Synthesis Energy Systems, Inc. (NASDAQ:SYMX)
Q2 2017 Results Earnings Conference Call
February 13, 2017, 4:15 pm ET
Susan Roush - Investor Relations, Media Relations Consultant at MDC Group
DeLome Fair - President, Chief Executive Officer, Director
Scott Davis - Chief Accounting Officer, Principal Accounting Officer, Corporate Secretary, Corporate Controller, Chief Financial Officer, Principal Financial Officer
Mike Niehuser - Scarsdale Equities
Good day and welcome to Synthesis Energy Systems Inc. fiscal 2017 second quarter financial results conference call. All participants will be in listen-only mode. [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please note this event is being recorded.
I would now like to turn the conference over to Susan Roush of MDC Group. Please go ahead.
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 2017 fiscal second quarter ended December 31, 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 sec.gov or on the company's website at synthesisenergy.com.
And now, I will turn the call over to SES' President and CEO, DeLome Fair.
Thank you Susan and good afternoon everyone. Chief Accounting Officer Scott Davis is joining me on today's call from our headquarters here in Houston. On December 31, we completed the second quarter of our fiscal year 2017. In addition to the successful completion of Batchfire Resources acquisition of the Callide coal mine in Australia this past quarter, we are focused on near-term orders and their associate revenue now closer than ever and we are in the midst of forming financially impactful business platforms, all of which have been made possible by the successful multiyear commercialization of our technology.
We believe we are now entering a leading gasification technology of choice role for responsible utilization of global coal resources. Projects on nearly every continent are seeking us out. These inquiries are from countries and regions eager for an economic alternative to expensive natural gas that is also environmentally responsible. Our SGT delivers a cleaner use of coal, a greener solution that has proven on over 50 coals, biomass and waste, including feedstocks from the U.S., Europe, China and Australia. Today, from our most advanced project bidding activities to early stage commercial discussions, SES is working a project pipeline with current and prospective project opportunities that would exceed $20 billion in total project facilities costs.
Our nearest term activities include the South America project that continues to move forward and now also includes multiple new potential projects in India, the Caribbean and Southeast Asia. The total installed cost of these projects is expected to exceed $2 billion beginning this year and extending across the next three to five years. We believe that one or more of these projects could decide to move forward with our technology in the next six to 12 month. Our immediate focus is on securing the technology licensing and equipment orders for these opportunities. In addition to the topline revenue that SES will bring in from these projects, if successful, we believe that we may also have the option of providing equity in many of these projects bringing recurring long-term cash flows to the company.
In parallel with a focus on near-term orders, we are actively developing business platforms in regions of the world with abundant low-cost lignite coal and coal wastes and limited access to affordable natural gas. Based on our success with this approach in Australia with the Australian Future Energy platform and a significant resource investment in Batchfire Resources, we intend to move into Eastern Europe in the near future. We are also making assessments to identify future target platform markets, for example, India.
We intend to do the same in China where we have spent the majority of our efforts over the past 10 years. We are working diligently at this moment on completing one or more self-funding China platforms with strong Chinese investment partners who are interested in taking our China assets, partnerships and future project opportunities that we have developed to the next stage, which will allow our Chinese operations to run relatively autonomously from SES. Once successful, our goal is to participate in China's energy growth potential through co-ownership of the project investment platform and technology license orders.
I will expand further on our progress after Scott reviews the financial report.
Thank you DeLome. The company reported a consolidated net loss attributable to SES shareholders of $0.6 million or $0.01 per share for the second quarter as compared to a net loss of $3.5 million or $0.04 per share for the second quarter of fiscal 2016. During the quarter, the company completed the deconsolidation of the ZZ joint venture, pursuant to the government approval of the transaction on October 31, 2016. You will remember that we began showing the ZZ Joint Venture as discontinued operations, beginning last quarter and continue to show the activities of the ZZ Joint Venture as discontinued operations on a go forward basis. In this overview, I will discuss both continuing and discontinued operations separately.
We will first turn our attention to our continuing operations. The company had $5,000 of technology consulting revenue for the three months ended December 31, 2016. We recorded $53,000 for the three months ended December 31, 2015. The decrease in revenue is related to technology and licensing related services from two separate customers that were recognized during the comparable quarter.
Regarding operating expenses. We experienced a net decrease in operating expenses primarily due to a decrease in share based expense and cost of sales. Share based expense decreased by $0.7 million to $0.5 million for the current quarter compared to $1.2 million for the comparable quarter. This decrease is due to fewer warrants granted during the current year, coupled with expenses related to modifications during the comparable quarter.
