Notes
to the Consolidated Financial Statements
Note
1 — Business and Liquidity
(a)
Organization and description of business
Synthesis
Energy Systems, Inc. (referred to herein as “we”, “us” and “our”), together with its wholly-owned
and majority-owned controlled subsidiaries is a global clean energy company that owns proprietary technology, SES Gasification
Technology (“SGT”), for the low-cost and environmentally responsible production of synthesis gas (referred to as the
“syngas”). Syngas is used to produce a wide variety of high-value clean energy and chemical products, such as synthetic
natural gas, power, methanol, and fertilizer. Our focus has been on commercializing our technology both in China and globally
through the regional business platforms we have created with partners in Australia, via Australia Future Energy Pty Ltd (“AFE”),
in Poland, via SES EnCoal Energy sp. zo. o (“SEE”) and in China, via Tianwo-SES Clean Energy Technologies Limited
(“TSEC Joint Venture”).
Over
the past twelve years, we have successfully commercialized SGT primarily through our efforts in China where, between 2006 and
2016, we invested in and built two commercial scale gasification projects together with Chinese partners and sub-licensed the
SGT into three additional projects in China. In the aggregate, we have completed five commercial scale industrial projects in
China over a ten-year period, in which the projects utilize twelve SES proprietary SGT systems. We believe the completion of these
projects in China propelled SGT into a globally recognized gasification technology.
In
2014, we undertook efforts to expand into other regions of the world and created AFE, a joint venture with partners Ambre Investments
PTY Limited (“Ambre”) in Australia, and in 2017, created SEE in Poland, with its partners from EnInvestments sp. z
o.o. These regions are ideal locations for industrial projects utilizing the SGT due to high energy prices and limited access
to affordable natural gas, combined with an abundance of low-quality, low-cost coal resources, renewable biomass and municipal
solid wastes.
Australia’s
lack of both domestic gas and a uniform energy policy has created a shortage of reliable energy supply and rising consumer prices,
creating a need and demand for more environmentally friendly and cleaner energy solutions. AFE was established for the purpose
of building large-scale vertically integrated projects using SGT to produce syngas used in manufacturing fuel gas, synthetic natural
gas, agricultural and other chemicals, transportation fuels, explosives and for power generation and also to secure ownership
positions in local resources, such as coal and biomass. AFE is able to leverage the unique flexible feedstock capability of SGT
to build industrial projects with low production costs that can also reduce carbon dioxide emissions and support Australian industry
and regional growth.
Since
its formation, AFE has made significant commercial progress, creating Batchfire Resources Pty Ltd (“BFR”), which acquired
one of the largest operating coal mines in Queensland, acquiring a coal resource mine development lease near Pentland, Queensland,
and advancing the development of its flagship Gladstone Energy and Ammonia Project (the “Gladstone Project”). The
AFE business underpins the future value of the Company and, to that end, on October 10, 2019, we and AFE entered into a definitive
agreement to merge the two entities, among other transactions.
We
have determined that we did not have adequate cash to continue the commercialization of SGT due primarily to our inability to
realize financial results from our two investments into projects in China and three technology licensed projects in China as well
as our inability to quickly develop alternative technology income sources in Australia, Poland and other global regions. As a
result, in our fiscal third quarter and the current quarter, we have suspended our global SGT commercialization efforts, we undertook
operating expense reductions, we ceased providing funds to project developments as
we continue to explore the divesting of assets such as our Yima and TSEC Joint Ventures and we formed a special committee of the
board of directors to evaluate financing and restructuring alternatives. On October 10, 2019, we announced the proposed merger
with AFE and the acquisition of additional ownership in BFR.
On
March 1, 2019, DeLome Fair resigned as President and Chief Executive Officer, principal financial officer and as a director on
the Board of Directors. Robert Rigdon, Vice Chairman of the Board and former President and Chief Executive Officer of the Company
succeeded Ms. Fair as President, Chief Executive Officer and principal financial officer.
On
May 16, 2019, we received a notice of noncompliance from the Listing Qualifications Staff of the Nasdaq Stock Market (“NASDAQ”)
indicating that the Company was not compliant with the minimum stockholders’ equity requirement under Nasdaq Listing Rule
5550(b)(1) for continued listing on the Nasdaq Capital Market because the Company’s stockholders’ equity, as reported
in the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2019, was below the required minimum of $2.5
million. This notice had no immediate effect on the Company’s listing. NASDAQ had provided the Company 45 calendar days
or until July 1, 2019 to submit a plan of compliance in order to maintain the listing. We submitted a plan of compliance to NASDAQ
addressing how we intended to regain compliance with Nasdaq Listing Rule 5550(b) within 180 days of notification, or by November
12, 2019. The plan of compliance submitted by the Company was accepted by NASDAQ on July 29, 2019. Subsequent NASDAQ communications
after June 30, 2019 are discussed in Note 16 – Subsequent Events – Other Subsequent Events.
We
operate our business from our headquarters located in Houston, Texas and our offices in Shanghai, China.
(b)
Liquidity, Management’s Plan and Going Concern
As
of June 30, 2019, we had $0.9 million in cash and cash equivalents and $34,000 of working capital.
As
of January 10, 2020, we had $0.4 million in cash and cash equivalents. Of the $0.4 million in cash and cash
equivalents, $347,000 resides in the United States or easily access foreign countries and approximately $40,000
resides in China.
We have determined
that we did not have adequate cash to continue the commercialization of SGT due primarily to our inability to realize financial
results from our two investments into projects in China and three technology licensed projects in China as well as our inability
to quickly develop alternative technology income sources in Australia, Poland and other global regions. As a result, in our fiscal
third quarter and the current quarter, we have suspended our global SGT commercialization efforts, we undertook operating expense
reductions, we ceased providing funds to project developments as we continue to explore the divesting of assets such as our Yima
and TSEC Joint Ventures and we formed a special committee of the board of directors to evaluate financing and restructuring alternatives.
On
March 29, 2019, our Board of Directors engaged Clarksons Platou Securities, Inc. (“CPS”) to act as our financial advisors
to advise us as we conducted a process to evaluate financing options and strategic alternatives such as but not limited to a strategic
merger, a sale, a recapitalization and/or a financing consisting of equity and/or debt securities focused on maximizing shareholder
value and protecting the interests of our debtholders.
As
a result of our efforts evaluating financing and strategic options, on October 10, 2019 we entered into an Agreement and Plan
of Merger (the “Merger Agreement”) with AFE as described further in Note 16 – Subsequent Events –
The Proposed Merger with AFE. Currently our focus is on completing the steps required to complete the merger, which include
but are not limited to, (i) completion of all Company required filings, (ii) curing the NASDAQ listing requirement deficiencies,
(iii) completion of the form S-4 and Proxy related to the merger, (iv) completion of the Batchfire Share Exchange pre-emptive
rights process and (v) all other tasks required to complete the merger.
In
connection with the entry into the Merger Agreement, the Company entered into a securities purchase and exchange agreements (each,
a “New Purchase Agreements”) with each of the existing holders of its 11% senior secured debentures issued in October
2017 (the “Debentures”), whereby each of the holders agreed to exchange their Debentures and accompanying warrants
(the “Debenture Warrants”) for new debentures (the “New Debentures”) and warrants (the “New Warrants”),
and certain of the holders agreed to provide $2,000,000 of additional debt financing (the “Interim Financing”). Pursuant
to the New Purchase Agreements, the Company also issued $2,000,000 of 11% senior secured debentures (the “Merger Debentures”)
to certain accredited investors, along with warrants to purchase $4,000,000 of shares of Common Stock, half of which were Series
A Common Stock Purchase Warrants (the “Series A Merger Warrants”) and half of which were Series B Common Stock Purchase
Warrants (the “Series B Merger Warrants” and, together with the Series A Merger Warrants, the “Merger Warrants”),
as part of the Interim Financing. The Company shall receive the $2,000,000 pursuant to the Merger Debentures according to the
following schedule: (i) $1,000,000 on or before October 14, 2019, (ii) $500,000 upon the filing of the proxy statement for the
Company stockholder approval of the Merger, and (iii) $500,000 within two business days of Company stockholder approval of the
Merger. The terms of the Merger Debentures are the same as the New Debentures. The Merger Debentures are intended to assist the
Company in financing its business through the closing of the Merger.
As
compensation for its services, the Company will pay to T.R. Winston & Company, LLC (the “Placement Agent”): (i)
a cash fee of $140,000 (representing an aggregate fee equal to 7% of the face amount of the Merger Debentures, as defined below);
and (ii) a warrant to purchase 100,000 shares of Common Stock (the “New Placement Agent Warrant”). We have also agreed
to reimburse certain expenses of the Placement Agent.
The Company has also
agreed to loan $350,000 of the proceeds from the Merger Debentures to AFE to assist AFE in financing its business through the
closing of the Merger. The loan is subject to interest at the rate of 11% per annum payable in full on the repayment date in conjunction
with the repayment of the principal amount. The repayment date is the earlier of five days after completion of the Merger transaction
or the later of March 31, 2020 or three months following the vote of the shareholders on the Merger.
