Synthesis Energy Systems' (SYMX) CEO DeLome Fair on Q4 2016 Results - Earnings Call Transcript

| About: Synthesis Energy (SYMX)

Synthesis Energy Systems, Inc. (NASDAQ:SYMX)

Q4 2016 Earnings Conference Call

September 27, 2016 16:15 P.M. ET


Susan Roush - IR, MDC Group

DeLome Fair - President and CEO

Roger Ondreko - CFO and Corporate Secretary


Mike Niehuser - Scarsdale Equities

Chris Potter - Northern Border Investments

Robert Smith - Center for Performance Investing


Good afternoon everyone and welcome to Synthesis Energy Systems Inc. Fiscal 2016 Year End and Fourth Quarter Financial Results Conference Call. All participants will be in a listen-only mode. [Operator Instructions]. After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please also note today's event is being recorded. At this time I would like to turn the conference call over to Ms. Susan Roush of MDC Group. Ma'am Please go ahead.

Susan Roush

Thank you. Good afternoon and thank you for joining Synthesis Energy Systems’ conference call. Today, SES management will discuss financial results for the Company’s 2016 fiscal year end and fourth quarter ended June 30, 2016, and will provide an update on corporate developments. Following management’s prepared remarks, we will open the line for questions.

Before we begin, I would like to remind you that during this call, management will be making forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended, and Section 21E of the Securities Exchange Act of 1934 as amended. 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. Although the Company believes that in making such forward-looking statements, its 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. There can be no assurances that the assumptions upon which these statements are based will prove to have been correct.

Please refer to the Company’s Annual Report on Form 10-K and its subsequent SEC filings for further discussion on risk factors. The SES 10-K and other SEC filings are available on the Securities and Exchange Commission’s website at or on the Company’s website at And now, I will turn the call over to SES’s President and CEO, DeLome Fair.

DeLome Fair

Thank you, Susan and good afternoon everyone. Our CFO Roger Ondreko is joining me on today’s call from our headquarters here in Houston, Texas. On June 30th we completed our fiscal year which I believe was our most progressive in terms of new technology system installations and strategically positioning the company for future profitability and growth. Based on this progress we are now focusing the company on accomplishing much more in the 2017 fiscal year.

Over the past year we have achieved two major accomplishments that are key drivers for our future growth. First, we launched our bold new business strategy based on our exciting clean energy value creation model which is broader than the technology and licensing and equipment model alone. And second, we more than doubled the installed base of our gasification technology in China which we believe is quickly establishing our premier technology as a global leader for low cost clean energy from Syngas.

Alongside these achievements we did face challenges during fiscal 2016 but we worked well to overcome our work through them for what we believe is the best possible outcome for SES and our shareholders. We remained strongly focused on achieving cash positive results, growth, and income during our 2017 fiscal year. With the significant expansion of our installed base from five SES gasification systems to 12, we are crossing the threshold from commercialization to globalization. We expect to continue to grow inside China while we also continue our efforts to expand outside of China. Based on this broadened strategy we intend to grow more rapidly and achieve a diverse global business operation capable of generating income for SES.

As part of our expanded business strategy we have launched our first project investment platform in China and subsequently establish a stronghold in two of three designated industrial parks in the Dongying Port Economic Development Zone. We believe that Dongying City will become a major hydrogen and industrial gas supply hub for China and are pleased to have entered into agreements to develop and build our initial two pipeline hydrogen projects for refining cleaner transportation fuels from our clean syngas.

This is one of several project investment platforms for which we are in discussions today based on either geographic regions or tied to specific market verticals such as LNG for transportation or district heating. All of these platforms would utilize our technology for clean energy projects. In addition as a result of our rapid commercialization we are seeing increased interest in our technology from customers around the globe and we remain in serious contention for the South American project I have mentioned previously that could bring over a $100 million in sales to SES if we are the successful bidder.

We believe we are at a very important point of time where our strong technology performance and increased commercial footprint combined with our clean energy value creation model for project investment platforms around the world position SES to achieve potential growth with income at a much larger scale then would be achievable from our technology licensing and equipment model alone. I will expand further on our progress after Roger reviews the financial report.

Roger Ondreko

Thank you, DeLome. The company reported $0.5 million of revenue for the three months ended June 30, 2016 versus $4.6 million for the three months ended June 30, 2015. The decrease in revenue was due to the shutdown of our ZZ Joint Venture's plant production in methanol in late October 2015. The company’s operating loss for the fourth quarter of fiscal 2016 increased to $11.2 million versus an operating loss of $3.8 million for the fourth quarter of fiscal 2015. The increase in operating loss is primarily related to an $8.6 million impairment we recorded for our investment in the Yima Joint Ventures. As far as our impairment of the Yima Joint Ventures, in June 2016 a local environmental bureau requested that the plant temporarily halt operations to address certain issues identified by the bureau.

