SYNTHESIS ENERGY SYSTEMS INC - Annual Report: 2011 (Form 10-K)
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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, 2011
| 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 | 20-2110031 | |
| (State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) | |
| Three Riverway, Suite 300, Houston, Texas | 77056 | |
| (Address of Principal Executive Offices) | (Zip Code) |
Registrant’s telephone number, including area code (713) 579-0600
Securities registered pursuant to Section 12(b) of the Exchange Act:
| Common Stock, $.01 par value | NASDAQ Stock Market | |
| (Title of Class) | (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
approximately $46.7 million on December 31, 2010. The registrant had 50,860,845 shares of common
stock outstanding on September 20, 2011.
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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, our ability to grow our
business as a result of the ZJX and Zuari transactions as well as our joint venture with Midas
Resource Partners, and the sufficiency of our internal controls. 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 a global energy and gasification technology company that provides products and
solutions to the energy and chemical industries. Our strategy is to create value by providing
technology and equipment in regions where low rank coals and biomass feedstocks can be profitably
converted into high value products through our proprietary U-GAS® fluidized bed
gasification technology. We do this through providing a proprietary technology package whereby we
license U-GAS® technology rights to third parties, deliver an engineered technology
package and provide proprietary equipment components to customers who have contracted to own and
operate projects. In addition, we may (i) integrate our U-GAS® technology package with
downstream technologies to provide a fully integrated offering where we may invest in projects
either directly or through an investment partner, (ii) partner with engineering, equipment and
technology companies to provide our U-GAS® technology package into an integrated modular
product offering, (iii) provide technology to enable coal resources to be integrated together with
our U-GAS® technology where the coal resources may be of little value without our
U-GAS® conversion technology, or (iv) acquire or partner with owners of these coal
resources to create more value and opportunity for us through the integration of our technology
with the coal resources.
We believe that we have several advantages over commercially available competing gasification
technologies, such as entrained flow, fixed and moving bed gasification technologies, including our
ability to use all ranks of coals (including low rank, high ash and high moisture coals, which are
significantly cheaper than higher grade coals), many coal waste products and biomass feed stocks.
In addition, U-GAS® technology’s advanced fluidized bed design is tolerant to changes in
feedstock. These factors enable us to be a lower cost producer of synthesis gas, or syngas, a
mixture of primarily hydrogen and carbon monoxide, which can then be used to
produce other products. Depending on local market need and fuel sources, syngas can be used as
a fuel gas in industrial applications or can be used to produce many products including power,
synthetic natural gas, or SNG, methanol, dimethyl ether, or DME, glycol, ammonia, direct reduction
iron, or DRI, gasoline and other transportation fuels, steam, and other byproducts (e.g., sulphur,
carbon dioxide or ash).
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Our principal operating activities are currently in China, however, we are developing
opportunities in other countries including India, the U.S. and Australia, as well as other parts of
Asia and Europe. Our ZZ Joint Venture project is our first commercial scale coal gasification plant
and is located in Shandong Province, China. It has been in operation since February 2008 and 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. 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, gasoline or other transportation fuels, 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 95% or higher. Cold gas efficiencies of over 80% and carbon conversion of over 98%
have been repeatedly demonstrated.
Fines carried over from the fluidized bed are separated from the product syngas prior to heat
recovery and syngas cleanup and returned to the gasifier through our proprietary Fines Management
System, or FMS, for maximizing carbon conversion. The product syngas is essentially free of tars
and oils due to the temperature profile and residence time of the gases in the fluidized bed,
simplifying downstream heat recovery and gas cleaning operations. Using FMS, we are now achieving
over 90-day continuous runs on each single gasifier, which allows us to achieve very high
availability of syngas due to our spare stem gasifier configuration. With FMS, we believe that we
can maximize the utilization of low rank coal in our U-GAS® -based gasifiers, and as a
result, improve the cost advantages derived from using our technology.
GTI Agreements
License Agreement
On November 5, 2009, we entered into an Amended and Restated License Agreement, or the New
Agreement, with GTI, replacing the Amended and Restated License Agreement between us and GTI dated
August 31, 2006, as amended, or the Original Agreement. Under the New Agreement, we maintain our
exclusive worldwide right to license the U-GAS® technology for all types of
coals and coal/biomass mixtures with coal content exceeding 60%, as well as the non-exclusive right
to license the U-GAS® technology for 100% biomass and coal/biomass blends
exceeding 40% biomass. The New Agreement differs from the Old Agreement most critically by allowing
us to sublicense U-GAS® to third parties for coal, coal and biomass mixtures
or 100% biomass projects (subject to the approval of GTI, which approval shall not be unreasonably
withheld), with GTI to share the revenue from such third party licensing fees based on an agreed
percentage split, or the Agreed Percentage. In addition, the prior obligation to fabricate and put
into operation at least one U-GAS® system for each calendar year of the
Original Agreement in order to maintain the license has been eliminated in the New Agreement.
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, which is payable in installments at the
beginning and at the completion of the construction of a project, or the Standard Royalty. Although
it is calculated using a different unit of measurement, the Standard Royalty is effectively the
same as the royalty payable to GTI under the Original Agreement. If we invest, or have the option
to invest, in a specified percentage of the equity of a third party, and the royalty payable by
such third party for their sublicense exceeds the Standard Royalty, we are required to pay to GTI
the Agreed Percentage of such royalty payable by such third party. However, if the royalty payable
by such third party for their sublicense is less than the Standard Royalty, we are required to pay
to GTI, in addition to the Agreed Percentage of such royalty payable by such third party, the
Agreed Percentage of our dividends and liquidation proceeds from our equity investment in the third
party. In addition, if we receive a carried interest in a third party, and the carried interest is
less than a specified percentage of the equity of such third party, we are required to pay to GTI,
in our sole discretion, either (i) the Standard Royalty or (ii) the Agreed Percentage of the
royalty payable to such third party for their sublicense, as well as the Agreed Percentage of the
carried interest. We will be required to pay the Standard Royalty to GTI if the percentage of the
equity of a third party that we (a) invest in, (b) have an option to invest in, or (c) receive a
carried interest in, exceeds the percentage of the third party specified in the preceding sentence.
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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.
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 ZZ Joint Venture plant in the near
term, while also continuing to evaluate alternatives to better position the project to be
commercially and financially successful in the future including the possible expansion of
the plant to produce other products for other customers. We also intend to continue to
leverage our 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
southern Africa. 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 package and provide proprietary equipment components to
customers who have contracted to own and operate projects. We intend to focus on developing
opportunities for our proprietary technology package whereby we may (i) integrate our
U-GAS® technology package with downstream technologies to provide a fully
integrated offering where we may invest in projects either directly or through an investment
partner or (ii) may partner with engineering, equipment and technology companies to provide
our U-GAS® technology package into an integrated modular product offering, which
may include coal or biomass feedstocks for units producing power and fuels such as SNG,
methanol to gasoline, or MTG, diesel and ethanol as well as methanol for gasoline blending.
We anticipate that we can increase revenues through collecting technology licensing fees and
royalties, engineering and technical service fees, as well as equipment product sales sold
to customers who have contracted to own and operate projects and desire to incorporate our
proprietary technology. We also believe that our licensing activities will provide
additional insight into project development activities, which may allow us to make selective
equity investments in such projects in the future, develop integrated, modular product
offerings, or take options in projects for which we provide a license. |
| • | Expanding our relationships with strong strategic partners. Our efforts have been
initially focused on facilities producing syngas, methanol and DME in China. We are
expanding our relationships with our current partners and developing new relationships,
including through our transaction with ZJX and China Energy and through strategic joint
venture initiatives in specific markets that will enable us to expand our business. Such
strategic relationships may include an investment in projects either directly by us or
through an investment partner where U-GAS® plants may supply syngas to strategic
customers via long-term offtake agreements. For example, through our joint venture SES
Resource Solutions, we are working with Midas
Resource Partners AG, a coal resource consulting and project development firm, to collaborate
on project origination and project development activities for integrated coal
resource-gasification projects to incentivize third party investors to commit to providing
financing for such projects. We are also developing new downstream coal-to-chemicals and
coal-to-energy projects which may expand our initial focus to include facilities producing
SNG, MTG, glycol, and power and reducing gas for the steel industry. We are exploring new
markets for entry such as India, Australia, and other parts of Asia and Europe. |
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| • | Developing value where we have a competitive advantage and have access of rights to
feedstock resources. We believe that we have the greatest competitive advantage using our
U-GAS® technology in situations where there is a ready source of low rank, low
cost coal, coal waste or biomass to utilize as a feedstock. We are focusing our efforts in
countries with large low rank coal resources such as India, China, Australia and South
Africa. We are working to develop transactions that include securing options to these
feedstock resources. For example, we are currently in discussions regarding development
opportunities in Inner Mongolia, China where provincial authorities are willing to make
available coal resources to the project owners, which adds protection from future coal cost
increases, and can potentially lead to increased project revenue. In these cases, we may
provide technology to add value to coal resources which may be of little value without our
U-GAS® conversion technology, or may acquire or partner with owners of these
resources to create more value and opportunity for us through the integration of our
technology with the resources. Additionally, where strategic relationships and capital
and/or financing is available, we may acquire an interest in such resources, including
existing facilities or coal mines, where we could create value with our U-GAS®
technology by securing direct access to feedstock. |
| • | Continue to develop and improve U-GAS® technology. We are continually seeking
to improve overall plant availability, plant efficiency rates and fuel handling capabilities
our U-GAS® gasification technology. We are continuing to work with our
prospective customers to determine the suitability of their low rank coals for our
U-GAS® technology through proprietary coal characterization testing as well as
selective commercial scale testing in our ZZ Joint Venture plant. Additionally, we are
growing our technology base through continued development of know-how with our engineering
and technical staff, growing and protecting our trade secrets as a result of patenting
improvements tested at our ZZ Joint Venture plant, and improvements resulting from
integration of our technology with downstream processes. One example includes the
development of our FMS which we believe can maximize the utilization of low rank coal in our
U-GAS®-based gasifiers, resulting in improved cost advantages. We have filed
several patent applications relating to our improvements to the U-GAS®
technology. |
| • | Grow earnings through increased revenues and control of expenses. We remain intently
focused on control of our expenses while we grow revenues from our technology business. 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 expenses until we have
assurances that acceptable financing is available to complete our projects. Until we have
such assurances, our strategy will be to operate using current capital resources and
leveraging the resources of our strategic relationship and/or 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 coals. According to the BP
Statistical Review of World Energy June 2011 report, as of yearend 2010, 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. As the technology to
make olefin from methanol matures, methanol-to-olefin projects are expected to play a key role in
driving the methanol demand growth. Methanol is also used to a lesser extent 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 20.9 million tonnes in 2010. 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.
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We believe coal to SNG will grow in China due to China’s limited natural gas resources.
According to the 2011 International Energy Outlook from the U.S. Energy Information Administration,
China’s natural gas consumption is estimated to reach 335 billion cubic meters in 2020 but domestic
production of natural gas in China is estimated to be 185 billion cubic meters 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.
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 9 million tonnes in 2010 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.
India
We believe that India is 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 reduced availability of, and increasing prices for, oil and natural gas, high economic growth
and a need for a variety of basic chemical and energy products which may be derived from 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 for which
other more established technologies are not as suitable. India also offers a base for high quality
engineering technical resources at low cost.
Australia
Australia presents an intriguing potential for our coal gasification deployment due to its
large quantities of low-rank coal. Much of this coal has limited commercial appeal as exporting it
is expensive due to Australia’s vast size and its distance from international coal users.
Australia itself is in the top tier of environmental activism, so conventional combustion of this
coal within the country is difficult. Finally, Australia has high energy prices due to its limited
gas and oil resources and its distance from oil producers. We are currently engaged with Ambre
Energy on a detailed paid feasibility study for producing synthetic gasoline from low quality
Australian coal and working with Coalworks Limited under a strategic alliance agreement, each as
discussed below under “— Technology Licensing and Related Services.”
Other Countries
We are considering projects in several other countries including the U.S., Vietnam, Turkey,
Japan, Korea, Indonesia, southern African countries, Brazil, and others. We will focus our
technical and business resources on what we believe to be the highest impact and most viable
projects. These analyses include project economics, the viability of competitors (both
gasification and non-gasification), financial strength of the prospective owners and investors, and
other criteria.
Business Development, Engineering and Project Management
Business Development Staff
We currently employ a staff of experienced business development professionals that are focused on opportunities in all of our target markets. 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.
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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 2011, we further 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.
Additionally, we have an experienced project management team that 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
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,
Eastern Europe, the U.S., Australia and Vietnam, as well as other parts of Asia and southern
Africa, 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 delivered our feasibility study
for this project and plan to discuss next steps with Coalworks.
In August 2011, we entered into a technical study agreement with Ambre Energy, or Ambre, of
Australia to supply a proprietary gasification design to support Ambre’s development of a planned
Coal to Liquids Project, or ambreCTL. Ambre intends to integrate this technical study with its
engineering work on the overall ambreCTL project that it is developing in Queensland, Australia.
During fiscal 2011, we conducted multiple coal tests for customers at our ZZ Joint Venture
Plant. In December 2010, we successfully completed a one-week campaign for Ambre on their Felton,
Queensland, high ash sub-bituminous coal. This test proved our technology’s capability to gasify
efficiently and cost effectively their low rank coal which previously had been unsuccessfully
tested in two other commercial gasification technologies. Ambre is using the results of this test
along with the engineering study that was initiated in August 2011, to advance the ambreCTL
project. In August 2011, we successfully completed a one-week campaign on high ash bituminous coal
washery wastes for Yankuang Yishan Coal Chemical Company, or YYCC, for their coal to ammonia
project in China. Based on the results of this campaign, YYCC will evaluate the replacement of
their current low-efficiency, high operating cost gasifiers with U-GAS® gasifiers in
order to increase the profitability of their coal to ammonia facilities.
In the U.S., we believe there may be opportunities 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.
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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., 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
96% of the ZZ Joint Venture and Hai Hua owns the remaining 4%. We consolidate the results of the
ZZ Joint Venture in our consolidated financial statements.
Syngas Purchase and Sale Agreement
The ZZ Joint Venture is also party to a purchase and sale agreement with Hai Hua for syngas
produced by the plant, whereby Hai Hua will pay the ZZ Joint Venture an energy fee and capacity
fee, as described below, based on the syngas production. The syngas to be purchased by Hai Hua is
subject to certain quality component requirements set forth in the contract. In late December 2008,
the plant declared commercial operations status for purposes of the purchase and sale agreement.
The energy fee is a per normal cubic meters, or Ncum, of syngas calculation based on a formula
which factors in the monthly averages of the prices of design base coal, coke, coke oven gas,
power, steam and water, all of which are components used in the production of syngas. The capacity
fee is paid based on the capacity of the plant to produce syngas, factoring in the number of hours
(i) of production and (ii) of capability of production as compared to the guaranteed capacity of
the plant, which for purposes of the contract is 22,000 Ncum per hour of net syngas. Hai Hua is
obligated to pay the capacity fee regardless of whether they use the gasification capacity, subject
only to availability of the plant, quality of the syngas and exceptions for certain events of force
majeure. Due to worldwide reductions in methanol prices, as well as operational issues with respect
to Hai Hua’s plant, Hai Hua has operated at a reduced rate of syngas consumption. Hai Hua has used
approximately 35% to 45% of the syngas guarantee capacity since 2009.
In May 2011, Hai Hua notified the ZZ Joint Venture plant that it will not continue payment of
capacity fees beyond April 2011 for commercial and contractual reasons. The unpaid amount totaled
approximately $619,000 as of June 30, 2011. The plant has continued to operate and provide syngas
to Hai Hua, and Hai Hua has paid other contractual obligations such as the energy fees and
by-product sales due under the contract. We are continuing to work with Hai Hua on alternatives to
resolve this issue. We did not recognize these capacity fee revenues during fiscal 2011 and we will
not recognize any capacity fees until collection is reasonably assured.
In April 2009, the ZZ Joint Venture entered into a Supplementary Agreement with Hai Hua,
amending the terms of the purchase and sale agreement. The Supplementary Agreement was entered into
to provide more clarity regarding the required syngas quality and volume to be delivered, recovery
of the energy fee during turndown periods and operations coordination during unscheduled outages.
Under the Supplementary Agreement, the syngas quality specification was amended to provide more
clarity as to the minor constituents allowable in the syngas. For purposes of the Supplementary
Agreement, syngas that meets these specifications is deemed “compliant gas” and syngas that does
not meet these specifications is deemed “non-compliant gas.” The Supplementary Agreement also added
a requirement for Hai Hua to pay the ZZ Joint Venture the capacity fee and 70% of the energy fee
for all non-compliant gas which is taken by Hai Hua. However, if more than 50% of the syngas taken
by Hai Hua during any operating day is non-compliant gas, all of the syngas for that day is deemed
to be non-compliant gas for purposes of calculating the energy fee. In addition, the Supplementary
Agreement accommodates periods of turndown operation by Hai Hua by establishing a minimum threshold
gas off take volume of 7,500 Ncum per hour of net syngas for the purpose of calculating the energy
fee during such periods. The Supplementary Agreement also provides that, to the extent Hai Hua has
an unscheduled shutdown, and the plant continues to operate on standby during such period, Hai Hua
is still required to pay the energy fee to the ZZ Joint Venture. In the event that the plant has an
unscheduled shutdown and does not provide at least three hours prior notice to Hai Hua, the ZZ
Joint Venture may be required to provide certain compensation to Hai Hua.
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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. 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. We are in
discussions with several potential partners on this expansion.
We are also continuing to evaluate other alternatives to improve the financial performance of
the ZZ Joint Venture. For example, in addition to the possible expansion to produce glycol as
described above, we are also working on various arrangements to increase the syngas offtake volume.
Such arrangements may involve selling syngas to another local customer and the possible
restructure of our current business arrangement with Hai Hua to share in methanol production.
Yima Joint Ventures
In August 2009, we entered into amended joint venture contracts with Yima Coal Industry
(Group) Co., Ltd., or Yima, replacing the prior joint venture contracts entered into in October
2008 and April 2009. The joint ventures were formed for each of the gasification, methanol/methanol
protein production, and utility island components of the plant, or collectively, the Yima Joint
Ventures. We obtained government approvals for the project’s feasibility study during the three
months ended December 31, 2008 and for the project’s environmental impact assessment during the
three months ended March 31, 2009, which were the two key approvals required to proceed with the
project. The amended joint venture contracts provide that: (i) we and Yima contribute equity of 25%
and 75%, respectively, to the Yima Joint Ventures; (ii) Yima will guarantee the repayment of loans
from third party lenders for 50% of the project’s cost and, if debt financing is not available,
Yima is obligated to provide debt financing via shareholder loans to the project until the project
is able to secure third-party debt financing; and (iii) Yima will supply coal to the project from a
mine located in close proximity to the project at a preferential price subject to a definitive
agreement to be subsequently negotiated. In connection with entering into the amended contracts, we
and Yima have contributed our remaining cash equity contributions of $29.3 million and $90.8
million, respectively, to the Yima Joint Ventures during the three months ended September 30, 2009.
We will also be responsible for our share of any cost overruns on the project. During the three
months ended September 30, 2009, we incurred a charge of $0.9 million relating to consulting fees
paid in connection with the closing and funding of the Yima project.
In exchange for the capital contributions, we own a 25% interest in each joint venture and
Yima owns a 75% interest. Notwithstanding this, in connection with an expansion of the project, we
have the option to contribute a greater percentage of capital for the expansion, such that as a
result, we would have up to a 49% ownership interest in the Yima Joint Ventures. The investment in
the Yima Joint Ventures is accounted for using the equity method.
During the three months ended September 30, 2010, 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. In addition, Yima has 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 the project’s syngas production facilities will be brought online in
mid-2012 as per the original schedule for commercial operation. The schedule for glycol production
is currently awaiting government approvals.
The Yima Joint Ventures are in discussions with a potential fuel gas off-take customer for the
sale of the initial syngas production. This would provide syngas sales until the syngas conversion
to methanol or glycol is completed. We are continuing to have discussions with Yima to restructure
the agreements as necessary to achieve these goals.
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Construction of the utilities and gasification portions of the plant are on schedule. The
remaining construction and commissioning for the project’s syngas production facilities is expected
to take approximately twelve to fifteen additional months from June 2011. All major civil work and
buildings have been completed and all long-lead items have been ordered and are in fabrication. We
completed a major operator training program for the Yima Joint Venture’s operators at our ZZ Joint
Venture plant and have completed important engineering design, operability and hazard reviews for
the gasification portion of the plant.
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; however, the construction of the
methanol portion of the plant is on hold pending the revisions for the possible glycol production.
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 us and six of whom were appointed by Yima. The joint ventures also
have officers that are nominated by us, Yima and/or the board of directors pursuant to the terms of
the joint venture contracts. We and Yima shall share the profits, and bear the risks and losses, of
the joint ventures in proportion to our respective ownership interests. The term of the joint
venture shall commence upon each joint venture company obtaining its business license and shall end
30 years after commercial operation of the plant.
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. We have a 51% ownership interest in the GC Joint Venture and 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, 2011.
These funds were used for engineering and initial construction work for this project, land use
rights, and for its development expenses.