The
$1,000,000 scheduled payment on or before October 14, 2019 was subsequently received less certain legal costs and escrow fees
in the amount of $966,000.
On October 24, 2019
we entered into a loan agreement with AFE whereby we loaned a portion of the $2.0 million proceeds received under the New Purchase
Agreements. Under the loan agreement, we loaned $350,000 to AFE, which is due in full on the later of March 31, 2020 or within
five days following the closing of the Merger. If the Merger does not close, the loan will mature on March 31, 2020 or three months
following the special stockholder meeting called to approve the merger transactions. The loan accrues interest at 11% per annum
and is also due in full upon repayment, subject to an increased default interest in certain limited circumstances.
We
can make no assurances that the proposed Merger will be completed on a timely basis or at all. In addition,
we may be forced to seek relief to avoid or end insolvency through other proceedings including bankruptcy. Based on the historical
negative cash flows and the continued limited cash inflows in the period subsequent to year end there is substantial doubt about
the Company’s ability to continue as a going concern.
Note
2 — Summary of Significant Accounting Policies
(a)
Reverse Stock Split
On
July 22, 2019, we enacted a 1 for 8 reverse stock split as approved by the shareholders at the Annual Meeting of Stockholders
held in June 2019. All share and per share amounts in the consolidated financial statements have been retroactively restated to
reflect the reverse stock split.
(b)
Basis of Presentation and Principles of Consolidation
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 including any contractual relationships
in such subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
(c)
Accounting for Variable Interest Entities and Financial Statement Consolidation Criteria
We
have equity investments in various privately held entities. We account for these investments either under the equity method or
cost method of accounting depending on our ownership interest and the level of our influence in each joint venture. Investments
accounted for under the equity method are recorded based upon the amount of our investment and adjusted each period for our share
of the investee’s income or loss. Cost method investments are recorded at cost less any impairments. All investments are
reviewed for changes in circumstance or the occurrence of events that suggest an other-than-temporary event where our investment
may not be recoverable.
The
joint ventures which we have entered into may be considered a variable interest entity, (“VIE”). We consolidate all
VIEs where we are the primary beneficiary. This determination is made at the inception of our involvement with the VIE and is
continuously re-assessed. We consider qualitative factors and form a conclusion that we, or another interest holder, has a controlling
financial interest in the VIE and, if so, whether it is the primary beneficiary. To determine the primary beneficiary, we consider
who has the power to direct activities of the VIE that most significantly impacts the VIE’s performance and has the obligation
to absorb losses from or the right to receive benefits of the VIE that could be significant to the VIE. We do not consolidate
VIEs where we are not the primary beneficiary. As noted above, we account for these unconsolidated VIEs using either the equity
method if we have significant influence but not control, or the cost method and include our net investment on our consolidated
balance sheet. Under the equity method, our equity interest in the net income or loss from our investments are recorded as non-operating
income/expense on a net basis on our consolidated statements of operations. In the event of a change in ownership, any gain or
loss resulting from an investee share issuance is recorded in earnings. 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. Our investments are as follows:
We
have determined that AFE (as defined in Note 4 – Current Projects – Australian Future Energy Pty Ltd)
is a VIE that we are not the primary beneficiary as other shareholders have a 65% ownership interest, we are not the largest shareholder
and we do not have the power to direct the activities of the VIE. We account for our investment in AFE under the equity method.
The carrying value of our investment in AFE as of both June 30, 2019 and June 30, 2018 was zero.
We
have determined that BFR (as defined in Note 4 – Current Projects – Batchfire Resources Pty Ltd) is
a VIE that we are not the primary beneficiary as other shareholders have more than an 92% ownership interest nor do we have the
power to direct the activities of the VIE. We account for our investment in BFR under the cost method. At the time of the spin-off
from AFE, the carrying value of our investment in AFE was reduced to zero through equity losses. As such, the value of our investment
in BFR was also zero. The carrying value of our investment in BFR at both June 30, 2019 and 2018 was zero.
We
have determined that CRR (as defined in Note 4 – Current Projects – Cape River Resources Pty Ltd) is
a VIE that we are not the primary beneficiary as other shareholders have a 63% ownership interest, we are not the largest shareholder
and we do not have the power to direct the activities of the VIE. We account for our investment in CRR under the equity method.
The carrying value of our investment in CRR as of both June 30, 2019 and June 30, 2018 was zero.
We
have determined that TMI (as defined in Note 4 – Current Projects – Townsville Metals Infrastructure Pty
Ltd) is a VIE that we are not the primary beneficiary as other shareholders have a 62% ownership interest, we are not the
largest shareholder and we do not have the power to direct the activities of the VIE. We account for our investment in TMI under
the equity method. The carrying value of our investment in TMI as of both June 30, 2019 and June 30, 2018 was zero.
We
have determined that SEE (as defined in Note 4 – Current Projects – SES EnCoal Energy sp. z o. o) is
a VIE that we are not the primary beneficiary as the ownership of the company is split between two equal shareholders, each with
a 50% ownership interest. We have the power to influence but not direct the activities of the VIE. We account for our investment
in SEE under the equity method. The initial capitalization of the company was funded in January 2018 with additional funding in
March 2018 and in August 2018. The carrying value of our investment in SEE at June 30, 2019 and 2018 was approximately $19,000
and $35,000 respectively.
We
have determined that the Yima Joint Venture (as defined in Note 4 – Current Projects – Yima Joint Venture)
is a VIE of which Yima, our joint venture partner, is the primary beneficiary since they have a 75% ownership interest in the
Yima Joint Venture and the power to direct the activities of the VIE that most significantly influence the VIE’s performance.
We have also determined that our 25% ownership interest does not allow us to influence the activities of the VIE. We account for
our investment in the Yima Joint Venture under the cost method. The carrying value of our investment in Yima Joint Venture at
June 30, 2019 and June 30, 2018 was zero and approximately $5.0 million respectively. See Note 4 – Current Projects
– Yima Joint Venture for a further discussion of our accounting method.
We
have determined that the TSEC Joint Venture (as defined in Note 4- Current Projects – Tianwo-SES Clean Energy
Technologies Limited) is a VIE of which STT, the largest joint venture partner, is the primary beneficiary since STT has a
50% 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. We account for our investment in the TSEC Joint Venture under the equity method. Because
of losses sustained by the TSEC Joint Venture, the carrying value of this joint venture at both June 30, 2019 and 2018 was zero.
See Note 4 – Current Projects - Tianwo-SES Clean Energy Technologies Limited for a further discussion of our
accounting method.
(d)
Revenue Recognition
We
adopted Accounting Standards Codification No. 606, Revenue from Contracts with Customers (ASC 606) beginning July 1, 2018.
We have elected to adopt ASC 606 under the modified retrospective method, under the modified retrospective method, we applied
the guidance retrospectively only to the most current period presented in the Company’s consolidated financial statements.
To do so, we have to recognize the cumulative effect of initially applying the standard as an adjustment to the opening balance
of retained earnings at the date of initial application with the prior period presented without change. Since an entity may elect
to apply the modified retrospective method to either all contracts as of the date of initial application or only to contracts
that are not completed as of this date, we have elected to apply the modified retrospective method only to those contracts not
completed before the date of initial application. Due to the limited number of contracts and revenue related to these contracts,
we had no cumulative adjustment.
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 or as services are provided.
There
were no license fee revenues was recorded in the fiscal year ending June 30, 2019 or 2018. There were no revenues related to the
sales of services or equipment in fiscal year ending June 30, 2019. Revenues of $250,000 related to percentage of completion projects
and $1,257,000 related to services provided or due to uncertainty when collected were recorded in the fiscal year ending June
30, 2018.
(e)
Use of estimates
The
preparation of consolidated financial statements in conformity with generally accepted accounting principles in the United States
requires management to make estimates that affect the amounts reported in the financial statements and accompanying notes. Management
considers many factors in selecting appropriate operational and financial accounting policies and controls, and in developing
the assumptions that are used in the preparation of these consolidated financial statements. Management must apply significant
judgment in this process. Among the factors, but not fully inclusive of all factors that may be considered by management in these
processes are: the range of accounting policies permitted by generally accepted accounting principles in the United States; management’s
understanding of the Company’s business for both historical results and expected future results; the extent to which operational
controls exist that provide high degrees of assurance that all desired information to assist in the estimation is available and
reliable or whether there is greater uncertainty in the information that is available upon which to base the estimate; expectations
of the future performance of the economy, both domestically, and globally, within various areas that serve the Company’s
principal customers and suppliers of goods and services; expected rates of exchange, sensitivity and volatility associated with
the assumptions used in developing estimates; and whether historical trends are expected to be representative of future trends.