DeLome will provide additional details on the shutdown and other ongoing activities in the plant later in the call. The Yima Joint Ventures also are experiencing certain liquidity concerns with a series of third party bank notes due prior to the end of 2016. Yima, a 75% shareholder of the Yima Joint Ventures has been routinely providing liquidity to the Yima Joint Ventures in the form of shareholder loans. Also the Yima Joint Ventures are currently in discussions with the impacted third party lenders to seek extensions, refinancing, or other alternative arrangements to avoid a default by the Yima Joint Ventures.

While we believe Yima will continue to provide additional liquidity to the Yima Joint Ventures until project is operating and producing income, we can make no assurances regarding operations or negotiation outcomes. Management determine that the decrease in value due to the shut down on liquidity situations are other than temporary in nature and therefore management retained a third party to assist in an impairment analysis utilizing a discounted cash flow fair market valuation. The valuation led to the conclusion that the investment in the Yima Joint Ventures was impaired and accordingly we took an $8.6 million impairment for the fiscal year ended June 30, 2016. Even though we recognize an impairment, we believe that the management of the Yima Joint Ventures are motivated to make this plan succeed and further believe that this investment can be profitable once they return to operations.

With the impairment the net loss attributable to stockholders for the fourth quarter of fiscal 2016 was $11.6 million or $0.13 per share versus a loss of $3.8 million or $0.05 per share for the prior year's fourth quarter. As of June 30, 2016 the company had cash and cash equivalents of 13.8 million and working capital of 2.4 million.

Now I will move on to the full fiscal year results. Total revenue was $6 million for the current year as compared to $15.5 million for the prior year. Our ZZ Joint Ventures sold 18,115 metric tons of methanol and generated approximately $4.8 million of revenue during the current year compared with 49,706 metric tons of methanol sold which generated approximately $15.1 million of revenue during the prior year. The decrease in both volume and revenue was primarily due to the shutdown of the ZZ Joint Ventures plant in late October of 2015.

Technology licensing and related services revenue was $0.3 million for the current year, which resulted from the technical consulting and engineering services provided to the company's Tianwo-SES Joint Venture. There was no technology licensing and related services revenue to customers during the prior year. Related party consulting revenue increased by $0.5 million to $0.9 million during the current year as compared to $0.4 million for the prior year, which primarily resulted from the technical consulting and engineering services provided to related parties.

The operating loss for fiscal 2016 was $22.5 million compared to an operating loss of $38.3 million for fiscal 2015. The decrease was primarily due to the inclusion of a $20.9 million impairment of the ZZ Joint Venture plant during the prior year partially offset by the $8.6 million impairment of our investment in the Yima Joint Ventures recorded during the current year.

Our adjusted EBITDA for fiscal 2016 was a negative 10.4 million. This included expenses related to ZZ for which SES is not obligated to provide funding for. For non-GAAP reconciliation of our operating loss to EBITDA for fiscal 2016 please see the events and presentation section on our Investor Center tab on our website at The net loss attributable to stockholders for fiscal 2016 was 23.1 million or a loss of $0.27 per share versus 37.9 million or a loss of $0.50 per share for fiscal 2015.

In August 2016 SES entered into a definitive agreement to restructure the Zao Zhuang new gas company joint venture with our partner Xuecheng Energy which will leave SES with an approximate 9% interest in a related joint venture. Because of this we will be deconsolidating the ZZ Joint Venture's assets and its related liabilities including the line of credit and short-term bank loan. Had the ZZ Joint Venture been deconsolidated as of June 30, 2016 SES would have had a cash balance of $13.8 million and a working capital balance of $13.1 million.

As we have previously stated Tianwo-SES is not consolidated onto our balance sheet. Our Tianwo-SES joint venture partner Suzhou Tianwo Technology Company did not complete its required April 2016 contribution of 46.2 million Yuan which is approximately $7 million into the Tianwo-SES Joint Venture. Should the payment not be made by our joint venture partner we will consider any and all legal actions to resolve this issue. That completes our financial review.

DeLome Fair

Thank you Roger. Turning now to our plant operations in China. I am very pleased that we recently have achieved an amicable resolution for our ZZ Joint Venture. It both removes the financial burden and uncertainty risk associated with the cessation of the methanol operations with Xuecheng Energy and affords us a new opportunity to expand ZZ in the future. Our ZZ plant, the first commercial application of our technology nearly 10 years ago in 2007 has been a great project that has allowed SES to demonstrate our technology, run multiple feedstock tests that have demonstrated our industry leading feedstock flexibility and develop many technology improvements that are key to the superior performance of SGT today. In addition it has also helped us learn what to do and what not to do while launching a business in China.

