Synthesis Energy Systems, Inc.
SYNTHESIS ENERGY SYSTEMS INC (Form: 10-Q, Received: 11/14/2014 16:15:44)

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

________________

 

FORM 10-Q

 

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2014

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from:                 to:                

 

Commission file number: 001-33522

________________

 

SYNTHESIS ENERGY SYSTEMS, INC.

(Exact name of registrant as specified in its charter)

 

Delaware 20-2110031
(State of Incorporation) (I.R.S. Employer Identification No.)
   
Three Riverway, Suite 300, Houston, Texas 77056
(Address of principal executive offices) (Zip code)

________________

 

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

 

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

 

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

 

Yes x No ¨

 

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

 

Yes x No ¨

 

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

 

Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company x

 

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

Yes ¨ No x

 

As of November 8, 2014 there were 73,224,330 shares of the registrant’s common stock, par value $.01 per share, outstanding.

 

 
 

 

TABLE OF CONTENTS

 

  Page
   
PART 1. Financial Information  
   
Item 1. Financial Statements 1
   
Consolidated Balance Sheets as of September 30, 2014 (unaudited) and June 30, 2014 1
   
Consolidated Statements of Operations for the Three Months ended September 30, 2014 and 2013 (unaudited) 2
   
Consolidated Statements of Comprehensive Loss for the Three Months ended September 30, 2014 and 2013 (unaudited) 3
   
Consolidated Statements of Cash Flows for the Three Months ended September 30, 2014 and 2013 (unaudited) 4
   
Consolidated Statements of Equity for the period from June 30, 2014 to September 30, 2014 (unaudited) 5
   
Notes to the Consolidated Financial Statements  (unaudited) 6
   
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 19
   
Item 3. Quantitative and Qualitative Disclosure about Market Risk 33
   
Item 4. Controls and Procedures 34
   
PART II. Other Information  
   
Item 1. Legal Proceedings 34
   
Item 1A. Risk Factors 34
   
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 35
   
Item 3. Defaults Upon Senior Securities 35
   
Item 4. Mine Safety Disclosures 35
   
Item 5. Other Information 35
   
Item 6. Exhibits 37

 

 
 

 

PART I

Item 1. Financial Statements

 

SYNTHESIS ENERGY SYSTEMS, INC.

Consolidated Balance Sheets

(In thousands, except per share amount)

 

    September 30,
2014
    June 30,
2014
 
ASSETS   (Unaudited)        
Current assets:            
Cash and cash equivalents   $ 14,417     $ 19,407  
Accounts receivable-related party, net     676       676  
Prepaid expenses and other currents assets     888       873  
Inventory     421       865  
Total current assets     16,402       21,821  
Property, plant and equipment, net     31,126       31,499  
Intangible asset, net     1,019       1,049  
Investment in joint ventures     34,856       34,856  
Other long-term assets     2,273       2,481  
Total assets   $ 85,676     $ 91,706  
                 
LIABILITIES AND EQUITY                
Current liabilities:                
Accrued expenses and accounts payable   $ 8,605     $ 7,167  
Short-term bank loan           3,251  
                 
Total current liabilities     8,605       10,418  
                 
Total liabilities     8,605       10,418  
                 
Commitment and contingencies                
                 
Common stock, $0.01 par value: 200,000 shares authorized: 73,224 and 73,107 shares issued and outstanding, respectively     732       731  
Additional paid-in capital     241,464       241,125  
Accumulated deficit     (170,500 )     (165,984 )
Accumulated other comprehensive income     6,062       6,062  
Total stockholders’ equity     77,758       81,934  
Noncontrolling interests in subsidiaries     (687 )     (646 )
Total equity     77,071       81,288  
Total liabilities and equity   $ 85,676     $ 91,706  

 

See accompanying notes to the consolidated financial statements.

 

1
 

 

SYNTHESIS ENERGY SYSTEMS, INC.

Consolidated Statements of Operations

(In thousands, except per share amounts)

(Unaudited)

 

  Three Months Ended  
  September 30,  
    2014     2013  
Revenue:            
Product sales and other — related parties   $ 4,214     $  
Total revenue     4,214        
                 
Costs and Expenses:                
Costs of sales and plant operating expenses     5,781       97  
General and administrative expenses     2,069       2,423  
Stock-based compensation expense     285       1,046  
Depreciation and amortization     573       565  
                 
Total costs and expenses     8,708       4,131  
               
Operating loss     (4,494 )     (4,131 )
                 
Non-operating (income) expense:                
Equity in losses of joint ventures           1  
Foreign currency (gains) losses, net     9       (12 )
Interest income     (10 )     (5 )
Interest expense     64       69  
                 
Net loss     (4,557 )     (4,184 )
                 
Less: net loss attributable to noncontrolling interests     41       22  
                 
Net loss attributable to stockholders   $ (4,516 )   $ (4,162 )
                 
Net loss per share:                
Basic and diluted   $ (0.06 )   $ (0.07 )
                 
Weighted average common shares outstanding:                
Basic and diluted     73,197       63,671  

  

See accompanying notes to the consolidated financial statements. 

 

2
 

 

SYNTHESIS ENERGY SYSTEMS, INC.

Consolidated Statements of Comprehensive Loss

(In thousands)

(Unaudited)

 

  Three Months Ended
September 30,
 
    2014     2013  
Net loss, as reported   $ (4,557 )   $ (4,184 )
Translation adjustment           122  
Comprehensive loss     (4,557 )     (4,062 )
Less comprehensive income attributable to noncontrolling interests     41       19  
Comprehensive loss attributable to the Company   $ (4,516 )   $ (4,043 )

 

See accompanying notes to the consolidated financial statements

 

3
 

 

SYNTHESIS ENERGY SYSTEMS, INC.

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

  Three Months Ended  
  September 30,  
    2014     2013  
Cash flows from operating activities:            
Net loss   $ (4,557 )   $ (4,184 )
Adjustments to reconcile net loss to net cash used in operating activities:
               
Stock-based compensation expense     285       1,046  
Depreciation of property, plant and equipment     515       509  
Amortization of intangible and other assets     58       56  
Equity in losses of joint ventures           1  
Foreign currency (gains) losses     9       (12 )
Changes in operating assets and liabilities:                
Accounts receivable     3        
Prepaid expenses and other current assets     (15 )     162  
Inventory     444        
Other long-term assets     179       (28 )
Accrued expenses and payables     1,424       (326 )
Net cash used in operating activities     (1,655 )     (2,776 )
                 
Cash flows from investing activities:                
Capital expenditures     (140 )     (132 )
Equity investment in joint ventures           (1 )
Net cash used in investing activities     (140 )     (133 )
                 
Cash flows from financing activities:                
Payments on long-term bank loan     (3,251 )     (1,252 )
Proceeds from short-term bank loan           3,253  
Proceeds from exercise of stock options, net     55        
Proceeds from issuance of common stock, net           100  
Net cash provided by financing activities     (3,196 )     2,101  
                 
Net decrease in cash     (4,991 )     (808 )
                 
Cash and cash equivalents, beginning of period     19,407       15,870  
Effect of exchange rates on cash     1       8  
Cash and cash equivalents, end of period   $ 14,417     $ 15,070  

 

See accompanying notes to the consolidated financial statements.

 

4
 

 

SYNTHESIS ENERGY SYSTEMS, INC.

Consolidated Statement of Equity

(In thousands)

(Unaudited)

 

   

Common Stock

          Deficit
Accumulated
During the
   

 

Accumulated

Other

   

 

 

Non-

       
 

 

Shares

   

Common

Stock

   

Additional

Paid-in Capital

   

Development

Stage

   

Comprehensive

Income

   

controlling

Interest

   

 

Total

 
Balance at June 30, 2014     73,107     $ 731     $ 241,125     $ (165,984 )   $ 6,062     $ (646 )   $ 81,288  
Net loss                       (4,516 )           (41 )     (4,557 )
Currency translation adjustment                                          
Comprehensive loss                                         (4,557 )
Net proceeds from issuance of common stock     117       1       54                         55  
Stock-based compensation expense                 285                         285  
Balance at September 30, 2014     73,224     $ 732     $ 241,464     $ (170,500 )   $ 6,062     $ (687 )   $ 77,071  

 

See accompanying notes to the consolidated financial statements.

 

5
 

 

SYNTHESIS ENERGY SYSTEMS, INC.

 

Notes to Consolidated Financial Statements

(Unaudited)

 

Note 1 — Summary of Significant Accounting Policies

 

(a) Organization and description of business

 

Synthesis Energy Systems, Inc. (“SES”), together with its wholly-owned and majority-owned controlled subsidiaries (collectively, the “Company”) is an energy and gasification technology company that provides products and solutions to the energy and chemical industries. The Company’s business is to create value by supplying its technology, equipment and services into global projects where lower cost low quality coals, coal wastes, municipal wastes, agricultural biomass, and other biomass feedstocks can be profitably converted through its proprietary gasification technology into clean synthesis gas, or syngas (a mixture of primarily hydrogen, carbon monoxide, and methane), which is then used to produce a variety of high value energy and chemical products. The Company’s initial operating projects to date convert high ash coal and coal wastes to chemical grade methanol, and the Company is pursuing a variety of additional global projects under development by customers who may use its technology platform to convert low quality coals such as lignite, coal wastes, municipal wastes and agricultural waste biomass to high value products such as electric power, transportation fuels, substitute natural gas fuel for direct reduction iron steel making and other products. The Company’s technology is originally based on the U-GAS ® process developed by the Gas Technology Institute and the Company has augmented and differentiated the technology through design, detailed engineering, constructing, starting up and operating two commercial plants in China. The Company’s headquarters are located in Houston, Texas.

 

(b) Basis of presentation and principles of consolidation

 

The consolidated financial statements for the periods presented are unaudited. Operating results for the three month period ended September 30, 2014 are not necessarily indicative of results to be expected for the fiscal year ending June 30, 2015.

 

The consolidated financial statements are in U.S. dollars. Non-controlling interests in consolidated subsidiaries in the consolidated balance sheets represents minority stockholders’ proportionate share of the equity in such subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto reported in the Company’s Annual Report on Form 10-K for the year ended June 30, 2014. Significant accounting policies that are new or updated from those presented in the Company’s Annual Report on Form 10-K for the year ended June 30, 2014 are included below. The consolidated financial statements have been prepared in accordance with the rules of the United States Securities and Exchange Commission (“SEC”) for interim financial statements and do not include all annual disclosures required by generally accepted accounting principles in the United States.

 

(c) Accounting for Variable Interest Entities (“VIEs”) and Financial Statement Consolidation Criteria

 

The joint ventures which the Company enters into may be considered VIEs. The Company consolidates all VIEs where it is the primary beneficiary. This determination is made at the inception of the Company’s involvement with the VIE and is continuously assessed. The Company considers qualitative factors and forms a conclusion that the Company, or another interest holder, has a controlling financial interest in the VIE and, if so, whether it is the primary beneficiary. In order to determine the primary beneficiary, the Company considers who has the power to direct activities of the VIE that most significantly impacts the VIE’s performance and has an obligation to absorb losses from or the right to receive benefits of the VIE that could be significant to the VIE. The Company does not consolidate VIEs where it is not the primary beneficiary. The Company accounts for these unconsolidated VIEs using either the equity method of accounting or the cost method of accounting and includes its net investment on its consolidated balance sheets. Under the equity method, the Company’s equity interest in the net income or loss from its unconsolidated VIEs is recorded in non-operating (income) expense on a net basis on its consolidated statement of operations. Equity investments in which the Company exercises significant influence but does not control and is not the primary beneficiary are accounted for using the equity method. In the event of a change in ownership, any gain or loss resulting from an investee share issuance is recorded in earnings. Investments in which the Company is not able to exercise significant influence over the investee are accounted for under the cost method. Controlling interest is determined by majority ownership interest and the ability to unilaterally direct or cause the direction of management and policies of an entity after considering any third-party participatory rights.

 

6
 

 

The Company has determined that the ZZ Joint Venture is a VIE and has determined that the Company is the primary beneficiary. In making the initial determination, the Company considered, among other items, the change in profit distribution between the Company and Xuejiao after 20 years. The expected negative variability in the fair value of the ZZ Joint Venture’s net assets was considered to be greater during the first 20 years of the ZZ Joint Venture’s life, which coincided with our original 95% profit/loss allocation, versus the latter 30 years in which the Company’s profit/loss allocation would be reduced to 10%. As the result of an amendment to the ZZ Joint Venture agreement in 2010, the profit distribution percentages will remain in place after the first 20 years, providing further support to the determination that the Company is the primary beneficiary.

 

The following tables provide additional information on the ZZ Joint Venture’s assets and liabilities as of September 30, 2014 and June 30, 2014 which are consolidated within the Company’s consolidated balance sheets (in thousands):

 

    September 30, 2014  
    Consolidated     ZZ Joint Venture
(1)
    %(2)  
                   
Current assets   $ 16,402     $ 1,310       8 %
Long-term assets     69,274       32,621       47 %
Total assets   $ 85,676     $ 33,931       40 %
                         
Current liabilities   $ 8,605     $ 5,871       68 %
Equity     77,071       28,060       36 %
Total liabilities and equity   $ 85,676     $ 33,931       40 %

 

    June 30, 2014  
    Consolidated     ZZ Joint Venture
(1)
    %(2)  
                   
Current assets   $ 21,821     $ 2,256       10 %
 Long-term assets     69,885       33,193       48 %
Total assets   $ 91,706     $ 35,449       39 %
                         
Current liabilities   $ 10,418     $ 7,462       72 %
Equity     81,288       27,987       34 %
Total liabilities and equity   $ 91,706     $ 35,449       39 %

 

(1) Amounts reflect information for the ZZ Joint Venture and exclude intercompany items.
(2) ZZ Joint Venture’s percentage of the amount on the Company’s consolidated balance sheets.

 

The Company has determined that the Yima Joint Ventures are VIEs and that Yima, the joint venture partner, is the primary beneficiary since Yima has a 75% ownership interest in the Yima Joint Ventures and has the power to direct the activities of the VIE that most significantly influence the VIE’s performance.

 

Until May 31, 2013, the Company accounted for its equity interest in the Yima Joint Ventures under the equity method of accounting. Under this method, the Company recorded its proportionate share of the Yima Joint Ventures’ net income or loss based on the Yima Joint Venture’s financial results. As of June 1, 2013, the Company changed to the cost method of accounting because the Company concluded that it is unable to exercise significant influence over the Yima Joint Ventures. The Company’s conclusion regarding of its lack of significant influence is due to various circumstances including limited participation in operating and financial policymaking processes and the Company’s limited ability to influence technological decisions.

 

7
 

 

The Company has determined that SES Resource Solutions, Ltd. (“SRS”) which was formed in June 2011 is a VIE and that the Company is not the primary beneficiary since neither the Company nor Midas Resources AG control SRS since each have a 50% ownership interest in SRS and the control, risks and benefits of SRS are shared equally. SRS had no assets or liabilities as of September 30, 2014 and is inactive. Therefore the Company is in the process of winding up this business.

 

The Company has determined that the TSEC Joint Venture (as defined in Note 2 – Joint Ventures – TSEC Joint Venture) is VIE and that ZCM, the joint venture partner, is the primary beneficiary since ZCM has a 65% ownership interest in the TSEC Joint Venture and has the power to direct the activities of the TSEC Joint Venture that most significantly influence its performance.

 

The Company has determined that the GC Joint Venture is a VIE and has determined that it is the primary beneficiary since the Company has a 51% ownership interest in the GC Joint Venture and since there are no qualitative factors that would preclude the Company from being deemed the primary beneficiary. There were no significant assets recorded within the GC Joint Venture as of September 30, 2014. There were however, current liabilities of approximately $0.6 million as of September 30, 2014 and $1.2 million as of September 30, 2013, related to unpaid settlements of amounts due to various contractors from the initial construction work for the project. In June 2014, the Company wrote off approximately $0.6 million of these unpaid settlements according to current local business contract law. The GC Joint Venture project is not currently being developed and the Company is continuing to work to liquidate and ultimately dissolve the GC Joint Venture.

 

(d) Revenue Recognition

 

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

 

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

 

(e) Fair value measurements

 

Accounting standards require that fair value measurements be classified and disclosed in one of the following categories:

 

Level 1 Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
   
Level 2 Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability; and
   
Level 3 Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).

 

8
 

 

The Company’s financial assets and liabilities are classified based on the lowest level of input that is significant for the fair value measurement. The following table summarizes the valuation of the Company’s financial assets by pricing levels, as of September 30, 2014 and June 30, 2014 (in thousands):

    September 30, 2014  
    Level 1     Level 2     Level 3     Total  
Assets:                        
Certificates of Deposit   $     $ 50  (1)   $     $ 50  
Money Market Funds           13,469  (2)           13,469  

 

    June 30, 2014  
    Level 1     Level 2     Level 3     Total  
Assets:                        
Certificates of Deposit   $     $ 50 (1)   $     $ 50  
Money Market Funds           16,971 (2)           16,971  
                                 
Liabilities:                                
Short-term bank loan           3,251 (3)           3,251  

 

(1) Amount included in current assets on the Company’s consolidated balance sheets.
(2) Amount included in cash and cash equivalents on the Company’s consolidated balance sheets.
(3) Amount included in current liabilities on the Company’s consolidated balance sheets.

 

The carrying values of the certificates of deposit, money market funds, short-term debt approximate fair value, which was estimated using quoted market prices for those or similar investments. The carrying value of the Company’s other financial instruments, including accounts receivable and accounts payable, approximate their fair values.

 

(f) Recently Issued Accounting Standards

 

The Financial Accounting Standards Board issued Accounting Standards Update (ASU) 2014-15, Presentation of Financial Statements – Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going concern . ASU 2014-15 is intended to define management’s responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern and provide related footnote disclosures. This ASU is effective for interim periods within annual periods beginning after December 15, 2016. The Company is currently evaluating the impact of the adoption of this ASU on its consolidated financial statements.

 

Note 2 – Joint Ventures

 

Zao Zhuang Joint Venture

 

Joint Venture Agreement

 

On July 6, 2006, the Company entered into a cooperative joint venture contract with Shandong Hai Hua Coal & Chemical Company Ltd., or Hai Hua, which established Synthesis Energy Systems (Zao Zhuang) New Gas Company Ltd., or the ZZ Joint Venture, a joint venture company that has the primary purposes of (i) developing, constructing and operating a syngas production plant utilizing the U-GAS ® technology in Zao Zhuang City, Shandong Province, China and (ii) producing and selling syngas and the various byproducts of the plant. In August 2012, Hai Hua’s name was changed to Shandong Weijiao Group Xuecheng Energy Company Ltd., or Xuecheng Energy, after a change in control transaction. We own 97.6% of the ZZ Joint Venture and Xuecheng Energy owns the remaining 2.4%. We consolidate the results of the ZZ Joint Venture in our consolidated financial statements.

 

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

 

9
 

 

Effective October 31, 2013, the ZZ Joint Venture terminated and waived its claims to past due capacity fees owed by Xuejiao under the prior syngas purchase and sale agreement. Pursuant to the ZZ Cooperation Agreement, prior payments of approximately $1.8 million were applied to settling the prior payments due under the syngas purchase and sale agreement. As a result, the ZZ Joint Venture recognized these related party advances as product sales of approximately $1.5 million, net of value-added taxes, during the year ended June 30, 2014.

 

The ZZ Joint Venture began producing and selling methanol in November 2013 and sold 12,849 tonnes of methanol during the three months ended September 30, 2014 generating approximately $4.2 million of revenue. The Company assumed operational control of the integrated methanol production facility in October 2013 under a restructured commercial arrangement. The ZZ Joint Venture completed the plant retrofits and equipment upgrades to enable increased methanol production from integrated syngas and coke oven gas feedstock. The ZZ Joint Venture is now operating an integrated plant which has two operating modes where it (i) converts coke oven gas directly to methanol and (ii) converts coal to syngas, then blends the syngas and coke oven gas at a specific ratio to produce additional quantities of methanol.  The ZZ Joint Venture began producing and selling methanol in November 2013 from coke oven gas. The ZZ Joint Venture restarted its syngas plant for approximately two weeks during December 2013. The ZZ Joint Venture intends to manage syngas production in order to optimize results. The syngas facility will generally operate when adequate coke oven gas supplies are available to achieve the correct syngas to coke oven gas blend ratio. The ZZ Joint Venture also recently executed agreements to secure an additional minimum 4,000 normal cubic meters per hour of coke oven gas from a local supplier, with a target of 5,000 normal cubic meters per hour, in order to increase methanol production and reduce supply risks. This additional coke oven gas represents approximately a 30% increase in feedstock supply for the ZZ Joint Venture Plant. In addition, the Company is focused on lowering our operating costs, as well as reducing forced outages at the facility.

 

Additionally, the Company is also evaluating alternative products and partnership structures for a possible expansion of the ZZ Joint Venture plant. In 2010, the ZZ Joint Venture received the necessary government approval for an expansion into monoethylene glycol production. This expansion project remains under evaluation by us. The Company is also evaluating certain new downstream technologies to produce high value products. 

 

Although the Company intends for the ZZ Joint Venture to sustain itself through its own earnings, the Company may need to make additional contributions to the ZZ Joint Venture in order for it to meet its obligations. For example, in September 2014, we made a capital contribution of $1.5 million to the ZZ Joint Venture. This capital contribution was used to pay a portion of the ZZ Short-term Loan, which was due on September 9, 2014.

 

Short-term Loan Agreement with Zaozhuang Bank Co., Ltd

 

On September 10, 2013, the ZZ Joint Venture entered into a short-term loan agreement with Zaozhuang Bank Co., Ltd. (the “ZZ Short-term Loan”) and received approximately $3.3 million of loan proceeds for the retrofit and related costs contemplated by the ZZ Cooperation Agreement, the principal was repaid on the due date, September 9, 2014.

 

Working Capital Loan Agreement with Zaozhuang Bank Co., Ltd

 

On October 2, 2014, the ZZ Joint Venture replaced the above ZZ Short-term Loan with a new working capital loan agreement with Zaozhuang Bank Co., Ltd. (the “ZZ Working Capital Loan”), and received approximately $3.3 million of loan proceeds.

 

Key terms of the Working Capital Loan are as follows:

 

Term of the loan is one year, due on September 23, 2015;

 

Interest is payable monthly at an annual rate of 9%;

 

Xuecheng Energy is the guarantor of the loan;

 

Certain assets of the ZZ Joint Venture, including land use rights and the administration building, are pledged as collateral for the loan; and

 

Subject to customary events of default which, should one or more of them occur and be continuing, would permit Zaozhuang Bank Co., Ltd. to declare all amounts owing under the agreement to be due and payable immediately.

 

10
 

 

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

 

On October 8, 2014, the ZZ Joint Venture entered a Line of Credit Agreement with Zaozhuang Bank Co., Ltd. (the “ZZ Line of Credit Agreement”), and received a line of credit of approximately $2.4 million. On October 9, 2014, the ZZ Joint Venture entered an additional Line of Credit Agreement with Zaozhuang Bank Co., Ltd. and received a line of credit of approximately $0.8 million.

 

Key terms of the two lines of credit are as follows:

 

The ZZ Joint Venture is required to deposit 50% of the total face amount, or approximately $1.6 million, to Zaozhuang Bank for the line of credit as a security deposit;

 

Term of the lines of credit is six months, due on April 8 and April 9, 2015 respectively, and can be renewed for another six months term with bank approval;

 

Service fee is 0.05% of the face amount for each renewal.

 

Xuecheng Energy is the guarantor of each line of credit;

 

Certain assets of the ZZ Joint Venture, including land use rights and the administration building, are pledged as collateral for the lines of credit; and

 

Subject to customary events of default which, should one or more of them occur and be continuing, would permit Zaozhuang Bank Co., Ltd. to declare all amounts owing under the agreements to be due and payable immediately.

