SYNTHESIS ENERGY SYSTEMS INC - Quarter Report: 2016 March (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

________________

FORM 10-Q

(Mark One)

For the quarterly period ended March 31, 2016

For the transition period from: _______ to: ________

Commission file number: 001-33522

________________

SYNTHESIS ENERGY SYSTEMS, INC.

(Exact name of registrant as specified in its charter)

________________

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

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

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes R No £

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes R No £

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

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

Yes £ No R

As of May 10, 2016 there were 86,963,907 shares of the registrant’s common stock, par value $.01 per share, outstanding.

TABLE OF CONTENTS

PART I

Item 1. Financial Statements

SYNTHESIS ENERGY SYSTEMS, INC.

Consolidated Balance Sheets

(In thousands, except per share amount)

See accompanying notes to the consolidated financial statements.

SYNTHESIS ENERGY SYSTEMS, INC.

Consolidated Statements of Operations

(In thousands, except per share amounts)

(Unaudited)

See accompanying notes to the consolidated financial statements

SYNTHESIS ENERGY SYSTEMS, INC.

Consolidated Statements of Operations

(In thousands, except per share amounts)

(Unaudited)

See accompanying notes to the consolidated financial statements.

SYNTHESIS ENERGY SYSTEMS, INC.

Consolidated Statements of Comprehensive Loss

(In thousands)

(Unaudited)

See accompanying notes to the consolidated financial statements

SYNTHESIS ENERGY SYSTEMS, INC.

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

See accompanying notes to the consolidated financial statements.

SYNTHESIS ENERGY SYSTEMS, INC.

Consolidated Statement of Equity

(In thousands)

(Unaudited)

See accompanying notes to the consolidated financial statements.

SYNTHESIS ENERGY SYSTEMS, INC.

Notes to Consolidated Financial Statements

(Unaudited)

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

You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and the related notes and other financial information included elsewhere in this quarterly report. Some of the information contained in this discussion and analysis or set forth elsewhere in this quarterly report, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. You should review the “Risk Factors” section of our Annual Report on Form 10-K for the fiscal year ended June 30, 2015 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 proprietary gasification technology systems and solutions to the energy and chemical industries. Our gasification technology is a flexible, efficient and economic technology for the production of synthesis gas, or syngas, a mixture of primarily hydrogen, carbon monoxide and methane. Syngas is a clean and versatile source of energy. Our technology is uniquely capable to manufacture clean syngas from a wide variety of energy resources including most all existing forms of coal, biomass, municipal wastes and refuse derived fuels and petroleum coke. In doing so, our technology produces syngas which allows us to unlock the energy from these resources and transform the syngas into electric power as well as a natural gas substitute. Furthermore our syngas can be used to produce a variety of chemical products, fertilizers and transportation fuels. Our proprietary fluidized bed technology is built on decades of research, development, demonstration and commercialization and is implemented in three operating plants in China using seven of our gasification systems and in two additional plants currently in the commissioning or construction stage using a total of five of our gasification systems.

Our business strategy is to create value by supplying our proprietary gasification technology, equipment and services into global projects where these lower cost feedstocks can be profitably converted into clean syngas, which can then be used to produce a variety of high value energy and chemical products. Our initial joint venture operating projects to date convert high ash coal and coal wastes to syngas for production of chemical grade methanol, while our three additional projects, one currently in operation and the others currently under construction and licensed via our Tianwo-SES joint venture, produce syngas from coal as a clean substitute to natural gas for the aluminum industry in China. We are pursuing a variety of additional global projects under development by our customers who wish to use our proprietary gasification technology platform to convert low-cost, locally available feedstocks to high value products.

Our technology can cleanly and economically extract carbon and hydrogen from most types of coal resources, coal wastes and renewable forms of biomass and municipal wastes. This carbon and hydrogen are extracted by reacting coal with oxygen to form a synthetic gas, otherwise known as syngas. Syngas can be used as a substitute for natural gas in many industries such as aluminum, ceramics, glass and others that burn natural gas for industrial heat energy. In addition, syngas can be readily converted into a wide range of energy and chemical products. These products include, but are not limited to, electric power, synthetic natural gas (“SNG”), transportation fuels such as gasoline, diesel and jet fuel, chemicals such as methanol, olefins, and glycols, ammonia and urea for agricultural fertilizers and feedstocks for use in the direct reduction of iron (“DRI”) for steel production. Our technology is one of several gasification technologies which have been used successfully in industrial applications for many years. However, our technology is meaningfully differentiated over these older forms of gasification primarily through its ability to create clean and economical syngas from most forms of coal resources—from the lowest quality brown coals and lignites, high ash sub-bituminous coals and including the highest quality bituminous and anthracite coals—as well as biomass and other renewable waste materials. Our XL3000 gasification system was introduced in October 2014. It is specifically targeted to provide higher syngas capacity and delivery pressure with lower capital costs, while maintaining high syngas generation efficiency on both high and low quality coals. The XL3000 is targeted to deliver efficiency and economy in performance required to meet the needs of the wide range of the world's syngas projects: distributed power, direct reduced iron, or DRI, steelmaking, industrial chemicals, fertilizers, SNG, and transportation fuels. The XL3000 gasification system delivers approximately 250% higher syngas capacity than our previous designs with delivery pressures up to 55 bar pressure.

We create value through two primary pathways:

 For both pathways to value creation, we rely on our ability to form value accretive partnerships and collaborations with other companies operating in the energy and chemical market segments in which we believe our technology is highly advantaged. Our technology license and equipment package is a low capital intensity business approach which we believe can generate attractive margins for us through providing our technology differentiated equipment and services in multiple market segments globally with a potential to build meaningful sales opportunities over time. Our selective project investment pathway has potential to generate much larger and more consistent revenue and earnings streams.

As part of our overall strategy we intend to form strategic regional and market-based partnerships or business verticals where our technology offers advantages and through cooperating with these partners grow an installed base of projects. Through these collaborative partnering arrangements we believe we will commercialize our technology much faster than entering these markets alone. In addition to regional business units, we are continuing to evaluate and develop our business in markets such as power, steel, fuels, substitute natural gas, chemicals and renewables which can benefit from deploying our technology to create these products from low cost coal and renewable feedstocks. We are developing these market-based business vertical opportunities together with strategic partners which have established businesses or interests in these markets.

In July 2015 we announced the signing of a Project Alliance Agreement that expands our exclusive relationship with Midrex Technologies for integration and optimization of DRI technology using coal gasification. Midrex will take the lead in marketing, sales, proposal development, and project execution for coal gasification DRI projects as part of the new project alliance. Midrex may also lead the construction of the fully integrated solution for customers who desire such an execution strategy. We will provide the DRI gasification technology for each project including engineering, key equipment, and technical services. The agreement includes finalization of an engineering package for the optimized coal gasification DRI solution. Prior to the Project Alliance Agreement, we also entered into an exclusive agreement with Tianwo-SES and Midrex for the joint marketing of coal gasification-based DRI facilities in China. These facilities will combine our gasification technology with the Direct Reduction Process of Midrex to create syngas from low quality coals in order to convert iron ore into high-purity DRI. Tianwo-SES will aid in the marketing of these DRI facilities in China and will supply the gasification equipment and licensing of the technology.

In November 2015 we announced the signing of a Global Business and Market Development Alliance with China Coal Research Institute (“CCRI”), a subsidiary of China Coal Technology & Engineering Group Corporation (“CCTEG”). The agreement is intended to deliver global clean energy technology projects that dovetail with the Chinese government's One Belt, One Road "Going Out" strategy and use our gasification technology. CCRI is the group designated to provide technical expertise for CCTEG to evaluate and prepare global project opportunities for coal gasification and related downstream technologies. We and CCRI have aligned the goals and competitive capabilities of each company to focus on clean energy and chemical projects exclusively based on our technology.

In March 2016, we entered a strategic Joint Project Development and Investment Agreement with China Environment State Investment Co., Ltd. (“CESI”). CESI is a state-owned enterprise established in Beijing under the China Ministry of Environmental Protection that is charged with, and funded to, develop and invest in the energy conservation and environmental protection industry. We and CESI have agreed to develop, jointly invest, and build a total of no less than 20 projects using our gasification technology over the next five years. Further, we and CESI are targeting to bring a minimum of two projects through development within 12 months. Equity in the projects for investment by us and CESI is expected to be owned 51% by CESI, and 49% by us through our wholly owned Hong Kong subsidiary, SES Clean Energy Investment Holdings Limited. We and CESI have identified a pipeline of potential projects and intend to focus initially on four target projects: an industrial fuel syngas project in Inner Mongolia for an industrial park, which is intended to be further expanded in Phase 2 to provide compressed natural gas and liquefied natural gas for transportation fuels; an industrial hydrogen and fuel syngas project in Shandong Province; and two industrial park syngas projects, in Shandong and Hebei provinces. The projects vary in size and the estimated total installed costs of the four projects range between $75 million to over $400 million per project.