We have a valuable book of data and lessons learnt from ZZ. As we have previously discussed we have been evaluating repurposing options including modifications, improvements, and increased operations in order to turn this plant into a profitable enterprise. However it finally became apparent to all involved that our biggest obstacle for the ZZ plant was actually the site in which the facility is located.

Our ZZ plant is located inside the city of Zao Zhuang proper very close to businesses and residential areas. With China’s increased awareness of environmental factors this proximity to the city has impeded our ability to obtain permits to expand and or change operations and repurpose the facility. Once we clearly identify that the changing regulations around ZZ at the current site where an insurmountable barrier, we joined with our partners Xuecheng Energy and made the decision to restructure the JV ownership and focus the ZZ JV on building a new syngas generating plant in a new industrial zone in the Xuecheng District of Zao Zhuang.

As a result we recently announced a definitive agreement to restructure our ZZ Joint Venture such as Xuecheng Energy assumes all outstanding financial liabilities of the ZZ JV and SES retains about 9% ownership in the JV. The agreement will take effect formally when the registration with the government is completed which is now expected to occur in September or October. The ZZ JV is currently evaluating a new and improved syngas facility at the Zouwu Industrial Park where our partner has already built and is operating new and larger coke ovens as well as an LNG manufacturing facility. Right now Xuecheng Energy is looking at valuable end products to make from ZZ syngas including LNG refined hydrocarbons fuels and acetic anhydride. We of course have the option to reinvest in the new ZZ project if we believe that’s the right thing to do for the company and our gasification technology will continue to be used for syngas production at the new site.

If this project moves forward as we expect it to this will be one of three new industrial parks where SES gasification systems are planned to be installed in Shandong Province. This coastal province in the East China region is one of the biggest industrial producers and one of the top chemical manufacturing provinces in China. This is a great testament to how well the ZZ plant has served as a showcase for SGT. Many customers and strategic partners have visited ZZ over the years and we are impressed by our technology achievements at this site. And believe our team and especially our Managing Director in China Donald Huang have done an admirable job of resolving a very challenging business issue in a way that removes our risks and liabilities, preserves our relationships with our partner, and provides us with a potential new project opportunity.

Turning now to Yima, we are very pleased to have achieved technical acceptance and that the Yima Joint Ventures have finally completed the physical construction of the facility, have received their business license, and are in the process of obtaining their permanent environmental and safety permits. The business license which was received in late July was the final milestone required for the Yima JV to be able to produce and sell higher value chemical grade methanol into the market. This represents about a 10% higher price per ton versus lower quality raw methanol with almost no increase in the cost to production.

Yima demonstrated continued improvement in operations during the first half of 2016 following completion of the physical construction of the plant. In May the plant generated 26,776 metric tons of methanol which is greater than 95% of its annual targeted capacity of 330,000 metric tons on an annualized basis. With the completion of the physical construction earlier this year and the finalization of the permits that are expected by year end and the results improved operations and reliability we expect to see the Yima generate improvements in margins and operating reliability overtime which is key to our ability to monetize this asset. While the plant is very focused on achieving all permits necessary to officially exit the construction phase of the project and enter the operating phase as required by Chinese regulations.

In June of this year the JV was requested to shut down operations by the local environmental bureau to bring attention to the required steps needed to complete the environmental permitting process. During this outage while performing routine maintenance an accident occurred unrelated to the gasification systems that extended the outage. While the plant has been down, the JV management has been proactively taking all steps required to finalize the required permits. One key step required to achieve this is modifying the existing three JV structure, a process which is ongoing. We anticipate that the original three joint ventures which together comprise the entire facility will be combined into a single JV entity and that new JV entity will receive its required safety and environmental permits and will resume operations during the coming quarter officially closing the construction period for this project.

Well we saw very encouraging results this spring and the JV was beginning to realize its potential capacity. The unexpected outage this summer caused what we believe a temporary financial challenges. As a result, the JV has taken on additional debt primarily via shareholder loans from its majority shareholder Yima Coal Mining Group in order to meet its bank debt payment commitments.