 

 

Yima Joint Ventures

 

In August 2009, the Company entered into amended joint venture contracts with Yima, replacing the prior joint venture contracts entered into in October 2008 and April 2009. The joint ventures were formed for each of the gasification, methanol/methanol protein production, and utility island components of the plant, or collectively, the Yima Joint Ventures. The amended joint venture contracts provide that: (i) the Company and Yima contribute equity of 25% and 75%, respectively, to the Yima Joint Ventures; (ii) Yima will guarantee the repayment of loans from third party lenders for 50% of the project’s cost and, if debt financing is not available, Yima is obligated to provide debt financing via shareholder loans to the project until the project is able to secure third-party debt financing; and (iii) Yima will supply coal to the project from a mine located in close proximity to the project at a preferential price subject to a definitive agreement to be subsequently negotiated. In connection with entering into the amended contracts, the Company and Yima contributed remaining cash equity contributions of $29.3 million and $90.8 million, respectively, to the Yima Joint Ventures during the three months ended September 30, 2009. The Company is responsible for our share of any cost overruns on the project.

  

In exchange for such capital contributions, the Company owns a 25% interest in each joint venture and Yima owns a 75% interest. Notwithstanding this, in connection with an expansion of the project, the Company has the option to contribute a greater percentage of capital for the expansion, such that as a result, the Company would have up to a 49% ownership interest in the Yima Joint Ventures.

  

The remaining capital for the project has been funded with project debt obtained by the Yima Joint Ventures. Yima agreed to guarantee the project debt in order to secure debt financing from domestic Chinese banking sources. The Company has agreed to pledge to Yima its ownership interests in the joint ventures as security for the Company’s obligations under any project guarantee. In the event that the necessary additional debt financing is not obtained, Yima has agreed to provide a loan to the joint ventures to satisfy the remaining capital needs of the project with terms comparable to current market rates at the time of the loan.

 

Under the terms of the joint venture agreements, the Yima Joint Ventures are to be governed by a board of directors consisting of eight directors, two of whom were appointed by the Company and six of whom were appointed by Yima. The joint ventures also have officers that are nominated by the Company, Yima and/or the board of directors pursuant to the terms of the joint venture contracts. The Company and Yima shall share the profits, and bear the risks and losses, of the joint ventures in proportion to their respective ownership interests. The term of the joint venture shall commence upon each joint venture company obtaining its business operating license and shall end 30 years after commercial operation of the plant.

 

11
 

 

The Yima Joint Venture plant generated its first methanol production in December 2012. The Yima Joint Venture plant’s refined methanol section was fully commissioned in December 2013, and has operated at limited capacity since that date. The plant is designed to produce 300,000 tonnes per year of methanol from operating two of its three available gasifiers and has achieved 100% peak syngas production levels and 80% peak methanol production levels. This plant is intended to provide a commercial demonstration of the Company’s technology as deployed on a much larger scale than the ZZ Joint Venture plant.

 

The Yima Joint Venture initiated an outage in March that was intended to allow the plant to make broad and miscellaneous improvements to many areas of the entire methanol producing facility which had not been completed or properly installed. Many of these improvements were punch-list items left over from construction, along with improvements which have been learned from the past year’s operation at the plant. Additionally, it was identified during this time that the Yima Joint Venture has not installed all the required units related to removal of sulfur compounds from syngas. A portion of these repairs were completed and the facility was restarted in late June 2014. After three weeks of operation the plant was shut down again due to improper repair techniques on its Heat Recovery System Generator.

 

The Company has included approximately $3.0 million of royalty costs due to GTI for the Yima Joint Ventures’ U-GAS ® license as part of its investment in joint ventures on its consolidated balance sheet, including a $1.5 million payment paid to GTI in June 2009 (when the amended joint venture contracts were signed), a $0.5 million payment in October 2013, and $1.0 million of payments in January 2014.

 

Until May 31, 2013, the Company accounted for its equity interest in the Yima Joint Ventures under the equity method of accounting. Under this method, the Company recorded its proportionate share of the Yima Joint Ventures’ net income or loss based on the Yima Joint Venture’s financial results. As of June 1, 2013, the Company changed to the cost method of accounting because the Company concluded that it is unable to exercise significant influence over the Yima Joint Ventures. The Company’s conclusion regarding its lack of significant influence is based on its interactions with the Yima Joint Ventures related to the start-up and operations and due to various other circumstances including limited participation in operating and financial policymaking processes and the Company’s limited ability to influence technological decisions. There was no equity in losses of the Yima Joint Ventures recognized for financial reporting purposes for the three month period ended September 30, 2014 and 2013 since the Company changed from the equity method to the cost method of accounting as of June 1, 2013.

 

Additionally, in January 2011, the Company signed gasifier sales agreements with the Yima Joint Ventures to sell gasifiers and gasifier related equipment for an aggregate contract price of $3.0 million. A portion of the equipment associated with these orders was ordered from ZCM (as defined under “Joint Venture with ZCM” in this Note 2). The gasifiers were completed and delivered in January 2012 to the Yima Joint Ventures. As of September 30, 2014, the Yima Joint Ventures had paid $2.4 million of the total contract price and still owed the remaining payment approximately of $0.67 million to the Company. The Company still owes $0.67 million to both ZCM and an additional vendor associated with the equipment purchase, which is accrued as a current liability on the Company’s consolidated balance sheet.

 

TSEC Joint Venture

 

Joint Venture Contract

 

On February 14, 2014, SES Asia Technologies Limited, one of the Company’s wholly owned subsidiaries, entered into a Joint Venture Contract (the “JV Contract”) with Zhangjiagang Chemical Machinery Co., Ltd. (“ZCM”) to form Jangsu Tianwo-SES Clean Energy Technologies Limited (the “TSEC” Joint Venture”). The purpose of the TSEC Joint Venture is to establish the Company’s gasification technology as the leading gasification technology in the TSEC Joint Venture territory (which is initially China, Indonesia, the Philippines, Vietnam, Mongolia and Malaysia) by becoming a leading provider of proprietary equipment for the technology. The scope of the TSEC Joint Venture is to market and license the Company’s gasification technology via project sublicenses; procurement and sale of proprietary equipment and services; coal testing; and engineering, procurement and research and development related to the technology. ZCM contributed RMB 53,800,000 in April 2014 and is required to contribute an additional RMB 46,200,000 within two years of contract execution for a total contribution of RMB 100,000,000 (approximately USD $16 million) in cash to the TSEC Joint Venture, and owns 65% of the TSEC Joint Venture. The Company has contributed an exclusive license to use of its technology in the TSEC Joint Venture territory pursuant to the terms of a Technology Usage and Contribution Agreement entered into among the TSEC Joint Venture, ZCM and the Company (the “TUCA”) on the same date. The Company owns 35% of the TSEC Joint Venture.

 

12
 

 

Under the JV Contract, neither party may transfer their interests in the TSEC Joint Venture without first offering such interests to the other party. Notwithstanding this, the Company has the right until 30 days after the first project sublicense is entered into by the TSEC Joint Venture to transfer 5% of its interest to a financial investor. If the Company elects not to transfer such 5% interest during that period, ZCM has the option to purchase such interest from the Company for RMB 10,000,000 (approximately USD$1.6 million).

 

The JV Contract also includes a non-competition provision which requires that the JV be the exclusive legal entity within the TSEC Joint Venture territory for the marketing and sale of any gasification technology or related equipment that utilizes low quality coal feedstock. Notwithstanding this, ZCM has the right to manufacture and sell gasification equipment outside the scope of the TSEC Joint Venture within the TSEC Joint Venture territory. In addition, the Company has the right to develop and invest equity in projects outside of the TSEC Joint Venture within the TSEC Joint Venture territory. After the termination of the TSEC Joint Venture, ZCM must obtain written consent from the Company for the market development of any gasification technology that utilizes feedstock in the TSEC Joint Venture territory.

 

The JV Contract may be terminated upon, among other things, (i) a material breach of the JV Contract which is not cured, (ii) a violation of the TUCA, (iii) the failure to obtain positive net income within 24 months of establishing the TSEC Joint Venture or (iv) mutual agreement of the parties.

 

On March 18, 2014, the TSEC Joint Venture received the required 20-year business license from the State Administration for Industry & Commerce of the People’s Republic of China (SAIC) in Zhangjiagang. On April 8, 2014, the transactions were completed and the TSEC Joint Venture began operations.

 

Technology Usage and Contribution Agreement

 

Pursuant to the TUCA, the Company has contributed to the TSEC Joint Venture the exclusive right to the Company’s gasification technology in the TSEC Joint Venture territory, including the right to: (i) grant site specific project sub-licenses to third parties; (ii) use the Company’s marks for proprietary equipment and services; (iii) engineer and/or design processes that utilize the Company’s technology or other Company 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 the Company and its affiliates.

 

The TSEC Joint Venture will be the exclusive operational entity for business relating to the Company’s technology in the TSEC Joint Venture Territory. If the TSEC Joint Venture loses exclusivity due to a Company breach, ZCM is to be compensated for direct losses and all lost project profits. The Company will also provide training for technical personnel of the TSEC Joint Venture through the second anniversary of the establishment of the TSEC Joint Venture. The Company will also provide a review of engineering works for the TSEC Joint Venture. If modifications are suggested by the Company and not made, the TSEC Joint Venture bears the liability resulting from such failure. If the Company suggests modifications and there is still liability resulting from the engineering work, it is the liability of the Company.

 

Any party making, whether patentable or not, improvements relating to the Company technology after the establishment of the TSEC Joint Venture, grants to the other Party an irrevocable, non-exclusive, royalty free right to use or license such improvements and agrees to make such improvements available to the Company free of charge. All such improvements shall become part of the Company’s technology and both parties shall have the same rights, licenses and obligations with respect to the improvement as contemplated by the TUCA.

 

The TSEC Joint Venture will establish an Intellectual Property Committee, with two representatives from the TSEC Joint Venture and two from the Company. This Committee shall review all improvements and protection measures and recommend actions to be taken by the TSEC Joint Venture in furtherance thereof. Notwithstanding this, each party is entitled to take actions on its own to protect intellectual property rights.

 

13
 

 

Any breach of or default under the TUCA which is not cured on notice entitles the non-breaching party to terminate. The parties can suspend performance of the TUCA in the event of a dispute if the dispute poses a significant adverse impact on performance. The TSEC Joint Venture indemnifies the Company for misuse of the Company’s technology or infringement of the Company’s technology upon rights of any third party.

 

The following table presents summarized unconsolidated financial information for the TSEC Venture (in thousands):

 

Income Statement data:   Three Months Ended September 30, 2014  
Revenue   $  
Operating loss     (675 )
Net loss     (676 )

 

Balance sheet data:   September 30,
2014
    June 30,
2014
 
Current assets   $ 8,129     $ 8,573  
Noncurrent assets     8,241       8,458  
Current liabilities     21       3  
Noncurrent liabilities            
Equity     16,349       17,028  

 

SES Resource Solutions

 

SES Resource Solutions, Ltd., or SRS, is a joint venture owned 50% by us and 50% by Midas Resources AG, or Midas that was formed in June 2011 to provide additional avenues of commercialization for the Company’s technology. Key objectives of the joint venture are to identify and procure low cost, low rank coal resources for which the Company’s technology represents the best route to commercialization; to provide investment opportunities in both gasification facilities and coal resources; and to facilitate the establishment of gasification projects globally based on the Company’s technology. In December 2012, SRS suspended its activities due to the unavailability of financing for coal resources. Therefore the Company is in the process of winding up this business.

 

The Company’s investment in SRS is accounted for using the equity method. SRS has no assets or liabilities as amounts are funded by the Company as costs are incurred.

 

Note 3 – GTI License Agreement

 

On November 5, 2009, the Company entered into an Amended and Restated License Agreement (the “GTI Agreement”) with GTI, replacing the Amended and Restated License Agreement between the Company and GTI dated August 31, 2006, as amended. Under the GTI Agreement, the Company maintains its 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 original U-GAS ® technology for 100% biomass and coal/biomass blends exceeding 40% biomass.  

 

In order to sublicense any U-GAS ® system, the Company is required to comply with certain requirements set forth in the GTI Agreement. In the preliminary stage of developing a potential sublicense, the Company is 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 the Company, provided that GTI is required to not unreasonably withhold their approval. If GTI does not respond within that ten business day period, they are deemed to have approved of the sublicense. The Company is required to provide updates on any potential sublicenses once every three months during the term of the GTI Agreement. The Company is also restricted from offering a competing gasification technology during the term of the GTI Agreement.

 

For each U-GAS ® unit which the Company licenses, designs, builds or operates for itself or for a party other than a sublicensee and which uses coal or a coal and biomass mixture or biomass as the feed stock, the Company 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 (the “Standard Royalty”). If the Company invests, or has 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, the Company is required to pay to GTI, an agreed percentage split of third party licensing fees (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, the Company is required to pay to GTI, in addition to the Agreed Percentage of such royalty payable by such third party, the Agreed Percentage of its dividends and liquidation proceeds from its equity investment in the third party. In addition, if the Company receives a carried interest in a third party, and the carried interest is less than a specified percentage of the equity of such third party, the Company is required to pay to GTI, in its 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. The Company will be required to pay the Standard Royalty to GTI if the percentage of the equity of a third party that the Company (a) invests in, (b) has an option to invest in, or (c) receives a carried interest in, exceeds the percentage of the third party specified in the preceding sentence.

 

14
 

 

The Company is 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 the Company is 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, the Company is not required to make the annual payment. The Company accrues the annual royalty expense ratably over the calendar year as adjusted for any royalties paid during year as applicable. The Company must also provide GTI with a copy of each contract that it enters into relating to a U-GAS® system and report to GTI with its progress on development of the technology every six months.

 

For a period of ten years, the Company 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. The Company has further indemnified GTI and its affiliates from any liability or loss resulting from unauthorized disclosure or use of any confidential information that the Company receives.

 

The GTI Agreement expires on August 31, 2016, but may be extended for two additional ten-year periods at the Company’s option.

 

Note 4 – Stock-Based Compensation

 

As of September 30, 2014, the Company had outstanding stock option and restricted stock awards granted under the Company’s Amended and Restated 2005 Incentive Plan, as amended (the “Incentive Plan”), under which the Company’s stockholders have authorized a total of 12,000,000 shares of common stock for awards under the Incentive Plan. As of September 30, 2014, there were 1,740,683 shares authorized for future issuance pursuant to the Incentive Plan. Under the Incentive Plan, the Company may grant incentive and non-qualified stock options, stock appreciation rights, restricted stock units and other stock-based awards to officers, directors, employees and non-employees. Stock option awards generally vest ratably over a one to four year period and expire ten years after the date of grant.

 

Stock option activity during the three months ended September 30, 2014 was as follows:

 

    Shares of Common Stock Underlying  
    Stock Options  
       
Outstanding at June 30, 2014     7,702,550  
Granted     301,025  
Exercised     (117,500 )
Forfeited     (20,000 )
Outstanding at September 30, 2014     7,866,075  
Exercisable at September 30, 2014     7,006,898  

 

The fair values for the stock options granted during the three months ended September 30, 2014 were estimated at the date of grant using a Black-Scholes-Morton option-pricing model with the following weighted-average assumptions:

 

Risk-free rate of return     1.67 %
Expected life of award     5.1 years  
Expected dividend yield     0.00 %
Expected volatility of stock     85 %
Weighted-average grant date fair value   $ 0.87  

 

15
 

 

Stock warrants activity during the three months ended September 30, 2014 were as follows:

 

    Shares of Common Stock Underlying  
    Stock Warrants  
       
Outstanding at June 30, 2014     6,616,667  
Granted      
Exercised      
Outstanding at September 30, 2014     6,616,667  

 

The Company recognizes the stock-based compensation expense related to the Incentive Plan awards and warrants over the requisite service period. The following table presents stock based compensation expense attributable to stock option awards issued under the Incentive Plan and attributable to warrants issued to consulting firms as compensation (in thousands):

 

    Three Months Ended  
    September 30,  
    2014     2013  
             
Incentive Plan   $ 285     $ 333  
Warrants and stock           713  
Total stock-based compensation expense   $ 285     $ 1,046  

 

Note 5 – Net Loss Per Share

 

Historical net loss per share of common stock is computed using the weighted average number of shares of common stock outstanding. Basic loss per share excludes dilution and is computed by dividing net loss available to common stockholders by the weighted average number of shares of common stock outstanding for the period. Stock options, warrants and unvested restricted stock are the only potential dilutive share equivalents the Company has outstanding for the periods presented. For the three months ended September 30, 2014 and 2013, options and warrants to purchase common stock were excluded from the computation of diluted earnings per share as their effect would have been antidilutive as the Company incurred net losses during those periods.

 

Note 6 – Risks and Uncertainties

 

Any future decrease in economic activity in China, India or in other regions of the world, in which the Company may in the future do business, could significantly and adversely affect its results of operations and financial condition in a number of other ways. Any decline in economic conditions may reduce the demand for prices from the products from our plants, thus the Company’s ability to finance and develop its existing projects, commence any new projects and sell its products could be adversely impacted.

 

As disclosed in Note 2, the ZZ Joint Venture began producing and selling methanol in November 2013 and sold 12,849 tonnes of methanol during the three months ended September 30, 2014 generating approximately $4.2 million of revenue. The ZZ Joint Venture has worked to complete the plant retrofits and equipment upgrades to enable increased methanol production from integrated syngas and coke oven gas feedstock. There can be no assurances that the methanol production operations contemplated by the ZZ Cooperation Agreement will be profitable. Profitability will be dependent on, among other things, our management of the operations of the plant, pricing of methanol, coal and power, and maintaining necessary government approvals.

 

16
 

 

The Yima Joint Venture plant’s refined methanol section was fully commissioned in December 2013, and has operated at limited capacity since that date. Methanol production was approximately 27% of its capacity during the three months ended September 30, 2014. The plant is designed to produce 300,000 tonnes per year of methanol from operating two of its three available gasifiers and has achieved 100% peak syngas production levels and 80% peak methanol production levels. Yima initiated an outage in March that should allow the plant to make improvements to the upstream and downstream units adjacent to the Company’s gasification systems at the Yima Joint Venture plant. . Many of these improvements were punch-list items left over from construction, along with improvements which have been learned from the past year’s operation at the plant. Additionally, it was identified during this time that the Yima Joint Venture has not installed all the required units related to removal of sulfur compounds from syngas. A portion of these repairs were completed and the facility was restarted in late June 2014. After three weeks of operation the plant was shut down again due to improper repair techniques on its Heat Recovery System Generator. The Company has limited influence on the operating and financial policymaking of the Yima Joint Ventures. There can be no assurances that the Yima Joint Ventures’ operations will be profitable or that dividends will be paid to the Company. There have been a variety of minor construction related shutdowns which are normally seen in the startup of these types of facilities, but the shutdowns have generally not been related to the gasifier systems. In addition, the Yima Joint Ventures still owe the Company approximately $0.67 million for certain gasifiers and gasifier related equipment delivered in 2012, a portion of which is due from the Company to ZCM and the balance to a second vendor for providing equipment associated with the gasifiers. It is unclear when or if the balance of this money will be paid to the Company from the Yima Joint Venture.

 

Although the Company has made significant progress recently on partnering its China business through the TSEC Joint Venture, the Company expects to continue to have negative operating cash flows until it can generate sufficient cash flows from its technology, equipment and services business and SES China (including the ZZ Joint Venture, the Yima Joint Ventures and the TSEC Joint Venture) to cover its general and administrative expenses and other operating costs. In addition, the Company may need to aggressively pursue additional partners in China and may need to seek other equity financing or reduce its operating expenses. The Company will also limit the development of any further projects until it has assurances that acceptable financing is available to complete the project.

 

 

The majority of our revenues are derived from the sale of methanol in China. We do not have long term offtake agreements for these sales, so revenues fluctuate based on local market spot prices, which have been under significant pressure and are generally not consistent or predictable, and we are unsure of how much longer this will continue. Our liquidity and capital resources will be materially adversely affected if markets remain under pressure, and we are unable to obtain satisfactory process for these commodities or if prospective buyers do not purchase these commodities

 

The Company currently plans to use its available cash for (i) securing orders and other associated tasks associated with the Company’s distributed power initiatives such as in Pakistan with General Electric; (ii) executing the Company’s strategy to develop market based business verticals; (iii) general and administrative expenses; and (iv) working capital and other general corporate purposes. Although the Company intends for the ZZ Joint Venture to sustain itself through its own earnings, the Company may also need to make additional contributions to the ZZ Joint Venture in order for it to meet its obligations until the ZZ Joint Venture generates sufficient cash flows to cover its operating costs and debt service. The actual allocation and timing of these expenditures will be dependent on various factors, including changes in the Company’s strategic relationships, commodity prices and industry conditions, and other factors that the Company cannot currently predict. In particular, any future decrease in economic activity in China or in other regions of the world in which the Company may in the future do business could significantly and adversely affect our results of operations and financial condition. Operating cash flows from the Company’s joint venture operating projects can be positively or negatively impacted by changes in coal and methanol prices. These are commodities where market pricing is often cyclical in nature.

 

The Company does not currently have all of the financial and human resources to fully develop and execute on all of its other business opportunities; however, the Company intends to finance their development through paid services, technology access fees, equity and debt financings and by securing financial and strategic partners focused on development of these opportunities. The Company can make no assurances that its business operations will provide it with sufficient cash flows to continue its operations. The Company may need to raise additional capital through equity and debt financing for any new ventures that are developed, to support its existing projects and possible expansions thereof and for its corporate general and administrative expenses. The Company is considering a full range of financing options in order to create the most value in the context of the increasing interest the Company is witnessing in its proprietary technology. The Company cannot provide any assurance that any financing will be available to it in the future on acceptable terms or at all. Any such financing could be dilutive to its existing stockholders. If the Company cannot raise required funds on acceptable terms, it may not be able to, among other things, (i) maintain its general and administrative expenses at current levels including retention of key personnel and consultants; (ii) successfully develop its licensing and related service businesses; (iii) negotiate and enter into new gasification plant development contracts and licensing agreements; (iv) make additional capital contributions to its joint ventures; (v) fund certain obligations as they become due; or (vi) respond to competitive pressures or unanticipated capital requirements.

 

17
 

 

The Company is subject to concentration of credit risk with respect to our cash and cash equivalents, which it attempts to minimize by maintaining cash and cash equivalents with major high credit quality financial institutions. At times, the Company’s cash balances in a particular financial institution may exceed limits that are insured by the U.S. Federal Deposit Insurance Corporation or equivalent agencies in foreign countries such as Hong Kong.

 

Note 7 – Segment Information

 

The Company’s reportable operating segments have been determined in accordance with the Company’s internal management reporting structure and include SES China, Technology Licensing and Related Services, and Corporate. The SES China reporting segment includes all of the assets and operations and related administrative costs for China including initial closing costs relating to our joint ventures. The Technology Licensing and Related Services reporting segment includes all of the Company’s current operating activities outside of China. The Corporate reporting segment includes the executive and administrative expenses of the corporate office in Houston. The Company evaluates performance based upon several factors, of which a primary financial measure is segment operating income or loss.

