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| SYMX > SEC Filings for SYMX > Form 10-Q on 9-Feb-2009 | All Recent SEC Filings |
9-Feb-2009
Quarterly Report
• Managing further project development in China based on available capital.
Based on our current focus on developing our projects in China, we plan to
use our available cash for (i) equity contributions to our YIMA project,
if constructed (currently estimated to be approximately $40 to
$60 million); (ii) debt service related to the HH Joint Venture; and
(iii) working capital and general corporate purposes. However, we do not
intend to develop any further projects or move ahead on any acquisitions
until we have assurances that acceptable financing is available to
complete the project. Until the capital markets improve, our strategy will
be to operate using our current capital resources.
• Leverage our proprietary technology. We intend to place increased focus on development of licensing arrangements for our proprietary U-GAS® technology. We anticipate that we can generate revenues through licensing fees and royalties on products sold by our licensees that incorporate our proprietary technology without incurring the significant capital costs required to develop a plant.
• Expand our relationships with our strong strategic partners for project development.China is presently our primary market, where our efforts have been focused primarily on facilities producing syngas, methanol and DME. We have also focused on expanding our relationship with our current partners, and developing new relationships with strategic partners in the key coal-to-chemicals regions of China. We are also working with partners that control coal and coal waste resources to develop projects in the United States that focus on methanol, ammonia, SNG and synthetic gasoline markets.
• Concentrate our efforts on opportunities where our U-GAS® technology provides us with a clear competitive advantage. We believe that we have the greatest competitive advantage using our U-GAS® technology in situations where there is a ready source of low rank, low cost coal or coal waste to utilize as fuel and the project scale is in our target size of up to 400 MW (equivalent).
• Continue to develop and improve U-GAS® technology. We are continually seeking to improve the overall plant availability, plant efficiency rates and fuel handling capabilities of the existing U-GAS® gasification technology. To date, we have filed six patent applications relating to improvements to the U-GAS® technology.
• Investigate acquisition opportunities. If we have the capital or financing is otherwise available, we plan to evaluate acquisition opportunities, including existing plants, facilities or coal mines, where we could enhance the economics with our U-GAS®technology.
Results of Operations
We are in our development stage and therefore have had limited operations. We
have sustained net losses of approximately $64.4 million from November 4, 2003,
the date of our inception, to December 31, 2008. We have primarily financed our
operations to date through private placements and two public offerings of our
common stock.
Three Months Ended December 31, 2008 Compared to Three Months Ended December 31,
2007
Revenue. Product sales were $0.5 million for the three months ended December 31,
2008 and were derived from the sale of syngas and by-products produced at the HH
Joint Venture plant in China. There was no revenue for the three months ended
December 31, 2007.
Cost of sales and plant operating expenses. Cost of sales and plant operating
expenses were $2.9 million for the three months ended December 31, 2008 and were
comprised principally of coal consumption, electricity, maintenance and other
operating costs at the HH Joint Venture plant in China. There were no cost of
sales and operating expenses for the three months ended December 31, 2007.
General and administrative expenses. General and administrative expenses
increased $2.4 million to $4.7 million for the three months ended December 31,
2008 compared to $2.3 million for the three months ended December 31, 2007. The
increase was primarily due to an increase in salaries as a result of increased
staffing levels in Houston and in China during the nine months ended
September 30, 2008, professional fees, severance costs associated with the
commencement of staffing reductions in our Houston office during the quarter
ended December 31, 2008, travel and other expenses.