As Roger reported earlier this additional debt caused by the extended shutdown triggered an analysis and per the accounting rules the asset has taken a 25% impairment. However, this development does not change our opinion that Yima still has the potential to be a profitable plant and we will continue to work hard to monetize this investment. It is worth reviewing that prior to this temporary setback the Yima JV plant operations for the first half of 2016 calendar year were by far the best we have witnessed to date. The plant ran at 79% of its targeted capacity on an annualized basis while demonstrating its efficient operations and was beginning to show financial improvement as a result. This is very encouraging and brings growing confidence that the JV will be capable of achieving attractive operating results over time.

Moving on to our Tianwo-SES Joint Venture business, this joint venture has won orders and built plants, two very strong positives. In spite of this I am not fully satisfied with the JV's performance primarily related to profitability. In addition our partner Suzhou-Tianwo Technology continues to fail to complete its required last payment of 46.2 million Yuan or approximately $7 million of registered capital into the JV. This is serious issue that we are demanding must improve. We are actively examining all options to remedy this.

The opportunities for SES in China are significant and this JV must aggressively win new projects and make money. I should add that even with these issues under discussion, Tianwo-SES continues to pursue new projects and is bidding new opportunities which maybe financially beneficial. We are hopeful that the JV will begin to be profitable soon but we know we must and are pushing hard to realize the continued improvements that will be required for it to achieve long-term profitability.

Now to update on the Tianwo-SES projects for the Aluminum Corporation of China commonly referred to as CHALCO. Our first two CHALCO industrial fuel plants Shandong and Shanxi are complete and are in operation while the larger Henan project has completed construction and started the commissioning process. Together these represent our first seven SGT gasification systems installed by the JV.

Henan, the third and largest of the CHALCO plants in this Tianwo-SES order began commissioning of the gas supplies last April but has temporarily suspended its commissioning due to operating issues in the aluminum facility unrelated to the claims in gas plant. We expect the commissioning to resume when the aluminum facility is ready but it is not known at this time when this expected to happen.

Looking ahead we believe the largest contributor to future earnings from our business strategy will be through the formation of project, investment partnerships, and platforms. We typically will work with platform partners who have aligned business interests with SES related to value creation and who bring financial capabilities such as debt guarantees and equity financing as well as local project implementation and operating expertise.

Once the project has been identified and developed to the stage of funding, the platforms are intended to finance the projects providing equity from the platform partners and achieving bank debt for 60% to 70% of the total cost. On the equity side in addition to the possibility of funding our portion of the equity via corporate funds we are exploring a variety of options including raising equities through private equity or other third party funding vehicles and taking a carried interest in projects, operating the platform under a separate publically traded entity so that the platforms can raise the project related funds through the capital markets, and a levered equity structure unique to China that would allow us to put in 25% of our required equity and use preferred debt for the remaining 75%.

This levered equity structure has several distinct requirements that may not make it available for all projects. As for the debt we are seeking and identifying partners that have the financial capability to provide guarantees to the projects. This debt guarantee structure will likely be required for early projects in platform and we have discussed this concept to the partners that we are in active discussions with and we believe that these debt guarantees will be achievable.

Through the development of projects we intend for the platforms to grow in value and generate earnings that will pull dividends back to SES and the other platform owners. Overtime it is our intention that the platforms will have the option to retain the earnings generating projects or sell them at multiples of EBITDA to generate funds to develop additional projects. Our estimate shows that the earnings of a single $100 million project funded in this manner with 20% in total rate of return on an unlevered basis would be adequate to similarly fund four equivalent projects if sold on a 6.25 multiple of EBITDA. As the value of the individual platforms grow overtime, the platforms will have the option to monetize the assets through an IPO or other vehicle.

In addition to this much larger scale of component of our strategy we intend to continue to sell our technology via licenses, equipment sales and services to each project investment platform, and to other third party customers for their projects. These two elements of our strategy are very synergistic. While smaller in scale our technology licensing and equipment model as the capital light business and we believe it can provide attractive margins. Additionally as our technology is adopted more widely in the marketplace, licensing our technology provides important access to multiple global project opportunities in which we may want to invest through our various project platforms. It also allows us to have access to robust technology performance data from a large global installed base which is key to continuing technology improvement and maintaining our market leading technology capability.

Today we are making progress on our expanded business strategy initially with a recently announced hydrogen projects in Dongying, an industrial City in Shandong Province China. In Dongying SES has ventured into two exciting new projects to produce high purity hydrogen as well as syngas and other industrial gases. The primary product of both projects will be hydrogen. This hydrogen will be used by the various off takers for the generation of cleaner transportation fuels.