The estimation process at times may yield a range of potentially reasonable estimates of the ultimate future outcomes and management
must select an amount that lies within that range of reasonable estimates based upon the risks associated with the variability
that might be expected from the future outcome and the factors considered in developing the estimate. Management attempts to use
its business and financial accounting judgment in selecting the most appropriate estimate, however, actual amounts could and will
differ from those estimates.
(f)
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).
|
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 assets of the Company measured at fair value as of June 30, 2019 and
June 30, 2018 (in thousands):
|
|
|
June 30, 2019
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of Deposit
|
|
$
|
—
|
|
|
$
|
50
|
(1)
|
|
$
|
—
|
|
|
$
|
50
|
|
|
Money Market Funds
|
|
|
369
|
(2)
|
|
|
—
|
|
|
|
—
|
|
|
|
369
|
|
|
Non-recurring Investment in Yima Joint Venture
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
87
|
|
|
$
|
87
|
|
|
|
|
June 30, 2018
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of Deposit
|
|
$
|
—
|
|
|
$
|
50
|
(1)
|
|
$
|
—
|
|
|
$
|
50
|
|
|
Money Market Funds
|
|
|
4,345
|
(2)
|
|
|
—
|
|
|
|
—
|
|
|
|
4,345
|
|
|
Non-recurring Investment in Yima Joint Venture
|
|
|
—
|
|
|
|
—
|
|
|
|
5,000
|
(3)
|
|
|
5,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,964
|
|
|
$
|
1,964
|
|
|
|
(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 sheet.
|
|
|
(3)
|
Significant unobservable inputs were used to
calculate the fair value of the investment in Yima Joint Venture. These inputs included forecasted methanol and coal prices,
calculated discount rates and discount for lack of marketability as the majority owner is a state-owned entity in China, volatility
analysis and information received from the joint venture.
|
The
following table sets forth the changes in the estimated fair value for our Level 3 classified derivative liabilities (in thousands):
|
|
|
Year ended
|
|
|
|
|
June 30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Beginning balance - investment in Yima joint venture
|
|
$
|
5,000
|
|
|
$
|
8,500
|
|
|
Impairments
|
|
|
(5,000
|
)
|
|
|
(3,500
|
)
|
|
Ending balance - investment in Yima joint venture
|
|
$
|
—
|
|
|
$
|
5,000
|
|
|
|
|
Year ended
|
|
|
|
|
June 30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Beginning balance - derivative liabilities
|
|
$
|
1,964
|
|
|
$
|
2,090
|
|
|
Change in fair value
|
|
|
(1,877
|
)
|
|
|
(126
|
)
|
|
Ending balance – derivative liabilities
|
|
$
|
87
|
|
|
$
|
1,964
|
|
The
carrying values of the certificates of deposit and money market funds approximate fair value, which were estimated using quoted
market prices for those or similar investments. The carrying value of other financial instruments, including accounts receivable
and accounts payable approximate their fair values due to the short maturities on those instruments. Our Debentures are recorded
at face value of $8.0 million and the fair value is unable to be determined due to lack of third-party quotes and the Company’s distressed financial
position. The derivative liabilities are
measured at fair value using a Monte Carlo simulation valuation methodology (See also Note 7 – Derivative Liabilities
for more details related to valuation and assumptions of the Company’s derivative liabilities).
(g)
Derivative Instruments
We
currently do not use derivative instruments to hedge exposures to cash flow, market or foreign currency risks. We account for
derivatives in accordance with ASC 815, which establishes accounting and reporting for derivative instruments and hedging activities,
including certain derivative instruments embedded in other financial instruments or contracts and requires recognition of all
derivatives on the balance sheet at fair value, regardless of hedging relationship designation.
(h)
Cash and cash equivalents
The
Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents.
(i)
Accounts receivable and allowance for doubtful accounts
Accounts
receivable are stated at historical carrying amounts net of allowance for doubtful accounts. We establish provisions for losses
on accounts receivable if it is determined that collection of all or part of an outstanding balance is not probable. Collectability
is reviewed regularly, an allowance is established or adjusted, as necessary. As of the fiscal year ending June 30, 2019 and 2018,
no allowance for doubtful accounts was necessary.
(j)
Property, plant, and equipment
Property,
plant and equipment are stated at cost, net of accumulated depreciation. Depreciation is computed by using the straight-line method
at rates based on the estimated useful lives of the various classes of property, plant and equipment. Estimates of useful lives
are based upon a variety of factors including durability of the asset, the amount of usage that is expected from the asset, the
rate of technological change and the Company’s business plans for the asset. Leasehold improvements are amortized on a straight-line
basis over the shorter of the lease term or estimated useful life of the asset. Should the Company change its plans with respect
to the use and productivity of property, plant and equipment, it may require a change in the useful life of the asset or incur
a charge to reflect the difference between the carrying value of the asset and the proceeds expected to be realized upon the asset’s
sale or abandonment. Expenditures for maintenance and repairs are expensed as incurred and significant major improvements are
capitalized and depreciated over the estimated useful life of the asset.
(k)
Intangible assets
Intangible
assets with indefinite useful lives are not amortized but instead are tested annually for impairment, or immediately if conditions
indicate that impairment could exist. Intangible assets with definite useful lives are amortized over their estimated useful lives
and reviewed for impairment when events or changes in circumstances indicate that the carrying value of such assets may not be
recoverable. Substantial judgment is necessary in the determination as to whether an event or circumstance has occurred that may
trigger an impairment analysis and in the determination of the related cash flows from the asset. Estimating cash flows related
to long-lived assets is a difficult and subjective process that applies historical experience and future business expectations
to revenues and related operating costs of assets. Should impairment appear to be necessary, subjective judgment must be applied
to estimate the fair value of the asset, for which there may be no ready market, which often times results in the use of discounted
cash flow analysis and judgmental selection of discount rates to be used in the discounting process. If the Company determines
an asset has been impaired based on the projected undiscounted cash flows of the related asset group, and if the cash flow analysis
indicates that the carrying amount of an asset group exceeds related undiscounted cash flows, the carrying value is reduced to
the estimated fair value of the asset. We evaluated such intangibles for impairments and did not record an impairment for the
year ended June 30, 2019.
(l)
Impairment of long-lived assets
We
evaluate our long-lived assets, such as property, plant and equipment, construction-in-progress, 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, it is 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. 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.
(m)
Impairment Accounting for Cost Method Investments
We
evaluated the conditions of the Yima Joint Venture to determine whether other-than-temporary decrease in value had occurred as
of June 30, 2019 and 2018. As of June 30, 2019, management determined there was a triggering events related to the value of its
investment in the Yima Joint Venture. The plant production levels exceeded expectations, yet the plant continued to experience
losses and an increase in working capital deficits.
In
May 2019, the plant was idled to perform its annual maintenance. Our joint venture partner, Yima, determined the plant would
remain idle until it could obtain funds to complete the maintenance and the price of methanol reached an acceptable level, although
we are not privy to what the price of methanol must reach to be considered acceptable. The plant remained idled from May 2019
until November 2019. The restarting of the plant is in line with the winter heating season where the plant provides steam to the
city.
At June 30, 2018, management determined there was a triggering event related to the value of its investment in the Yima
Joint Venture. Lower production levels in the fourth quarter reduced the annual production below expectations which resulted in
a net increase in the working capital deficit and the debt levels of the joint venture. Management determined these events in
both years were other-than-temporary in nature and therefore conducted an impairment analysis utilizing a discounted cash flow
fair market valuation. In the June 30, 2018 valuation, we also utilized a Black-Scholes Model-Fair Value of Optionality used in
valuing companies with substantial amount of debt where a discounted cash flow valuation may be inadequate for estimating fair
value. In the June 30, 2019 valuation, the Black-Scholes Model-Fair Value of Optionality was not available due to the results
of the discounted cash flow fair market valuation results. We did these valuations with the assistance of a third-party valuation
expert. In this valuation, significant unobservable inputs were used to calculate the fair value of the investment. These inputs
included forecasted methanol and coal prices, calculated discount rates and discount for lack of marketability as the majority
owner is a state-owned entity in China, volatility analysis and information received from the joint venture. The valuation led
to the conclusion that the investment in the Yima Joint Venture was impaired as of June 30, 2019 and, therefore, we recorded a
$5.0 million impairment for the year ended June 30, 2019. The previous valuation concluded there was an impairment which resulted
in a $3.5 million impairment for the year ended June 30, 2018. The carrying value of our Yima investment as of June 30, 2019 and
June 30, 2018 was zero and $5.0 million respectively.
(n)
Income taxes
Deferred
tax liabilities and assets are determined based on temporary differences between the basis of assets and liabilities for income
tax and financial reporting purposes. The deferred tax assets and liabilities are classified as long-term asset or long-term liability.
Valuation allowances are established when necessary based upon the judgment of management to reduce deferred tax assets to the
amount expected to be realized and could be necessary based upon estimates of future profitability and expenditure levels over
specific time horizons in tax jurisdictions. We recognize the tax benefits from an uncertain tax position when, based on technical
merits, it is more likely than not the position will be sustained on examination by the taxing authorities.