We believe our operations in China have clearly demonstrated that we have several advantages which differentiate our technology over other commercially available gasification technologies, such as entrained flow, fixed bed, and moving bed gasification technologies. The first of these advantages is our ability to use a wide range of feedstocks (as detailed above) to make clean syngas. Our feedstock advantage opens up global opportunities for gasification project in areas where the coal quality would not be suitable for other currently available commercial gasification technologies.  Secondly, our technology’s advanced fluidized bed design is extremely tolerant to a wide range of changes in feedstock during operation, which allows for flexible fuel purchasing for our customers over the life of their projects. Additionally, our technology uses much less water and its simple design leads to more favorable fabrication costs and lower capital cost than other commercially available technologies. We believe that these important cost, feedstock flexibility, and water consumption factors position our technology for future deployment of gasification worldwide because our technology can enable projects to become a lower cost producer of products.

Results of Operations

Three Months Ended March 31, 2016 Compared to the Three Months Ended March 31, 2015

Revenue. Total revenue was $1.3 million for the three months ended March 31, 2016 compared to $2.8 million for the three months ended March 31, 2015.

Our ZZ Joint Venture sold 4,524 metric tons of methanol from inventory and generated approximately $1 million of revenue during the three months ended March 31, 2016 compared with 10,584 metric tons of methanol sold and generated approximately $2.8 million of revenue during the three months ended March 31, 2015. The decrease in revenue was primarily due to the shutdown of our ZZ Joint Venture’ production of methanol in late October 2015. Xeucheng Energy permanently shut down one of its two operating coke oven units in late October 2015, and the ZZ Joint Venture requires both coke oven units to produce an adequate supply to operate the ZZ Joint Venture methanol unit.

Technology licensing and related services revenue was $0.3 million for the three months ended March 31, 2016 compared to $15,000 for the three months ended March 31, 2015. This increase resulted from technical consulting and engineering services provided to our TSEC Joint Venture.

Costs of sales and plant operating expenses. Costs of sales and plant operating expenses decreased by $2.2 million to $1.7 million for the three months ended March 31, 2016 compared to $3.9 million for the three months ended March 31, 2015. The decrease was primarily due to the shutdown of ZZ Joint Venture’s production of methanol in October 2015.

General and administrative expenses. General and administrative expenses decreased by $0.4 million to $1.8 million for the three months ended March 31, 2016 compared to $2.2 million for the three months ended March 31, 2015. The decrease was primarily related to a valuation adjustment of approximately $0.3 million on our ZZ Joint Venture’s methanol inventory. Recurring general and administrative expenses consist primarily of compensation, professional and consulting fees, travel, and other costs of our corporate, development and administrative functions in Houston and Shanghai, and project and technical development expenses.

Stock-based compensation expense. Stock-based compensation expense increased by $0.1 million to $0.5 million for the three months ended March 31, 2016 compared to $0.4 million for the three months ended March 31, 2015. Stock-based compensation expense relates to the expensing of the estimated fair values of stock options, restricted stock awards and stock warrants awarded to consulting firms, directors and employees during the period. The increase was due primarily to the additional stock-based compensation related to stock options and restricted stock awards issued to directors and employees during the three months ended March 31, 2016.

Depreciation and amortization expense. Depreciation and amortization expense was $0.2 million for both the three months ended March 31, 2016 and 2015 and was primarily related to the depreciation of our ZZ Joint Venture plant’s assets.

Foreign currency loss. Foreign currency gain was $ 20,000 for the three months ended March 31, 2016 compared to foreign currency loss of $20,000 for the three months ended March 31, 2015. These amounts resulted from the appreciation or depreciation (as applicable) of the Renminbi Yuan relative to the U.S. dollar.

Interest expense. Interest expense was $79,000 for the three months ended March 31, 2016 compared to $76,000 for the three months ended March 31, 2015. Our interest expense related to the ZZ Line Of Credit Agreement and the ZZ Working Capital Loan with ZZ Bank.

Nine Months Ended March 31, 2016 Compared to the Nine Months Ended March 31, 2015

Revenue. Total revenue decreased to $5.5 million for the nine months ended March 31, 2016 compared to $10.9 million for the nine months ended March 31, 2015.

Our ZZ Joint Venture sold 18,112 metric tons of methanol and generated approximately $4.8 million of revenue during the nine months ended March 31, 2016, compared with 35,702 metric tons of methanol sold and generated approximately $10.7 million of revenue during the nine months ended March 31, 2015. The decrease in revenue was primarily due to the shutdown of our ZZ Joint Venture’ production of methanol in late October 2015. Xeucheng Energy permanently shut down one of its two operating coke oven units in late October 2015, and the ZZ Joint Venture requires both coke oven units to operate the ZZ Joint Venture methanol unit.

Technology licensing and related services revenue increased by $0.6 million to $0.8 million for the nine months ended March 31, 2016, compared to $0.2 million for the nine months ended March 31, 2015. The increase was due primarily to the technical consulting and engineering services provided to three customers during the nine months ended March 31, 2016.

Costs of sales and plant operating expenses. Costs of sales and plant operating expenses decreased by $8.1 million to $ 6.8 million for the nine months ended March 31, 2016 compared to $14.9 million for the nine months ended March 31, 2015. The decrease was primarily due to the shutdown of ZZ Joint Venture’s production of methanol in October 2015.

General and administrative expenses. General and administrative expenses was $6.6 million for both the nine months ended March 31, 2016 and 2015. Recurring general and administrative expenses consist primarily of compensation, professional and consulting fees, travel, and other costs of our corporate, development and administrative functions in Houston and Shanghai, and project and technical development expenses.

Stock-based compensation expense. Stock-based compensation expense increased by $1.2 million to $2.8 million for the nine months ended March 31, 2016 compared to $1.6 million for the nine months ended March 31, 2015. The increase was due primarily to approximately $0.6 million recognized for the modification and replacement of warrants in July 2015, in addition to the expensing of approximately $0.7 million in the fair value of stock warrants issued in May 2015 to TRW.

Depreciation and amortization expense. Depreciation and amortization expense decreased by $0.7 million to $0.7 million for the nine months ended March 31, 2016 compared to $1.4 million for the nine months ended March 31, 2015 and was primarily related to depreciation of our ZZ Joint Venture’s plant assets. The decrease was due primarily to the lower carrying value of our ZZ Joint Venture Facility due to the impairment which was recognized in the quarter ended December 31, 2014.

Impairment of ZZ Joint Venture Plant. Impairment of the ZZ Joint Venture Plant was recognized for the nine months ended March 31, 2015 of approximately $20.9 million and no impairment was recognized for the nine months ended March 31, 2016. (See “–Current Operations and Projects – Zao Zhuang Joint Venture”).

Foreign currency (gain) loss. Foreign currency loss was $0.3 million for the nine months ended March 31, 2016 compared to foreign currency gain $6,000 for the nine months ended March 31, 2015. These amounts resulted from the depreciation or appreciation of the Renminbi Yuan relative to the U.S. dollar. The $0.3 million foreign currency loss for nine months ended March 31, 2016 primarily resulted from the 6% depreciation of the yuan relative to the U.S. dollar during the nine months ended March 31, 2016.

Interest expense. Interest expense increased to $0.3 million for the nine months ended March 31, 2016 compared to $0.2 million for the nine months ended March 31, 2015. Our interest expense relates to the ZZ Line Of Credit Agreement and the ZZ Working Capital Loan with ZZ Bank. The increase was primarily due to higher principal amount outstanding on the Line Of Credit Agreement for the nine months ended March 31, 2016.

Liquidity and Capital Resources

We have financed our operations to date through private placements and public offerings of our common stock and through lines of credit and working capital loans in our ZZ Joint Venture. We do not currently have all of the financial resources necessary to fully develop and execute on all of our business opportunities and, as discussed further under “–Outlook,” we may need to raise additional capital through equity and debt financing for any new ventures that are developed, to support our existing projects and possible expansions thereof and for our corporate general and administrative expenses.

As described below under “-Current Operations and Projects – Zao Zhuang Joint Venture”, effective June 26, 2015, the we entered into an SPA with Rui Feng, whereby Rui Feng was to acquire a controlling interest in SESI, a wholly owned subsidiary of which we owns our interest in the ZZ Joint Venture.  Under the terms of the SPA, SESI will sell an approximately 61% equity interest to Rui Feng in exchange for $10 million.  Rui Feng’s second installment payment was due in December 2015 and the third installment was due on or before May 1, 2016, and neither of these installment payments has been made. It is not certain when or if Rui Feng will make any additional required installment payments under the SPA.