Dongying houses the largest concentration of non-state owned refineries in China and as the city developed around the Shanglee oilfield we are now focused on the configuration of the plants and are in the process of completing the feasibility study reports also called FSR for both projects, Lijin Binhai New District and Hekou Blue Economy Industrial Park. The FSRs are a critical steps in the government approval process in China. Additionally we are in active discussion with the targeted off takers for hydrogen gas sales and we intend to move quickly into the related agreements.

Both of the Dongying hydrogen projects in which SES has equity ownership will be serving the increased demand for cleaner transportation fuels in China propelled by the new and ever increasing national clean air standards. For those who may not be aware, hydrogen is used to break complex bonds in hydrocarbon chains making them simpler chains that burn cleaner in vehicles. We are pleased that China is moving towards advancing its standards to brings its citizens a cleaner fuel for their cars and trucks and that they are using our advanced gasification technology that’s a more cost effective way to produce the hydrogen required to do so.

Typically in China hydrogen is produced from cracking methanol and most methanol is derived from coal. Since we can generate hydrogen directly from coal at a lower cost and the production of methanol, we believe that our cost of hydrogen production will be consistently lower than the historical alternative. These projects also are part of Shandong Provinces and the Chinese governments movement to consolidate industrial complexes into zones away from residential and commercial areas. We have established limited exclusivity in two of the three designated industrial parks in Dongying both of which have capacity for potential expansion.

Additionally these clean energy projects are expected to become demonstration sites for CO2 capture and utilization via oil field serving at the nearby Shengli Oil Field and are expected to achieve national demonstration project status. As we have now successfully began in China we are excited to have begun the process of expanding globally outside of China with our dual strategic business models. We plan to continue to work to advance other similar platforms based on both geographic regions and market verticals around the world.

First in our line of sight is Europe where we are in advance discussions for the aforementioned of the European clean energy platform that will expand in multiple countries and multiple markets. Eastern Europe especially is ripe with lower quality coals and biomass materials and have a strong and growing need for energy independence from the surrounding regions while maintaining a clean environmental footprint.

Additionally we are extending our focus on India. Our technology is extremely and uniquely well suited for the high ash, low grade coals that comprised efforts of 80% of all domestically available coal in India where we indications that the Indian government is now actively supporting the development of coal-based projects. We are now shifting our focus in India to securing a substantial strategic partner there, one who has the need to grow its own portfolio of projects and that brings to the table operations and/or large scale execution capability along with feedstock access and strong connections within the Indian business community.

This will be a good compliment to our ongoing work with Simon Engineering and we believe the right strong local partner can bring a huge benefit in countries like India helping us win projects and to implement them well. And the opportunities for India are vast, for SES are vast and exciting. I look forward to updating you on our progress on these major -- on this major initiative during our next call.

Also during additional -- after several additional updates we have restructured and signed agreement with Dengfeng Power Group to complete the FSR for our first iGas project and we are working with them to put engineering agreements in place with the design of cities in China to finalize the work for the FSR. We continue our alliance with the China Coal Research Institute and honors a very large and influential China Coal Technology and Engineering Group Corporation in Beijing, in support of the Chinese governments one belt, one road initiative.

Our DRI for steel collaboration with the industry leading Midrex Technologies is progressing well. Midrex continues the lead work on securing the first project expected to be in India and finally as I have mentioned previously, we remain in strong consideration for a potential project in South America where we estimated a bid proposal that could result in over $100 million in sales for SES.

I am excited as I look through the year ahead for SES and our low cost clean energy technology. We will continue the process of expanding globally outside of China with ongoing activities underway across multiple markets that support our equity growth model and our technology licensing and equipment model. We are responding to an uptick in enquiries from around the world, locations with abundant local supplies of low grade, low cost coal and coal waste versus expensive imported natural gas.

There is an increasing global need for affordable, clean, and secure energy that is propelling SGT to the forefront. Our technology stands alone in its ability to cleanly transform multiple feedstocks including movable biomass and municipal solid waste into thin gas from valuable energy products vitally needed to address the economic and environmental realities of the developing world.

I want to stress why I believe the future of SES is bright. Through our bold new strategy we have identified multiple projects, partners, and opportunities for the future including our first investment platform in China with two projects in Dongying actively under development, the restructuring of ZZ, and the opportunity for a new project there with Xuecheng Energy. The technical acceptance and improved performance at Yima combined with Yima JV managements concentrated efforts to finalize permits and move forward into its official operations phase, our efforts outside of China including the potential European clean energy platform in which we are in advance discussions and our expanded activities in India, the project in South America that can bring over $100 million in sales of our technology selected, and many other developments that are currently underway. These successful developments are the direct result of our laser focus on generating positive cash flow and building a foundation for generating earnings on a larger scale than was previously possible allowing us to realize global growth with Blue Skies? With that I’d like to open up the call for questions.