On
December 22, 2017, the Tax Cuts and Jobs Act (the “Act”) was signed into law. The Act provides for numerous significant
tax law changes and modifications with varying effective dates, which include reducing the corporate income tax rate from 35%
to 21%, creating a territorial tax system, broadening the tax base, and allowing for immediate capital expensing of certain qualified
property. Due to losses recorded in past years and the fact we have offset our net deferred tax assets with a valuation allowance,
the Act had a minimal effect. The Act however does allow for Alternative Minimum Tax (“AMT”) to be refundable over
subsequent periods. The tax benefit of approximately $129,000 was recorded for the fiscal year ending June 30, 2018 includes previously
paid AMT tax amounts we paid in past years which are refundable under the Act.
(o)
Foreign currency remeasurement gains and losses
Transactions
denominated in Renminbi in SES Shanghai entity are remeasured to its functional currency of U.S. dollars at average exchange rate.
Monetary assets and liabilities are remeasured to U.S. dollars at closing exchange rates, whereas non-monetary assets and liabilities
are remeasured to U.S. dollars at historical rates. Remeasurement gains and losses on monetary assets and liabilities are included
in the calculation of net loss.
(p)
Stock-based expense
The
Company has a stock-based compensation plan under which stock-based awards have been granted to employees and non-employees. Stock-based
expense is accounted for in accordance with ASC 718, “Compensation – Stock Compensation.” We establish
fair values for our equity awards to determine its cost and recognize the related expense over the appropriate vesting periods.
We recognize expense for stock options, stock warrants, and restricted stock awards. The fair value of restricted stock awards
is based on the market value as of the date of the awards, and for stock-based awards vesting based on service period, the value
of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service period on
a straight-line basis for each separately vesting portion of the award as if the award was, in substance, multiple awards. See
Note 14 – Equity – Stock-Based Awards for additional information related to stock-based expense.
Note
3 — Recently Issued Accounting Standards
In
February 2016, the FASB issued ASU No. 2016-02, which creates ASC Topic 842, “Leases.” This update increases transparency
and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key
information about leasing arrangements. This guidance is effective for interim and annual reporting periods beginning after December
15, 2018. We are currently evaluating what impact, if any, the adoption of this guidance will have on our financial condition,
results of operations, cash flows or financial disclosures.
In
June 2018, the FASB issued ASU No. 2018-07, which expands the scope of Topic 718, “Compensation – Stock Compensation”,
to include share-based payment transactions for acquiring goods and services from non-employees. An entity should apply the requirements
of Topic 718 to non-employee awards except for specific guidance on inputs to an option pricing model and the attribution of cost.
This amendment specify that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services
to be used or consumed in a grantor’s own operations by issuing share-based payment awards. This amendment also clarifies
that Topic 718 does not apply to share-based payments used to effectively provide (1) financing to the issuer or (2) awards granted
in conjunction with selling goods or services to customers as part of a contract accounted for under Topic 606, Revenue from Contracts
with Customers. The standard is effective for fiscal years beginning after December 15, 2018, including interim periods within
that fiscal year. We do not expect the standard to have a material effect on our financial condition, results of operations, cash
flows or financial disclosures.
Note
4 — Current Projects
Australian
Future Energy Pty Ltd
In
February 2014, we established AFE together with an Australian company, Ambre Investments PTY Limited (“Ambre”). AFE
is an independently managed Australian business platform established for the purpose of building a large-scale, vertically integrated
business in Australia based on developing, building and owning equity interests in financially attractive and environmentally
responsible projects that produce low-cost syngas as a competitive alternative to expensive local natural gas and LNG.
On
June 9, 2015, we entered into a Master Technology Agreement (the “MTA”) with AFE which was later revised on May 10,
2017 (as described below). Pursuant to the MTA, we have conveyed certain exclusive access rights to our gasification technology
in Australia focusing on promotion and use of our technology in projects. AFE is the exclusive operational entity for business
relating to our technology in Australia and AFE owns no rights to sub-license our technology. AFE will work with us on project
license agreements for use of our technology as projects are developed in Australia. In return for its work, AFE will receive
a share of any license fee we receive for project licenses in Australia.
On
May 10, 2017, we entered into a project technology license agreement with AFE in connection with a project being developed by
AFE in Queensland Australia. AFE intends to form a subsidiary project company and assign the project technology license agreement
to that company which will assume all of the obligations of AFE thereunder. Pursuant to the project technology license agreement,
we granted a non-exclusive license to use our technology at the project to manufacture syngas and to use our technology in the
design of the facility. In consideration, the project technology license agreement calls for a license fee to be finalized based
on the designed plant capacity and a separate fee of $2.0 million for the delivery of a process design package. The license agreement
calls for license fees to be paid as project milestones are reached throughout the planning, construction and first five years
of plant operations. The success and timing of the project being developed by AFE will affect if and/or when we will be able to
receive all of the payments related to this license agreement. However, there can be no assurance that AFE will be successful
in developing this or any other project.
In
October 2016, AFE completed the creation and spin-off of BFR (as discussed below) as a separate standalone company which acquired
and operates the Callide thermal coal mine in Queensland.
In
August 2017, AFE completed the acquisition of a mine development lease related to the 266-million-ton resource near Pentland,
Queensland through AFE’s wholly owned subsidiary, Great Northern Energy Pty Ltd (“GNE”).
In
July 2018, we entered into a loan agreement (the “Loan Agreement”) with AFE to provide short-term funding in order
to enable AFE to continue to progress its project related initiatives for the betterment of AFE shareholders and the successful
promotion of their projects in the amount of 350,000 Australian Dollars, approximately $260,000. The Loan Agreement had a term
of three months, subject to certain events, and an interest rate of 6%. AFE repaid the outstanding principal amount under the
Loan Agreement plus interest in August 2018.
In
September 2018, AFE’s Gladstone Project was formally announced in Queensland Parliament by Minister for State Development,
Manufacturing, Innovation and Planning, Mr. Cameron Dick and was declared by the Queensland Co-Ordinator General as a Co-Ordinated
Project.
On
April 4, 2019, we entered into a Technology Purchase Option Agreement (the “Option Agreement”) with AFE providing
AFE with an exclusive option through July 31, 2019 to purchase 100% ownership of Synthesis Energy Systems Technology, LLC, our
wholly-owned subsidiary which owns our interest in the SGT. In addition, ownership rights to SGT were to be carved out of the
transaction and retained by us for China and we have a three-year option period post-closing to monetize SGT for India, Brazil,
Poland and for the DRI technology market segment. On July 31, 2019, we entered into an Amendment to the Option Agreement with
AFE extending the exclusive option provided in the Option Agreement through August 31, 2019. On August 31, 2019, we mutually agreed
with AFE to allow the Option Agreement to terminate pursuant to its terms and no penalties or payments were due as a result of
the termination of the agreement.
AFE
issued one million shares to us in connection with the execution of the Option Agreement. AFE would also pay (i) an additional
$2.0 million in three equal installments, with the first installment paid at closing and the remainder over the subsequent twelve
months, and (ii) $3.8 million on the earlier of the closing of a construction financing by AFE or five years from closing. The
closing of the transaction was subject to the negotiation of definitive agreements and other conditions specified in the Option
Agreement. In addition to the payment schedule above, AFE issued an additional one million shares with the execution of the Option
Agreement and would also pay an additional $100,000 with the first installment paid at closing as full and final settlement of
outstanding invoices owing AFE to us at the date of this Option Agreement. As a result of the termination, we retained the two
million shares AFE issued in connection with the Option Agreement. We accounted for the first million shares as an additional
investment in AFE and a reduction of receivable amounts due from AFE with a fair value of $100,000. The second million shares
were accounted for as an additional investment in AFE and a deferred liability in the amount of $70,000 as a down payment on the
purchase of our subsidiary.
For
our ownership interest in AFE, we have been contributing cash and engineering support for AFE’s business development while
Ambre contributed cash and services. Additional ownership in AFE has been granted to the AFE management team and staff individuals
providing services to AFE. In August 2017 and March 2018, we elected to make additional contributions of $0.47 million and $0.16
million respectively to assist AFE with developing its business in Australia. In April 2019, we were issued two million shares
in connection with the Option Agreement and its subsequent termination.
We
account for our investment in AFE under the equity method. Our ownership of 36% makes us the second largest shareholder. We also
maintain a seat on the board of directors which allows us to have significant influence on the operations and financial decisions,
but not control, of AFE. Our carrying value of our AFE investment as of both June 30, 2019 and June 30, 2018 was zero.