In connection with entering into the SPA, the ZZ Joint Venture, SESI and Rui Feng also entered into a separate Operation and Management Agreement (the “OMA”) with Shandong Saikong Automation Equipment Co. Ltd. (“Saikong”), an affiliate of Rui Feng. Under this agreement, Saikong is required to fund all losses from the ZZ Joint Venture during the expansion of the facility, and Rui Feng will receive 90% of the profits and losses for the first three years of operations after the completion of the expansion. To date, Saikong has not funded any of the ZZ Joint Venture losses and it is not certain when or if Saikong will fund any ZZ Joint Venture losses.

As of March 31, 2016, we had $16.7 million in cash and cash equivalents and $4.4 million of working capital available to us.

The majority of our revenues have been derived from the sale of methanol in China. Since we are no longer making methanol at our ZZ Joint Venture Facility, we will no longer be generating revenue from methanol production until we finish repurposing the facility.

We currently plan to use our available cash for (i) commercializing our technology and securing orders and associated tasks with developing our business with a prime focus on the markets of syngas for direct replacement of natural gas, syngas for producing substitute natural gas and power; (ii) securing new partners for our technology business; (iii) technology product advancement for power applications and industrial syngas (iv) general and administrative expenses; and (v) working capital and other general corporate purposes. We intend for the ZZ Joint Venture to sustain itself through its own earnings, funds contributed by Rui Feng and other funding sources. We do not intend to provide additional funds to continue to support the current operations. We are evaluating alternatives to repurpose the ZZ Joint Venture facility, including the equipment, land, permits and licenses. If it is determined that any of these alternatives have potential for success, we may commit funds to the ZZ Joint Venture for the purpose of preserving assets which are deemed critical for the success of the new alternative, and we may provide additional funding to the ZZ Joint Venture if there is a viable project going forward, although we are currently not intending to make additional contributions to the ZZ Joint Venture. Saikong has committed to providing required funding, but we have no assurances that they will honor that commitment, particularly since they did not make their second payment due in December 2015 and their third payment due on May 1, 2016 under the SPA. If the ZZ Joint Venture does not have adequate funds to repay the ZZ Working Capital Loan and the ZZ Line of Credit Agreement, and we or Saikong do not make additional capital contributions or loans, or the ZZ Joint Venture is unable to obtain necessary financing, the loan will be in default and ZZ Bank will be able to exercise any and all remedies available under the law or the agreements, including the risk of ZZ Bank taking control of the ZZ Joint Venture facility and the forfeiture of our $2.3 million restricted certificate of deposit. In addition, the ZZ Joint Venture is required under the ZZ Line of Credit Agreement to repay amount outstanding under the agreement on various dates beginning on May 16, 2016 through May 30, 2016, and then the ZZ Bank is required to reissue the notes unless a default is declared. In order for the ZZ Joint Venture to repay the ZZ Line of Credit Agreement notes, it must secure financing as it currently does not have the funds to repay the notes. We can make no assurances that the ZZ Joint Venture will be able to secure the necessary financing. If the ZZ Joint Venture is unable to repay the ZZ Line of Credit Agreement notes now or when finally due in November 2016, the ZZ Bank may use any and all remedies available to them, including pursuing the guarantee from Xuecheng Energy (which is limited to $3.1 million as described below), foreclosure proceedings on the ZZ Joint Venture land and buildings and filing a bankruptcy petition against the ZZ Joint Venture.

The ZZ Working Capital Loan Agreement with ZZ Bank is due on August 22, 2016. Our current projections indicate that there will not be adequate funds to repay this debt when due. In the event that the ZZ Joint Venture does not repay ZZ Working Capital Loan Agreement when due, the ZZ Bank may use any and all remedies available to them, including pursuing the guarantee from Xuecheng Energy (which is limited to $3.1 million as described below), foreclosure proceedings on the ZZ Joint Venture land and buildings and filing a bankruptcy petition against the ZZ Joint Venture.

The ZZ Joint Venture is currently not paying all of its vendor payables. In the event that this continues, the vendors have the right to filing a bankruptcy petition against the ZZ Joint Venture.

Working Capital Loan Agreement with Zaozhuang Bank Co., Ltd

On October 2, 2014, the ZZ Joint Venture entered into a working capital loan agreement (the “ZZ Working Capital Loan”) with Zaozhuang Bank Co., Ltd. (“ZZ Bank”), and received approximately $3.3 million of loan proceeds, with a maturity of September 23, 2015. On September 22, 2015, we refinanced the ZZ Working Capital Loan through August 22, 2016 for approximately $3.1 million.

Key terms of the refinanced Working Capital Loan are as follows:

Line of Credit (Deposit Secured Loan) with Zaozhuang Bank Co., Ltd

In October 2014, the ZZ Joint Venture entered two lines of credit with the ZZ Bank for a total of $2.5 million (collectively, the “ZZ Line of Credit Agreement”). In April 2015, we repaid the ZZ Line of Credit Agreement and renewed the agreement for $3.3 million under the same terms for an additional six months. In November 2015, we repaid $3.1 million of the ZZ Line of Credit Agreement, and refinanced the ZZ Line of Credit Agreement with the ZZ Bank for $3.9 million under the terms below.

Key terms of the refinanced line of credit are as follows:

Xuecheng Energy’s combined guarantee for both the ZZ Working Capital Loan and the ZZ Line of Credit Agreement is limited to approximately $3.1 million. We do not guarantee either of the credit facilities.

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. In August 2012, Hai Hua’s name was changed to Shandong Weijiao Group Xuecheng Energy Company Ltd., or Xuecheng Energy, after a change in control transaction. We initially owned 97.6% of the ZZ Joint Venture and Xuecheng Energy owns the remaining 2.4%. As part of the Rui Feng transaction described below, our interest in the ZZ Joint Venture will be reduced. We consolidate the results of the ZZ Joint Venture in our consolidated financial statements.

On July 24, 2013, the ZZ Joint Venture entered into a cooperation agreement, or the ZZ Cooperation Agreement, with Xuecheng Energy and its parent company, Shandong Xuejiao Chemical Co., Ltd. (collectively referred to as “Xuejiao”), which serves to supersede the existing syngas purchase and sale agreement among the parties dated October 22, 2006 and supplemented previously in 2008. The ZZ Cooperation Agreement, which became effective on October 31, 2013, represents the basis for an integrated syngas to methanol operation and resolution of the nonpayment of the contractual capacity fees by Xuejiao.  Under the terms of the ZZ Cooperation Agreement, Xuejiao will (i) provide the ZZ Joint Venture with use of its methanol plant for ten years at no cost to the ZZ Joint Venture, (ii) provide a bank loan guarantee of approximately $3.3 million for a majority of the financing necessary for the ZZ Joint Venture for the retrofit and related costs of the ZZ Joint Venture plant, (iii) waive certain advances previously made to the ZZ Joint Venture and (iv) supply discounted coke oven gas produced by its existing coke ovens to be used in combination with synthesis gas to produce refined methanol from the new ZZ Joint Venture integrated syngas methanol operation. The new integrated operation is managed by the ZZ Joint Venture. We assumed operational control of the integrated methanol production facility in October 2013 under a restructured commercial arrangement.

Effective June 26, 2015, we entered into a Share Purchase and Investment Agreement (the “SPA”) with Rui Feng Enterprises Limited (“Rui Feng”), whereby Rui Feng will acquire a controlling interest in Synthesis Energy Systems Investments Inc. (“SESI”), a wholly owned subsidiary, which owns our interest in the ZZ Joint Venture.  Under the terms of the SPA, SESI will sell an approximately 61% equity interest to Rui Feng in exchange for $10 million.  This amount shall be paid in four installments through December 2016, with the first installment of approximately $1.6 million paid on June 26, 2015. Since we retained control of SESI, the proceeds received from the first installment are accounted for as an equity transaction with no gain or loss recognized. We have allocated the proceeds received between additional paid in capital and non-controlling interest based on the interest acquired by Rui Feng and the carrying value of our investment in SESI.

Rui Feng’s second installment payment was due in December 2015 and the third installment was due on or before May 1, 2016, and neither of these installment payments has been made. It is not certain when or if Rui Feng will make any additional required installment payments under the SPA. If Rui Feng continues to fail to make the required installment payments, we would be entitled to terminate the agreement and Rui Feng would lose future rights to acquire additional interest in SESI and additional positions on the board of SESI, as well as seek other remedies against Rui Feng. As discussed below, we continue to review alternatives for receiving these payments, as well as alternatives for repurposing the ZZ Joint Venture assets.