 

The following table presents statements of operations data and assets by segment (in thousands):

 

    Three Months Ended  
    September 30,  
    2014     2013  
Revenue:            
SES China   $ 4,214     $  
Technology licensing and related services            
Total revenue   $ 4,214     $  
                 
Depreciation and amortization:                
SES China   $ 521     $ 515  
Technology licensing and related services     50       47  
Corporate & other     2       3  
Total depreciation and amortization   $ 573     $ 565  
                 
Operating loss:                
SES China   $ (2,637 )   $ (2,664 )
Technology licensing and related services     (597 )     (90 )
Corporate & other     (1,260 )     (1,377 )
Total operating loss   $ (4,494 )   $ (4,131 )
                 
Interest expense:                
SES China   $ 64     $ 69  
Technology licensing and related services            
Corporate & other            
Total interest expense   $ 64     $ 69  
                 
Equity in losses of joint ventures:                
SES China   $       $—  
Technology licensing and related services            
Corporate & other           1  
Total equity in losses of joint ventures   $     $ 1  

 

    September 30,
2014
    June 30,
2014
 
Assets:            
SES China   $ 67,521     $ 76,316  
Technology licensing and related services     982       943  
Corporate & other     17,173       14,447  
Total assets   $ 85,676     $ 91,706  

 

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

 

You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and the related notes and other financial information included elsewhere in this quarterly report. Some of the information contained in this discussion and analysis or set forth elsewhere in this quarterly report, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. You should review the “Risk Factors” section of our Annual Report on Form 10-K for the fiscal year ended June 30, 2014 for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

 

Business Overview

 

We are a global energy and gasification technology company that provides proprietary gasification technology systems and solutions to the energy and chemical industries.

 

Our business strategy is to create value by supplying our technology, equipment and services into global projects where lower cost low quality coals, coal wastes, municipal wastes, agricultural biomass, and other biomass feedstocks can be profitably converted through our proprietary gasification technology into clean synthesis gas, or syngas (a mixture of primarily hydrogen, carbon monoxide, and methane), which is then used to produce a variety of high value energy and chemical products. Our initial operating projects to date convert high ash coal and coal wastes to chemical grade methanol, and we are pursuing a variety of additional global projects under development by customers who may use our technology platform to convert low quality coals such as lignite, coal wastes, municipal wastes and agricultural waste biomass to high value products such as electric power, transportation fuels, substitute natural gas, or SNG, fuel for direct reduction iron, or DRI, steel making and other products. Our technology is originally based on the U-GAS ® process developed by the Gas Technology Institute and we have augmented and differentiated the technology through newly developed intellectual property related to design, detailed engineering, constructing, starting up and operating our two commercial joint venture plants in China.

 

Our technology can cleanly and economically extract carbon and hydrogen from most types of coal resources, coal wastes and renewable forms of biomass and municipal wastes. This carbon and hydrogen is extracted in the form of synthesis gas, called syngas. Our syngas is then readily converted into a wide range of fundamental energy and chemical products. These products include, but are not limited to, electric power, natural gas (methane), transportation fuels such as gasoline, diesel and jet fuel, chemicals such as methanol, olefins, and glycols, ammonia and urea for agricultural fertilizers and feedstocks for steel making. Our technology is part of a family of gasification technologies which have been used successfully in industrial applications for many years. However, our technology is meaningfully differentiated over these older forms of gasification primarily through its ability to create clean and economical syngas from most forms of coal resources—from the lowest quality brown coals and lignites , high ash sub-bituminous coals and including the highest quality bituminous and anthracite coals—as well as biomass and other renewable waste materials. Our most recent development is the SES XL3000 gasification system introduced in October 2014. It is specifically targeted to provide higher syngas capacity and delivery pressure with lower specific capital costs, while maintaining high carbon to syngas conversion ratios with high syngas generation efficiency on both high and low quality coals. The XL3000 is targeted to deliver efficiency and economy in performance required to meet the needs of the wide range of the world's syngas projects: distributed power, direct reduced iron (DRI) steelmaking, industrial chemicals, fertilizers, synthetic natural gas, and transportation fuels . The XL3000 gasification system delivers approximately 250% higher syngas capacity than our previous designs with delivery pressures up to 55 bar pressure, driving lower specific capital costs per unit.

 

We intend to further commercialize our technology through supplying our gasification systems, which consist of technology, equipment and services to projects globally via value accretive partnerships and collaborations with other companies operating in the energy and chemical market segments in which we believe our technology is highly advantaged. This is a low capital intensity business approach which we believe can generate attractive margins for us through providing our technology differentiated equipment and services in multiple market segments globally with a potential to build meaningful sales opportunities over time. To date our principal operating activities have focused in China where we have invested and built two commercial projects and recently entered into a joint venture designed to establish our gasification technology as the leading gasification technology in China and other territories in Asia. We made these investments to fully demonstrate our technology and our capabilities to build and operate, but with this step of commercializing our technology successfully completed, we no longer intend to make such extensive capital investments in the foreseeable future.

 

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Our business model is to deploy our technology on a global basis via supplying a technology package, containing license rights to operate a project using our technology, gasification system equipment, and technology related services. As part of our overall strategy we intend to form strategic regional and market-based partnerships or business verticals where our technology offers advantages and through cooperating with these partners grow an installed base of projects. Through collaborative partnering arrangements we believe we will commercialize our technology much faster than entering these markets alone. In addition to regional business units, we are continuing to evaluate and develop our business in markets such as power, steel, fuels, substitute natural gas, chemicals and renewables which can benefit from deploying our technology offering to create these products from low cost coal and renewable feedstocks. We are developing these market-based business vertical opportunities together with strategic partners which have established businesses or interests in these markets with the goal of growing and expanding these businesses by partnering with us and deployment of our technology offering.

 

Our ZZ Joint Venture project is our first commercial scale coal gasification plant and is located in Shandong Province, China. It achieved commercial operation in December 2008. The ZZ Joint Venture is designed to produce clean syngas for sale to an immediately adjacent industrial company which manufactures methanol from the syngas. Under the new commercial structure completed effective October 31, 2013, we assumed control of XE’s methanol facilities and the ZZ Joint Venture plant is operating as an integrated plant which converts coal to syngas and then converts syngas and coke oven gas into methanol, as described in more detail under “Note 2 –Joint Ventures– Zao Zhuang Joint Venture” to our consolidated financial statements.

 

The Yima Joint Venture project in Henan Province, China generated its first methanol production in December 2012, and is currently in its start-up phase as described in more detail under “Note 2 –Joint Ventures-Yima Joint Venture” to our consolidated financial statements. The Yima Joint Venture plant’s refined methanol section was fully commissioned in December 2013, and has operated at limited capacity since that date. Methanol production was approximately 8% of its capacity during the three months ended September 30, 2014. The plant is designed to produce 300,000 tonnes per year of methanol from operating two of its three available gasifiers and has achieved 100% peak syngas production levels and 80% peak methanol production levels.

 

We also recently completed the formation of the TSEC Joint Venture, our China joint venture with ZCM. The purpose of the TSEC Joint Venture is to establish our gasification technology as the leading gasification technology in the TSEC Joint Venture territory (which is initially China, Indonesia, the Philippines, Vietnam, Mongolia and Malaysia) by becoming a leading provider of proprietary equipment for the technology. The scope of the TSEC Joint Venture is to market and license our gasification technology via project sublicenses; procurement and sale of proprietary equipment and services; coal testing; and engineering, procurement and research and development related to the technology.

 

Our collaboration with GE Packaged Power, Inc., a subsidiary of GE, which began in early 2013 to jointly evaluate and market a small scale power generation unit combining our gasification technology with GE’s aeroderivative gas turbines, is an ongoing example of our market-based business vertical developments underway. We, along with our distributed power collaborators, GE, ISTROENERGO GROUP, Inc. and TUTEN Ltd, have signed our first letter of intent, or LOI, with K-Electric (formerly known as Karachi Electric Supply Company), or KESC. KESC is a large electric utility company in Karachi, Pakistan with over 2.3 GW of installed electric generating capacity. The exclusive LOI calls for a feasibility engineering and financial evaluation of a coal gasification power generation project with a capacity between 90 and 200 MW to be constructed near Karachi. The completed feasibility study will serve as the basis for further discussions and negotiations for a syngas power plant contract. We believe the distributed power segment offers opportunity over time to provide meaningful sales opportunities for our gasification technology and equipment systems. We intend to focus on the continued development of this business vertical. We are also advancing developments via technology integration studies with potential partners for business verticals in DRI steel and “green” chemicals derived from municipal wastes. We have also formalized agreements with Simon India Ltd., a subsidiary of the Adventz Group, for marketing our technology in India which we believe is an important growth region for which our technology is uniquely well suited.

 

We have also entered into an exclusive agreement with TSEC 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. TSEC will aid in the marketing of these DRI facilities in China and will supply the gasification equipment and licensing of the technology.

 

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We believe our existing operating projects in China have clearly demonstrated that we have several advantages which differentiate our technology over other commercially available gasification technologies, such as entrained flow, fixed bed, and moving bed gasification technologies. The first of these advantages is our ability to use a wide range of feedstocks (including low rank, high ash and high moisture coals, which are significantly cheaper than higher grade coals), coal wastes, municipal wastes, agricultural wastes, and other biomass feedstocks to make clean syngas. Our feedstock advantage opens up many of these global resources for use to manufacture energy and chemical products which otherwise could not be done with other currently available commercial gasification technologies.  Secondly, our technology’s advanced fluidized bed design is extremely tolerant to a wide range of changes in feedstock during operation, which allows for flexible fuel purchasing for our customers. Additionally, our technology can use much less water and its simple design leads to more favorable fabrication costs and resulting plant costs being lower compared to other commercially available technologies. We believe that these important cost, feedstock flexibility, and water consumption factors position our technology for future deployment of gasification worldwide because our technology can enable projects to become a lower cost producer of products. Depending on local market needs and fuel sources, our syngas can be used to produce many valuable products including electric power, SNG, chemicals such as methanol, dimethyl ether, or DME, and glycol, ammonia for fertilizer production, reducing gas for DRI processes, and transportation fuels such as gasoline and diesel.

 

Business Strategy

 

The key elements of our business strategy include:

 

Generate financial results from our existing joint venture assets in China.

 

ZZ Joint Venture

 

Our ZZ Joint Venture plant produces clean syngas which is blended with coke oven gas, or COG, to produce chemical-grade methanol, or MeOH. This methanol is sold into the local methanol market in Shandong Province, China.  The history of the ZZ Joint Venture and the commercially restructured facility is described in more detail under “Current Operations and Projects– Zao Zhuang Joint Venture. Key elements of our business strategy for the plant are:

 

a) Operating at the highest possible production rates, based on market conditions, to maximize the financial results from the facility.
b) Maximizing the operation of our gasification systems at the ZZ Joint Venture within local market constraints and continue to demonstrate the robustness and efficient capability of our technology.
c) Secure alternative and increased sources of COG to aid increased production rates and lower production costs.
d) Selective testing of new inventions at the ZZ Joint Venture that will benefit the joint venture and our future gasification projects.
e) Continuously improving and innovating at the ZZ Joint Venture to lower production costs and improve operating margins.
f) Evaluating, advancing and closing new partnering and/or expansion alternatives for improving the financial results which may include additional downstream technologies to produce high value products at the site and further enhance the financial results of the facility.

 

Yima Joint Venture

 

The Yima Joint Venture plant generated its first methanol production in December 2012. The Yima Joint Venture plant’s refined methanol section was fully commissioned in December 2013, and has operated at limited capacity since that date. The plant is designed to produce 300,000 tonnes per year of methanol from operating two of its three available gasifiers and has achieved 100% peak syngas production levels and 80% peak methanol production levels. This plant is intended to provide a commercial demonstration of our technology as deployed on a much larger scale than the ZZ Joint Venture plant.

 

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We own 25% of the Yima Joint Ventures and Yima Coal Industry (Group) Co., Ltd., or Yima, owns 75%. Yima controls the construction, startup and operation of the plant. Recently, Yima put in place a new facility management structure, which we believe will significantly improve the operations of the facility. We believe the fundamental value of the Yima Joint Ventures is sound due to (1) the preferential coal pricing Yima can provide to the facility, (2) our technology’s capability to efficiently gasify this low quality coal and (3) the benefits derived from the plant’s large scale. More detail is available under “Current Operations and Projects – Yima Joint Ventures”. Key elements of our business strategy for the Yima plant are:

 

a) Achieving formal commercial acceptance of the entire facility including documented acceptance of the performance of our technology at Yima.
b) Achievement of safe, full-design annual methanol production rates and overall profitable operation which can lead to dividend distributions to the shareholders of the joint venture.
c) Increase the scrutiny of results from onsite JV management via cooperation with Yima and Henan Energy and Chemical Industry Group Co., Ltd., parent company of Yima, or HNECGC, senior leadership, maintaining our onsite staff, regular joint venture board meetings and related shareholder meetings.
d) Continually assess long-term approach for us in the Yima Joint Ventures to maximize our financial return through achieving eventual dividends, restructuring alternatives and/or exit strategies.

 

TSEC Joint Venture

 

The purpose of the TSEC Joint Venture is to establish our gasification technology 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 for the technology. The scope of the TSEC Joint Venture is to market and license our gasification technology via project sublicenses; procurement and sale of proprietary equipment and services; coal testing; and engineering, procurement and research and development related to the technology. In addition, we believe our TSEC Joint Venture will also help build new partnerships within market segments such as DRI steel, power, transportation fuels and for longer term value creation, larger scale SNG projects utilizing low rank coal resources and biomass where our technology brings, and accelerate the commercialization of our technology on a global basis enabling us to reduce the capital requirements to achieve this acceleration. We own a 35% interest in the TSEC Joint Venture. More detail is available under “Current Operations and Projects – TSEC Joint Venture” . Key elements of our business strategy for TSEC are:

 

a) Achieve initial orders for new project license and equipment supply.
b) Secure first customers for our higher pressure 40bar gasification platform, with a focus on brown field projects which could move quickly to install and operate the 40 bar system.
c) Expand the scope of supply of the TSEC joint venture to grow from licenses and proprietary equipment supply into supply of non-proprietary process equipment into TSEC projects.
d) Expand the TSEC engineering and construction capability together with ZCM to provide fully constructed fixed priced gasification systems in the territory.
e) Endeavor to form collaborations and partnerships in market segments with known leaders in those markets to help advance our technology, such as our exclusive marketing agreement with the TSEC Joint Venture and Midrex Technologies for coal gasification-based DRI.
f) Build implementation capability with TSEC to supply high quality, low cost equipment into our global projects outside the territory.

 

Partnering with proven project development companies .

 

We believe that partnering to enable the development of gasification projects, which can benefit from our technology’s capability regarding low cost feedstock flexibility, lower capital cost and reduce water usage footprint, can provide value through creating a channel for us to secure new orders and the ability to share in project development fees and/or achieve carried interests in projects. We believe that we have the greatest competitive advantage by using our gasification technology in situations where there is a ready source of low quality coal, coal waste or biomass to utilize as a feedstock. In many cases such low cost resources are not a viable energy source without our technology’s capability to convert the resource into syngas and resulting energy and chemical products.

 

Increase our organizational and financial capability to deliver our technology, equipment and services .

 

As our business verticals and other business initiatives develop and we secure new technology orders, we believe we may need to add significant implementation capability to follow through with fulfillment and implementation and increase our ability to provide the necessary financial and performance guarantees required by project customers and equity and debt financiers. We intend to seek new and impactful partnering opportunities to provide this needed capability in similar fashion to our TSEC Joint Venture in China.

 

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Continue to develop and improve our technology .

 

We are continually seeking to advance and improve our gasification technology, such as through our new XL3000 gasification system. We are continuing to work with our prospective customers to determine the suitability of their low rank coals for our technology through proprietary coal characterization testing and bench scale gasification tests. We are advancing our higher pressure 40bar to 60bar gasification system designs which can further enhance our capital and operating expenses effectiveness and allow our system to achieve much higher syngas output from a smaller sized gasifier. Additionally, we are growing our technology base through (i) continued development of know-how with our engineering and technical staff, (ii) growing and protecting our trade secrets as a result of patenting improvements tested at our ZZ and Yima Joint Venture plants, (iii) developing improvements resulting from integration of our technology with downstream processes, and (iv) developing improvements resulting from scaling up the design of our technology in pressure and capacity. Examples of our technology development include our High Pressure Gasifier, Fines Management System and Ash Management System which increase overall efficiency. We have several patent applications pending relating to these technology improvements in addition to a number of other improvements to increase the gasifier availability and to lower the costs of the gasifier installation and subsequent operations.

 

Results of Operations

 

Three Months Ended September 30, 2014 Compared to the Three Months Ended September 30, 2013

 

Revenue . Total revenue was $4.2 million for the three months ended September 30, 2014 compared with no revenue for the three months ended September 30, 2013.

 

Our ZZ Joint Venture began producing and selling methanol in November 2013 and sold 12,849 tonnes of methanol during the three months ended September 30, 2014 generating approximately $4.2 million of revenue. There were no product sales revenues for the three months ended September 30, 2013 due primarily to no capacity fee revenue being received and the suspension of syngas production at the ZZ Joint Venture plant in late September 2011.

 

There was no technology licensing and related services revenues for both the three months ended September 30, 2014 and 2013.

 

Costs of sales and plant operating expenses. Costs of sales and plant operating expenses increased to $5.8 million for the three months ended September 30, 2014 compared to $97,000 for the three months ended September 30, 2013. The increase was primarily due to the costs incurred for the ZZ Joint Venture’s production of methanol from coke oven gas purchased from Xuecheng Energy, those costs include electricity, coke oven gas, labor and other operating costs. Although the ZZ Joint Venture restarted its syngas plant for approximately two weeks during December 2013, it has since stopped syngas production and is using coke oven gas only as its feedstock until additional coke oven gas supply is available. The ZZ Joint Venture plans to resume syngas production in the near term and has secured additional sources of coke oven gas from a local supplier in order to increase its methanol production capability.

 

General and administrative expenses. General and administrative expenses decreased by $0.3 million to $2.1 million for the three months ended September 30, 2014 compared to $2.4 million for the three months ended September 30, 2013. The decrease was due primarily to a reduction of payroll expenses resulting from the termination of our consulting agreement with Crystal Vision Energy Limited, or CVE as of August 31, 2013 and reductions in employee related compensation cost resulting from reducing headcount in China. Recurring general and administrative expenses consist primarily of compensation, professional and consulting fees, travel, and other costs of our corporate, development and administrative functions in Houston and Shanghai, and project and technical development expenses.

 

Stock-based compensation expense. Stock-based compensation expense decreased by $0.8 million to $0.3 million for the three months ended September 30, 2014 compared to $1.1 million for the three months ended September 30, 2013 and related to expensing the estimated fair values of stock-base compensation, including stock options and stock warrants, awarded to consulting firms, directors and employees during the period. The decrease was due primarily to termination of our consulting agreement with CVE in August 2013.

 

Depreciation and amortization. Depreciation and amortization expense was $0.6 million for both of the three months ended September 30, 2014 and 2013 and was primarily related to depreciation of our ZZ Joint Venture plant’s assets.

 

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Equity in losses of joint ventures. There was no equity in losses of joint ventures for the three months ended September 30, 2014 due to our change from the equity method to the cost method of accounting for Yima Joint Ventures as of June 1, 2013. There was $1,000 equity in losses of joint ventures incurred for SRS’s registration expense for the three months ended September 30, 2013. SRS suspended its activities in December 2012 due to the unavailability of financing for coal resources, we are in the process of winding up this business.

 

Foreign currency (gain) loss . Foreign currency loss was $9,000 for the three months ended September 30, 2014, and foreign currency gain was $12,000 for the three months ended September 30, 2013. These amounts resulted from the depreciation and appreciation, as applicable, of the Renminbi Yuan relative to the U.S. dollar.

 

Interest expense. Interest expense was $64,000 for the three months ended September 30, 2014 compared to $69,000 for the three months ended September 30, 2013. Our interest expense relates to the ZZ Joint Venture’s loans with Industrial and Commercial Bank of China, or ICBC, and its short-term loan with Zaozhuang Bank Co. Ltd., or the ZZ Short-term Loan. The ZZ Joint Venture repaid its final principal payment of approximately $1.2 million to ICBC in January 2014 and its principal of approximately $3.3 million for the ZZ Short-term Loan in September 2014.

 

Liquidity and Capital Resources

 

We have financed our operations to date through private placements of our common stock and in three public offerings: one in November 2007, one in June 2008 and one in March 2014. We have used the proceeds of these offerings primarily for the development of our technology, including the investments in the ZZ Joint Venture and the Yima Joint Ventures, and to pay other business development and general and administrative expenses. In addition, the ZZ Joint Venture had a loan agreement with ICBC which funded certain of its plant’s construction costs, the ZZ Short-term Loan funded in September 2013 to finance costs related to the ZZ Cooperation Agreement, and the ZZ working capital loan and line of credit funded in October 2014 for purchase of raw material.

 

As of September 30, 2014, we had $14.4 million in cash and cash equivalents and $7.8 million of working capital available to us. During the three months ended September 30, 2014, we used $1.7 million in operating activities compared to $2.8 million for the three months ended September 30, 2013. We used $0.1 million in investing activities for the three months ended September 30, 2014 and 2013 for capital expenditures related to the ZZ Cooperation Agreement. For the three months ended September 30, 2014, we used $3.3 million in financing activities to repay the ZZ Short-term bank loan with Zaozhuang Bank, and we used $1.2 million for the scheduled semi-annual principal payments on the ZZ Joint Venture’s loan with ICBC for the three months ended September 30, 2013.

 

We currently plan to use our available cash for (i) securing orders and other associated tasks associated with our distributed power initiatives such as in Pakistan with General Electric; (ii) executing our strategy to develop market based business verticals, (iii) general and administrative expenses and (iv) working capital and other general corporate purposes. Although we intend for the ZZ Joint Venture to sustain itself through its own earnings, we may also need to make additional contributions to the ZZ Joint Venture in order for it to meet its obligations until the ZZ Joint Venture generates sufficient cash flows to cover its operating costs and debt service.

 

Short-term Loan Agreement with Zaozhuang Bank Co., Ltd

 

On September 10, 2013, the ZZ Joint Venture entered into a short-term loan agreement with Zaozhuang Bank Co., Ltd., and received approximately $3.3 million of loan proceeds for the retrofit and related costs contemplated by the ZZ Cooperation Agreement. The ZZ Joint Venture paid off the ZZ Short-term Loan in September 2014.

 

Working Capital Loan Agreement with Zaozhuang Bank Co., Ltd

 

On October 2, 2014, the ZZ Joint Venture replaced the above ZZ Short-term Loan with a new working capital loan agreement with Zaozhuang Bank Co., Ltd. (the “ZZ Working Capital Loan”), and received approximately $3.3 million of loan proceeds.

 

Key terms of the Working Capital Loan are as follows:

 

Term of the loan is one year, due on September 23, 2015;

 

Interest is payable monthly at an annual rate of 9%;

 

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Xuecheng Energy is the guarantor of the loan;

 

Certain assets of the ZZ Joint Venture, including land use rights and the administration building, are pledged as collateral for the loan; and

 

Subject to customary events of default which, should one or more of them occur and be continuing, would permit Zaozhuang Bank Co., Ltd. to declare all amounts owing under the agreement to be due and payable immediately.

 

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

 

On October 8, 2014, the ZZ Joint Venture entered a Line of Credit Agreement with Zaozhuang Bank Co., Ltd. (the “ZZ Line of Credit Agreement”), and received a line of credit of approximately $2.4 million. On October 9, 2014, the ZZ Joint Venture entered an additional Line of Credit Agreement with Zaozhuang Bank Co., Ltd. and received a line of credit of approximately $0.8 million.

 

Key terms of the two lines of credit are as follows:

 

The ZZ Joint Venture is required to deposit 50% of the total face amount, or approximately $1.6 million, to Zaozhuang Bank for the line of credit as a security deposit;

 

Term of the lines of credit is six months, due on April 8 and April 9, 2015 respectively, and can be renewed for another six months term with bank approval;

 

Service fee is 0.05% of the face amount for each renewal.