The
following summarizes unaudited condensed financial information of AFE as of and for the years ended June 30, 2019 and 2018 (in
thousands):
|
|
|
Year ended
|
|
|
|
|
June 30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Total assets
|
|
$
|
1,555
|
|
|
$
|
1,241
|
|
|
Total equity
|
|
|
324
|
|
|
|
635
|
|
|
Net loss
|
|
|
(1,515
|
)
|
|
|
(1,343
|
)
|
For
more on the Merger and related transactions, see Note 16 – Subsequent Events – The Proposed Merger with
AFE.
Batchfire
Resources Pty Ltd
As
a result of AFE’s early stage business development efforts associated with the Callide thermal coal mine in Central Queensland,
Australia, AFE created BFR. BFR was a spin-off company for which ownership interest was distributed to the existing shareholders
of AFE and to the new BFR management team in December 2015. BFR is registered in Australia and was formed for the purpose of purchasing
the Callide thermal coal mine from Anglo-American plc (“Anglo-American”). The Callide mine is one of the largest thermal
coal mines in Australia and has been in operation for more than 40 years.
In
October 2016, BFR stated that it had received investment support for the acquisition from Singapore-based Lindenfels Pte Ltd,
a subsidiary of commodity traders Avra Commodities, and as a result, the acquisition of the Callide thermal coal mine from Anglo-America
was completed.
On
April 29, 2019, BFR issued additional shares as part of a rights offering. We did not execute our rights in this offering and
therefore after the completion of the offering process and the issuance of the additional shares, our ownership interest has been
diluted from approximately 11% to approximately 7%.
We
account for our investment in BFR under the cost method. Our limited ownership interest in BFR was approximately 7% and we do
not have significant influence over the operation or financial decisions made by the company. At the time of the spin-off, the
carrying amount of our investment in AFE was reduced to zero through equity losses. As such, the value of the investment in BFR
post spin-off was also zero. On June 30, 2019, our ownership in BFR was approximately 7% and the carrying value of our BFR investment
as of both June 30, 2019 and June 30, 2018 was zero.
For
more on the Batchfire Share Exchange Agreements, see Note 16 – Subsequent Events – The Proposed Merger with
AFE.
Cape
River Resources Pty Ltd
In
October 2018, AFE formed a separate unrelated company, Cape River Resources Pty Ltd (“CRR”) for the purpose of developing
the Pentland resource into an operating thermal coal mine. Ownership in CRR was distributed proportionately to the shareholders
of AFE with additional shares issued to the management team. Our ownership in CRR was approximately 38% upon the formation of
CRR through our ownership interest in AFE. GNE sold its 100% ownership interest in the Pentland Coal Mine to CRR.
We
account for our investment in CRR under the equity method. Our ownership interest of approximately 38% makes us the second largest
shareholder. We may appoint one board director for each 15% ownership interest we hold in CRR which allows us to have significant
influence on the operations and financial decisions, but not control, of CRR. Our carrying value of our CRR investment as of June
30, 2019 was zero.
In
September 2019, AFE repurchased all of the shares in CRR in exchange for AFE shares. The CRR shareholders received one share of
AFE for every ten shares of CRR. As a result of the transaction, CRR is a wholly-owned subsidiary of AFE. The Pentland Coal Mine
Project is a 266 million metric tonne thermal coal resource located approximately 230 kms southwest of Townsville in Queensland,
Australia. The project is not being actively pursued at present due to funding restraints and the focus of AFE on the Gladstone
Project. Following the proposed Merger, it is intended to devote additional funding and resources to this project.
Townsville
Metals Infrastructure Pty Ltd
In
August 2018, AFE formed a separate unrelated company, Townsville Metals Infrastructure Pty Ltd (“TMI”) for the purpose
of completing the development of the required infrastructure such as rail and port modifications related to the transport of mined
products including coal from the Pentland resource to the Townsville port. Ownership in TMI was distributed proportionately to
the shareholders of AFE. Our ownership in TMI is approximately 38% upon the formation of TMI through our ownership interest in
AFE.
We
account for our investment in TMI under the equity method. Our ownership interest of approximately 38% makes us the second largest
shareholder. We may appoint one board director for each 15% ownership interest we hold in TMI which allows us to have significant
influence on the operations and financial decisions, but not control, of TMI. Our carrying value of our TMI investment as of June
30, 2019 was zero.
SES
EnCoal Energy sp. z o.o
In
October 2017, we entered into agreements with Warsaw-based EnInvestments sp. z o.o. Under the terms of the agreements, we and
EnInvestments are equal shareholders of SEE and SEE will exclusively market, develop, and commercialize projects in Poland which
utilize our technology, services, and proprietary equipment and we share with SEE a portion of the technology license payments,
net of fees, we receive from Poland. The goal of SEE is to establish efficient clean energy projects that provide Polish industries
superior economic benefits as compared to the use of expensive, imported natural gas and LNG, while providing energy independence
through our technological capabilities to convert the wide range of Poland’s indigenous coals, coal waste, biomass and municipal
waste to valuable syngas products. SEE has developed a pipeline of projects and together with us is actively working with Polish
customers and partners to complete necessary project feasibility, permitting, and SGT agreement steps required prior to starting
construction on the projects.
For
our ownership interest in SEE, we have been contributing cash and assisting in the development of SEE. SEE was initially funded
in January 2018 with a cash contribution of approximately $6,000 and an additional funding in March 2018 of approximately $76,000.
In August 2018, we made an additional cash contribution of approximately $11,000.
We
account for our investment in SEE under the equity method. Our ownership of 50% makes us an equal shareholder and we also maintain
two of the four seats on the board of directors which allows us to have significant influence on the operations and financial
decisions, but not control, of SEE. Our carrying value of our SEE investment was approximately $19,000 and $36,000 as of June
30, 2019 and June 30, 2018, respectively.
Midrex
Technologies
In
July 2015, we entered into a Project Alliance Agreement that expands our exclusive relationship with Midrex Technologies for integration
and optimization of DRI technology using coal gasification. Midrex has taken the lead in marketing, sales, proposal development,
and project execution for coal gasification DRI projects as part of the new project alliance. Midrex may also lead the construction
of the fully integrated solution for customers who desire such an execution strategy. We will provide the DRI gasification technology
for each project including engineering, key equipment, and technical services. The agreement includes finalization of an engineering
package for the optimized coal gasification DRI solution. Prior to the Project Alliance Agreement, we also entered into an exclusive
agreement with the TSEC Joint Venture and Midrex for the joint marketing of coal gasification-based DRI facilities in China. These
facilities will combine our gasification technology with the Direct Reduction Process of Midrex to create syngas from low quality
coals in order to convert iron ore into high-purity DRI. The TSEC Joint Venture will aid in the marketing of these DRI facilities
in China and will supply the gasification equipment and licensing of the technology.
Yima
Joint Venture
In
August 2009, we entered into joint venture contracts and related agreements with Yima Coal Industry Group Company (“Yima”),
replacing the prior joint venture contracts entered 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 (collectively the “Yima
Joint Venture”). The joint venture contracts provided that we and Yima contribute equity of 25% and 75%, respectively, to
the Yima Joint Venture. The remaining capital for the project construction has been funded with project debt obtained by the Yima
Joint Venture. Yima agreed to guarantee the project debt in order to secure debt financing from domestic Chinese banking sources.
We agreed to pledge to Yima our ownership interests in the joint ventures as security for our obligations. In the event that the
necessary additional debt financing is not obtained, Yima agreed to provide a loan to the joint venture to satisfy the remaining
capital needs of the project with terms comparable to current market rates at the time of the loan. Yima also agreed to provide
coal to the project at preferential pricing under a side-letter agreement related to the JV contracts
The
term of the joint venture commenced June 9, 2009 at the time each joint venture company obtained its business operating license
and shall end 30 years after the business license issue date, June 8, 2039. As discussed below, in November 2016, as part of an
overall corporate restructuring plan, these joint ventures were combined into a single joint venture.
We
continue to own a 25% interest in the Yima 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 could expand through contributions, at our election, up to a 49% ownership interest in the Yima Joint Venture.
During
the quarter ended June 30, 2016, the Yima Joint Venture commenced an organizational restructuring to better streamline the operations.
This restructuring effort included combining the three joint ventures into a single joint venture entity and obtaining a business
operating license which was completed in November 2016.
In
December 2017 and January 2018, on-going development cooperation and discussions with the Yima Joint Venture management resulted
in the joint venture agreeing to pay various costs incurred by us during the construction and commissioning period of the facility
in the amount of approximately 16 million Chinese Renminbi yuan, (“RMB”) (approximately $2.5 million). As of June
30, 2018, we have received 6.15 million RMB (approximately $0.9 million) of payments from the Yima Joint Venture related to these
costs. Due to uncertainty, revenues will be recorded upon receipt of payment.