Question-and-Answer Session


[Operator Instructions]. And our first question today comes from Mike Niehuser from Scarsdale Equities. Please go ahead with your questions.

Mike Niehuser

Hi DeLome, it is Mike Niehuser. Of all these opportunities that you have mentioned which do you think comes to the forefront as far as timing?

DeLome Fair

Hi Mike, thanks for the question. It’s hard to tell. We’re working them all equally as hard. They are all independent activities and it’s hard to discuss to predict timing because there is other parties involved but we are working all of these items equally hard.

Mike Niehuser

Well if both the ZZ and the Yima projects it seems like right now they are in a position where you know what you want to do but you are waiting for government permits for both of those to move forward, is that right?

DeLome Fair

Well for ZZ we’re waiting for the government to approve our restructuring which we believe that’s eminent and then our partners are already moving forward for their new projects for which they already have approvals. The next step will really be to get the economic details around those new project and determine if we want to participate as an investor in the ZZ site.

For Yima the project is coming out of its shutdown, it will be coming out of its shutdown this fall and finalizing its permits by year end. And then it needs to get up and running and you know once it gets up and running and demonstrates its ability to generate cash then we believe we can start moving forward with some of the ideas we have been thinking about regarding monetizing the assets.

Mike Niehuser

Good answer. On the Tianwo-SES with the failure by the joint venture partner to make their payment it appears that CHALCO is happy with the construction and the operation of those seven gasifiers and I am just wondering if they’re talking to you about additional gasifiers for other projects that they have. So I am curious if they are interested in doing more and if the nonpayment by the JV partner is thwarting that process?

DeLome Fair

Two good questions, Mike. Let me separate them, the 7 million I want to be clear that’s not money that is owed to SES, that’s money that Tianwo partner Shuzou-Tianwo is required to pay into the JV itself. We’re still -- very important that that happen and we were working efforts to make sure that gets done. But the JV has adequate cash right now and is still operating. This hasn’t been a hindrance to their activities. The JV is out actively pursuing numerous projects and I am not aware if they are talking to CHALCO about additional projects. The aluminum industry is in somewhat of a downturn so that may be coming into play but I know they are out talking to numerous customers and pursuing numerous projects in many industries across China.

Mike Niehuser

Okay, and what kind of timing are you looking out with the South America project as far as any news regarding the award or not. Is that an event for this year or is that going to stretch out into next year just looking for when you’re expecting to hear back?

DeLome Fair

We would be the technology supplier to the customers in this case these customers are developing a project and that project has a timeline and a process that we’re not the drivers of and as you can imagine sometimes for projects especially projects this large these you know some of the steps take longer than they had originally planned. What I can say is the activity is still quite a bit of activity going on with regards to the project. We still feel we’re in strong consideration and it is a top priority to make sure we’re not the bottleneck in anything that is going on but I can't predict the timing there because it is not our schedule to drive.

Mike Niehuser

Okay, and I guess last question, I will get back in the queue is regarding kind of the one belt one road where you mentioned Eastern Europe but what are you are doing in Dongying if I pronounce that right is really quite exciting in terms of being at the hub of an activity that is very efficient, producing high quality clean fuels, and just kind of smacks up a little bit of a home run in terms of being able to demonstrate some real exciting new technology and commercialize it. Could you elaborate on the time frame there, about what you would expect to see or what you are hoping to see or what you are striving for?

DeLome Fair

Well, we are working hard to develop the two projects. We are very excited about those projects. You are absolutely right, this is an example of a lot of things coming together just exactly the way we like them to. We have increased air standards in China driving the need for more hydrogen, the formation of the industrial parks happening kind of at the same time and us getting in on the ground floor of two out of three of these large industrial parks in this area with exclusivity tied to both of these. So it is a big opportunity to get these first two projects up and running and a large potential for expansion in both of the industrial parks, so very important projects as far as SES is concerned.

The key activities going on now are to secure the off take agreements and to finish the plant configurations and the feasibility study reports so we can gain the government approvals. Those are the two key steps that then would allow us to move into the financing phase which is our ultimate goal and get these projects under construction and start moving to that next phase.

Mike Niehuser

Well it seems pretty exciting, you are going to almost move into the utility business or the end of the grid in terms of providing something that, anyway, but one last question if you don’t mind, are you going to be needing to raise equity in the next three to six months?

DeLome Fair

We are working very hard through all the different areas that I talked about to raise cash for our operations, through our operations, and through relationships we are developing with strategic partners and so that is our plans for the future, near future.

Mike Niehuser

Okay, great, thanks for all the answers.