 

Xuecheng Energy is the guarantor of ech line of credit;

 

Certain assets of the ZZ Joint Venture, including land use rights and the administration building, are pledged as collateral for the lines of credit; and

 

•     Subject to customary events of default which, should one or more of them occur and be continuing, would permit Zaozhuang Bank Co., Ltd. to declare all amounts owing under the agreements to be due and payable immediately.

 

Current Operations and Projects

 

Zao Zhuang Joint Venture

 

Joint Venture Agreement

 

On July 6, 2006, we entered into a cooperative joint venture contract with Shandong Hai Hua Coal & Chemical Company Ltd., or Hai Hua, which established Synthesis Energy Systems (Zao Zhuang) New Gas Company Ltd., or the ZZ Joint Venture, a joint venture company that has the primary purposes of (i) developing, constructing and operating a syngas production plant utilizing the U-GAS ® technology in Zao Zhuang City, Shandong Province, China and (ii) producing and selling syngas and the various byproducts of the plant. In August 2012, Hai Hua’s name was changed to Shandong Weijiao Group Xuecheng Energy Company Ltd., or Xuecheng Energy, after a change in control transaction. We own 97.6% of the ZZ Joint Venture and Xuecheng Energy owns the remaining 2.4%. We consolidate the results of the ZZ Joint Venture in our consolidated financial statements.

 

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

 

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Effective October 31, 2013, the ZZ Joint Venture terminated and waived its claims to past due capacity fees owed by Xuejiao under the prior syngas purchase and sale agreement. Pursuant to the ZZ Cooperation Agreement, prior payments of approximately $1.8 million were applied to settling the prior payments due under the syngas purchase and sale agreement. As a result, the ZZ Joint Venture recognized these related party advances as product sales of approximately $1.5 million, net of value-added taxes, during the year ended June 30, 2014.

 

 The ZZ Joint Venture began producing and selling methanol in November 2013 and sold 12,849 tonnes of methanol during the three months ended September 30, 2014 generating approximately $4.2 million of revenue. We assumed operational control of the integrated methanol production facility in October 2013 under a restructured commercial arrangement. The ZZ Joint Venture completed the plant retrofits and equipment upgrades to enable increased methanol production from integrated syngas and coke oven gas feedstock. The ZZ Joint Venture is now operating an integrated plant which has two operating modes where it (i) converts coke oven gas directly to methanol and (ii) converts coal to syngas, then blends the syngas and coke oven gas at a specific ratio to produce additional quantities of methanol.  The ZZ Joint Venture began producing and selling methanol in November 2013 from coke oven gas. The ZZ Joint Venture restarted its syngas plant for approximately two weeks during December 2013. The ZZ Joint Venture intends to manage syngas production in order to optimize results. The syngas facility will generally operate when adequate coke oven gas supplies are available to achieve the correct syngas to coke oven gas blend ratio. The ZZ Joint Venture also recently executed agreements to secure an additional minimum 4,000 normal cubic meters per hour of coke oven gas from a local supplier, with a target of 5,000 normal cubic meters per hour, in order to increase methanol production and reduce supply risks. This additional coke oven gas represents approximately a 30% increase in feedstock supply for the ZZ Joint Venture Plant. In addition, the Company is focused on lowering our operating costs, as well as reducing forced outages at the facility.

 

Additionally, we are also evaluating alternative products and partnership structures for a possible expansion of the ZZ Joint Venture plant. In 2010, the ZZ Joint Venture received the necessary government approval for an expansion into monoethylene glycol production. This expansion project remains under evaluation by us. We are also evaluating certain new downstream technologies to produce high value products. 

 

Current ZZ Operating Description and Capability

 

As described above, we assumed operational control of the integrated methanol production facility in October 2013 under a restructured commercial arrangement pursuant to the ZZ Cooperation Agreement. The ZZ Joint Venture completed plant retrofits and equipment upgrades to enable increased methanol production from integrated syngas and COG feedstock. The ZZ Joint Venture began producing and selling methanol in November 2013 and sold 12,849 tonnes of methanol during the three months ended September 30, 2014 generating approximately $4.2 million of revenue. The ZZ Joint Venture restarted its syngas plant for approximately two weeks during December 2013. In January 2014, the facility produced methanol from coke oven gas only due to coke oven gas supplies disruptions during the cold weather when COG was diverted to the city gas loop for residential heating needs. We expect such diversions of COG into residential heating during the winter months to be reduced or eliminated in the future due to local town gas system being upgraded to use pipeline natural gas.

 

Between January and October 2014, methanol prices in China and at our ZZ facility have been near historic lows. Under these conditions the facility has operated primarily in the COG only mode. We believe methanol prices have been at these recent low levels primarily related to the general economic conditions in China as demonstrated by China’s current low PMI. We are aware of new facilities soon to startup in local Shandong province area which will increase local demand for methanol to be used for olefins production, which we believe will be reflected in improving methanol prices over time.

 

Other non-market based factors affect economic expectations at the ZZ Joint Venture facility such as but not limited to unscheduled maintenance, forced outages, catalyst degradation and performance in both the COG reformer and methanol synthesis loop and third party coke oven outages which can curtail available COG feedstock. The ZZ facility is limited to approximately 24 hours of COG storage.

 

Although we intend for the ZZ Joint Venture to sustain itself through its own earnings, we may need to make additional contributions to the ZZ Joint Venture in order for it to meet its obligations. In September 2014, we made a capital contribution of $1.5 million to the ZZ Joint Venture. This capital contribution was used to pay a portion of the ZZ Short-term Loan, which was due on September 9, 2014.

 

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During meetings with the local government at Xuecheng in June, 2014 and separate meetings with Xuejiao, the ZZ Joint Venture has been advised that the existing Xuejiao coke oven facility may be permanently shutdown in the future. A definitive timeline has not been established for this shutdown and the ZZ Joint Venture was informed that it may occur in the next 3 to 4 years. Xuejiao has constructed and new coking coal facility about 20KM away for the current facility and this new facility is intended to eventually replaced the current facility which has come under scrutiny for pollution from its old generation coking coal technology used. Because of this the ZZ Joint Venture intends to develop its alternatives for continued production of methanol and other products from the facility. The ZZ Joint Venture is expected to qualify as a clean industrial producer of chemicals such as methanol which can be expanded into a clean industrial park once the existing coke ovens are removed. We are evaluating alternative products and partnership structures for partnering and/or expansion of the ZZ Joint Venture plant. In 2010, the ZZ Joint Venture received the necessary government approval for an expansion into mono-ethylene glycol production. This expansion project remains under evaluation by us. We are also evaluating new downstream technologies to produce high value products at the site. 

 

Yima Joint Ventures

 

In August 2009, we entered into amended joint venture contracts with Yima, replacing the prior joint venture contracts entered into in October 2008 and April 2009. The joint ventures were formed for each of the gasification, methanol/methanol protein production, and utility island components of the plant, or collectively, the Yima Joint Ventures. The amended joint venture contracts provide that: (i) we and Yima contribute equity of 25% and 75%, respectively, to the Yima Joint Ventures; (ii) Yima will guarantee the repayment of loans from third party lenders for 50% of the project’s cost and, if debt financing is not available, Yima is obligated to provide debt financing via shareholder loans to the project until the project is able to secure third-party debt financing; and (iii) Yima will supply coal to the project from a mine located in close proximity to the project at a preferential price subject to a definitive agreement to be subsequently negotiated. In connection with entering into the amended contracts, we and Yima contributed remaining cash equity contributions of $29.3 million and $90.8 million, respectively, to the Yima Joint Ventures during the three months ended September 30, 2009. We are responsible for our share of any cost overruns on the project.

   

In exchange for such capital contributions, we own a 25% interest in each joint venture and Yima owns a 75% interest. Notwithstanding this, in connection with an expansion of the project, we have the option to contribute a greater percentage of capital for the expansion, such that as a result, we would have up to a 49% ownership interest in the Yima Joint Ventures.

 

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

 

Under the terms of the joint venture agreements, the Yima Joint Ventures are to be governed by a board of directors consisting of eight directors, two of whom were appointed by us and six of whom were appointed by Yima. The joint ventures also have officers that are nominated by us, Yima and/or the board of directors pursuant to the terms of the joint venture contracts. We and Yima shall share the profits, and bear the risks and losses, of the joint ventures in proportion to our respective ownership interests. The term of the joint venture shall commence upon each joint venture company obtaining its business operating license and shall end 30 years after commercial operation of the plant.

 

The Yima Joint Venture plant generated its first methanol production in December 2012. The Yima Joint Venture plant’s refined methanol section was fully commissioned in December 2013, and has operated at limited capacity since that date. The plant is designed to produce 300,000 tonnes per year of methanol from operating two of its three available gasifiers and has achieved 100% peak syngas production levels and 80% peak methanol production levels. This plant is intended to provide a commercial demonstration of our technology as deployed on a much larger scale than the ZZ Joint Venture plant.

 

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The Yima Joint Venture initiated an outage in March that was intended to allow the plant to make broad and miscellaneous improvements to many areas of the entire methanol producing facility which had not been completed or properly installed. Many of these improvements were punch-list items left over from construction, along with improvements which have been learned from the past year’s operation at the plant. Additionally, it was identified during this time that the Yima Joint Venture has not installed all the required units related to removal of sulfur compounds from syngas. A portion of these repairs were completed and the facility was restarted in late June, 2014. After three weeks of operation the plant was shut down again due to improper repair techniques on its Heat Recovery System Generator.

 

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

 

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

 

TSEC Joint Venture

 

On February 14, 2014, SES Asia Technologies Limited, one of our wholly owned subsidiaries, entered into a Joint Venture Contract (the “JV Contract”) with Zhangjiagang Chemical Machinery Co., Ltd. (“ZCM”) to form Jiangsu Tianwo-SES Clean Energy Technologies Limited (the “TSEC” Joint Venture”). The purpose of the TSEC Joint Venture is to establish our gasification technology as the leading gasification technology in the TSEC Joint Venture territory (which is initially China, Indonesia, the Philippines, Vietnam, Mongolia and Malaysia) by becoming a leading provider of proprietary equipment for the technology. The scope of the TSEC Joint Venture is to market and license our gasification technology via project sublicenses; procurement and sale of proprietary equipment and services; coal testing; and engineering, procurement and research and development related to the technology. ZCM contributed RMB 53,800,000 in April 2014 and is required to contribute an additional RMB 46,200,000 within two years of contract execution for a total contribution of RMB 100,000,000 (approximately USD $16 million) in cash to the TSEC Joint Venture, and owns 65% of the TSEC Joint Venture, and we have contributed an exclusive license to use of our technology in the TSEC Joint Venture territory pursuant to the terms of a Technology Usage and Contribution Agreement entered into among the TSEC Joint Venture, ZCM and us (the “TUCA”) on the same date, and own 35% of the TSEC Joint Venture.

 

Through the TSEC Joint Venture, we have partnered a significant portion of our China business with ZCM, a financially strong and highly skilled Chinese chemical equipment manufacturing company which desired to invest into the growth of China’s clean energy space and which recognized the opportunity afforded by our technology capability and business model.  We believe partnering with ZCM can accelerate the commercialization of our technology on a global basis and will enable us to reduce our capital requirements to achieve this acceleration. In addition, our China business will not only support the growth of our TSEC Joint Venture but we believe will also build new partnerships in China within market segments such as DRI steel, power, transportation fuels and for longer term value creation, larger scale SNG projects utilizing low rank coal resources and biomass which our technology brings. We intend to form business verticals where we can secure ownership positions in these market vertical partnerships that both help build value for the TSEC Joint Venture and for our China business.

 

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GTI Agreement

 

On November 5, 2009, we entered into an Amended and Restated License Agreement, or the GTI Agreement, with GTI, replacing the Amended and Restated License Agreement between us and GTI dated August 31, 2006, as amended. Under the GTI Agreement, we maintain our exclusive worldwide right to license the U-GAS ® technology for all types of coals and coal/biomass mixtures with coal content exceeding 60%, as well as the non-exclusive right to license the U-GAS ® technology for 100% biomass and coal/biomass blends exceeding 40% biomass.

 

In order to sublicense any U-GAS ® system, we are required to comply with certain requirements set forth in the GTI Agreement. In the preliminary stage of developing a potential sublicense, we are required to provide notice and certain information regarding the potential sublicense to GTI and GTI is required to provide notice of approval or non-approval within ten business days of the date of the notice from us, provided that GTI is required to not unreasonably withhold their approval. If GTI does not respond within that ten business day period, they are deemed to have approved of the sublicense. We are required to provide updates on any potential sublicenses once every three months during the term of the GTI Agreement. We are also restricted from offering a competing gasification technology during the term of the GTI Agreement.

   

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

 

We are required to make an annual payment 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 accrue the annual royalty expense ratably over the calendar year as adjusted for any royalties paid during year as applicable. We must also provide GTI with a copy of each contract that we enter into relating to a U-GAS ® system and report to GTI with our progress on development of the technology every six months.

 

For a period of ten years, we and GTI are restricted from disclosing any confidential information (as defined in the GTI Agreement) to any person other than employees of affiliates or contractors who are required to deal with such information, and such persons will be bound by the confidentiality provisions of the GTI Agreement. We have further indemnified GTI and its affiliates from any liability or loss resulting from unauthorized disclosure or use of any confidential information that we receive.

 

The GTI Agreement expires on August 31, 2016, but may be extended for two additional ten-year periods at our option.

 

Outlook

 

Our strategies are focused on the continuing progress of the ZZ Joint Venture’s methanol production and commercial sales including the syngas plant’s restart, improving operations at the Yima Joint Venture, developing our TSEC Joint Venture, sourcing suitable partners for our other business verticals and advancing and improving our gasification technology, such as through our new XL3000 gasification system. Our business is to create value by supplying our technology, equipment and services into global projects where lower cost low quality coals, coal wastes, municipal wastes, agricultural biomass, and other biomass feedstocks can be profitably converted through our proprietary gasification technology into clean synthesis gas, or syngas (a mixture of primarily hydrogen, carbon monoxide, and methane), which is then used to produce a variety of high value energy, power, and chemical products.

 

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

 

We believe that there is currently a shift in the coal gasification business toward the use of low quality, and therefore low cost, coals for coal-to-energy and chemicals projects. We believe China is a good example of this new direction in coal gasification. The energy and chemicals landscape has been evolving rapidly with upward pressure on demand and increasing pressure to deliver improved environmental performance while simultaneously delivering economics that will attract investment capital. World energy consumption is expected to increase significantly over the next two decades and demand is heavily driven by non-OECD nations where developing economies require ever increasing access to more energy products to establish healthy economies that improve the living conditions of those populations. Our market research indicates that coal will be required as a major source of energy for decades to come and growth in coal usage is expected to be led by the non-OECD nations. Because of these market dynamics, we believe our gasification technology has strategic importance to countries and regions with developing economies which have their own low cost domestic coal resources and need access to low cost clean energy and chemical products to grow. We believe this also applies to developed nations in the west such as Australia, Europe and US which possess significant low cost coal resources and which have a strategic need and desire to produce clean and affordable energy and chemicals from their own domestic resources and to existing operating companies which deploy their own technologies for energy and/or chemicals production. We believe that our technology is well positioned to address the market needs of the changing global energy landscape and we believe we are well positioned in Asia where we have two operating projects using five of our gasification systems. In addition, the TSEC Joint Venture provides us with a strong Chinese partner already specialized in the manufacturing and design of processing industry equipment and projects.

 

Although we have made significant progress recently on partnering our China business through our TSEC Joint Venture, we expect to continue for a period of time to have negative operating cash flows until we are generating sufficient cash flows from our technology, equipment and services business and our China business (including our ZZ Joint Venture, the Yima Joint Ventures and TSEC Joint Venture) to cover our general and administrative expenses and other operating costs. We will also limit the development of any further projects until we have assurances that acceptable financing is available to complete the project. We may pursue the development of selective projects with strong and credible partners or off-takers where we believe equity and debt can be raised or where we believe we can attract a financial partner to participate in the project and where the project would utilize our technology, equipment and services.

 

We currently plan to use our available cash for (i) securing orders and other associated tasks associated with our distributed power initiatives such as in Pakistan with General Electric; (ii) executing the our strategy to develop market based business verticals; (iii) general and administrative expenses; and (iv) working capital and other general corporate purposes. Although we intend for the ZZ Joint Venture to sustain itself through its own earnings, we may also need to make additional contributions to the ZZ Joint Venture in order for it to meet its obligations until the ZZ Joint Venture generates sufficient cash flows to cover its operating costs and debt service. The actual allocation and timing of these expenditures will be dependent on various factors, including changes in our strategic relationships, commodity prices and industry conditions, and other factors that we cannot currently predict. In particular, any future decrease in economic activity in China or in other regions of the world in which we may in the future do business could significantly and adversely affect our results of operations and financial condition. Operating cash flows from our joint venture operating projects can be positively or negatively impacted by changes in coal and methanol prices. These are commodities where market pricing is often cyclical in nature.

 

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

 

Critical Accounting Policies

 

The preparation of financial statements in accordance with U.S. generally accepted accounting principles, or GAAP, requires our management to make certain estimates and assumptions which are inherently imprecise and may differ significantly from actual results achieved. We believe the following are our critical accounting policies due to the significance, subjectivity and judgment involved in determining our estimates used in preparing our consolidated financial statements. We evaluate our estimates and assumptions used in preparing our consolidated financial statements on an ongoing basis utilizing historic experience, anticipated future events or trends and on various other assumptions that are believed to be reasonable under the circumstances. The resulting effects of changes in our estimates are recorded in our consolidated financial statements in the period in which the facts and circumstances that give rise to the change in estimate become known.

 

We believe the following describes significant judgments and estimates used in the preparation of our consolidated financial statements:

 

Revenue Recognition

 

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

 

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

 

Impairment Evaluation of Long-Lived Assets

 

We evaluate our long-lived assets, such as property, plant and equipment, construction-in-progress, equity method investments and specifically identified intangibles, when events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. When we believe an impairment condition may have occurred, we are required to estimate the undiscounted future cash flows associated with a long-lived asset or group of long-lived assets at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities for long-lived assets that are expected to be held and used. We evaluate our operating plants as a whole. Production equipment at each plant is not evaluated for impairment separately, as it is integral to the assumed future operations of the plant. All construction and development projects are reviewed for impairment whenever there is an indication of potential reduction in fair value. If it is determined that it is no longer probable that the projects will be completed and all capitalized costs recovered through future operations, the carrying values of the projects would be written down to the recoverable value. If we determine that the undiscounted cash flows from an asset to be held and used are less than the carrying amount of the asset, or if we have classified an asset as held for sale, we estimate fair value to determine the amount of any impairment charge.

 

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The following summarizes some of the most significant estimates and assumptions used in evaluating if we have an impairment charge.

 

Undiscounted Expected Future Cash Flows . In order to estimate future cash flows, we consider historical cash flows and changes in the market environment and other factors that may affect future cash flows. To the extent applicable, the assumptions we use are consistent with forecasts that we are otherwise required to make (for example, in preparing our other earnings forecasts). The use of this method involves inherent uncertainty. We use our best estimates in making these evaluations and consider various factors, including forward price curves for energy, feedstock costs, and other operating costs. However, actual future market prices and project costs could vary from the assumptions used in our estimates, and the impact of such variations could be material.

 

Fair Value . Generally, fair value will be determined using valuation techniques such as the present value of expected future cash flows. We will also discount the estimated future cash flows associated with the asset using a single interest rate representative of the risk involved with such an investment. We may also consider prices of similar assets, consult with brokers, or employ other valuation techniques. We use our best estimates in making these evaluations; however, actual future market prices and project costs could vary from the assumptions used in our estimates, and the impact of such variations could be material.

 

The evaluation and measurement of impairments for investments such as our investment in the Yima Joint Ventures involve the same uncertainties as described for long-lived assets that we own directly. Similarly, our estimates that we make with respect to our equity and cost-method investments are subjective, and the impact of variations in these estimates could be material.

 

ZZ Joint Venture Plant Impairment Analysis

 

We performed an analysis of the ZZ Joint Venture plant as of September 30, 2014 and determined that these assets were not impaired based upon management’s estimated cash flow projections for the plant. Such estimated cash flow projections included production capacity, methanol price, raw materials consumption and a combination of technical improvements being made to Xuecheng Energy’s methanol unit allowing for increased syngas off-take and other repairs and improvements being made to the plant enabling more efficient joint production of methanol for a nine-year period. If we are not successful in finalizing effectiveness of the ZZ Cooperation Agreement or otherwise improving the ZZ Joint Venture’s profitability, or if management’s estimated cash flow projections for these assets decrease, the ZZ Joint Venture plant could become impaired which could have a material effect on our consolidated financial statements. No significant changes occurred during the three months ended September 30, 2014.

 

Accounting for Variable Interest Entities and Financial Statement Consolidation Criteria

 

The joint ventures which we enter into may be considered variable interest entities, or VIEs. We consolidate all VIEs where we are the primary beneficiary. This determination is made at the inception of our involvement with the VIE. We consider both qualitative and quantitative factors and form a conclusion that we, or another interest holder, absorb a majority of the entity’s risk for expected losses, receive a majority of the entity’s potential for expected residual returns, or both. We do not consolidate VIEs where we are not the primary beneficiary. We account for these unconsolidated VIEs under the equity method or cost method of accounting and include our net investment in investments on our consolidated balance sheets. Our equity interest in the net income or loss from our unconsolidated VIEs under the equity method of accounting is recorded in non-operating (income) expense on a net basis on our consolidated statement of operations.

 

We have determined that the ZZ Joint Venture is a VIE and that we are the primary beneficiary. We have determined that the Yima Joint Ventures are VIEs and that Yima is the primary beneficiary since Yima has a 75% ownership interest in the Yima Joint Ventures. We have determined that TSEC is a VIE and that ZCM is the primary beneficiary since ZCM has a 65% ownership interest in the Joint Venture. We have determined that SRS is a VIE and that we are not the primary beneficiary since we and Midas each have a 50% ownership interest in SRS and the control, risks and benefits of SRS are shared equally. We have determined that the GC Joint Venture is a VIE and that we are the primary beneficiary since we have a 51% ownership interest in the GC Joint Venture and since there are no qualitative factors that would preclude us from being deemed the primary beneficiary.

 

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Item 3. Quantitative and Qualitative Disclosures About Market Risk.

 

Qualitative disclosure about market risk

 

We are exposed to certain qualitative market risks as part of our ongoing business operations, including risks from changes in foreign currency exchange rates and commodity prices that could impact our financial position, results of operations and cash flows. We manage our exposure to these risks through regular operating and financing activities, and may, in the future, use derivative financial instruments to manage this risk. We have not entered into any derivative financial instruments to date.

 

Foreign currency risk

 

We conduct operations in China and our functional currency in China is the Renminbi Yuan. Our financial statements are expressed in U.S. dollars and will be negatively affected if foreign currencies, such as the Renminbi Yuan, depreciate relative to the U.S. dollar. In addition, our currency exchange losses may be magnified by exchange control regulations in China or other countries that restrict our ability to convert into U.S. dollars. The People’s Bank of China, the monetary authority in China, sets the spot rate of the Renminbi Yuan, and may also use a variety of techniques, such as intervention by its central bank or imposition of regulatory controls or taxes, to affect the exchange rate relative to the U.S. dollar. In the future, the Chinese government may also issue a new currency to replace its existing currency or alter the exchange rate or relative exchange characteristics by devaluation or revaluation of the Renminbi Yuan in ways that may be adverse to our interests.

 

Commodity price risk

 

Our business plan is to purchase coal and other consumables from suppliers and to sell commodities, such as syngas, methanol and other products. Coal is the largest component of our costs of product sales and in order to mitigate coal price fluctuation risk for future projects, we expect to enter into long-term contracts for coal supply or to acquire coal assets.