Since
2014, we have accounted for this joint venture under the cost method of accounting. Our conclusion to account for this joint venture
under this methodology is based upon our historical lack of significant influence in the Yima Joint Venture. The lack of significant
influence was determined based upon our interactions with the Yima Joint Venture related to our limited participation in operating
and financial policymaking processes coupled with our limited ability to influence decisions which contribute to the financial
success of the Yima Joint Venture. Under the terms of the joint venture agreement, the Yima Joint Venture is 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. Although
we maintain two seats on the board of directors, the board does not meet on a regular basis and management, who has been appointed
by Yima has acted alone without board approval in many cases. In 2016, the board began holding periodic meetings beginning in
April 2016 and again in July 2016. The next meeting was held in January 2017 and the last meeting to date was held in December
2018. Discussions at these meetings generally have not included policy decisions, but rather served a more ceremonial function.
Yima’s parent company, Henan Energy Chemistry Group Company (“Henan Energy”) restructured the management of
the Yima Joint Venture under the direction of the Henan Coal Gasification Company (“Henan Gasification”), which is
an affiliated company reporting directly to Henan Energy. Henan Gasification currently has full authority of day to day operational
and personnel decisions at the Yima Joint Venture. In May 2019, the plant was idled to perform annual maintenance. Due to lack
of funds the maintenance program was delayed and a decrease in the price of methanol the plant will remain idled until Henan Energy
determines the price of methanol has increased sufficiently or other determining factors dictate the restarting of the plant.
Therefore, we concluded, and continue to believe, that we do not have significant influence in the matters of the Yima Joint Venture
and the cost method is the appropriate accounting method. This consideration has been and continues to be monitored on a quarterly
basis to assess whether that conclusion remains appropriate.
We
evaluated the conditions of the Yima Joint Venture to determine whether other-than-temporary decrease in value had occurred as
of June 30, 2019 and 2018. At June 30, 2019, management determined there were triggering events related to the value of its investment.
The plant production levels exceeded expectations, yet the plant continued to experience losses and an increase in working capital
deficits.
In
May 2019, the plant was idled to perform its annual maintenance. Yima determined that the plant would remain idle until it
could obtain funds to complete the maintenance and the price of methanol reached an acceptable level, although we are not
privy to what the price of methanol must be reached to be considered acceptable. The plant remained idled from May 2019
until November 2019. The restarting of the plant is in line with the winter heating season where the plant provides steam to
the city.
At June 30, 2018, management determined there was a triggering event related to the value of its investment. Lower
production levels in the fourth quarter reduced the annual production below expectations which resulted in a net increase in
the working capital deficit and the debt level of the joint venture. Management determined these events in both years were
other than temporary in nature and therefore conducted an impairment analysis utilizing a discounted cash flow fair market
valuation. In the June 30, 2018 valuation we also utilized a Black-Sholes Model-Fair Value of Optionality used in valuing
companies with substantial amounts of debt where a discounted cash flow valuation may be inadequate for estimating fair
value. In the June 30, 2019 valuation, the Black-Scholes Model-Fair Value of Optionality was not available due to the results
of the discounted cash flow fair market valuation results. We did these valuations with the assistance of a third-party
valuation expert. In this valuation, significant unobservable inputs were used to calculate the fair value of the investment
(see Note 2 – (f) Use of Estimates). These inputs included forecasted methanol and coal prices, calculated
discount rates, calculated discount for lack of marketability as the majority owner is a state-owned entity in China,
volatility analysis and information received from the joint venture. The valuation led to the conclusion that the investment
in the Yima Joint Venture was impaired as of June 30, 2019 and, therefore, we recorded a $5.0 million impairment for the year
ended June 30, 2019. The previous valuation concluded there was an impairment which resulted in a $3.5 million impairment for
the year ended June 30, 2018.
The
carrying value of our Yima Joint Venture investment as of June 30, 2019 and June 30, 2018 was zero and approximately $5.0 million
respectively.
Tianwo-SES
Clean Energy Technologies Limited
Joint
Venture Contract
In
February 2014, SES Asia Technologies Limited, one of our wholly owned subsidiaries, entered into a Joint Venture Contract (the
“JV Contract”) with Zhangjiagang Chemical Machinery Co., Ltd., which subsequently changed its legal name to Suzhou
Thvow Technology Co. Ltd. (“STT”), to form the TSEC Joint Venture. The purpose of the TSEC Joint Venture is to establish
SGT as the leading gasification technology in the TSEC Joint Venture territory (which is China, Indonesia, the Philippines, Vietnam,
Mongolia and Malaysia) by becoming a leading provider of proprietary equipment and engineering services for the technology. The
scope of the TSEC Joint Venture is to market and license SGT via project sublicenses, procurement and sale of proprietary equipment
and services, coal testing, engineering, procurement, and research and development related to SGT. STT contributed 53.8 million
RMB (approximately $8.0 million) in April 2014 and was required to contribute an additional 46.2 million RMB (approximately $6.8
million) within two years of such date for a total contribution of 100 million RMB (approximately $14.8 million) in cash to the
TSEC Joint Venture in return for a 65% ownership interest in the TSEC Joint Venture. The second capital contribution from STT
of 46.2 million RMB (approximately $6.8 million) was not paid by STT in April 2016 as required by the initial JV Contract. As
part of a restructuring of the agreement described below, the obligation for payment of additional registered capital was removed.
We
contributed certain exclusive technology sub-licensing rights into the TSEC Joint Venture for the territory pursuant to the terms
of a Technology Usage and Contribution Agreement (the “TUCA”) entered into among the TSEC Joint Venture, STT and us
on the same date and further described in more detail below. This resulted in our original ownership of 35% of the TSEC Joint
Venture. Under the JV Contract, neither party may transfer their interests in the TSEC Joint Venture without first offering such
interests to the other party.
In
August 2017, we entered into a restructuring agreement of the TSEC Joint Venture (“Restructuring Agreement”). The
agreed change in share ownership, reduction in the registered capital of the joint venture, and the final transfer of shares with
local government authorities was completed in December 2017. In this restructuring, an additional party was added to the JV Contract,
upon receipt of final government approvals, The Innovative Coal Chemical Design Institute (“ICCDI”) became a 25% owner
of the TSEC Joint Venture, we decreased our ownership to 25% and STT decreased its ownership to 50%. ICCDI previously served as
general contractor and engineered and constructed all three projects which utilize SGT in seven gasification systems for the Aluminum
Corporation of China.
We
received 11.15 million RMB (approximately $1.7 million) from ICCDI as a result of this restructuring. In conjunction with the
joint venture restructuring, we also received 1.2 million RMB (approximately $180,000) related to outstanding invoices for services
we had provided to the TSEC Joint Venture.
In
addition to the ownership changes described above, TSEC Joint Venture is now managed by a board of directors (the “Board”)
consisting of eight directors, four appointed by STT, two appointed by ICCDI and two appointed by us. All significant acts as
described in the JV Contract require the unanimous approval of the Board.
The
JV Contract also includes a non-competition provision which requires that the TSEC Joint Venture 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, STT retained the right to manufacture and sell gasification equipment outside
the scope of the TSEC Joint Venture within the TSEC Joint Venture territory. In addition, we retained the right to develop and
invest equity in projects outside of the TSEC Joint Venture within the TSEC Joint Venture territory. As a result of the Restructuring
Agreement, we have further retained the right to provide SGT licenses and to sell proprietary equipment directly into projects
in the TSEC Joint Venture territory provided we have an equity interest in the project. After the termination of the TSEC Joint
Venture, STT and ICCDI must obtain written consent from us to market development of any gasification technology that utilizes
low quality coal 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.
TSEC
Joint Venture unaudited financial data
The
following table presents summarized unaudited financial information for the TSEC Joint Venture for the fiscal years ended June
30, 2019 and June 30, 2018 (in thousands):
|
|
|
Year Ended
|
|
|
|
|
June 30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Income Statement data:
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
151
|
|
|
$
|
109
|
|
|
Operating loss
|
|
|
(1,236
|
)
|
|
|
(1,686
|
)
|
|
Net loss
|
|
|
(1,247
|
)
|
|
|
(1,686
|
)
|
|
|
|
As of June 30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Balance sheet data:
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
3,491
|
|
|
$
|
5,151
|
|
|
Noncurrent assets
|
|
|
86
|
|
|
|
1,376
|
|
|
Current liabilities
|
|
|
3,661
|
|
|
|
4,011
|
|
|
Noncurrent liabilities
|
|
|
—
|
|
|
|
—
|
|
|
Equity
|
|
|
(84
|
)
|
|
|
2,516
|
|
The
TSEC Joint Venture is accounted for under the equity method. Our initial capital contribution in the formation of the venture
was the TUCA, which is an intangible asset. As such, we did not record a carrying value at the inception of the venture. The carrying
value of our investment in the TSEC Joint Venture as of both June 30, 2019 and 2018 was zero. As such in December 2017, the receipt
of proceeds related to the Restructuring Agreement and transfer of shares, in the amount of 11.15 million RMB (approximately $1.7
million) were recorded as a gain when the final transfer of shares with local government authorities was completed.