After each installment payment, Rui Feng shall be entitled to appoint one director on the board of SESI. Currently, Rui Feng has made one installment and has appointed one director to the board of SESI. In the event that four installments are paid, the board shall consist of seven directors, with four appointed by Rui Feng and the balance appointed by SESI.  Rui Feng shall also be entitled to appoint directors of the ZZ Joint Venture as the installment payments are made, such that if all installment payments are made, Rui Feng will have three directors, SESI shall have two directors and Xuecheng Energy shall have one director on the ZZ Joint Venture board.

Rui Feng shall receive equity interest in SESI proportionate to its installment payments.  After the four installment payments have been made, if Rui Feng invests an additional amount of 40 million yuan equivalent, or approximately $6.3 million in U.S. dollars, for the construction of an expansion to the ZZ Joint Venture, Rui Feng will receive an additional 14% interest in SESI, for a total of 75%. If Rui Feng acquires a controlling interest in the subsidiary, we will deconsolidate the investment in the subsidiary which holds the investment in the ZZ Joint Venture.

In connection with entering into the SPA, the ZZ Joint Venture, SESI and Rui Feng also entered into a separate Operation and Management Agreement (the “OMA”) with Shandong Saikong Automation Equipment Co. Ltd. (“Saikong”), an affiliate of Rui Feng. Under this agreement, Saikong, is required to fund all losses from the ZZ Joint Venture during the expansion of the facility, and Rui Feng will receive 90% of the profits and losses for the first three years of operations after the completion of the expansion. To date, Saikong has not funded any losses and it is not certain when or if Saikong will fund any ZZ Joint Venture losses.

The original purpose for entering into the SPA and OMA was to repurpose the ZZ Joint Venture facility by refurbishing the existing SES gasification systems to full capacity operation and the syngas was to be used for the production of 100,000 tons per year of acetic acid, as well as a secondary product of propionic acid. It does not appear that the government will approve the production of acetic acid and propionic acid at that location. As such, the Company is looking for other alternatives to repurpose the ZZ Joint Venture facility.

Current ZZ Operating Description and Capability

In late October 2015, Xeucheng Energy permanently shut down one of its two operating coke oven units. The ZZ Joint Venture requires both coke oven units to produce an adequate supply to operate the ZZ Joint Venture methanol unit. This shutdown prevents Xeucheng Energy from fulfilling its obligations under the ZZ Cooperation Agreement, and therefore we ended the methanol production operation related to the ZZ Cooperation Agreement. We are negotiating a permanent solution to the outstanding issues related to the ZZ Cooperation Agreement, including all payables related to the methanol operations and the early shut down of the coke oven facilities.

Impairment

Due to the downward shift in the market for methanol during 2014, we were required to evaluate the ongoing value of the ZZ Joint Venture facility and, based on this evaluation, we determined that the carrying value of the ZZ Joint Venture asset value was no longer recoverable as of December 31, 2014. Because of this, we recognized an impairment expense of $20.9 million, reducing the value of the ZZ Joint Venture facility to its estimated fair value of $11 million as of December 31, 2014. Fair value was based on discounted expected future cash flows.

Furthermore, since Rui Feng did not make their second installment as required under the SPA in December 2015, the decision to shut down the facility and due to the decline in methanol prices, we determined that these were indicators of impairment. While we continue to evaluate alternatives for the facility there are no current reliable cash flow estimates available to perform the first step of the impairment analysis under ASC 360 for long-lived assets. As such in February 2016, we retained a third party to prepare an estimate of the fair value of the ZZ Joint Venture facility. The land and buildings were valued on a market comparison basis, and the equipment was valued on a value in-exchange basis, which assumes the equipment is dismantled, sold and transferred to another site for use. The results of the valuation indicated the estimated fair value exceeded the carrying value of the long-lived assets and therefore no impairment was required at December 31, 2015. During the quarter ended March 31, 2016, we continued to evaluate alternatives for the ZZ Joint Venture facility, however, we have concluded that as of March 31, 2016 there were no indicators of impairment. We have not declared a default under the SPA, as we continue to work on alternatives for the facility. As of March 31, 2016 and June 30, 2015, the carrying value of the ZZ Joint Venture facility was $8.3 million and $10.3 million, respectively.

Yima Joint Ventures

In August 2009, we entered into amended joint venture contracts with 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. 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, contributed 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 and Yima shall share the profits, and bear the risks and losses, of the joint ventures in proportion to our respective ownership interests.

In exchange for such 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 remaining capital for the project has been funded with project debt obtained by the Yima Joint Ventures. Yima agreed to guarantee the project debt in order to secure debt financing from domestic Chinese banking sources. We have agreed to pledge to Yima our ownership interests in the joint ventures as security for our obligations under any project guarantee. In the event that the necessary additional debt financing is not obtained, Yima has agreed to provide a loan to the joint ventures to satisfy the remaining capital needs of the project.

Under the terms of the joint venture agreements, the Yima Joint Ventures are to be 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 operating license and shall end 30 years after commercial operation of the plant.

The Yima Joint Venture plant generated its first methanol production in December 2012. The Yima Joint Venture plant’s refined methanol section was fully commissioned in December 2013, and has operated at limited capacity since that date. The plant has a capacity to produce 377,000 metric tons per year of methanol and expected production capacity of 333,000 metric tons based on normal expected availability from operating two of its three available gasifiers and has achieved 100% peak syngas production levels and 100% peak methanol production levels. This plant is intended to provide a commercial demonstration of our technology as deployed on a much larger scale than the ZZ Joint Venture plant.

In August 2015, the Yima Joint Ventures shut down plant operation due to a lack of coal supply from Yima Coal Industrial Group, which has been encountering a reduction in coal production and coal quality issues. Henan Energy and Chemical Industry Group (“Henan”), secured a coal contract in December 2015 and the Yima Joint Venture Plant is currently operational.

The Yima Joint Venture Plant has been operating since the end of 2015 and continues to operate and produce methanol.  The Performance test for the gasification plant was conducted in March 2016 and the plant achieved over 100 percent syngas production rates with 99+% carbon conversion.  During the execution of the performance test, the Yima Joint Venture plant achieved all the target figures for the guarantee parameters, including oxygen and coal consumption, carbon conversion and syngas production, and methanol production reached over 900 metric tons per day. We received a formal letter of technical acceptance from the Yima Joint Venture in March 2016. In operations both before and after the performance test, the Yima Joint Venture plant has operated rates as high as 1000 metric tons per day. The annual maintenance of the plant originally scheduled for April 2016 has been delayed due to current favorable prices for the methanol market.   

Although we are seeing signs of improvement, we believe there is a consistent pattern of the Yima Joint Venture management not demonstrating an understanding of the methanol facility operations and not sourcing available expertise in China to improve the overall operations. We have witnessed operation of the gasifier systems at Yima with design and operating parameter deviations from our existing technology recommendations. We have experienced limited ability to influence the Yima Joint Ventures’ operating performance. Our conclusion regarding our lack of significant influence is based on our interactions with the Yima Joint Ventures related to the start-up and operations and due to various other circumstances including limited participation in operating and financial policymaking processes and our limited ability to influence technological decisions.

As a result of these issues, HNECGC restructured the management of the Yima Joint Ventures under the direction of the Henan Coal Gasification Company or Henan, which is an affiliated company reporting directly to HNEGC. The ownership of the Yima Joint Ventures is unchanged. Henan currently has full authority of day to day operational and personnel decisions at the Yima Joint Venture. The goal of the management restructuring is to provide for a more experienced and efficient operations management system. The management team at Henan is experienced at running and optimizing coal gasification facilities, and they currently operate other coal gasification facilities. We currently plan to rely upon and assist Henan's management to achieve optimized operations and will continue to attempt to improve our influence on the Yima Joint Ventures. Despite this, we believe the fundamental value of the Yima Joint Ventures remains sound due to (1) the facility’s ability to use low cost coals, (2) our technology’s capability to efficiently gasify this low quality coal and (3) the benefits derived from the plant’s large scale.

Until May 31, 2013, we accounted for its equity interest in the Yima Joint Ventures under the equity method of accounting. Under this method, we recorded its proportionate share of the Yima Joint Ventures’ net income or loss based on the Yima Joint Venture’s financial results. As of June 1, 2013, we changed to the cost method of accounting because we concluded that it is unable to exercise significant influence over the Yima Joint Ventures. Our conclusion regarding of its lack of significant influence is due to various circumstances including limited participation in operating and financial policymaking processes and our limited ability to influence technological decisions. There was no equity in losses of the Yima Joint Ventures recognized for financial reporting purposes for the three and nine months ended March 31, 2016 and 2015, since we changed from the equity method to the cost method of accounting as of June 1, 2013. The carrying value of our interest in the Yima Joint Venture as of March 31, 2016 and December 31, 2015 was $34.8 million. We continue to monitor the carrying value of this investment, and we also continue to monitor the basis of accounting for the Yima Joint Ventures.

