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| SYMX > SEC Filings for SYMX > Form 10-Q on 11-May-2009 | All Recent SEC Filings |
11-May-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;
(ii) debt service related to the HH Joint Venture; and (iii) working capital
and general corporate purposes. However, we intend to minimize any further
development on 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.
• 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.
• 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.
• 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.
• 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).
Results of Operations
We are in our development stage and therefore have had limited operations. We
have sustained net losses of approximately $68.1 million from November 4, 2003,
the date of our inception, to March 31, 2009. We have primarily financed our
operations to date through private placements and two public offerings of our
common stock.
Three Months Ended March 31, 2009 Compared to Three Months Ended March 31, 2008
Revenue. Product sales were $0.1 million and $40,000 for the three months
ended March 31, 2009 and 2008, respectively, and were derived from the sale of
syngas and by-products produced at the HH Joint Venture plant. The plant's
initial syngas sales commenced in February 2008. Although the HH Joint Venture
began to invoice Hai Hua for the energy and capacity fees after declaring
commercial operations status in December 2008, Hai Hua has not yet paid, nor has
the HH Joint Venture recognized revenue for, such fees due to uncertainties
regarding the syngas quality component requirements. During the three months
ended March 31, 2009, the plant was only operating for approximately 13% of the
period due to an unscheduled maintenance outage, repairs related to a power
outage, a local area government industrial inspection, and scheduled maintenance
by Hai Hua.
Project development fees were $0.3 million for the three months ended
March 31, 2009 and were earned upon completion of the Otter Creek project
pre-feasibility study for NAC.
Cost of sales and plant operating expenses. Cost of sales and plant operating
expenses increased $0.7 million to $0.9 million for the three months ended
March 31, 2009 compared to $0.2 million for the three months ended March 31,
2008 and were comprised principally of coal consumption, electricity,
maintenance and other operating costs at the HH Joint Venture plant. Although
the plant shut-down for much of the quarter, operating costs increased due
principally to utilities, payroll, coal consumption, and maintenance costs. The
plant's initial operations commenced in February 2008.
General and administrative expenses. General and administrative expenses were
$3.8 million for the three months ended March 31, 2009 and 2008 and were
comprised principally of employee compensation costs, professional fees, travel
and other operating expenses. The 2009 quarter included workforce and other cost
reductions which reduced general and administrative expenses by 19% as compared
to the quarter ended December 31, 2008.
Project and technical development expenses. Project and technical development
expenses decreased $1.4 million to $0.3 million for the three months ended
March 31, 2009 compared to $1.7 million for the three months ended March 31,
2008. The decrease was primarily due the decline in U.S. development activities
as a result of economic conditions. Expenses for the quarter ended March 31,
2009 related principally to our YIMA project. Expenses for the quarter ended
March 31, 2008 related to our projects with CONSOL, Hai Hua, Golden Concord and
the amortization of $1.25 million of the GTI facility reservation and use fee
for calendar year 2008.
Stock-based compensation expense. Stock-based compensation expense was a
credit of $1.8 million for the three months ended March 31, 2009 compared to
expense of $1.7 million for the three months ended March 31, 2008. The 2009
quarter included a reduction of approximately $3.4 million due to the reversal
of previously recognized expense due to forfeitures related to cancellations of
certain executive employee's stock option awards offset, in part, with
incremental compensation cost related to modifications resulting from the option
exchange program.
Depreciation and amortization. Depreciation and amortization increased
$0.4 million to $0.7 million for the three months ended March 31, 2009 compared
to $0.3 million for the three months ended March 31, 2008. The increase was due
principally to a full quarter of depreciation expense during the 2009 quarter
for the HH Joint Venture plant which started operating during the 2008 quarter.
Interest income. Interest income increased $0.1 million to $0.2 million for
the three months ended March 31, 2009 compared to $0.1 million for the three
months ended March 31, 2008. The increase was due to higher cash and cash
equivalent balances for the 2009 quarter offset, in part, by lower yields earned
on investments.
Interest expense. Interest expense increased $0.1 million to $0.2 million for
the three months ended March 31, 2009 compared to $0.1 million for the three
months ended March 31, 2008. The increase was due principally to a full quarter
of interest expense during the 2009 quarter. Prior to the commissioning of the
HH Joint Venture plant in January 2008, the interest expense for the HH Joint
Venture loan was capitalized.
Minority interest. Minority interest decreased $0.2 million to $8,000 for the
three months ended March 31, 2009 compared to $0.2 million for the three months
ended March 31, 2008. The decrease was principally due to Hai Hua's interest in
the operating losses of the HH Joint Venture exceeding its equity contribution
during the 2009 quarter.
