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, 2019 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.
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 and 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
ability that our proposed merger transaction with Australian Future Energy Pty
Ltd may be unable to obtain stockholder approval or satisfy the other conditions
to closing; the ability to achieve the necessary consents to acquire the
additional share of Batchfire Resources Pty Ltd; the ability of Batchfire ,
Australian Future Energy Pty Ltd , and Cape River Resources Pty Ltd management
to successfully grow and develop their Australian assets and operations,
including Callide, Pentland and the Gladstone Energy and Ammonia Project; the
ability of Batchfire to produce earnings and pay dividends; the ability of SES
EnCoal Energy sp. z o. o. management to successfully grow and develop projects,
assets and operations in Poland; our ability to raise additional capital; our
indebtedness and the amount of cash required to service our indebtedness; our
ability to find a partner for our technology business; our ability to develop
and expand business of the TSEC Joint Venture in the joint venture territory;
our ability to develop our business verticals, including DRI steel, through our
marketing arrangement with Midrex Technologies; our ability to successfully
develop our licensing business; our ability to continue as a going concern; the
ability of our project with Yima to produce earnings and pay dividends; the
economic conditions of countries where we are operating; events or circumstances
which result in an impairment of our assets; our ability to reduce operating
costs; our ability to make distributions and repatriate earnings from our
Chinese operations; our ability to maintain our listing on the NASDAQ Stock
Market; our ability to successfully commercialize our technology at a larger
scale and higher pressures; commodity prices, including in particular natural
gas, crude oil, methanol and power; the availability and terms of financing; our
customers' and/or our ability to obtain the necessary approvals and permits for
future projects; 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 be 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," "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.
27
Business Overview
Synthesis Energy Systems, Inc. (referred to herein as "we", "us", and "our"),
together with its wholly-owned and majority-owned controlled subsidiaries, is a
global clean energy company that owns proprietary technology, SES Gasification
Technology ("SGT"), for the low-cost and environmentally responsible production
of synthesis gas (referred to as "syngas"). Syngas is used to produce a wide
variety of high-value clean energy and chemical products, such as synthetic
natural gas, power, methanol, and fertilizer. Our current focus has been on
commercializing our technology both in China and globally through the regional
business platforms we have created with partners in Australia, via Australian
Future Energy Pty Ltd ("AFE"), in Poland, via SES EnCoal Energy sp. z o.o
("SEE") and in China, via Tianwo-SES Clean Energy Technologies Limited ("TSEC
Joint Venture").
SGT produces syngas that can provide a competitive alternative to other forms of
energy such as natural gas, LNG, crude oil and the conventional utilization of
coal in boilers for power generation. Our syngas can provide a lower cost energy
source in markets where coal, low quality coal, coal wastes, biomass and
municipal wastes are available and where natural gas, LNG, and crude oil are
expensive or constrained due to lack of infrastructure such as distribution
pipelines or power transmission lines, such as Australia, Asia, Eastern Europe
and parts of South America. In addition to the economic advantages, we believe
our syngas also provides an environmentally responsible option for the
manufacturing of chemical, hydrogen, industrial fuel gas and a cleaner option
for the generation of power from coal. We believe that our technology is well
positioned to be an important solution that addresses the market needs of a
changing global energy landscape.
Over the past twelve years, we have successfully commercialized SGT, primarily
through our efforts in China where, between 2006 and 2016, we invested in and
built two commercial scale gasification projects together with Chinese partners
and sub-licensed the SGT into three additional projects in China. In the
aggregate, we have completed five commercial scale industrial projects in China
over a ten-year period, in which the projects utilize twelve SES proprietary SGT
systems. These projects represent a total project level investment of
approximately $450 million. We believe the completion of these projects in China
propelled SGT into a globally recognized gasification technology.
In 2014, we undertook efforts to expand into other regions of the world and
created AFE, a joint venture with partners Ambre Investments PTY Limited
("Ambre") in Australia, and in 2017, created SEE in Poland, with its partners
from EnInvestments sp. z o.o. These regions are ideal locations for industrial
projects utilizing the SGT due to high energy prices and limited access to
affordable natural gas, combined with an abundance of low-quality, low-cost coal
resources, renewable biomass and municipal solid wastes.