Under
the equity method, losses in the venture are not recorded if the losses cause the carrying value to be negative and there is no
requirement to contribute additional capital. As we are not required to contribute additional capital, we have not recognized
losses in the venture, as this would cause the carrying value to be negative.
TUCA
Pursuant
to the TUCA, we have contributed to the TSEC Joint Venture certain exclusive rights to our SGT in the TSEC Joint Venture territory,
including the right to: (i) grant site specific project sub-licenses to third parties; (ii) use our marks for proprietary equipment
and services; (iii) engineer and/or design processes that utilize our SGT or our other intellectual property; (iv) provide engineering
and design services for joint venture projects and (v) take over the development of projects in the TSEC Joint Venture territory
that have previously been developed by us and our affiliates. As a result of the Restructuring Agreement, ICCDI was added as a
party to the TUCA, but all other material terms remained the same.
The
TSEC Joint Venture will be the exclusive operational entity for business relating to SGT in the TSEC Joint Venture territory,
except for projects in which we have an equity ownership position. For these projects, as a result of the Restructuring Agreement,
we can provide technology and equipment directly with no obligation to the joint venture. If the TSEC Joint Venture loses exclusivity
due to a breach by us, STT and ICCDI are to be compensated for direct losses and all lost project profits. We were also required
to provide training for technical personnel of the TSEC Joint Venture through the second anniversary of the establishment of the
TSEC Joint Venture, which has now passed. We will also provide a review of engineering works for the TSEC Joint Venture. If modifications
are suggested by us and not made, the TSEC Joint Venture bears the liability resulting from such failure. If we suggest modifications
and there is still liability resulting from the engineering work, it is our liability.
Any
party making improvements, whether patentable or not, relating to SGT 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 us free of charge. All such improvements shall become part of SGT and both parties shall have the same
rights, licenses and obligations with respect to the improvement as contemplated by the TUCA.
Any
breach of or default under the TUCA which is not cured on notice entitles the non-breaching party to terminate. The TSEC Joint
Venture indemnifies us for misuse of SGT or infringement of SGT upon rights of any third party.
Note
5 — Senior Secured Debentures
On
October 24, 2017, the Company entered into a securities purchase agreement (the “Purchase Agreement”) with certain
accredited investors (the “Purchasers”) for the purchase of $8.0 million in principal amount of Debentures. The Debentures
have a term of 5 years with an interest rate of 11% that adjusts to 18% in the event the Company defaults on an interest payment.
The Debentures require that dividends received from BFR are used to pay down the principal amounts of outstanding Debentures.
Additionally, we issued warrants to purchase 125,000 shares of common stock at $32.00 per common share (the “Debenture Warrants”).
The Purchase Agreement and the Debentures contain certain customary representations, warranties and covenants. There are no financial
metric covenants related to the Debentures. The transaction was approved by a special committee of our board of directors due
to the fact that certain board members were Purchasers. Interest on the outstanding balance of Debentures is payable quarterly
commencing on January 2, 2018. All unpaid principal and interests on the Debentures will be due on October 23, 2022.
The
net offering proceeds to us from the sale of the Debentures and the Debenture Warrants, after deducting the placement agent’s
fee and associated costs and expenses, was approximately $7.4 million, not including the proceeds, if any, from the exercise of
the warrants issued in this offering. As compensation for their services, we paid T.R. Winston & Company, LLC (the “Placement
Agent”): (i) a cash fee of $0.56 million (representing an aggregate fee equal to 7% of the face amount of the Debentures);
and (ii) a warrant to purchase 8,750 shares of common stock, representing 7% of the warrants issued to the Purchasers (the “Placement
Agent Warrant”). We also reimbursed certain expenses of the Placement Agent. The fair market value of the warrants was approximately
$137,000 at the time of issuance and recorded as debt issuance cost. A total of approximately $1.0 million debt issuance cost
was recorded as a result and is being amortized to interest expense over the term of the Debentures by using effective interest
method beginning in October 2017.
The
Debenture Warrants and Placement Agent Warrant contain provisions providing for the adjustment of the purchase price and number
of shares into which the securities are exercisable in certain events. Also, under certain events, we shall, at the holder’s
option, purchase these warrants from the holder by paying the holder an amount in cash based on a Black Scholes Option Pricing
Model for remaining unexercised warrants. Under U.S. GAAP, this potential cash transaction requires us to record the fair market
value of the warrants as a liability as opposed to equity. Management used a Monte Carlo Simulation method to value the warrants
with Anti-Dilution Protection with the assistance of a third-party valuation expert. To execute the model and value the warrants,
certain assumptions were needed as noted below:
|
Valuation
Date:
|
October
24, 2017
|
|
Warrant
Expiration Date:
|
October
31, 2022
|
|
Total
Number of Warrants Issued:
|
133,750
|
|
Contracted
Conversion Ratio:
|
1:1
|
|
Warrant
Exercise Price (USD)
|
32.00
|
|
Next
Capital Raise Date:
|
October
31, 2018
|
|
Threshold
exercise price post Capital raise:
|
20.08
|
|
Spot
Price (USD):
|
26.53
|
|
Expected
Life (Years):
|
5.0
|
|
Volatility:
|
66.0%
|
|
Volatility
(Per-period Equivalent):
|
19.1%
|
|
Risk
Free Interest Rate:
|
2.04%
|
|
Risk
Free Rate (Per-period Equivalent):
|
0.17%
|
|
Nominal
Value (USD Mn):
|
4.0
|
|
No
of Shares on conversion (Mn):
|
0.1
|
The
results of the valuation exercise valued the warrants issued at $15.62 per share, or approximately $2.0 million in total.
The
total proceeds received are first allocated to the fair value of all the derivative instruments, the remaining proceeds are then
allocated to the Debentures, resulting in the Debentures being recorded at a discount from the face value.
We
recorded $8.0 million as the face value of the Debentures and a total of $2.0 million as discount of Debentures and $0.1 million
as debt issuance cost for the warrants issued to investors and placement agent, which is being amortized to interest expense over
the term of the Debenture which resulted in a charge to interest expense of $0.4 million and $0.3 million for the year ended June
30, 2019 and June 30, 2018, respectively.
The
effective annual interest rate of the Debentures is approximately 18% after considering this $2.0 million discount related to
the Debentures.
The
Debentures are guaranteed by the U.S. subsidiaries of the Company, as well as the Company’s British Virgin Islands subsidiary,
pursuant to a Subsidiary Guarantee, in favor of the holders of the Debentures by the subsidiary guarantors, party thereto, as
well as any future subsidiaries which the Company forms or acquires. The Debentures are secured by a lien on substantially all
of the assets of the Company and the subsidiary guarantors, other than their equity ownership interest in the Company’s
foreign subsidiaries, pursuant to the terms of the Purchase Agreement among the Company, the subsidiary guarantors and the holders
of the Debentures.
For
more on the Debentures, see Note 16 – Subsequent Events – The Proposed Merger with AFE.
Note
6 — Derivative Liabilities
The
warrants issued to the Debenture investors and the Placement Agent contain provisions providing for the adjustment of the purchase
price and number of shares into which the securities are exercisable under certain events. Under certain events, we shall, at
the holder’s option, purchase the warrants from the holder by paying the holder an amount in cash based on a Black Scholes
Option Pricing Model for remaining unexercised warrants. ASC 815, which establishes accounting and reporting standards for derivative
instruments including certain derivative instruments embedded in other financial instruments or contracts and requires recognition
of all derivatives on the balance sheet at fair value. Management used a Monte Carlo Simulation method to value the warrants with
Anti-Dilution Protection with the assistance of a third-party valuation expert to initially record the fair value of these derivatives.
The third-party valuation expert also assisted management in valuing the derivatives as of the years ended June 30, 2018 and June
30, 2019 with the changes in the fair value reported as non-operating income or expense.