TSEC Joint Venture

On February 14, 2014, SES Asia Technologies Limited, one of our wholly owned subsidiaries, entered into a Joint Venture Contract (the “JV Contract”) with Zhangjiagang Chemical Machinery Co., Ltd., which subsequently changed its name to Suzhou Thvow Technology Co. Ltd. (“STT”), to form Jiangsu Tianwo-SES Clean Energy Technologies Limited (the “Tianwo-SES Joint Venture”). The purpose of the Tianwo-SES Joint Venture is to establish our gasification technology as the leading gasification technology in the Tianwo-SES Joint Venture territory (which is initially China, Indonesia, the Philippines, Vietnam, Mongolia and Malaysia) by becoming a leading provider of proprietary equipment for the technology. The scope of the Tianwo-SES Joint Venture is to market and license our gasification technology via project sublicenses; procurement and sale of proprietary equipment and services; coal testing; and engineering, procurement and research and development related to the technology. STT contributed 53.8 million yuan in April 2014 and is required to contribute an additional 46.2 million yuan within two years of contract execution for a total contribution of 100 million yuan (approximately $15.4 million) in cash to the Tianwo-SES Joint Venture, and owns 65% of the Tianwo-SES Joint Venture, and we have contributed an exclusive license to use of our technology in the Tianwo-SES Joint Venture territory pursuant to the terms of a Technology Usage and Contribution Agreement entered into among the Tianwo-SES Joint Venture, STT and us (the “TUCA”) on the same date, and own 35% of the Tianwo-SES Joint Venture. The second capital contribution of 46.2 million yuan was due in April 2016 and was not made. We have notified SST in writing to determine the status of the payment. If this payment is not made, we will consider any and all actions, including restructuring and termination. Under the JV Contract, neither party may transfer their interests in the Tianwo-SES Joint Venture without first offering such interests to the other party.

The JV Contract may be terminated upon, among other things, (i) a material breach of the JV Contract which is not cured, (ii) a violation of the TUCA, (iii) the failure to obtain positive net income within 24 months of establishing the Tianwo-SES Joint Venture or (iv) mutual agreement of the parties. In addition to not having positive net income within 24 months of establishment, there have been other possible breaches of the JV Contract, including the failure of STT to make the required installment payment and possible failures to secure required approvals. We are continuing to review all of our options to remedy these issues.

Tianwo-SES Projects

In December 2014, Innovative Coal Chemical Design Institute, ICCDI, a subsidiary of STT, was awarded three projects from Aluminum Corporation of China Limited, CHALCO, Shandong Branch. The award calls for ICCDI to serve as the general contractor providing all engineering and construction services for the three projects. Our technology systems are to be supplied by Tianwo-SES to ICCDI and will be used to produce an expected combined total of approximately 175,000 normal cubic meters per hour of industrial syngas as a clean energy fuel for three existing aluminum manufacturing plants, located in the Shandong, Henan and Shanxi provinces. Tianwo-SES is also undertaking the required engineering work now while also developing the required contracts with ICCDI for completion of the three projects. In June 2015, the first of the three industrial syngas gasification plants in Zibo City, Shandong Province entered the commissioning phase and has completed a planned 90-day continuous full-load operation test run successfully supplying stable and reliable industrial syngas to CHALCO aluminum manufacturing facility as of January 2016.

In December 2014, we and Tianwo-SES also entered into an agreement with Dengfeng Power Group Co., Ltd., or DFPG, for a distributed power generation program initially in Henan Province, China. The first phase of the program will be a pre-feasibility study for the first of several planned 160 MW distributed power plants designed to utilize two SES XL3000 advanced fluidized bed gasification systems; gasification equipment provided by Tianwo-SES, and four GE model LM2500+G4 aero-derivative gas turbines and related power generation equipment. Upon the completion and successful results of the feasibility studies, and requisite government approvals, the first cleaner distributed power plant is expected to be built in Dengfeng. It is intended to serve as a model for additional cleaner coal distributed power generation projects in Dengfeng (up to 600 MW total), as well as elsewhere in Henan Province and in other regions of China. DFPG is an industrial conglomerate specializing in thermal power generation whose products include aluminum, other non-ferrous metals and cement, and which operates power generation plants and coal mines in Henan Province.

In April 2016, STT announced that they won the bid for an industrial syngas supply project which will utilize two SES gasification technology systems provided by Tianwo-SES. The project, for Shandong Xinhai Industrial Co., Ltd., is a coal-to-syngas engineering-procurement-construction turnkey facility which, according to Thvow, is to be built to provide 80,000 normal cubic meters per hour of industrial syngas as a clean energy fuel for the metallurgical industry, in Shandong Province.

GTI Agreement

On November 5, 2009, we entered into an Amended and Restated License Agreement, or the GTI Agreement, with GTI, replacing the Amended and Restated License Agreement between us and GTI dated August 31, 2006, as amended. Under the GTI 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.

In order to sublicense any U-GAS^® system, we are required to comply with certain requirements set forth in the GTI 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 GTI Agreement. We are also restricted from offering a competing gasification technology during the term of the GTI Agreement.

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

We are required to make an annual payment of $500,000 to GTI for each year of the term, 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 GTI 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 GTI 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 GTI 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 GTI Agreement expires on August 31, 2016, but may be extended for two additional ten-year periods at our option. We are currently evaluating extension alternatives for the GTI Agreement.

Outlook

Our strategies are focused on commercializing our technology via the two primary pathways of (1) providing our technology license and equipment package and (2) securing interests or selective investments in attractive projects that use our technology. In addition, we intend to remain focused on improving operations at the Yima Joint Venture, developing our Tianwo-SES Joint Venture, sourcing suitable partners for our other business verticals and advancing and improving our gasification technology, such as through our new XL3000 gasification system. Our business is to create value by supplying our technology, equipment and services into global projects where lower cost low quality coals, coal wastes, municipal wastes, agricultural biomass, and other biomass feedstocks can be profitably converted through our proprietary gasification technology into clean synthesis gas, or syngas (a mixture of primarily hydrogen, carbon monoxide, and methane), which is then used to produce a variety of high value energy, power, and chemical products.

Our business model is to deploy our technology on a global basis by supplying a technology package, containing license rights to operate a project using our technology, gasification system equipment, and technology related services. As part of our overall strategy we intend to form strategic regional and market-based partnerships or business verticals where our technology offers advantages and through cooperating with these partners grow an installed base of projects. Through collaborative partnering arrangements we believe we will commercialize our technology much faster than entering these markets alone.  This is a low capital intensity business approach which we believe can generate attractive margins for us through providing our technology differentiated equipment and services in multiple market segments globally with a potential to build meaningful sales opportunities over time. We also believe that our technology business activities will help advance our capabilities and provide opportunities which may allow us to selectively participate as equity partners in such projects in the future. Additionally, we are continuing to improve our technology in ways we believe will enhance our competitive position. We are pursuing other possible technology licensing opportunities with third parties and through our Tianwo-SES JV allowing us to build on our capability as demonstrated at both the ZZ Joint Venture and the Yima Joint Venture. We are focusing our efforts globally with our partners in countries with large low rank coal resources, but our principal operating activities to-date have focused on China and India.

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. We believe China is a good example of this new direction in coal gasification. The energy and chemicals landscape has been evolving rapidly with long-term trends showing upward pressure on demand and increasing pressure to deliver improved environmental performance while simultaneously delivering economics that will attract investment capital. World energy consumption is expected to increase significantly over the next two decades and demand is heavily driven by non-OECD nations where developing economies require ever increasing access to more energy products to establish healthy economies that improve the living conditions of those populations. Our market research indicates that coal will be required as a major source of energy for decades to come and growth in coal usage is expected to be led by the non-OECD nations. Because of these market dynamics, we believe our gasification technology has strategic importance to countries and regions with developing economies which have their own low cost domestic coal resources and need access to low cost clean energy and chemical products to grow. We believe this also applies to developed nations in the west such as Australia, Europe and US which possess significant low cost coal resources and which have a strategic need and desire to produce clean and affordable energy and chemicals from their own domestic resources and to existing operating companies which deploy their own technologies for energy and/or chemicals production.