General and administrative expenses were $2.4 million in the current quarter compared with $1.9 million for the comparable quarter. The $0.5 million increase is due primarily to one-time engineering and professional fees incurred related to projects currently in bidding.
On the non-operating expense side, we had foreign currency losses of $0.1 million for the current quarter as compared to $63,000 in the comparable quarter. The increased loss relates to foreign currency exchange from our Chinese operations. This results in a net loss from continuing operations of $2.9 million or $0.03 per share in the current quarter as compared to $3.0 million or $0.03 per share in the comparable quarter.
Now turning to discontinued operations. As previously noted, our discontinued operations relate to our ZZ Joint Venture. In the current quarter, we had a net gain from the deconsolidation of the ZZ Joint Venture of $2.3 million. The gain primarily relates to the realization of the cumulative translation adjustments of the ZZ Joint Venture. This gain compares to a net loss from discontinued operations of $1.0 million in the comparable quarter. This results in an overall net loss of $0.6 million or $0.01 per share for the quarter as compared to a net loss of $3.9 million or $0.4 per share for the second quarter of fiscal 2016, as previously noted.
Now turning quickly to the balance sheet. As of December 31, 2016, the company had cash and cash equivalents of $9.3 million and working capital of $8.2 million. That completes our financial review.
Thank you Scott. Turning now to the first order of business at SES, which is securing technology licensing and proprietary equipment orders that can bring in cash in the near-term. We believe conversion of bids into orders are much closer than ever before and I believe that our current global pipeline is the most commercially advanced set of opportunities in the history of SES.
We are in active discussions with customers in multiple countries around the world that are considering using our technology for projects they have in development. These projects are considering products that range from substitute natural gas and industrial syngas to fertilizer and electric power. While the schedules and the decision-making processes are not within our control, we believe it is likely that one or more of these projects could move forward with SGT in the next six to 12 months.
We [indiscernible] a signed agreement for a technology license, engineering services and/or equipment supply. As I have previously cited, the shortlist of near-term development efforts outside of China includes projects in India, the Caribbean and Southeast Asia, as well as the South American project I referred to on prior calls. The total installed cost of these projects would likely exceed $2 billion. While the actual values will vary from project to project, the SES scope of supply for these same projects should be roughly 20% of the actual total installed cost with margins as high as 20% to 30%.
In addition to these near-term opportunities, there are additional projects in our pipeline that could exceed $20 billion in total installed cost. This expanding global pipeline is the direct result of the significant efforts made by the company these past years to complete the process of commercializing our technology. 12 commercial operating systems have led to a growing global awareness of SGT's commercial scale capability and superior economics. We believe we are in the global leadership position. We are increasingly and frequently being recognized by customers and by their engineering and construction companies as the premier gasification technology recognized for having superior economics, being environmentally responsible and most importantly being commercially proven.
In addition to the increasing number of projects around the world that are seeking out our technology to improve their economics, we are focusing our own project development activities in specific regions of the world with characteristics that lead to multi-project potential. In these regions, we are working to create platforms with the goal to identify project opportunities for development and investment. Where possible, we are also evaluating strategic linkage to coal resources to provide long-term supply of low-cost coal feedstock for the projects in which we invest. SGT's powerful economic equation is strongest in certain parts of the world with extensive resources of unmarketable coal, low-grade lignite or brown coal and low-quality accumulated coal from producing mines which is typically considered to be waste coal.
These same regions which are coal rich tend to be natural gas poor and are therefore reliant upon expensive imported liquefied natural gas or LNG that is at the pipelines to deliver this gas to the regions interior even exist. Our Australian platform, Australian Future Energy or AFE is our first success story in our platform development efforts. We identified Australia as a platform target a couple of years ago. It's large-scale mining business, which serves the greater Asian markets and which has significant quantities of unmarketable and low rank coal, combines well with our ability to improve the mining effectiveness and energy utilization of these mines themselves. Also, Australia natural gas is becoming increasingly more costly and less available, particularly on the Eastern side of the country.
As a result, through the value of our superior technology alone, we were able to achieve about 37% ownership in AFE, the platform company that will develop and ultimately build multiple projects utilizing our technology and approximately 11% ownership in Batchfire Resources, a company that now owns one of the largest thermal coal mines in Australia, the Callide mine. This combination of linkage to low-cost coal resources, combined with platforms working to develop gasification projects exclusively with our technology, is a win-win scenario allowing us to develop needed projects with very strong economics that are environmentally responsible, strategically impactful and bring job benefits to the communities they serve. Combining this with our ability to gasify extremely low rank coal that is today generally unmarketable presents upside for the coal mine owner as well. On top of this is the financial ownership that Batchfire brings directly to SES.