 

The majority of our revenues are derived from the sale of methanol in China. We do not have long term offtake agreements for these sales, so revenues fluctuate based on local market spot prices, which have been under significant pressure, and we are unsure of how much longer this will continue. Our liquidity and capital resources will be materially adversely affected if markets remain under pressure, and we are unable to obtain satisfactory prices for these commodities or if prospective buyers do not purchase these commodities.

 

Hedging transactions may be available to reduce our exposure to these commodity price risks, but availability may be limited and we may not be able to successfully hedge this exposure at all. To date, we have not entered into any hedging transactions.

 

Customer credit risk

 

When our projects, including the ZZ Joint Venture plant’s methanol production, progress to commercial operation, we will be exposed to the risk of financial non-performance by customers. To manage customer credit risk, we intend to monitor credit ratings of customers and seek to minimize exposure to any one customer where other customers are readily available.

 

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Item 4. Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in our annual and periodic reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. In addition, we designed these disclosure controls and procedures to ensure that this information is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures.

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements. Because of inherent limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

Our management, with the participation of the Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness of our internal control over financial reporting as of September 30, 2014 based on criteria set forth in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on our evaluation, management has concluded that we did maintain effective internal control over financial reporting as of September 30, 2014.

 

Changes in Internal Control Over Financial Reporting

 

There have been no changes in our internal control over financial reporting during the three months ended September 30, 2014 that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II

 

Item 1. Legal Proceedings.

 

None.

 

Item 1A.    Risk Factors.

 

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

 

As of September 30, 2014, we had $14.4 million in cash and cash equivalents. We currently plan to use our available cash for (i) securing orders and other associated tasks associated with our distributed power initiatives such as in Pakistan with General Electric; (ii) executing our strategy to develop market based business verticals; (iii) general and administrative expenses; and (iv) working capital and other general corporate purposes. Although we intend for the ZZ Joint Venture to sustain itself through its own earnings, we may also need to make additional contributions to the ZZ Joint Venture in order for it to meet its obligations until the ZZ Joint Venture generates sufficient cash flows to cover its operating costs and debt service. The actual allocation and timing of these expenditures will be dependent on various factors, including changes in our strategic relationships, commodity prices and industry conditions, and other factors that we cannot currently predict. In particular, any future decrease in economic activity in China or in other regions of the world in which we may in the future do business could significantly and adversely affect our results of operations and financial condition. Operating cash flows from our joint venture operating projects can be positively or negatively impacted by changes in coal and methanol prices. These are commodities where market pricing is often cyclical in nature.

 

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Although we made significant progress recently on partnering our China business through the TSEC Joint Venture, we expect to continue for a period of time to have negative operating cash flows until we are generating sufficient cash flows from our technology, equipment and services business and our China business (including the ZZ Joint Venture, the Yima Joint Ventures and the TSEC Joint Venture) to cover our general and administrative expenses and other operating costs. We will also limit the development of any further projects until we have assurances that acceptable financing is available to complete the project. We may pursue the development of selective projects with strong and credible partners or off-takers where we believe equity and debt can be raised or where we believe we can attract a financial partner to participate in the project and where the project would utilize our technology, equipment and services.

 

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

 

We cannot provide any assurance that any financing will be available to us in the future on acceptable terms or at all. Any such financing could be dilutive to our existing stockholders. If we cannot raise required funds on acceptable terms, we may not be able to, among other things, (i) maintain our general and administrative expenses at current levels including retention of key personnel and consultants; (ii) successfully develop our licensing and related service businesses; (iii) negotiate and enter into new gasification plant development contracts and licensing agreements; (iv) make additional capital contributions to our joint ventures; (v) fund certain obligations as they become due; and (vi) respond to competitive pressures or unanticipated capital requirements.

 

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

 

None

 

Item 3. Defaults Upon Senior Securities.

 

None.

 

Item 4. Mine Safety Disclosures

 

Not Applicable.

 

Item 5. Other Information.

 

None.

 

35
 

 

Forward-Looking Statements

 

This Quarterly Report on Form 10-Q includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act. All statements other than statements of historical fact are forward-looking statements. Forward-looking statements are subject to certain risks, trends and uncertainties that could cause actual results to differ materially from those projected. Among those risks, trends and uncertainties are the ability of our ZZ joint venture to effectively operate XE's methanol plant and produce methanol; the ability of our project with Yima to produce earnings and pay dividends; our ability to develop and expand business of the ZCM joint venture in the joint venture territory; our ability to develop our power business unit and marketing arrangement with GE and our other business verticals, including DRI steel, through our marketing arrangement with Midrex Technologies, and renewables; our ability to successfully develop the SES licensing business; our ability to reduce operating costs; our ability to make distributions and repatriate earnings from our Chinese operations; our limited history, and viability of our technology; commodity prices, and the availability and terms of financing; our ability to obtain the necessary approvals and permits for future projects; our ability to raise additional capital, if any, and our ability to estimate the sufficiency of existing capital resources; the sufficiency of internal controls and procedures; and our results of operations in countries outside of the U.S., where we are continuing to pursue and develop projects. Although we believe that in making such forward-looking statements our expectations are based upon reasonable assumptions, such statements may be influenced by factors that could cause actual outcomes and results to be materially different from those projected. We cannot assure you that the assumptions upon which these statements are based will prove to have been correct.

 

When used in this Form 10-Q, the words “expect,” “anticipate,” “intend,” “plan,” “believe,” “seek,” “estimate” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. Because these forward-looking statements involve risks and uncertainties, actual results could differ materially from those expressed or implied by these forward-looking statements for a number of important reasons, including those discussed under “Risk Factors” in our Annual Report on Form 10-K for the year ended June 30, 2014, as well as in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and elsewhere in this Form 10-Q.

 

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

 

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

 

36
 

 

Item 6. Exhibits

 

Number   Description of Exhibits
     
10.1   Letter Agreement between Robert Rigdon and the Company dated August 22, 2014. (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on August 25, 2014).
     
10.2*   Credit Agreement between Zaozhuang Bank and Synthesis Energy Systems (Zaozhuang) New Gas Co., Ltd. dated October 2, 2014.
     
10.3*   Working Capital Loan Contract between Zaozhuang Bank and Synthesis Energy Systems (Zaozhuang) New Gas Co., Ltd. dated October 2, 2014.
     
10.4*+   Form of Restricted Stock Incentive Agreement for Employees.
     
10.5*+   Form of Restricted Stock Incentive Agreement for Directors
     
31.1*   Certification of Chief Executive Officer of Synthesis Energy Systems, Inc. pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended.
     
31.2*   Certification of Chief Financial Officer of Synthesis Energy Systems, Inc. pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended.
     
32.1*   Certification of Chief Executive Officer of Synthesis Energy Systems, Inc. pursuant to Rule 13a-14(b) promulgated under the Securities Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the United States Code.
     
32.2*   Certification of Chief Financial Officer of Synthesis Energy Systems, Inc. pursuant to Rule 13a-14(b) promulgated under the Securities Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the United States Code.
     
101.INS   XBRL Instance Document.
     
101.SCH   XBRL Taxonomy Extension Schema Document.
     
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document.
     
101.DEF   XBRL Taxonomy Extension Definition Linkbase Document.
     
101.LAB   XBRL Taxonomy Extension Label Linkbase Document.
     
101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document.

 


+ Management contract or compensatory plan or arrangement.

 

* Filed herewith.

   

37
 

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

    SYNTHESIS ENERGY SYSTEMS, INC.
     
Date:  November 14, 2014 By:   /s/ Robert Rigdon
      Robert Rigdon
      President and Chief Executive Officer
     
Date:  November 14,  2014 By:   /s/ Roger Ondreko
      Roger Ondreko
      Chief Financial Officer

 

38

 

 

Exhibit 10.2

 

ZAOZHUANG BANK Contract No.: 2014 Zao Yin Shou Zi 10020602 No. 00005

 

Credit Agreement

 

Creditor: Zaozhuang Bank Junshan Road Sub-branch

 

Applicant: Synthesis Energy Systems (Zaozhuang) New Gas Co., Ltd.

 

1
 

 

Creditor: Zaozhuang Bank Co., Ltd. Junshan Road Sub-branc h (hereinafter referred to as “Party A”)

Legal representative (principal): Zhou Changtao

Applicant: Synthesis Energy Systems (Zaozhuang) New Gas Co., Ltd. (hereinafter referred to as “Party B”)

Legal representative (principal): John Winter

 

Party B made a credit application to Party A, which agrees. By related regulations and mutual communication, below articles were reached.

 

Article 1 Credit Amount

Party A shall provide RMB (total) _ 30,000,000 _Yuan as the credit amount.

 

The amount is the maximum that Party A could supplies to Party B including loan, trade financing (packed release, import & export documentary bill), discount and commercial acceptance bill and guarantee letter, etc.

 

The above mentioned amount excludes the related guarantee or that of deposit mortgage, so does below covered.

 

The business type and scope is listed in Article 3.

 

Article 2 Terms of Crediting

The duration is for one year, from October 2, 2014 to September 23, 2015 .

 

Party B should submit the application with the period or Party A shall reject the request.

 

Article 3 Usage of Credit Amount

3.1 Amount type and scope

The above credit is (Comprehensive or single).

3.1.1 The comprehensive credit amount is to be assigned as:

3.1.1.1 Working Capital loan: RMB__ 2000 _ Wan Yuan (+0,000);

3.1.1.2 Bank Acceptance bill discount: RMB__ 1000 _ Wan Yuan (+0,000);

3.1.1.3 Commercial Acceptance bill discount: RMB_________ Wan Yuan (+0,000);

3.1.1.4 Commercial bill Acceptance: RMB________________ Wan Yuan (+0,000);

3.1.1.5 Open letter of guarantee: RMB___________________ Wan Yuan (+0,000);

When Party A agreed, Party B can adjust above amount on different type usage.

3.1.2 _____________________ single credit amount.

3.2 during the valid period, Party B can circulate the credit amount application one by one. Party A shall review and approve each application. A separate business contract is to be signed between the two parties.

3.3 Each separate loan application should be based on party B’s business request and Party A’s regulated term. So the separate term can be later than credit date.

 

Article 4 Interest and Expenditure

All the loan, financing rate, acceptance, credit letter opening and cost for guarantee letter should be referred to each separate regulated contract.

 

2
 

 

Article 5 Guarantee Clauses

5.1 All the debts under this agreement from Party B shall be joint liability guarantee by Shandong Weijiao Group Xuecheng Energy Co., Ltd., which shall provide Party A with irrevocable maximum guarantee letter and guarantee contract.

5.2 All the debts under this agreement from Party B are subject to its guarantor and its real estate, land as mortgage. The two parties are to sign the guarantee contract (see attached mortgage list).

 

Article 6 Party B’s Rights and Obligations

6.1 Party B has below rights

6.1.1 It has the rights to ask Party A providing the credit or other credit within the amount and under the regulations;

6.1.2 It can use the credit amount under the rules regulated in this agreement;

6.1.3 Party A should keep confidential to the information provided by party B related to its production, operation, Property and Accounting except the legal part.

6.1.4 After the written consent from Party A, Party B is able to assign its debt to a third party.

6.2 Party B has below obligations:

6.2.1 Party B shall provide the required documentation in real situation, including the open account, number and balance for the deposit and loan, cooperating party A’s review and check;

6.2.2 Agree with Party A’s surveillance on Party B’s credit usage and production and financial activities;

6.2.3 Use the loan or credit under each separate contract regulations;

6.2.4 Pay back the loan or principal of the advanced money according to the regulations under this agreement and each separate contract;

6.2.5 When Party B plans to transfer all or part of the debt to a third party, written consent by Party A should be obtained;

6.2.6 should any below item happened, Party B should notice Party A immediately and actively cooperate Party A on assured actions for the loan and other credit principal and interest and all the related expenditure payment:

6.2.6.1 Big financial or property loss or other crisis;

6.2.6.2 Provide loan or guarantee for third party in order to prevent from interest loss or use its own property for mortgage guarantee;

6.2.6.3 Changes happened including merger, separation, reconstruction, joint venture, shares transfer and stock reforming;

6.2.6.4 Stopping, revocation, license withdrawing, bankruptcy or dissolution;

6.2.6.5 Its major shareholder or related company has financial crisis and influenced its normal operation;

6.2.6.6 Have big transaction with major shareholder and its related company and influenced its normal operation;

6.2.6.7 Any lawsuit, arbitration, criminal or administrative punishment which bring bad influence to its business or financial status;

6.2.6.8 Any big event that may affect its loan payment.

Article 7 Party A’s Rights and Obligations

 

7.1 Party A has below rights:

7.1.1 Party A can request Party B to pay back the loan and principal of advanced money on time;

7.1.2 Party A has right to ask Party B to provide related document supporting the credit amount;

 

3
 

 

7.1.3 Party A can make command of Party B’s production and financial activity;

7.1.4 Party A can have surveillance on Party B’s usage of the loan or other credit;

7.1.5 Party A is able to remit from any of Party B’s accounts the related loan or principal and interest of advanced money;

7.1.6 If Party B failed to follow any obligation, Party A is able to stop the balanced loan or credit amount and ask Party B to pay back the released loan and interest;

7.1.7 If any circumstance happened to Party B as described under Article 6.2.6, Party A has the right to stop the balanced loan quota or credit and ask Party B to pay immediately the loan or principal of the advanced money and related expenditure. It is acceptable that when Party A agrees, all the debts can be transferred to an assignee or to add new guarantee which Party agrees.

7.2 Party A has below obligations:

7.2.1 Based on this agreement and each separate contract, Party A arrange to Party B the regulated loan or credit;

7.2.2 Party A should keep confidential on Party B’s information including property, finance, production and operation except for those legal parts.

 

Article 8 Special items which Party B should promise

8.1 Party B was legally established according to PRC laws. It is qualified as a legal person and has civil action to sign and fulfill the agreement;

8.2 Party B has got full authorization from related Board Directors or organizations to sign and fulfill the agreement;

8.3 Party B should provide true, accurate, complete and valid documentation covering guarantor and mortgage with no violated error or missing;

8.4 Party B should have no lawsuit, arbitration, criminal or administrative punishment which may cause bad result to its property when signing the agreement or during the valid term of the agreement. If any, Party B should notice Party A immediately;

8.5 Party B should follow the national laws and operates within the regulated business scope, doing the annual inspection on legal person registration;

8.6 Keep and improve the current management to assure the value and elevating the property. Do not give up any due debt and manage the major property for free or with improper manner;

8.7 When signing this agreement, Party B has no big happening that may affect its fulfilling of those described obligations.

 

Article 9         Other expenses

Any expenses occurred by credit information, inspection, notarization, etc., and under the condition that party B can’t repay all debts owed to party A under this contract on time, all expenses party A paid such as lawyer fee, lawsuit fee, and travel expenses in order to realize the creditor’s right should be borne by party B. Here party B authorizes party A to deduct the expenses from its bank account opened under party A or any other financing institutions. For any deficiency, party B assures the payback of the exact amount upon party A’s notice, without any evidence from party A.

 

Article 10        Default and conduct

10.1   If one of the following issues happened to party B, it is regarded as event of default:

10.1.1   Violation of obligations stipulated in term 6.2.1, providing fake information to party A or hide important situation, failing to co-operate in party A’s investigation, audit and check, party A asked for correction by party B within reasonable period but party B failed to make correction within given period, damaged the interests of party A;

 

4
 

 

10.1.2    Violation of obligations stipulated in term 6.2.2, refuses to accept or avoid party A’s supervision on party B’s use of loan funds, operation and financial activities, damages the interests of party A;

10.1.3   Violation of obligations stipulated in term 6.2.3, fails to use load funds and/or other credit along with this contract and other related contracts, damages the interests of party A;

10.1.4   Violation of obligations stipulated in term 6.2.4, fails to repay the loan and/or advances principal and interest on time;

10.1.5   Violation of obligations stipulated in term 6.2.5, transfers debt under this contract to third party unilaterally, damages the interests of party A;

10.1.6   Violation of obligations stipulated in term 6.2.6, when the conditions occurred as stipulated in this term, fails to notice party A timely, or after party A is informed of such condition and asks party B to increase guarantee measures for loan payback but party B fails to co-operate, or party A thinks the loan and/or advances principal and interest’s safe return is affected;

10.1.7   Violation of term 8.1, 8.2 and 8.4, damages the interests of party A, or violation of term 8.3, 8.5, 8.6 and 8.7, fails to make correction as required by party A, damages the interests of party A;

10.1.8   Any other situations which party A thinks damages the interests of party A.

10.2   If any of the following circumstances occurred to the guarantor, party A will think the guarantee capability is affected and ask guarantor remove adverse impact, or ask party B to increase or replace guarantee conditions, if the guarantor and party B fail to co-operate, it will be regarded as event of default.

10.2.1   Any circumstances occurred as stipulated in term 6.2.6;

10.2.2   Hide its capability of guarantee liability when drawing irrevocable letter of guarantee, or fails to get relevant authorization;

10.2.3   Fails to conduct yearly audit registration

10.2.4   Failure to manage and claim due debts, or disposes current main assets for free or with any other improper way.

10.3   If any of the following circumstances occurred to the pledger, party A will think it will cause the mortgage failure or lead the value of the guaranties or pledged assets to decrease, and asks pledger to remove such adverse impact, or asks party B to increase or replace guarantee conditions, the pledger and party B fail to co-operate:

10.3.1   Lacks of the ownership or disposition right of the guaranties or pledged assets, or dissension concerning the ownership of guaranties;

10.3.2   Leasing, sealed up, sequestrated or controlled are occurred to the guaranties or pledged assets, and/or party B hide such occurrence;

10.3.3   Without the written consent of party A, the pledger disposes the guaranties by transferring, leasing, remortgages or any other improper ways, or though with the written consent of party A, fails to payback debts which party B owed to party A as party A requested with the earnings from disposed guaranties;

10.3.4   The pledger fails to keep, maintenance and repair the guaranties to lead the decrease of the value of guaranties, or the pledger’s behavior causes the decrease of the value of guaranties; or the pledger fails to insure the guaranties during mortgage period as requested by party A.

10.4   Once any violation of obligations stipulated in term 10.1, 10.2, 10.3 occurred, party A is entitled to take any actions as follows, and party B has no objection to them:

10.4.1   Stop to issue to party B unused loan within credit limit, stop to provide party B unused credit limit on acceptance bill, LC opening, letter of guarantee opening;

 

5
 

 

10.4.2   Take back issued loan’s principal and interests within credit limit and related expenses;

10.4.3   For the draft accepted by party A or opened LC, letter of guarantee during credit period, despite if party A has paid advance in cash or not, party A can ask party B to increase guarantee money amount, or transfer party B deposit or clearing account deposit to guarantee money account as a guarantee money to pay off future party A’s advance in cash, or give to the third party for drawing as future party A’s advance cash.

10.4.4   Deduct directly from party B’s clearing account and/or deposits on other accounts to pay off all debts under this contract and any other detail contracts;

10.4.5   Exercises recourse based on article 13.

 

Article 11       Alteration and termination of contract

Any alteration and termination to this contract shall be made in a writing based on an agreement reached by both parties through consultation. This contract should remain effective before any written agreement reached. Any party are not allowed to make alternation or termination in advance without authorization.

 

Article 12       Others

12.1   During effective period of this contract, any tolerance, grace period or delay to exercise party A’s rights and interests under this contract by party A based on party B’s violation of this contract or any delay should not damage, affect or restrict party A’s all rights and interests according to related laws and this contract, neither party A’s permission or recognition to violation of this contract, neither regarded as party A’s waiver of the right to take any action to current or future violation of this contract.

12.2   If all or part terms becomes ineffective legally for any reasons, party B still needs to take the responsibility to pay off all debts owed to party A under this contract. If the above-mentioned happens, party A is entitled to terminate this contract and ask for paying off all debts by party B immediately.

12.3   All notices and requests related to this contract shall be sent in a written form. Any telex, telegraph from party A once sent out, mails delivered to post office will be regarded as to be reached party B.

12.4   Any written supplemental agreement after both parties’ consultation for unaccomplished matter or modification to this contract, and other detailed contracts under this contract are all attachment of this contract, shall constitute an integral part of this contract.

 

Article 13     Governing laws and settlement of dispute

13.1   The conclusion, execution, and dispute settlement of this contract shall be subject to the laws of the People’s Republic of China. Both parties’ rights and interests are protected by the laws of the People’s Republic of China.

13.2   For all disputes arising out of this contract, both Party A and Party B shall try to settle them through consultation. Shall such consultation failed, they shall be settled in the method stipulated herein.

13.2.1   Lodge a lawsuit with the people’s court where party A is located

13.2.2   Apply for arbitration to                      arbitration committee.

13.2.3   After both parties’ conduction of notarization on enforcement of this contract and detailed contracts, in order to recourse the due debt of party B under this contract and detailed contracts, party A is entitled to apply for enforcement to people’s court of jurisdiction.

 

6
 

 

Article 14       Effectiveness of this contract

This contract becomes effective after both parties’ signatures or stamps by authorized people and stamped of official seals, as well as the guarantee procedure under article 5 of this contract is conducted. This contract will be automatically ineffective at the day when party B pays off all debts and other related expenses to party A.

 

Article 15       This contract is made in three counterparts of the equal legal effect, with the party A, party B and registration authority holding one copy respectively.

 

Party A: (corporate seal):   Party B: (corporate seal):
     

Zaozhuang Bank
Co., Ltd.
Junshan Road
Sub-branch

[seal]

 

Synthesis
Energy
Systems
(Zaozhuang)
New Gas Co.,
Ltd.

[seal]

     

Legal representative (principal)

(signature or seal):

 

Legal representative (principal)

(signature or seal):

     

Zhou
Changtao

[seal]

 

John Winter

[seal]

     
Entrusted agent: (signature):   Entrusted agent: (signature):
     
October 2, 2014   October 2, 2014

 

7

 

Exhibit 10.3

 

ZAOZHUANG BANK Contract No.: 2014 Zao Yin Jie Zi 10020602 No. 00005

 

Working Capital Loan Contract

 

Lender: Zaozhuang Bank Co., Ltd. Junshan Road Sub-branch

 

Borrower: Synthesis Energy Systems (Zaozhuang) New Gas Co., Ltd.

 

1
 

 

Special notes: This Contract is entered into by and between the Lender and the Borrower through consultation based on equality and free will, and all terms and conditions hereof are genuine intentions of both the Lender and the Borrower. In order to protect the legitimate rights and interests of the Borrower, the Lender hereby asks the Borrower to give full attention to the contents of all terms regarding the rights and obligations of both parties.

 

Borrower (Party A): Synthesis Energy Systems (Zaozhuang) New Gas Co., Ltd.

Domicile: No. 2 Hengshan Road, Xuecheng District

Legal representative: John Winter

Account-opening financial institution and account No.:  

Tel or fax: 0632-4161799

Postal code: 277000

Lender (Party B): Zaozhuang Bank Co., Ltd. Junshan Road Sub-branch

Domicile: No. 67 North Zhenxing Road

Legal representative: Zhou Changtao

Tel or fax: 3398035

Postal code: 277100

 

Upon the equal consultation of both parties, the Lender and the Borrower, in order to specify the rights and obligations of both parties, hereby sign and enter into this Contract after reaching an agreement in respect of the Lender’s granting of loans to the Borrower in accordance with relevant national laws and regulations.

 

Article 1       Definitions and interpretation

 

1.1   Unless otherwise provided in this Contract, the following terms herein shall have the following meanings:

 

1.1.1   Loan amount: the total amount of loans provided by the Lender to the Borrower pursuant to this Contract.

 

1.1.2   Loan term: the period of time extending from the granting date of the first loan to the day when the Borrower pay off all the loan principal and interest as provided herein.

 

1.1.3   Available period: the period of time that the Borrower withdraws loans as agreed herein, including the period of time that both parties agree to postpone the withdrawal through consultation.