We have seen a shifting of the competitive landscape of gasification over the past year away from more commonly deployed gasification technologies that rely on higher grade coals and utilize more water. This has generated an increasing interest in our technology and its capabilities to produce syngas cleanly, efficiently and with lower water consumption for most all qualities of coal as well as biomass and municipal solid waste. We believe that our technology is well positioned to address the market needs of the changing global energy landscape, and we believe we are well positioned in Asia where we have two operating projects using five of our gasification systems and where Tianwo-SES is providing seven of our gasification systems now into three additional projects. We now have a total 12 commercial systems in China.

With the shut down of the methanol plant, the ZZ Joint Venture has no earnings. We do not intend to provide additional funds to continue to support the current operations. We are evaluating alternatives to repurpose the ZZ Joint Venture facility, including the equipment, land, permits and licenses. If it is determined that any of these alternatives have potential for success, we may commit funds to the ZZ Joint Venture for the purpose of preserving assets which are deemed critical for the success of the new alternative. Saikong has committed to providing required funding, but we have no assurances that they will honor that commitment, as they have not made required installment payments under the SPA as noted above. If Rui Feng continues to fail to make the required installment payments, we would be entitled to terminate the agreement and Rui Feng would lose future rights to acquire additional interests in SESI and additional positions on the board of SESI, as well as seek other remedies against Rui Feng. If the ZZ Joint Venture does not have adequate funds to repay the ZZ Working Capital Loan and the ZZ Line of Credit Agreement, and we or Saikong do not make additional capital contributions or loans, or the ZZ Joint Venture is unable to obtain adequate financing, the loan will be in default and ZZ Bank will be able to exercise any and all remedies available under the law or the agreements, including the risk of ZZ Bank taking control of the ZZ Joint Venture facility and the forfeiture of our $2.3 million restricted certificate of deposit. In addition, the ZZ Joint Venture is required under the ZZ Line of Credit Agreement to repay amount outstanding under the agreement on various dates beginning on May 16, 2016 through May 30, 2016, and then the ZZ Bank is required to reissue the notes unless a default is declared. In order for the ZZ Joint Venture to repay the ZZ Line of Credit Agreement notes, it must secure financing as it currently does not have the funds to repay the notes. We can make no assurances that the ZZ Joint Venture will be able to secure the financing. If the ZZ Joint Venture is unable to repay the ZZ Line of Credit Agreement notes now or when finally due in November 2016, the ZZ Bank may use any and all remedies available to them, including pursuing the guarantee from Xuecheng Energy (which is limited to $3.1 million), foreclosure proceedings on the ZZ Joint Venture land and buildings and filing a bankruptcy petition against the ZZ Joint Venture.

In late October 2015, Xeucheng Energy permanently shut down one of its two operating coke oven units. The ZZ Joint Venture requires both coke oven units to produce an adequate supply to operate the ZZ Joint Venture methanol unit. This shutdown prevents Xeucheng Energy from fulfilling its obligations under the ZZ Cooperation Agreement, and therefore we ended the methanol production operation related to the ZZ Cooperation Agreement. We are negotiating a permanent solution to the outstanding issues related to the ZZ Cooperation Agreement, including all payables related to the methanol operations and the early shut down of the coke oven facilities. Due to the methanol unit being shut down, we do not expect to have future revenue from sales unless the facility is repurposed.

The ZZ Joint Venture is currently not paying all of its vendor payables. In the event that this continues, the vendors have the right to filing a bankruptcy petition against the ZZ Joint Venture.

There have been several possible breaches under the Tianwo-SES Joint Venture agreement by STT. The JV Contract may be terminated upon, among other things, (i) a material breach of the JV Contract which is not cured, (ii) a violation of the TUCA, (iii) the failure to obtain positive net income within 24 months of establishing the Tianwo-SES Joint Venture or (iv) mutual agreement of the parties. In addition to not having positive net income within 24 months of establishment, there have been other possible breaches of the JV Contract, including the failure of STT to make the required installment payment and possible failures to secure required approvals. We are continuing to review all of our options to remedy these issues.

We are a minority owner in the Yima Joint Ventures, and we are relying on Yima to provide the management and operational support for the project. As a result, the success and timing of the Yima project will depend upon a number of factors that will be largely outside of our control and influence. As of June 1, 2013, we changed from the equity method of accounting for our investment in the Yima Joint Ventures to the cost method of accounting because we concluded that we are unable to exercise significant influence over the Yima Joint Ventures. Our conclusion regarding our lack of significant influence is based on our interactions with the Yima Joint Ventures related to the start-up and operations and due to various other circumstances including limited participation in operating and financial policymaking processes and our limited ability to influence technological decisions.  Dependence on Yima, and other owners of future projects in which we have a minority interest, or extended negotiations regarding the scope of the projects, could delay or prevent the realization of targeted returns on our capital invested in these projects.

We have recently announced projects through our Tianwo-SES Joint Venture, including projects with ICCDI, and Aluminum Corporation of China for an industrial syngas project, as well as with Dengfeng for a planned 160 MW distributed power generation program initially in Henan Province, China. However, we expect to continue to have negative operating cash flows until we can generate sufficient cash flows from our technology, equipment and services business and SES China (including the ZZ Joint Venture, the Yima Joint Ventures and the Tianwo-SES Joint Venture) to cover our general and administrative expenses and other operating costs. We will also limit the development of any further projects until we have assurances that acceptable financing is available to complete the project. We may 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 and where the project would utilize our technology, equipment and services.

We are also actively seeking additional partners for our technology vertical with existing businesses and vested interest in the growth of the global energy and chemicals projects who also has financial strength, a strong global sales force and demonstrated experience in process or power industry engineering and technology deployment are target candidates for this cooperation with us.

We currently plan to use our available cash for (i) commercializing our technology and securing orders and associated tasks with developing our business with a prime focus on the markets of syngas for direct replacement of natural gas, syngas for producing substitute natural gas and power; (ii) securing new partners for our technology business; (iii) technology product advancement for power applications and industrial syngas (iv) general and administrative expenses; and (v) working capital and other 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. Operating cash flows from our joint venture operating projects can be positively or negatively impacted by changes in coal and methanol prices. These are commodities where market pricing is often volatile in nature.

We do not currently have all of the financial and human resources necessary to fully develop and execute on all of our business opportunities; however, we intend to finance our development through paid services, technology access fees, equity and debt financings and by securing financial and strategic partners focused on the development of these opportunities. We can make no assurances that our business operations will provide us with sufficient cash flows to continue our operations. We are also seeking to raise capital by partnering our technology vertical. We may need to raise additional capital through equity and debt financing for any new ventures that are developed, to support our existing projects and possible expansions thereof and for our corporate general and administrative expenses. We may consider a full range of financing options in order to create the most value in the context of the increasing interest we are seeing in our technology. 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 including retention of key personnel and consultants; (ii) successfully develop our licensing and related service businesses; (iii) negotiate and enter into new gasification plant development contracts and licensing agreements; (iv) make additional capital contributions to our joint ventures; (v) fund certain obligations as they become due; (vi) respond to competitive pressures or unanticipated capital requirements; or (vii) repay our indebtedness.

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.

Revenue Recognition

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

Technology licensing revenue is typically received over the course of a project’s development as milestones are met. We may receive upfront licensing fee payments when a license agreement is entered into. Typically, the majority of a license fee is due once project financing and equipment installation occur. We recognize license fees as revenue when the license fees become due and payable under the license agreement, subject to the deferral of the amount of the performance guarantee. Fees earned for engineering services, such as services that relate to integrating our technology to a customer’s project, are recognized using 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, feedstock costs, and other 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 investments such as our 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.

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 or cost 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 under the equity method of accounting is recorded in non-operating (income) expense on a net basis on our consolidated statements of operations.

We have determined that the ZZ Joint Venture is a VIE and that we are the primary beneficiary. 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 Tianwo-SES is a VIE and that SST is the primary beneficiary since SST has a 65% ownership interest in the Joint Venture.

Item 3. Quantitative and Qualitative Disclosures 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 consolidated 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. For example, there has recently been intense pressure on the yuan due to the devaluation by China’s central bank. We cannot predict at this time when prices will stabilize or recover. 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 resulting in devaluation or revaluation of the Renminbi yuan in ways that may be adverse to our interests.

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.

The majority of our revenues was derived from the sale of methanol in China. Since we are no longer making methanol at our ZZ Joint Venture Facility, we will no longer be generating revenue from methanol production until we finish repurposing the facility. Since resuming operations in November 2015, Yima continues to generate revenues from methanol sales, however we account for our investment in Yima at cost and will not recognize any income until Yima distributes profits. We do not have long term offtake agreements for these sales, so revenues fluctuate based on local market spot prices, which have been under significant pressure, and we are unsure of how much longer this will continue. Our liquidity and capital resources will be materially adversely affected if markets remain under pressure, and we are unable to obtain satisfactory prices for these commodities or if prospective buyers do not purchase these commodities.