Australia's lack of both domestic gas and a uniform energy policy has created a
shortage of reliable energy supply and rising consumer prices, creating a need
and demand for more environmentally friendly and cleaner energy solutions. AFE
was established for the purpose of building large-scale vertically integrated
projects using SGT to produce syngas used in manufacturing fuel gas, synthetic
natural gas, agricultural and other chemicals, transportation fuels, explosives
and for power generation and also to secure ownership positions in local
resources, such as coal and biomass. AFE is able to leverage the unique flexible
feedstock capability of SGT to build industrial projects with low production
costs that can also reduce carbon dioxide emissions and support Australian
industry and regional growth.
Since its formation, AFE has made significant commercial progress, creating
Batchfire Resources Pty Ltd ("BFR"), which acquired one of the largest operating
coal mines in Queensland, acquiring a coal resource mine development lease near
Pentland, Queensland, and advancing the development of its flagship Gladstone
Energy and Ammonia Project (the "Gladstone Project"). The AFE business underpins
the future value of the Company and, to that end, on October 10, 2019, we and
AFE entered into a definitive agreement to merge the two entities, among other
transactions.
For a discussion on the proposed Merger with AFE and the related transactions,
see "Liquidity and Capital Resources."
We have determined that we did not have adequate cash to continue the
commercialization of SGT due primarily to our inability to realize financial
results from our two investments into projects in China and three technology
licensed projects in China as well as our inability to quickly develop
alternative technology income sources in Australia, Poland and other global
regions. As a result, we suspended our global SGT commercialization efforts, we
undertook operating expense reductions, we ceased providing funds to project
developments, we continue to explore the divesting of assets such as our Yima
and TSEC Joint Ventures and we formed a special committee of the board of
directors to evaluate financing and restructuring alternatives. On October 10,
2019, we announced the proposed merger with AFE and the acquisition of
additional ownership in BFR.
We operate our business from our headquarters located in Houston, Texas and our
offices in Shanghai, China.
28
Outlook
As a result of our efforts evaluating financing and strategic options, on
October 10, 2019, we entered into an Agreement and Plan of Merger (the "Merger
Agreement") with AFE as previously discussed and also described in Note 13 -
Subsequent Events - The Proposed Merger with AFE. Currently our focus is on
completing the steps required to complete the merger, which include but are not
limited to, (i) completion of all Company required filings, (ii) curing the
NASDAQ listing requirement deficiencies, (iii) completion of the Form S-4 and
Proxy related to the merger, (iv) completion of the Batchfire Share Exchange
pre-emptive rights process and (v) all other tasks required to complete the
merger.
We can make no assurances that the proposed Merger will be completed on a timely
basis or at all. We may also need to raise additional capital through equity and
debt financing to complete the Merger or to otherwise strengthen our balance for
our corporate general and administrative expenses. We cannot provide any
assurance that any financing will be available to us in the future on acceptable
terms or at all. Any such financing could be dilutive to our existing
stockholders. If we cannot raise required funds on acceptable terms, we may
further reduce our expenses and 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 implement our
business strategy; (iii) make additional capital contributions to our joint
ventures; (iv) fund certain obligations as they become due; (v) respond to
competitive pressures or unanticipated capital requirements; or (vi) repay our
indebtedness. In addition, we may elect to sell certain investments as a source
of cash to develop additional projects or for general corporate purposes.
Results of Operations
Three Months Ended September 30, 2019 ("Current Quarter") Compared to the Three
Months Ended September 30, 2018 ("Comparable Quarter")
Revenue. Total revenue were zero for both the Current Quarter and the Comparable
Quarter.
Costs of sales expenses. There were no costs of sales expenses for both the
Current and Comparable Quarter.
General and administrative expenses. General and administrative expenses were
$0.6 million in the Current Quarter compared with $1.5 million for the
Comparable Quarter. The decrease of $0.9 million was due primarily to the
reduction of employee related compensation costs, professional fees, and other
general and administrative expenses.
Stock-based expense. Stock-based expense was approximately $1,000 for the
Current Quarter compared with $0.2 million for the Comparable Quarter. There
were no new options and warrants issued for both the Current Quarter and the
Comparable Quarter, the decrease was primarily due to fewer stock options and
warrants vested and amortized during the Current Quarter as compared with the
Comparable Quarter.
Depreciation and amortization. Depreciation and amortization expense was $13,000
for the Current Quarter compared with $11,000 for the Comparable Quarter, which
relates to the amortization of our global patents.