We continue to seek development partners for 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 also entered into a cooperation agreement with a local Chinese company who has
assisted with obtaining certain necessary government approvals and who may desire to continue the
development of the project.
SES Resource Solutions
SES Resource Solutions, Ltd., or SRS, is a joint venture owned 50% by us and 50% by Midas
Resources AG, or Midas, that was created during fiscal 2011 to provide additional avenues of
commercialization for our U-GAS® technology. Key objectives of the joint venture are to
identify and procure low cost, low rank coal resources for which our technology and the SRS’
know-how represent the best route to commercialization; to provide investment opportunities in both
gasification facilities and coal resources; and to facilitate the establishment of gasification
projects globally based on our technology. In pursuing these objectives, the joint venture will
seek to minimize the requirement for joint venture shareholder capital and maximize the use of
third party financing.
Terms of the SRS joint venture agreement include:
| • | SRS having the exclusive right to promote our gasification technology for the
purpose of securing low-cost coal resources in projects worldwide that have been
approved by us; |
| • | Midas providing expertise to originate and execute the above projects; |
| • | Us providing SRS with technology licenses and engineering development support
for use in developing the joint integrated coal resource projects; and |
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| • | SRS being managed by a four person board of directors, two of which were
appointed by us and two of which were appointed by Midas. |
| • | Us agreeing to provide up to $2.0 million in funding to the joint
venture, although it has the ability to discontinue funding at any point in time. |
| • | Revenue and profits being equally divided between the joint venture partners. |
SES and Midas intend to establish separate entities for specific projects to attract
external funding for these entities and will derive revenue from licensing fees, service fees,
equity participation and royalties.
Share Purchase Agreement with ZJX
On March 31, 2011, we entered into a Share Purchase Agreement, or the Agreement, with China Energy Industry
Holdings Group Co, Ltd., or China Energy, and Zhongjixuan Investment Management Company Ltd., or ZJX,
pursuant to which we will issue on the closing date to China Energy 37,254,475 shares of our common stock, in
exchange for approximately $83.8 million, or the Consideration. Within 20 business days after the accomplishment
of the Milestone (as defined below), we shall further issue directly to China Energy an amount of shares of common
stock which, when combined with the shares issued on the closing date, equals 60.0% of the outstanding common
stock on a fully-diluted basis. In August 2011, we agreed to extend the closing period of the Agreement through
December 31, 2011. The terms and conditions of the Agreement are summarized in Note 12 to the consolidated
financial statements included herein.
Use of Proceeds
Subject to the discretion and approval of the Board, the Consideration, net of costs and expenses, is required to
be applied to the following: (i) incorporation of a Company headquarters in China to consolidate the ownership of
our investment projects in China and enhance our presence in China; (ii) investing in the expansion of our ZZ Joint
Venture; (iii) investing in Phase I of our Yima Joint Ventures; (iv) acquiring an ownership interest in a coal mine
that will provide coal to the Yima Joint Venture project; (v) investing in our Golden Concord Joint Venture;
(vi) other Chinese projects that may be recommended to the Board from time to time; and (vii) other expenses of the
operation and business of us in China.
ZJX will use reasonable endeavours to assist us to obtain third party funding (third party direct equity investment
in projects or debt financing to the projects) to (a) cover funding needs of the above projects; (b) provide funding for
us to invest in future phases of the Yima Joint Venture project; (c) invest in strategic coal resources in China
connected to our projects; and (d) provide funding for us to invest in other projects in China not listed above and
assist us to obtain third party investment in any of our other projects.
Project Development
ZJX will use reasonable endeavours to create at least four project joint ventures , or the MJVs, in the areas of
synthetic natural gas, methanol to gasoline; fertilizer; and electric power. Funding for each MJV is expected to be
approximately RMB20 billion. Each MJV is expected to be funded with equity from a strategic investor plus project
debt. We are anticipated to be part owner of each MJV through a targeted 35% carry provided by the strategic
investor as part of our development of and provision of technology for the particular projects. ZJX will help us work
with the strategic investors to obtain long term purchase commitments for each of the MJVs prior to the start of
construction of each such project.
Closing of the transaction with China Energy and ZJX is subject to approval by our stockholders and other customary closing conditions.
Business Concentration
Hai Hua is currently our sole customer for syngas. In addition, our noncurrent assets in China
accounted for $69.3 million of the $72.9 million of consolidated total noncurrent assets as of June
30, 2011, which includes property, plant and equipment, our investment in the Yima Joint Ventures
and other assets.
Competition
The primary competition for the U-GAS® coal 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 and reduced coal utilization when 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. Other technologies, such as the Winkler and High Temperature
Winkler fluidized bed gasifiers, British Gas Lurgi fixed bed gasifiers, and others are being
marketed in specific regions like China, Russia, and North Korea. These technologies have a longer
history but generally have lower carbon conversions, 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 but as yet 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.
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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.
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.
In March 2011, China released its 12th Five — Year Plan, which maps a path for
more sustainable economic growth, focusing on energy efficiency and the use of cleaner energy
sources to mitigate the effects of rapidly rising energy demand. We believe these policies could
lead to expanded syngas application in methanol production as well as in the licensing business of
coal gasification technologies, which we believe 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.
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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 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.
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
of 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, 2011, we had 189 employees, including 141 employees at the ZZ Joint Venture
plant. 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, 2011, we had $32.2 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; |
| • | operating expenses of SRS; and |
| • | general corporate purposes. |
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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 expect to continue for a period of time to have negative operating 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. In addition, if we are not able to complete the ZJX/China Energy transaction, we will need to
aggressively pursue additional partners in China and may need to cut our operating expenses. We will also limit the
development of any further projects until we have assurances that acceptable financing is available to complete the
project.
We
can make no assurances that our business operations will develop and
provide us with sufficient cash to continue operations. 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.
Our lack of operating history precludes us from forecasting operating results and our business
strategies may not be accepted in the marketplace and may not help us to achieve profitability.
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, terms of possible project
investments 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 ZZ Joint
Venture 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. In addition, Hai Hua has not made the capacity fee
payments to the ZZ Joint Venture since April 2011. The unpaid amount totals approximately $619,000
as of June 30, 2011. Although we are continuing to work with Hai Hua on alternatives to resolve
the issue, there can be no assurances that we will collect these amounts. Hai Hua’s failure to
make the energy or capacity fee payments in either case could lead us to shut down the ZZ Joint
Venture plant for a period of time until we are able to either find an alternative purchaser
of our production or a different use for the plant.
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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, Vietnam and southern Africa, as well as other parts of Europe and Asia. We have 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.
In addition, due to our size and lack of operating history, there
could be a perception that we are not able to satisfy our obligations under the license agreement.
As a result, partners may choose to enter into agreements with our larger competitors due to the belief that they are in a
greater position to stand by their performance. Our inability to
generate revenues from, and otherwise further develop, our licensing
business 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.
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.
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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.
Economic uncertainty could negatively impact our business, limit our access to the credit and
equity markets, increase the cost of capital, and may have other negative consequences that we
cannot predict.
Economic uncertainty in the United States could create financial challenges if conditions do
not improve. Most recently, Standard & Poor’s downgraded the U.S. credit rating to AA+ from its top
rank of AAA, which has increased the possibility of other credit-rating agency downgrades which
could have a material adverse effect on the financial markets and economic conditions in the United
States and throughout the world. Our internally generated cash flow and cash on hand historically
have not been sufficient to fund all of our expenditures, and we have relied on, among other
things, bank financings and private equity to provide us with additional capital. Our ability to
access capital may be restricted at a time when we would like, or need, to raise capital. If our
cash flow from operations is less than anticipated and our access to capital is restricted, we may
be required to reduce our operating and capital budget, which could have a material adverse effect
on our results and future operations. Ongoing uncertainty may also reduce the values we are able to
realize in asset sales or other transactions we may engage in to raise capital, thus making these
transactions more difficult and less economic to consummate.
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, our licensing and related service business and
our joint venture with SRS 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.
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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 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
strategic 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 and the Yima Joint Ventures, all of our other potential
development opportunities are in the early stages of development and/or contract negotiations. Our
agreements with Hai Hua and Yima, discussed under “Description of Business—Current Operations and
Projects,” are currently our only negotiated joint venture contracts with operations. 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, but this
involves a lengthy and costly process of fulfilling the requirements of requests for proposals and
negotiating contracts before offering our services. Additionally, we have 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.
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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.
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 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, William E. Preston, our Senior Vice President — Global Business Development and Licensing
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.
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, 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 the 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 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.
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 only 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.
The Chinese government exerts substantial influence over the manner in which we must conduct
our business activities.
The Chinese government has exercised and continues to exercise substantial control over
virtually every sector of the Chinese economy through regulation and state ownership. Our ability
to operate in China may be harmed by changes in its laws and regulations, including those relating
to taxation, import and export tariffs, environmental regulations, land use rights, property and
other matters. We believe that our operations in China are in material compliance with all
applicable legal and regulatory requirements. However, the central or local governments of the
jurisdictions in which we operate may impose new, stricter regulations or interpretations of
existing regulations that would require additional expenditures and efforts on our part to ensure
our compliance with such regulations or interpretations. Accordingly, government actions in the
future, including any decision not to continue to support recent economic reforms and to return to
a more centrally planned economy or regional or local variations in the implementation of economic
policies, could have a significant effect on economic conditions in China or particular regions
thereof and could require us to divest ourselves of any interest we then hold in Chinese properties
or joint ventures.
We may have difficulty establishing adequate management, legal and financial controls in
China.
China historically has been deficient in Western style management and financial reporting
concepts and practices, as well as in modern banking, computer and other control systems. We may
have difficulty in hiring and retaining a sufficient number of employees who are qualified to
assist us in application of such concepts and practices to work in China. As a result of these
factors, we may experience difficulty in establishing management, legal and financial controls,
collecting financial data and preparing financial statements, books of account and corporate
records and instituting business practices that meet Western standards.
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Any recurrence of Severe Acute Respiratory Syndrome, Avian Flu, or another widespread public
health problem, in China could adversely affect our operations.
A renewed outbreak of Sever Acute Respiratory Syndrome, Avian Flu, or another widespread
public health problem in China could have a negative effect on our operations. Such an outbreak
could have an impact on our operations as a result of:
| • | quarantines or closures of some of our operating plants, which would severely disrupt
our operations, |
||
| • | the sickness or death of our key officers and employees, and |
||
| • | a general slowdown in the Chinese economy. |
Any of the foregoing events or other unforeseen consequences of public health problems could
adversely affect our operations.
Uncertainties with respect to the Chinese legal system could limit the legal protections
available to you and us.
We conduct substantially all of our business through our operating subsidiaries in China. Our
operating subsidiaries are generally subject to Chinese laws and regulations including those
applicable to foreign investments in China and, in particular, laws applicable to foreign-invested
enterprises. The Chinese legal system is a civil law system based on written statutes. Unlike
common law systems, decided legal cases have little precedential value in China. In 1979, the
Chinese government began to promulgate a comprehensive system of laws and regulations governing
economic matters in general. The overall effect of legislation since 1979 has significantly
enhanced the protections afforded to various forms of foreign investment in China. However, Chinese
laws and regulations change frequently and the interpretation of laws and regulations is not always
uniform and enforcement thereof can involve uncertainties. For instance, we may have to resort to
administrative and court proceedings to enforce the legal protection that we are entitled to by law
or contract. However, since Chinese administrative and court authorities have significant
discretion in interpreting statutory and contractual terms, it may be difficult to evaluate the
outcome of administrative court proceedings and the level of law enforcement that we would receive
in more developed legal systems. Such uncertainties, including the potential inability to enforce
our contracts, could limit legal protections available to you and us and could affect our business
and operations. In addition, intellectual property rights and confidentiality protections in China
may not be as effective as in the United States or other countries. Accordingly, we cannot predict
the effect of future developments in the Chinese legal system, particularly with regard to the
industries in which we operate, including the promulgation of new laws. This may include changes to
existing laws or the interpretation or enforcement thereof, or the preemption of local regulations
by national laws. These uncertainties could limit the availability of law enforcement, including
our ability to enforce our agreements with Chinese government entities and other foreign investors.
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.
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
historically 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.
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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.
| Item 3. | Legal Proceedings |
We are a party to various legal proceedings including the one noted below. While management
presently believes that the ultimate outcome of these proceedings will not have a material adverse
effect on its financial position, overall trends in results of operations or cash flows, litigation
is subject to inherent uncertainties, and unfavorable rulings or settlements could occur which
could have a material adverse impact on our financial position and operating results.
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 a former director), 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
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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. The
parties are currently engaged in discovery related to those claims the court has allowed to remain
in the case. Additionally, on August 15, 2011, the SES Defendants filed a motion for summary
judgment or, in the alternative, summary adjudication as to each of the claims remaining against
them, collectively, and the individually named director, separately. This motion is fully briefed
and oral argument was heard by the court on
September 26, 2011 and the court has taken the matter under
submission. 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.] |
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 under the symbol SYMX. 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, 2011: |
||||||||
First Quarter |
$ | 1.21 | $ | 0.81 | ||||
Second Quarter |
$ | 1.20 | $ | 0.80 | ||||
Third Quarter |
$ | 3.12 | $ | 1.03 | ||||
Fourth Quarter |
$ | 4.50 | $ | 1.55 | ||||
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 | ||||
As of September 20, 2011, our authorized capital stock consisted of 200,000,000 shares of
common stock, of which 50,860,845 shares of common stock were issued and outstanding. As of such
date, there were 159 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,
or the Board, in light of conditions then existing, including our earnings, financial condition,
capital requirements, and restrictions in financing agreements, business conditions and other
factors.
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Securities Authorized For Issuance Under Equity Compensation Plans
The following table sets forth information regarding our existing equity compensation plans as
of June 30, 2011.
| 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) |
6,563,344 | (2) | $ | 0.91 | 690,370 | (2) | ||||||
Equity compensation plans not approved by security
holders |
— | — | — | |||||||||
Total as of June 30, 2011 |
6,563,344 | $ | 0.91 | 690,370 | ||||||||
| (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 6,563,344 shares of commons
stock were outstanding at June 30, 2011 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. |
| 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)
(in thousands, except per share amounts)
| Years Ended June 30, | ||||||||||||||||||||
| 2011 | 2010 | 2009 | 2008 | 2007 | ||||||||||||||||
Total revenue |
$ | 10,158 | $ | 9,301 | $ | 2,102 | $ | 328 | — | |||||||||||
Operating loss |
(15,730 | ) | (24,964 | ) | (30,062 | ) | (28,061 | ) | (13,642 | ) | ||||||||||
Net loss |
(15,620 | ) | (25,415 | ) | (29,279 | ) | (28,052 | ) | (13,179 | ) | ||||||||||
Less: net loss attributable to noncontrolling interests |
157 | 3,667 | 703 | 610 | 37 | |||||||||||||||
Net loss attributable to stockholders |
(15,463 | ) | (21,748 | ) | (28,576 | ) | (27,442 | ) | (13,142 | ) | ||||||||||
Net loss per share: |
||||||||||||||||||||
Basic and diluted |
$ | (0.32 | ) | $ | (0.45 | ) | $ | (0.60 | ) | $ | (0.80 | ) | $ | (0.47 | ) | |||||
Weighted average common shares outstanding: |
||||||||||||||||||||
Basic and diluted |
48,584 | 48,230 | 48,017 | 34,385 | 27,852 | |||||||||||||||
Balance Sheet Data
(in thousands)
(in thousands)
| June 30, | ||||||||||||||||||||
| 2011 | 2010 | 2009 | 2008 | 2007 | ||||||||||||||||
Total working capital |
$ | 28,552 | $ | 38,305 | $ | 82,140 | $ | 117,646 | $ | (54 | ) | |||||||||
Total assets |
109,974 | 120,581 | 146,136 | 177,747 | 38,472 | |||||||||||||||
Total liabilities |
13,190 | 16,542 | 20,040 | 24,241 | 18,922 | |||||||||||||||
Total equity |
96,784 | 104,039 | 126,096 | 153,506 | 19,550 | |||||||||||||||
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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 a global energy and gasification technology company that provides products and
solutions to the energy and chemical industries. 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
package and provide proprietary equipment components to customers who have contracted to own and
operate projects. In addition, we may (i) integrate our U-GAS® technology package with
downstream technologies to provide a fully integrated offering where we may invest in projects
either directly or through an investment partner, (ii) partner with engineering, equipment and
technology companies to provide our U-GAS® technology package into an integrated modular
product offering, (iii) provide technology to enable coal resources to be integrated together with
our U-GAS® technology where the coal resources may be of little value without our
U-GAS® conversion technology, or (iv) acquire or partner with owners of these coal
resources to create more value and opportunity for us through the integration of our technology
with the coal resources.
We believe that we have several advantages over commercially available competing gasification
technologies, such as entrained flow, fixed and moving bed gasification technologies, including our
ability to use all ranks of coals (including low rank, high ash and high moisture coals, which are
significantly cheaper than higher grade coals), many coal waste products and biomass feed stocks.
In addition, U-GAS® technology’s advanced fluidized bed design is tolerant to changes in
feedstock. These factors enable us to be a lower cost producer of synthesis gas, or syngas, a
mixture of primarily hydrogen and carbon monoxide, which can then be used to produce other
products. Depending on local market need and fuel sources, syngas can be used as a fuel gas in
industrial applications or can be used to produce many products including power, synthetic natural
gas, or SNG, methanol, dimethyl ether, or DME, glycol, ammonia, direct reduction iron, or DRI,
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 India, the U.S. and Australia, as well as other parts of
Asia and Europe. Our ZZ Joint Venture project is our first commercial scale coal gasification plant
and is located in Shandong Province, China. It has been in operation since February 2008 and 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 ZZ Joint Venture plant in the near
term, while also continuing to evaluate alternatives to better position the project to be
commercially and financially successful in the future, including the possible expansion of
the plant to produce other products for other customers. We also intend to continue to
leverage our 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
southern Africa. 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 package and provide proprietary equipment components to
customers who have contracted to own and operate projects. We intend to focus on developing
opportunities for our proprietary technology package whereby we may (i) integrate our
U-GAS® technology package with downstream technologies to provide a fully
integrated offering where we may invest in projects either directly or through an investment
partner or (ii) may partner with engineering, equipment and technology companies to provide
our U-GAS® technology package into an integrated modular product offering,
which may include coal or biomass feedstocks for units producing power and fuels such as SNG,
methanol to gasoline, or MTG, diesel and ethanol as well as methanol for gasoline blending. We
anticipate that we can increase revenues through collecting technology licensing fees and
royalties, engineering and technical service fees, as well as equipment product sales sold to
customers who have contracted to own and operate projects and desire to incorporate our
proprietary technology. We also believe that our licensing activities will provide additional
insight into project development activities, which may allow us to make selective equity
investments in such projects in the future, develop integrated, modular product offerings, or
take options in projects for which we provide a license.
|
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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 and developing new relationships,
including through our transaction with ZJX and China Energy and through strategic joint
venture initiatives in specific markets that will enable us to expand our business. Such
strategic relationships may include an investment in projects either directly by us or
through an investment partner where U-GAS® plants may supply syngas to strategic
customers via long-term offtake agreements. For example, through our joint venture SES
Resource Solutions, we are working with Midas Resource Partners AG, a coal resource
consulting and project development firm, to collaborate on project origination and project
development activities for integrated coal resource-gasification projects to incentivize
third party investors to commit to providing financing for such projects. We are also
developing new downstream coal-to-chemicals and coal-to-energy projects which may expand our
initial focus to include facilities producing SNG, MTG, glycol, and power and reducing gas
for the steel industry. We are exploring new markets for entry such as India, Australia, and
other parts of Asia and Europe. |
| • | 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, China, Australia and South
Africa. We are working to develop transactions that include securing options to these
feedstock resources. For example, we are currently in discussions regarding development
opportunities in Inner Mongolia, China where provincial authorities are willing to make
available coal resources to the project owners, which adds protection from future coal cost
increases, and can potentially lead to increased project revenue. In these cases, we may
provide technology to add value to coal resources which may be of little value without our
U-GAS® conversion technology, or may acquire or partner with owners of these
resources to create more value and opportunity for us through the integration of our
technology with the resources. Additionally, where strategic relationships and capital
and/or financing is available, we may acquire an interest in such resources, including
existing facilities or coal mines, where we could create value with our U-GAS®
technology by securing direct access to feedstock. |
| • | Continue to develop and improve U-GAS® technology. We are continually seeking
to improve overall plant availability, plant efficiency rates and fuel handling capabilities
our U-GAS® gasification technology. We are continuing to work with our
prospective customers to determine the suitability of their low rank coals for our
U-GAS® technology through proprietary coal characterization testing as well as
selective commercial scale testing in our ZZ Joint Venture plant. Additionally, we are
growing our technology base through continued development of know-how with our engineering
and technical staff, growing and protecting our trade secrets as a result of patenting
improvements tested at our ZZ Joint Venture plant, and improvements resulting from
integration of our technology with downstream processes. One example includes the
development of our FMS which we believe can maximize the utilization of low rank coal in our
U-GAS®-based gasifiers, resulting in improved cost advantages. We have filed
several patent applications relating to our improvements to the U-GAS®
technology. |
| • | Grow earnings through increased revenues and control of expenses. We remain intently
focused on control of our expenses while we grow revenues from our technology business. 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 expenses until we have
assurances that acceptable financing is available to complete our projects. Until we have
such assurances, our strategy will be to operate using current capital resources and
leveraging the resources of our strategic relationship and/or financing partners. |
Results of Operations
We are in our development stage and therefore have had limited operations. We generated
revenues of $10.2 million for the year ended June 30, 2011. We have sustained net losses of
approximately $111.9 million from November 4, 2003, the date of our inception, to June 30, 2011. We
have primarily financed our operations to date through private placements and two public offerings
of our common stock.