Project and technical development expenses. Project and technical development
expenses increased $0.5 million to $1.4 million for the three months ended
December 31, 2008 compared to $0.9 million for the three months ended
December 31, 2007. The increase was primarily due to a non-cash charge to
write-off the $1.25 million remaining carrying value of the reservation and use
fee for GTI's Flex-Fuel Test Facility in Des Plaines, Illinois. The GTI
reservation and use fee was paid for with shares of our common stock during
fiscal 2008 to reserve the facility for calendar 2008 and 2009. Management does
not anticipate utilizing GTI's facility during calendar 2009. Excluding the
effect of this charge, project and technical development expenses decreased by
approximately $0.8 million due primarily to a $0.6 million reimbursement from
CONSOL Energy, Inc., or CONSOL, in full settlement of its cost-sharing
arrangement under our joint development agreement with CONSOL. Project and
technical development expense incurred during the period related principally to
the feasibility study with NAC for the development of a coal-based gasification
facility at NAC's proposed Otter Creek Mine in North Dakota and for the YIMA
joint venture project. We have an agreement with NAC wherein the Company will
earn a project development fee of $250,000 upon delivery of the Otter Creek
pre-feasibility study which management expects will occur during our fiscal
third quarter as discussed in more detail below under "Liquidity and Capital
Resources - North American Coal".
Stock-based compensation expense. Stock-based compensation expense increased
$0.1 million to $1.3 million for the three months ended December 31, 2008
compared to $1.2 million for the three months ended December 31, 2007. The
increase was due principally to a larger quantity of non-vested outstanding
stock options, offset, in part, by the reversal of previously recognized expense
due to stock option forfeitures during the three months ended December 31, 2008.
Depreciation and amortization. Depreciation and amortization increased
$0.6 million to $0.7 million for the three months ended December 31, 2008
compared to $0.1 million for the three months ended December 31, 2007. The
increase was due principally to commencing depreciation of the HH Joint Venture
plant during the quarter ended March 31, 2008.
Interest income. Interest income increased $0.7 million to $0.7 million for the
three months ended December 31, 2008 compared to $35,000 for the three months
ended December 31, 2007. The increase was primarily due to interest income from
higher cash balances and marketable securities due to investment of the proceeds
from an equity offering completed in July 2008.
Interest expense. Interest expense was $0.3 million for the three months ended
December 31, 2008 and there was no interest expense for the three months ended
December 31, 2007. During construction and prior to the HH Joint Venture's plant
being placed into service, interest expense related to the HH Joint Venture's
outstanding loan with the Industrial and Commercial Bank of China, or ICBC, was
capitalized. The HH Joint Venture's plant was commissioned in January 2008.
Minority interest. Minority interest increased $0.2 million to $0.3 million for
the three months ended December 31, 2008 compared to $0.1 million for the three
months ended December 31, 2007. The increase was due to recognizing our joint
venture partners' interests in the operating losses of the HH Joint Venture and
the GC Joint Venture during the period.
Six Months Ended December 31, 2008 Compared to Six Months Ended December 31,
2007
Revenue. Product sales were $0.6 million for the six months ended December 31,
2008 and were derived from the sale of syngas and by-products produced at the HH
Joint Venture plant in China. There was no revenue for the six months ended
December 31, 2007.
Cost of sales and plant operating expenses. Cost of sales and plant operating
expenses were $4.3 million for the six months ended December 31, 2008 and were
comprised principally of coal consumption, electricity, maintenance and other
operating costs at the HH Joint Venture plant in China. There were no cost of
sales and operating expenses for the six months ended December 31, 2007.
General and administrative expenses. General and administrative expenses
increased $4.6 million to $9.3 million for the six months ended December 31,
2008 compared to $4.7 million for the six months ended December 31, 2007. The
increase was primarily due to an increase in employee compensation as a result
of increased staffing levels during the nine months ended September 30, 2008,
professional fees, travel and other expenses resulting from our growth and
project development activities.
