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| SYMX > SEC Filings for SYMX > Form 10-K on 21-Sep-2009 | All Recent SEC Filings |
21-Sep-2009
Annual Report
You should read the following discussion and analysis of our financial condition
and results of operations together with our consolidated financial statements
and the related notes and other financial information included elsewhere in this
annual report. Some of the information contained in this discussion and analysis
or set forth elsewhere in this annual report, including information with respect
to our plans and strategy for our business and related financing, includes
forward-looking statements that involve risks and uncertainties. You should
review the "Risk Factors" section of this annual report for a discussion of
important factors that could cause actual results to differ materially from the
results described in or implied by the forward-looking statements contained in
the following discussion and analysis.
Business Overview
We are in our development stage and therefore have had limited operations. We
build, own and operate coal gasification plants that utilize our proprietary
U-GAS® fluidized bed gasification technology to convert low rank coal and coal
wastes into higher value energy products. We believe that we have several
advantages over commercially available competing gasification technologies, such
as entrained flow and fixed bed, including our ability to use all ranks of coals
(including low rank, high ash and high moisture coals, which are significantly
cheaper than higher grade coals), many coal waste products and biomass feed
stocks, which provide greater fuel flexibility, and our ability to operate
efficiently on a smaller scale, which enables us to construct plants at a lower
capital cost thus enabling us to be a lower cost producer of syngas for energy
products.
Our principal business activities are currently focused in China. Our first
commercial scale coal gasification plant is located in Shandong Province, China
and has been in operation since the three months ended March 31, 2008. We have
additional projects in various stages of development in Henan Province, China
and in the Inner Mongolia Autonomous Region of China. During the year ended
June 30, 2009, we also investigated opportunities in Mississippi and North
Dakota with North American Coal, or NAC. However, based on current commodity
prices and current financial market conditions in the U.S., we do not expect
projects in the U.S. will be a viable development option for us in the near
term.
Our gasification plants can produce synthesis gas, or syngas, a mixture of
hydrogen, carbon monoxide and other products. Depending on local market need and
fuel sources, syngas can in turn be used to produce many products including
methanol, dimethyl ether, or DME, glycol, synthetic natural gas, or SNG,
ammonia, synthetic gasoline, steam, power and other byproducts (e.g., sulphur,
carbon dioxide or ash).
Our business strategy includes the following elements:
• Improve the profitability and cash flows of the HH Joint Venture plant. We
are in the process of implementing operational measures and evaluating
strategies to reduce the HH Joint Venture's losses and improve its
financial performance, including the possible expansion of the plant to
produce other products and through the sharing of certain costs with Hai
Hua.
• Execute on projects in China currently under development. We intend to leverage our success to date at the HH Joint Venture in our ongoing business development efforts. Our projects under development are also expected to have a significant impact on our business development efforts and financial results once they are completed and producing. We also believe that our Yima Joint Venture will help to demonstrate our ability to expand into increasingly larger projects and new product markets.
• 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) general and administrative expenses;
(ii) project and technical development expenses; (iii) debt service
related to the HH Joint Venture; and (iv) 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 on a global basis with a focus on China, India, the U.S. and Australia due to their large low rank coal resources. 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 and new products. China is presently our primary market, where our efforts have been focused primarily on facilities producing syngas, methanol and DME. We plan to expand our relationships with our current partners, develop new relationships with strategic partners and develop new downstream coal-to-chemicals and coal-to-energy products.
• 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 eight 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, coal waste or biomass to utilize as fuel.
Results of Operations
We are in our development stage and therefore have had limited operations. We
have sustained net losses of approximately $74.7 million from November 4, 2003,
the date of our inception, to June 30, 2009. We have primarily financed our
operations to date through private placements and two public offerings of our
common stock.