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Year Ended June 30, 2011 Compared to the Year Ended June 30, 2010
Revenue. Total revenue increased by $0.9 million to $10.2 million for the year ended June 30,
2011 compared to $9.3 million for the year ended June 30, 2010.
Product sales increased by $1.1 million to $8.9 million for the year ended June 30, 2011
compared to $7.8 million for the year ended June 30, 2010 and were derived from the sale of syngas
and byproducts produced at the ZZ Joint Venture plant to Hai Hua. The increase in revenue was due
to higher levels of syngas production during fiscal 2011 as compared to fiscal 2010. For the
years ended June 30, 2011 and 2010, the plant operated for 65% and 61% of the period, respectively,
and the plant’s availability for production was 97% and 94% of the period, respectively.
During the three months ended June 30, 2011, Hai Hua notified the ZZ Joint Venture plant that
it will not continue payment of capacity fees beyond April 2011 for commercial and contractual
reasons. The unpaid amount totaled approximately $619,000 as of June 30, 2011. The plant has
continued to operate and provide syngas to Hai Hua, and Hai Hua has paid other contractual
obligations such as the energy fees and by-product sales due under the contract. We are working
with Hai Hua to resolve payment of the capacity fees. We did not recognize these capacity fee
revenues during fiscal 2011 and we will not recognize any capacity fees until collection is
reasonably assured.
Technology licensing and related services revenues increased by $0.5 million to $1.2 million
for the year ended June 30, 2011 compared to $0.7 million for the year ended June 30, 2010. The
increase was due primarily to revenues generated from the recognition of previously deferred
revenues received under a license agreement entered into in April 2010 which has since been
terminated due to the licensee’s inability to obtain financing for its project. Related services
revenue for both years included testing of coal at the ZZ Joint Venture plant, and other coal
testing, feasibility studies and other technical services provided in association with our
technology licensing business.
Costs of sales and plant operating expenses. Costs of sales and plant operating expenses
increased by $0.5 million to $9.1 million for the year ended June 30, 2011 compared to $8.6 million
for the year ended June 30, 2010 and were comprised principally of coal consumption and electricity
cost at the ZZ Joint Venture plant. The increase was due primarily to the increase in syngas
production during the year ended June 30, 2011.
General and administrative expenses. General and administrative expenses increased by $0.4
million to $12.7 million during the year ended June 30, 2011 compared to $12.3 million during the
year ended June 30, 2010. The increase was primarily due to increased travel and professional fees
related to licensing, other business development activities, and increased annual royalty expense
owed to GTI beginning in January 2010. These cost increases were offset, in part, by a reduction
in corporate personnel expenses of approximately $0.5 million.
Project and technical development expenses. Project and technical development expenses
decreased by $1.7 million to $0.2 million for the year ended June 30, 2011 compared to $1.9 million
for the year ended June 30, 2010. Technical development expenses decreased for the year ended June
30, 2011 due to reducing costs we incurred with third parties for development of our technology.
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 and other technical support and development
costs of biomass gasification projects in the U.S.
Stock-based compensation expense. Stock-based compensation expense decreased by $1.0 million
to $1.2 million for the year ended June 30, 2011 compared to $2.2 million for the year ended June
30, 2010. The decrease was principally due to forfeitures of certain stock option awards and due to
the fair values of recent stock option awards being lower than the fair values of certain prior
awards as a result of the decrease in the price of our common stock since 2008.
Depreciation and amortization expense. Depreciation and amortization expense decreased by $0.1
million to $2.6 million for the year ended June 30, 2011 compared to $2.7 million for the year
ended June 30, 2010 and was primarily related to depreciation of our ZZ Joint Venture plant’s
assets.
Asset impairment loss. The asset impairment loss of $6.6 million during the year ended June
30, 2010 was related to the write-off of the long-lived assets of our joint venture with Golden
Concord. We had no asset impairment loss during the year ended June 30, 2011.
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Equity in losses of Yima Joint Ventures. The equity in losses of the Yima Joint Ventures
increased by $0.3 million to $0.4 million for the year ended June 30, 2011 compared to $39,000 for
the year ended June 30, 2010 and relates to our 25% share of the losses incurred by the Yima Joint
Ventures during the construction phase. The losses were 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. The losses for the year ended June 30, 2011 increased
due to higher personnel and land lease related costs as portions of the project are nearing
completion.
Foreign currency gain. Foreign currency gains increased $0.9 million to $1.0 million for the
year ended June 30, 2011 compared to $0.1 million for the year ended June 30, 2010. The foreign
currency gains have resulted from the appreciation of the Renminbi Yuan relative to the U.S. dollar
and are generated on U.S. dollar denominated shareholder loans payable by our Chinese operations.
Interest income. Interest income increased $0.1 million to $0.2 million for the year ended
June 30, 2011 compared to $0.1 million for the year ended June 30, 2010. The increase was primarily
due to higher yields earned on cash equivalent investments.
Interest expense. Interest expense was $0.7 million for both of the years ended June 30, 2011
and 2010. Our interest expense relates primarily to our long term debt comprised of the ZZ Joint
Venture’s outstanding principal balance on its loan with the Industrial and Commercial Bank of
China, or ICBC. In addition, the ZZ Joint Venture has incurred additional interest expense of
approximately $161,000 during 2011 due to incurring discounting costs on bank notes received from
its customer in settlement of the ZZ Joint Venture’s accounts receivable.
Net loss attributable to noncontrolling interests. Net loss attributable to noncontrolling
interests decreased by $3.5 million to $0.2 million for the year ended June 30, 2011 compared to
$3.7 million during the year ended June 30, 2010. Net loss attributable to noncontrolling interests
for the year ended June 30, 2010 was principally from Golden Concord absorbing their interest in
the asset impairment loss recognized by the GC Joint Venture.
Year Ended June 30, 2010 Compares to the 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 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 commenced in September 2009. For the year ended June
30, 2010, the ZZ Joint Venture plant operated for 61% of the period and was available for
production for 94% of the period. Plant operations and syngas production was limited primarily due
to extended shutdowns by Hai Hua. Although the syngas volume offtake by Hai Hua increased during
fiscal 2010 compared to fiscal 2009, to date, Hai Hua was unable to offtake the volume of syngas
originally expected for the original plant design. The ZZ Joint Venture plant was in its
commissioning phase prior to achieving commercial operations status in December 2008.
Other related party revenue during the year ended June 30, 2010 of $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.
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General and administrative expenses. General and administrative expenses decreased by $4.1
million to $12.3 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 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 grants of stock
option awards during 2009 and 2010 was lower than certain prior awards due to the decrease in the
price of our common stock.
Depreciation and amortization expense. Depreciation and amortization expense 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 $0.5 million due to
settlement with a construction vendor.
Equity in losses of the 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 losses were 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. There were no equity in losses of the Yima Joint Venture during the year ended June 30,
2009.
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.
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 ICBC
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 recognized by the GC Joint Venture.
Liquidity and Capital Resources
We are in our development stage and have financed our operations to date through private
placements of our common stock in 2005 and 2006 and two public offerings, one in November 2007 and
one in June 2008. We have used the proceeds of these offerings primarily for the development of and
investments in our joint ventures in China and to pay other development and general and
administrative expenses. In addition, we have entered into a loan agreement with ICBC to fund
certain of the costs of the ZZ Joint Venture.
As of June 30, 2011, we had $32.2 million in cash and cash equivalents and $28.6 million of
working capital available to us. During the year ended June 30, 2011, we used $13.5 million in
operating activities compared to $16.3 million for the year ended June
30, 2010. During fiscal 2011, we had net cash provided from financing activities of $2.8
million due to receiving $5.0 million from the issuance of additional common stock to Zuari and
using approximately $2.4 million for the scheduled semi-annual principal payments on the ZZ Joint
Venture’s loan with ICBC.
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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 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, 2011, the applicable interest rate was 6.6% and
is payable monthly; |
| • | Principal payments of RMB 7.7 million (approximately $1.2 million based on current
currency exchange rates) are due in March and September of each year 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 ZZ Joint Venture
plant; and |
| • | Subject to customary events of default which, should one or more of them occur and be
continuing, would permit ICBC to declare all amounts owing under the contract to be due and
payable immediately. |
As of June 30, 2011, the ZZ Joint Venture was in compliance with all covenants and obligations
under the Fixed Asset Loan Contract.
Share Purchase Agreement with ZJX
On March 31, 2011, we entered into a Share Purchase Agreement, or the Agreement, with China
Energy and ZJX pursuant to which we will issue on the closing date to China Energy
37,254,475 shares of our common stock, in exchange for approximately $83.8 million, or the
Consideration. Within 20 business days after the accomplishment of the Milestone (as defined
below), we shall further issue directly to China Energy an amount of shares of common stock which,
when combined with the shares issued on the closing date, equals 60.0% of the outstanding common
stock on a fully-diluted basis. In August 2011, we agreed to extend the closing period of the
Agreement through December 31, 2011. The terms and conditions of the Agreement are summarized in
Note 12 to the consolidated financial statements included herein.
Use of Proceeds
Subject to the discretion and approval of the Board, the Consideration, net of costs and
expenses, is required to be applied to the following: (i) incorporation of a Company headquarters
in China to consolidate the ownership of our investment projects in China and enhance our presence
in China; (ii) investing in the expansion of our ZZ Joint Venture; (iii) investing in Phase I of
our Yima Joint Ventures; (iv) acquiring an ownership interest in a coal mine that will provide coal
to the Yima Joint Venture project; (v) investing in our Golden Concord Joint Venture; (vi) other
Chinese projects that may be recommended to the Board from time to time; and (vii) other expenses
of the operation and business of us in China.
ZJX will use reasonable endeavours to assist us to obtain third party funding (third party
direct equity investment in projects or debt financing to the projects) to (a) cover funding needs
of the above projects; (b) provide funding for us to invest in future phases of the Yima Joint
Venture project; (c) invest in strategic coal resources in China connected to our projects; and (d)
provide funding for us to invest in other projects in China not listed above and assist us to
obtain third party investment in any of our other projects.
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Project Development
ZJX will use reasonable endeavours to create at least four project joint ventures, or the
MJVs, in the areas of synthetic natural gas, methanol to gasoline; fertilizer; and electric power.
Funding for each MJV is expected to be approximately RMB20 billion. Each MJV is expected to be
funded with equity from a strategic investor plus project debt. We are anticipated to be part owner
of each MJV through a targeted 35% carry provided by the strategic investor as part of our
development of and provision of technology for the particular projects. ZJX will help us work with
the strategic investors to obtain long term purchase commitments for each of the MJVs prior to the
start of construction of each such project.
Closing of the transaction with China Energy and ZJX is subject to approval by our
stockholders and other customary closing conditions.
Other
We have included the $1.5 million payment paid to GTI in June 2009 toward future royalties due
to GTI for the Yima Joint Ventures’ project as part of our investment in the Yima project. An
additional future royalty payment of approximately $1.5 million will be due to GTI upon the
commissioning of the gasifier equipment for the Yima project. See Note 7 —Intangible Assets for
more information on the royalty payments.
Outlook
Our strategy is to create value by providing technology and equipment in regions where low
rank coals and biomass feedstocks can be profitably converted into high value products through our
proprietary U-GAS® fluidized bed gasification technology. We do this by providing a
proprietary technology package whereby we license U-GAS® technology rights to third
parties, deliver an engineered technology package and provide proprietary equipment components to
customers who have contracted to own and operate projects. We anticipate that we can generate
revenues through engineering and technical service fees, as well as licensing fees and royalties on
products sold by our licensees that incorporate our proprietary technology without incurring the
significant capital costs required to develop a plant. We also believe that our licensing
activities will provide additional insight into project development activities, which may allow us
to make selective equity investments in such projects in the future and afford opportunities to
develop integrated, modular product offerings. Additionally, we are continuing to improve our
technology in ways we believe will enhance our ability to further develop our licensing activities.
For example, in December 2010, we successfully implemented our Fines Management System, or FMS,
which is a new technology for which we have filed a patent that relates to recovering energy
remaining in the fines resulting from the gasification process. Using FMS, we are now achieving
over 90-day continuous runs on each single gasifier, which allows us to achieve very high
availability of syngas due to our spare stem gasifier configuration. With FMS, we believe we can
maximize the utilization of low rank coal in our U-GAS® -based gasifiers, and as a
result, improve the cost advantages derived from using our technology.
We currently plan to use our available cash for (i) our general and administrative expenses;
(ii) debt service related to the ZZ Joint Venture; (iii) working capital; (iv) project and
third-party licensing and technical development expenses; (v) operating expenses of SRS; and (vi)
general corporate purposes. The actual allocation and timing of these expenditures will be
dependent on various factors, including changes in our strategic relationships, commodity prices
and industry conditions, and other factors that we cannot currently predict. In particular, any
future decrease in economic activity in China or in other regions of the world in which we may in
the future do business could significantly and adversely affect our results of operations and
financial condition. Additionally, markets for commodities such as methanol have been under
significant recent pressure and we are unsure of how much longer methanol prices may remain
depressed. Accordingly, our ability to finance and develop our existing projects, commence any new
projects and sell products from our current operations could be adversely impacted.
We are pursuing possible U-GAS® licensing opportunities with third parties allowing
us to build on our experience at the ZZ Joint Venture and our overall technological and engineering
capabilities. We intend to place increased focus on development of licensing opportunities for our
proprietary U-GAS® technology on a global basis with a particular focus on India, China,
Australia and South Africa due to large low rank coal resources present in these areas. Having
access to such resources may lead to new commercial opportunities and greater cost and operating
efficiencies in existing or planned projects.
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We may (i) integrate our U-GAS® technology package with downstream technologies to
provide a fully integrated offering where we may invest in projects either directly or through an
investment partner, (ii) partner with engineering, equipment and technology companies to provide
our U-GAS® technology package into an integrated modular product offering, (iii) provide
technology to enable
coal resources to be integrated together with our U-GAS® technology where the coal
resources may be of little commercial value without our U-GAS® conversion technology, or
(iv) acquire or partner with owners of these coal resources to create more value and opportunity
for us through the integration of our technology with the coal resource. We understand the need to
partner in certain markets, and plan to do so with companies that we believe can help us accelerate
our business. Our partnering approach in some cases is country specific and in some cases is
industry or segment specific. Additionally, where capital and/or financing is available, we may
acquire an interest in such resources, including existing facilities or coal mines, where we could
create value with our U-GAS® technology through securing greater access to feedstock.
We believe our transaction with ZJX and China Energy when closed will further our business and
strategic interests. We believe the transaction will allow us to leverage ZJX’s existing
relationships with major Chinese companies, agencies, and institutions to raise additional capital
and develop, permit, and construct additional projects, and to provide support to resolve any
issues with our Yima Joint Ventures and ZZ Joint Venture projects, as well as other projects in
China we may become involved in. If approved by our stockholders, the transaction will provide an
immediate and substantial increase in our cash resources providing flexibility for our China
business and the means to execute on portions of our business plan. We believe that the
strengthened balance sheet resulting from the transaction and the show of support by a significant
investor and partner will have a positive impact on our technology licensing business and help
facilitate new commercial opportunities. Additionally, ZJX is prepared to assist us in securing
long-term offtake contracts with several of China’s largest energy and commodity companies further
enhancing our ability to finance our projects.
We are actively pursuing new project partners to invest in our ongoing development efforts and
are investigating possibly implementing a different project scope and end product for our Yima
Joint Ventures and our GC Joint Venture and may possibly be expanding both the size and scope of
our ZZ Joint Venture plant. Our Yima project is currently under construction and Yima is the
project management leader for the project. During the three months ended September 30, 2010, Yima
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. In addition, Yima
has 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 the project’s syngas
production facilities will be brought online in mid-2012 as per the original schedule for
commercial operation. Although the schedule for glycol production is currently under evaluation,
Yima is taking steps to connect the syngas production facility with their east and west coal
chemical zones to provide an outlet for syngas sales prior to glycol production. We are continuing
to have discussions with Yima to restructure the agreements as necessary to achieve these goals.
We are of the view that by improving financial performance and reducing operating costs at the
ZZ Joint Venture plant our overall financial performance can be improved, and one method to achieve
this is by expanding the ZZ Joint Venture plant to produce products such as glycol. As an interim
step to producing glycol, however, the existing contractual arrangement with Hai Hua could be
modified which would allow us to participate directly in methanol sales. Hai Hua, to date, has
been unable to offtake the volume of syngas envisaged in the original plant design and as a result,
the plant has incurred operating losses. We do not foresee this situation changing significantly in
the near term, although Hai Hua has indicated that they may be able to take advantage of higher
gasifier utilization if we are able to alter the composition of our syngas to fit their needs. In
an effort to improve the return on our investment in this plant, we are currently evaluating
several alternative products and partnership structures, including participation in methanol sales,
and are considering a possible expansion of the ZZ Joint Venture plant to produce products such as
glycol. We are in discussions with several potential partners on this contemplated expansion. In
February 2010, we received the necessary government approval for such an expansion. These
approvals, along with previously received environmental approvals, are necessary in order for us to
commence execution of the expansion. The approvals document certain terms of the expansion,
including, but not limited to, the project’s use of land, additional facilities required, use of
existing facilities, etc. The exact size and scope of the expansion, however, is still under
evaluation. In addition, our successful commercial-scale demonstration at the ZZ Joint Venture
plant using lignite coal from the Inner Mongolia region of China was a significant milestone for us
and our U-GAS® technology as it demonstrated our ability to efficiently process lignite
coal. As a result of the lignite demonstration, we have seen an increase in visits to our ZZ Joint
Venture 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. Despite our work with Hai Hua on improving financial performance and reducing costs, Hai
Hua has not made the capacity fee payments to the ZZ Joint Venture since April 2011 as described
under “—Results of Operation.” The unpaid amount totals approximately $619,000 as of June 30,
2011. Although we are continuing to work with Hai Hua on alternatives to resolve the issue, there
can be no assurances that we will collect these amounts. Hai Hua’s failure to make capacity fee
payments
could lead us to shut down the ZZ Joint Venture plant for a period of time until we are able
to either find an alternative purchaser of our production or a different use for the plant.
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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 these high coal prices have
had a very negative impact on the margins of current coal gasification projects. In order to fuel
its energy needs, China today is moving toward even larger coal based projects, which include
several large scale coal-to-methane or SNG projects, as compared to previous coal-to-chemical
projects. Due to current encouragement from the Chinese government, we believe there is potential
in China for several of these projects, some of which currently are in various stages of planning.
We believe many of these projects will be located in regions where very low cost lignite coals can
be made available reducing production costs of SNG and enhancing the profitability of these kinds
of projects. As we have determined with testing at our ZZ Joint Venture plant, our technology has
the unique ability to efficiently process lignite and thus we believe it is very desirable for
projects of the type the Chinese government appears to support. As evidence of this, we are in
discussions regarding several projects in Inner Mongolia where the provincial government is making
coal resources available to the project owners which adds protection for the project from future
coal cost increases, as well as potentially increasing project revenues. In these types of
projects, we believe that we have the opportunity to create more value from the U-GAS technology
than licensing alone could bring us.
We expect to continue for a period of time to have negative operating cash flows until we can
generate sufficient revenues from 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. In addition, if we are not able
to complete the ZJX/China Energy transaction, we will need to aggressively pursue additional
partners in China and may need to cut our operating expenses. We will also limit the development
of any further projects until we have assurances that acceptable financing is available to complete
the project. Despite this, we will continue to pursue the development of selective projects with
strong and credible partners or off-takers where we believe equity and debt can be raised or where
we believe we can attract a financial partner to participate in the project.
We can make no assurances that our business operations will develop and provide us with
sufficient cash to continue operations. We may need to raise additional capital through equity
and debt financing for any new projects that are developed, to support our existing projects and
possible expansions, and to meet corporate general and administrative expenses. We cannot provide
any assurance that any financing will be available to us in the future on acceptable terms or at
all. Any such financing could be dilutive to our existing stockholders. If we cannot raise
required funds on acceptable terms, we may not be able to, among other things, (i) maintain our
general and administrative expenses at current levels; (ii) successfully develop our licensing and
related service businesses; (iii) negotiate and enter into new gasification plant development
contracts and licensing agreements; (iv) expand our operations; (v) hire and train new employees;
or (vi) respond to competitive pressures or unanticipated capital requirements.
Critical Accounting Policies
The preparation of financial statements in accordance with U.S. generally accepted accounting
principles, or 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.
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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 met. 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.
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
The ZZ Joint Venture plant has operated at limited capacity and is expected to continue
operating at reduced capacity due to the depressed methanol market and limited off-take by Hai Hua.
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 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 and sharing in
methanol production with Hai Hua. 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. 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 become impaired. As of June 30, 2011, we have determined that these assets
were not impaired.