Equity in income of joint ventures. The equity income of joint ventures was zero
during the Current Quarter as compared to $75,000 for the Comparable Quarter.
The $75,000 equity income for the Comparable Quarter primarily relates to our
share of income in AFE.
Gain on fair value adjustments of derivative liabilities. The net gain on fair
value adjustments of derivative liabilities was approximately $34,000 for the
Current Quarter compared with $0.8 million for the Comparable Quarter, which
resulted from the lower fair market value for our Debentures Warrants and the
Placement Agent Warrants as of September 30, 2019 versus June 30, 2019. The
change in the derivative liability was primarily due to movements in our stock
price. Other changes in the assumptions related to the passage of time, interest
rate fluctuations and stock market volatility.
29
Foreign currency gain losses. Foreign currency losses were approximately $11,000
for the Current Quarter compared with a gain of $122,000 for the Comparable
Quarter, which were the result of a 4% depreciation of the Chinese Renminbi yuan
("RMB") to the U.S. dollar for both the Current Quarter and the Comparable
Quarter.
Interest expenses: Interest expenses were $0.3 million for both the Current
Quarter and the Comparable Quarter, which was primarily due to the interest
payments related to the Debenture and the amortization of debenture discount and
issuance costs for the Debentures issued on October 24, 2017.
Liquidity and Capital Resources
As of September 30, 2019, we had $0.4 million in cash and cash equivalents and
negative $0.8 million in working capital. As of January 10, 2020, we had $0.4
million in cash and cash equivalents. Of the $0.4 million in cash and cash
equivalents, $347,000 resides in the United States or easily accessed foreign
countries and approximately $40,000 resides in China.
In connection with the entry into the Merger Agreement, the Company entered into
a securities purchase and exchange agreements (each, a "New Purchase
Agreements") with each of the existing holders of its 11% senior secured
debentures issued in October 2017 (the "Debentures"), whereby each of the
holders agreed to exchange their Debentures and accompanying warrants (the
"Debenture Warrants") for new debentures (the "New Debentures") and warrants
(the "New Warrants"), and certain of the holders agreed to provide $2,000,000 of
additional debt financing (the "Interim Financing"). Pursuant to the New
Purchase Agreements, the Company also issued $2,000,000 of 11% senior secured
debentures (the "Merger Debentures") to certain accredited investors, along with
warrants to purchase $4,000,000 of shares of Common Stock, half of which were
Series A Common Stock Purchase Warrants (the "Series A Merger Warrants") and
half of which were Series B Common Stock Purchase Warrants (the "Series B Merger
Warrants" and, together with the Series A Merger Warrants, the "Merger
Warrants"), as part of the Interim Financing. The Company shall receive the
$2,000,000 pursuant to the Merger Debentures according to the following
schedule: (i) $1,000,000 on or before October 14, 2019, (ii) $500,000 upon the
filing of the proxy statement for the Company stockholder approval of the
Merger, and (iii) $500,000 within two business days of Company stockholder
approval of the Merger. The terms of the Merger Debentures are the same as the
New Debentures. The Merger Debentures are intended to assist the Company in
financing its business through the closing of the Merger.
As compensation for its services, the Company will pay to T.R. Winston &
Company, LLC (the "Placement Agent"): (i) a cash fee of $140,000 (representing
an aggregate fee equal to 7% of the face amount of the Merger Debentures, as
defined below); and (ii) a warrant to purchase 100,000 shares of Common Stock
(the "New Placement Agent Warrant"). We have also agreed to reimburse certain
expenses of the Placement Agent.
The $1,000,000 scheduled payment on or before October 14, 2019 was subsequently
received less certain legal costs and escrow fees in the amount of $966,000.
The Company has also agreed to loan $350,000 of the proceeds from the Merger
Debentures to AFE to assist AFE in financing its business through the closing of
the Merger. The loan is subject to interest at the rate of 11% per annum payable
in full on the repayment date in conjunction with the repayment of the principal
amount. The repayment date is the earlier of five days after completion of the
Merger transaction or the later of March 31, 2020 or three months following the
vote of the shareholders on the Merger.
On October 24, 2019 we entered into a loan agreement with AFE whereby we loaned
a portion of the $2.0 million proceeds received under the New Purchase
Agreements. Under the loan agreement, we loaned $350,000 to AFE, which is due in
full on the later of March 31, 2020 or within five days following the closing of
the Merger. If the Merger does not close, the loan will mature on March 31, 2020
or three months following the special stockholder meeting called to approve the
merger transactions. The loan accrues interest at 11% per annum and is also due
in full upon repayment, subject to an increased default interest in certain
limited circumstances.