Nine Months Ended March 31, 2009 Compared to Nine Months Ended March 31, 2008
Revenue. Product sales increased $0.6 million to $0.7 million for the nine
months ended March 31, 2009 compared to $40,000 for the nine months ended
March 31, 2008 and were derived from the sale of syngas and by-products produced
at the HH Joint Venture plant. The plant's initial syngas sales commenced in
February 2008. Although the HH Joint Venture began to invoice Hai Hua for the
energy and capacity fees after declaring commercial operations status in
December 2008, Hai Hua has not yet paid, nor has the HH Joint Venture recognized
revenue for, such fees due to uncertainties regarding the syngas quality
component requirements. During the three months ended March 31, 2009, the plant
was only operating for approximately 13% of the period due to an unscheduled
maintenance outage, repairs related to a power outage, a local area government
industrial inspection, and scheduled maintenance by Hai Hua.
Project development fees were $0.3 million for the nine months ended
March 31, 2009 and were earned upon completion of the Otter Creek project
pre-feasibility study for NAC.
Cost of sales and plant operating expenses. Cost of sales and plant operating
expenses increased $5.0 million to $5.2 million for the nine months ended
March 31, 2009 compared to $0.2 million for the nine months ended March 31, 2008
and were comprised principally of coal consumption, electricity, maintenance and
other operating costs at the HH Joint Venture plant. The plant's initial
operations commenced in February 2008. Costs were higher during the 2009 period
due to the plant operating for a longer period of time and due to costs incurred
to enable the plant to declare commercial operations status.
General and administrative expenses. General and administrative expenses
increased $4.6 million to $13.1 million for the nine months ended March 31, 2009
compared to $8.5 million for the nine months ended March 31,
2008. The increase was primarily due to an increase in employee compensation as
a result of increased staffing levels during the first six months of the 2009
period, professional fees, travel and other expenses. Our quarter ended
March 31, 2009 included workforce and other cost reductions which reduced
general and administrative expenses by 19% as compared to the quarter ended
December 31, 2008.
Project and technical development expenses. Project and technical development
expenses decreased $0.7 million to $2.2 million for the nine months ended
March 31, 2009 compared to $2.9 million for the nine months ended March 31,
2008. The 2009 period included 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. Based on current commodity prices and current financial
market conditions in the U.S., 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 $2.0 million due
primarily to a reduction in U.S project and technical development activities and
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.
Stock-based compensation expense. Stock-based compensation expense decreased
$2.3 million to $1.6 million for the nine months ended March 31, 2009 compared
to $2.9 million for the nine months ended March 31, 2008. The 2009 period
included a reduction of approximately $3.4 million due to the reversal of
previously recognized expense due to forfeitures related to cancellations of
certain executive employee's stock option awards offset, in part, with
incremental compensation cost related to modifications resulting from the option
exchange program.
Depreciation and amortization. Depreciation and amortization increased
$1.7 million to $2.2 million for the nine months ended March 31, 2008 compared
to $0.5 million for the nine months ended March 31, 2008. 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 $1.5 million to $1.7 million for
the nine months ended March 31, 2009 compared to $0.2 million for the nine
months ended March 31, 2008. The increase was primarily due to interest income
from higher cash balances due to investment of the proceeds from an equity
offering completed in June 2008.
Interest expense. Interest expense increased $0.7 million to $0.8 million for
the nine months ended March 31, 2009 compared to $0.1 million for the nine
months ended March 31, 2008. Prior to the commissioning of the HH Joint Venture
plant in January 2008, the interest expense for the HH Joint Venture loan was
capitalized.
Minority interest. Minority interest increased $0.4 million to $0.7 million
for the nine months ended March 31, 2009 compared to $0.3 million for the nine
months ended March 31, 2008. 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 March 31, 2009
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. We
contributed $21.1 million in equity capital and Hai Hua contributed $480,000 in
equity capital. We are in the process of implementing operational measures and
evaluating strategies to reduce losses and improve the cash flows of the HH
Joint Venture. 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 March 31, 2009, 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 the Industrial and Commercial Bank of China
("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 was 7.11% and is adjusted annually based upon the standard rate announced each year by the People's Bank of China. As of March 31, 2009, the applicable interest rate was 5.94%. 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.
As of March 31, 2009, the HH Joint Venture is in compliance with all
covenants and obligations under the Fixed Asset Loan Contract.
The plant produced its first syngas in December 2007 and initial syngas sales
commenced in February 2008. Due to recent worldwide reductions in methanol
prices, Hai Hua is operating at a reduced rate of syngas consumption. Hai Hua is
forecasting the use of approximately 35% to 45% of the syngas guarantee capacity
for the remainder of calendar 2009.