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Despite our work with Hai Hua on improving financial performance and reducing costs, Hai Hua has
not made the capacity fee payments to the ZZ Joint Venture since April 2011 as described under
“—Results of Operation.” The unpaid amount totals approximately $619,000 as of June 30, 2011.
Although we are continuing to work with Hai Hua on alternatives to resolve the issue, there can be
no assurances that we will collect these amounts. Hai Hua’s failure to make capacity fee payments
could lead us to shut down the ZZ Joint Venture plant for a period of time until we are able to
either find an alternative purchaser of our production or a different use for the plant.
Accounting for Variable Interest Entities and Financial Statement Consolidation Criteria
The joint ventures which we enter into may be considered variable interest entities, or 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.
We have determined that the ZZ Joint Venture is a VIE and that we are the primary beneficiary.
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.
We have determined that the Yima Joint Ventures are VIEs and that Yima is the primary
beneficiary since Yima has a 75% ownership interest in the Yima Joint Ventures.
We have determined that the GC Joint Venture is a VIE and that we are the primary beneficiary
since we have a 51% ownership interest in the GC Joint Venture and since there are no qualitative
factors that would preclude us from being deemed the primary beneficiary.
We have determined that SRS is a VIE and that neither we nor Midas is the primary beneficiary
since we each have a 50% ownership interest in SRS and the control, risks and benefits of SRS are
shared equally.
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.
Contractual Obligations
Our material contractual obligations at June 30, 2011 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 |
$ | 7,798 | $ | 2,777 | $ | 5,021 | $ | — | $ | — | ||||||||||
Operating leases |
629 | 365 | 264 | — | — | |||||||||||||||
Total |
$ | 8,427 | $ | 3,142 | $ | 5,285 | $ | — | $ | — | ||||||||||
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, rather than net, basis. The new
disclosures were 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
only impact is potential additional disclosure in the financial statements.
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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, enterprises are required to disclose significant
judgments and assumptions used to determine whether or not to consolidate a VIE. This amendment
was adopted by us effective as of July 1, 2010 and adoption of the standard has not impacted the
entities which we consolidate. The only impact is potential additional disclosure in the financial
statements. See Note 1 to the consolidated financial statements included herein for disclosures
regarding our involvement with VIEs.
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 requirements in the amendment must be applied to transfers occurring on or
after the effective date. Our adoption of these requirements as of July 1, 2010 had no effect on
our financial statements.
In July 2010, the FASB issued guidance for the disclosures about the credit quality of
financing receivables and the allowance for credit losses. This guidance amends existing disclosure
guidance to require an entity to provide a greater level of disaggregated information about the
credit quality of its financing receivables and its allowance for credit losses. This guidance is
effective for fiscal and interim periods beginning after December 15, 2010. Our adoption of these
requirements effective January 1, 2011 had no effect on our consolidated financial statements.
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. Our adoption of this guidance effective July 1, 2010 had no effect on our financial
statements.
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. Our adoption of this guidance effective July 1,
2010 had no effect on our financial statements.
| 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 our functional currency in China is the Renminbi Yuan. Our
financial statements are expressed in U.S. dollars and will be negatively affected if foreign
currencies, such as the Renminbi Yuan, depreciate relative to the U.S. dollar. In addition, our
currency exchange losses may be magnified by exchange control regulations in China or other
countries
that restrict our ability to convert into U.S. dollars. The People’s Bank of China, the
monetary authority in China, sets the spot rate of the Renminbi Yuan, and may also use a variety of
techniques, such as intervention by its central bank or imposition of regulatory controls or taxes,
to affect the exchange rate relative to the U.S. dollar. In the future, the Chinese government may
also issue a new currency to replace its existing currency or alter the exchange rate or relative
exchange characteristics by devaluation or revaluation of the Renminbi Yuan in ways that may be
adverse to our interests.
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Commodity price risk
Our business plan is to purchase coal and other consumables from suppliers and to sell
commodities, such as syngas, methanol and other products. Coal is the largest component of our
costs of product sales and in order to mitigate coal price fluctuation risk for future projects, we
expect to enter into long-term contracts for coal supply or to acquire coal assets. For the sale of
commodities from our projects, fixed price contracts will not be available to us in certain
markets, such as China, which will require us to purchase some portion of our coal and other
consumable needs, or sell some portion of our production, into spot commodity markets or under
short term supply agreements. Hedging transactions may be available to reduce our exposure to these
commodity price risks, but availability may be limited and we may not be able to successfully hedge
this exposure at all. To date, we have not entered into any hedging 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, 2011, the applicable interest rate was 6.6%. We could also be exposed to the risk of
rising interest rates through our future borrowing activities. This is an inherent risk as
borrowings mature and are renewed at then current market rates. The extent of this risk as to our
ICBC loan, or any future borrowings, is not quantifiable or predictable because of the variability
of future interest rates.
Customer credit risk
When our projects other than the ZZ Joint Venture plant progress to commercial production, we will
be exposed to the risk of financial non-performance by customers. To manage customer credit risk,
we intend to monitor credit ratings of customers and seek to minimize exposure to any one customer
where other customers are readily available. As of June 30, 2011, Hai Hua, a related party, is our
only customer for syngas sales and as such, we are exposed to significant customer credit risk due
to this concentration. In addition, as described under “—Results of Operation,” Hai Hua has not
made the capacity fee payments to the ZZ Joint Venture since April 2011. The unpaid amount totals
approximately $619,000 as of June 30, 2011. Although we are continuing to work with Hai Hua on
alternatives to resolve the issue, there can be no assurances that we will collect these amounts.
Our revenue and results of operations would be adversely affected if Hai Hua continues to not pay
the capacity fee or if we are otherwise unable to retain Hai Hua as a customer and secure new
customers and we may need to shut down the ZZ Joint Venture plant for a period of time until we are
able to either find an alternative purchaser of our production or a different use for the plant.
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| Item 8. | Financial Statements and Supplementary Data |
INDEX TO FINANCIAL STATEMENTS
| Page | ||||
| 43 | ||||
| 45 | ||||
| 46 | ||||
| 47 | ||||
| 48 | ||||
| 49 | ||||
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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, 2011 and June 30, 2010, and the results of their operations and their cash
flows for each of the three years in the period ended June 30, 2011 and, cumulatively, for the
period from July 1, 2008 to June 30, 2011 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.
/s/ PricewaterhouseCoopers LLP
September 26, 2011
September 26, 2011
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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 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 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
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SYNTHESIS ENERGY SYSTEMS, INC.
(A Development Stage Enterprise)
(A Development Stage Enterprise)
Consolidated Balance Sheets
(In thousands)
| June 30, | June 30, | |||||||
| 2011 | 2010 | |||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 32,176 | $ | 42,573 | ||||
Accounts receivable |
2,574 | 2,672 | ||||||
Prepaid expenses and other currents assets |
1,382 | 1,875 | ||||||
Inventory |
913 | 983 | ||||||
Total current assets |
37,045 | 48,103 | ||||||
Property, plant and equipment, net |
35,183 | 35,881 | ||||||
Intangible asset, net |
1,226 | 1,272 | ||||||
Investment in Yima joint ventures |
33,520 | 32,430 | ||||||
Other long-term assets |
3,000 | 2,895 | ||||||
Total assets |
$ | 109,974 | $ | 120,581 | ||||
LIABILITIES AND EQUITY |
||||||||
Current liabilities: |
||||||||
Accrued expenses and accounts payable |
$ | 6,113 | $ | 7,008 | ||||
Deferred revenue |
— | 522 | ||||||
Current portion of long-term bank loan |
2,380 | 2,268 | ||||||
Total current liabilities |
8,493 | 9,798 | ||||||
Long-term bank loan |
4,697 | 6,744 | ||||||
Total liabilities |
13,190 | 16,542 | ||||||
Equity: |
||||||||
Common stock, $0.01 par value - 200,000
shares authorized - 50,850 and 48,337
shares issued and outstanding, respectively |
509 | 483 | ||||||
Additional paid-in capital |
205,055 | 198,720 | ||||||
Deficit accumulated during development stage |
(111,912 | ) | (96,449 | ) | ||||
Accumulated other comprehensive income |
3,848 | 1,835 | ||||||
Total stockholders’ equity |
97,500 | 104,589 | ||||||
Noncontrolling interests in subsidiaries |
(716 | ) | (550 | ) | ||||
Total equity |
96,784 | 104,039 | ||||||
Total liabilities and equity |
$ | 109,974 | $ | 120,581 | ||||
See accompanying notes to the consolidated financial statements.
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SYNTHESIS ENERGY SYSTEMS, INC.
(A Development Stage Enterprise)
(A Development Stage Enterprise)
Consolidated Statements of Operations
(In thousands, except per share amounts)
| November 4, 2003 | ||||||||||||||||
| Year Ended June 30, | (inception) | |||||||||||||||
| 2011 | 2010 | 2009 | to June 30, 2011 | |||||||||||||
Revenue: |
||||||||||||||||
Product sales and other — related parties |
$ | 8,913 | $ | 8,423 | $ | 1,852 | $ | 19,390 | ||||||||
Technology licensing and related services |
1,245 | 732 | — | 1,977 | ||||||||||||
Other |
— | 146 | 250 | 521 | ||||||||||||
Total revenue |
10,158 | 9,301 | 2,102 | 21,888 | ||||||||||||
Costs and Expenses: |
||||||||||||||||
Costs of sales and plant operating expenses |
9,120 | 8,621 | 7,449 | 27,584 | ||||||||||||
General and administrative expenses |
12,686 | 12,343 | 16,395 | 62,141 | ||||||||||||
Project and technical development expenses |
227 | 1,873 | 1,046 | 11,283 | ||||||||||||
Asset impairment losses |
— | 6,575 | 2,500 | 9,075 | ||||||||||||
Stock-based compensation expense |
1,234 | 2,179 | 1,869 | 20,994 | ||||||||||||
Depreciation and amortization |
2,621 | 2,674 | 2,905 | 9,631 | ||||||||||||
Total costs and expenses |
25,888 | 34,265 | 32,164 | 140,708 | ||||||||||||
Operating loss |
(15,730 | ) | (24,964 | ) | (30,062 | ) | (118,820 | ) | ||||||||
Non-operating (income) expense: |
||||||||||||||||
Equity in losses of Yima joint ventures |
363 | 39 | — | 402 | ||||||||||||
Foreign currency gains, net |
(1,004 | ) | (123 | ) | — | (1,805 | ) | |||||||||
Interest income |
(169 | ) | (133 | ) | (1,742 | ) | (3,047 | ) | ||||||||
Interest expense |
700 | 668 | 959 | 2,717 | ||||||||||||
Net loss |
(15,620 | ) | (25,415 | ) | (29,279 | ) | (117,087 | ) | ||||||||
Less: net loss attributable to noncontrolling interests |
157 | 3,667 | 703 | 5,175 | ||||||||||||
Net loss attributable to stockholders |
$ | (15,463 | ) | $ | (21,748 | ) | $ | (28,576 | ) | $ | (111,912 | ) | ||||
Net loss per share: |
||||||||||||||||
Basic and diluted |
$ | (0.32 | ) | $ | (0.45 | ) | $ | (0.60 | ) | $ | (3.06 | ) | ||||
Weighted average common shares outstanding: |
||||||||||||||||
Basic and diluted |
48,584 | 48,230 | 48,017 | 36,535 | ||||||||||||
See accompanying notes to the consolidated financial statements.
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SYNTHESIS ENERGY SYSTEMS, INC.
(A Development Stage Enterprise)
(A Development Stage Enterprise)
Consolidated Statement of Equity
(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 |
— | — | — | — | 237 | 1 | 238 | |||||||||||||||||||||
Comprehensive loss |
— | — | — | — | — | — | (25,177 | ) | ||||||||||||||||||||
Contributions from noncontrolling interest
partners |
— | — | — | — | — | 839 | 839 | |||||||||||||||||||||
Stock-based compensation |
— | — | 2,179 | — | — | — | 2,179 | |||||||||||||||||||||
Exercise of stock options |
219 | 2 | 100 | — | — | — | 102 | |||||||||||||||||||||
Balance at June 30, 2010 |
48,337 | 483 | 198,720 | (96,449 | ) | 1,835 | (550 | ) | 104,039 | |||||||||||||||||||
Net loss |
— | — | — | (15,463 | ) | — | (157 | ) | (15,620 | ) | ||||||||||||||||||
Currency translation adjustment |
— | — | — | — | 2,013 | (9 | ) | 2,004 | ||||||||||||||||||||
Comprehensive loss |
— | — | — | — | — | — | (13,616 | ) | ||||||||||||||||||||
Stock-based compensation |
— | — | 1,203 | — | — | — | 1,203 | |||||||||||||||||||||
Exercise of stock options |
291 | 4 | 166 | — | — | — | 170 | |||||||||||||||||||||
Net proceeds from issuance of common stock |
2,222 | 22 | 4,966 | — | — | — | 4,988 | |||||||||||||||||||||
Balance at June 30, 2011 |
50,850 | $ | 509 | $ | 205,055 | $ | (111,912 | ) | $ | 3,848 | $ | (716 | ) | $ | 96,784 | |||||||||||||
See accompanying notes to the consolidated financial statements.
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SYNTHESIS ENERGY SYSTEMS, INC.
(A Development Stage Enterprise)
(A Development Stage Enterprise)
Consolidated Statements of Cash Flows
(In thousands)
| November 4, 2003 | ||||||||||||||||
| Year Ended June 30, | (inception) | |||||||||||||||
| 2011 | 2010 | 2009 | to June 30, 2011 | |||||||||||||
Cash flows from operating activities: |
||||||||||||||||
Net loss |
$ | (15,620 | ) | $ | (25,415 | ) | $ | (29,279 | ) | $ | (117,087 | ) | ||||
Adjustments to reconcile net loss to net cash used in
operating activities: |
||||||||||||||||
Stock-based compensation expense |
1,234 | 2,179 | 1,869 | 20,994 | ||||||||||||
Depreciation of property, plant and equipment |
2,400 | 2,445 | 2,671 | 8,565 | ||||||||||||
Amortization of intangible and other assets |
221 | 229 | 234 | 1,066 | ||||||||||||
Equity in losses of Yima joint ventures |
363 | 39 | — | 402 | ||||||||||||
Foreign currency gains |
(1,004 | ) | (123 | ) | — | (1,805 | ) | |||||||||
Loss on disposal of property, plant and equipment |
17 | 3 | 37 | 153 | ||||||||||||
Asset impairment losses |
— | 6,575 | 2,500 | 9,075 | ||||||||||||
Changes in operating assets and liabilities: |
||||||||||||||||
Accounts receivable |
218 | (1,331 | ) | (1,164 | ) | (2,445 | ) | |||||||||
Prepaid expenses and other current assets |
(456 | ) | (906 | ) | 1,578 | (687 | ) | |||||||||
Inventory |
119 | (199 | ) | (261 | ) | (858 | ) | |||||||||
Other long-term assets |
590 | 154 | (1,353 | ) | (639 | ) | ||||||||||
Deferred revenue |
(522 | ) | 522 | — | — | |||||||||||
Accrued expenses and payables |
(1,093 | ) | (511 | ) | (3,581 | ) | 566 | |||||||||
Net cash used in operating activities |
(13,533 | ) | (16,339 | ) | (26,749 | ) | (82,700 | ) | ||||||||
Cash flows from investing activities: |
||||||||||||||||
Capital expenditures |
(74 | ) | (801 | ) | (4,155 | ) | (38,030 | ) | ||||||||
Equity investment in Yima joint ventures |
— | (29,288 | ) | (1,500 | ) | (30,788 | ) | |||||||||
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 — redemptions of certificates of deposit |
329 | 50 | 150 | (50 | ) | |||||||||||
Amendment to GTI license rights |
— | — | — | (500 | ) | |||||||||||
Purchase of land use rights |
— | (177 | ) | — | (1,896 | ) | ||||||||||
Receipt of Chinese governmental grant |
— | — | — | 556 | ||||||||||||
Project prepayments |
— | — | (102 | ) | (3,210 | ) | ||||||||||
Net cash provided by (used in) investing activities |
255 | (30,216 | ) | (8,350 | ) | (76,661 | ) | |||||||||
Cash flows from financing activities: |
||||||||||||||||
Payments on long-term bank loan |
(2,351 | ) | (2,268 | ) | (2,253 | ) | (6,872 | ) | ||||||||
Proceeds from long-term bank loan |
— | — | — | 12,081 | ||||||||||||
Proceeds from exercise of stock options, net |
186 | 138 | 63 | 951 | ||||||||||||
Proceeds (costs) from issuance of common stock, net |
4,988 | — | (107 | ) | 179,969 | |||||||||||
Prepaid interest |
— | — | — | (276 | ) | |||||||||||
Financing costs |
— | — | — | (143 | ) | |||||||||||
Contributions from noncontrolling interest partners |
— | 839 | — | 4,456 | ||||||||||||
Loans from shareholders |
— | — | — | 11 | ||||||||||||
Net cash provided by (used in) financing activities |
2,823 | (1,291 | ) | (2,297 | ) | 190,177 | ||||||||||
Net increase (decrease) in cash |
(10,455 | ) | (44,846 | ) | (37,396 | ) | 30,816 | |||||||||
Cash and cash equivalents, beginning of period |
42,573 | 90,420 | 127,872 | — | ||||||||||||
Effect of exchange rates on cash |
58 | (1 | ) | (56 | ) | 1,360 | ||||||||||
Cash and cash equivalents, end of period |
$ | 32,176 | $ | 42,573 | $ | 90,420 | $ | 32,176 | ||||||||
See accompanying notes to the consolidated financial statements.
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SYNTHESIS ENERGY SYSTEMS, INC.
(A Development Stage Enterprise)
Notes to the Consolidated Financial Statements
(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 a global energy and gasification technology company that provides products and solutions
to the energy and chemical industries. The Company builds, owns and operates coal gasification
plants that utilize its proprietary U-GAS® fluidized bed gasification technology to
convert low rank coal and coal wastes into higher value energy products. The Company provides
licenses, equipment components, engineering services and product offerings related to the
U-GAS® technology. The Company’s headquarters are located in Houston, Texas.
(b) Basis of presentation and principles of consolidation
The Company’s consolidated financial statements are in U.S. dollars. 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) | |||||||||||||||
| 2011 | 2010 | 2009 | to June 30, 2011 | |||||||||||||
Interest paid |
$ | 498 | $ | 608 | $ | 950 | $ | 3,417 | ||||||||
Interest received |
169 | 133 | 1,746 | 3,019 | ||||||||||||
Non-cash transactions: |
||||||||||||||||
Accrued construction-in- progress |
— | 101 | 1,556 | — | ||||||||||||
Stock issued to employees |
— | — | — | 52 | ||||||||||||
Fair value of stock issued to GTI |
— | — | — | 3,876 | ||||||||||||
Conversion of debt to equity |
— | — | — | 11 | ||||||||||||
(f) Restricted assets
At June 30, 2011 and 2010, cash and cash equivalents included a $50,000 certificate of deposit
which collateralizes a Company credit card program with a financial institution. At June 30, 2010,
included in current assets was a $328,900 investment in a short-term certificate of deposit that
was pledged as collateral for a letter of credit in connection with the Company’s corporate office
lease.
(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) and replacement parts for plant
equipment which are expensed to cost of sales when consumed.
(h) 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.
(i) 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, 2011.
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(j) 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 (as defined in Note 3) plant’s
operating losses to-date, including the year ended June 30, 2011, the Company believed an
impairment assessment of the plant’s assets was warranted. As of June 30, 2011, 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 (as
defined in Note 3).
(k) 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.
(l) 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 using
the effective interest rate method.
(m) 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.
(n) 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, 2011, 2010 and 2009, 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.
(o) 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.
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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.
(p) 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 11 for additional information related to stock-based
compensation expense.
(q) Accounting for variable interest entities (VIEs) and financial statement consolidation criteria
The joint ventures which the Company enters into may be considered VIEs. The Company
consolidates all VIEs where it is the primary beneficiary. This determination is made at the
inception of the Company’s involvement with the VIE and is continuously assessed. The Company
considers qualitative factors and forms a conclusion that the Company, or another interest holder,
has a controlling financial interest in the VIE and, if so, whether it is the primary beneficiary.
In order to determine the primary beneficiary, the Company considers who has the power to direct
activities of the VIE that most significantly impacts the VIE’s performance and has an obligation
to absorb losses from or the right to receive benefits of the VIE that could be significant to the
VIE. The Company does not consolidate VIEs where it is not the primary beneficiary. The Company
accounts for these unconsolidated VIEs under the equity method of accounting and includes its net
investment on its consolidated balance sheets. The Company’s equity interest in the net income or
loss from its unconsolidated VIEs is recorded in non-operating (income) expense on a net basis on
its consolidated statement of operations.
