |
||||||||||||||||
Net loss |
$ | (25,415 | ) | $ | (29,279 | ) | $ | (28,052 | ) | $ | (101,466 | ) | ||||
Adjustments to reconcile net loss to net cash used in
operating activities: |
||||||||||||||||
Stock-based compensation expense |
2,179 | 1,869 | 6,029 | 19,760 | ||||||||||||
Depreciation of property, plant and equipment |
2,445 | 2,671 | 986 | 6,165 | ||||||||||||
Equity in losses of Yima joint ventures |
(39 | ) | — | — | (39 | ) | ||||||||||
Amortization of intangible and other assets |
229 | 234 | 215 | 845 | ||||||||||||
Loss on disposal of property, plant and equipment |
3 | 37 | 93 | 136 | ||||||||||||
Asset impairment losses |
6,575 | 2,500 | — | 9,075 | ||||||||||||
Changes in operating assets and liabilities: |
||||||||||||||||
Accounts receivable |
(1,331 | ) | (1,164 | ) | (168 | ) | (2,663 | ) | ||||||||
Prepaid expenses and other current assets |
(906 | ) | 1,578 | (462 | ) | (230 | ) | |||||||||
Inventory |
(199 | ) | (261 | ) | (516 | ) | (977 | ) | ||||||||
Other long-term assets |
154 | (1,353 | ) | (31 | ) | (1,230 | ) | |||||||||
Deferred revenue |
522 | — | — | 522 | ||||||||||||
Accrued expenses and payables |
(511 | ) | (3,581 | ) | 3,065 | 980 | ||||||||||
Net cash used in operating activities |
(16,294 | ) | (26,749 | ) | (18,841 | ) | (69,122 | ) | ||||||||
Cash flows from investing activities: |
||||||||||||||||
Capital expenditures |
(801 | ) | (4,155 | ) | (22,268 | ) | (37,957 | ) | ||||||||
Equity investment in Yima Joint Ventures |
(29,391 | ) | (1,500 | ) | — | (30,891 | ) | |||||||||
Purchase of marketable securities |
— | (45,000 | ) | — | (45,000 | ) | ||||||||||
Redemption of marketable securities |
— | 45,000 | — | 45,000 | ||||||||||||
GTI license royalty — Yima Joint Ventures |
— | (1,500 | ) | — | (1,500 | ) | ||||||||||
ExxonMobil license royalty |
— | (1,250 | ) | — | (1,250 | ) | ||||||||||
Proceeds from sale of fixed assets |
— | 7 | — | 7 | ||||||||||||
Restricted cash — investments in (redemptions of)
certificates of deposit |
50 | 150 | (579 | ) | (379 | ) | ||||||||||
Loan proceeds transferred from (to) restricted cash |
— | — | 11,101 | — | ||||||||||||
Amendment to GTI license rights |
— | — | — | (500 | ) | |||||||||||
Purchase of land use rights |
(177 | ) | — | (833 | ) | (1,896 | ) | |||||||||
Receipt of Chinese governmental grant |
— | — | 556 | 556 | ||||||||||||
Project prepayments |
— | (102 | ) | (895 | ) | (3,210 | ) | |||||||||
Net cash used in investing activities |
(30,319 | ) | (8,350 | ) | (12,918 | ) | (77,020 | ) | ||||||||
Cash flows from financing activities: |
||||||||||||||||
Payments on long-term bank loan |
(2,268 | ) | (2,253 | ) | — | (4,521 | ) | |||||||||
Proceeds from long-term bank loan |
— | — | — | 12,081 | ||||||||||||
Proceeds (costs) from issuance of common stock, net |
— | (107 | ) | 148,556 | 174,981 | |||||||||||
Prepaid interest |
— | — | — | (276 | ) | |||||||||||
Deferred financing costs |
— | — | — | (143 | ) | |||||||||||
Contributions from noncontrolling interest partners |
839 | — | 3,124 | 4,456 | ||||||||||||
Proceeds from exercise of stock options, net |
138 | 63 | 565 | 765 | ||||||||||||
Loans from shareholders |
— | — | — | 11 | ||||||||||||
Net cash provided by (used in) financing activities |
(1,291 | ) | (2,297 | ) | 152,245 | 187,354 | ||||||||||
Net increase (decrease) in cash |
(47,904 | ) | (37,396 | ) | 120,486 | 41,212 | ||||||||||
Cash and cash equivalents, beginning of period |
90,420 | 127,872 | 6,202 | — | ||||||||||||
Effect of exchange rates on cash |
57 | (56 | ) | 1,184 | 1,361 | |||||||||||
Cash and cash equivalents, end of period |
$ | 42,573 | $ | 90,420 | $ | 127,872 | $ | 42,573 | ||||||||
See accompanying notes to the consolidated financial statements.
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SYNTHESIS ENERGY SYSTEMS, INC.
(A Development Stage Enterprise)
(A Development Stage Enterprise)
Notes to the Consolidated Financial Statements
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 an alternative energy technology company that provides advanced technology products and
solutions to the energy and chemical industries. The Company builds, owns and operates coal
gasification plants that utilize our proprietary U-GAS® fluidized bed gasification
technology to convert low rank coal and coal wastes into higher value energy products. We provide
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 are in U.S. dollars and include SES and all of its
wholly-owned and majority-owned controlled subsidiaries. Noncontrolling interests in consolidated
subsidiaries in the consolidated balance sheets represent minority stockholders’ proportionate
share of the equity in such subsidiaries. All significant intercompany balances and transactions
have been eliminated in consolidation. Certain reclassifications have been made in prior period
financial statements to conform to current period presentation. These reclassifications had no
effect on net loss.
(c) Use of estimates
The preparation of financial statements in conformity with generally accepted accounting
principles requires management to make estimates that affect the amounts reported in the financial
statements and accompanying notes. Management considers many factors in selecting appropriate
operational and financial accounting policies and controls, and in developing the assumptions that
are used in the preparation of these financial statements. Management must apply significant
judgment in this process. Among the factors, but not fully inclusive of all factors that may be
considered by management in these processes are: the range of accounting policies permitted by
accounting principles generally accepted in the United States of America; management’s
understanding of the Company’s business for both historical results and expected future results;
the extent to which operational controls exist that provide high degrees of assurance that all
desired information to assist in the estimation is available and reliable or whether there is
greater uncertainty in the information that is available upon which to base the estimate;
expectations of the future performance of the economy, both domestically, and globally, within
various areas that serve the Company’s principal customers and suppliers of goods and services;
expected rates of exchange, sensitivity and volatility associated with the assumptions used in
developing estimates; and whether historical trends are expected to be representative of future
trends. The estimation process often times may yield a range of potentially reasonable estimates of
the ultimate future outcomes and management must select an amount that lies within that range of
reasonable estimates based upon the risks associated with the variability that might be expected
from the future outcome and the factors considered in developing the estimate. Management attempts
to use its business and financial accounting judgment in selecting the most appropriate estimate,
however, actual amounts could and will differ from those estimates.
(d) Cash and cash equivalents
The Company considers all highly liquid investments with original maturities of three months
or less to be cash equivalents. Cash equivalents are carried at cost, which approximates market
value.
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(e) Supplemental disclosures of cash flow information (in thousands):
| November 4, 2003 | ||||||||||||||||
| Years Ended June 30, | (inception) | |||||||||||||||
| 2010 | 2009 | 2008 | to June 30, 2010 | |||||||||||||
Interest paid |
$ | 608 | $ | 950 | $ | 918 | $ | 2,919 | ||||||||
Interest received |
133 | 1,746 | 416 | 2,850 | ||||||||||||
Non-cash transactions: |
||||||||||||||||
Accrued construction-in- progress |
101 | 1,556 | 367 | 101 | ||||||||||||
Stock issued to employees |
— | — | 19 | 52 | ||||||||||||
Fair value of stock issued to GTI |
— | — | 2,500 | 3,876 | ||||||||||||
Conversion of debt to equity |
— | — | — | 11 | ||||||||||||
(f) Restricted assets
At June 30, 2010, cash and cash equivalents included a $50,000 certificate of deposit which
collateralizes a company credit card program with a financial institution and included in current
assets was a $328,900 investment in a short-term certificate of deposit pledged as collateral for a
letter of credit issued in connection with the lease agreement for the Company’s corporate office
in Houston, Texas.
(g) Inventories
Inventories are stated at the lower of cost or market. Cost is determined using the average
cost method. Inventories include raw materials (primarily coal which is processed into syngas) and
replacement parts for plant equipment which are expensed to cost of
sales when consumed.
(h) Construction-in-progress
Construction-in-progress consists primarily of coal gasification plants under construction
including engineering and construction costs, cost of machinery and equipment, installation costs
and any interest charges arising from borrowings.