The HH Joint Venture began to invoice Hai Hua for the energy and capacity
fees after declaring commercial operations in December 2008, Hai Hua has not yet
paid such fees nor have we recognized these revenues due to differing
interpretations between Hai Hua and the HH Joint Venture regarding certain
syngas quality components requirements under the contract. During the three
months ended March 31, 2009, the plant was only operating for approximately 13%
of the period. The downtime was due to an unscheduled maintenance outage,
repairs related to a power outage,
a local area government industrial inspection, and scheduled maintenance by Hai
Hua. A significant increase in the percentage of operating time is expected
beginning in May 2009.
Based on these events, in April 2009, the HH Joint Venture entered into a
Supplementary Agreement (the "Supplementary Agreement") with Hai Hua, amending
the terms of the purchase and sales contract. The Supplementary Agreement was
entered into to provide more clarity regarding the required syngas quality and
volume to be delivered, recovery of the energy fee during turndown periods and
operations coordination during unscheduled outages. Under the Supplementary
Agreement, the syngas quality specification has been amended to provide more
clarity as to the minor constituents allowable in the syngas. For purposes of
the contract, syngas that meets these specifications is deemed "compliant gas"
and syngas that does not meet these specifications is deemed "non-compliant
gas." The Supplementary Agreement also adds a requirement for Hai Hua to pay the
joint venture the capacity fee and 70% of the energy fee for all non-compliant
gas which is taken by Hai Hua. However, if more than 50% of the syngas taken by
Hai Hua during any operating day is non-compliant gas, all of the syngas for
that day is deemed to be non-compliant gas for purposes of calculating the
energy fee. In addition, the Supplementary Agreement accommodates periods of
turndown operation by Hai Hua by establishing a minimum threshold gas off take
volume of 7,500 Ncum per hour of net syngas for the purpose of calculating the
energy fee during such periods. The Supplementary Agreement also provides that,
to the extent Hai Hua has an unscheduled shutdown, and the plant continues to
operate on standby during such period, Hai Hua is still required to pay the
energy fee to the joint venture. In the event that the plant has an unscheduled
shutdown and does not provide at least three hours prior notice to Hai Hua, the
joint venture may be required to provide certain compensation to Hai Hua.
In order to make up for the expected reduced energy fee and take advantage of
current excess oxygen capacity, we have entered into an agreement with Hai Hua
whereby Hai Hua will purchase excess oxygen generated by the plant.
Additionally, we have entered into a non-binding letter of intent with another
potential customer to evaluate the feasibility of syngas sales to their nearby
facility.
Other than the $0.3 million of project development fees revenue recognized
during the three months ended March 31, 2009, our operations in China through
the HH Joint Venture accounted for all of its revenue for the three months and
nine months ended March 31, 2009, and Hai Hua is currently our sole customer for
syngas. In addition, the operations in China accounted for $43.6 million of the
$44.6 million of long-lived assets, which consisted of construction-in-progress
and property, plant and equipment, net of accumulated depreciation.
We are in the process of implementing operational measures, pursuing
additional syngas customers and evaluating strategies to reduce the HH Joint
Venture's losses and improve its cash flows. If we are not successful in
improving the HH Joint Venture's profitability, or if management's estimated
cash flow projections for these assets significantly decrease, or if Hai Hua
does not make its required payments, the plant's assets could be impaired. As of
March 31, 2009, we have determined that these assets were not impaired.
YIMA Joint Venture
In April 2009, we entered into updated joint venture contracts with YIMA Coal
Industry (Group) Co., Ltd. ("YIMA"), replacing the prior joint venture contracts
entered into during the quarter ended December 31, 2008. The joint venture was
formed to develop a coal gasification plant in Henan Province, China. The new
agreements create separate joint ventures for each of the gasification,
methanol/methanol protein production, and utility island components of the
plant. We obtained government approvals for the project's feasibility study
during the three months ended December 31, 2008 and for the project's
environmental impact assessment during the three months ended March 31, 2009,
which are the two key approvals required to proceed with the project. In
exchange for their capital contributions, we will own a 49% interest in each
joint venture and YIMA will own a 51% interest. The project scope has been
revised such that when phase one is completed, the plant is expected to have an
annual capacity of 300,000 tonnes of refined methanol. The parties are planning
two future phases of coal gasification projects at this location. Phase two is
expected to add additional capacity of 300,000 tonnes of refined methanol or
methanol equivalent products, and phase three is expected to add additional
capacity of 600,000 tonnes of refined methanol or methanol equivalent products.
Refined methanol is the main feedstock for methanol protein and the approvals to
date have related to methanol protein production which has not yet been proven
to be a commercially viable technology. We intend to sell methanol as the
primary product from the project and sell methanol protein from a small scale
demonstration unit in the project. We and YIMA intend to obtain the business
license and related permits for both methanol and methanol protein production.
There may be delays in the project if we are unable to obtain these permits.
Additionally, YIMA has identified an operating coal mine that would supply coal to the project and the parties are in discussions to acquire the coal mine . . .
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