Year Ended June 30, 2009 Compared to Year Ended June 30, 2008
Revenue. Product sales increased by $1.7 million to $1.9 million for the year
ended June 30, 2009 compared to $0.2 million for the year ended June 30, 2008
and were derived from the sale of syngas and byproducts produced at the HH Joint
Venture plant. The plant's initial syngas sales commenced during the three
months ended March 31, 2008. Product sales of $1.2 million were recognized
during the three months ended June 30, 2009 as the plant operated for
approximately 60% of the period and was available for production for
approximately 95% of the period. Although the plant declared commercial
operations in December 2008, Hai Hua did not begin paying the HH Joint Venture
for the energy and capacity fees until May 2009 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
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 year ended June 30, 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 by $5.0 million to $7.4 million for the year ended June 30,
2009 compared to $2.4 million for the year ended June 30, 2008 and were
comprised principally of coal consumption, electricity, maintenance and other
operating costs at the HH Joint Venture plant. The plant's initial operations
commenced during the three months ended March 31, 2008. Costs were higher during
the year ended June 30, 2009 due to the plant operating for a longer period of
time and due to costs incurred to enable the plant to declare commercial
operations status in December 2008.
General and administrative expenses. General and administrative expenses
increased by $3.3 million to $16.4 million for the year ended June 30, 2009
compared to $13.1 million for the year ended June 30, 2008. The increase was
primarily due to an increase in employee compensation as a result of increased
staffing levels during the first half of fiscal 2009, professional fees, travel
and other expenses. During the second half of fiscal 2009, we made significant
workforce and other cost reductions which reduced general and administrative
expenses by 24% as compared to the first half of fiscal 2009. General and
administrative expenses included our internal project development and
engineering staffing costs which have supported development of our Yima project
and other projects.
Project and technical development expenses. Project and technical development
expenses decreased by $2.1 million to $3.5 million for the year ended June 30,
2009 compared to $5.6 million for the year ended June 30, 2008. The 2009 period
included a $1.25 million impairment loss on a royalty deposit paid to ExxonMobil
during the three months ended December 31, 2008 and a non-cash charge to
write-off the $1.25 million remaining carrying value of the reservation and use
fee paid to GTI. 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., we have not utilized, and do not anticipate utilizing, GTI's
facility during calendar year 2009. Excluding the effect of these charges,
project and technical development expenses decreased by approximately
$4.6 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 Yima project, the feasibility study with NAC
for the development of a coal-based gasification facility at NAC's proposed
Otter Creek Mine in North Dakota which has been suspended 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 by
$4.1 million to $1.9 million for the year ended June 30, 2009 compared to
$6.0 million for the year ended June 30, 2008. For the year ended June 30, 2009,
stock-based compensation expense included a reduction of approximately
$4.8 million due to the reversal of previously recognized expense due to
forfeitures related to cancellations of terminated employees' stock option
awards. This decrease was offset, in part, with incremental compensation cost
related to modifications resulting from the stock option exchange program and
additional stock option awards granted during 2009.
Depreciation and amortization. Depreciation and amortization increased by
$1.7 million to $2.9 million for the year ended June 30, 2009 compared to
$1.2 million for the year ended June 30, 2008. The increase was due principally
to commencing depreciation of the HH Joint Venture plant during the quarter
ended March 31, 2008.
Interest income. Interest income increased by $1.3 million to $1.7 million for
the year ended June 30, 2009 compared to $0.4 million for the year ended
June 30, 2008. The increase was primarily due to interest income from higher
cash balances due to investment of the proceeds from an equity offering
completed in June 2008. The yields earned on our investments have decreased
significantly over fiscal 2009 due to market conditions.
Interest expense. Interest expense increased by $0.6 million to $1.0 million for
the year ended June 30, 2009 compared to $0.4 million for the year ended
June 30, 2008. Prior to the commissioning of the HH Joint Venture plant in
January 2008, the interest expense for the HH Joint Venture loan was
capitalized.
Minority interest. Minority interest increased by $0.1 million to $0.7 million
for the year ended June 30, 2009 compared to $0.6 million for the year ended
June 30, 2008. The increase was due to recognizing our joint venture partners'
interests in the operating losses of the GC Joint Venture and the HH Joint
Venture during the period.