(i) Property, plant, and equipment
Property, plant and equipment are stated at cost, net of accumulated depreciation.
Depreciation is computed by using the straight-line method at rates based on the estimated useful
lives of the various classes of property, plant and equipment. Estimates of useful lives are based
upon a variety of factors including durability of the asset, the amount of usage that is expected
from the asset, the rate of technological change and the Company’s business plans for the asset.
Leasehold improvements are amortized on a straight-line basis over the shorter of the lease term or
estimated useful life of the asset. Should the Company change its plans with respect to the use and
productivity of property, plant and equipment, it may require a change in the useful life of the
asset or incur a charge to reflect the difference between the carrying value of the asset and the
proceeds expected to be realized upon the asset’s sale or abandonment. Expenditures for maintenance
and repairs are expensed as incurred and significant major improvements are capitalized and
depreciated over the estimated useful life of the asset.
(j) Intangible assets
The Company accounts for intangible assets in accordance with ASC 350, “Intangibles- Goodwill
and Other.” This standard requires that goodwill and other intangible assets with indefinite useful
lives not be amortized but instead tested annually for impairment, or immediately if conditions
indicate that impairment could exist. Intangible assets with definite useful lives are amortized
over their estimated useful lives and reviewed for impairment in accordance with ASC 360,
“Accounting for Impairment or Disposal of Long-Lived Assets.” Substantial judgment is necessary in
the determination as to whether an event or circumstance has occurred that may trigger an
impairment analysis and in the determination of the related cash flows from the asset. Estimating
cash flows related to long-lived assets is a difficult and subjective process that applies
historical experience and future business expectations to revenues and related operating costs of
assets. Should impairment appear to be necessary, subjective judgment must be applied to estimate
the fair value of the asset, for which there may be no ready market, which often times results in
the use of discounted cash flow analysis and judgmental selection of discount rates to be used in
the discounting process. If the Company determines an asset has been impaired based on the
projected undiscounted cash flows of the related asset or the business unit, and if
the cash flow analysis indicates that the carrying amount of an asset exceeds related
undiscounted cash flows, the carrying value is reduced to the estimated fair value of the asset. There were no events or circumstances that
triggered an impairment analysis of intangible assets during the year ended June 30, 2010.
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(k) Impairment of long-lived assets
The Company evaluates its long-lived assets, such as property, plant and equipment,
construction-in-progress, equity method investments and specifically identified intangibles, when
events or changes in circumstances indicate that the carrying value of such assets may not be
recoverable. When the Company believes an impairment condition may have occurred, it is required to
estimate the undiscounted future cash flows associated with a long-lived asset or group of
long-lived assets at the lowest level for which identifiable cash flows are largely independent of
the cash flows of other assets and liabilities for long-lived assets that are expected to be held
and used. The Company evaluates its operating plants as a whole. Production equipment at each plant
is not evaluated for impairment separately, as it is integral to the assumed future operations of
the plant. All construction and development projects are reviewed for impairment whenever there is
an indication of potential reduction in fair value. If it is determined that it is no longer
probable that the projects will be completed and all capitalized costs recovered through future
operations, the carrying values of the projects would be written down to the recoverable value. If
the Company determines that the undiscounted cash flows from an asset to be held and used are less
than the carrying amount of the asset, or if the Company has classified an asset as held for sale,
it estimates fair value to determine the amount of any impairment charge.
Due to the business climate, the recessionary trends that have significantly affected
commodity prices including methanol, and the ZZ Joint Venture plant’s operating losses to-date,
including the year ended June 30, 2010, the Company believed an impairment assessment of the
plant’s assets was warranted. As of June 30, 2010, the Company performed an analysis of this
project and has determined that these assets were not impaired.
The Company recognized an impairment loss of approximately $6.6 million during the three
months ended December 31, 2009 to write-off the long-lived assets of the GC Joint Venture.
(l) Income taxes
The Company accounts for income taxes using the asset and liability method. Deferred tax
liabilities and assets are determined based on temporary differences between the basis of assets
and liabilities for income tax and financial reporting purposes. The deferred tax assets and
liabilities are classified according to the financial statement classification of the assets and
liabilities generating the differences. Valuation allowances are established when necessary based
upon the judgment of management to reduce deferred tax assets to the amount expected to be realized
and could be necessary based upon estimates of future profitability and expenditure levels over
specific time horizons in particular tax jurisdictions. The Company recognizes the tax benefit from
an uncertain tax position when, based on technical merits, it is more likely than not the position
will be sustained on examination by the taxing authorities.
(m) Debt issuance costs
The Company capitalizes direct costs incurred to issue debt or modify debt agreements. These
costs, which are included in other long-term assets on the Company’s consolidated balance sheet,
are deferred and amortized to interest expense over the term of the related debt agreement.
(n) Land use rights
Prepayments for land use rights are amortized on a straight-line basis over the term of the
rights agreements and are included in long-term assets on the Company’s consolidated balance sheet.
(o) Foreign currency translation
Assets and liabilities of the Company’s foreign subsidiaries are translated into U.S. dollars
at period-end rates of exchange, and income and expenses are translated at average exchange rates
during the period. For the years ended June 30, 2010, 2009 and 2008, adjustments resulting from
translating financial statements into U.S. dollars are reported as cumulative translation
adjustments and are shown as a separate component of other comprehensive income. Gains and losses
from foreign currency transactions are included in the calculation of net loss.
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(p) Revenue recognition
Revenue from sales of products, which includes the capacity fee and energy fee earned at the
ZZ Joint Venture plant, 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 terms under the
licensing agreement are finalized with the licensee. The Company recognizes revenue from
engineering services under the percentage-of-completion method.
(q) Stock-based compensation
The Company has a stock-based compensation plan under which stock-based awards have been
granted to employees and non-employees. Stock-based compensation is accounted for in accordance
with ASC 718, “Compensation – Stock Compensation.” The Company establishes fair values for its
equity awards to determine its cost and recognizes the related expense over the appropriate vesting
period. The Company recognizes expense for stock options and restricted stock awards. For
stock-based awards vesting based on service period, the value of the portion of the award that is
ultimately expected to vest is recognized as expense over the requisite service period on a
straight-line basis for each separately vesting portion of the award as if the award was, in
substance, multiple awards. See Note 12 for additional information related to stock-based
compensation expense.
(r) Accounting for variable interest entities (VIEs) and financial statement consolidation criteria
The Company’s joint ventures are VIEs. The Company consolidates all VIEs where the Company is
the primary beneficiary. This determination is made at the inception of the Company’s involvement
with the VIE. The Company considers both qualitative and quantitative factors and forms a
conclusion that the Company, or another interest holder, absorbs a majority of the entity’s risk
for expected losses, receives a majority of the entity’s potential for expected residual returns,
or both.
The Company does not consolidate VIE’s where the Company is not the primary beneficiary. The
Company accounts for unconsolidated VIEs under the equity method of accounting and includes the
Company’s net investments on the Company’s consolidated balance sheets. The Company’s equity
interest in the net income (loss) from unconsolidated VIEs is recorded in non-operating (income)
expense on a net basis on the Company’s consolidated statements of operations.
(s) 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). |
The carrying value of the Company’s non-financial items including accounts receivable,
investment in the Yima Joint Ventures, accounts payable and long-term debt approximate their fair
values.
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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 June 30, 2010 and 2009 (in
thousands):
| June 30, 2010 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Assets: |
||||||||||||||||
Certificates of Deposit |
$ | — | $ | 379 | (1) | $ | — | $ | 379 | |||||||
Money Market Funds |
— | 38,624 | (2) | — | 38,624 | |||||||||||
| June 30, 2009 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Assets: |
||||||||||||||||
Certificates of Deposit |
$ | — | $ | 679 | $ | — | $ | 679 | ||||||||
Money Market Funds |
— | 89,035 | (2) | — | 89,035 | |||||||||||
| (1) | Amount included in other current assets on the Company’s consolidated balance sheet. |
|
| (2) | Amount included in cash and cash equivalents on the Company’s consolidated balance sheet. |
On July 1, 2009, the Company adopted a newly issued accounting standard for fair value
measurements of all nonfinancial assets and nonfinancial liabilities not recognized or disclosed at
fair value in the financial statements on a nonrecurring basis. This accounting standard has not
had a material impact on the Company’s financial position, results of operations or liquidity.
The Company uses observable inputs when available. When observable inputs are not available,
the Company uses internally developed, unobservable inputs (Level 3 inputs in the fair value
hierarchy of fair value accounting) to estimate cash flow projections used in its analysis to
determine whether its long-lived assets are impaired.