We are pleased to see that the reports in the early operation of the mine since the acquisition by Batchfire is showing a smooth transition with financial results that are ahead of the original plan. Based on SES' internal assessment, assuming no significant variation from today's coal prices and Batchfire's continued successful implementation of its business plan over the next several years, we believe that our ownership in the Callide mine through Batchfire has significant value today with great upside potential to grow into SES' largest asset.
Now that the Batchfire acquisition of the Callide mine is complete, AFE is focused on actively evaluating multiple projects with the goal of down-selecting to one or two key projects for its initial round of project development activities which includes beginning the required upfront work to prepare for securing funds in Australia for the project. Projects that are developed successfully will enter into technology license agreements providing technology and SGT equipment orders back to the SES parent company. We expect that the efforts of AFE could bring at least one license order to SES this year.
As an owner in AFE, SES will also be involved as an equity owner of the projects with the opportunity to provide additional investment when these projects move towards funding. With our recent success in Australia, we are now turning our sites to another region we feel has the right combination of factors, abundant low-cost coal and waste coal, combined with limited access to affordable natural gas, Eastern Europe. We are continuing to make good progress in identifying potential partners and potential project opportunities with the goal of setting up a platform in Eastern Europe similar in concept to what we have successfully achieved in Australia. I am hopeful that we will have more news to report on this in the near-term.
Thinking ahead, there other regions that will also be good target for platforms in the future including, for example, India. I am extremely excited about the progress we are making through our technology projects and platforms outside of China. However, I expect our most impactful platform formation underway in terms of positively affecting our immediate cash position is our work in China. It is important to remember that our now rapidly emerging global business would not have been possible without the work we have accomplished in China over the past years. China was the only place we could have achieved the successful commercialization of our technology since it is the most advanced gasification market in the world. Over the past 20 years, nearly 100% of all new gasification projects in the world have been built in China. Companies in China have also helped provide more than $400 million of investment in our China projects in the form of equity, debt guarantees and project guarantees that were key to the completion of our 12 commercial systems.
Let me provide a quick update on our China activities. We accomplished the closing of the restructuring of SES' commercial proof of concept SGT demonstration plant and feedstock testing facility and in the process created an opportunity to participate in a new project in the new industrial zone for the Xuecheng district of Zao Zhuang in Shandong province with our former ZZ partner, Xuecheng Energy. This project is essentially developed and now ready for funding. The Yima JV management continues its efforts to consolidate the JV structure in order to finalize the permits and move forward into the plant's official operations phase. The plant returned to operations in November with good reports since the restart. We are aggressively pursuing options to flow cash back to SES to monetizing this asset.
We have significantly developed one of the Industrial Park hydrogen projects in the Dongying Lijin area in Shandong province. This development activity has led to a growing business relationship with our prospective syngas fire there and the potential for investment in a nearly complete facility that will produce isobutane for cleaner transportation fuels. This project is anticipated to start up in the first half of 2017 and the investment is under evaluation.
Our Tianwo-SES joint venture is actively pursuing multiple large projects in China, including a facility to produce substitute natural gas that is expected to cost nearly $2 billion. This is a national scale project with a large enough scope to have a meaningful positive impact not only on SES' financials but also by significantly increasing our installed syngas capacity and increasing our global recognition.
One key aspect of China's 13th five-year plan is the efficient utilization of China's abundant low rank coal. This has created strong interest in our technology from national level business entities throughout the country with several potential investment partners showing interest in working together to develop one or more self funding China platform. While China is admittedly a difficult place at times to do business, it is also a region with enormous energy growth potential from coal for the next two to three decades. We intend to put SES in a good position to jointly own and to realize the financial benefit of this growth based on our technology.
Our objectives for China are to complete the establishment of a comprehensive business platform, the technology and investment business partnerships with national scale China partners who have cleaner energy value creation interest aligned to our own. This work is underway now. We believe that many of our current projects and development activities can be incorporated into this platform providing funding for the new investment opportunities from within China.
This will allow us to maximize the value of our current investments and participate in the anticipated continuing large growth opportunities that are expected there while minimizing our cost in China essentially bottling up our China activities in a way that creates value so that we can focus our resources on the significant opportunities that are now in front of us outside of China. After a decade of development and commercialization, SES' gasification technology has now become what of the founders of this company envisioned, a globally recognized industry-leading technology with unsurpassed performance and economics on the world's most challenging feedstocks.