We can make no assurances that the proposed Merger will be completed on a timely
basis or at all. We may also need to raise additional capital through equity and
debt financing to complete the Merger or to otherwise strengthen our balance for
our corporate general and administrative expenses. We cannot provide any
assurance that any financing will be available to us in the future on acceptable
terms or at all. Any such financing could be dilutive to our existing
stockholders. In addition, we may be forced to seek relief to avoid or end
insolvency through other proceedings including bankruptcy. Based on the
historical negative cash flows and the continued limited cash inflows in the
period subsequent to year end there is substantial doubt about the Company's
ability to continue as a going concern.
30
The following summarizes the sources and uses of cash during the Current
Quarter:
? Operating Activities: During the Current Quarter, we used $0.5 million in
cash for operating activities compared to $1.6 million during the Comparable
Quarter. The decrease was primarily due to our reduced employee related
compensation costs; other general and administrative expenses; and zero
payment of interest expense on the Debentures as compared with the Comparable
Quarter.
? Investing Activities: There was no investing activities for the Current
Quarter. During the Comparable Quarter, we used approximately $11,000 to
invest in our SEE joint venture .
? Financing Activities: There were no financing activities for both the Current
Quarter and the Comparable Quarter.
Current Operations and Projects
Australian Future Energy Pty Ltd
In February 2014, we established AFE together with an Australian company, Ambre
. AFE is an independently managed Australian business platform established for
the purpose of building a large-scale, vertically integrated business in
Australia based on developing, building and owning equity interests in
financially attractive and environmentally responsible projects that produce
low-cost syngas as a competitive alternative to expensive local natural gas and
LNG.
On May 10, 2017, we entered into a project technology license agreement with AFE
in connection with a project being developed by AFE in Queensland Australia. AFE
intends to form a subsidiary project company and assign the project technology
license agreement to that company which will assume all of the obligations of
AFE thereunder. Pursuant to the project technology license agreement, we granted
a non-exclusive license to use our technology at the project to manufacture
syngas and to use the technology in the design of the facility. In
consideration, the project technology license agreement calls for a license fee
to be finalized based on the designed plant capacity and a separate fee of $2.0
million for the delivery of a process design package. License fees shall be paid
as project milestones are reached throughout the planning, construction and
first five years of plant operations. The success and timing of the project
being developed by AFE will affect if and/or when we will be able to receive all
of the payments related to this technology license agreement. However, there can
be no assurance that AFE will be successful in developing this or any other
project.
In September 2018, AFE's Gladstone Project was formally announced in Queensland
Parliament by Minister for State Development, Manufacturing, Innovation and
Planning, Mr. Cameron Dick and was declared by the Queensland Co-Ordinator
General as a Co-Ordinated Project. A coordinated project approach also means
that all the potential impacts and benefits of the project are considered in an
integrated and comprehensive manner and the Coordinator-General's decision to
declare this project a Coordinated Project is expected to help streamline
approvals and fast-track delivery of the project.
The project will be located in the State Development Area in Gladstone,
Queensland and is planned to process 1.5 million mtpa of low-quality coal using
SGT, to produce up to 330,000 mtpa of ammonia product, and up to 8 petajoules of
pipeline quality gas for the east coast domestic gas market. In addition, the
proposed project will generate approximately 90 MW of electrical power, with
approximately 25 MW of this being available for export to the local domestic
grid. The ammonia and gas produced is to be used by major industrial users,
including those focusing on agriculture, the mining industry and advanced
manufacturing. The project is estimated by AFE to commence construction by
early-2021, with the first ammonia production proposed in early-2023.
On April 4, 2019, we entered into a Technology Purchase Option Agreement (the
"Option Agreement") with AFE providing AFE has an exclusive option through July
31, 2019 to purchase 100% ownership of Synthesis Energy Systems Technology, LLC,
our wholly-owned subsidiary which owns our interest in the SGT. In addition,
ownership rights to SGT are carved out of the transaction and retained by us for
China and we have a three-year option period post-closing to monetize SGT for
India, Brazil, Poland and for the DRI technology market segment. On July 31,
2019, we entered into an Amendment to the Option Agreement with AFE extending
the exclusive option provided in the Option Agreement through August 31, 2019.