(t) Comprehensive income (loss)
Our comprehensive income (loss) was as follows (in thousands):
| Three Months Ended June 30, | Twelve Months Ended June 30, | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
Net loss, as reported |
$ | (3,742 | ) | $ | (6,742 | ) | $ | (25,415 | ) | $ | (29,279 | ) | ||||
Unrealized foreign currency translation adjustment |
223 | 9 | 238 | 44 | ||||||||||||
Comprehensive loss |
(3,519 | ) | (6,733 | ) | (25,177 | ) | (29,235 | ) | ||||||||
Less comprehensive loss attributable to
noncontrolling interests |
51 | 48 | 3,667 | 692 | ||||||||||||
Comprehensive loss attributable to SES |
$ | (3,468 | ) | $ | (6,685 | ) | $ | (21,510 | ) | $ | (28,543 | ) | ||||
Note 2 — Recently Issued Accounting Standards
In December 2007, the Financial Accounting Standards Board (“FASB”) revised the authoritative
guidance for business combinations which establishes principles and requirements for how the
acquirer in a business combination (1) recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the
acquiree, (2) recognizes and measures the goodwill acquired in the business combination or a gain
from a bargain purchase and (3) determines what information to disclose to enable users of the
financial statements to evaluate the nature and financial effects of the business combination. This
guidance applies prospectively to business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after December 15, 2008.
The Company’s adoption of this revised guidance on July 1, 2009 did not have any impact on its
consolidated results of operations or financial condition as it did not have any business
combination activity during the year ended June 30, 2010.
Additionally, the FASB amended the factors that should be considered in developing renewal or
extension assumptions used to determine the useful life of a recognized intangible asset to improve
the consistency between the useful life of a recognized intangible asset and the period of expected
cash flows used to measure the fair value of the asset under the current guidance concerning
business combinations and other U.S. generally accepted accounting principles. This new guidance
is effective for financial statements issued for fiscal years beginning after December 15, 2008,
and interim periods within those fiscal years. The Company’s adoption of the new guidance on
July 1, 2009 did not have a significant impact on its consolidated financial position, results of
operations or cash flows.
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In December 2007, the FASB issued authoritative guidance which established new accounting and
reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of
a subsidiary. The new guidance requires the recognition of a noncontrolling interest (minority
interest) as equity in the consolidated financial statements and separate from the parent’s
equity. The
amount of net income attributable to the noncontrolling interest will be included in
consolidated net income on the face of the income statement. This guidance clarifies that changes
in a parent’s ownership interest in a subsidiary that do not result in deconsolidation are equity
transactions if the parent retains its controlling financial interest. In addition, it requires
that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated. Such
gain or loss will be measured using the fair value of the noncontrolling equity investment on the
deconsolidation date. Additionally, there are expanded disclosure requirements regarding the
interests of the parent and its noncontrolling interest. This guidance is effective for fiscal
years, and interim periods within those fiscal years, beginning on or after December 15, 2008. The
Company adopted the new guidance on July 1, 2009 and applied the provisions to its fiscal 2010
financial statements and retroactively to all prior periods presented.
In May 2008, the FASB issued new authoritative guidance which establishes general standards of
accounting and disclosure of events that occur after the balance sheet date but before the
financial statements are issued. This guidance sets forth (1) the period after the balance sheet
date during which management should evaluate events or transactions that may occur for potential
recognition or disclosure in the financial statements, (2) the circumstances under which an entity
should recognize events or transactions occurring after the balance sheet date and (3) the
disclosures an entity should make about such events or transactions.
In June 2009, the FASB issued the FASB Accounting Standards Codification (“Codification”). The
Codification became the single source for all authoritative generally accepted accounting
principles (“GAAP”) recognized by the FASB to be applied for financial statements issued for
periods ending after September 15, 2009. The Codification does not change GAAP and did not have an
effect on our financial position, results of operations or cash flows.
In January 2010, the FASB issued an amendment to the disclosure requirement related to fair
value measurements. The amendment requires new disclosures related to transfers in and out of
Levels 1 and 2 and activity in Level 3 fair value measurements. A reporting entity is required to
disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair
value measurements and describe the reasons for the transfers. Additionally, in the reconciliation
for fair value measurements in Level 3, a reporting entity must present separately information
about purchases, sales, issuances and settlements (on a gross basis rather than a net number). The
new disclosures are effective for interim and annual reporting periods beginning after December 15,
2009, except for the disclosures about purchases, sales, issuances and settlements in the roll
forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal
years beginning after December 15, 2010 and for interim periods within those fiscal years. The
Company does not anticipate that our adoption of this amendment will have a material effect on its
financial position, results of operations or cash flows.
In June 2009, the FASB issued an amendment to the accounting and disclosure requirements for
transfers of financial assets. This amendment applies to the financial reporting of a transfer of
financial assets; the effects of a transfer on an entity’s financial position, financial
performance and cash flows; and a transferor’s continuing involvement, if any, in transferred
financial assets. It eliminates (1) the exceptions for qualifying special-purpose entities from
the consolidation guidance and (2) the exception that permitted sale accounting for certain
mortgage securitizations when a transferor has not surrendered control over the transferred
financial assets. The provisions of this amendment must be applied as of the beginning of each
reporting entity’s first annual reporting period that begins after November 15, 2009, for interim
periods within that first annual reporting period and for interim and annual reporting periods
thereafter. Earlier application is prohibited. The requirements in the amendment must be applied
to transfers occurring on or after the effective date. The Company is currently evaluating the
impact, if any, that such requirements may have on its financial statements once adopted.
In June 2009, the FASB also issued an amendment to the accounting and disclosure requirements
for the consolidation of variable interest entities (“VIEs”). This amendment requires an enterprise
to perform a qualitative analysis when determining whether or not it must consolidate a VIE. The
amendment also requires an enterprise to continuously reassess whether it must consolidate a VIE.
Additionally, the amendment requires enhanced disclosures about an enterprise’s involvement with
VIEs and any significant change in risk exposure due to that involvement, as well as how its
involvement with VIEs impacts the enterprise’s financial statements. Finally, an enterprise will
be required to disclose significant judgments and assumptions used to determine whether or not to
consolidate a VIE. This amendment is effective for financial statements issued for fiscal years
beginning after November 15, 2009. Earlier application is prohibited. The Company is currently
evaluating the impact, if any, that this amendment may have on its financial statements once
adopted.
In April 2010, the FASB issued
accounting guidance for the milestone method of revenue recognition. This
guidance allows entities to make a policy election to use the milestone method
of revenue recognition and provides guidance on defining a milestone and the
criteria that should be met for applying the milestone method. The scope of
this guidance is limited to transactions involving milestones relating to
research and development deliverables. The guidance includes enhanced
disclosure requirements about each arrangement, individual milestones and
related contingent consideration, information about substantive milestones and
factors considered in the determination. This guidance is effective
prospectively to milestones achieved in fiscal years, and interim periods
within those years, beginning after June 15, 2010. Early application and
retrospective application are permitted. The Company is currently
evaluating the impact, if any, that this new
guidance will have on the determination or reporting of its financial
results.
The FASB issued new guidance
relating to revenue recognition for contractual arrangements with multiple
revenue-generating activities. The ASC Topic for revenue recognition includes
identification of a unit of accounting and how arrangement consideration should
be allocated to separate the units of accounting, when applicable. The new
guidance, including expanded disclosures, is applied on a prospective basis
beginning on or after June 15, 2010.
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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. (which was acquired by China National Offshore Oil Corporation
in September 2009), (“Hai Hua”), which established Synthesis Energy Systems (Zao Zhuang) New Gas
Company Ltd., or 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 95.5% of the ZZ
Joint Venture and Hai Hua owns the remaining 4.5%. The Company has contributed approximately $27.0
million in equity capital to the ZZ Joint Venture and Hai Hua has contributed approximately $1.3
million in equity capital. The remainder of the ZZ Joint Venture’s capital has been funded by
intercompany loans from the Company. For the first 20 years after the commercial operation date of
the plant, the net profits and losses of the ZZ Joint Venture will be distributed to the Company
and to Hai Hua based on the parties’ ownership interest. After the initial 20 years, the profit
distribution percentages will be changed, with the Company receiving 10% of the net profits/losses
of the ZZ Joint Venture and Hai Hua receiving 90%. 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, Hai Hua has operated at a reduced rate of
syngas consumption. Hai Hua used approximately 35% to 45% of the syngas guarantee capacity during
2009 and has forecasted the same level of syngas consumption through December 2010.
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 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.
In order to make up for the reduced energy fee, the ZZ Joint Venture entered into an
additional agreement with Hai Hua whereby the cost of operating the plant’s air separation unit, or
ASU, can be shared between the two parties based on the oxygen consumption of the respective
parties over the relevant period. The ZZ Joint Venture began to provide oxygen to Hai Hua in
September 2009. This cost sharing arrangement has increased the ZZ Joint Venture’s byproduct
revenues and has reduced the operating costs of Hai Hua by allowing the parties to operate only one
ASU instead of both parties operating their respective ASU’s at low capacity.