The Company has determined that the ZZ Joint Venture is a VIE and has determined that it is
the primary beneficiary. In making the initial determination, the Company considered, among other
items, the change in profit distribution between the Company and Hai Hua, the joint venture
partner, after 20 years. The expected negative variability in the fair value of the ZZ Joint
Venture’s net assets was considered to be greater during the first 20 years of the ZZ Joint
Venture’s life, which coincided with our original 95% profit/loss allocation, versus the latter 30
years in which the Company’s profit/loss allocation would be reduced to 10%. As the result of an
amendment to the ZZ Joint Venture agreement in 2010, the profit distribution percentages will
remain in place after the first 20 years, providing further support to the determination that the
Company is the primary beneficiary. In addition, the Company considered whether the terms of the
syngas purchase and sale agreement with Hai Hua contained a lease. The factors considered included
(i) the Company’s ability to operate and control the plant during the initial 20 years; and (ii)
whether it was more than remote that one or more parties other than Hai Hua would purchase more
than a minor amount (considered to be 10%) of the plant’s output during the term of the syngas
purchase and sale agreement. Because the Company determined that the syngas purchase and sale
agreement did not contain a lease, the Company accounts for the revenues from that agreement in
accordance with the Company’s revenue recognition policy for product sales.
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The following tables provide additional information on the ZZ Joint Venture’s assets and
liabilities as of June 30, 2011 and 2010 which are consolidated within the Company’s consolidated
balance sheets (in thousands):
| June 30, 2011 | ||||||||||||
| Consolidated | ZZ Joint Venture (1) | % (2) | ||||||||||
Current assets |
$ | 37,045 | $ | 3,767 | 10 | % | ||||||
Long-term assets |
72,929 | 36,936 | 51 | % | ||||||||
Total assets |
$ | 109,974 | $ | 40,703 | 37 | % | ||||||
Current liabilities |
$ | 8,493 | $ | 3,486 | 41 | % | ||||||
Long-term liabilities |
4,697 | 4,697 | 100 | % | ||||||||
Equity |
96,784 | 32,520 | 34 | % | ||||||||
Total liabilities and equity |
$ | 109,974 | $ | 40,703 | 37 | % | ||||||
| June 30, 2010 | ||||||||||||
| Consolidated | ZZ Joint Venture (1) | % (2) | ||||||||||
Current assets |
$ | 48,103 | $ | 5,198 | 11 | % | ||||||
Long-term assets |
72,478 | 38,811 | 54 | % | ||||||||
Total assets |
$ | 120,581 | $ | 44,009 | 36 | % | ||||||
Current liabilities |
$ | 9,798 | $ | 5,852 | 60 | % | ||||||
Long-term liabilities |
6,744 | 6,744 | 100 | % | ||||||||
Equity |
104,039 | 31,413 | 30 | % | ||||||||
Total liabilities and equity |
$ | 120,581 | $ | 44,009 | 36 | % | ||||||
| (1) | Amounts reflect information for ZZ Joint Venture and exclude intercompany items. |
|
| (2) | ZZ Joint Venture’s percentage of the amount on the Company’s consolidated balance
sheets. |
The Company has determined that the Yima Joint Ventures are VIEs and that Yima, the joint
venture partner, is the primary beneficiary since Yima has a 75% ownership interest in the Yima
Joint Ventures and has the power to direct the activities of the VIE that most significantly
influence the VIE’s performance.
The Company has determined that the GC Joint Venture is a VIE and has determined that it is
the primary beneficiary since the Company has a 51% ownership interest in the GC Joint Venture and
since there are no qualitative factors that would preclude the Company from being deemed the
primary beneficiary. The Company consolidates the GC Joint Venture in its consolidated financial
statements; however, as of June 30, 2011 and June 30, 2010, there were no significant assets or
liabilities within the GC Joint Venture.
The Company has determined that SES Resource Solutions, Ltd. (“SRS”) that was formed in June
2011 is a VIE and that neither the Company nor Midas Resources AG control SRS since each have a 50%
ownership interest in SRS and the control, risks and benefits of SRS are shared equally. SRS had
no assets or liabilities as of June 30, 2011.
(r) Fair value measurements
Accounting standards require that fair value measurements be classified and disclosed in one
of the following categories:
| Level 1 | Unadjusted quoted prices in active markets that are accessible at the measurement date for
identical, unrestricted assets or liabilities; |
| Level 2 | Quoted prices in markets that are not active, or inputs that are observable, either
directly or indirectly, for substantially the full term of the asset or liability; and |
| Level 3 | Prices or valuation techniques that require inputs that are both significant to the fair
value measurement and unobservable (i.e., supported by little or no market activity). |
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The carrying value of the Company’s other financial instruments including accounts
receivable, accounts payable and long-term debt approximate their fair values.
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, 2011
and 2010 (in thousands):
| June 30, 2011 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Assets: |
||||||||||||||||
Certificates of Deposit |
$ | — | $ | 50 | (1) | $ | — | $ | 50 | |||||||
Money Market Funds |
— | 29,372 | (2) | — | 29,372 | |||||||||||
| 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 | |||||||||||
| (1) | Amount included in other current assets on the Company’s consolidated balance sheets. |
|
| (2) | Amount included in cash and cash equivalents on the Company’s consolidated balance sheets. |
(s) Comprehensive income (loss)
The Company’s comprehensive income (loss) was as follows (in thousands):
| Year Ended | ||||||||
| June 30, | ||||||||
| 2011 | 2010 | |||||||
Net loss, as reported |
$ | (15,620 | ) | $ | (25,415 | ) | ||
Unrealized foreign currency translation
adjustment |
2,004 | 238 | ||||||
Comprehensive loss |
(13,616 | ) | (25,177 | ) | ||||
Less comprehensive loss attributable to
noncontrolling interests |
166 | 3,666 | ||||||
Comprehensive loss attributable to the Company |
$ | (13,450 | ) | $ | (21,511 | ) | ||
(t) Developmen Stage Status
Since its inception, the Company has focused primarily on identifying and developing projects
and strategies to commercialize its gasification technology and on raising the capital necessary to
do so. During fiscal 2011, the Company continued development of its technology licensing business
and the development of strategic and financial partner relationships in regions such as China and
India. Additionally, the Company formed SRS to develop integrated coal resource
projects using the Company’s technology. To date, revenues have been generated primarily from the
ZZ Joint Venture which operates a small scale commercial syngas production plant that the Company
also utilizes to demonstrate the Company’s technology for other commercial development
opportunities. As a result of these factors, the Company continues to be classified as a
development stage enterprise as of and for the year ended June 30, 2011.
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Note 2 — Recently Issued Accounting Standards
In January 2010, the Financial Accounting Standards Board (“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, rather
than net, basis. These new disclosure requirements had no impact on the Company’s current fair
value disclosures included in Note 1.
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, enterprises are required to disclose significant
judgments and assumptions used to determine whether or not to consolidate a VIE. This amendment
was adopted by the Company effective as of July 1, 2010 and adoption of the standard has not
impacted the entities which the Company consolidates. The only impact is additional disclosure in
the financial statements. See Note 1 for disclosures regarding the Company’s involvement with
VIEs.
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 requirements in the amendment must be applied to transfers occurring on or
after the effective date. The Company’s adoption of these requirements as of July 1, 2010 had no
effect on the Company’s financial statements.
In July 2010, the FASB issued guidance for the disclosures about the credit quality of
financing receivables and the allowance for credit losses. This guidance amends existing disclosure
guidance to require an entity to provide a greater level of disaggregated information about the
credit quality of its financing receivables and its allowance for credit losses. This guidance is
effective for fiscal and interim periods beginning after December 15, 2010. The Company’s adoption
of these requirements effective January 1, 2011 had no effect on the Company’s consolidated
financial statements.
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. The Company’s adoption of this guidance effective July 1, 2010 had no effect on the
Company’s financial statements.
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 Company’s adoption of this guidance
effective July 1, 2010 had no effect on the Company’s financial statements.
Note 3 — Current Projects
Zao Zhuang Joint Venture
Joint Venture Agreement
On July 6, 2006, the Company entered into a cooperative joint venture contract with Shandong
Hai Hua Coal & Chemical Company Ltd. (“Hai Hua”), which established Synthesis Energy Systems (Zao
Zhuang) New Gas Company Ltd. (the “ZZ Joint Venture”), a joint venture company that has the primary
purposes of (i) developing, constructing and operating a syngas production plant utilizing the
U-GAS® technology in Zao Zhuang City, Shandong Province, China and (ii) producing and
selling syngas and the various byproducts of the plant, including ash and elemental sulphur. The
Company owns 95.8% of the ZZ Joint Venture and Hai Hua owns the remaining 4.2%. The Company
consolidates the results of the ZZ Joint Venture in its 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, as well as reliability issues with respect
to Hai Hua’s plant, Hai Hua has operated at a reduced rate of syngas consumption. Hai Hua has used
approximately 35% to 45% of the syngas guarantee capacity since 2009.
In May 2011, Hai Hua notified the ZZ Joint Venture plant that it will not continue payment of
capacity fees beyond April 2011 for commercial and contractual reasons. The unpaid amount totaled
approximately $619,000 as of June 30, 2011. The plant has continued to operate and provide syngas
to Hai Hua, and Hai Hua has paid other contractual obligations such as the energy fees and
by-product sales due under the contract. The Company is continuing to work with Hai Hua on
alternatives to resolve this issue. The Company did not recognize these capacity fee revenues
during fiscal 2011 and will not recognize any capacity fees until collection is reasonably assured.
In April 2009, the ZZ Joint Venture entered into a Supplementary Agreement with Hai Hua,
amending the terms of the purchase and sale agreement. The Supplementary Agreement was entered into
to provide more clarity regarding the required syngas quality and volume to be delivered, recovery
of the energy fee during turndown periods and operations coordination during unscheduled outages.
Under the Supplementary Agreement, the syngas quality specification was amended to provide more
clarity as to the minor constituents allowable in the syngas. For purposes of the Supplemental
Agreement, syngas that meets these specifications is deemed “compliant gas” and syngas that does
not meet these specifications is deemed “non-compliant gas.” The Supplementary Agreement also added
a requirement for Hai Hua to pay the ZZ Joint Venture the capacity fee and 70% of the energy fee
for all non-compliant gas which is taken by Hai Hua. However, if more than 50% of the syngas taken
by Hai Hua during any operating day is non-compliant gas, all of the syngas for that day is deemed
to be non-compliant gas for purposes of calculating the energy fee. In addition, the Supplementary
Agreement accommodates periods of turndown operation by Hai Hua by establishing a minimum threshold
gas off take volume of 7,500 Ncum per hour of net syngas for the purpose of calculating the energy
fee during such periods. The Supplementary Agreement also provides that, to the extent Hai Hua has
an unscheduled shutdown, and the plant continues to operate on standby during such period, Hai Hua
is still required to pay the energy fee to the ZZ Joint Venture. In the event that the plant has an
unscheduled shutdown and does not provide at least three hours prior notice to Hai Hua, the ZZ
Joint Venture may be required to provide certain compensation to Hai Hua.
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. The Company does not foresee
this situation changing significantly in the near term, although Hai Hua has indicated that they
may be able to increase their syngas consumption if the Company is able to alter the composition of
the produced syngas to fit Hai Hua’s needs. In an effort to improve the return on its investment
in this plant, the Company is evaluating alternative products and partnership structures for a
possible expansion of the ZZ Joint Venture plant. In February 2010, the Company received the
necessary government approval for the expansion. This approval, along with the previously received
environmental approvals, are the key approvals required to commence execution of the expansion and
also describe certain terms of the expansion project, including but not limited to, its use of
land, the main additional facilities required and the use of the existing facilities. The scope of
the expansion is still under evaluation. The local government has expressed strong support for this
expansion project and has executed a letter of intent allowing a new state-owned local coal mine to
be used as a debt guarantee. The letter of intent also contemplates providing discounted coal to
the project from this local coal mine. The Company is in discussions with several potential
partners on this expansion.
As an alternative to the possible expansion to produce glycol as described above, the ZZ Joint
Venture is also working on various arrangements to increase the syngas offtake volume. Such
arrangements may involve selling syngas to another local customer and the possible restructure of
the current business arrangement with Hai Hua to share in methanol production.
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, the
Company believed an impairment assessment of the plant’s assets was warranted. As of June 30, 2011,
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 become impaired.
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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, 2011, the applicable interest rate was 6.6% and
is payable monthly; |
| • | Principal payments of RMB 7.7 million (approximately $1.2 million based on current
currency exchange rates) are due in March and September of each year 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, 2011, the ZZ Joint Venture was in compliance with all covenants and obligations
under the Fixed Asset Loan Contract.
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.
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During the three months ended September 30, 2010, 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. In addition, Yima has 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 the project’s syngas
production facilities will be brought online in mid-2012 as per the original schedule for
commercial operation. The schedule for glycol production is currently awaiting government
approvals.
The Yima Joint Ventures are in discussions with a potential fuel gas off-take customer for the
sale of the initial syngas production. This would provide syngas sales until the syngas conversion
to methanol or glycol is completed.
The Company is continuing to have discussions with Yima to restructure the agreements as
necessary to achieve these goals.
Construction of the utilities and gasification portions of the plant are on schedule. The
remaining construction and commissioning for the project’s syngas production facilities is expected
to take approximately twelve to fifteen additional months. 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; however, the construction of the methanol portion of the plant is on hold
pending the revisions for the possible glycol production. Based on the project’s current scope of
methanol only, the current estimate of the total required capital of the project is approximately
$250 million. The remaining capital for the project is to be provided by project debt to be
obtained by the Yima Joint Ventures. Yima has agreed to guarantee the project debt in order to
secure debt financing from domestic Chinese banking sources. The Company has agreed to pledge to
Yima its ownership interests in the joint ventures as security for its obligations under any
project guarantee. In the event that the debt financing is not obtained, Yima has agreed to provide
a loan to the joint ventures to satisfy the remaining capital needs of the project with terms
comparable to current market rates at the time of the loan.
The Yima Joint Ventures are governed by a board of directors consisting of eight directors,
two of whom were appointed by the Company and six of whom were appointed by Yima. The joint
ventures also have officers that are nominated by the Company, Yima and/or the board of directors
pursuant to the terms of the joint venture contracts. The Company and Yima shall share the profits,
and bear the risks and losses, of the joint ventures in proportion to our respective ownership
interests. The term of the joint venture shall commence upon each joint venture company obtaining
its business license and shall end 30 years after commercial operation of the plant.
The Company has included the $1.5 million payment paid to the Gas Technology Institute (“GTI”)
in June 2009 toward future royalties due to GTI for the Yima Joint Ventures’ project as part of the
Company’s investment in the Yima project. An additional future royalty payment of approximately
$1.5 million will be due to GTI upon the commissioning of the gasifier equipment for the Yima
project.
The Company’s equity in losses of the Yima Joint Ventures for the year ended June 30, 2011 and
2010 were $0.4 million and $0.04 million, respectively. The following table presents summarized
unconsolidated financial information for the Yima Joint Ventures (in thousands):
| Three Months Ended | Year Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||||||
Income statement data: |
||||||||||||||||
Revenue |
$ | — | $ | — | $ | — | $ | — | ||||||||
Operating loss |
(577 | ) | (451 | ) | (2,110 | ) | (1,189 | ) | ||||||||
Net loss |
(340 | ) | (130 | ) | (1,484 | ) | (157 | ) | ||||||||
| June 30, | June 30, | |||||||
| 2011 | 2010 | |||||||
Balance sheet data: |
||||||||
Current assets |
$ | 64,120 | $ | 118,073 | ||||
Noncurrent assets |
75,096 | 11,694 | ||||||
Current liabilities |
10,916 | 6,046 | ||||||
Noncurrent liabilities |
— | — | ||||||
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Golden Concord Joint Venture
The Company’s joint venture with Golden Concord (“GC Joint Venture”) 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. The Company has a 51% ownership interest in the GC Joint Venture
and consolidates the results of the GC Joint Venture in its consolidated financial statements.
The Company continues to seek development partners for 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 also entered into a cooperation agreement with a local Chinese company
who has assisted with obtaining certain necessary government approvals and who may desire to
continue the development of the project.
SES Resource Solutions
SRS is a joint venture owned 50% by us and 50% by Midas Resources AG, or Midas, that was
formed in June 2011 to provide additional avenues of commercialization for the Company’s
U-GAS® technology. Key objectives of the joint venture are to identify and procure low
cost, low rank coal resources for which the Company’s technology and the SRS’ know-how represent
the best route to commercialization; to provide investment opportunities in both gasification
facilities and coal resources; and to facilitate the establishment of gasification projects
globally based on the Company’s technology. Terms of the SRS joint venture agreement include:
| • | SRS has the exclusive right to promote our gasification technology for the
purpose of securing low-cost coal resources in projects worldwide that have been
approved by the Company; |
| • | Midas provides expertise to originate and execute the above projects; |
| • | the Company providing SRS with technology licenses and engineering development
support for use in developing the joint integrated coal resource projects; and |
| • | SRS being managed by a four person board of directors, two of which are
appointed by the Company and two of which are appointed by Midas. |
| • | the Company agreeing to provide up to $2.0 million in funding to the joint
venture, although it has the ability to discontinue funding at any point in time. |
| • | revenue and profits being equally divided between the joint venture partners. |
The Company’s investment in SRS is accounted for using the equity method.
Note 4 — Risks and Uncertainties
Any future decrease in economic activity in China, India or in other regions of the world, in
which the Company may in the future do business, could significantly and adversely affect its
results of operations and financial condition in a number of other ways. Any decline in economic
conditions may reduce the demand 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. Credit markets in China have also continued to tighten
recently, as inflation has caused the Chinese government to raise interest rates and there is
evidence of similar trends in the Indian credit markets.
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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, 2011, Hai Hua is the Company’s only customer for syngas sales
and as such, it is exposed to significant customer credit risk due to this concentration. In
addition, as
described under Note 3, Hai Hua has not made the capacity fee payments to the ZZ Joint Venture
since April 2011. The unpaid amount totals approximately $619,000 as of June 30, 2011. Although
the Company is continuing to work with Hai Hua on alternatives to resolve the issue, there can be
no assurances that the Company will collect these amounts. The Company’s revenue and results of
operations would be adversely affected if Hai Hua continues to not pay the capacity fee or if it is
unable to retain Hai Hua as a customer or secure new customers. The Company may need to shut down
the ZZ Joint Venture plant for a period of time until it is able to either find an alternative
purchaser of its production or a different use for the plant. There have also been recent
announcements of a constricting credit market in China. Even if the Company does obtain the
necessary capital for its projects, the Company could face other delays in its projects due to
additional approval requirements or due to unanticipated issues in the commissioning of such a
project. These factors 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 expects to continue for a period of time to have negative operating cash flows until it can generate
sufficient revenues from its 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 its general and administrative expenses and
other operating costs. In addition, if the Company is not able to complete the ZJX/China Energy transaction, the
Company will need to aggressively pursue additional partners in China and may need to cut its operating expenses.
The Company will also limit the development of any further projects until it has assurances that acceptable
financing is available to complete the project.
The Company can make no assurances that its business operations will
develop and provide it with sufficient cash to continue operations. The Company may need to raise additional capital through equity and debt financing for any new
projects that are developed, to support its existing projects and possible expansions thereof and
for its corporate general and administrative expenses. The Company cannot provide any assurance
that any financing will be available to the Company in the future on acceptable terms or at all.
Any such financing could be dilutive to the Company’s existing stockholders. If the Company cannot
raise required funds on acceptable terms, it may not be able to, among other things, (i) maintain
its general and administrative expenses at current levels; (ii) negotiate and enter into new
gasification plant development contracts; (iii) expand its operations; (iv) hire and train new
employees; or (v) respond to competitive pressures or unanticipated capital requirements.
The Company can make no assurances that its business operations will develop and provide it with significant cash to continue operations.
Note 5 — Property, Plant and Equipment
Property, plant and equipment consisted of the following (in thousands):
| Estimated | June 30, | |||||||||||
| useful lives | 2011 | 2010 | ||||||||||
Furniture and fixtures |
2 to 3 years | $ | 317 | $ | 312 | |||||||
Production equipment |
20 years | 33,276 | 31,599 | |||||||||
Building — plant and office |
30 years | 7,715 | 7,344 | |||||||||
Leasehold improvements |
Lease term | 119 | 115 | |||||||||
Computer hardware |
3 years | 377 | 376 | |||||||||
Computer software |
3 years | 954 | 901 | |||||||||
Office equipment |
3 years | 249 | 233 | |||||||||
Motor vehicles |
5 years | 207 | 197 | |||||||||
Construction-in-progress |
414 | 565 | ||||||||||
| 43,628 | 41,642 | |||||||||||
Less: Accumulated depreciation |
(8,445 | ) | (5,761 | ) | ||||||||
Net carrying value |
$ | 35,183 | $ | 35,881 | ||||||||
Construction-in-progress consists primarily of the cost of machinery and equipment not yet in
operation. Depreciation expense for the years ended June 30, 2011, 2010 and 2009 was $2.4 million,
$2.4 million and $2.7 million, respectively.