On August 31, 2019, we mutually agreed with AFE to allow the Option Agreement to
terminate pursuant to its terms and no penalties or payments were due as a
result of the termination of the agreement.
31
AFE issued one million shares to us in connection with the execution of the
Option Agreement. AFE would also pay (i) an additional $2.0 million in three
equal installments, with the first installment paid at closing and the remainder
over the subsequent twelve months, and (ii) $3.8 million on the earlier of the
closing of a construction financing by AFE or five years from closing. The
closing of the transaction was subject to the negotiation of definitive
agreements and other conditions specified in the Option Agreement. In addition
to the payment schedule above, AFE issued an additional one million shares with
the execution of the Option Agreement and would also pay an additional $100,000
with the first installment paid at closing as full and final settlement of
outstanding invoices owing AFE to us at the date of this Option Agreement. As a
result of the termination of the Option Agreement, we retained the two million
shares AFE issued in connection with the Option Agreement. We accounted for the
first million shares as an additional investment in AFE for $70,000 and a
reduction of the receivable amounts due from AFE with a fair value of $100,000
with a write-off for the remaining $30,000. The second million shares were
accounted for as an additional investment in AFE and a deferred liability in the
amount of $70,000 as a down payment on the purchase of our subsidiary. In the
quarter ending September 30, 2019, we recognized the $70,000 down payment as an
other gain due to the termination of the Option Agreement.
For our ownership interest in AFE, we have been contributing cash and
engineering support for AFE's business development while Ambre contributed cash
and services. Additional ownership in AFE has been granted to the AFE management
team and staff individuals providing services to AFE. In April 2019, we were
issued two million shares in connection with the Option Agreement and its
subsequent termination.
We account for our investment in AFE under the equity method. Our ownership
interest of approximately 35% makes us the second largest shareholder. We also
maintain a seat on the board of directors, which allows us to have significant
influence on the operations and financial decisions, but not control, of AFE.
Our carrying value of our AFE investment as of both September 30, 2019 and June
30, 2019 was zero.
See "Liquidity and Capital Resources" for a discussion of the Merger with AFE
under Subsequent Event.
Cape River Resources Pty Ltd
In October 2018, AFE formed a separate unrelated company, Cape River Resources
Pty Ltd ("CRR") for the purpose of developing the Pentland resource into an
operating thermal coal mine. Ownership in CRR was distributed proportionately to
the shareholders of AFE with additional shares issued to the management team.
Our ownership in CRR was approximately 38% upon the formation of CRR through our
ownership interest in AFE. GNE sold its 100% ownership interest in the Pentland
Coal Mine to CRR.
We account for our investment in CRR under the equity method. Our ownership
interest of approximately 38% makes us the second largest shareholder. We may
appoint one board director for each 15% ownership interest we hold in CRR which
allows us to have significant influence on the operations and financial
decisions, but not control, of CRR. Our carrying value of our CRR investment as
of June 30, 2019 was zero.
Batchfire Resources Pty Ltd
As a result of AFE's early stage business development efforts associated with
the Callide coal mine in Central Queensland, Australia, AFE created Batchfire
Resources Pty Ltd ("BFR"). BFR was a spin-off company for which ownership
interest was distributed to the existing shareholders of AFE and to the new BFR
management team in December 2015. BFR is registered in Australia and was formed
for the purpose of purchasing the Callide thermal coal mine from Anglo-American
plc ("Anglo-American"). The Callide mine is one of the largest thermal coal
mines in Australia and has been in operation for more than 20 years. As reported
by BFR at the time of the acquisition, Callide has approximately 230 million
metric tons of recoverable reserves and an additional 850 million metric tons of
proven resources.
In October 2016, BFR stated that it had received investment support for the
acquisition from Singapore-based Lindenfels Pte, Ltd, a subsidiary of commodity
traders Avra Commodities, and as a result the acquisition of the Callide thermal
coal mine from Anglo-American was completed in October 2016. Since then, BFR has
been implementing its plan at Callide intended to lower the per unit mining
costs and deliver profitable financial results.
In January 2018, the Minister of Natural Resources, Mines and Energy approved
BFR's mining lease application through to 2043 for Callide coal mine's Boundary
Hill South Project. The Callide mining tenure extends across 180 square
kilometers and contains an estimated coal resource of up to 1.7 billion metric
tons and saleable coal production averages 10 million metric tons per year. BFR
is implementing its mining plan at Callide intended to lower the per unit mining
costs and deliver profitable financial results.