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To date, Hai Hua has been unable to offtake the volume of syngas originally expected for the
original plant design and the plant has incurred operating losses. We do not foresee Hai Hua’s
volume offtake changing significantly in the near term. In an effort to improve the return on our
investment in this plant, we are evaluating alternative products and partnership structures for a
possible expansion of the ZZ Joint Venture plant to produce products such as glycol. We have
entered into an investment cooperation framework agreement with a local Zao Zhuang area coal mining
company which outlines proposed terms for a structure to expand the plant. We do not expect any
additional equity for an expansion would be required from us as we continue to expect to
contribute our 95.5% equity interest toward the expansion with third parties contributing all the
additional required equity to expand the 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 for us 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. In addition, a provincial level coal
company has also expressed interest in becoming our partner on this expansion. We are working with
local government entities and prospective partners to finalize the partnership and project
structure
Due to the business climate, the recessionary trends that have significantly affected
commodity prices including methanol, and the ZZ Joint Venture plant’s operating losses to-date
including the year ended June 30, 2010, the Company believed an impairment assessment of the
plant’s assets was warranted. As of June 30, 2010, the Company performed an analysis of this
project and has determined that these assets were not impaired based upon management’s estimated
cash flow projections for the project. If the Company is not successful in improving the ZZ Joint
Venture’s profitability, or if management’s estimated cash flow projections for these assets
decrease, or if Hai Hua does not make its required payments, the plant’s assets could be impaired.
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 June 30, 2010, the applicable interest rate was 5.94% and
is payable monthly; |
| • | Principal payments of $1.1 million are due in March and September of each year beginning
on September 22, 2008 and ending on March 31, 2014; |
| • | 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 Zao Zhuang
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 June 30, 2010, the ZZ Joint Venture was in compliance with all covenants and obligations
under the Fixed Asset Loan Contract.
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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. During the
three months ended September 30, 2009, the Company 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 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.
During this first quarter of fiscal 2011, Yima expressed their intent to convert the existing
project from methanol production to glycol production. Yima has communicated their belief that the
prospect for strong economic performance of the plant can be improved by modifying the backend of
the project to make glycol. This is due to the relatively low margins on methanol today versus
the more robust margins that could be achieved from glycol production. In addition, Yima has
recently acquired a nearby coal to methanol facility and is looking to diversify and sees glycol as
a potentially more profitable alternative. The Company has indicated to Yima that it would be
willing to support this scope change if both parties can agree upon appropriate modifications to
the joint venture contracts that can improve the Company’s overall risk and return without
requiring any additional capital investment from the Company. Yima’s project management team
believes that this change can be executed without delaying the original schedule for commercial
operation. The Company has agreed to work diligently with Yima to restructure the agreements as
necessary to achieve these goals.
Construction activities for site preparation are currently underway and a Chinese engineering
company has been selected for the project’s engineering work. The remaining construction and
commissioning of the project is expected to take approximately two years. Yima is the project
management leader for the project and has indicated their belief that the change in the scope of
the project would not delay this schedule. 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 and the Company expects this
guarantee will allow debt financing to be obtained 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 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.
During the year ended June 30, 2010, the Company recognized $0.6 million of other revenue for
engineering services provided to the Yima Joint Ventures.
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.
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The Company’s equity in losses of Yima joint ventures for the year ended June 30, 2010 were
$39,000. The following table presents summarized financial information for the Company’s
unconsolidated Yima Joint Ventures:
| Year ended | ||||
| (In thousands) | June 30, 2010 | |||
Revenue |
$ | — | ||
Operating loss |
(1,189 | ) | ||
Net loss |
(157 | ) | ||
| As of | ||||
| (In thousands) | June 30, 2010 | |||
Current assets |
$ | 118,073 | ||
Noncurrent assets |
11,694 | |||
Current liabilities |
6,046 | |||
Noncurrent liabilities |
— | |||
Golden Concord Joint Venture
The Company’s joint venture with Golden Concord was formed to (i) develop, construct and
operate a coal gasification, methanol and dimethyl either (“DME”) production plant utilizing
U-GAS® technology in the Xilinghote Economic and Technology Development Zone, Inner
Mongolia Autonomous Region, China and (ii) produce and sell methanol, DME and the various
byproducts of the plant, including fly ash, steam, sulphur, hydrogen, xenon and argon. At the time
of the formation of the GC Joint Venture, the Company agreed to contribute approximately $16.3
million in cash in exchange for a 51% ownership interest in the GC Joint Venture, and Golden
Concord agreed to contribute approximately $16.0 million in cash for the remaining 49% ownership
interest in the GC Joint Venture. The Company consolidates the results of the GC Joint Venture in
its consolidated financial statements. The Company has funded a total of $3.4 million of its equity
contribution and Golden Concord has additionally funded approximately $3.1 million of its equity
contribution as of June 30, 2010. These funds were used for engineering and initial construction
work for this project, land use rights, and for its development expenses.
During the three months ended
December 31, 2009, the Company determined that Golden Concord and other
potential partners were not interested in the GC Joint Venture project’s
investment as originally envisioned. However, since the formation of the GC
Joint Venture, the Company has continued to make progress demonstrating the
capability of its technology. This progress has attracted the interest of some
of China’s coal to energy companies that are interested in using
U-GAS®
technology for larger scale projects such as SNG. Due to the need to
shift the project to a larger scale and higher value end product alternative
such as SNG, it was determined that development of the project would be delayed
significantly. The Company believed that the GC Joint Venture project, as
originally planned, would not be developed at that time. Due to these facts and
circumstances, the Company determined that, as of December 31, 2009, it
was improbable that the long-lived assets of the GC Joint Venture would be
recovered. Therefore, the Company recognized an impairment loss of approximately $6.6 million during the three
months ended December 31, 2009 to write-off the long-lived assets of the GC Joint Venture. Golden
Concord’s noncontrolling interest balance was a deficit of approximately $0.8 million as of June
30, 2010.
The Company is continuing to develop this project and has shifted its focus to include end
products such as SNG, glycol, olefins, methanol and DME that can be economically produced from
local low rank coal when utilizing the U-GAS® technology and which are of strategic
interest to possible partners in China, including state owned, private and publicly traded gas
companies. The Company has entered into a cooperation agreement with a local Chinese company who
is assisting with obtaining certain necessary government approvals and who may desire to continue
the development of the project.
Note 4 — Risks and Uncertainties
Since mid-2008, the global economy has experienced a significant contraction, with an almost
unprecedented lack of availability of business and consumer credit, which has impeded, and could
continue to impede, the Company’s ability to obtain financing for its projects. Although the
Company is seeing signs of improved economic activity, this decrease and any future decrease
in economic activity in China 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 or 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.
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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 June 30, 2010, 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. The
Company’s
revenue and results of operations would be adversely affected if it is unable to retain Hai
Hua as a customer or secure new customers. 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 have led to the impairment of the GC
Joint Venture’s assets and 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 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.
Note 5 — Property, Plant and Equipment
Property, plant and equipment consisted of the following (in thousands):
| Estimated | June 30, | |||||||||||
| useful lives | 2010 | 2009 | ||||||||||
Furniture and fixtures |
2 to 3 years | $ | 312 | $ | 384 | |||||||
Production equipment |
20 years | 31,599 | 31,295 | |||||||||
Building — plant and office |
30 years | 7,344 | 7,736 | |||||||||
Leasehold improvements |
Lease term | 115 | 131 | |||||||||
Computer hardware |
3 years | 376 | 397 | |||||||||
Computer software |
3 years | 901 | 897 | |||||||||
Office equipment |
3 years | 233 | 240 | |||||||||
Motor vehicles |
5 years | 197 | 211 | |||||||||
| $ | 41,077 | $ | 41,291 | |||||||||
Less: Accumulated depreciation |
(5,761 | ) | (3,578 | ) | ||||||||
Net carrying value |
$ | 35,316 | $ | 37,713 | ||||||||
Depreciation expense for the years ended June 30, 2010, 2009, 2008 was $2.4 million, $2.7
million, and $1.0 million, respectively.