Year Ended June 30, 2008 Compared to Year Ended June 30, 2007
Revenue. We had $0.3 million in revenue during the year ended June 30, 2008 and
none during the year ended June 30, 2007. Revenue during the year ended June 30,
2008 was comprised of $0.2 million of syngas sales produced at the HH Joint
Venture plant in China and $0.1 million of revenue from project development
fees.
Cost of sales and plant operating expenses. There were $2.4 million of costs of
sales and plant operating expenses the year ended June 30, 2008 and none during
the year ended June 30, 2007. Cost of sales and plant operating expenses during
the year ended June 30, 2008 were comprised principally of coal consumption,
electricity, maintenance and other operating costs at the HH Joint Venture
plant.
General and administrative expenses. General and administrative expenses
increased by $7.5 million to $13.1 million for the year ended June 30, 2008
compared to $5.6 million for the year ended June 30, 2007. The increase was
primarily due to an increase in salaries and incentive wages as a result of
increased staffing levels, and to a lesser extent, an increase in travel
expenses associated with activities in China, investor relations expenses,
outside consulting and accounting fees incurred in connection with
Sarbanes-Oxley Act compliance requirements and legal fees.
Project and technical development expenses. Project and technical development
expenses increased by $4.5 million to $5.6 million during the year ended
June 30, 2008 compared to $1.1 million during the year ended June 30, 2007 due
to expenditures related to our projects with CONSOL, Hai Hua and 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 decreased by
$0.6 million to $6.0 million during the year ended June 30, 2008 compared to
$6.6 million during the year ended June 30, 2007. The decrease was due to the
partial immediate vesting of options granted to certain members of senior
management in prior periods.
Depreciation and amortization. Depreciation and amortization increased by
$1.0 million to $1.2 million for the year ended June 30, 2008 compared to
$0.2 million for the year ended June 30, 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 decreased by $0.1 million to $0.4 million
during the year ended June 30, 2008 from $0.5 million during the year ended
June 30, 2007. The decrease was primarily due to lower effective interest rates
partially offset by higher interest income from higher cash balances due to
investment of the proceeds from equity offerings during the year.
Interest expense. Interest expense was $0.4 million for the year ended June 30,
2008 and none for the year ended June 30, 2007. Prior to the HH Joint Venture
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 Hai Hua plant was commissioned in January 2008.
Interest on the ICBC loan has been expensed from that point forward.
Minority interest. Minority interest increased by $0.6 million to $0.6 million
for the year ended June 30, 2008 compared to $37,000 for the year ended June 30,
2007. The increase was due to recognizing our joint venture partners' interests
in the operating losses of the GC Joint Venture and the HH Joint Venture during
the period.
Liquidity and Capital Resources
We are in our development stage and have financed our operations to date through
private placements of our common stock in 2005 and 2006 and two public
offerings, one in November 2007 and one in June 2008. We have used the proceeds
of these offerings for the development of our joint ventures in China and to pay
other development and general and administrative expenses. In addition, we have
entered into a loan agreement with ICBC to fund certain of the costs of the HH
Joint Venture.
As of June 30, 2009, we had $90.4 million in cash and cash equivalents and
$82.1 million of working capital available to us. During the year ended June 30,
2009, cash flows used in operating activities were $26.7 million. In
August 2009, we invested $29.3 million of our cash into the Yima Joint Ventures.
At current levels, we expect to incur general and administrative expenses of
approximately $10.0 to $11.0 million during fiscal 2010. We are also funding the
working capital, operating losses and debt service of the HH Joint Venture. The
following summarizes the uses of equity capital and debt with respect to our
projects.
HH 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. The
plant produces and sells syngas and the various byproducts 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 have
contributed $22.6 million in equity capital and Hai Hua has contributed
$0.5 million in equity capital. The plant produced initial syngas and syngas
sales commenced during the three months ended March 31, 2008. The plant was
built on a site adjacent to the Hai Hua coke and methanol facility. Hai Hua has
granted rights of way for construction access and other ongoing operations of
the plant. The land for the construction of this plant was acquired from the
Chinese government with the assistance of the Shandong Xue Cheng Economic
Development Zone.