Our fully commercialized clean energy solution is in growing global demand as an alternative to expensive natural gas with a strong set of assets, projects and partnerships in China and an initiative to complete a China SGT-based platform with Chinese investment partners that would run relatively autonomously from the SES parent company, a robust global pipeline with projects expected to total more than $20 billion in total installed cost over the next decade, attractive near-term opportunities outside of China with projects totaling more than $2 billion in total installed cost that can potentially start providing orders with cash down payment to SES in the next six to 12 months, a successfully established platform in Australia including approximately 11% ownership in one of the largest thermal coal mines in Australia with real value today and expectations for significant value growth in the future and ownership in AFE, a project development company that is actively working to develop one to two projects over the next year with a strong potential for a license order for SES in 2017 and a potential new platform opportunity that is currently under developed in Eastern Europe with expectations to move into a similar platform opportunity in India in the future.
We are very excited with what lies ahead for SES, both in the near and long-term as the world opens up to our unique technology that provides superior economics for the production of energy and other useful products in areas of the world with abundant low rank coal and limited access to natural gas with a solution that is commercially proven and environmentally responsible.
With that, I would like to open up the call for questions.
[Operator Instructions]. Our first question comes from Mike Niehuser with Scarsdale Equities. Please go ahead.
I am looking at this 11% ownership in Batchfire and the ownership in AFE and going back to some press that came out with some people associated with Batchfire, they were looking at putting in, developing a plan of action or a permit in about six plus months and I am wondering if there is anything that you could report on that?
I do not have any details to update to report, Mike. I know they are progressing and things are basically ahead of plan, but that's really all the details that we can share. We have some confidentiality obligations there and we have to be a little bit cautious. But we believe everything is going according to plan and moving forward as anticipated.
Okay. Well, I think on this call you mentioned that at current, I think you said that at current coal prices with operations as days progress over the last year that the 11% ownership position in Callide could be, at this point, the largest asset held by Synthesis? And we have seen that decline for four years in thermal coal prices on Australia and then up doubling over the last year and the question I have is that if you look at that asset value compared to what was mentioned in the press, I am going back to an article that you don't have the responsibility for, but they talked about a $2 billion coal gasification project providing urea and other types of syngases, if they basically getting the non-marketable coal for free for that facility, in either one of these cases, these are the large values and I am just wondering, are you looking at what you have done in Australia from an asset point of view with the value as a minority interest in Callide as being more significant than the gasification opportunity associated with Callide, which clearly has a tremendous carbon resource that could be gasified? I am just wondering which opportunity do you see better as being more interesting?
Well, they are both very interesting and they work together. The key point is, by the gasification project that could be developed by AFE that would take coal from the Callide mine could take coal that Callide can normally not be able to sell anywhere else. They would be normally unmarketable. So the gasification project would benefit the mine and the mine could benefit the gasification project. But back to my comment about the value of Batchfire, I think we are not able to quantify numbers yet today but we believe that Callide has some or Batchfire has real value to us today and if they are successful in implementing their business plan and the coal prices stay where they are, we believe that it can grow into our largest asset compared to what we have on our books today. That's not necessarily trying to compare it to anything we would do the future.
Also, you mentioned that you have a new hire there, Chris, forgive me if I am mispronouncing, Raczkowski?
Raczkowski. And is he going to be taking a leadership position there in the Chinese work and will that free you up? And will that basically allow your management team to open up to respond to this level of interest that you are seeing from around the world?
Absolutely. Chris was a great hire for us and the timing couldn't have been better. He is taking the role of President of Asia for us and living there in China and working out of the Shanghai office. So he is definitely going to take the leadership position in the China activities that we are doing with the support of Robert and Lorenzo and the team as we continue to move forward. And the plan was to do that to allow us to spend more time with these out of China opportunities which are just starting to really grow in number and potential. So the timing was perfect for us to bring him onboard.
Well, following that and I am looking at his last name and thinking about Eastern Europe, I think it's been mentioned that Poland is one of the target markets for future platforms in Eastern Europe and could you share some comparisons to whether how it is doing business potentially in Poland versus Australia and China and how Poland may trend in terms of importance to future gasification platforms?