Note 6 — Detail of Selected Balance Sheet Accounts
Inventory consisted of the following (in thousands):
| June 30, | ||||||||
| 2010 | 2009 | |||||||
Raw Materials |
$ | 983 | $ | 192 | ||||
Parts and assemblies |
— | 588 | ||||||
| $ | 983 | $ | 780 | |||||
Construction-in-progress related to the following projects (in thousands):
| June 30, | ||||||||
| 2010 | 2009 | |||||||
Golden Concord JV |
$ | — | $ | 4,821 | ||||
ZZ Joint Venture |
565 | 1,257 | ||||||
| $ | 565 | $ | 6,078 | |||||
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Other long-term assets consisted of the following (in thousands):
| June 30, | ||||||||
| 2010 | 2009 | |||||||
GTI license royalty — Yima Joint Ventures (a) |
$ | — | $ | 1,500 | ||||
Land use rights |
739 | 1,448 | ||||||
Project prepayments |
— | 666 | ||||||
GTI license royalty, net — ZZ Joint Venture |
733 | 744 | ||||||
Restricted cash |
— | 329 | ||||||
Value added tax receivable — ZZ Joint Venture |
1,284 | 1,368 | ||||||
Other |
139 | 182 | ||||||
| $ | 2,895 | $ | 6,237 | |||||
| (a) | In June 2009, the Company agreed to pay GTI a non-refundable payment of $1.5 million
toward future royalties due to GTI for the Yima Joint Ventures’ project. Upon formation of
the Yima Joint Ventures, the Company reclassified this cost as part of its investment in
the Yima Joint Ventures. |
Accrued expenses and other payables consisted of the following (in thousands):
| As of June 30, | ||||||||
| 2010 | 2009 | |||||||
Construction and equipment costs |
$ | 3,308 | $ | 4,880 | ||||
Accounts payable — trade |
293 | 562 | ||||||
Accrued payroll, vacation and bonuses |
907 | 1,025 | ||||||
Technical consulting, engineering and design services |
459 | 423 | ||||||
Yima Joint Ventures consulting fee |
924 | — | ||||||
Book overdrafts |
— | 1,003 | ||||||
Other |
1,117 | 935 | ||||||
| $ | 7,008 | $ | 8,828 | |||||
Note 7 — Intangible assets
GTI License Agreement
On November 5, 2009, the Company entered into an Amended and Restated License Agreement (“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.
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.
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For each U-GAS® unit which the Company licenses, designs, builds or operates for
itself or for a party other than a sub licensee 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
with the year ended 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 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.
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.
Other Services
GTI also offers various technical services including but not limited to laboratory testing of
coal samples and plant design review. While the Company has no obligations to do so, the Company
has requested GTI to provide various services including: (i) developing an industry-standard
process model for performance and cost evaluations of U-GAS®, (ii) replenishing and
enlarging the intellectual property portfolio for U-GAS® technology and (iii) assisting
the Company with appropriate design support for gasification opportunities that would include fuel
feeder, gasifier, solids separation and solids handling systems sizing and configuration.
During fiscal 2007, the Company paid GTI $500,000 cash and issued to GTI 190,500 shares of
restricted common stock valued at approximately $1.4 million as consideration for the U-GAS® license.
The cost and accumulated amortization of intangible assets were as follows (in thousands):
| As of June 30, 2010 | As of June 30, 2009 | |||||||||||||||||||||||
| Gross | Gross | |||||||||||||||||||||||
| Carrying | Accumulated | Carrying | Accumulated | |||||||||||||||||||||
| Amount | Amortization | Net | Amount | Amortization | Net | |||||||||||||||||||
Use rights of U-GAS® |
$ | 1,886 | $ | 725 | $ | 1,161 | $ | 1,886 | $ | 537 | $ | 1,349 | ||||||||||||
Other intangible assets |
111 | — | 111 | 37 | — | 37 | ||||||||||||||||||
Total |
$ | 1,997 | $ | 725 | $ | 1,272 | $ | 1,923 | $ | 537 | $ | 1,386 | ||||||||||||
The use rights of U-GAS® have an amortization period of ten years. Amortization
expense was $0.2 million for each of the years ended June 30, 2010, 2009 and 2008 and is recorded
in depreciation and amortization expense. Estimated amortization expense for each of the five
subsequent fiscal years is expected to be $0.2 million.
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Note 8 — Income taxes
For financial reporting purposes, net loss before income taxes and noncontrolling interest
showing domestic and foreign sources was as follows (in thousands):
| Year Ended June 30, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
Domestic |
$ | (8,289 | ) | $ | (9,992 | ) | $ | (18,969 | ) | |||
Foreign |
(17,126 | ) | (19,287 | ) | (9,083 | ) | ||||||
Net loss before noncontrolling interest |
$ | (25,415 | ) | $ | (29,279 | ) | $ | (28,052 | ) | |||
Provision for income taxes
The following is a reconciliation of income taxes at the statutory federal income tax rate of
35% to the income tax provision (benefit) recorded (in thousands):
| Year Ended June 30, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
Net loss before noncontrolling interest |
$ | (25,415 | ) | $ | (29,279 | ) | $ | (28,052 | ) | |||
Computed tax benefit at statutory rate |
(8,896 | ) | (10,247 | ) | (9,818 | ) | ||||||
Other |
105 | 463 | 88 | |||||||||
Tax on income (losses) from foreign operations |
2,318 | 4,400 | 1,822 | |||||||||
Valuation allowance |
6,473 | 5,384 | 7,908 | |||||||||
| $ | — | $ | — | $ | — | |||||||
Deferred tax assets (liabilities)
Net deferred asset (liabilities) consisted of the following (in thousands):
| Year Ended June 30, | ||||||||
| 2010 | 2009 | |||||||
Deferred tax assets (liabilities): |
||||||||
Net operating loss carry forward |
$ | 18,374 | $ | 12,833 | ||||
Depreciation and amortization |
6 | (32 | ) | |||||
Stock-based compensation |
5,183 | 4,613 | ||||||
Accrued vacation |
9 | 23 | ||||||
Accrued bonus |
— | 97 | ||||||
Other accruals |
963 | 529 | ||||||
Subtotal |
24,535 | 18,063 | ||||||
Valuation allowance |
(24,535 | ) | (18,063 | ) | ||||
Net deferred assets (liabilities) |
$ | — | $ | — | ||||
At June 30, 2010, the Company had approximately $31.2 million of U.S. federal net operating
loss (“NOL”) carryforwards, and $29.9 million of China NOL carryforwards. The U.S. federal NOL
carryforwards have expiration dates through the year 2028. The China NOL carry forwards have
expiration dates through 2013. The utilization of U.S. federal NOLs and other tax attributes may be
limited due to changes in ownership from equity offerings that occurred during the year and any
future equity offerings.
The Company’s tax returns are subject to periodic audit by the various taxing jurisdictions in
which the Company operates, which can result in adjustments to its NOLs. There are no significant
audits underway at this time.
In assessing the realizability of deferred tax assets, management considers whether it is more
likely than not that some portion or all of the deferred tax assets will not be realized. Based on
the level of historical taxable income and projections for future taxable income over the periods
in which the deferred tax assets are deductible, management believes it is more likely than not
that the Company will not realize the benefits of these deductible differences. Future changes in
estimates of taxable income or in tax laws may change the need for the valuation allowance.
The Company and one of its subsidiaries files income tax returns in the U.S. federal
jurisdiction, and various states and foreign jurisdictions. The Company has been subject to U.S.
federal, state, and local, or non-U.S. income tax examinations by tax authorities
for all tax years since its operations began in 2003. As of June 30, 2010, the Internal
Revenue Service (“IRS”) has not proposed any adjustments to the Company’s material tax positions.
The Company establishes reserves for positions taken on tax matters which, although considered
appropriate under the regulations, could potentially be successfully challenged by authorities
during a tax audit or review. The Company did not have any liability for uncertain tax positions as
of June 30, 2010 or 2009.
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Note 9 — Net Loss Per Share Data
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 are the only potential dilutive share
equivalents the Company has outstanding for the periods presented. For the years ended June 30,
2010, 2009 and 2008 and the period from November 4, 2003 (inception) to June 30, 2010, options to
purchase shares of common 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 the periods.
Note 10 — Commitments and Contingencies
Letters of credit
On January 14, 2008, the Company entered into a 63 month lease agreement, with a 60 month
optional renewal, for its new corporate office in Houston, Texas. The lease commenced on March 27,
2008 with rental payments of $20,308 per month for the first year and escalating thereafter
annually. The obligations of the Company under the lease are secured by a letter of credit for
$328,900, which will be paid to the landlord if the Company commits any default under the lease
which is not cured. The letter of credit remains in place until the third anniversary of the lease.
The Company has a $328,900 investment in a short-term certificate of deposit pledged as collateral
for this letter of credit and also pays an annual fee of 1.0% on this letter of credit.
Operating leases
The Company occupies approximately 10,000 square feet of leased office space in Houston,
Texas. The Company also leases approximately 6,000 square feet of office space in Shanghai, China.