Note 6 — Detail of Selected Balance Sheet Accounts
Inventory consisted of the following (in thousands):
| June 30, | ||||||||
| 2011 | 2010 | |||||||
Raw materials |
$ | 212 | $ | 365 | ||||
Parts and assemblies |
701 | 618 | ||||||
| $ | 913 | $ | 983 | |||||
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Other long-term assets consisted of the following (in thousands):
| June 30, | ||||||||
| 2011 | 2010 | |||||||
Land use rights |
$ | 759 | $ | 739 | ||||
GTI license royalty, net — ZZ Joint Venture |
753 | 733 | ||||||
Value added tax receivable — ZZ Joint Venture |
705 | 1,284 | ||||||
Deferred stock offering costs (a) |
685 | — | ||||||
Other |
98 | 139 | ||||||
| $ | 3,000 | $ | 2,895 | |||||
| (a) | Deferred stock offering costs are costs incurred related to the share purchase agreement with
ZJX and China Energy as described in Note 12. |
Accrued expenses and other payables consisted of the following (in thousands):
| As of June 30, | ||||||||
| 2011 | 2010 | |||||||
Construction and equipment costs |
$ | 668 | $ | 3,308 | ||||
Accounts payable — trade |
866 | 293 | ||||||
Accrued payroll, vacation and bonuses |
910 | 907 | ||||||
Technical consulting, engineering and design services |
662 | 459 | ||||||
Yima Joint Ventures consulting fee |
924 | 924 | ||||||
Advance from Yima Joint Ventures for equipment construction |
877 | — | ||||||
Other |
1,206 | 1,117 | ||||||
| $ | 6,113 | $ | 7,008 | |||||
Note 7 — Intangible assets
GTI License Agreement
On November 5, 2009, the Company entered into an Amended and Restated License Agreement (the
“New Agreement”) with GTI, replacing the Amended and Restated License Agreement between the Company
and GTI dated August 31, 2006, as amended, or the Original Agreement. Under the New Agreement, the
Company maintains its exclusive worldwide right to license the U-GAS® technology for all
types of coals and coal/biomass mixtures with coal content exceeding 60%, as well as the
non-exclusive right to license the U-GAS® technology for 100% biomass and coal/biomass
blends exceeding 40% biomass. The New Agreement differs from the Old Agreement most critically by
allowing the Company to sublicense U-GAS® to third parties for coal, coal and biomass
mixtures or 100% biomass projects (subject to the approval of GTI, which approval shall not be
unreasonably withheld), with GTI to share the revenue from such third party licensing fees based on
an agreed percentage split (the “Agreed Percentage”). In addition, the prior obligation to
fabricate and put into operation at least one U-GAS® system for each calendar year of
the Original Agreement in order to maintain the license has been eliminated in the New Agreement.
In order to sublicense any U-GAS® system, the Company is required to comply with
certain requirements set forth in the New Agreement. In the preliminary stage of developing a
potential sublicense, the Company is required to provide notice and certain information regarding
the potential sublicense to GTI and GTI is required to provide notice of approval or non-approval
within ten business days of the date of the notice from the Company, provided that GTI is required
to not unreasonably withhold their approval. If GTI does not respond within that ten business day
period, they are deemed to have approved of the sublicense. The Company is required to provide
updates on any potential sublicenses once every three months during the term of the New Agreement.
The Company is also restricted from offering a competing gasification technology during the term of
the New Agreement.
For each U-GAS® unit which the Company licenses, designs, builds or operates for
itself or for a party other than a sublicensee and which uses coal or a coal and biomass mixture or
biomass as the feed stock, the Company must pay a royalty based upon a calculation using the MMBtu
per hour of dry syngas production of a rated design capacity, payable in installments at the
beginning and at the completion of the construction of a project (the “Standard Royalty”). Although
it is calculated using a different unit of measurement, the Standard Royalty is effectively the
same as the royalty payable to GTI under the Original Agreement. If the Company invests, or has the
option to invest, in a specified percentage of the equity of a third party, and the royalty payable
by such third party for their sublicense exceeds the Standard Royalty, the Company is required to
pay to GTI the Agreed Percentage of such royalty payable by such third party. However, if the
royalty payable by such third party for their sublicense is less than the Standard Royalty, the
Company is required to pay to GTI, in addition to the Agreed Percentage of such royalty payable by
such third party, the Agreed Percentage of its dividends and liquidation proceeds from its equity
investment in the third party. In addition, if the Company
receives a carried interest in a third party, and the carried interest is less than a
specified percentage of the equity of such third party, the Company is required to pay to GTI, in
its sole discretion, either (i) the Standard Royalty or (ii) the Agreed Percentage of the royalty
payable to such third party for their sublicense, as well as the Agreed Percentage of the carried
interest. The Company will be required to pay the Standard Royalty to GTI if the percentage of the
equity of a third party that the Company (a) invests in, (b) has an option to invest in, or (c)
receives a carried interest in, exceeds the percentage of the third party specified in the
preceding sentence.
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The Company is required to make an annual payment to GTI for each year of the term beginning
December 31, 2010, with such annual payment due by the last day of January of the following year;
provided, however, that the Company is entitled to deduct all royalties paid to GTI in a given year
under the New Agreement from this amount, and if such royalties exceed the annual payment amount in
a given year, the Company is not required to make the annual payment. The Company accrues the
annual royalty expense ratably over the calendar year as adjusted for any royalties paid during
year. The Company must also provide GTI with a copy of each contract that it enters into relating
to a U-GAS® system and report to GTI with its progress on development of the technology
every six months.
For a period of ten years, the Company and GTI are restricted from disclosing any confidential
information (as defined in the New Agreement) to any person other than employees of affiliates or
contractors who are required to deal with such information, and such persons will be bound by the
confidentiality provisions of the New Agreement. The Company has further indemnified GTI and its
affiliates from any liability or loss resulting from unauthorized disclosure or use of any
confidential information that the Company receives.
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, 2011 | As of June 30, 2010 | |||||||||||||||||||||||
| Gross | Gross | |||||||||||||||||||||||
| Carrying | Accumulated | Carrying | Accumulated | |||||||||||||||||||||
| Amount | Amortization | Net | Amount | Amortization | Net | |||||||||||||||||||
Use rights of U-GAS® |
$ | 1,886 | $ | 914 | $ | 972 | $ | 1,886 | $ | 725 | $ | 1,161 | ||||||||||||
Other intangible assets |
254 | — | 254 | 111 | — | 111 | ||||||||||||||||||
Total |
$ | 2,140 | $ | 914 | $ | 1,226 | $ | 1,997 | $ | 725 | $ | 1,272 | ||||||||||||
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, 2011, 2010 and 2009 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, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
Domestic |
$ | (6,835 | ) | $ | (8,289 | ) | $ | (9,992 | ) | |||
Foreign |
(8,785 | ) | (17,126 | ) | (19,287 | ) | ||||||
Net loss before noncontrolling interest |
$ | (15,620 | ) | $ | (25,415 | ) | $ | (29,279 | ) | |||
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, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
Net loss before noncontrolling interest |
$ | (15,620 | ) | $ | (25,415 | ) | $ | (29,279 | ) | |||
Computed tax benefit at statutory rate |
(5,467 | ) | (8,896 | ) | (10,247 | ) | ||||||
Other |
178 | 105 | 463 | |||||||||
Tax on income (losses) from foreign operations |
2,910 | 2,318 | 4,400 | |||||||||
Valuation allowance |
2,379 | 6,473 | 5,384 | |||||||||
| $ | — | $ | — | $ | — | |||||||
Deferred tax assets
Net deferred tax assets consisted of the following (in thousands):
| As of June 30, | ||||||||
| 2011 | 2010 | |||||||
Deferred tax assets (liabilities): |
||||||||
Net operating loss carry forward |
$ | 20,351 | $ | 18,374 | ||||
Depreciation and amortization |
(14 | ) | 6 | |||||
Stock-based compensation |
5,400 | 5,183 | ||||||
Investment in joint venture |
186 | — | ||||||
Accruals |
992 | 972 | ||||||
Subtotal |
26,915 | 24,535 | ||||||
Valuation allowance |
(26,915 | ) | (24,535 | ) | ||||
Net deferred assets |
$ | — | $ | — | ||||
At June 30, 2011, the Company had approximately $36.5 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 2030. The China NOL carry forwards have
expiration dates through 2015. 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 Company’s ability to utilize its 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, 2011, 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, 2011 or 2010.
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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,
2011, 2010 and 2009 and the period from November 4, 2003 (inception) to June 30, 2011, 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
Operating leases
On January 14, 2008, the Company entered into a 63 month lease agreement, with a 60 month
optional renewal, for approximately 10,000 square feet for its 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 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, 2011, 2010, 2009 and the period from November 4, 2003 (inception) to June 30, 2011
were approximately $0.5 million, $0.4 million $0.3 million and $1.6 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, 2011 are as follows (in thousands):
| Years Ending June 30, | Total | |||
2012 |
$ | 365 | ||
2013 |
264 | |||
2014 |
— | |||
Thereafter |
— | |||
Total operating lease commitments |
$ | 629 | ||
Litigation
The Company is a party to various legal proceedings including the one noted below. While
management presently believes that the ultimate outcome of these proceedings will not have a
material adverse effect on its financial position, overall trends in results of operations or cash
flows, litigation is subject to inherent uncertainties, and unfavorable rulings or settlements
could occur which could have a material adverse impact on the Company’s financial position and
operating results.
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 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’
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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.
The parties are currently engaged in discovery related to those claims the court has allowed to
remain in the case. Additionally, on August 15, 2011, the SES Defendants filed a motion for summary
judgment or, in the alternative, summary adjudication as to each of the claims remaining against
them, collectively, and the individually named director, separately. This motion is fully briefed
and oral argument was heard by the court on September 26, 2011
and the court has taken the matter under submission. 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, (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, 2011, 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, 2011, 690,370 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, 2011, 2010 and 2009, the Company recorded stock-based
compensation expense of approximately $1.2 million, $2.2 million and $1.9 million, respectively.
During the year ended June 30, 2011 and 2010, credits of approximately $0.3 million and $0.2
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, 2011, 2010 and
2009 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, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
Risk-free rate of return |
2.31 | % | 2.53 | % | 1.80 | % | ||||||
Expected life of award |
5.6 years | 5.6 years | 5.6 years | |||||||||
Expected dividend yield |
0.00 | % | 0.00 | % | 0.00 | % | ||||||
Expected volatility of stock |
109 | % | 94 | % | 87 | % | ||||||
Weighted-average grant date fair value |
$ | 1.35 | $ | 0.73 | $ | 0.46 | ||||||
The expected volatility of stock assumption was derived by referring to changes in the
historical volatility of comparable companies. We used the “simplified” method for “plain vanilla”
options to estimate the expected term of options granted during the years ended June 30, 2011, 2010
and 2009.
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Stock option activity during the three years ended June 30, 2011 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, 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 | |||||||||||||
Cancelled/forfeited |
(42,250 | ) | 0.49 | |||||||||||||
Outstanding at June 30, 2010 |
6,037,573 | 0.74 | ||||||||||||||
Granted |
1,490,496 | 1.66 | ||||||||||||||
Exercised |
(291,486 | ) | 0.71 | $ | 0.49 | |||||||||||
Cancelled/forfeited |
(673,239 | ) | 1.13 | |||||||||||||
Outstanding at June 30, 2011 |
6,563,344 | 0.91 | 8.26 | 6.89 | ||||||||||||
Exercisable at June 30, 2011 |
4,860,508 | 0.76 | 8.00 | 5.55 | ||||||||||||
As of June 30, 2011, approximately $1.2 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 1.4 years.
The following table summarizes information with respect to stock options outstanding and
exercisable at June 30, 2011:
| 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 |
3,991,424 | 7.73 | $ | 0.62 | 3,623,049 | $ | 0.63 | |||||||||||||
$0.67 to $1.00 |
1,157,213 | 8.52 | 0.91 | 818,463 | 0.90 | |||||||||||||||
$1.01 to $2.00 |
969,707 | 9.45 | 1.05 | 311,496 | 1.04 | |||||||||||||||
$2.01 to $3.00 |
45,000 | 9.02 | 2.35 | 7,500 | 2.32 | |||||||||||||||
$3.01 to $4.00 |
400,000 | 9.77 | 3.25 | 100,000 | 3.25 | |||||||||||||||
Total |
6,563,344 | 4,860,508 | ||||||||||||||||||
Note 12 — Share Purchase Agreement with ZJX
On March 31, 2011, the Company entered into a Share Purchase Agreement (the “Agreement”) with
China Energy Industry Holdings Group Co, Ltd. (“China Energy”) and Zhongjixuan Investment
Management Company Ltd. (“ZJX”). In August 2011, the Company agreed to extend the closing period
of the Agreement through December 31, 2011. The terms and conditions of the Agreement are
summarized below.
Issuance of Shares
On the closing date for the Agreement, the Company will issue 37,254,475 shares of Common
Stock (the “Closing Shares”) in exchange for the Consideration. Within 20 business days after the
accomplishment of the Milestone (as defined below), the Company will issue to China Energy
additional shares of Common Stock (the “Milestone Shares”) which, when combined with the Closing
Shares, equals 60.0% of the issued and outstanding Common Stock on a fully-diluted basis, including
shares reserved for future issuance pursuant to the Plan, as of the date that the Milestone is
achieved.
For the purpose of the Agreement, the “Milestone” will be deemed to be achieved if the average
closing price of the Common Stock for 20 consecutive trading days equals or exceeds $8.00 per share
(the “Threshold Price”), provided that the 20 consecutive trading day period will begin upon the
occurrence of both (i) ZJX/China Energy undertaking best endeavours to secure certain projects
described in the Agreement; and (ii) the expiration of six months after the Closing Date.
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In the event that the Milestone is not achieved within a five year period commencing on the
Closing Date (such five years plus any extensions granted under the Agreement is referred to as the
“Deadline”), and no Target Projects (as defined below) are secured by ZJX for the Company by the
Deadline, the Company shall then have the sole discretion to extend or not extend the Deadline. If
ZJX has secured Target Projects for the Company prior to the Deadline, but the Milestone has not
been achieved by the Deadline, the Company shall agree to extend the period to achieve the
Milestone by one year for each Target Project secured by ZJX for the Company, provided that the
Deadline will not be extended beyond 10 years from the Closing Date. If the Deadline is not
extended, ZJX/China Energy’s rights to the Milestone Shares shall be relinquished.
For the purpose of the above, a “Target Project” shall mean either (i) the execution of a
joint venture agreement, and other ancillary and necessary documents, related to the formation of a
project joint venture, or (ii) securing for the Company a coal resource project that is already in
operation, a new coal chemical project or any other project that is approved by the Company’s board
of directors (the “Board”), each with a total investment of at least RMB1.5 billion.
In the event that the Milestone is achieved but, pursuant to restriction or non-approval by
any U.S. governmental agency or regulatory authority, (i) the issuance of the Milestone Shares to
China Energy is prevented from occurring or (ii) the ownership of the Milestone Shares by China
Energy is required to be divested, the Company shall be required to seek qualified third parties to
purchase the right of China Energy to the Milestone Shares. If this does not occur within twelve
(12) months of the date of the action of such U.S. governmental agency or competent regulatory
authority, the Company shall compensate ZJX/China Energy for the Milestone Shares by making a
payment in an amount equal to $2.00 per share for each Milestone Share, representing full
satisfaction of any obligation of the Company to ZJX with respect to the Milestone Shares. Such
payment may be made by the Company to China Energy in the form of cash or an equivalent amount of
the Company’s assets in China.
Use of Proceeds
Subject to the discretion and approval of the Board, the Consideration, net of costs and
expenses, is required to be applied to the following: (i) incorporation of a Company headquarters
in China to consolidate the ownership of the Company’s investment projects in China and enhance the
Company’s presence in China; (ii) investing in the expansion of the ZZ Joint Venture; (iii)
investing in Phase I of the Company’s Yima Joint Ventures; (iv) acquiring an ownership interest in
a coal mine that will provide coal to the Yima Joint Ventures; (v) investing in the GC Joint
Venture; (vi) other Chinese projects that may be recommended to the Board from time to time; and
(vii) other expenses of the operation and business of the Company in China.
ZJX will use reasonable endeavours to assist the Company to obtain third party funding (third
party direct equity investment in projects or debt financing to the projects) to (a) cover funding
needs of the above projects; (b) provide funding for the Company to invest in future phases of the
Yima joint venture project; (c) invest in strategic coal resources in China connected to the
Company’s projects; and (d) provide funding for the Company to invest in other projects in China
not listed above and assist the Company to obtain third party investment in any of the Company’s
other projects.
Other
Closing of the transaction with China Energy and ZJX is subject to approval by the Company’s
stockholders and other customary closing conditions.
Although the Company is still in process of determining the financial statement impact
resulting from China Energy’s contingent right to receive the Milestone Shares, the Company expects
that the estimated fair value of this contingent right will be reported as a liability on its
consolidated balance sheet at closing of the transaction. The Company also expects that this
liability will be adjusted prospectively to reflect the change in the estimated fair value of the
contingent right. Changes in the liability are expected to be recorded in earnings of the
respective period. The financial statement reporting of this liability is expected to have a
material impact on the Company’s consolidated financial position and potentially have a material
impact on its consolidated results of operations depending on the outcome of future valuations of
the contingent right.
In the event that the Milestone Shares are issued, all of the Company’s non-vested stock-based
awards would become fully vested and immediately exercisable under the terms of the Plan.
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Note 13 — Quarterly Results of Operations
(Unaudited) (in thousands, except per share amounts)
| 1st Quarter | 2nd Quarter | 3rd Quarter | 4th Quarter | Year | ||||||||||||||||
2011: |
||||||||||||||||||||
Revenues |
$ | 1,622 | $ | 2,882 | $ | 3,133 | $ | 2,521 | $ | 10,158 | ||||||||||
Operating loss |
(3,862 | ) | (3,544 | ) | (3,603 | ) | (4,721 | ) | (15,730 | ) | ||||||||||
Net loss |
(3,768 | ) | (3,593 | ) | (3,596 | ) | (4,663 | ) | (15,620 | ) | ||||||||||
Net loss attributable to stockholders |
(3,742 | ) | (3,561 | ) | (3,559 | ) | (4,601 | ) | (15,463 | ) | ||||||||||
Net loss per share — basic and diluted |
(0.08 | ) | (0.07 | ) | (0.07 | ) | (0.09 | ) | (0.32 | ) | ||||||||||
2010: |
||||||||||||||||||||
Revenues |
2,301 | 2,607 | 2,621 | 1,772 | 9,301 | |||||||||||||||
Operating loss (a) |
(4,858 | ) | (11,119 | ) | (5,209 | ) | (3,778 | ) | (24,964 | ) | ||||||||||
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 | ) | ||||||||||
| (a) | The operating results for the second quarter of 2010 included a $6.6 million impairment
loss related to the GC Joint Venture. |
Note 14 — Segment Information
The Company’s reportable operating segments have been determined in accordance with the
Company’s internal management reporting structure and include the ZZ Joint Venture plant
operations, technology licensing and related services, and corporate and other. The corporate and
other segment includes the Company’s investment in the Yima Joint Ventures. The Company evaluates
performance based upon several factors, of which a primary financial measure is segment operating
income (loss).
The following table presents the revenue, operating loss and total assets by segment (in
thousands):
| Three Months Ended | Year Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||||||
Revenue: |
||||||||||||||||
ZZ Joint Venture plant |
$ | 2,290 | $ | 1,429 | $ | 8,913 | $ | 7,939 | ||||||||
Technology licensing and related services |
231 | 343 | 1,245 | 1,362 | ||||||||||||
Corporate & other |
— | — | — | — | ||||||||||||
Total revenue |
$ | 2,521 | $ | 1,772 | $ | 10,158 | $ | 9,301 | ||||||||
Operating loss: |
||||||||||||||||
ZZ Joint Venture plant |
(1,299 | ) | (590 | ) | (2,848 | ) | (3,332 | ) | ||||||||
Technology licensing and related services |
(244 | ) | (537 | ) | (1,149 | ) | (1,598 | ) | ||||||||
Corporate & other |
(3,178 | ) | (2,652 | ) | (11,733 | ) | (20,034 | ) | ||||||||
Total operating loss |
$ | (4,721 | ) | $ | (3,779 | ) | $ | (15,730 | ) | $ | (24,964 | ) | ||||
| June 30, | June 30, | |||||||
| 2011 | 2010 | |||||||
Assets: |
||||||||
ZZ Joint Venture plant |
$ | 40,703 | $ | 44,009 | ||||
Technology licensing and related services |
1,196 | 1,255 | ||||||
Corporate & other |
68,075 | 75,317 | ||||||
Total assets |
$ | 109,974 | $ | 120,581 | ||||
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| Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosures |
None.
| Item 9A. | Controls and Procedures |
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, or the SEC, rules
and forms. In addition, we designed these disclosure controls and procedures to ensure that this
information is accumulated and communicated to our management, including the Chief Executive
Officer and Chief Accounting Officer, to allow timely decisions regarding required disclosures.
Our management, with the participation of the Chief Executive Officer and the Chief Accounting
Officer, assessed the effectiveness of our disclosure controls and procedures as defined in Rules
13a-15(e) and 15d-15(e) of the Securities and Exchange Act of 1934, as amended, or the Exchange
Act, as of June 30, 2011. Based upon that evaluation, including consideration of the material
weaknesses in our internal control over financial reporting that existed in prior periods as
discussed below, our Chief Executive Officer and Chief Accounting Officer have concluded that our
disclosure controls and procedures were effective as of June 30, 2011.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our
internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with GAAP. Our internal control over financial reporting includes
those policies and procedures that (i) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with GAAP, and that our receipts and expenditures are being made only in
accordance with authorizations of our management and directors; and (iii) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition
of our assets that could have a material effect on the financial statements. Because of inherent
limitations, there is a risk that material misstatements may not be prevented or detected on a
timely basis by internal control over financial reporting. Projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
Our management, with the participation of the Chief Executive Officer and the Chief Accounting
Officer, evaluated the effectiveness of our internal control over financial reporting as of June
30, 2011 based on criteria set forth in Internal Control — Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on our evaluation,
management has concluded that we did maintain effective internal control over financial reporting
as of June 30, 2011.