32
On April 29, 2019, BFR issued additional shares as part of a rights offering. We
did not execute our rights in this offering and therefore after the completion
of the offering process and the issuance of the additional shares, our ownership
interest was diluted from approximately 11% to approximately 7%.
In connection with the entry into the Merger Agreement, we entered into Share
Exchange Agreements (each, a "Share Exchange Agreement") with certain of the
shareholders of BFR, whereby such shareholders will exchange their shares of BFR
for shares of common stock at a ratio of 10 BFR shares for one share of common
stock. As a result of these exchanges, we would own 25% of the outstanding
shares of BFR. The closing of the exchange is subject to certain conditions
specified in the Share Exchange Agreements, including, without limitation, the
consummation of the transactions contemplated by the Merger Agreement. In
addition, we are making an offer to the remaining shareholders of BFR such that
we would acquire 100% of the shares if the offers are all accepted.
We account for our investment in BFR under the cost method. Our limited
ownership interest in BFR was approximately 7% and we do not have significant
influence over the operation or financial decisions made by the company. At the
time of the spin-off, the carrying amount of our investment in AFE was reduced
to zero through equity losses. As such, the value of the investment in BFR post
spin-off was also zero. As of September 30, 2019, our ownership interest in BFR
was approximately 7% and the carrying value of our investment in BFR as of both
September 30, 2019 and June 30, 2019 was zero.
Townsville Metals Infrastructure Pty Ltd
In August 2018, AFE formed a separate unrelated company, Townsville Metals
Infrastructure Pty Ltd ("TMI") for the purpose of completing the development of
the required infrastructure such as rail and port modifications related to the
transport of mined products including coal from the Pentland resource to the
Townsville port. Ownership in TMI was distributed proportionately to the
shareholders of AFE. Our ownership in TMI is approximately 38% upon the
formation of TMI through our ownership interest in AFE.
We account for our investment in TMI under the equity method. Our ownership
interest of approximately 38% makes us the second largest shareholder. We may
appoint one board director for each 15% ownership interest we hold in TMI which
allows us to have significant influence on the operations and financial
decisions, but not control, of TMI. Our carrying value of our TMI investment as
of both September 30, 2019 and June 30, 2019 was zero.
SES EnCoal Energy sp. z o.o
In October 2017, we entered into agreements with Warsaw-based EnInvestments sp.
z o.o. Under the terms of the agreements, we and EnInvestments are equal
shareholders of SEE and SEE will exclusively market, develop, and commercialize
projects in Poland which utilize our technology, services and proprietary
equipment and we share with SEE a portion of the technology license payments,
net of fees, we receive from Poland. The goal of SEE is to establish efficient
clean energy projects that provide Polish industries superior economic benefits
as compared to the use of expensive, imported natural gas and LNG, while
providing energy independence through our technological capabilities to convert
the wide range of Poland's indigenous coals, coal waste, biomass and municipal
waste to valuable syngas products. SEE has developed a pipeline of projects and
together we are actively working with Polish customers and partners to complete
the necessary project feasibility, permitting and SGT technology agreement steps
required prior to starting construction on the projects.
Tauron Wytwarzanie S.A., ("Tauron"), has contracted Poland's Institute of Coal
Chemistry ("IChPW") to complete a detailed preliminary design assessment and
economic study for the conversion of its 200MW conventional power boilers to
clean syngas which would be Poland's first SGT facility. The project feasibility
study concluded in March 2018 with positive results. The results presented by
IChPW to Tauron have shown that the conversion of Tauron's 200 MW power boiler
utilizing SGT can be both economically attractive and environmentally
beneficial. We believe that SGT power boiler conversions are an ideal solution
capable of meeting EU and IED targets.
33
For our ownership interest in SEE, we have been contributing cash and assisting
in the development of SEE. In August 2018, we contributed additional cash of
approximately $11,000.
We account for our investment in SEE under the equity method. Our ownership
interest of 50% makes us an equal shareholder and we also maintain two of the
four seats on the board of directors which allows us to have significant
influence on the operations and financial decisions, but not control, of the
company. On September 30, 2019, as an equal shareholder, our ownership was 50%
of SEE and the carrying value of our investment in SEE as of both September 30,
2019 and June 30, 2019 was approximately $19,000.