 

1.1.4   Eligible withdrawal period: the period of time extending from the effective date of this Contract to the day when the Borrower specified in this Contract makes the first withdrawal.

 

1.1.5   Date of withdrawal: the day when each loan hereunder is transferred to the account of the Borrower.

 

1.1.6   Repayment period: the period of time extending from the time when the Borrower specified in this Contract repays the loan principal and interest the first time to the time when the Borrower pays off all the loan principal and interest, including the period of repayment decided anew by both parties through consultation.

 

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1.1.7   Grace period: the period of time extending from the first loan granting date agreed in this Contract to the day when the Borrower repays the loan principal the first time.

 

1.1.8   Shareholder: investor of the Borrower holding the equity of the Borrower, including the successor and assignee of equity.

 

1.1.9   Workday: working days of the Lender excluding the legal festivals/holidays and public holidays set by the state.

 

1.1.10   Guarantee-related document: legal documents and relevant materials signed for the purpose of assuring the performance of this Contract, including letter of guarantee/standby letter of credit, contract of guarantee, mortgage contract, pledge contract, and letter of commitment, etc.

 

1.2   Unless otherwise provided herein, this Contract shall be interpreted in accordance with the following rules:

 

1.2.1   Loan ratio of the Lender: the proportion of loans provided by the Lender herein to all of its loans.

 

1.2.2   “Maturity” includes the circumstances where the Lender announces the early maturity of debts in accordance with the provisions of this Contract or national laws and regulations.

 

1.2.3   “Substantially unfavorable circumstances” include but not limited to the following ones: the Borrower has fully or partly loses its repayment capacity; the guarantor’s guaranteeing capacity decreases significantly due to its deteriorated financial situation or other causes; the decrease in the value, destruction, loss, or expropriation of the guaranties or dispute over their ownership is enough to have an impact over the Lender’s exercise of hypothec; the decrease in the value of the pledge is enough to have impact over the Lender’s exercise of the right of pledge.

 

1.2.4   The term “include” does not contain restrictive meaning under this Contract.

 

1.2.5   “Laws and regulations” include laws, administrative regulations, local regulations, rules, judicial interpretation and any provisions of legal effect of the People’s Republic of China.

 

Article 2        Loan purpose

 

The loans hereunder may be used for the following purpose, and without the written consents of the Lender, the Borrower shall not use them for any other purposes. The Lender has the right to supervise the use of the funds concerned.

 

Loan purpose: purchase of raw materials .

 

Article 3       Loan amount, term and type

 

3.1   The loan currency hereunder is RMB , and the amount is RMB 20,000,000             (in words: Renminbi Erqianwan Yuan              ) (should there be any inconsistency between the amounts represented in numbers and words, the latter shall prevail).

 

3.2   The loan term hereunder extends from October 2, 2014 to September 23, 2015 , starting from the actual date of withdrawal (starting from the date of first withdrawal if withdrawal is made in installments), and the actual date of withdrawal is subject to the IOU.

 

3.3   The loan type hereunder is short-term loan .

 

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Article 4       Guarantee

 

Except the credit loan, the Borrower shall provide legitimate and valid guarantee recognized by the Lender for the performance of its obligations hereunder. The contract of guarantee shall be signed separately.

 

4.1   Where the loan hereunder is guarantee-based, the guarantee shall be a joint and several liability guarantee .

 

4.2   Where the loan guarantee hereunder is provided in the mode of ceiling amount guarantee, the corresponding contract of ceiling amount guarantee shall be made as below:

 

No. of the contract of ceiling amount guarantee: 2014 Zao Yin Bao Zi 1002602 No.00005

 

Guarantor: Shandong Weijiao Group Xuecheng Energy Co., Ltd.

 

4.3   Where the loan hereunder is mortgage or pledge based, the corresponding mortgage or pledge contract shall be made as follows:

 

No. of mortgage or pledge contract: 2014 Zao Yin Di Zi 10020602 No. 00005

 

Mortgager or pledger: Synthesis Energy Systems (Zaozhuang) New Gas Co., Ltd.

 

4.3.1   Should the guaranties hereunder are damaged, depreciated, involved in any ownership dispute, impounded or sealed up, or the mortgager disposes the guaranties without authorization, or the guarantor providing the assurance guarantee encounters unfavorable changes in its financial situation or other changes harmful to the creditor’s right of the Lender, the Borrower shall lose no time to notify the Lender and otherwise provide other guarantee recognized by the Lender.

 

4.3.2   Where the loan hereunder is guaranteed by pledging the accounts receivable, within the effective period of this Contract, the Lender is entitled to announce the early maturity of the loans in question and ask the Borrower to repay the loan principal and interest immediately in part or in whole, or to add legitimate, valid and sufficient guarantee recognized by the Lender, under any of the following circumstances:

 

(1) The bad debt rate of the accounts receivable payable to the payee of accounts receivable (the pledger) by the payer keeps rising continuously for 2 months;

 

(2) The amount of accounts receivable from the payer which are mature but not collected by the payee of accounts receivable (the pledger) accounts for more than 5% of the remaining amount of accounts receivable from the payer;

 

(3) The payee of accounts receivable (the pledger) has any trade dispute (including, without limitation, disputes over quality, technology and service) or debt dispute with the payer or any other third party, resulting in that the accounts receivable cannot be paid as scheduled upon maturity.

 

Article 5       Interest rate and the interest accruing and settling methods

 

5.1   Loan interest rate

 

5.1.1   The first of the following methods shall be adopted to determine the interest rate of the loan in RMB:

 

(1) Fixed interest rate: The loan rate floats (up√/down) _50_ % based on the benchmark interest rate of the same level in the same period published by the People’s Bank of China that corresponds to the date of withdrawal of each loan October 2, 2014 (the term of the loan/the loan term specified in Article 3.2 hereof), till the date of loan maturity. The specified interest rate adopted shall be subject to the corresponding loan certificate.

 

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(2) Floating interest rate: The loan rate floats (up/down) __/__% based on the benchmark interest rate of the same level in the same period published by the People’s Bank of China that corresponds to the date of withdrawal of each loan _____/______ (the term of the loan/the loan term specified in Article 3.2 hereof). The specified interest rate shall be subject to the corresponding loan certificate in line with the interest rate floating rules as agreed in this Contract.

 

The interest rate shall be adjusted every_____/____ (in words) month(s). During the repayment period, in the event that the People’s Bank of China adjusts the benchmark interest rate of loan, from the loan corresponding date in the first month of the next period after the adjustment of benchmark interest rate, the Lender may determine the new loan interest rate according to the benchmark interest rate of the same level for the corresponding period after adjustment and the floating extent agreed in this Contract without a separate notice to the Borrower. In the event the adjustment date of benchmark interest rate falls on the loan granting date or the loan corresponding date in the first month of such adjustment period, the new loan interest rate shall be determined since the adjustment date of benchmark interest rate. Where there is no such loan corresponding date, the last day in the first month of the period shall be deemed as the loan corresponding date.

 

5.1.2   The        /        of the following methods shall be adopted to determine the interest rate of loan in a foreign currency:

 

(1) The interest rate formed by    /    (in words)-month     /    (LIBOR/HIBOR) +  /    % of spread shall be adjusted every     /     (in words) month(s). LIBOR/HIBOR here refers to the London Interbank Offer Rate / Hong Kong Interbank Offer Rate for the corresponding term two workdays immediately prior to the value date announced by Reuters.

 

(2) The adopted monthly interest rate is     /     ‰, valid till the loan maturity date.

 

(3) Other methods _________________/____________________________.

 

5.2   Punitive interest rate

 

5.2.1   In the event that the Borrower fails to use the loan for the purposes as stipulated herein, the Lender shall, from the default date, collect the punitive interest for the default part at the rate of 80 % of the adopted loan interest rate agreed herein to the extent that all principal and interest have been paid off. During the default period, in the event that the benchmark interest rate for RMB loan of the same period is raised by the People’s Bank of China, the rate for such punitive interest shall be raised from the adjustment date of the benchmark interest rate accordingly.

 

5.2.2   In the event that the Borrower fails to repay the loan principal in accordance with the term stipulated herein, the Lender shall, from the overdue date, collect the punitive interest for the overdue part at the rate of 40 % of the adopted loan interest rate stipulated herein to the extent that all principal and interest have been satisfied. During the overdue period, in the event that the benchmark interest rate for RMB loan of the same period is raised by the People’s Bank of China, the rate for such punitive interest shall be raised from the adjustment date of the benchmark interest rate accordingly.

 

5.3   Compound interest

 

For the interest that the Borrower does not pay as scheduled, the Lender shall collect the compound interest from the day when the interest is not paid as scheduled on a / (quarterly/monthly) basis. For the interest not paid as scheduled within the loan term, compound interest will be collected at the loan interest rate as agreed in this Contract, but starting from the loan maturity date, compound interest will be collected at the overdue punitive interest rate as agreed herein. For the interest not paid as scheduled in the period of overdue or default use of loan, compound interest will be collected at the punitive interest rate as agreed herein.

 

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5.4   Interest accruing and settling methods

 

5.4.1   The interest of loan hereunder shall be settled on a     monthly      (monthly/quarterly) basis, and the settlement date shall be the 20 th day of every      month     (month/last month of every quarter).

 

5.4.2   The loan interest hereunder shall, on the basis of 360 days a year, be collected according to the actual loan balance and the number of days used from the day when the Borrower withdraws the loan.

 

5.4.3   The Borrower shall, prior to the settlement date, transfer the payable interest into the account stipulated in Article 10.1 of this Contract, and irrevocably entrust the Lender to deduct such interest from the account directly. If the last repayment date of the loan principle does not fall on the interest settlement date, the unpaid interest shall be paid off with the principal.

 

5.4.4   For the loan to which a fixed interest rate is applied, the interest shall be calculated at the agreed interest rate upon the settlement of interest. For the loan to which a floating interest rate is applied, the interest rate shall be calculated at the interest rate determined in each floating period. Where the interest rate floats more than once within a single interest settlement period, the interest in each floating period shall be calculated first, and then the interest within the interest settlement period shall be calculated by summing the interest in all floating periods on the date of interest settlement.

 

Article 6        Revolving loan

 

6.1   Where the loan hereunder may be used in a revolving manner, within the use term of revolving loan line, the loan balance of the Borrower at any time may not exceed the revolving loan line; the loan term for each withdrawal of the Borrower shall extend from the actual withdrawal date to the agreed repayment date, subject to what is written on the IOU, and the repayment date of each withdrawal may not exceed the use term of revolving loan line.

 

6.2   Where the loan hereunder may be used in a revolving manner, the Lender is entitled to cancel the revolving loan line if the Borrower fails to make any withdrawal for three consecutive months starting from the execution of this Agreement.

 

Article 7        Special provisions on revolving loan (optional clause, this article is □ applicable □ not applicable)

 

7.1   Where the loan hereunder may be used in a revolving manner, the loan amount and loan term set out in Article 3 above shall be the revolving loan line and use term of revolving loan line. Specifically, the use term of revolving loan line shall start from the effective date of this Contract.

 

7.2   For the RMB revolving loan to which a floating interest rate is applied, the benchmark interest rate shall be determined according to the benchmark interest rate of the People’s Bank of China for the level corresponding to each loan term.

 

7.3   In addition to interest, the Borrower shall also pay commitment charges to the Lender. The commitment charges shall be paid in the __/__ of the following methods:

 

(1) to be paid to the Lender in a lump sum upon the effective date of this Contract at __/_% of the revolving loan line.

 

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(2) after this Contract comes into effect, to be paid to the Lender in installments on the 20 th day of each __/__(month/quarter/half year) according to the difference between the revolving loan line and the amount withdrawn by the Borrower (daily mean balance within the charging period) and the annual fee rate of __/__%, until the day when the use term of the revolving loan line expires.

 

(3)___________________/___________________________

 

Article 8       Terms of withdrawal

 

8.1   Prior to the first withdrawal, the Borrower has provided the documents, including articles of incorporation, duplicate of business license, identity certificate of the legal representative, as required by the Lender. If copies are provided, the corresponding originals shall be ensured to be true, complete and valid.

 

8.2   Prior to the first and each withdrawal, the Lender shall meet the following requirements:

 

8.2.1   An account has been opened as provided in Article 10.1 of this Contract.

 

8.2.2   The Borrower presents to the Lender the “application of withdrawal” conforming with the provisions of this Agreement, indicating the information including the reason, purpose and amount of withdrawal, method of payment, and name and account number of the counterparty, provides duplicates of relevant transaction certificates and other materials, and go through relevant withdrawal formalities in accordance with relevant provisions and requirements of the Lender.

 

8.2.3   Where the loan hereunder is borrowed in a foreign currency, the Borrower has properly completed the formalities of approval, registration, delivery and other statutory formalities related to the said loan hereunder in accordance with the provisions of relevant laws and regulations.

 

8.2.4   Where the loan hereunder involves mortgage or pledge, relevant formalities for guarantee and insurance needed before the withdrawal as may be required by the Lender have been duly completed, and such guarantee and insurance shall continuously remain effective. In the event that the loan hereunder involves an assurance guarantee, the contract of guarantee shall have been executed and come into force.

 

8.2.5   No event of default specified herein has happened, nor has any other event which may constitute a default occurred.

 

8.2.6   Not any substantially unfavorable circumstance as defined herein has occurred.

 

8.2.7   Any and all representations and warranties made by the Borrower upon the execution of this Contract shall still keep effective upon the date of withdrawal, and no any substantially unfavorable change has occurred thereto.

 

8.2.8   If the Borrower borrows money from any shareholder, the shareholder shall have made a written promise that the principal, interest and payable fees of the borrowed money will not be collected from the Borrower in part or in whole until the Borrower has paid all the loan principal, interest and payable fees hereunder.

 

8.2.9   Other requirements for withdrawal agreed by both parties:

 

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Article 9       Withdrawal

 

9.1   The Borrower of the loan hereunder shall withdraw loan according its actual needs. The withdrawal period shall extend from October 2, 2014 to October 4, 2014 . Specifically, the first withdrawal must be made prior to October 2, 2014 , and the last withdrawal prior to October 4, 2014 . Otherwise, the Lender is entitled to cancel the loans in part or in whole. (This article is not applicable to revolving loan)

 

9.2   Procedure of withdrawal

 

9.2.1   The Borrower shall open a special account for working capital loan with the Lender, which shall be specially used for loan granting and payment, as well as capital recovery (see Article 10.1 for details).

 

9.2.2   The Borrower shall make withdrawal according to its capital turnover needs for day-to-day production and operation. Upon withdrawal, the Borrower shall submit an “Application of Withdrawal” (in duplicate) to the business department of our bank and provide corresponding transaction certification. The written documents provided shall be original; if any original cannot be provided, a copy with the corporate seal of the Borrower may be provided with the consent of the Lender.

 

9.2.3   The Lender may decide whether to grant the loan or not after examining the materials provided by the Borrower in line with its internal procedure.

 

9.3   If the Borrower fails to go through the formalities for withdrawal within the withdrawal period as agreed, nor applies for postponing the withdrawal, the Lender may notify the Borrower, requesting it to go through relevant formalities within five workdays. Should the Borrower still fail to completing such formalities, the Lender is entitled to cancel or partly cancel the loan not withdrawn, and collect compensations at the rate of 1% of cancelled amount.

 

Article 10     Account supervision

 

10.1   The Borrower shall, prior to withdrawal, open a general settlement account with the Lender and keep such account until the accounts payable hereunder are all paid off and all obligations and responsibilities of the Borrower hereunder are completely performed.

 

10.2   The Borrower shall deposit the amounts, including but not limited to the following money, into the account agreed in Article 10.1 of this Contract:

 

(1) Loan under this Contract;

 

(2) The Borrower’s corresponding sales income or money planned for repayment. If the corresponding sales income is settled in a non-cash manner, the Borrower shall ensure that the money can be transferred into the said account in a timely manner.

 

(3) Income of the Borrower obtained during the process of production and operation;

 

(4) Other money related to operating income required by the Lender.

 

10.3   In order to the ensure the exercise of the rights hereunder and the performance of the obligations hereunder, the Lender has the right to supervise the account opened by the Borrower in accordance with Article 10.1 of this Contract within the effective term hereof in accordance with relevant provisions on the administration of bank settlement accounts and stipulations hereof.

 

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10.4   The account supervision includes, without limitation:

 

10.4.1   The withdrawal of loan and supervision over the use of loan

 

(1) When using the funds borrowed, the Borrower must provide materials including the application of withdrawal as required by the Lender, and the fund will be granted to the account with the consent of the Lender after examination and paid externally in the method of payment as stipulated herein;

 

(2) Where the Borrower’s application for the use of loan fails to conform to the fund use plan or purpose, the Lender is entitled to refuse the granting of the loan, but it shall give written notice to the Borrower, indicating the reason for refusal.

 

10.4.2   The Borrower shall cooperate with the inquiry and supervision over the incomes and expenses of the account. Upon the request of the Lender, the Borrower shall sign a special account supervision agreement with the Lender.

 

10.4.3   Supervision over production and operating incomes

 

(1) The incomes made by the Borrower during its day-to-day production and operation, shall be deposited into the account stipulated in Article 10.1 of this Contract __/__ (fully/at the amount not less than the loan ratio of the Lender).

 

(2) Supervision over the repayment of loan with incomes. Except some necessary expenses, the Borrower shall use the operating income first for repaying the loan hereunder.

 

10.5   The Borrower undertakes that all the money withdrawn and transferred out of the account stipulated in Article 10.1 of this Contract shall only be used for the following payments:

 

(1) The loan principal, interest, penalty, compensation, payable expenses and other money hereunder;

 

(2) Other necessary expenses that the Borrower shall pay for its business operation.

 

10.6   The Lender will not assume any legal liabilities for such measures as refusal of granting loan and restriction over expenditure taken for the purpose of implementing account supervision as agreed in this Contract.

 

Article 11     Loan granting and payment

 

11.1   To withdraw the loan hereunder, the Borrower must satisfy the following preconditions, otherwise the Lender is not obligated to grant any funds to the Borrower, excluding those funds that the Lender agrees to grant in advance:

 

(1) Except the credit-based loan, the Borrower has, as required by the Lender, provided corresponding guarantee and gone through relevant formalities for guarantee;

 

(2) No event of default under the Contract or other contracts signed by the Borrower and the Lender has happened;

 

(3) The certification for the loan purpose provided conforms to the agreed purpose.

 

11.2   If the Borrower meets the preconditions for withdrawal, or with the consent of the Lender to grant loan in advance, the Lender transfers the loan into the designated account of the Borrower, it shall be deemed that the Borrower has granted the loan to the Borrower as provided herein.

 

11.3   The Borrower shall pay the loan externally by way of “payment by the Lender upon entrustment” or “payment by the Borrower itself”. In accordance with relevant regulatory provisions and management requirements of the Lender, the loan exceeding certain amount or meeting other conditions shall be paid in the manner of “payment by the Lender upon entrustment”, and the Lender will, according to the Borrower’s application of withdrawal and payment entrustment, pay the loan to the payee conforming to the purpose agreed herein. For this reason, the Borrower shall sign a separate agreement on entrustment-based payment with the Lender as an annex hereto, and open or designate a special account with the Lender to handle the matters concerning the entrustment-based payment.

 

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11.4   Payment by the Lender upon entrustment: It means that the Lender pays the loan funds to the counterparty of the Borrower conforming to the purpose as stipulated herein according to the Borrower’s application of withdrawal and payment entrustment.

 

11.4.1   In the case of “payment by the Lender upon entrustment”, the Lender shall submit a “letter of payment entrustment” (in duplicate) to the Lender while submitting the “application of withdrawal”, expressing its intention to entrust the Lender to make external payment.

 

11.4.2   The Lender may decide whether to make external payment as entrusted after examining the contents of entrusted payment in line with its own internal procedure. If accepting the entrustment, the Lender shall lose no time to pay the money concerned externally in line with the “letter of payment entrustment” after the funds are granted to the special account of the Borrower.

 

11.5   Payment by the Borrower itself: It means that the Borrower, on its own, pays the loan funds to the counterparty thereof meeting the purpose as agreed herein after the said funds are granted by the Lender to the Borrower’s account upon its application for withdrawal.

 

11.5.1   In the case of “payment by the Borrower itself”, the Borrower shall, after the loan funds are granted to the special account of the Borrower, lose no time to pay the said money to counterparty thereof determined for the payment concerned, and the Lender has the right to supervise the payment act of the Borrower. If it is required to withdraw cash, the Borrower shall lose no time to transfer the funds from the special account into the basic account.

 

Article 12     Repayment

 

12.1   Source of repayment

 

12.1.1   The financial source of the Borrower for repaying the loan principal and interest hereunder include, without limitation:

 

(1)  Operating incomes                                                                   ;

 

(2)________________________________________________;

 

(3)________________________________________________.

 

12.2   Sequence of repayment

 

12.2.1   Any repayment of the Borrower hereunder shall be made in the sequence to the repay the previous loans first and then the current loans. That is to say, the sequence of repayment is based on date of maturity: first the loans which become mature earlier, and then those which become mature later.

 

12.2.2   In case that the amount repaid by the Borrower is not sufficient to discharge the payables hereunder, the Lender may elect to use such amount to repay the principal, interest, punitive interest, compound interest or relevant fees.

 

12.3   Repayment schedule

 

12.3.1   The grace period hereunder is ___/____(in words, year/month), starting from the day the first loan is granted. During the grace period, the Borrower is not required to repay the loan principal.

 

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12.3.2   The Borrower shall fully pay the interest as provided herein, and repay the loan principal as agreed in the first of the following methods: (optional)

 

(1) Repayment of loan principal in a lump sum on September 23, 2015 .

 

(2) Repayment of loan principal in installments in a period extending from __/__(date) to __/__(date). The specific repayment schedule is shown as follows:

 

Time of repayment   Amount of repayment
     
     
     
     
     

 

(Notes: ① The time of repayment in the table may be based on time point and time range. ② A sheet added due to the limited space of the table shall constitute a part hereto, and shall have articles linking hereto.)

 

12.4   Method of repayment

 

The Borrower shall fully repay the loan principal, interest, and other payables on schedule as agreed herein. The payables in the current period shall, at a banking workday prior to the repayment date and each interest settlement date, be deposited into the account as agreed in Article 10.1 hereof, and the Lender is entitled to deduct such money on its own on the repayment date or interest settlement date, or require the Borrower to provide cooperation in going through relevant formalities for such funds transfer so that it may perform its repayment obligations in full. If the money in the repayment account is not enough to pay all the Borrower’s mature payables, the Lender is entitled to decide the sequence of repayment.

 

12.5   Early repayment

 

12.5.1   In the event of early repayment, the Borrower shall submit a written application to the Lender 10 workdays in advance, and make the early repayment after reaching an agreement with Lender upon consultation.

 

12.5.2   Upon the early repayment of the Borrower, the interest for the early-repaid part shall be collected in the __/_ of the following methods, with interest being paid off with the principal.

 

(1) to collect the interest according to the actual loan term and the interest rate agreed herein;

 

(2) to collect the interest according to the loan term and interest rate agreed herein;

 

(3) to collect the interest in accordance with actual loan term at the interest rate stipulated herein plus__/___(in words) percent (but the actual amount of interest collected may not exceed the amount of interest accrued according to the loan term and interest rate stipulated herein.

 

(4) other method

 

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12.5.3   Where the Borrower makes early repayment, the principal repaid may not be less than RMB ____/___ and shall also be integral multiple of RMB 100,000.

 

12.5.4   If the Lender agrees with the early repayment, the Borrower shall, upon the early repayment date, also pay off the payable loan principal, interest and other money accrued until the early repayment date as stipulated herein.