Rental expenses incurred under operating leases for the years ended June 30, 2010, 2009, 2008 and
the period from November 4, 2003 (inception) to June 30, 2010 were approximately $0.4 million, $0.3
million $0.3 million and $1.1 million, respectively. Future minimum lease payments under
non-cancelable operating leases (with initial or remaining lease terms in excess of one year) as of
June 30, 2010 are as follows (in thousands):
| Years Ending June 30, | Total | |||
2011 |
$ | 390 | ||
2012 |
265 | |||
2013 |
264 | |||
Thereafter |
— | |||
Total operating lease commitments |
$ | 919 | ||
Litigation
In September 2008, the Company was named as one of a number of defendants in a lawsuit filed
in the U.S. District Court for the Central District of California, Southern Division, by Igor
Olenicoff, one of its former stockholders, and a company he controls. Also named were Timothy E.
Vail (our former CEO and one of the Company’s directors), David Eichinger (the Company’s former
CFO), and another one of the Company’s directors (collectively, the Company, Mr. Vail, Mr.
Eichinger and the director are referred to as the “SES Defendants”), as well as UBS AG, Union
Charter Ltd., and other persons who allegedly managed Mr. Olenicoff’s investments outside the U.S.
The SES Defendants have been named in this lawsuit based primarily upon allegations that one of our
former stockholders, Teflomi Trade & Trust, Inc., was a shell company formed for the purposes of
holding Mr. Olenicoff’s assets overseas, and that the SES Defendants allegedly had knowledge of
this arrangement. The claims initially asserted against the SES Defendants included, among others,
securities fraud in violation of Rule 10b-5 under the Securities Act and the California state law
equivalent, violations of the Racketeer Influenced and Corrupt Organizations Act, or RICO, common
law fraud and negligent misrepresentation, breach of fiduciary duty, conspiracy and unfair business
practices. On the SES Defendants’ motion, on July 31, 2009, the court issued an order dismissing
the securities fraud claims as to each of
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the
SES Defendants and the common law fraud, negligent misrepresentation claim and breach of fiduciary duty claims as to us, Mr. Vail and Mr.
Eichinger. The court determined that certain other claims, including RICO, conspiracy and unfair
business practices, were sufficiently pled and could proceed at this stage. Plaintiffs were given
leave to amend and, on August 24, 2009, filed an amended complaint attempting to replead their
securities fraud claims, and alleged a new claim for violation of the Uniform Commercial Code (the
“UCC”). In response, on September 23, 2009, the SES Defendants filed a motion to dismiss the
securities fraud and UCC claims. The court heard oral argument on the SES Defendants’ motion to
dismiss, and on various other defendants’ motions to dismiss, on November 9, 2009. On March 16,
2010, the court issued an order on the pending motions to dismiss, dismissing the securities fraud
and UCC claims as to each of the SES Defendants. Thus, the claims that remain as to the SES
Defendants collectively include violations of RICO, RICO conspiracy, unfair business practices,
conversion and civil conspiracy; the claims that remain as to the individually named director
include fraudulent misrepresentation, constructive fraud, negligent misrepresentation and breach of
fiduciary duty. The SES Defendants filed their answer to these claims on April 22, 2010. With the
pleadings now resolved, the case is moving forward with respect to those claims the court has
allowed to remain in the case. The court has set a trial date of February 7, 2012. The SES
Defendants believe the claims alleged against them to be without merit and intend to continue to
vigorously defend all claims which are allowed to proceed in the court.
Governmental and Environmental Regulation
The Company’s operations are subject to stringent federal, state and local laws and
regulations governing the discharge of materials into the environment or otherwise relating to
environmental protection. Numerous governmental agencies, such as the U.S. Environmental Protection
Agency, or the EPA, and various Chinese authorities, issue regulations to implement and enforce
such laws, which often require difficult and costly compliance measures that carry substantial
administrative, civil and criminal penalties or may result in injunctive relief for failure to
comply. These laws and regulations may require the acquisition of a permit before operations at a
facility commence, restrict the types, quantities and concentrations of various substances that can
be released into the environment in connection with such activities, limit or prohibit construction
activities on certain lands lying within wilderness, wetlands, ecologically sensitive and other
protected areas, and impose substantial liabilities for pollution resulting from our operations.
The Company believes that it is in substantial compliance with current applicable environmental
laws and regulations and it has not experienced any material adverse effect from compliance with
these environmental requirements.
Note 11 — Stock-Based Compensation
As of June 30, 2010, the Company had outstanding stock option and restricted stock awards
granted under the Company’s Amended and Restated 2005 Incentive Plan, as amended (the “Plan”). As
of June 30, 2010, 1,507,627 shares were authorized for future issuance pursuant to the Plan. Under
the Plan, the Company may grant both incentive and non-qualified stock options, stock appreciation
rights, restricted stock units and other stock-based awards to officers, directors, employees and
non-employees. Stock option awards generally vest ratably over a one to four year period and expire
ten years after the date of grant.
For the years ended June 30, 2010, 2009 and 2008, the Company recorded stock-based
compensation expense of approximately $2.2 million, $1.9 million and $6.0 million, respectively.
During the year ended June 30, 2010 and 2009, credits of approximately $0.2 million and $4.8
million were recognized to stock-based compensation expense due to the reversal of previously
recognized expense due to forfeitures related to cancellations of terminated employees’ stock
option awards.
Assumptions
The fair values for the stock options granted during the years ended June 30, 2010, 2009 and
2008 were estimated at the date of grant using a Black-Scholes-Morton option-pricing model with the
following weighted-average assumptions.
| Year Ended June 30, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
Risk-free rate of return |
2.53 | % | 1.80 | % | 3.47 | % | ||||||
Expected life of award |
5.6 years | 5.6 years | 6.1 years | |||||||||
Expected dividend yield |
0.00 | % | 0.00 | % | 0.00 | % | ||||||
Expected volatility of stock |
94 | % | 87 | % | 73 | % | ||||||
Weighted-average grant date fair value |
$ | 0.73 | $ | 0.46 | $ | 6.72 | ||||||
The expected volatility of stock assumption was derived by referring to changes in the
historical volatility of comparable companies. In accordance with SAB 107, we used the “simplified”
method for “plain vanilla” options to estimate the expected term of options granted during 2010,
2009 and 2008.
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Stock option activity during the three years ended June 30, 2010 was as follows:
| Weighted | ||||||||||||||||
| Weighted | Average | Aggregate | ||||||||||||||
| Average | Remaining | Intrinsic | ||||||||||||||
| Number of | Exercise | Contractual | Value | |||||||||||||
| Stock Options | Price | Term (years) | (in millions) | |||||||||||||
Outstanding at June 30, 2007 |
5,662,500 | $ | 3.50 | |||||||||||||
Granted |
1,852,500 | 9.65 | ||||||||||||||
Exercised |
(92,000 | ) | 6.20 | |||||||||||||
Cancelled/forfeited |
(287,000 | ) | 7.89 | |||||||||||||
Outstanding at June 30, 2008 |
7,136,000 | 4.90 | ||||||||||||||
Granted |
6,082,538 | 1.08 | ||||||||||||||
Exercised |
(106,750 | ) | 0.59 | |||||||||||||
Cancelled/forfeited |
(8,012,250 | ) | 4.83 | |||||||||||||
Outstanding at June 30, 2009 |
5,099,538 | 0.67 | ||||||||||||||
Granted |
1,230,535 | 0.99 | ||||||||||||||
Exercised |
(250,250 | ) | 0.55 | $ | 0.15 | |||||||||||
Cancelled/forfeited |
(42,250 | ) | 0.49 | |||||||||||||
Outstanding at June 30, 2010 |
6,037,573 | 0.74 | 8.79 | $ | 2.36 | |||||||||||
Exercisable at June 30, 2010 |
4,184,831 | 0.67 | 8.70 | $ | 1.84 | |||||||||||
As of June 30, 2010, approximately $1.3 million of estimated expense with respect to
non-vested stock-based awards has yet to be recognized and will be recognized in expense over the
remaining weighted average period of approximately 1.3 years.