Midrex Technologies
In July 2015, we entered into a Project Alliance Agreement that expands our
exclusive relationship with Midrex Technologies for integration and optimization
of DRI technology using coal gasification. Midrex has taken 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 the TSEC Joint Venture 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. The TSEC Joint Venture will aid in the marketing
of these DRI facilities in China and will supply the gasification equipment and
licensing of the technology.
Yima Joint Venture
In August 2009, we entered into joint venture contracts and related agreements
with Yima Coal Industry Group Company ("Yima"). We continue to own a 25%
interest in the Yima Joint Venture and Yima owns a 75% interest.
In December 2017 and January 2018, on-going development cooperation and
discussions with the Yima Joint Venture management resulted in the joint venture
agreeing to pay various costs incurred by us during the construction and
commissioning period of the facility in the amount of approximately 16 million
Chinese Renminbi yuan, ("RMB"). As of June 30, 2018, we have received 6.15
million RMB (approximately $0.9 million) of payments from the Yima Joint Venture
related to these costs. Since June 2018, no additional payments have been
received. Due to uncertainty, revenues will be recorded upon receipt of payment.
Since 2014, we have accounted for this joint venture under the cost method of
accounting. Our conclusion to account for this joint venture under this
methodology is based upon our historical lack of significant influence in the
Yima Joint Venture. The lack of significant influence was determined based upon
our interactions with the Yima Joint Venture related to our limited
participation in operating and financial policymaking processes coupled with our
limited ability to influence decisions which contribute to the financial success
of the Yima Joint Venture. We continue to evaluate our level of influence over
the Yima Joint Venture.
The carrying value of our Yima Joint Venture investment as of both September 30,
2019 and June 30, 2019 was zero.
Tianwo-SES Clean Energy Technologies Limited
Joint Venture Contract
In February 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 legal
name to Suzhou Thvow Technology Co. Ltd. ("STT"), to form the TSEC Joint
Venture. In August 2017, we entered into a restructuring agreement which changed
the share ownership in the TSEC Joint Venture, reduced the registered capital
and brought an additional party, The Innovative Coal Chemical Design Institute
("ICCDI"), into the JV Contract. Current ownership interests of the TSEC Joint
Venture are STT owning 50%, ICCDI owning 25% and we own the remaining 25%. The
purpose of the TSEC Joint Venture is to establish SGT as the leading
gasification technology in the TSEC Joint Venture territory (which is China,
Indonesia, the Philippines, Vietnam, Mongolia and Malaysia) by becoming a
leading provider of proprietary equipment and engineering services for the
technology. The scope of the TSEC Joint Venture is to market and license SGT via
project sublicenses; procurement and sale of proprietary equipment and services;
coal testing; and engineering, procurement and research and development related
to SGT.
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The TSEC Joint Venture is accounted for under the equity method. Our initial
capital contribution in the formation of the venture was the TUCA, which is an
intangible asset. As such, we did not record a carrying value at the inception
of the venture. The carrying value of our investment in the TSEC Joint Venture
as of both September 30, 2019 and June 30, 2019 was zero.
TUCA
Pursuant to the TUCA, we have contributed to the TSEC Joint Venture certain
exclusive rights to our SGT in the TSEC Joint Venture territory, including the
right to: (i) grant site specific project sub-licenses to third parties; (ii)
use our marks for proprietary equipment and services; (iii) engineer and/or
design processes that utilize our technology or our other intellectual property;
(iv) provide engineering and design services for joint venture projects and (v)
take over the development of projects in the TSEC Joint Venture territory that
have previously been developed by us and our affiliates. As a result of the
Restructuring Agreement, ICCDI was added as a party to the TUCA, but all other
material terms remained the same.
GTI Agreement
In November 2009, we entered into an Amended and Restated License Agreement (the
"GTI Agreement") with the Gas Technology Institute ("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 the 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.
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We are required to make an annual payment 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, beginning in May 2016, 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.
We continue to innovate and modify the SGT process to a point where we maintain
certain intellectual property rights over SGT. Since the original licensing in
2004, we have maintained a strong relationship with GTI and continue to benefit
from the resources and collaborative work environment that GTI provides us. In
relation to the Merger with AFE, AFE and GTI have agreed upon new terms which,
subject to a definitive agreement being completed prior to the Merger closing,
would replace the current GTI Agreement.
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