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.

Customer credit risk

When our projects, including the ZZ Joint Venture plant’s methanol production, progress to commercial operation, 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.

Item 4. 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 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 Financial Officer, to allow timely decisions regarding required disclosures.

Our management, with the participation of the Chief Executive Officer and the Chief Financial 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 March 31, 2016. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of March 31, 2016.

Notwithstanding the foregoing, there can be no assurance that our disclosure controls and procedures will detect or uncover all failures of persons within the Company and its consolidated subsidiaries to disclose material information otherwise required to be set forth in our periodic reports. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures.

Changes in Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting during the nine months ended March 31, 2016 that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.

PART II

Item 1. Legal Proceedings.

None.

Item 1A. Risk Factors.

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

As of March 31, 2016, we had $16.7 million in cash and cash equivalents. We currently plan to use our available cash for (i) commercializing our technology and securing orders and associated tasks with developing our business with a prime focus on the markets of syngas for direct replacement of natural gas, syngas for producing substitute natural gas and power; (ii) securing new partners for our technology business; (iii) technology product advancement for power applications and industrial syngas; (iv) general and administrative expenses; and (v) working capital and other general corporate purposes. We intend for the ZZ Joint Venture to sustain itself through its own earnings, funds contributed by Rui Feng and other funding sources. We do not intend to provide additional funds to continue to support the current operations. We are evaluating alternatives to repurpose the ZZ Joint Venture facility, including the equipment, land, permits and licenses. If it is determined that any of these alternatives have potential for success, we may commit funds to the ZZ Joint Venture for the purpose of preserving assets which are deemed critical for the success of the new alternative. Saikong has committed to providing required funding, but we have no assurances that they will honor that commitment, particularly since they did not make their second payment in December 2015 and third payment due on May 1, 2016 under the SPA. If the ZZ Joint Venture does not have adequate funds to repay the ZZ refinanced Working Capital Loan and the ZZ Line of Credit Agreement, and we or Saikong do not make additional capital contributions or loans, or the ZZ Joint Venture is unable to obtain required financing, the loan will be in default and ZZ Bank will be able to exercise any and all remedies available under the law or the agreements, including the risk of ZZ Bank taking control of the ZZ Joint Venture facility and the forfeiture of our $2.3 million restricted certificate of deposit. In addition, we are required under the ZZ Line of Credit Agreement to repay amount outstanding under the agreement on various dates beginning on May 16, 2016 through May 30, 2016, and then the ZZ Bank is required to reissue the notes unless a default is declared. Such a default could result from the failure to make the additional contributions contemplated above, or from the fact the ZZ Joint Venture plant has been shut down since late October 2015 as described above. In order for the ZZ Joint Venture to repay the ZZ Line of Credit Agreement notes, it must secure necessary financing as it currently does not have the funds to repay the notes. If the ZZ Bank fails to reissue the notes, as noted above, or declares an event of default, the ZZ Bank is entitled to exercise any and all remedies under the agreement. If the ZZ Joint Venture does not have the funds, we will need to find alternative funding, which would likely result in funding delays. 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. Operating cash flows from our joint venture operating projects can be positively or negatively impacted by changes in coal and methanol prices. These are commodities where market pricing is often volatile in nature.

We have recently announced projects through our Tianwo-SES Joint Venture, including projects with ICCDI, and Aluminum Corporation of China for an industrial syngas project, as well as with Dengfeng for a planned 160 MW distributed power generation program initially in Henan Province, China. However, we expect to continue to have negative operating cash flows until we can generate sufficient cash flows from our technology, equipment and services business and SES China (including the ZZ Joint Venture, the Yima Joint Ventures and the Tianwo-SES Joint Venture) to cover our general and administrative expenses and other operating costs. We will also limit the development of any further projects until we have assurances that acceptable financing is available to complete the project. We may 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 and where the project would utilize our technology, equipment and services.

 We do not currently have all of the financial resources to fully develop and execute on all of our other business opportunities; however, we intend to finance our development through paid services, technology access fees, equity financings and by securing financial and strategic partners focused on development of these opportunities. We can make no assurances that our business operations will provide us with sufficient cash flows to continue our operations. We will need to raise additional capital through equity and debt financing for any new ventures that are developed, to support our existing projects and possible expansions thereof and for our corporate general and administrative expenses. Uncertainty in the Chinese economy, including as related to the devaluation of the yuan, will have a significant impact on the ability of our partners to provide financing in China. We may consider a full range of financing options in order to create the most value in the context of the increasing interest we are witnessing in our proprietary technology.

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 including retention of key personnel and consultants; (ii) successfully develop our licensing and related service businesses; (iii) negotiate and enter into new gasification plant development contracts and licensing agreements; (iv) make additional capital contributions to our joint ventures; (v) fund certain obligations as they become due; (vi) respond to competitive pressures or unanticipated capital requirements; or (vii) repay its indebtedness.

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 and cash flows.

We have developed two projects in China, the ZZ Joint Venture and the Yima Joint Ventures, and also have our Tianwo-SES Joint Venture. In addition, as part of our business strategy, we plan to enter into other joint ventures or similar transactions, including as part of our business verticals for power, steel and renewables, 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. For example, the ZZ Joint Venture facility is currently shut down due to Xuecheng Energy shutting down a one its coke oven units. In some cases, our joint venture partner has a contractual commitment to provide funding to the joint venture, although we do not have assurances that they will satisfy such obligations. We can give no assurances that Rui Feng will continue to make payments under the agreement to acquire our interests or to make payments to fund the repurposing and expansion of the ZZ Joint Venture facility, for example, Saikong has failed to make a required payment to us in December 2015 and a required payment to us on May 1, 2016. In addition, we are required under the ZZ Line of Credit Agreement to repay amount outstanding under the agreement on various dates beginning on May 16, 2016 through May 30, 2016, and then the ZZ Bank is required to reissue the notes unless a default is declared. Such a default could result from the failure by Rui Feng to make the additional contributions contemplated above, or from the fact the ZZ Joint Venture plant has been shut down since late October 2015 as described above. If the ZZ Bank fails to reissue the notes, as noted above, or declares an event of default, the ZZ Bank is entitled to exercise any and all remedies under the agreement. Continued economic uncertainty in China could also cause delays or make financing of operations more difficult. Any of these risks could reduce our revenues or increase our expenses, which could adversely affect our results of operations and cash flows.

Additionally, we are a minority owner in the Yima Joint Ventures, and we are relying on Yima to provide the management and operational support for the project. As a result, the success and timing of the Yima project will depend upon a number of factors that will be largely outside of our control and influence. As of June 1, 2013, we changed from the equity method of accounting for our investment in the Yima Joint Ventures to the cost method of accounting because we concluded that we are unable to exercise significant influence over the Yima Joint Ventures. Our conclusion regarding our lack of significant influence is based on our interactions with the Yima Joint Ventures related to the start-up and operations and due to various other circumstances including limited participation in operating and financial policymaking processes and our limited ability to influence technological decisions.  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.

There have been several possible breaches under the Tianwo-SES Joint Venture agreement by STT. The JV Contract may be terminated upon, among other things, (i) a material breach of the JV Contract which is not cured, (ii) a violation of the TUCA, (iii) the failure to obtain positive net income within 24 months of establishing the Tianwo-SES Joint Venture or (iv) mutual agreement of the parties. In addition to not having positive net income within 24 months of establishment, there have been other possible breaches of the JV Contract, including the failure of STT to make the required installment payment and possible failures to secure required approvals. The Company is continuing to review all of its options to remedy these issues. Failure to remedy these possible breaches could adversely affect our business, results of operations and cash flows.

Continued disruption in U.S. and international economic conditions and in the commodity and credit markets may adversely affect our business, financial condition and results of operation.

The global economy is currently experiencing a significant contraction, which has impeded our ability and the ability of our partners to obtain financing for our projects. This current decrease and any future decrease in economic activity in the United States, China or in other regions of the world in which we may in the future do business could significantly and adversely affect our results of operations and financial condition in a number of other ways. Any decline in economic conditions may reduce the demand or prices for the production from our plants. Our industry partners and potential customers and suppliers may also experience insolvencies, bankruptcies or similar events. In particular, the market for commodities such as methanol is under significant pressure and we are unsure of how much longer this will continue. As a direct result of these trends, our ability to finance and develop our existing projects, commence any new projects and sell our products may continue to be adversely impacted. In addition, the increased currency volatility could significantly and adversely affect our results of operations and financial condition. Any of the above factors could also adversely affect our ability to access credit or raise capital even if the capital markets improve.