Project and technical development expenses. Project and technical development
expenses increased $0.7 million to $1.9 million for the six months ended
December 31, 2008 compared to $1.2 million for the six months ended December 31,
2007. The increase was primarily due to a non-cash charge to write-off the
$1.25 million remaining carrying value of the reservation and use fee for GTI's
Flex-Fuel Test Facility in Des Plaines, Illinois. The GTI reservation and use
fee was paid for with shares of our common stock during fiscal 2008 to reserve
the facility for calendar 2008 and 2009. Management does not anticipate
utilizing GTI's facility during calendar 2009. Excluding the effect of this
charge, project and technical development expenses decreased by approximately
$0.5 million due primarily to a $0.6 million reimbursement from CONSOL in full
settlement of its cost-sharing arrangement under our joint development agreement
with CONSOL. Project and technical development expenses incurred during the
period related principally to the feasibility study with NAC for the development
of a coal-based gasification facility at NAC's proposed Otter Creek Mine in
North Dakota, the YIMA joint venture project, and our project with CONSOL which
will not continue due to the expiration of the joint development agreement. We
have an agreement with NAC wherein the Company will earn a project development
fee of $250,000 upon delivery of the Otter Creek pre-feasibility study which
management expects will occur during our fiscal third quarter as discussed in
more detail below under "Liquidity and Capital Resources - North American Coal".
Stock-based compensation expense. Stock-based compensation expense increased
$1.2 million to $3.4 million for the six months ended December 31, 2008 compared
to $2.2 million for the six months ended December 31, 2007. The increase was due
principally to a larger quantity of non-vested outstanding stock options,
offset, in part, by the reversal of previously recognized expense due to stock
option forfeitures during the three months ended December 31, 2008.
Depreciation and amortization. Depreciation and amortization increased
$1.3 million to $1.5 million for the six months ended December 31, 2008 compared
to $0.2 million for the six months ended December 31, 2007. The increase was due
principally to commencing depreciation of the HH Joint Venture plant during the
quarter ended March 31, 2008.
Interest income. Interest income increased $1.4 million to $1.5 million for the
six months ended December 31, 2008 compared to $0.1 million for the six months
ended December 31, 2007. The increase was primarily due to interest income from
higher cash balances and marketable securities due to investment of the proceeds
from an equity offering completed in July 2008.
Interest expense. Interest expense was $0.5 million for the six months ended
December 31, 2008 and there was no interest expense for the six months ended
December 31, 2007. During construction and prior to the HH Joint Venture's plant
being placed into service during the three months ended March 31, 2008, interest
expense related to the HH Joint Venture's outstanding loan with ICBC was
capitalized. The HH Joint Venture's plant was commissioned in January 2008.
Minority interest. Minority interest increased $0.6 million to $0.7 million for
the six months ended December 31, 2008 compared to $0.1 million for the six
months ended December 31, 2007. The increase was due to recognizing our joint
venture partners' interests in the operating losses of the HH Joint Venture and
the GC Joint Venture during the period.
Liquidity and Capital Resources
We are in our development stage and have financed our operations to date through
private placements of our common stock in 2005 and 2006 and two public
offerings, one in November 2007 and one in June 2008. In calendar year 2005, we
issued 2,000,000 shares of common stock in a private placement for net proceeds
of $4.9 million. In August 2006, we issued 3,345,715 shares of common stock in a
private placement for net proceeds of $16.2 million. In November 2007, we
received net proceeds of $49.2 million from a public offering of 5,951,406
shares of our common stock at a price to the public of $9.00 per share. In
addition, in July 2008, we received net proceeds of $99.2 million from a public
offering in which we sold 11,500,000 shares of our common stock at a price to
the public of $9.25 per share. We have used the proceeds of these offerings for
the development of our joint ventures in China and to pay other development and
general and administrative expenses. In addition, we have entered into a loan
agreement to fund certain of the costs of the HH Joint Venture. The following
summarizes the uses of equity capital and debt as of December 31, 2008 with
respect to our projects.