 

12.5.5   Where the actual loan term is shortened because the Borrower makes early repayment or the Lender takes back loans as provided herein, the corresponding level of interest rate will not be adjusted and the original loan interest rate shall still be adopted.

 

12.6   Extension

 

Where the Borrower cannot repay loans in line with the repayment schedule as agreed herein, it may apply to the Lender for extension. The Borrower shall submit the application for extension to the Lender at least 15 workdays prior to the loan maturity date, and after the Lender’s examination and approval, the Lender may enter into a loan extension agreement with the Borrower.

 

12.7   The Lender has the right to take back loans according to the capital recovery situation of the Borrower.

 

Article 13     Inspection over the use of loan funds

 

13.1   After granting loans, the Lender is entitled to inspect the use of loan funds hereunder either in an on-site or off-site manner. The Borrower shall, as required by the Lender, submit the report on use of loan funds, corresponding certificates for payment of funds, and performance of trading contract, etc. in a timely manner. The Lender’s inspection and supervision shall cover the following areas, including without limitation:

 

(1) Whether the Borrower has used the loans for the purposes stipulated herein, and whether the loans have been used for engaging in speculation in the areas, including equity capital investment, marketable securities, and futures, which are prohibited by the state explicitly;

 

(2) Other circumstances over which the Lender deems it necessary to carry out inspection.

 

13.2   Where the Lender, during its inspection, discovers that the production and operation of the Borrower is affected by the improper use of funds, it may request the Borrower to make corrections with a given period. If the Borrower fails to make corrections within the given period, the Lender may require the Borrower to assume the liability for breach of contract as provided in Article 17 hereof.

 

13.3   The Lender may visit the Borrower on a regular or irregular basis, to learn relevant information in the following ways:

 

(1) listening to the report of the Borrower on its business scope, core businesses, production and operation, business plan and major investment plans within the loan term, etc.;

 

(2) introduction about the Borrower’ industry made by the Borrower;

 

(3) the Borrower’s total need of working capital and current financing liabilities;

 

(4) real financial situation of the Borrower in respect of accounts receivable, accounts payable, and stock-in-trade, etc.

 

(5) Information on the related parties and related transactions of the Borrower;

 

(6) Information on the specific loan purposes and capital usage of the counterparty related to the loan purposes;

 

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(7) Information on the source of repayment, including the cash flow, consolidated incomes and other legitimate incomes generated from production and operation;

 

(8) Checking the financial and accounting data of the Borrower such as financial statement, accounting documents, and account books, as well as other relevant information, and checking the financial and capital situation of the Borrower.

 

Article 14     Representations and warranties of the Borrower

 

The Borrower makes the following representations and warranties to the Lender and keeps them valid throughout the effective term of this Contract:

 

14.1   It lawfully has the right as principal of a Borrower, and is qualified and able to sign and perform this Contract.

 

14.2   It has obtained all necessary authorizations or approvals to sign this Contract, and the execution and performance hereof will not go against the provisions of its articles of incorporation and relevant laws and regulations, nor be in conflict with the obligations that it shall assume under other contracts.

 

14.3   Other payable debts have been paid off on schedule and it does not have any malicious act to default on the loan principal and interest of any bank.

 

14.4   It has well-established organizational structure and financial management rules. In the latest year, no substantial breaching behavior has occurred during its production and operation, and none of the current senior executives has any substantially bad record.

 

14.5   All the documents and data provided to the Lender are true, accurate, complete and valid, free of any falsified record, material omissions or misleading information.

 

14.6   The financial accounting reports provided to the Lender are compiled in accordance with the Chinese Accounting Standards, reflecting the operation conditions and liabilities of the Borrower truthfully, fairly and completely, and no substantially unfavorable changes have occurred to the financial situation of the Borrower since the closing date for the latest financial accounting report.

 

14.7   It has not concealed any litigation, arbitration or claim for compensation that it has got involved in.

 

Article 15     Undertakings of the Borrower

 

15.1   It shall withdraw and use the loans in line with the term and purposes agreed herein, and the funds borrowed will not be used for investment in fixed assets and equity, nor flow into the securities market and futures market in any ways, nor be used for other purposes that are prohibited or restricted by relevant laws and regulations in any ways.

 

15.2   It shall pay off the loan principal, interest and other payables as stipulated in this Contract.

 

15.3   It will accept and actively cooperate with the inspection and supervision of the Lender over the use of loan funds (including the purpose) by way of account analysis, inspection of certificates, and on-site investigation, and report the use of loan funds as required by the Lender on a regular basis.

 

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15.4   It will accept the credit investigation of the Lender, provide financial and accounting data including balance sheet and income statement and other materials which may reflect the solvency of the Borrower as required by the Lender, and actively provide assistance and cooperation to the Lender to investigate, understand and supervise its production, operation, and financial situation.

 

15.5   It will not distribute any dividends and bonus in any form before paying off the loan principal and interest and other payables hereunder.

 

15.6   When launching any action that may cause unfavorable impact to the rights and interests of the Lender, such as merger, split-off, capital reduction, changes in equity, substantial transfer of assets and creditor’s rights, substantial foreign investment, substantial increase in debt financing, the Borrower shall first get the written consent of the Lender or make arrangement regarding the realization of creditor’s rights of the Lender that is satisfactory to the Lender.

 

15.7   Under any of the following circumstances, the Borrower shall send a timely notice to the Lender:

 

(1) Change in articles of incorporation, business scope, registered capital, and legal representative;

 

(2) Shutdown, dissolution, liquidation, business suspension for rectification, and revocation of business license, cancellation, or application (being applied) for bankruptcy;

 

(3) Involvement or possible involvement in substantial economic dispute, litigation, arbitration, or sealing-up, sequestration or control of assets under law;

 

(4) Involvement of any shareholder, director or current senior executive in any major cases or economic disputes.

 

15.8   It shall disclose the relations with any related parties and the related transactions to the Lender in a timely, comprehensive and accurate manner.

 

15.9   It shall sign and receive the relevant notices sent or served in other ways by the Lender in a timely manner.

 

15.10   It may not dispose its own assets by reducing its solvency, nor provide any guarantee for any third party that will impair the rights and interests of the Lender.

 

15.11   Where the loans hereunder are granted in a credit-based manner, it shall regularly report the external guarantee information to the Lender fully, truthfully, and accurately, and sign an account supervision agreement as required by the Lender. Where the external guarantee may affect its performance of obligations hereunder, it shall obtain the written consent of the Lender.

 

15.12   It shall bear all the costs for the execution and performance of this Contract and the expenses that have been paid or are payable by the Lender with a view to realizing the creditor’s right hereunder, including, without limitation, litigation or arbitration fees, property preservation fees, lawyer’s fees, execution cost, assessment charges, auction fees, and announcement expenses.

 

15.13   The debts hereunder shall be paid off in an order taking priority over those debts owed to shareholders, and remain at least at an equal level compared with other similar debts of the Borrower to other creditors.

 

Article 16     Undertakings of the Lender

 

16.1   It shall grant the loans to the Borrower as agreed herein.

 

16.2   It shall keep all the non-public information and data provided by the Borrower confidential, except for those as otherwise provided in relevant laws and regulations and in this Contract.

 

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Article 17     Liability for breach of Contract

 

17.1   Any of the following circumstances shall constitute the default of the Borrower:

 

(1) The Borrower fails to repay the loan principal and interest as well as other payables hereunder as agreed herein, or fails to perform any other obligations hereunder, or breaches any representation, warranty or undertaking hereunder;

 

(2) In the event of any change in the guarantee hereunder which is unfavorable to the creditor’s rights of the Lender, the Borrower fails to otherwise provide other guarantee acceptable to the Lender;

 

(3) The Borrower fails to pay off any other mature debts (including those about which an early maturity are announced), or fails to perform or goes against the obligations under other agreements, which has affected or may affect its performance of the obligations hereunder;

 

(4) The financial indicators of the Borrower such as profit-making capacity, solvency, operating capacity and cash flow break the stipulated criteria, or become deteriorated, which has impaired or may impair its performance of obligations hereunder;

 

(5) A substantially unfavorable change happens to the shareholding structure, production and operation, and foreign investment of the Borrower, which has impaired or may impair its performance of obligations hereunder;

 

(6) The Borrower gets involved or is likely to get involved in any substantial economic dispute, litigation, arbitration, or has its assets sealed up, sequestrated or under any specific performance, or it is investigated in a case placed on file or imposed punitive measures by any judicial authority or administrative authority under law, or it is exposed by media as a result of violating relevant national provisions or policies, which has impaired or may impair its performance of obligations hereunder;

 

(7) The main individual investors and key executives of the Borrower undergo abnormal change, get lost, or are investigated or have their freedom restricted by any judicial authority pursuant to laws, which has impaired or may impair its performance of obligations hereunder;

 

(8) The Borrower fraudulently obtains the funds or credit from the Lender by making use of false contracts with the related parties and transactions without real trading background, or intentionally evades the creditor’s rights of the Lender relying on related transactions;

 

(9) The Borrower has got or may get involved in shutdown, dissolution, liquidation, business suspension for rectification, and revocation of business license, cancellation, or application (being applied) for bankruptcy;

 

(10) The Borrower has caused any negligent accident due to its violation of relevant laws and regulations, regulatory provisions or industrial standards on food safety, production safety and environmental protection, which has impaired or may impair its performance of obligations hereunder;

 

(11) Where the loans hereunder are granted in a credit-based manner, the indicators of the Borrower, including credit rating, profitability, asset-liability ratio, and net cash flow from business activities, fail to meet the credit-based loan requirements of the Lender; or without the written consent of the Lender, the Borrower sets its effective business assets as mortgage/pledge guarantee for others, or provides external guarantee, which has impaired or may impair its performance of obligations hereunder;

 

15
 

 

(12) Other circumstances that may result in unfavorable impact to the Lender in realizing its creditor’s right hereunder.

 

17.2   Upon the default of the Borrower, the Lender is entitled to take one or more of the following measures:

 

(1) Requiring the Borrower to correct its breaching behavior within a time limit;

 

(2) Stopping extending to the Borrower loans or other financing funds under this Contract or other contracts reached by and between the Lender and the Borrower, and canceling in part or in whole the loans and other financing funds that the Borrower has not withdrawn;

 

(3) Announcing that the unpaid loans under this Contract or other contracts reached by and between the Lender and the Borrower become mature immediately and take back the unpaid money immediately;

 

(4) Requiring the Borrower to compensate all losses suffered by the Lender owing to the former’s breach of contract;

 

(5) Other measures provided in relevant laws and regulation, stipulated in this Contract, or deemed to be necessary by the Lender.

 

17.3   Where the Borrower fails to make repayment as agreed upon the loan maturity (including the early maturity announced), the Lender is entitled to collect any punitive interest at the overdue punitive interest rate stipulated in this Contract since the overdue date. For the interest not paid by the Borrower on schedule, compound interest will be collected at the overdue punitive interest rate.

 

17.4   Where the Borrower fails to use the loans for the purposes stipulated herein, the Lender is entitled to collect punitive interest for the misappropriated part at the punitive interest rate for misappropriation of loans as stipulated herein since the date when the loan is misappropriated, and for the interest not paid on schedule within the period of misappropriation, compound interest will be collected at the punitive interest rate for misappropriation of loans.

 

17.5   Where the Borrower gets involved in the circumstances as mentioned both in Articles 17.3 and 17.4 above, the higher punitive interest rate rather than the superposed rate will be adopted.

 

17.6   Where the Borrower fails to repay the loan principal, interest (including punitive interest and compound interest) or other payables, the Lender is entitled to expedite the collection via announcement on media.

 

17.7   Where there is any change in relations of controlling and being controlled between the related parties of the Borrower and the Borrower, or the related parties of the Borrower get involved in circumstances other than those mentioned in Items (1) and (2) of Article 17.1 above, which has or may have affected the performance of the obligations hereunder by the Borrower, the Lender is entitled to take various measures as stipulated herein.

 

Article 18     Deduction

 

18.1   Where the Borrower fails to repay the mature debts hereunder (including those which are announced to be mature immediately) as agreed in this Contract, the Lender is entitled to deduct the corresponding funds from all the accounts both in home and foreign currencies opened by the Borrower with other sub-braches of our bank for repayment till all the debts of the Borrower hereunder are paid off completely.

 

16
 

 

18.2   When the deducted funds are not of the same currency as that provided herein, the said money will be converted at the applicable exchange rate of the Lender upon the date of deduction. The interest and other fees accruing during the period from the date of deduction to the date of clearance (the day when the Lender converts the deducted funds into the currency hereunder in accordance with national policies on administration of foreign exchange and has the debts hereunder cleared actually), as well as the difference arising from the fluctuation in foreign exchange rate during this period shall all be borne by the Borrower.

 

18.3   Where the funds deducted by the Lender are not enough to clear all debts of the Borrower, the Lender is entitled to decide the sequence of clearance.

 

Article 19     Rights and obligations of the Borrower

 

19.1   It may withdraw and use the loans in line with the terms agreed herein.

 

19.2   It shall repay the loan principal and interest in full on schedule.

 

19.3   It shall deal with the settlement of account current and deposits related to the loans hereunder through the account stipulated in Article 10 hereof.

 

19.4   Where the loan hereunder is borrowed in a foreign currency, it shall duly go through the formalities of approval and registration as well as other statutory formalities related to the said loan in accordance with relevant provisions; for the loan in foreign currency, the Borrower cannot use it for foreign exchange settlement.

 

19.5   The Borrower shall accept and actively cooperate with the inspection and supervision carried out by the Lender and the entities or individuals entrusted thereby over its financial activities and the use of loan funds hereunder.

 

19.6   Where the Borrower has any of the following acts within the effective term of this Contract, it shall send a prior written notice to the Lender, and with the consent of the Lender, implement the measures for paying off debts or pay off debts in advance:

 

(1) acts enough to result in change in the relation between creditor’s rights and liabilities hereunder or affect the realization of creditor’s rights by the Lender, including contracting, lease, joint-stock transformation, joint operation, consolidation, merger, split-off, reduction in registered capital, joint venture, transfer of assets, foreign investment, application for business suspension for rectification, application for dissolution, application for bankruptcy;

 

(2) acts that may affect its solvency hereunder, such as providing guarantee for debts of others, or mortgaging and pledging its primary assets for a third person;

 

(3) acts to mortgage and pledge the project assets formed with the loan hereunder for any third party.

 

19.8   Where the Borrower gets involved in any of the following events, it shall, within five workdays after the occurrence of such events, notify the Lender in writing and implement the measures for preserving the creditor’s rights acceptable to the Lender:

 

(1) Its legal representative or chief executive involving in any illegal activities;

 

(2) Production halt, shutdown, cancellation of registration, revocation of business license, being cancelled, or being applied for bankruptcy;

 

(3) Deterioration of financial situation or serious difficulty in production and operation, or involvement in substantial litigation or arbitration event;

 

17
 

 

(4) Other events that are of substantially unfavorable impact to the realization of creditor’s rights by the Lender.

 

19.9   Upon any of the following events, the Borrower shall, within five workdays after the occurrence of such event, notify the Lender in writing:

 

(1) Change in subordination relation and top management members, as well as adjustment in organizational structure;

 

(2) Alteration to matters regarding industrial and commercial registration such as its name, domicile, legal representative, and business scope;

 

(3) Increase in registered capital and modification to articles of incorporation;

 

(4) Change in other major matters of the Borrower.

 

19.10   The Borrower and its investors shall not draw out their capital illegally, transfer their assets or assign their shares without permission to evade the Borrower’s debts owed to the Lender.

 

19.11   The Borrower may not sign any agreement or document that is enough to impair the interests of the Lender, or engage in any matter that is enough to damage the interests of the Lender.

 

19.12   The Borrower shall timely report to the Lender any breaching behavior specified herein that has happened or will happen.

 

19.13   Where the guarantor for the loans hereunder gets involved in the circumstances including production halt, shutdown, cancellation of registration, revocation of business license, bankruptcy or being cancelled and business losses, which makes the guarantor lose its guaranteeing capacity related to the loans hereunder in part or in whole, or the value of the guaranties or pledged assets as a security for the loans hereunder is reduced, damaged or lost accidentally, the Borrower shall forthwith provide other guarantee acceptable to the Lender.

 

19.14   The Borrower shall bear all the charges and expenses for legal service, insurance, transport, assessment, registration, safe-keeping, authentication, and notarization, etc. related to this Contract and the guarantee hereunder.

 

Article 20     Rights and obligations of the Lender

 

20.1   It is entitled to inspect and supervise the Borrower’s financial situation, inventory and use of loan funds, and demand the Borrower to provide the documents, materials and information such as financial statement periodically.

 

20.2   Where the Borrower has any unfavorable acts or gets involved in any unfavorable situation which is enough to endanger the safety of the loans hereunder, including but not limited to those specified in Article 18 hereof, the Lender may stop granting loans and take back the part granted in advance.

 

20.3   When taking back or taking back in advance the loan principal, interest, punitive interest, compound interest and other payables from the Borrower in accordance with the terms hereunder, the Lender may make direct deduction from any account of the Borrower.

 

20.4   The Lender shall grant loans to the Borrower in full and on schedule in accordance with the terms stipulated herein, but excluding the postponement owing to the fault of the Borrower or other persons rather than the Lender.

 

18
 

 

20.5   The Lender shall give a reply to the application of the Borrower within the time limit as agreed in this Contract. In the event that it fails to do so, it shall be deemed that the Lender reject the application of the Borrower unless otherwise provided herein.

 

20.6   For any substantial breaching behavior of the Borrower such as escaping the supervision of the Lender, and default on the loan principal and interest, the Lender is entitled to impose credit sanction, report to relevant authorities or entities, and disclose the said behavior to the public.

 

20.7   The Lender has the right to transfer its rights hereunder in part or in whole to any third party, and such transfer does not need the consent of the Borrower. Without the written consent of the Lender, the Borrower may not transfer any of its rights and obligations hereunder.

 

Article 21     Confidentiality

 

21.1   Either party is obligated to keep confidential the business secrets or other interest-related information of the other party known in the execution and performance of this Contract. Unless otherwise provided in laws and administrative regulations, without the permission of the other party, none of the aforesaid information may be disclosed or divulged to a third party.

 

21.2   Unless otherwise provided herein, without the consent of the other party, either party may not disclose any information of this Contract and non-public information related hereto to any third party.

 

To extent permitted by relevant laws and regulations, the Lender may disclose data or information related hereto to the regulatory authorities, its superior bank, branches, and assignee of the creditor’s right.

 

Article 22     Effectiveness, alteration, and rescinding of Contract

 

22.1   This Contract shall come into effect as from the date of execution and keep effective till the day when the Borrower performs all obligations hereunder.

 

22.2   Any alteration to this Contract shall be made in a writing based on an agreement reached by both parties through consultation. The altered clauses or agreements shall constitute a part hereto and be of the same legal effect as that of this Contract. Except the altered part, the remaining part of this Contract shall remain effective, and the original clauses remain effective before the altered part comes into effect.

 

22.3   The alteration and rescinding of this Contract shall have no impact on the rights of either party to claim compensations for losses. The rescinding of this Contract will not affect the effect of the clauses on dispute settlement.

 

22.4   This Contract is made in Three counterparts of the equal legal effect, with the Borrower, the Lender and recording department holding one copy respectively.

 

Article 23     Governing laws and settlement of dispute

 

The execution, effect, interpretation, performance and dispute settlement of this Contract shall be subject to the laws of the People’s Republic of China. For all disputes and dissensions arising out of this Contract or related hereto, both Party A and Party B shall try to settle them through consultation. Shall such consultation fail, they shall be settled in the method stipulated herein.

 

19
 

 

Article 24     Notification

 

24.1   All notices hereunder shall be sent in a written form. Unless otherwise provided, the domiciles specified herein by both parties shall be the addresses for communication and correspondence. Where either party’s address for communication or other contact method changes, it shall write to notify the other party in a timely manner.

 

24.2   Where either party hereto refuses to sign a notice or there is any notice failing to be served, the notifying party may have the notice in question served by way of notarization or announcement.

 

Article 25     Miscellaneous

 

25.1   If the Lender fails to exercise, or exercise in part, or delay its exercise of any right hereunder, it shall not constitute its waiver or change of the right concerned or other rights, nor shall it affect its further exercise of such right or other rights.

 

25.2   The ineffectiveness or unenforceability of any clause hereof may not affect the effectiveness and enforceability of other clauses hereof, nor the effect of this Contract as a whole.

 

25.3   The Lender is, in accordance with the provisions of relevant laws and regulations and the requirements of financial regulatory authorities, entitled to provide information related hereto and other relevant information of the Borrower to the credit reference system established by the People’s Bank of China and other credit information databases established under law for inquiry and use by entities and individuals with appropriate qualifications. The Lender also has the right to inquire relevant information of the Borrower through the credit reference system established by the People’s Bank of China and other credit information databases established under law for purposes of executing and performing this Contract.

 

25.4   The terms mentioned herein, including “related party”, “relation with related party”, “related transaction”, “main individual investor”, and “key executive”, are of the same meanings as the identical terms defined in the Accounting Standards for Business Enterprises No. 36 – Disclosure of Related Parties (Cai Kuai [2006] No. 3) promulgated by the Ministry of Finance of the PRC and the revised versions thereof.

 

25.5   The documents and certificates of loans hereunder prepared and kept by the Lender according to its business rules shall constitute effective evidences for proving the relation of creditor’s rights and liabilities between the Lender and Borrower, and have a binding force to the Borrower.

 

25.6   In this contract, (1) the references to this Contract shall also cover the alteration or supplementation hereto; (2) the titles of articles are only for reference, not constituting any interpretation to this Contract, nor restricting the contents under such titles or the scope thereof; (3) if the withdrawal date or repayment date is not a banking workday, it shall be postponed to the next banking workday accordingly.

 

Article 26     Settlement of dispute

 

26.1   In the event of any dispute arising during the performance of this Contract, the parties shall try to settle it through consultation. Shall such consultation fail, either party is entitled to lodge a lawsuit with the people’s court where the Lender is located for settlement through litigation.

 

26.2   During any litigation, other clauses herein unrelated to the dispute shall be performed as normal.

 

20
 

 

Article 27     Other matters as agreed upon by both parties

 

Article 28     Notes

 

The Lender has asked the Borrower to understand the clauses specified herein completely and accurately, and has made explanations on certain clauses as requested by the Borrower. Both parties hereto have reached agreement on the meaning of this Contract.

 

In addition, the Borrower hereby represents that it has given special attention to its obligations and those clauses unfavorable to itself and confirmed to accept the same.

 

Party A: (corporate seal):   Party B: (corporate seal):
     

Synthesis Energy
Systems
(Zaozhuang)
New Gas Co.,
Ltd.

[seal]

 

Zaozhuang Bank
Co., Ltd.
Junshan Road
Sub-branch

[seal]

     
Legal representative (signature or seal):   Legal representative (signature or seal):
     

John Winter

[seal]

 

Zhou Changtao

[seal]

     
Entrusted agent: (signature)   Entrusted agent: (signature)
     
October 2, 2014   October 2, 2014

 

21

 

Exhibit 10.4

 

RESTRICTED STOCK INCENTIVE AGREEMENT

 

THIS RESTRICTED STOCK INCENTIVE AGREEMENT (this “ Agreement” ) is made and entered into by and between Synthesis Energy Systems, Inc., a corporation organized under the laws of the State of Delaware (the “ Company” ), and [ name ] (the “ Grantee ”), an individual, on [ date ] (the “Grant Date” ) pursuant to the Synthesis Energy Systems, Inc. 2005 Incentive Plan (as amended and restated effective August 5, 2006) (the “ Plan” ). The Plan is incorporated by reference herein in its entirety. Capitalized terms not otherwise defined in this agreement shall have the meaning given to such terms in the Plan.