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.
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, 2011 that have materially affected, or that are reasonably likely to materially
affect, our internal control over financial reporting.
| Item 9B. | Other Information |
None.
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PART III
| Item 10. | Directors, Executive Officers and Corporate Governance |
Directors and Executive Officers
The following table sets forth information concerning our directors and executive officers as
of June 30, 2011:
| Name | Age | Position | ||||
Robert Rigdon
|
53 | President, Chief Executive Officer and Director | ||||
Kevin Kelly
|
48 | Chief Accounting Officer, Controller and Secretary | ||||
Lorenzo Lamadrid
|
60 | Chairman of the Board | ||||
Donald Bunnell
|
46 | Director | ||||
Michael Storey
|
69 | Director | ||||
Denis Slavich
|
71 | Director | ||||
Harry Rubin
|
58 | Director | ||||
Ziwang Xu
|
54 | Director | ||||
Robert Rigdon. Mr. Rigdon is our President and Chief Executive Officer and is also a director.
Mr. Rigdon joined us as a director in August 2009, and has served as President and Chief Executive
Officer since March 31, 2009. Prior to that, he served as Chief Operating Officer since November
2008 and as Senior Vice President of Global Development since May 2008, where he was responsible
for overseeing all aspects of our current and future coal gasification projects worldwide. From
June 2004 until joining us, Mr. Rigdon worked for GE Energy in a variety of capacities, including
Manager—Gasification Engineering, Director—IGCC Commercialization, and Director—Gasification
Industrials and Chemicals Business. For the 20 years previous to this, Mr. Rigdon worked for
Texaco, and later ChevronTexaco, as an engineer and in the Worldwide Power & Gasification group,
where he ultimately became Vice President—Gasification Technology for the group. As a result of
his three decades working on gasification, Mr. Rigdon is experienced in the operational and
marketing strategies that are key to our development and success.
Education: Mr. Rigdon is a mechanical engineer with a B.S. from Lamar University.
Directorships in the past five years: Mr. Rigdon serves on no other boards of
directors.
Kevin Kelly. Mr. Kelly joined us as our Controller in October 2008 and was named our Chief
Accounting Officer and Secretary in November 2008. From 2005 to October 2008, Mr. Kelly served as
the Corporate Controller for W-H Energy Services. Prior to that, Mr. Kelly held controllership and
treasury management positions with a variety of public-traded companies and as an audit manager
with Deloitte & Touche.
Education: Mr. Kelly is a Certified Public Accountant with a B.A. from Houston Baptist
University.
Lorenzo Lamadrid. Mr. Lamadrid has been the Chairman of the Board since April 2005. Since
2001, Mr. Lamadrid has been the Managing Director of Globe Development Group, LLC, a firm that
specializes in the development of large scale energy, power generation, transportation and
infrastructure projects in China and provides business advisory services and investments with a
particular focus on China. Mr. Lamadrid has also been a director of Flow International Corporation
since January 2006. Mr. Lamadrid has been a member of the International Advisory Board of Sirocco
Aerospace, an international aircraft manufacturer and marketer, since mid-2001. He previously
served as President and Chief Executive Officer of Arthur D. Little, a management and consulting
company, from 1999 to 2001 (which filed for bankruptcy under Chapter 11 of the U.S. Bankruptcy Code
within two years of his leaving the company), as President of Western Resources International, Inc.
from 1996 through 1999 and as Managing Director of The Wing Group from 1993 through 1999. The Wing
Group was a leading international electric power project-development company that was sold to
Western Resources in 1999. Prior to that, he was with General Electric from 1984 to 1993 serving as
corporate officer, Vice President and General Manager at GE Aerospace for Marketing and
International Operations, and as General Manager of Strategic Planning and Business Development of
GE’s International Sector. Prior to joining GE, Mr. Lamadrid was a senior Manager at the Boston
Consulting Group where he worked from 1975 to 1984. Mr. Lamadrid’s experience in business
development and management is a key attribute for us, and his background in overseas markets has
provided him with valuable insights into our international focus.
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Education: Mr. Lamadrid holds a dual bachelor’s degree in Chemical Engineering and
Administrative Sciences from Yale University, an M.S. in Chemical Engineering from the
Massachusetts Institute of Technology and an M.B.A. in Marketing and International Business from
the Harvard Business School.
Directorships in the past five years (other than our Board): Flow International (2006
to present).
Donald Bunnell. Mr. Bunnell is a director and one of our co-founders. He was our President
and Chief Executive Officer—Asia Pacific until February 2011 when he resigned to pursue other
interests. Since 2009, his duties included oversight of our global licensing business. From 2001
until our founding in 2003, Mr. Bunnell was the Asia Business Development Vice President for BHP
Billiton’s aluminum group. Between 1997 and 2001, Mr. Bunnell served in various capacities,
including Vice President in charge of Enron China’s power group, and Country Manager, with the
power development team of Enron Corporation. During this time, Mr. Bunnell spent three years
leading the Enron/Messer/Texaco consortium for the Nanjing BASF Project. From 1995 to 1997, Mr.
Bunnell was a manager with Coastal Power Corporation (now part of El Paso Corporation) in Beijing,
where he was involved in development of gas turbine power plants and other power projects. Mr.
Bunnell has practiced law in Hong Kong, advising clients on China investments, prior to entering
the power business. Mr. Bunnell is fluent in Mandarin Chinese, has lived in China for over 14
years, and has 10 years of experience in the China power industry developing projects and managing
joint ventures. Mr. Bunnell’s extensive experience in the power industry, wealth of technical
knowledge and role as one of our founders provides him with unique insight into potential issues
that could emerge with respect to our operational development.
Education: Mr. Bunnell graduated from Miami University with a B.A. and from the
William & Mary School of Law with a J.D.
Directorships in the past five years (other than our Board): None.
Michael Storey. Mr. Storey has served as one of our directors since November 2005. From June
2002 through November 2005, he was a partner with Union Charter Financial. From 2000 to 2004, he
served as President and CEO of Inmarsat Ventures, a global communications company. He resigned in
March 2004, but continued as an advisor until March 2006. In 2000, Mr. Storey established and became Chairman of Landfall Holdings
LLC, a real estate development in New York, and is currently its Chairman. From 1993 to 1999, Mr. Storey ran several
telecommunications businesses during European deregulation that became MCI Europe and is now
Verizon Communications. In 1984, Mr. Storey and
a partner established City Centre Communications, a business in the cable television and
telecommunications industry. The business was grown through several acquisitions of franchises
before the business was sold in 1992 to Videotron and Bell Canada. He served as a Director and
later as Chairman of the Cable Communications Association from 1983 to 1990, representing all the
investors in the U.K. cable industry. Starting in 1972, Mr. Storey served for 10 years as a Vice
President and Partner of Booze Allen Hamilton International Management Consultants. He is also
currently the non-executive Chairman of Impello Plc, an independent utility company in the United
Kingdom. From 1958 to 1968, he worked in the healthcare industry, operating hospitals in the U.K.,
Middle East and North America. Through his various management roles, Mr. Storey has developed an
in-depth knowledge and experience in strategic development that is key to our growth.
Education: Mr. Storey is a graduate of King’s Fund Administrative Staff College and
has an M.B.A. from the University of Chicago. He also holds two professional certifications:
Professionally Qualified Hospital Administrator and Professionally Qualified Personnel Manager.
Directorships in the past five years (other than our Board): Impello Plc (2008 to
present).
Denis Slavich. Mr. Slavich has served as a director since November 2005. Mr. Slavich has over
35 years of experience in large scale power generation development. He is currently the Chief
Executive Officer and Vice Chairman of Astrata Group Inc, a privately held global telematics
company headquartered in Singapore, and an international consultant, as well as an advisor and
board member for a number of additional firms. He served as a director of China Advanced
Construction Materials Group, Inc., a company traded on the NASDAQ, from September 2009 until May
2011. From 1998 to 2000, Mr. Slavich was the CFO and director of KMR Power Corporation and was
responsible for the development of this international IPP company that developed projects in
Columbia as well as other areas. From 2000 until 2002, he served as Vice President and CFO of
BigMachines Inc., a software company, and from 2001 until the present, he has served as Chairman of
Leading Edge Technologies, a privately held desalination technology company. Mr. Slavich also
served as acting President for Kellogg Development Corporation, a division of M.W. Kellogg, during
1997. From 1991 to 1995, Mr. Slavich was also a Vice President of Marketing for Fluor Daniel. From
1971 to 1991, Mr. Slavich served in various
executive positions at Bechtel Group including Sr. VP, CFO, and director and Sr. VP and
division manager of the International Power Division. In addition to his experience in power
generation development, Mr. Slavich is experienced in finance and accounting matters and has
extensive experience with financial statements.
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Education: Mr. Slavich received his Ph.D. from Massachusetts Institute of Technology,
his M.B.A. from the University of Pittsburgh and his B.S. in Electrical Engineering from the
University of California at Berkeley.
Directorships in the past five years(other than our Board): China Advanced
Construction Materials Group, Inc. (2009 to 2011), Leading Edge Technologies (2001 to present),
Comsat International (2006-2007), and Astrata Group (2011 to present).
Harry Rubin. Mr. Rubin has served as a director since August 2006. Mr. Rubin is currently
Chairman of Henmead Enterprises, in which capacity he advises various companies regarding strategy,
acquisitions and divestitures. He held board positions at a number of private and public companies
such as the A&E Network, RCA/Columbia Pictures Home Video, the Genisco Technology Corporation and
Image-Metrics Plc. He was a founding partner of the Boston Beer Company. In the 12 years prior to
2006, Mr. Rubin held various senior management roles in the computer software industry, including
Senior Executive Vice President and Chief Operating Officer of Atari, and President of
International Operations and Chief Financial Officer for GT Interactive Software. Mr. Rubin entered
the computer software business in 1993 when he became Executive VP for GT Interactive Software as a
start-up company, and played a leadership role in GT’s progression as the company went public in
1995 and became one of the largest industry players. Through his various management roles, Mr.
Rubin has developed an in-depth knowledge and experience in strategic development that is key to
our growth. Prior to 1993, he held various senior financial and general management positions at
RCA, GE and NBC.
Education: He is a graduate of Stanford University and Harvard Business School.
Directorships in the past five years (other than our Board): 784 Park Avenue Realty,
Inc. (December 2005 to present), Henmead Enterprises, Inc. (1991 to present), Image-Metrics Plc
(December 2005 to April 2010).
Ziwang Xu. Mr. Xu is currently the Chairman of CXC Capital, Inc. and CXC China Sustainable
Growth Fund, companies which he founded in March of 2008 and which are based in Shanghai, China.
From November of 2005 until founding CXC, he was a private investor in Shanghai and worked on the
development of residential real estate projects. During this same time, he was an Advisory
Director for Goldman Sachs in Beijing, China. From 1997 through 2005, he served as a Managing
Director and Partner for Goldman Sachs in Hong Kong. He is also currently an Advisor with
Clayton, Dubilier & Rice, a member of the Board of Overseers of the Fletcher School of Law and
Diplomacy at Tufts University, and Vice Chairman, Alumni Association of Economics and Finance, of
Fudan University in Shanghai, China. Additionally, he is a member of the Shanghai Comprehensive
Economy Studies Council and the Shanghai International Cultural Council. Mr. Xu’s background in
overseas markets and his experience in finance matters has provided him with valuable insights into
our strategy.
Education: He holds a B.A. from East China Normal University and an M.A. in Economics
from Fudan University and an M.A. in International Business from the Fletcher School of Law and
Diplomacy at Tufts University.
Directorships in the past five years (other than our Board): CXC Capital, Inc. (2008
to present), Shanghai Ruibo New Energy Automobile Technology Company (2010 to present), Lubao New
Energy Company (2007 to present).
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our directors and executive officers, and persons
who own more than 10% of our equity securities, to file initial reports of ownership and reports of
changes in ownership of our common stock with the SEC and to furnish us a copy of each filed
report.
To our knowledge, based solely on review of the copies of such reports furnished to us and
written representations that no other reports were required, during the fiscal year ended June 30,
2011, our officers, directors and greater than 10% beneficial owners timely filed all required
Section 16(a) reports.
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Director Independence
The Board has determined that the following members are independent within the meaning of Rule
4200 of the NASDAQ Stock Market Rules: Lorenzo Lamadrid, Michael Storey, Denis Slavich, Harry Rubin
and Ziwang Xu.
Material Changes in Director Nominations Process
There have not been any material changes to the procedures by which shareholders may recommend
nominees to our Board.
Audit Committee
During the year ended June 30, 2010, the members of the Audit Committee were Michael Storey,
Denis Slavich and Harry Rubin. The Board has determined that Denis Slavich is an audit committee
financial expert under Item 407(d) of Regulation S-K of the SEC. All of the members of the Audit
Committee were and are independent within the meaning of Rule 4200 of the NASDAQ Stock Market
Rules. The Audit Committee met seven times during the year ended June 30, 2010.
Code of Ethics
We have adopted a Code of Business and Ethical Conduct that applies to all of our employees,
as well as each member of our Board. The Code of Business and Ethical Conduct is available under
“Corporate Governance” in the “Investors” section of our website at
www.synthesisenergy.com. We intend to post amendments to or waivers from the Code of
Business and Ethical Conduct (to the extent applicable to our chief executive officer, principal
financial officer or principal accounting officer) at this location on our website.
Corporate Governance
The charters for our Audit Committee, the Compensation Committee of the Board, or the
Compensation Committee, and the Nominating and Governance Committee of the Board, or the Nominating
and Governance Committee, and our Code of Business and Ethical Conduct are available on our website
at www.synthesisenergy.com under “Corporate Governance” in the “Investors” section. Copies
of these documents are also available in print form at no charge by sending a request to Synthesis
Energy Systems, Inc., Attention: Investor Relations, Three Riverway, Suite 300, Houston, Texas
77056, telephone (713) 579-0606.
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Table of Contents
| Item 11. | Executive Compensation |
Summary Compensation Table
The following table provides information concerning compensation paid or accrued during the
fiscal years ended June 30, 2011, 2010 and 2009 to our principal executive officer and our two
other executive officers, including our principal financial officer, determined at the end of the
last fiscal year, and one former executive officer for whom disclosure would have been required but
for the fact that he was not serving as an executive officer at the end of the fiscal year ended
June 30, 2011:
| Non-Equity | ||||||||||||||||||||||||||||||||
| Name and Principal | Fiscal | Stock | Option | Incentive Plan | All Other | |||||||||||||||||||||||||||
| Position | Year | Salary | Bonus | Awards | Awards (1) | Compensation | Compensation | Total | ||||||||||||||||||||||||
Robert Rigdon |
2011 | $ | 300,000 | $ | 120,000 | $ | — | $ | 1,066,394 | $ | — | $ | — | $ | 1,486,394 | |||||||||||||||||
President and CEO |
2010 | $ | 300,000 | $ | 120,000 | $ | — | $ | — | $ | — | $ | — | $ | 420,000 | |||||||||||||||||
| 2009 | $ | 270,000 | $ | 146,000 | $ | — | $ | 185,789 | $ | — | $ | — | $ | 601,789 | ||||||||||||||||||
Kevin Kelly |
2011 | $ | 230,000 | $ | 34,500 | $ | — | $ | — | $ | — | $ | — | $ | 264,500 | |||||||||||||||||
Chief Accounting |
2010 | $ | 230,000 | $ | 69,000 | $ | — | $ | — | $ | — | $ | — | $ | 299,000 | |||||||||||||||||
Officer, Controller |
2009 | $ | 155,000 | $ | 62,000 | $ | — | $ | 207,773 | $ | — | $ | — | $ | 424,773 | |||||||||||||||||
and Secretary |
||||||||||||||||||||||||||||||||
Donald Bunnell (2) |
2011 | $ | 120,000 | $ | — | $ | — | $ | — | $ | — | $ | 20,000 | $ | 140,000 | |||||||||||||||||
President and CEO |
2010 | $ | 180,000 | $ | — | $ | — | $ | — | $ | — | $ | 5,000 | $ | 185,000 | |||||||||||||||||
- Asia Pacific |
2009 | $ | 180,000 | $ | 72,000 | $ | — | $ | — | $ | — | $ | — | $ | 252,000 | |||||||||||||||||
Timothy Vail (3) |
2011 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||||
Former President |
2010 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||||
and CEO |
2009 | $ | 135,000 | $ | — | $ | — | $ | 469,723 | $ | — | $ | — | $ | 604,723 | |||||||||||||||||
| (1) | The amounts in the “Option awards” column reflect the aggregate grant date fair value
of awards pursuant to the Plan, as amended (the “2005 Plan”) for the fiscal years ended
June 30, 2009, 2010 and 2011, in accordance with ASC 718. Assumptions used in the
calculation of these amounts are included in “Note 11—Stock-Based Compensation” to our
audited financial statements for the fiscal year ended June 30, 2011 included herein our
annual report on Form 10-K for the year ended June 30, 2011. However, as required, the
amounts shown exclude the impact of estimated forfeitures related to service-based vesting
conditions. |
|
| (2) | Effective March 1, 2011, Mr. Bunnell ceased employment with us to pursue other
long-standing interests. In addition to the compensation that he received as an employee,
Mr. Bunnell has earned, but not yet received, $18,000 during the year ended June 30, 2011
for consulting services provided to us as described below under “— Director Compensation.” |
|
| (3) | Effective March 31, 2009, Mr. Vail ceased employment with us based on a mutual decision
with the Board. In connection with the departure, he entered into a Separation Agreement
and Release with us, or the Release, whereby (i) his employment agreement with us was
terminated, subject to the continued enforcement of the provisions relating to
non-competition and confidentiality; (ii) he entered into a mutual release; (iii) his
Indemnification Agreement with us, dated August 13, 2008, survived the termination of his
employment agreements; (iv) he was granted reimbursement of his payment of his COBRA
premiums through (a) the one year anniversary of the termination or (b) until he is
eligible to participate in the health insurance plan of another employer, whichever is
sooner; and (v) he was granted a new option grant in satisfaction of his 2008 bonus and a
right to participate in our option exchange program. The grant was a fully vested option
to acquire 68,182 shares of common stock at an exercise price of $0.66 per share, in
satisfaction of his bonus earned during the year ended December 31, 2008. In addition, as
part of the option exchange program, Mr. Vail exchanged all of his option grants
outstanding on March 31, 2009 for a new fully vested option grant to acquire 960,000 shares
of common stock at an exercise price of $0.66 per share. |
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Table of Contents
Employment Agreements
On April 8, 2011, we entered into an Amended and Restated Employment Agreement with Mr.
Rigdon, which replaced his employment agreement dated March 14, 2008, as amended on March 31, 2009.
The employment agreement has a term of three years,
with automatic renewal for successive one year periods unless either we or Mr. Rigdon elects
not to renew. He is entitled to receive an annual base salary of up to $300,000 and a bonus of
$120,000 payable in two equal installments within 10 days of January 1 and July 1 of a given year.
He may also receive an outperformance bonus annually as may be awarded in the sole discretion of
the Compensation Committee of the Board. Mr. Rigdon’s salary is subject to increase in the
discretion of the Board. In connection with the execution of the employment agreement, Mr. Rigdon
also received a grant of options to acquire 400,000 shares of our common stock vesting in four
equal annual installments with the first vesting occurring on the date of the employment agreement.
The employment agreement prohibits Mr. Rigdon from competing with us during his employment and for
a period of twelve months thereafter and is also prohibited from soliciting our employees for a
period of twelve months after the termination of the employment agreement. Mr. Rigdon is also
subject to confidentiality and non-disparagement obligations for a period of five years after
cessation of his employment with us. Payments under the agreement to Mr. Rigdon in connection with
his termination or a change of control are described below under “-Potential Payments Upon
Termination or Change of Control.”
Our agreement with Mr. Kelly became effective October 16, 2008 and has a term of two years,
with automatic renewal for two additional one year periods unless either we or Mr. Kelly elects not
to renew. He currently receives an annual base salary of up to $230,000 and bonuses as may be
awarded from time to time based on criteria established by our chief executive officer, including a
performance bonus targeted at 50% of his base salary. The Compensation Committee also evaluates Mr.
Kelly’s salary on an annual basis and will determine if any additional increases are warranted. The
employment agreement prohibits Mr. Kelly from competing with us during his employment and for a
period of eighteen months thereafter if he is terminated by us, if he resigns without good reason
or if either he or us elects not to renew the agreement past its initial term. Mr. Kelly is also
subject to a confidentiality obligation for a period of five years after cessation of his
employment with us. Payments under the agreement to Mr. Kelly in connection with his termination or
a change of control are described below under “-Potential Payments Upon Termination or Change of
Control.”