Cyber security threats and our failure to protect our electronically stored data could adversely affect our business.

We store and maintain electronic information and data necessary to conduct our business. Data maintained in electronic form is subject to the risk of intrusion, tampering and theft. While we have adopted industry-accepted security measures and technology to protect the confidential and proprietary information, the development and maintenance of these systems is costly and require ongoing monitoring and updating as technologies change and efforts to overcome security measures become more sophisticated. As such, we may be unable to anticipate and implement adequate preventive measures in time. This may adversely affect our business, including exposure to government enforcement actions and private litigation, and our reputation with our partners and employees may be injured. In addition to Company-specific cyber threats or attacks, our business and results of operations could also be impacted by breaches affecting our peers and partners within our industry.

Our business depends on China’s economic growth and in particular as it relates to coal.

Our business and prospects depend on the rate of economic growth in China. The Chinese economy differs from the economies of most developed countries in many respects, including the amount of government involvement, level of development, growth rate, control of foreign exchange, and allocation of resources. Since 2008, China has been experiencing a slowdown in growth, which led to a reduction in economic activity. In particular, they are also scaling back capacity on coal production, which will directly impact certain of our joint venture partners, including Yima. We cannot provide any assurances as to how Yima or others will respond to this slowdown. Any prolonged slowdown of the Chinese economy generally, and continued contraction of the coal market specifically, in the future could have a material adverse effect on our business, financial condition and results of operations.

Our liquidity and capital resources are highly dependent on Chinese methanol prices.

The majority of our revenues for our ZZ Joint Venture Facility and Yima historically have been derived from the sale of methanol in China. Since we are no longer making methanol at our ZZ Joint Venture Facility, we will no longer be generating revenue from methanol production until we finish repurposing the facility. Since resuming operations in November 2015, Yima continues to recognize revenues from methanol sales, however we will not realize any liquidity until Yima is in a position to distribute profits. We do not have long term offtake agreements for these sales, so revenues fluctuate based on local market spot prices, which have been under significant pressure, and we are unsure of how much longer this will continue. Our liquidity is also negatively affected if the ZZ Joint Venture plant does not operate due to the reduced methanol pricing or, as is currently the case, the plant is shut down and will therefore have no revenues from methanol sales. Although we are considering various options for these gasifiers due to the pricing of methanol, including repurposing by moving them to a new location, there can be no assurances that we will be able to generate revenues by repurposing the facility or by selling the facility. Our revenues, liquidity and capital resources will be materially adversely affected if markets remain under pressure, and we are unable to obtain satisfactory prices for these commodities or if prospective buyers do not purchase these commodities.

We may be subject to future impairment losses due to potential declines in the fair value of our assets.

During the three months ended December 31, 2014, there was a significant decline in methanol prices in the China commodity market, which put significant pressure on our ZZ Joint Venture plant methanol production margins. As a result, we evaluated both operating assets for potential impairment as of December 31, 2014. Based on this evaluation, we determined that the $32 million carrying value of the ZZ Joint Venture facility was no longer entirely recoverable. Due to this impairment, we wrote down the value of the facility to its estimated fair value of $11 million and recognized an impairment expense of $20.9 million as of December 31, 2014. At December 31, 2015, Rui Feng did not make their second installment payment under the SPA, which we considered that an indicator of impairment. As such, in February 2016 we retained a third party valuation company to performed valuation on the ZZ Joint Venture facility. The results of the valuation indicated that there was no impairment at December 31, 2015. Future impairments may be required if payments under SPA are not received, and if we are unable to complete the repurposing and expansion of the facility.

In addition, the potential for future impairment at the Yima facility is increased during a period of economic uncertainty, including with respect to the current reduced pricing of methanol.

Should general economic, market or business conditions decline further, and continue to have a negative impact on our stock price or revenues, we may be required to record impairment charges in the future, which could materially and adversely affect financial condition and results of operation.

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.

Through the Tianwo-SES Joint Venture, we have partnered a significant portion of our China business with STT, a Chinese company which desires to invest into the growth of China’s clean energy space and which recognizes the opportunity afforded by our technology capability and business model.  We believe partnering with STT can accelerate the commercialization of our technology on a global basis and will enable us to reduce our capital requirements to achieve this acceleration. We are also seeking a partner for our technology vertical. 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, including partnering our technology vertical. Further, we cannot assure you that our joint venture partners, including STT, will grow the joint venture or effectively meet their development objectives and other obligations under the joint venture contracts. The termination of any relationship with an existing strategic partner, our failure to successfully partner our technology vertical, or the inability to establish additional strategic relationships may limit our ability to develop the Tianwo-SES Joint Venture, our projects, including the ZZ Joint Venture and Yima Joint Ventures and our marketing arrangement with GE and Midrex, and may have a material adverse effect on our business and financial condition.

We may not be successful developing our business strategies.

In addition to the completion of the Yima Joint Venture plant and the restart and repurposing of the ZZ Joint Venture plant via the Rui Feng partnership, we intend to focus on developing our business verticals and focus on the development of our Tianwo-SES Joint Venture.  Although we have begun to develop our power vertical through our relationship with GE and our DRI steel vertical with Midrex, we are still in the early stages of developing these verticals and many of the relationships with potential partners are still being cultivated. We are also seeking a partner for our technology vertical. We cannot provide assurance that we will be able to successfully develop our business verticals or to successfully grow the Tianwo-SES Joint Venture, which depends upon several factors, including the strength of global energy and chemical markets, commodity prices, the ability of our joint venture to timely perform their obligations, and the continued success of our ZZ Joint Venture Plant and Yima Joint Venture plant.  There can be no assurances that we will be able to succeed in these strategies and our inability to do so could have a material adverse effect on our business and results of operation.

Our results of operations and cash flows may fluctuate.

Our operating results and cash flows 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 and cash flows include: (i) the success of the Tianwo-SES, the Yima Joint Ventures and ZZ Joint Ventures; (ii) our ability to obtain new customers and retain existing customers; (iii) the cost of coal and electricity; (iv) the success and acceptance of our technology; (v) our ability to successfully develop our licensing business verticals for power, steel and renewables, as well as execute on our projects; (vi) the ability to obtain financing for our projects; (vii) shortages of equipment, raw materials or feedstock; (viii) approvals by various government agencies; (ix) the reduction or elimination of methanol sales; (x) the volatility of local Chinese methanol markets; and (xi) general economic conditions as well as economic conditions specific to the energy industry.

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

None

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures

Not Applicable.

Item 5. Other Information.

None.

Forward-Looking Statements

This Quarterly Report on Form 10-Q includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act. All statements other than statements of historical fact are forward-looking statements. Forward-looking statements are subject to certain risks, trends and uncertainties that could cause actual results to differ materially from those projected. Among those risks, trends and uncertainties are: the completion of the expansion and repurposing of our ZZ Joint Venture plant to produce acetic acid and propionic acid; our ability to successfully expand the ZZ joint venture through our partnership with Rui Feng; the ability of our project with Yima Coal Industry (Group) Co., Ltd. to produce earnings and pay dividends; our ability to develop and expand business of the Tianwo-SES Joint Venture in the joint venture territory; the continued shut down of the ZZ Joint Venture plant; our ability to successfully partner our technology business; our ability to develop our power business unit and marketing arrangement with GE and our other business verticals, including DRI steel, through our marketing arrangement with Midrex Technologies, and renewables; our ability to successfully develop our licensing business; events or circumstances which result in an impairment of assets, including, but not limited to, at our ZZ Joint Venture; our ability to reduce operating costs; our ability to timely complete our proposed projects with Chalco; our ability to make distributions and repatriate earnings from our Chinese operations; our limited history, and viability of our technology; commodity prices, including in particular methanol, and the availability and terms of financing; our ability to obtain the necessary approvals and permits for future projects; our ability to raise additional capital, if any, and our ability to estimate the sufficiency of existing capital resources; the sufficiency of internal controls and procedures; and our results of operations in countries outside of the U.S., where we are continuing to pursue and develop projects. 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 by us. 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-Q, the words “expect,” “anticipate,” “intend,” “plan,” “believe,” “seek,” “estimate” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. Because these forward-looking statements involve risks and uncertainties, actual results could differ materially from those expressed or implied by these forward-looking statements for a number of important reasons, including those discussed under “Risk Factors” in our Annual Report on Form 10-K for the year ended June 30, 2015, as well as in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and elsewhere in this Form 10-Q.

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

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

Item 6. Exhibits

_____________________________

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.

46