The following table summarizes information with respect to stock options outstanding and
exercisable at June 30, 2010:
| Weighted | ||||||||||||||||||||
| Average | ||||||||||||||||||||
| Remaining | Weighted | Weighted | ||||||||||||||||||
| Contractual | Average | Average | ||||||||||||||||||
| Number | Term | Exercise | Number | Exercise | ||||||||||||||||
| Range of Exercise Prices | Outstanding | (Years) | Price | Exercisable | Price | |||||||||||||||
$0.43 to $0.66 |
4,404,538 | 8.63 | $ | 0.62 | 3,728,412 | $ | 0.63 | |||||||||||||
$0.67 to $1.00 |
1,044,088 | 9.35 | 0.88 | 416,419 | 0.89 | |||||||||||||||
$1.01 to $2.00 |
538,947 | 9.10 | 1.28 | 27,500 | 1.92 | |||||||||||||||
$2.01 to $3.00 |
50,000 | 8.29 | 2.59 | 12,500 | 2.59 | |||||||||||||||
Total |
6,037,573 | 4,184,831 | ||||||||||||||||||
Note 12 — Quarterly Results of Operations (Unaudited) (in thousands, except per share amounts)
| 1st Quarter | 2nd Quarter | 3rd Quarter | 4th Quarter | Year | ||||||||||||||||
2010: |
||||||||||||||||||||
Revenues |
$ | 2,301 | $ | 2,607 | $ | 2,621 | $ | 1,772 | $ | 9,301 | ||||||||||
Operating loss (a) |
(4,858 | ) | (11,119 | ) | (5,209 | ) | (3,655 | ) | (24,841 | ) | ||||||||||
Net loss (a) |
(4,999 | ) | (11,320 | ) | (5,353 | ) | (3,743 | ) | (25,415 | ) | ||||||||||
Net loss attributable to stockholders (a) |
(4,579 | ) | (8,199 | ) | (5,281 | ) | (3,689 | ) | (21,748 | ) | ||||||||||
Net loss per share — basic and diluted (a) |
(0.10 | ) | (0.17 | ) | (0.11 | ) | (0.08 | ) | (0.45 | ) | ||||||||||
2009: |
||||||||||||||||||||
Revenues |
125 | 483 | 326 | 1,168 | 2,102 | |||||||||||||||
Operating loss (b) |
(9,337 | ) | (10,519 | ) | (3,559 | ) | (6,647 | ) | (30,062 | ) | ||||||||||
Net loss (b) |
(8,839 | ) | (10,090 | ) | (3,607 | ) | (6,743 | ) | (29,279 | ) | ||||||||||
Net loss attributable to stockholders (b) |
(8,516 | ) | (9,752 | ) | (3,615 | ) | (6,693 | ) | (28,576 | ) | ||||||||||
Net loss per share — basic and diluted (b) |
(0.18 | ) | (0.20 | ) | (0.08 | ) | (0.14 | ) | (0.60 | ) | ||||||||||
| (a) | The operating results for the second quarter of 2010 included a $6.6 million impairment
loss related to the GC Joint Venture. |
|
| (b) | The operating results for the third quarter of 2009 included credits of approximately
$3.4 million that were recognized to stock-based compensation expense due to the reversal
of previously recognized expense due to forfeitures related to cancellations of terminated
employees’ stock option awards. |
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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
None.
Item 9A. Controls and Procedures
| (a) | Evaluation of Disclosure 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 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 and Exchange Act of 1934, as amended
(the “Exchange Act”), as of June 30, 2010. Based upon that evaluation, including consideration
of the material weaknesses in our internal control over financial reporting discussed below, our
Chief Executive Officer and Chief Accounting Officer have concluded that our disclosure controls
and procedures were not effective as of June 30, 2010.
| (b) | 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 generally accepted accounting principles. 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
generally accepted accounting principles, 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 June 30, 2010 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 not maintain effective internal control
over financial reporting as of June 30, 2010 due to the material weakness in internal control
over financial reporting described below. A material weakness is a control deficiency, or a
combination of control deficiencies, in internal control over financial reporting such that
there is a reasonable possibility that a material misstatement to the annual or interim
financial statements could occur and not be prevented or detected on a timely basis.
Management concluded that our disclosure controls and procedures were not effective as of
June 30, 2010 due to a previously disclosed material weakness in our internal accounting
controls. Specifically, our internal control over financial reporting was not effective at
ensuring that financial reporting risks arising from complex and non-routine transactions are
identified timely and that appropriate accounting policies for such transactions are selected
and applied. This material weakness resulted in adjustments to our interim preliminary
consolidated financial statements during fiscal year 2010 that were not
prevented or detected by our internal control over financial reporting. These errors could
have resulted in a material misstatement of our interim or year-end consolidated financial
statements and disclosures.
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This annual report on Form 10-K does not include an attestation report of our independent
registered public accounting firm regarding internal control over financial reporting. Internal
control over financial reporting was not subject to attestation by our independent registered
public accounting firm pursuant to the amendments to Rule 2-02(f) of Regulation S-X that exempts
us from this attestation requirement based on our status as a non-accelerated filer. We are
required to provide only management’s report in this annual report on Form 10-K.
| (c) | Remediation Plans for Material Weakness in Internal Control over Financial Reporting
Related to Complex and Non-Routine Transactions |
During fiscal year 2009, we designed and implemented controls and procedures to address the
material weakness identified in management’s assessment of our disclosure controls and
procedures as noted above. These controls and procedures included ensuring that the relevant
personnel involved in the accounting for complex and non-routine transactions fully understand
and apply the proper recognition and accounting of such transactions. In addition, we are fully
prepared to engage external accounting resources to augment our consideration and resolution of
accounting matters especially those involving complex and non-routine transactions. However, we
will not consider this material weakness fully remediated until we can evidence effectiveness of
these procedures for a sufficient period of time.
| (d) | Changes in Internal Control Over Financial Reporting |
There have been no changes in our internal control over financial reporting during the
quarter ended June 30, 2010 that have materially affected, or that are reasonably likely to
materially affect, our internal control over financial reporting.
Item 9B. Other Information
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
The information required by this item is incorporated in this Annual Report by reference to
our definitive proxy statement to be filed with the Securities and Exchange Commission not later
than 120 days after the close of our fiscal year ended June 30, 2010.
Item 11. Executive Compensation
The information required by this item is incorporated in this Annual Report by reference to
our definitive proxy statement to be filed with the Securities and Exchange Commission not later
than 120 days after the close of our fiscal year ended June 30, 2010.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
The information required by this item is incorporated in this Annual Report by reference to
our definitive proxy statement to be filed with the Securities and Exchange Commission not later
than 120 days after the close of our fiscal year ended June 30, 2010.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this item is incorporated in this Annual Report by reference to
our definitive proxy statement to be filed with the Securities and Exchange Commission not later
than 120 days after the close of our fiscal year ended June 30, 2010.
Item 14. Principal Accounting Fees and Services
The information required by this item is incorporated in this Annual Report by reference to
our definitive proxy statement to be filed with the Securities and Exchange Commission not later
than 120 days after the close of our fiscal year ended June 30, 2010.
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Item 15. Exhibits and Financial Statement Schedules
| 1. | Financial Statements. Reference is made to the Index to Consolidated Financial
Statements at Item 8 of this Annual Report. |
| 2. | Financial Statement Schedules. All schedules are omitted because they are not
applicable or the required information is shown in the financial statements or the notes
to the financial statements. |
| 3. | Exhibits. |
| Number | Description of Exhibits | |||
| 3.1 | Certificate of Incorporation of the Company (incorporated by
reference to Exhibit 3.1 to the Company’s Registration
Statement (Registration No. 333-140367) on Form SB-2 filed on
January 31, 2007). |
|||
| 3.2 | Certificate of Amendment to the Certificate of Incorporation
of the Company dated effective December 16, 2009 (incorporated
by reference to Exhibit 3.1 to the Company’s Current Report on
Form 8-K filed on December 17, 2009). |
|||
| 3.3 | Amended and Restated Bylaws of the Company (incorporated by
reference to Exhibit 3.2 to Amendment No. 2 to the Company’s
Registration Statement (Registration No. 333-140367) on Form
SB-2 filed on March 30, 2007). |
|||
| 4.1 | Specimen Stock Certificate (incorporated by reference to
Exhibit 4.1 to the Company’s Registration Statement
(Registration No. 333-140367) on Form SB-2 filed on January
31, 2007). |
|||
| 10.1 | Cooperative Joint Venture Contract of SES (Zao Zhuang) New Gas
Company Ltd. between Shandong Hai Hua Coal & Chemical Company
Ltd. and Synthesis Energy Systems Investments, Inc. dated July
6, 2006 — English translation from original Chinese document
(incorporated by reference to Exhibit 10.4 to the Company’s
Registration Statement (Registration No. 333-140367) on Form
SB-2 filed on January 31, 2007). |
|||
| 10.2 | Amendment to Cooperative Joint Venture Contract of SES
(Zao Zhuang) New Gas Company Ltd. between Shandong Hai Hua Coal
& Chemical Company Ltd. and Synthesis Energy Systems
Investments, Inc. dated November 8, 2006 — English translation
from original Chinese document (incorporated by reference to
Exhibit 10.5 to the Company’s Registration Statement
(Registration No. 333-140367) on Form SB-2 filed on January
31, 2007). |
|||
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Table of Contents
| Number | Description of Exhibits | |||
| 10.3 | ** | Contract for Synthesis Gas Purchase and Sales by and between
Shandong Hai Hua Coal & Chemical Company Ltd. and Synthesis
Energy Systems (Zao Zhuang) New Gas Company Ltd. dated October
22, 2006 — English translation from original Chinese document
(incorporated by reference to Exhibit 10.6 to Amendment No. 4
to the Company’s Registration Statement (Registration No.