DeLome Fair

Thanks Mike.


Our next question comes from Chris Potter from Northern Border Investments. Please go ahead with your question.

Chris Potter

Hi, was all of the revenue associated with the seven new systems recognized in 2016? I ask just because it seems like most of the revenue came from your ZZ plant, I am trying to figure out how the seven systems fit into the top line?

DeLome Fair

Thanks, Chris, the seven systems were actually licensed through our joint venture in China in which we are 35% owner. And so that wasn’t consolidated through our books because we are a minority owner. There was about $18.5 million of revenue that they recognized for those projects and I believe that was -- some of that was in 2015, most of that was in 2015 and some in 2016 but it didn’t show up. It doesn’t show up in our books because it is not a consolidated asset.

Chris Potter

I see, now I understand. And I think you said earlier in the call that you were hoping to be cash flow positive in 2017 and if that is right how many systems do you need to sell to get to that or is it more a function of the new business model equity interest in the plants that will get you there?

DeLome Fair

We are pursuing numerous fronts to achieve that -- to become cash positive as quickly as we can. We can't really tell you -- that is one of our goals for 2017 is to achieve that status as quickly as we can. Through our licensing business, lot of it depends on the size of the order, the size of the project and whether it is done in China through our joint venture project or if it is done outside of China directly with SES. And then we also have our equity business but for example in the licensing side one order in South America that I talked about earlier would be worth $100 million in sales to SES and that has four gasification systems within it. But it’s one -- a single order. So it just depends on a lot of different things but we have quite a few activities ongoing and ultimately the equity projects that we’re developing instead will generate earnings over long periods of time through the investment platform. So we’re booking both sides of -- our activities on both sides of the technology both as an owner and as a licensor.

Chris Potter

Okay, thank you, I understand, just last question can you talk about what effect if any fluctuations in the LNG price have on your customer’s appetite for doing business with you?

DeLome Fair

Sure, I mean we’re very tied to LNG. We see ourselves as a replacement for LNG. We generate our syngas generally in the range of about $4 to $6 per million btu, it depends on coal price and couple other key factors. And you have to compare that not just to the landed LNG price which it’s been coming down in recent years but we don’t -- there is no way to know if it’s going to stay low or whether it’s going to go back up. That's the nice thing about what we do is we’re tied to coal which is much less volatile than natural gas. So when natural gas starts to go back up again as it inevitably does from time to time, our low cost syngas will stay low across -- consistently across time.

The other thing to think about as with LNG is it might be $4 or $5 to get it landed at the end of a country but then you still have to regasify that, you have to have the infrastructure to take that LNG into the countries and all the way to the cities that need them and a lot of places in the world that infrastructure doesn’t even exist. And even if it does exist by the time the LNG makes all of those transfers through all those different pipelines the cost of that can go up quite substantially.

Chris Potter

Okay, I understand, thank you.


[Operator Instructions]. Our next question comes from Robert Smith from Synthesis. Please go ahead with your question.

Robert Smith

Yes, it is Robert Smith from Center for Performance Investing. Good afternoon and thanks for taking my questions. First, I just want to ask you is Robert Rigdon still involved in the company and if so in what capacity?

DeLome Fair

Hey Robert, yes Robert Rigdon is very much involved in the company. He is in the role of Vice Chairman and very active working side by side with Lorenzo, our Chairman particularly on the equity side of our business and helping us develop that, working with identifying partners and for our investment platforms.

Robert Smith

Well I am glad to hear that. It seems that the company has really made a bet on China and certainly the emphasis has been there but it also appears to me that they do business a little differently in China which might be an understatement and got some fast and loose happenings in that country with respect to projects of financing and I was wondering if you could share with me what your own due diligence and oversight is with respect to the projects and yours and your partners quality control emphasis? Thanks.

DeLome Fair

Sure, sure. You’re right doing business in China or any foreign country especially in the developing world has some unique challenges. China and we’ve learnt a lot of lessons over the years. We’ve found the most important thing is to identify partners that have aligned interest with you because if you both are working towards the same goal then you are much more -- those issues that sometimes there is less to worry about because you both are working toward that same common goal. We approach Chinese partnership the way we would approach any partnership in terms of financial auditing and making sure things are getting accounted for the way they should get accounted for. And our auditors here just recently went over to China and we’re involved in and looking at what’s going on with our assets over there. So that goes on as typical but the most important thing and the lesson we’ve learned and the thing we’re trying to really focus on as we move forward is identifying partners that really have aligned goals because then it’s much easier to find that win-win and for both parties to be successful at the end of the day.