Hai Hua Joint Venture
Our first project is the HH Joint Venture, through which we and Hai Hua
developed, constructed and are now operating a syngas production plant utilizing
U-GAS® technology in Zaozhuang City, Shandong Province, China designed to
produce approximately 28,000 standard cubic meters per hour of gross syngas. We
have also received government approvals for the expansion of the plant to a
production capacity of approximately 45,000 standard cubic meters per hour and
are presently in discussions with several potential partners regarding this
expansion. The plant produces and sells syngas and the various by-products of
the plant, including ash and elemental sulphur. Hai Hua, an independent producer
of coke and coke oven gas, owns a subsidiary engaged in methanol production. In
exchange for their respective ownership shares in the HH Joint Venture, we
contributed $9.1 million in equity capital, and Hai Hua contributed $480,000 in
equity capital. We are in process of evaluating strategies to reduce operating
costs of the HH Joint Venture which would reduce its losses and improve its cash
flows. If we are not successful in improving the HH Joint Venture's
profitability or if our estimated cash flow projections for these assets
significantly decrease, the plant's assets could be impaired. See "Outlook"
below. As of December 31, 2008, we determined that these assets were not
impaired.
On March 22, 2007, the HH Joint Venture entered into a seven-year loan agreement
and received $12.6 million of loan proceeds pursuant to the terms of a Fixed
Asset Loan Contract with ICBC to complete the project financing for the HH Joint
Venture. Key terms of the Fixed Asset Loan Contract with ICBC are as follows:
• Term of the loan is seven years from the commencement date (March 22,
2007) of the loan;
• Interest for the first year is 7.11% to be adjusted annually based upon the standard rate announced each year by the People's Bank of China. As of December 31, 2008, the applicable interest rate was 7.83%. Interest is payable monthly on the 20th day of each month;
• Principal payments of $1.1 million are due in March and September of each year beginning on September 22, 2008 and ending on March 21, 2014;
• Hai Hua is the guarantor of the entire loan;
• The assets of the HH Joint Venture are pledged as collateral for the loan;
• The HH Joint Venture agreed to covenants that, among other things, prohibit pre-payment without the consent of ICBC and permit ICBC to be involved in the review and inspection of the Hai Hua plant; and
• The loan is subject to customary events of default which, should one or more of them occur and be continuing, would permit ICBC to declare all amounts owing under the contract to be due and payable immediately.
The plant produced its first syngas in December 2007 and initial syngas sales
commenced in February 2008.
We are also party to a purchase and sale contract with Hai Hua for syngas
produced by the plant, whereby Hai Hua will pay us an energy fee and capacity
fee based on the syngas production. The syngas to be purchased by Hai Hua is
subject to certain quality component requirements set forth in the contract. In
late December 2008, the plant declared commercial operations status for purposes
of the purchase and sale agreement. The Company then began to invoice Hai Hua
for the energy and capacity fees. To date, we have charged Hai Hua based on
negotiated fees for any syngas purchased. Due to recent worldwide reductions in
methanol prices, Hai Hua is operating at a reduced rate of syngas consumption
and is forecasting to continue using approximately 40% of the syngas provided by
the HH Joint Venture for the remainder of 2009. However, Hai Hua will
nevertheless remain obligated to pay the full capacity fee to the HH Joint
Venture.
Golden Concord Joint Venture
The GC Joint Venture was established for the primary purposes of (i) developing,
constructing and operating a coal gasification, methanol and DME production
plant utilizing U-GAS® technology in the Xilinguole Economic and Technology
Development Zone, Inner Mongolia Autonomous Region, China and (ii) producing and
selling methanol, DME and the various byproducts of the plant, including fly
ash, steam, sulphur, hydrogen, xenon and argon. In exchange for their respective
ownership shares in the GC Joint Venture, we agreed to contribute $16.3 million
in cash, and Golden Concord agreed to contribute $16.0 million in cash. As of
December 31, 2008, we had funded a total of approximately $3.3 million of its
equity contribution and Golden Concord had funded approximately $3.1 million of
its equity contribution. We do not anticipate funding any further equity
contributions to the GC Joint Venture until acceptable financing can be obtained
for the project. Although we are continuing to work with Golden Concord on
financing alternatives for the project, we do not believe that debt financing is
readily available given existing market conditions. If we are not successful in
obtaining the necessary equity and debt financing for this project, our
investment in this project may become impaired. See "Outlook" below. As of
December 31, 2008, we determined that this asset was not impaired.