For the first 20 years after the date that the plant became operational, 95% of
all net profits of the HH Joint Venture will be distributed to us. After the
initial twenty years, the profit distribution percentages will be changed, with
us receiving 10% of the net profits of the HH Joint Venture and Hai Hua
receiving 90%. The contract has a term of 50 years, subject to earlier
termination if the HH Joint Venture either files for bankruptcy or becomes
insolvent or if the syngas purchase contract between the HH Joint Venture and
Hai Hua (discussed in more detail below) is terminated. Hai Hua has also agreed
that the License Agreement is our sole property and that it will not compete
with us with respect to fluidized bed gasification technology for the term of
the HH Joint Venture.
The HH Joint Venture plant operated at limited capacity for a significant part
of fiscal 2009 and is expected to continue operating at reduced capacity due to
the depressed methanol market. The reduced capacity at the HH Joint Venture
plant has contributed to the plant's operating losses. In addition to funding
these operating losses, we are funding the working capital and debt service for
the HH Joint Venture. We are in the process of implementing operational
measures, pursuing additional customers and evaluating strategies to reduce the
HH Joint Venture's losses and improve its financial performance including the
possible expansion of the plant to produce other products. If an expansion of
the HH Joint Venture plant were to be developed, we would expect to contribute
our interest in the HH Joint Venture to the project without significant
additional cash investment by us. 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 June 30,
2009, we estimated projected cash flows for the plant and based on this we have
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 is adjusted annually based upon the standard rate announced each year by the People's Bank of China. As of June 30, 2009, the applicable interest rate was 5.94% and is payable monthly;
• Principal payments of $1.1 million are due in March and September of each year beginning on September 22, 2008 and ending on March 21, 2014;
• Hai Hua is the guarantor of the entire loan;
• Assets of the HH Joint Venture are pledged as collateral for the loan;
• Covenants include, among other things, prohibiting pre-payment without the consent of ICBC and permiting ICBC to be involved in the review and inspection of the Hai Hua plant; and
• 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 June 30, 2009, the HH Joint Venture is in compliance with all covenants
and obligations under the Fixed Asset Loan Contract.
The plant produced initial syngas, and syngas sales commenced, during the three
months ended March 31, 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.
Although the plant declared commercial operations in December 2008, Hai Hua did
not begin paying the HH Joint Venture for the energy and capacity fees until
May 2009 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. During
the three months ended June 30, 2009, the plant operated for approximately 60%
of the period, was available for production for approximately 95% of the period,
and met Hai Hua's syngas demand and quality requirements for approximately 98%
of the time it was operating.
Based on these events, in April 2009, the HH Joint Venture entered into 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 HH 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 HH
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 HH Joint Venture
may be required to provide certain compensation to Hai Hua.
In an effort to reduce operating costs, the HH Joint Venture entered into an
additional agreement with Hai Hua in May 2009 whereby the cost of operating the
plant's air separation unit, or ASU, can be shared between the two parties based
on the oxygen consumption of the respective parties over the relevant period.
The HH Joint Venture began to provide oxygen and nitrogen to Hai Hua in
September 2009. This cost sharing arrangement is expected to reduce operating
costs of both the HH Joint Venture and Hai Hua by allowing the parties to
operate only one ASU instead of both parties operating their respective ASU's at
low capacity.
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 Yima Joint Ventures were formed 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 were the two key approvals required to proceed with the project. The
amended joint venture contracts provide that: (i) we and Yima contribute equity
of 25% and 75%, respectively, to the Yima Joint Ventures; (ii) if debt financing
is not available to the project, 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. As a result of these
provisions, we and Yima have contributed our remaining equity contributions of
$29.3 million and $90.8 million, respectively, to the Yima Joint Ventures. In
the first fiscal quarter of 2010, we will incur a charge of $0.9 million
relating to consulting fees paid in connection with the closing and funding of
the Yima project.
In exchange for our 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.
. . .
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