Potential Payments upon Termination or Change of Control
Pursuant to the terms of Mr. Rigdon’s employment agreement, upon a termination without cause
(including non-renewal of his employment agreement by us), a voluntary termination for good reason
or a termination for any reason (other than by us for cause) within 60 days of a change of control
(as defined in his employment agreement), Mr. Rigdon is entitled to receive (i) a severance
payment of twelve months of base salary (as of the date of termination), (ii) payment of any bonus
earned and not yet paid, and (iii) reimbursement of his COBRA premiums through the earlier of (a)
twelve months after termination or (b) until he is eligible to participate in the health insurance
plan of another employer. In addition, all unvested options shall automatically vest as of the
termination date. All unvested options also automatically vest in connection with a termination
due to Mr. Rigdon’s death or disability.
Pursuant to the terms of his employment agreement, upon a termination without cause or a
voluntary termination for good reason, Mr. Kelly is entitled to receive a severance payment of up
to twelve months of base salary (as of the date of termination) for the remainder of the term of
his agreement and in accordance with the terms thereof and all unvested options shall automatically
vest as of the termination date. In addition, in connection with a termination without cause, Mr.
Kelly is entitled to reimbursement of his COBRA premiums through the earlier of (i) twelve months
after his termination or (ii) until he is eligible to participate in the health insurance plan of
another employer. Upon a change of control (as defined in his employment agreement), all unvested
options of Mr. Kelly would automatically vest on the effective date of the change of control, even
if his employment is not terminated.
Upon a voluntary termination without good reason, termination for cause, death or disability,
Messrs. Rigdon and Kelly would not be entitled to receive benefits from us.
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The following tables further describe the potential payments upon termination or a change in
control for Messrs. Rigdon and Kelly.
Robert Rigdon
Chief Executive Officer and President
Chief Executive Officer and President
| Voluntary | ||||||||||||||||||||||||
| Termination | Involuntary | After a | ||||||||||||||||||||||
| Voluntary | for Good | For Cause | Not for Cause | Death or | Change in | |||||||||||||||||||
| Executive Benefits and Payments | Termination | Reason | Termination | Termination(2) | Disability | Control(3) | ||||||||||||||||||
| Upon Termination(1) | ($) | ($) | ($) | ($) | ($) | ($) | ||||||||||||||||||
Compensation |
||||||||||||||||||||||||
Severance (4) |
— | 300,000 | — | 300,000 | — | 300,000 | ||||||||||||||||||
Performance bonus (5) |
— | 120,000 | — | 120,000 | — | — | ||||||||||||||||||
Stock Options (Unvested and
Accelerated) (6) |
— | 232,969 | — | 232,969 | 232,969 | 232,969 | ||||||||||||||||||
Benefits and Perquisites |
||||||||||||||||||||||||
Health and Welfare Benefits
Continuation (7) |
— | 18,541 | — | 18,541 | — | 18,541 | ||||||||||||||||||
Tax Gross-up |
— | — | — | — | — | — | ||||||||||||||||||
Total |
— | 671,510 | — | 671,510 | 232,969 | 551,510 | ||||||||||||||||||
Kevin Kelly
Chief Accounting Officer, Controller and Secretary
Chief Accounting Officer, Controller and Secretary
| Voluntary | ||||||||||||||||||||||||
| Termination | Involuntary | After a | ||||||||||||||||||||||
| Voluntary | for Good | For Cause | Not for Cause | Death or | Change in | |||||||||||||||||||
| Executive Benefits and Payments | Termination | Reason | Termination | Termination(2) | Disability | Control(3) | ||||||||||||||||||
| Upon Termination(1) | ($) | ($) | ($) | ($) | ($) | ($) | ||||||||||||||||||
Compensation |
||||||||||||||||||||||||
Severance (4) |
— | 230,000 | — | 230,000 | — | — | ||||||||||||||||||
Annual Cash Incentive (5) |
— | — | — | — | — | — | ||||||||||||||||||
Stock Options (Unvested and
Accelerated) (6) |
— | 101,750 | — | 101,750 | — | 101,750 | ||||||||||||||||||
Benefits and Perquisites |
||||||||||||||||||||||||
Health and Welfare Benefits
Continuation (7) |
— | — | — | 18,541 | — | 18,541 | ||||||||||||||||||
Tax Gross-up |
— | — | — | — | — | — | ||||||||||||||||||
Total |
— | 331,750 | — | 350,291 | — | 120,291 | ||||||||||||||||||
| (1) | For purposes of this analysis, we assumed that the effective date of termination is June 30,
2011 and that the executive’s compensation is as follows: Mr. Rigdon’s base salary is equal to
$300,000 and his performance bonus is equal to 40% of base salary; and Mr. Kelly’s base salary
is equal to $230,000 and incentive target opportunity is equal to 50% of base salary. |
|
| (2) | Non-renewal of Mr. Rigdon’s agreement by us is considered an involuntary not for cause
termination for purposes of his employment agreement. |
|
| (3) | In the case of Mr. Rigdon, “After a Change in Control” means a termination for any reason
(other than by us for cause) within 60 days of a change in control. In the case of Mr. Kelly,
“After a Change in Control” means automatically upon the occurrence of a change in control. |
|
| (4) | Under “Voluntary Termination for Good Reason” and “Involuntary Not for Cause Termination”
(and in the case of Mr. Rigdon, under “After a Change in Control”) severance under Mr. Kelly’s
agreements is all base salary for the remainder of the employment period for not less than
twelve months and severance under Mr Rigdon’s agreement is one year of base salary as in
effect at the time of termination. |
|
| (5) | The bonus amounts included under “Voluntary Termination for Good Reason” and “Involuntary Not
for Cause Termination” (and in the case of Mr. Rigdon, under “After a Change in Control”), are
based on the maximum bonus that each executive could receive upon termination under their
employment agreement for such reasons. The amounts of performance bonuses payable under the
employment agreements of each of Messrs. Rigdon and Kelly are in the discretion of the Board
and/or the Compensation Committee. |
|
| (6) | Pursuant to the terms of their employment agreements, under “Voluntary Termination for Good
Reason,” “Involuntary Not for Cause Termination” or “After a Change in Control” for Messrs.
Rigdon and Kelly, the vesting of all outstanding stock options will be accelerated and all
stock options shall be 100% vested on the date of termination of employment or on the
effective date of the “change in control,” as applicable. |
|
| (7) | Health and Welfare Benefits Continuation is calculated as 12 months of reimbursement of COBRA
premiums under “Involuntary Not for Cause Termination” (and in the case of Mr. Rigdon under
“Voluntary Termination for Good Reason” and “After a Change in Control”). Such benefits
payable will cease prior to the end of 12 months if the executive is eligible to participate
in the health insurance plan of another employer. |
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Outstanding Equity Awards for Year Ended June 30, 2011
The following table shows the number of shares covered by exercisable and unexercisable
options held by our named executive officers on June 30, 2011. Each of the awards in the table was
made under the 2005 Plan.
| Option Awards | Stock Awards | |||||||||||||||||||||||||||||||||||
| Equity | ||||||||||||||||||||||||||||||||||||
| Incentive | ||||||||||||||||||||||||||||||||||||
| Plan Awards: | ||||||||||||||||||||||||||||||||||||
| Market or | ||||||||||||||||||||||||||||||||||||
| Equity | Equity | Payout | ||||||||||||||||||||||||||||||||||
| Incentive | Incentive | Value | ||||||||||||||||||||||||||||||||||
| Plan | Plan Awards: | of | ||||||||||||||||||||||||||||||||||
| Awards: | Market | Number | Unearned | |||||||||||||||||||||||||||||||||
| Number | Number | Number | Number | Value of | of | Shares, | ||||||||||||||||||||||||||||||
| of | of | of | of Shares | Shares or | Unearned | Units or | ||||||||||||||||||||||||||||||
| Securities | Securities | Securities | or Units | Units of | Shares, | Other | ||||||||||||||||||||||||||||||
| Underlying | Underlying | Underlying | of Stock | Stock | Units or | Rights | ||||||||||||||||||||||||||||||
| Unexercised | Unexercised | Unexercised | Option | That Have | That Have | Other Rights | That Have | |||||||||||||||||||||||||||||
| Options | Options | Unearned | Exercise | Option | Not | Not | That Have | Not | ||||||||||||||||||||||||||||
| (#) | (#) | Options | Price | Expiration | Vested | Vested | Not Vested | Vested | ||||||||||||||||||||||||||||
| Name | Exercisable | Unexercisable | (#) | ($) | Date | (#) | ($) | (#) | ($) | |||||||||||||||||||||||||||
| (a) | (b) | (c) | (d) | (e) | (f) | (g) | (h) | (i) | (j) | |||||||||||||||||||||||||||
Robert Rigdon |
65,625 | 21,875 | — | 0.43 | 02/10/19 | (1) | — | — | — | — | ||||||||||||||||||||||||||
| 65,625 | 21,875 | — | 0.66 | 03/31/19 | (1) | — | — | — | — | |||||||||||||||||||||||||||
| 37,500 | 37,500 | — | 0.43 | 02/10/19 | — | — | — | — | ||||||||||||||||||||||||||||
| 100,000 | 100,000 | — | 0.66 | 03/31/19 | — | — | — | — | ||||||||||||||||||||||||||||
| 100,000 | 300,000 | — | 3.25 | 04/08/21 | — | — | — | — | ||||||||||||||||||||||||||||
Kevin Kelly |
18,750 | 18,750 | — | 0.43 | 02/10/19 | (1) | — | — | — | — | ||||||||||||||||||||||||||
| 12,500 | 12,500 | — | 0.73 | 01/09/19 | — | — | — | — | ||||||||||||||||||||||||||||
| 20,000 | — | — | 0.66 | 03/31/19 | — | — | — | — | ||||||||||||||||||||||||||||
| 50,000 | 50,000 | — | 0.66 | 03/31/19 | — | — | — | — | ||||||||||||||||||||||||||||
Donald Bunnell |
— | — | — | — | — | — | — | |||||||||||||||||||||||||||||
Timothy Vail |
960,000 | — | — | 0.66 | 03/31/19 | (1) | — | — | — | — | ||||||||||||||||||||||||||
| 68,182 | — | — | 0.66 | 03/31/19 | — | — | — | — | ||||||||||||||||||||||||||||
| (1) | Represents stock option awards made in connection with our stock option exchange program
during fiscal 2009. |
Director Compensation
Independent directors, other than Mr. Lamadrid, received a quarterly cash payment of $1,500 as
reimbursement for expenses incurred in connection with their service on the Board. Non-executive
directors who serve as chair of a Board committee receive an annual grant of stock options with an
aggregate value of $100,000 and (iii) all other non-executive directors receive an annual grant of
stock options with an aggregate value of $90,000, in each case based on a fair market valuation and
the exercise price in the grant, while non-independent, executive directors receive no compensation
for their service on the Board. The options vest as to 25% of the shares on each of March 31, June
30, September 30 and December 31 in the year of grant and the exercise price is determined based on
the closing price on the date of the grant. In addition, Messrs. Lamadrid and Bunnell have
consulting agreements with us as described below.
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The following table summarizes the annual compensation for our non-employee directors during
the year ended June 30, 2011.
| Nonqualified | ||||||||||||||||||||||||||||
| Fees Earned | Non-Equity | Deferred | ||||||||||||||||||||||||||
| or Paid in | Stock | Option | Incentive | Compensation | All Other | |||||||||||||||||||||||
| Name | Cash | Awards | Awards (1) (2) | Compensation | Earnings | Compensation | Total | |||||||||||||||||||||
| (a) | (b) | (c) | (d) | (e) | (f) | (g) | (h) | |||||||||||||||||||||
Lorenzo Lamadrid |
$ | 60,000 | — | $ | 100,000 | — | — | — | $ | 160,000 | ||||||||||||||||||
Donald Bunnell |
$ | 18,000 | — | — | — | — | — | $ | 18,000 | |||||||||||||||||||
Michael Storey |
$ | 6,000 | — | $ | 100,000 | — | — | — | $ | 106,000 | ||||||||||||||||||
Denis Slavich |
$ | 6,000 | — | $ | 100,000 | — | — | — | $ | 106,000 | ||||||||||||||||||
Harry Rubin |
$ | 6,000 | — | $ | 100,000 | — | — | — | $ | 106,000 | ||||||||||||||||||
Ziwang Xu |
$ | 6,000 | — | $ | 90,000 | — | — | — | $ | 96,000 | ||||||||||||||||||
| (1) | The amounts in the “Option Awards” column reflect the aggregate grant date fair
value for the fiscal year ended June 30, 2011, in accordance with ASC 718. Assumptions
used in the calculation of these amounts are included in “Note 11—Stock-Based
Compensation” to our audited financial statements for the fiscal year ended June 30,
2011 included herein. However, as required, the amounts shown exclude the impact of
estimated forfeitures related to service-based vesting conditions. |
|
| (2) | As of June 30, 2011, Messrs. Lamadrid, Storey, Slavich, Rubin and Xu had
outstanding options exercisable for a total of 381,481; 481,481; 481,481; 456,481and
184,470 shares of common stock, respectively. |
Mr. Lamadrid has a consulting agreement with us for his service as Chairman of our Board.
The agreement was initially for a four-year term effective August 1, 2006 and was extended for an
additional three years in August 2010. Mr. Lamadrid receives an annual consulting fee of $60,000
and reimbursement for reasonable expenses incurred in the performance of his services. The
Compensation Committee also evaluates Mr. Lamadrid’s consulting fee on an annual basis and
determines if any changes are warranted.
On April 1, 2011, we entered into a consulting agreement with Mr. Bunnell. The agreement is
for a term ending February 28, 2012. Mr. Bunnell will receive a monthly fee of $4,500 and
reimbursement for reasonable expenses incurred in the performance of his services.
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
The following table sets forth information with respect to the beneficial ownership of our
common stock as of June 30, 2011, by:
| • | each person who is known by us to beneficially own 5% or more of the outstanding
class of our capital stock; |
| • | each member of the Board; |
| • | each of our executive officers; and |
| • | all of our directors and executive officers as a group. |
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Beneficial ownership is determined in accordance with the rules of the SEC. To our knowledge,
each of the holders of capital stock listed below has sole voting and investment power as to the
capital stock owned unless otherwise noted.
| Numbers of Shares of | ||||||||
| Common Stock | % of Common Stock | |||||||
| Name and Address of Beneficial Owner | Beneficially Owned | Outstanding (1) | ||||||
Columbia Wanger Asset Management, L.P. (2) 227 West Monroe Street, Suite 3000 Chicago, IL 60606 |
6,981,000 | 13.7 | % | |||||
Donald Bunnell |
3,804,318 | 7.5 | % | |||||
Lorenzo Lamadrid (3) |
3,556,481 | 6.9 | % | |||||
David A. Schwedel (4) 4000 Ponce de Leon Boulevard, Suite 470 Coral Gables, Florida 33134 |
3,020,738 | 5.9 | % | |||||
Michael Storey (5) |
1,881,481 | 3.7 | % | |||||
Harry Rubin (6) |
526,481 | 1 | % | |||||
Denis Slavich (7) |
501,481 | 1 | % | |||||
Ziwang Xu (8) |
184,470 | * | ||||||
Robert Rigdon (9) |
388,750 | * | ||||||
Kevin Kelly (10) |
103,750 | * | ||||||
Executive Officers and Directors as a
group (8 persons) |
10,947,212 | 20.5 | % | |||||
| * | Less than 1% |
|
| (1) | Based on 50,850,220 shares outstanding as of June 30, 2011. |
|
| (2) | Based on information included in a Schedule 13G/A filed on February 11, 2011. Also includes
shares held by Columbia Acorn Trust, which has agreed to file as a group with Columbia Wanger
Asset Management, L.P. |
|
| (3) | Includes 381,481 shares of common stock issuable upon the exercise of options which are
currently exercisable or exercisable within 60 days. |
|
| (4) | Based on information included in a Form 4 filed on January 9, 2008. Includes 205,200 shares
held by the David A. Schwedel Living Trust of which Mr. Schwedel is the beneficial owner. |
|
| (5) | Includes 481,481 shares of common stock issuable upon the exercise of options which are
currently exercisable or exercisable within 60 days. |
|
| (6) | Includes 456,481 shares of common stock issuable upon the exercise of options which are
currently exercisable or exercisable within 60 days. |
|
| (7) | Includes 481,481 shares of common stock issuable upon the exercise of options which are
currently exercisable or exercisable within 60 days. |
|
| (8) | Includes 184,470 shares of common stock issuable upon the exercise of options which are
currently exercisable or exercisable within 60 days. |
|
| (9) | Includes 368,750 shares of common stock issuable upon the exercise of options which are
currently exercisable or exercisable within 60 days. |
|
| (10) | Includes 101,250 shares of common stock issuable upon the exercise of options which are
currently exercisable or exercisable within 60 days. |
| Item 13. | Certain Relationships and Related Transactions, and Director Independence |
Lorenzo Lamadrid, the Chairman of the Board, and Donald Bunnell, a director, each have a
consulting agreement with us as disclosed under “Item 11. Executive Compensation — Director
Compensation.”
The Audit Committee is required to approve all related party transactions regardless of the
dollar amount. In assessing a related party transaction, the Audit Committee considers such
factors as it deems appropriate including without limitation (i) the benefits to us of the
transaction; (ii) the commercial reasonableness of the terms of the related party transaction;
(iii) the materiality of the related party transaction to us; (iv) the extent of the related
party’s interest in the related party transaction; and (iv) the actual or apparent conflict of
interest of the related party participating in the related party transaction.
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Table of Contents
| Item 14. | Principal Accounting Fees and Services |
In the years ended June 30, 2011 and June 30, 2010, PwC, and KPMG LLP, a U.S. based accounting
firm and our prior audit firm, or KPMG, provided services in the following categories and amounts:
| June 30, 2011 | June 30, 2010 | |||||||
Audit Fees |
$ | 455,000 | $ | 440,000 | ||||
Other |
— | 28,842 | ||||||
Total |
$ | 455,000 | (1) | $ | 468,842 | (1) | ||
| (1) | Includes $10,000 of audit fees for services rendered by KPMG for each of the
years ended June 30, 2011 and 2010. |
The Audit Committee’s policy is to pre-approve all audit and non-audit services provided
by the independent registered public accountants. These services may include audit services,
audit-related services, tax services and other services subject to the de minimis exceptions for
non-audit services described in Section 10A(i)(1)(B) of the Exchange Act which are approved by the
Audit Committee prior to the completion of the audit. Alternatively, the engagement of the
independent registered public accountants may be entered into pursuant to pre-approval policies and
procedures established by the Audit Committee, provided that the policies and procedures are
detailed as to the particular services and the Audit Committee is informed of each service. The
Audit Committee may form and delegate authority to subcommittees consisting of one or more members
when appropriate, including the authority to grant pre-approvals of audit and permitted non-audit
services, provided that decisions of such subcommittee to grant pre-approvals shall be presented to
the full Audit Committee at its next scheduled meeting.
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Table of Contents
| 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 on Form 10-K. |
| 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). |
|||
| 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). |
|||
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Table of Contents
| Number | Description of Exhibits | |||
| 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). |
|||
| 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
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). |
|||
| 10.18 | 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). |
|||
| 10.19 | 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). |
|||
| 10.20 | 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). |
|||
| 10.21 | 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). |
|||
| 10.22 | 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). |
|||
| 10.23 | ** | 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). |
||
| 10.24 | + | 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). |
||
| 10.25 | Share Purchase Agreement dated March 31, 2011
between Synthesis Energy Systems, Inc., China
Energy Industry Holdings Group Co. Ltd. and
Zhongjixuan Investment Management Company Ltd
(incorporated by reference to Exhibit 10.1 to
the Company’s Current Report on Form 8-K
filed on March 31, 2011). |
|||
| 10.26 | Consulting Agreement between the Company and
Don Bunnell dated April 1, 2011 (incorporated
by reference to Exhibit 10.1 to the Company’s
Current Report on Form 8-K filed on April 6,
2011). |
|||
| 10.27 | Amended and Restated Employment Agreement
between the Company and Robert W. Rigdon
dated April 8, 2011 (incorporated by
reference to Exhibit 10.1 to the Company’s
Current Report on Form 8-K filed on April 12,
2011). |
|||
82
Table of Contents
| Number | Description of Exhibits | |||
| 10.28 | Share Purchase Agreement dated June 9, 2011
between the Company and Zuari Industries
Limited (incorporated by reference to Exhibit
10.1 to the Company’s Current Report on Form
8-K filed on June 10, 2011). |
|||
| 10.29 | Letter Agreement date August 16, 2011 between
the Company, China Energy Industry Holding
Group Co. Ltd and Zhongjixuan Investment
Management Company Ltd. (incorporated by
reference to Exhibit 10.2 to the Company’s
Current Report on Form 8-K filed on August
16, 2011). |
|||
| 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. |
83
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 27, 2011 | 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 27, 2011 | ||
/s/ Kevin Kelly
|
Chief Accounting Officer, Controller and Secretary (Principal Financial and Accounting Officer) | September 27, 2011 | ||
/s/ Donald Bunnell
|
Director | September 27, 2011 | ||
/s/ Lorenzo Lamadrid
|
Director | September 27, 2011 | ||
/s/ Michael Storey
|
Director | September 27, 2011 | ||
/s/ Denis Slavich
|
Director | September 27, 2011 | ||
/s/ Harry Rubin
|
Director | September 27, 2011 | ||
/s/ Ziwang Xu
|
Director | September 27, 2011 |
84