 

WHEREAS, Grantee is an Employee (as defined in the Plan), and in connection therewith, the Company desires to grant to Grantee the number of shares of the Company’s common stock, par value $.01 per share (the “ Common Stock” ), identified below, subject to the terms and conditions of this Agreement and the Plan; and

 

WHEREAS, Grantee desires to have the opportunity to be a holder of shares of the Common Stock subject to the terms and conditions of this Agreement and the Plan.

 

NOW, THEREFORE, in consideration of the premises, mutual covenants and agreements contained herein, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto, intending to be legally bound hereby, agree as follows:

 

Grant of Common Stock and Administration. Subject to the restrictions, forfeiture provisions and other terms and conditions set forth herein (i) the Company grants to Grantee [ number ] shares of Common Stock ( “Restricted Shares” ), and (ii) Grantee shall have and may exercise all rights and privileges of ownership of such shares, including, without limitation, the voting rights of such shares. This Agreement and its grant of Restricted Shares is subject to the terms and conditions of the Plan, and the terms and conditions of the Plan shall control except to the extent otherwise permitted or authorized in the Plan and specifically addressed in this Agreement. The Plan and this Agreement shall be administered by the Committee pursuant to the Plan.

 

Transfer Restrictions.

Generally . Grantee shall not sell, assign, transfer, exchange, pledge, encumber, gift, devise, hypothecate or otherwise dispose of (collectively, “ Transfer” ) any Restricted Shares and the Restricted Shares shall be subject to forfeiture until the date such shares become Vested Shares. The transfer restrictions and forfeiture provisions imposed by this Section 2 shall lapse as to 25.0% of the Restricted Shares on the March 31, ____, an additional 25.0% of the Restricted Shares on June 30, ____, 25.0% of the Restricted Shares on September 30, ____ and 25.0% of the Restricted Shares on December 31, ____; provided, however , that, subject to Sections 3 and 4 , Grantee then is, and continuously since the Grant Date has been, in Employment. The Restricted Shares as to which such restrictions and forfeiture provisions so lapse are referred to as “ Vested Shares.”

Stock Adjustments. In the event of certain changes in the Company’s Common Stock, the Committee may make adjustments in the number or kind of Shares pursuant to Section 4.5 of the Plan.

Change in Control . If there is a Change in Control of the Company (as defined in the Plan), the transfer restrictions of this Section 2 shall automatically cease as of the date immediately preceding the Change in Control, and all the Restricted Shares shall be 100% vested.

Forfeiture. Notwithstanding anything in the Plan to the contrary, if Grantee ceases Employment for any reason other than as described in Section 4 below, then Grantee shall immediately forfeit all Restricted Shares which are not Vested Shares. Any Restricted Shares forfeited under this Agreement shall automatically revert to the Company and become canceled and such shares shall be again subject to the Plan pursuant to the terms of the Plan. Any certificate(s) representing Restricted Shares which include forfeited shares shall only represent that number of Restricted Shares which have not been forfeited hereunder. Upon the Company’s request, Grantee agrees for himself and any other holder(s) to tender to the Company any certificate(s) representing Restricted Shares which include forfeited shares for a new certificate representing the unforfeited number of Restricted Shares.

 

 
 

 

Disability or Death. If Grantee’s Employment with the Company and its Affiliates ceases due to Disability (as defined below) or death, then Grantee shall immediately forfeit all Restricted Shares which are not Vested Shares. Disability shall mean the Grantee’s inability to perform his services to the Company due to mental or physical illness for a continuous period exceeding 90 days as determined by the Committee in its sole discretion.

 

Issuance of Certificate.

The Restricted Shares may not be Transferred until they become Vested Shares. Further, the Restricted Shares may not be transferred and the Vested Shares may not be sold or otherwise disposed of in any manner which would constitute a violation of any applicable federal or state securities laws, any rules of the national securities exchange on which the Company’s securities are traded, listed or quoted, or violation of Company policy. The Company shall cause to be issued a stock certificate, registered in the name of the Grantee, evidencing the Restricted Shares upon receipt of a stock power duly endorsed in blank with respect to such shares. Each such stock certificate shall bear the following legend:

THE TRANSFERABILITY OF THIS CERTIFICATE AND THE SHARES OF STOCK REPRESENTED HEREBY ARE SUBJECT TO THE RESTRICTIONS, TERMS AND CONDITIONS (INCLUDING FORFEITURE AND RESTRICTIONS AGAINST TRANSFER) CONTAINED IN THE SYNTHESIS ENERGY SYSTEMS, INC. 2005 INCENTIVE PLAN (AS AMENDED AND RESTATED EFFECTIVE AUGUST 5, 2006) AND A RESTRICTED STOCK AGREEMENT ENTERED INTO BETWEEN THE REGISTERED OWNER OF SUCH SHARES AND SYNTHESIS ENERGY SYSTEMS, INC. A COPY OF THE PLAN AND A RESTRICTED STOCK AGREEMENT ARE ON FILE IN THE CORPORATE OFFICES OF SYNTHESIS ENERGY SYSTEMS, INC.

 

Such legend shall not be removed from the certificate evidencing Restricted Shares until such time as the restrictions imposed by Section 2 hereof have lapsed.

 

The certificate issued pursuant to this Section 5 , together with the stock powers relating to the Restricted Shares evidenced by such certificate, shall be held by the Company. The Company shall issue to the Grantee a receipt evidencing the certificates held by it which are registered in the name of the Grantee.

Tax Requirements. This grant of Restricted Shares is subject to all applicable federal, state and local taxes and such tax withholding requirements (domestic and foreign).

 

Miscellaneous.

Certain Transfers Void . Any purported Transfer of shares of Common Stock or Restricted Shares in breach of any provision of this Agreement shall be void and ineffectual, and shall not operate to Transfer any interest or title in the purported transferee.

No Fractional Shares . All provisions of this Agreement concern whole shares of Common Stock. If the application of any provision hereunder would yield a fractional share, such fractional share shall be rounded down to the next whole share if it is less than 0.5 and rounded up to the next whole share if it is 0.5 or more.

 

 
 

 

Not an Agreement to Continue Employment or Any Service . This Agreement is not an agreement for continued Employment or service with the Company or any of its Parent, Subsidiaries or affiliates and no provision of this Agreement shall be construed or interpreted to create any right of Grantee to continue in Employment or to provide services to the Company or any Parent, Subsidiary or affiliate.

Notices . Any notice, instruction, authorization, request or demand required hereunder shall be in writing, and shall be delivered either by personal delivery, by telegram, telex, telecopy or similar facsimile means, by certified or registered mail, return receipt requested, or by courier or delivery service, addressed to the Company at the address indicated beneath its signature on the execution page of this Agreement, and to Grantee at his address indicated on the Company’s stock records, payroll or other Company records, or at such other address and number as a party shall have previously designated by written notice given to the other party in the manner hereinabove set forth. Notices shall be deemed given when received, if sent by facsimile means (confirmation of such receipt by confirmed facsimile transmission being deemed receipt of communications sent by facsimile means); and when delivered and receipted for (or upon the date of attempted delivery where delivery is refused), if hand-delivered, sent by express courier or delivery service, or sent by certified or registered mail, return receipt requested.

Amendment and Waiver . This Agreement may be amended, modified or superseded only by written instrument executed by the Company and Grantee. Any waiver of the terms or conditions hereof shall be made only by a written instrument executed and delivered by the party waiving compliance. Any waiver granted by the Company shall be effective only if it is in a written instrument executed and delivered by a duly authorized Company officer. The failure of any party at any time or times to require performance of any provisions hereof, shall in no manner effect the right to enforce the same. No waiver by any party of any term or condition, or the breach of any term or condition contained in this Agreement in one or more instances shall be deemed to be, or construed as, a further or continuing waiver of any such condition or breach or a waiver of any other condition or the breach of any other term or condition.

Governing Law and Severability . This Agreement shall be governed by the internal laws, and not the laws of conflict, of the State of Delaware. The invalidity of any provision of this Agreement shall not affect any other provision of this Agreement, which shall remain in full force and effect.

Successors and Assigns . Subject to the limitations which this Agreement imposes upon transferability of shares of Common Stock, this Agreement shall bind, be enforceable by and inure to the benefit of the Company and its successors and assigns, and Grantee, and Grantee’s permitted assigns and upon death, estate and beneficiaries thereof (whether by will or the laws of descent and distribution), executors, administrators, agents, legal and personal representatives.

Community Property . Each spouse individually is bound by, and such spouse’s interest, if any, in any Shares is subject to, the terms of this Agreement. Nothing in this Agreement shall create a community property interest where none otherwise exists.

Entire Agreement . This Agreement together with the Plan supersede any and all other prior understandings and agreements, either oral or in writing, between the parties with respect to the subject matter hereof and constitute the sole and only agreements between the parties with respect to the said subject matter. All prior negotiations and agreements between the parties with respect to the subject matter hereof are merged into this Agreement. Each party to this Agreement acknowledges that no representations, inducements, promises, or agreements, orally or otherwise, have been made by any party or by anyone acting on behalf of any party, which are not embodied in this Agreement or the Plan and that any agreement, statement or promise that is not contained in this Agreement or the Plan shall not be valid or binding or of any force or effect.

Compliance with Other Laws and Regulations . This Agreement, the grant of Restricted Shares and issuance of Common Stock shall be subject to all applicable federal and state laws, rules, regulations and applicable rules and regulations of any exchanges on which such securities are traded or listed, and Company rules or policies. Any determination in which connection by the Committee shall be final, binding and conclusive on the parties hereto and on any third parties, including any individual or entity.

Independent Legal and Tax Advice . The Grantee has been advised and Grantee hereby acknowledges that he has been advised to obtain independent legal and tax advice regarding this Agreement, grant of the Restricted Shares and the disposition of such shares, including, without limitation, the election available under Section 83(b) of the Internal Revenue Code.

 

 
 

 

Counterparts and Electronic Execution. This Agreement may be executed in multiple original counterparts, each of which shall be deemed an original, but all of which together shall constitute but one and the same instrument.

 

Grantee’s Acknowledgments.  The Grantee acknowledges receipt of a copy of the Plan and represents that he or she is familiar with the terms and provisions thereof, and hereby accepts this Agreement subject to all the terms and provisions of the Plan and this Agreement. The Grantee hereby agrees to accept as binding, conclusive, and final all decisions or interpretations of the Committee or the Board, as appropriate, upon any questions arising under the Plan or this Agreement.

 

[SIGNATURE PAGE FOLLOWS]

 

 
 

 

IN WITNESS WHEREOF, the parties have caused this Agreement to be executed effective as of the date first written above.

 

  COMPANY :
   
  SYNTHESIS ENERGY SYSTEMS, INC.

 

  By:  
  Name:  
  Title:  

 

Address:       Three Riverway, Suite 300
   
  Houston, Texas 77056
   
  Telecopy No.:  (713) 579-0610
   
  Attention: Corporate Secretary
   
  GRANTEE :

 

     
  Signature  
     
     
  Printed Name  
  Address:  
     
     

 

 

 

Exhibit 10.5

 

RESTRICTED STOCK INCENTIVE AGREEMENT

 

THIS RESTRICTED STOCK INCENTIVE AGREEMENT (this “ Agreement” ) is made and entered into by and between Synthesis Energy Systems, Inc., a corporation organized under the laws of the State of Delaware (the “ Company” ), and [ name ] (the “ Grantee ”), an individual, on [ date ] (the “Grant Date” ) pursuant to the Synthesis Energy Systems, Inc. 2005 Incentive Plan (as amended and restated effective August 5, 2006) (the “ Plan” ). The Plan is incorporated by reference herein in its entirety. Capitalized terms not otherwise defined in this agreement shall have the meaning given to such terms in the Plan.

 

WHEREAS, Grantee is an Outside Director (as defined in the Plan), and in connection therewith, the Company desires to grant to Grantee the number of shares of the Company’s common stock, par value $.01 per share (the “ Common Stock” ), identified below, subject to the terms and conditions of this Agreement and the Plan; and

 

WHEREAS, Grantee desires to have the opportunity to be a holder of shares of the Common Stock subject to the terms and conditions of this Agreement and the Plan.

 

NOW, THEREFORE, in consideration of the premises, mutual covenants and agreements contained herein, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto, intending to be legally bound hereby, agree as follows:

 

Grant of Common Stock and Administration. Subject to the restrictions, forfeiture provisions and other terms and conditions set forth herein (i) the Company grants to Grantee [ number ] shares of Common Stock ( “Restricted Shares” ), and (ii) Grantee shall have and may exercise all rights and privileges of ownership of such shares, including, without limitation, the voting rights of such shares and the right to receive any dividends declared in respect thereof. This Agreement and its grant of Restricted Shares is subject to the terms and conditions of the Plan, and the terms and conditions of the Plan shall control except to the extent otherwise permitted or authorized in the Plan and specifically addressed in this Agreement. The Plan and this Agreement shall be administered by the Committee pursuant to the Plan.

 

Transfer Restrictions.

Generally . Grantee shall not sell, assign, transfer, exchange, pledge, encumber, gift, devise, hypothecate or otherwise dispose of (collectively, “ Transfer” ) any Restricted Shares. The transfer restrictions imposed by this Section 2 shall lapse as to 25.0% of the Restricted Shares on the March 31, ____, an additional 25.0% of the Restricted Shares on June 30, ____, 25.0% of the Restricted Shares on September 30, ____ and 25.0% of the Restricted Shares on December 31, ____; provided, however , that, subject to Sections 3 and 4 , Grantee then is, and continuously since the Grant Date has been, an Outside Director. The Restricted Shares as to which such restrictions so lapse are referred to as “ Vested Shares.”

Stock Adjustments. In the event of certain changes in the Company’s Common Stock, the Committee may make adjustments in the number or kind of Shares pursuant to Section 4.5 of the Plan.

Change in Control . If there is a Change in Control of the Company (as defined in the Plan), the transfer restrictions of this Section 2 shall automatically cease as of the date immediately preceding the Change in Control, and all the Restricted Shares shall be 100% vested.

Forfeiture.  Notwithstanding anything in the Plan to the contrary, if Grantee ceases to be an Outside Director for any reason other than as described in Section 4 below, then Grantee shall immediately forfeit all Restricted Shares which are not Vested Shares. Any Restricted Shares forfeited under this Agreement shall automatically revert to the Company and become canceled and such shares shall be again subject to the Plan pursuant to the terms of the Plan. Any certificate(s) representing Restricted Shares which include forfeited shares shall only represent that number of Restricted Shares which have not been forfeited hereunder. Upon the Company’s request, Grantee agrees for himself and any other holder(s) to tender to the Company any certificate(s) representing Restricted Shares which include forfeited shares for a new certificate representing the unforfeited number of Restricted Shares.

 

 
 

 

Disability or Death. If Grantee’s service with the Company ceases due to Disability (as defined below) or death, the Restricted Shares shall be 100% vested on the date of Grantee’s Disability or death. Disability shall mean the Grantee’s inability to perform his services to the Company due to mental or physical illness for a continuous period exceeding 90 days as determined by the Committee in its sole discretion.

 

Issuance of Certificate.

The Restricted Shares may not be Transferred until they become Vested Shares. Further, the Restricted Shares may not be transferred and the Vested Shares may not be sold or otherwise disposed of in any manner which would constitute a violation of any applicable federal or state securities laws, any rules of the national securities exchange on which the Company’s securities are traded, listed or quoted, or violation of Company policy. The Company shall cause to be issued a stock certificate, registered in the name of the Grantee, evidencing the Restricted Shares upon receipt of a stock power duly endorsed in blank with respect to such shares. Each such stock certificate shall bear the following legend:

THE TRANSFERABILITY OF THIS CERTIFICATE AND THE SHARES OF STOCK REPRESENTED HEREBY ARE SUBJECT TO THE RESTRICTIONS, TERMS AND CONDITIONS (INCLUDING FORFEITURE AND RESTRICTIONS AGAINST TRANSFER) CONTAINED IN THE SYNTHESIS ENERGY SYSTEMS, INC. 2005 INCENTIVE PLAN (AS AMENDED AND RESTATED EFFECTIVE AUGUST 5, 2006) AND A RESTRICTED STOCK AGREEMENT ENTERED INTO BETWEEN THE REGISTERED OWNER OF SUCH SHARES AND SYNTHESIS ENERGY SYSTEMS, INC. A COPY OF THE PLAN AND A RESTRICTED STOCK AGREEMENT ARE ON FILE IN THE CORPORATE OFFICES OF SYNTHESIS ENERGY SYSTEMS, INC.

 

Such legend shall not be removed from the certificate evidencing Restricted Shares until such time as the restrictions imposed by Section 2 hereof have lapsed.

 

The certificate issued pursuant to this Section 5 , together with the stock powers relating to the Restricted Shares evidenced by such certificate, shall be held by the Company. The Company shall issue to the Grantee a receipt evidencing the certificates held by it which are registered in the name of the Grantee.

Tax Requirements. This grant of Restricted Shares is subject to all applicable federal, state and local taxes and withholding requirements.

 

Miscellaneous.

Certain Transfers Void . Any purported Transfer of shares of Common Stock or Restricted Shares in breach of any provision of this Agreement shall be void and ineffectual, and shall not operate to Transfer any interest or title in the purported transferee.

No Fractional Shares . All provisions of this Agreement concern whole shares of Common Stock. If the application of any provision hereunder would yield a fractional share, such fractional share shall be rounded down to the next whole share if it is less than 0.5 and rounded up to the next whole share if it is 0.5 or more.

 

 
 

 

Not an Agreement to Continue Service . This Agreement is not an agreement for continued service with the Company and no provision of this Agreement shall be construed or interpreted to create any right of Grantee to continue to provide services to the Company or any of its Affiliates.

Notices . Any notice, instruction, authorization, request or demand required hereunder shall be in writing, and shall be delivered either by personal delivery, by telegram, telex, telecopy or similar facsimile means, by certified or registered mail, return receipt requested, or by courier or delivery service, addressed to the Company at the address indicated beneath its signature on the execution page of this Agreement, and to Grantee at his address indicated on the Company’s stock records, or at such other address and number as a party shall have previously designated by written notice given to the other party in the manner hereinabove set forth. Notices shall be deemed given when received, if sent by facsimile means (confirmation of such receipt by confirmed facsimile transmission being deemed receipt of communications sent by facsimile means); and when delivered and receipted for (or upon the date of attempted delivery where delivery is refused), if hand-delivered, sent by express courier or delivery service, or sent by certified or registered mail, return receipt requested.

Amendment and Waiver . This Agreement may be amended, modified or superseded only by written instrument executed by the Company and Grantee. Any waiver of the terms or conditions hereof shall be made only by a written instrument executed and delivered by the party waiving compliance. Any waiver granted by the Company shall be effective only if it is in a written instrument executed and delivered by a duly authorized Company officer. The failure of any party at any time or times to require performance of any provisions hereof, shall in no manner effect the right to enforce the same. No waiver by any party of any term or condition, or the breach of any term or condition contained in this Agreement in one or more instances shall be deemed to be, or construed as, a further or continuing waiver of any such condition or breach or a waiver of any other condition or the breach of any other term or condition.

Governing Law and Severability . This Agreement shall be governed by the internal laws, and not the laws of conflict, of the State of Delaware. The invalidity of any provision of this Agreement shall not affect any other provision of this Agreement, which shall remain in full force and effect.

Successors and Assigns . Subject to the limitations which this Agreement imposes upon transferability of shares of Common Stock, this Agreement shall bind, be enforceable by and inure to the benefit of the Company and its successors and assigns, and Grantee, and Grantee’s permitted assigns and upon death, estate and beneficiaries thereof (whether by will or the laws of descent and distribution), executors, administrators, agents, legal and personal representatives.

Community Property . Each spouse individually is bound by, and such spouse’s interest, if any, in any Shares is subject to, the terms of this Agreement. Nothing in this Agreement shall create a community property interest where none otherwise exists.

Entire Agreement . This Agreement together with the Plan supersede any and all other prior understandings and agreements, either oral or in writing, between the parties with respect to the subject matter hereof and constitute the sole and only agreements between the parties with respect to the said subject matter. All prior negotiations and agreements between the parties with respect to the subject matter hereof are merged into this Agreement. Each party to this Agreement acknowledges that no representations, inducements, promises, or agreements, orally or otherwise, have been made by any party or by anyone acting on behalf of any party, which are not embodied in this Agreement or the Plan and that any agreement, statement or promise that is not contained in this Agreement or the Plan shall not be valid or binding or of any force or effect.

Compliance with Other Laws and Regulations . This Agreement, the grant of Restricted Shares and issuance of Common Stock shall be subject to all applicable federal and state laws, rules, regulations and applicable rules and regulations of any exchanges on which such securities are traded or listed, and Company rules or policies. Any determination in which connection by the Committee shall be final, binding and conclusive on the parties hereto and on any third parties, including any individual or entity.

Independent Legal and Tax Advice . The Grantee has been advised and Grantee hereby acknowledges that he has been advised to obtain independent legal and tax advice regarding this Agreement, grant of the Restricted Shares and the disposition of such shares, including, without limitation, the election available under Section 83(b) of the Internal Revenue Code.

 

 
 

 

Counterparts and Electronic Execution.  This Agreement may be executed in multiple original counterparts, each of which shall be deemed an original, but all of which together shall constitute but one and the same instrument.

 

Grantee’s Acknowledgments.  The Grantee acknowledges receipt of a copy of the Plan and represents that he or she is familiar with the terms and provisions thereof, and hereby accepts this Agreement subject to all the terms and provisions of the Plan and this Agreement. The Grantee hereby agrees to accept as binding, conclusive, and final all decisions or interpretations of the Committee or the Board, as appropriate, upon any questions arising under the Plan or this Agreement.

 

[SIGNATURE PAGE FOLLOWS]

 

 
 

 

IN WITNESS WHEREOF, the parties have caused this Agreement to be executed effective as of the date first written above.

 

  COMPANY :
   
  SYNTHESIS ENERGY SYSTEMS, INC.

 

  By:  
  Name:  
  Title:  

 

Address:    
     

 

  Telecopy No.:  (713) 579-0610
   
  Attention: Corporate Secretary
   
  GRANTEE :

 

     
  Signature  
     
     
  Printed Name  
  Address:  
     
     

 

 

 

Exhibit 31.1

 

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO RULE 13a-14(a)/15d-14(a) PROMULGATED UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED

 

I, Robert Rigdon, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of Synthesis Energy Systems, Inc.;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: November 14, 2014

 

/s/ Robert Rigdon  
Robert Rigdon
President and Chief Executive Officer

 

 

 

Exhibit 31.2

 

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO RULE 13a-14(a) PROMULGATED UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED

 

I, Roger Ondreko, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of Synthesis Energy Systems, Inc.;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: November 14, 2014

 

/s/Roger Ondreko  
Roger Ondreko
Chief Financial Officer

 

 

 

Exhibit 32.1

 

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906

OF THE SARBANES-OXLEY ACT OF 2002

 

In connection with the Quarterly Report of Synthesis Energy Systems, Inc. (the “Company”) on Form 10-Q for the period ended September 30, 2014 (the “Report”), as filed with the Securities and Exchange Commission on the date hereof, I, Robert Rigdon, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

 

1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

 

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

/s/ Robert Rigdon  
Robert Rigdon
President and Chief Executive Officer
 
November 14, 2014
 

 

Exhibit 32.2

 

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906

OF THE SARBANES-OXLEY ACT OF 2002

 

In connection with the Quarterly Report of Synthesis Energy Systems, Inc. (the “Company”) on Form 10-Q for the period ended September 30, 2014 (the “Report”), as filed with the Securities and Exchange Commission on the date hereof, I, Roger Ondreko, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

 

1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

 

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

/s/ Roger Ondreko  
Roger Ondreko
Chief Financial Officer
 
November 14, 2014