Well, we see Poland as a great opportunity. There's other areas in Eastern Europe have interest as well but Poland is especially interesting. It's very similar in nature to China, if you think about it, they currently get most of their energy today from coal and they are also trying to clean up the environment and they have limited natural gas. So they are very tied to the natural gas that they get from Russia, which has some national security concerns for them. So definitely a lot of similarities in the demographics between those two countries in terms of the need for our technology. They have generated huge amounts of waste coal from the mining process. This waste coal that's just not high-quality enough to be used in boilers and they can't sell it. So very low cost coal feedstock for our technology. So we are working with some people there and we have some, I can't get into any more details than this, but definitely see some exciting opportunities there in Poland. Well, probably in terms of how we would structure what we do, I think what we would try to structure in Poland would be very similar to what we have done in Australia in terms of trying to set up an investment platform based on our technology and trying to link that to long-term coal availability.
So does Poland have the best attributes of both China and Australia?
Well, I think they all three have the magic beans, so to speak, for what makes a good platform for SES. They have large amounts of low rank coal. They have a limited supply of natural gas. And they are all concerned about the environment. So they all three are great targets for our technology.
And just one last question, I will get back in line. With regards to South America, you have been talking about that for a little while and these are large long-term projects, but I am just sensing that this is getting closer than --even though the reporting on it has been pretty consistent, it actually seems like we are getting closer to hearing some kind word. Could you talk about where Synthesis is in terms of being a potential winner or a finalist or one of many in terms of, so we might be able to see and chart some progress in our minds?
I really can't provide any details. We do have some confidentiality obligations. But we are continuing to make progress. We are still a very strong contender. I believe our technology is going to provide by far the best economics for this project based on the coal they want to use which is an extremely low rank coal. And so I feel very bullish about our chances on this opportunity and I am hoping it's close too. We are continuing to work with the owners and the developers to move this forward as quickly as we can. But as you said, it's a large project and they are driving the schedule.
Okay. I will get back in line. Thank you.
[Operator Instructions]. And it looks like we have a follow-up question from Mike actually.
Yes. Well, hi again.
Absence makes the heart grow fonder. With what you have planned or potential in your pipeline in the next six to 12 months with regards to the monetization in China or other projects with AFE or India or Tianwo-SES and Poland and South America, what are the prospects that Synthesis Energy could be cash flow positive in the calendar 2017?
Well, Mike, as you know, we don't make predictions on that. But I feel like we are in the best position we have ever been in, in terms of the number of opportunities that we have in front of us. So I guess I think as I said earlier in the script, we have never had this volume of projects that are this far along that are seriously considering our technology at the same time. This is unprecedented in the history of the company and combining that with what's going on in China with the attention of getting from the focus in the 13th five-year plan and the national level attention we are getting, I am just very excited about the future of the company.
And I guess one last question. On prior calls, we talked about Tianwo-SES contributing cash into that partnership or that JV. I am just curious if they have done that or have conversations, discussions continue?
Conversation definitely are continuing. They have not provided the funding. Just to remind everybody, this is not money they owe to SES. It's money that they owe to the JV as a contribution of registered capital into the joint venture. The joint venture is adequately funded right now. So this isn't causing any problems with the JV. Tim always is making some very good progress in bidding some very large national scale projects. They have taken on new -- working together with a new, larger company in China that is helping them along those lines. And so we are keeping that obligation in our heads and we are going to continue to work that through with whatever solution we end up working with these guys. But there hasn't been any progress yet but we believe that in general that joint venture looks to be making some very positive progress.
Okay. And you also mentioned the Caribbean and I am not familiar, I am not a coal mining analyst, but is the project in the Caribbean that you mentioned is the source of carbon there? Is that coal? Or is that something else like biomass or municipal solid waste?
It could be all of the above, Mike. There's actually several projects there. The thing about the Caribbean that's very interesting for our technology is most of their electricity on a lot of those islands comes from bunker fuel oil. They don't have a lot of access to natural gas at all and the LNG that they can bring in still pretty high compared to what we can do. We have the ability to bring in coal from the U.S. or from Columbia. There is a lot of pet coke in Venezuela that could be a potential feed for our technology and then combining that, well some of the islands do have some significant waste issues and so bringing a mixture of coal and MSW may also be a good solution. So lots of opportunities for our technology in that region with our flexibility makes us an ideal candidate.
Well, thank you for letting me ask some follow-up questions. That's all I can think of right now. Thank you.
[Operator Instructions]. And it appears at this time we have no questions. So this concludes our question-and-answer session. I would now like to turn the conference back over to DeLome Fair for any closing remarks.
Thank you for participating on the call and for your questions. With there being no further questions, this will conclude the 2017 fiscal second quarter financial results call.
Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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