Robert Smith

Do you feel like your efforts have been robust enough to date? I mean I ask that because it seems that things come out of the wood work?

DeLome Fair

I understand where your question is coming from and we have learnt some, we have been learning some lessons along the way. But we just have to keep out looking for those partners with aligned interests and we’re collaboratively together continue to put strong contracts in place. We’ve consistently had very strong contracts in place. And China is the leading user of gasification in the world so it’s a place we need to be in and it’s a place there is not any other place in the world where we could have launched our technology and got 12 systems up and running the way we have achieved there in China. And so even though there has been some challenges I do feel we’ve been very successful in China and we’re going to continue to do business there because that is a huge market for what we offer. But we’re also moving outside of China as I talked quite a bit about today because there is also opportunities in other parts of the world and we can leverage what we’ve learnt in China and also the relationships we’ve developed in China to help us be successful outside of China.

Robert Smith

The foreseeable 90 days until the next call what are your plans, what are you looking for in this period of time till the next call?

DeLome Fair

We need to keep our focus on exactly what we have been focused on continuing to work these platforms that we are in -- have been in discussions on and get some of these over the finish line. And we’ve got to continue to develop the Dongying projects and work towards getting the off take agreements done and continue to support the South America project as that continues to go through its process. We just need to keep our heads to the grindstone and just keep pushing forward on these key -- we built up a strong foundation of projects and activities and we got to keep it moving forward.

Robert Smith

Well I am hopeful but it would be lovely if you would be able to bring in something substantive in the foreseeable future I am waiting? Thanks.

DeLome Fair

Thanks Robert.


[Operator Instructions]. We do have a follow up question from Mike Niehuser from Scarsdale Equities. Please go ahead with your follow up.

Mike Niehuser

Well kind of following up on the prior call it seems like if you look at the last several years what you have been doing in China up to SES and other things is that you have constantly been improving on your partnerships, quality and debts, and so real it seems like you have marked key names here in China. And I guess the question that I have is outside of China when I read about one belt one road, China is involved in a lot of energy related infrastructure projects in Africa and all the way to Europe and I am wondering if your part of your strategy is to stick with Chinese partners as they roll through some of these other nations and to produce energy infrastructure projects or if like with South America or maybe Eastern Europe if you are pursuing other types of EPC type entities and are trying to get embedded in products that they are providing. So I guess the question is outside of China what sort of your strategy to and since you are only the one that provides this type of gasification product technology it is okay, you are probably just divulge what you are planning on doing but how do you see expanding this beyond China because that’s where this could really blossom?

DeLome Fair

That’s a really good question Mike and I think ultimately we’re going to do what’s best for each individual project. But the thing we have that a lot of our competitors don’t have in addition to the superior technology as you just mentioned is this long standing activity in China. So we have the option of working with a lot of Chinese companies such as CCRI. We can purchase equipment through our Tianwo-SES Joint Venture, we can supply equipment through that joint venture. So we have been developing these relationships in China that give us options that other companies don’t necessarily have. But it doesn’t mean we’ve made a decision. We will only use China for all of these things. We’re going to evaluate each project on its own needs and situation and do what’s most cost advantage for our customers and for us.

Mike Niehuser

Well are the calls you are talking about getting are those from non-Chinese type engineering firms that are trying to advance projects or they more limited to China?

DeLome Fair

No, we’re getting calls from all over the world and we get calls from a wide range of sources. We sometimes get calls from developers that are developing projects, sometimes we get calls from EPC companies like you mentioned that are helping customers develop projects. We get calls from the end users themselves. But the China calls go to our partner Tianwo-SES, the non China calls come to us here in Houston. So that’s what I -- when I refer to an uptick in call so it’s all outside of China.

Mike Niehuser

Can you handle these calls within your current bandwidth of your organization or you are going to need go find other good people to add to the team?

DeLome Fair

No, that’s the dance we dance every day. We have to keep our cost down until we bring the money in from operations and strategic partnerships and it’s a balancing act. But we’re going to have to make priority calls from time to time but right now we’re handling things as they come in but we’re busy.

Mike Niehuser

Well it would be great to see if you could a hit on a couple of these that you have been working on and wish the best of luck. Thanks for answering my questions and letting me ask a follow up.


[Operator Instructions]. And ladies and gentlemen at this time I’m showing no additional questions. We’ll conclude today’s question and answer session. I’d like to turn the conference call back over to the management for any closing remarks.

DeLome Fair

That concludes our remarks today and we thank you for attending our conference call. Thank you very much.


And ladies and gentlemen that will conclude today’s conference, we do thank you for attending. You may now disconnect your lines.

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