The current estimate of total required capital of the GC Joint Venture is
approximately $110.0 to $130.0 million, including the $32.0 million in cash to
be contributed by us and Golden Concord. Assuming that the GC Joint Venture is
successful in obtaining debt financing for this project, we and Golden Concord
have each agreed to guarantee any such project debt. We are required to
guarantee no less than 55% and no more than 60% of its debt, based on the
percentage of the debt which relates to the gasification processes of the plant,
and Golden Concord is required to guarantee the remainder. Each party is subject
to penalties under the GC Joint Venture contract if they are unable to perform
their guarantee obligations.
YIMA Project
In October 2008, we entered into a joint venture contract with YIMA Coal
Industry (Group) Co., Ltd., or YIMA. YIMA-SES New Energy Company Ltd., or the
YIMA Joint Venture, was formed to develop a coal gasification plant in Henan
Province, China which will feed the downstream process for the production of
transportation fuels and chemicals intermediates. Groundbreaking on the plant
occurred in late December 2008. The YIMA Joint Venture has received all
significant governmental approvals for the project and is also currently seeking
approval of its environmental impact assessment from the provincial government.
In addition, we have negotiated agreements with YIMA for the downstream facility
and a utility island. The utility island will include an air separation unit and
steam boilers that will supply utilities to both the gasification and downstream
facilities. In exchange for the capital contributions, we will own a 49%
interest in the joint venture and YIMA will own a 51% interest. The current
estimate of the total required capital of the project, including the downstream
facilities, is approximately $350 million, which would require an equity
investment of between $40 and $60 million by us. This estimate is based on a
possible reduction in the capacity of the project which is currently being
reviewed and which would result in a lower capital cost for the project. We are
also considering alternative sources of equity which would reduce our capital
contributions and percentage ownership interest in the project.
The capital contributions from us and YIMA are payable in installments, with the
first 20% due within 30 days of the receipt of final government approvals.
Further contributions will be made within two years of the date of the issuance
of such approvals, based on the construction schedule for the plant, or sooner
if required by the joint venture's lenders. Half of the total required capital
of the YIMA Joint Venture is expected to come from equity contributed by us and
YIMA, with the remaining capital to be provided by project debt to be obtained
by the YIMA Joint Venture. YIMA has agreed to guarantee any such project debt.
We expect this guarantee will allow debt financing to be obtained from domestic
Chinese banking sources. We have agreed to pledge to YIMA our ownership
interests in the YIMA Joint Venture as security for its obligations under any
project guarantee. We have received a loan commitment letter from the Yima City
branch of the Industrial and Commercial Bank of China which loans will represent
50% of the capital costs of the project. The final terms and conditions of the
loan will be determined by the bank. The YIMA Joint Venture will be governed by
a board of directors consisting of eight directors, four of whom will be
appointed by us and four of whom will be appointed by YIMA. The YIMA Joint
Venture will also have officers that are appointed by us, YIMA and/or the board
of directors pursuant to the terms of the joint venture contract. We and YIMA
shall share the profits, and bear the risks and losses, of the YIMA Joint
Venture in proportion to our respective ownership interests. The YIMA Joint
Venture has a term of 30 years which commences upon the receipt of final
government approvals.
In November 2008, coal testing for the YIMA project was successfully completed
at our Hai Hua plant utilizing coal from YIMA's Yaojin mine. The Yaojin mine's
coal is a reactive sub-bituminous coal containing approximately 33% ash. Our
U-GAS® technology showed excellent carbon conversions and high capacity
utilizations on this feedstock. This performance information will be utilized to
further define the gasifier design for the YIMA project.
Expiration of Development Agreement with CONSOL Energy
In October 2008, our joint development agreement with CONSOL expired according
to its terms; therefore, funding of the front-end engineering design package for
. . .
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