333-140367) on Form SB-2 filed on May 23, 2007). |
||
| 10.4 | + | Amended and Restated Employment Agreement between the Company
and Donald P. Bunnell dated July 14, 2006 (incorporated by
reference to Exhibit 10.10 to the Company’s Registration
Statement (Registration No. 333-140367) on Form SB-2 filed on
January 31, 2007). |
||
| 10.5 | + | Consulting Agreement between the Company and Lorenzo Lamadrid
dated May 30, 2006 (incorporated by reference to Exhibit 10.11
to the Company’s Registration Statement (Registration No.
333-140367) on Form SB-2 filed on January 31, 2007). |
||
| 10.6 | + | Amended and Restated 2005 Incentive Plan (incorporated by
reference to Exhibit 10.13 to Amendment No. 3 to the Company’s
Registration Statement (Registration No. 333-140367) on Form
SB-2 filed on May 1, 2007). |
||
| 10.7 | Shareholder’s Loan Agreement by and between Synthesis Energy
Systems Investments, Inc. and Synthesis Energy Systems
(Zao Zhuang) dated March 20, 2007 (incorporated by reference to
Exhibit 10.15 to Amendment No. 2 to the Company’s Registration
Statement (Registration No. 333-140367) on Form SB-2 filed on
March 30, 2007). |
|||
| 10.8 | Fixed Assets Loan Contract between Synthesis Energy Systems
(Zao Zhuang) New Gas Company Ltd. and Industrial and Commercial
Bank of China dated March 27, 2007 — English translation from
original Chinese document (incorporated by reference to
Exhibit 10.16 to Amendment No. 2 to the Company’s Registration
Statement (Registration No. 333-140367) on Form SB-2 filed on
March 30, 2007). |
|||
| 10.9 | Second Amendment to Cooperative Joint Venture Contract of SES
(Zao Zhuang) New Gas Company Ltd., between Shandong Hai Hua
Coal & Chemical Company Ltd. and Synthesis Energy Systems
Investments, Inc., dated February 12, 2007 — English
translation from original Chinese document (incorporated by
reference to Exhibit 10.6 to Amendment No. 3 to the Company’s
Registration Statement (Registration No. 333-140367) on Form
SB-2 filed on May 1, 2007). |
|||
| 10.10 | Co-Operative Joint Venture Contract of SES — GCL (Inner
Mongolia) Coal Chemical Co., Ltd. between Inner Mongolia
Golden Concord (Xilinhot) Energy Investment Co., Ltd. and
Synthesis Energy Systems Investments, Inc. dated May 25, 2007
— English translation from original Chinese document
(incorporated by reference to Exhibit 10.21 to Amendment No. 5
to the Company’s Registration Statement (Registration No.
333-140367) on Form SB-2 filed on June 6, 2007). |
|||
| 10.11 | Joint Development Agreement by and between Synthesis Energy
Systems, Inc. and AEI dated July 11, 2007 (incorporated by
reference to Exhibit 10.24 to Amendment No. 1 to the Company’s
Registration Statement (Registration No. 333-143817) on Form
SB-2 filed on July 16, 2007). |
|||
| 10.12 | Form of Indemnification Agreement between the Company and its
officers and directors (incorporated by reference to Exhibit
10.25 to the Company’s Annual Report on Form 10-KSB for the
year ended June 30, 2007). |
|||
| 10.13 | Reservation and Use Agreement dated September 25, 2007 between
the Company and the Gas Technology Institute (incorporated by
reference to Exhibit 10.26 to Amendment No. 4 to the Company’s
Registration Statement (Registration No. 333-143817) on Form
SB-2 filed on September 26, 2007). |
|||
| 10.14 | First Amendment to Joint Development Agreement by and between
the Company and AEI dated September 26, 2007 (incorporated by
reference to Exhibit 10.1 to the Company’s Current Report on
Form 8-K filed on October 2, 2007). |
|||
| 10.15 | Lease Agreement between Synthesis Energy Systems, Inc. and
AVPF Riverway Ltd. dated January 14, 2008 (incorporated by
reference to Exhibit 10.1 to the Company’s Current Report on
Form 8-K filed on January 31, 2008). |
|||
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Table of Contents
| Number | Description of Exhibits | |||
| 10.16 | + | First Amendment to the Amended and Restated 2005 Incentive
Plan (incorporated by reference to Annex B to the Company’s
Proxy Statement on Schedule 14A filed on November 15, 2007). |
||
| 10.17 | Employment Agreement between the Company and Robert Rigdon
dated March 14, 2008 (incorporated by reference to Exhibit
10.1 to the Company’s Current Report on Form 8-K filed on
November 12, 2008). |
|||
| 10.18 | Employment Agreement between the Company and Kevin Kelly dated
October 16, 2008 (incorporated by reference to Exhibit 10.2 to
the Company’s Current Report on Form 8-K filed on November 12,
2008). |
|||
| 10.19 | Letter Agreement between the Company and Kevin Kelly dated
January 9, 2009 (incorporated by reference to Exhibit 10.2 to
the Company’s Current Report on Form 8-K filed on January 14,
2009). |
|||
| 10.20 | Separation Agreement and Release between the Company and
Timothy E. Vail dated effective March 31, 2009 (incorporated
by reference herein to Exhibit 10.6 to the Company’s Current
Report on Form 8-K dated April 2, 2009). |
|||
| 10.21 | Separation Agreement and Release between the Company and David
Eichinger dated effective March 31, 2009 (incorporated by
reference herein to Exhibit 10.7 to the Company’s Current
Report on Form 8-K dated April 2, 2009). |
|||
| 10.22 | Form of Nonstatutory Stock Option Agreement (incorporated by
reference herein to Exhibit 10.8 to the Company’s Current
Report on Form 8-K dated April 2, 2009). |
|||
| 10.23 | + | Letter Agreement between the Company and Don Bunnell dated
August 13, 2009 (incorporated by reference to Exhibit 10.2 to
the Company’s Current Report on Form 8-K filed on August 13,
2009). |
||
| 10.24 | Form of Equity Joint Venture Contract between Yima Coal
Industry (Group) Co., Ltd. and Synthesis Energy Investment
Holdings, Inc. dated August 27, 2009 — English translation
from original Chinese document. (incorporated by reference to
Exhibit 10.1 to the Company’s Current Report on Form 8-K filed
on September 2, 2009). |
|||
| 10.25 | ** | Amended and Restated License Agreement by and between the
Company and the Gas Technology Institute dated November 5,
2009 (incorporated by reference to Exhibit 10.1 to the
Company’s Current Report on Form 8-K filed on November 12,
2009). |
||
| 10.26 | + | Letter Agreement between the Company and Lorenzo Lamadrid
dated August 15, 2010 (incorporated by reference to Exhibit
10.2 to the Company’s Current Report on Form 8-K filed on
August 17, 2010). |
||
| 21.1 | * | Subsidiaries of the Company. |
||
| 23.1 | * | Consent of PricewaterhouseCoopers LLP. |
||
| 23.2 | * | Consent of KPMG LLP. |
||
| 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 Accounting 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 Accounting 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. |
|
| ** | Portions of this exhibit have been omitted pursuant to a request for confidential treatment
accepted by the Securities and Exchange Commission and this exhibit has been filed separately
with the Securities and Exchange Commission in connection with such request. |
|
| + | Management contract or compensatory plan or arrangement. |
65
Table of Contents
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: September 23, 2010 | By: | /s/ Robert Rigdon | ||
| Robert Rigdon, President | ||||
| and Chief Executive Officer | ||||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the capacities and on the
dates indicated.
| Signature | Capacity In Which Signed | Date | ||
/s/ Robert Rigdon
|
President and Chief Executive Officer and Director (Principal Executive Officer) |
September 23, 2010 | ||
/s/ Kevin Kelly
|
Chief Accounting Officer, Controller and Secretary (Principal Financial and Accounting Officer) |
September 23, 2010 | ||
/s/ Donald Bunnell
|
President, Chief Executive Officer — Asia Pacific and Director | September 23, 2010 | ||
/s/ Lorenzo Lamadrid
|
Director | September 23, 2010 | ||
/s/ Michael Storey
|
Director | September 23, 2010 | ||
/s/ Denis Slavich
|
Director | September 23, 2010 | ||
/s/ Harry Rubin
|
Director | September 23, 2010 | ||
/s/ Ziwang Xu
|
Director | September 23, 2010 |
66