To
execute the model and value the derivatives, certain assumptions were needed as noted below:
|
Assumptions
|
|
At Issuance
October 24, 2017
|
|
|
Year Ending
June 30, 2018
|
|
|
Year Ending
June 30, 2019
|
|
|
Warrant Issue Date:
|
|
|
October 24, 2017
|
|
|
|
October 24, 2017
|
|
|
|
October 24, 2017
|
|
|
Valuation Date:
|
|
|
October 24, 2017
|
|
|
|
June 30, 2018
|
|
|
|
June 30, 2019
|
|
|
Warrant Expiration Date:
|
|
|
October 31, 2022
|
|
|
|
October 31, 2022
|
|
|
|
October 31, 2022
|
|
|
Total Number of Warrants Issued:
|
|
|
133,750
|
|
|
|
133,750
|
|
|
|
133,750
|
|
|
Warrant Exercise Price (USD):
|
|
|
32.00
|
|
|
|
32.00
|
|
|
|
32.00
|
|
|
Next Capital Raise Date:(1)
|
|
|
October 31, 2018
|
|
|
|
June 30, 2019
|
|
|
|
February 29, 2020
|
|
|
Threshold Exercise
Price Post Capital Raise:
|
|
|
20.08
|
|
|
|
17.20
|
|
|
|
6.40
|
|
|
Spot Price (USD):
|
|
|
26.53
|
|
|
|
26.24
|
|
|
|
2.48
|
|
|
Expected Life (Years):
|
|
|
5.0
|
|
|
|
4.3
|
|
|
|
3.3
|
|
|
Volatility:
|
|
|
66.0
|
%
|
|
|
65.0
|
%
|
|
|
75.0
|
%
|
|
Volatility (Per-period Equivalent):
|
|
|
19.1
|
%
|
|
|
18.8
|
%
|
|
|
21.7
|
%
|
|
Risk Free Interest Rate:
|
|
|
2.04
|
%
|
|
|
2.71
|
%
|
|
|
1.73
|
%
|
|
Risk Free Rate (Per-period Equivalent):
|
|
|
0.17
|
%
|
|
|
0.22
|
%
|
|
|
0.14
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nominal Value (USD Mn):
|
|
|
4.3
|
|
|
|
4.3
|
|
|
|
4.3
|
|
|
No. of Shares on Conversion (Mn):
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
0.1
|
|
|
Contracted Conversion Ratio:
|
|
|
1:1
|
|
|
|
1:1
|
|
|
|
1:1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Values (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value without Anti-Dilution Protection:
|
|
$
|
1,837
|
|
|
$
|
1,704
|
|
|
$
|
15
|
|
|
Fair Value of Embedded Derivative:
|
|
|
253
|
|
|
|
260
|
|
|
$
|
72
|
|
Fair Value of the Warrants Issued:
|
|
$
|
2,090
|
|
|
$
|
1,964
|
|
|
$
|
87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain/(Loss) on Fair Value Adjustments to Derivative Liabilities
|
|
|
Not Applicable
|
|
|
|
126
|
|
|
|
1,877
|
|
|
(1)
|
Next
Capital Raise Date was assumed to be within a year of the debt offering and each valuation date.
|
The
change in the derivative liability was mostly due to movements in the Company’s stock price. Other changes in assumptions
are listed above, some change with the passage time, interest rate fluctuations and stock market volatility. In addition, a change
of control scenario was added to the valuation calculation due to the status of the proposed merger transaction. The change of
value due to the addition was immaterial.
For
more on the Debentures, Debenture Warrants and Placement Agent Warrant, see Note 16 – Subsequent Events – The
Proposed Merger with AFE.
Note
7 — Risks and Uncertainties
As
of June 30, 2019, we had $0.9 million in cash and cash equivalents and $34,000 of working capital.
As
of January 10, 2020, we had $0.4 million in cash and cash equivalents. Of the $0.4 million in cash and cash
equivalents, $347,000 resides in the United States or easily access foreign countries and approximately $40,000
resides in China.
On
March 29, 2019, our Board of Directors engaged Clarksons Platou Securities, Inc. (“CPS”) to act as our financial advisors
to advise us as we conducted a process to evaluate financing options and strategic alternatives such as but not limited to a strategic
merger, a sale, a recapitalization and/or a financing consisting of equity and/or debt securities focused on maximizing shareholder
value and protecting the interests of our debtholders.
As
a result of our efforts evaluating financing and strategic options, on October 10, 2019 we entered into an Agreement and Plan
of Merger (the “Merger Agreement”) with AFE as described further in Note 16 – Subsequent Events –
The Proposed Merger with AFE. Currently our focus is on completing the steps required to complete the merger, which include
but are not limited to, (i) completion of all Company required filings, (ii) curing the NASDAQ listing requirement deficiencies,
(iii) completion of the form S-4 and Proxy related to the merger, (iv) completion of the Batchfire Share Exchange pre-emptive
rights process and (v) all other tasks required to complete the merger.
In
connection with the entry into the Merger Agreement, the Company entered into a securities purchase and exchange agreements (each,
a “New Purchase Agreements”) with each of the existing holders of its 11% senior secured debentures issued in October
2017 (the “Debentures”), whereby each of the holders agreed to exchange their Debentures and accompanying warrants
(the “Debenture Warrants”) for new debentures (the “New Debentures”) and warrants (the “New Warrants”),
and certain of the holders agreed to provide $2,000,000 of additional debt financing (the “Interim Financing”). Pursuant
to the New Purchase Agreements, the Company also issued $2,000,000 of 11% senior secured debentures (the “Merger Debentures”)
to certain accredited investors, along with warrants to purchase $4,000,000 of shares of Common Stock, half of which were Series
A Common Stock Purchase Warrants (the “Series A Merger Warrants”) and half of which were Series B Common Stock Purchase
Warrants (the “Series B Merger Warrants” and, together with the Series A Merger Warrants, the “Merger Warrants”),
as part of the Interim Financing. The Company shall receive the $2,000,000 pursuant to the Merger Debentures according to the
following schedule: (i) $1,000,000 on or before October 14, 2019, (ii) $500,000 upon the filing of the proxy statement for the
Company stockholder approval of the Merger, and (iii) $500,000 within two business days of Company stockholder approval of the
Merger. The terms of the Merger Debentures are the same as the New Debentures. The Merger Debentures are intended to assist the
Company in financing its business through the closing of the Merger.
As
compensation for its services, the Company will pay to T.R. Winston & Company, LLC (the “Placement Agent”): (i)
a cash fee of $140,000 (representing an aggregate fee equal to 7% of the face amount of the Merger Debentures, as defined below);
and (ii) a warrant to purchase 100,000 shares of Common Stock (the “New Placement Agent Warrant”). We have also agreed
to reimburse certain expenses of the Placement Agent.
The Company has also
agreed to loan $350,000 of the proceeds from the Merger Debentures to AFE to assist AFE in financing its business through the
closing of the Merger. The loan is subject to interest at the rate of 11% per annum payable in full on the repayment date in conjunction
with the repayment of the principal amount. The repayment date is the earlier of five days after completion of the Merger transaction
or the later of March 31, 2020 or three months following the vote of the shareholders on the Merger.
The
$1,000,000 scheduled payment on or before October 14, 2019 was subsequently received less certain legal costs and escrow fees
in the amount of $966,000.
On October 24, 2019
we entered into a loan agreement with AFE whereby we loaned a portion of the $2.0 million proceeds received under the New Purchase
Agreements. Under the loan agreement, we loaned $350,000 to AFE, which is due in full on the later of March 31, 2020 or within
five days following the closing of the Merger. If the Merger does not close, the loan will mature on March 31, 2020 or three months
following the special stockholder meeting called to approve the merger transactions. The loan accrues interest at 11% per annum
and is also due in full upon repayment, subject to an increased default interest in certain limited circumstances.
We
can make no assurances that the proposed merger transaction will be completed on a timely basis or at all. In addition, we may
be forced to seek relief to avoid or end insolvency through other proceedings including bankruptcy. Based on the historical negative
cash flows and the continued limited cash inflows in the period subsequent to year end there is substantial doubt about the Company’s
ability to continue as a going concern.
Other
than AFE and our Yima Joint Venture, all of our other development opportunities are in the early stages of development and/or
contract negotiations.
Our
operations are subject to stringent laws and regulations governing the discharge of materials into the environment, remediation
of contaminated soil and groundwater, sitting of facilities or otherwise relating to environmental protection. Numerous governmental
agencies, such as various Chinese, Australian and European Union authorities at the municipal, provincial or central government
level and similar regulatory bodies in other countries, issue regulations to implement and enforce such laws, which often require
difficult and costly compliance measures that carry substantial potential administrative, civil and criminal penalties or may
result in injunctive relief for failure to comply. Although to date we have not experienced any material adverse effect from compliance
with existing environmental requirements, we cannot assure you that we will not suffer such effects in the future or that projects
developed by our partners or customers will not suffer such effects.
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 exceed limits that are insured by the U.S. Federal Deposit Insurance Corporation
or equivalent agencies in foreign countries and jurisdictions such as Hong Kong.
On
May 16, 2019, SES received a notice of noncompliance (the “Notice”) from the Listing Qualifications Staff (the “Staff”)
of The Nasdaq Stock Market LLC (“Nasdaq”) indicating that the Company was not compliant with the minimum stockholders’
equity requirement under Nasdaq Listing Rule 5550(b)(1) for continued listing on The Nasdaq Capital Market because the Company’s
stockholders’ equity, as reported in SES’s Quarterly Report on Form 10-Q for the period ended March 31, 2019, was
below the required minimum of $2.5 million. Based on materials provided to Nasdaq by SES, the Staff granted SES an extension through
November 12, 2019 to complete the Merger.
On
November 13, 2019, SES received notification from the Staff that it did not meet the terms of the previously granted extension
and, as a result, the Staff has determined that that the securities of SES would be subject to delisting unless SES timely requested
a hearing before a Nasdaq Hearings Panel (the “Panel”).
Additionally,
on October 17, 2019, the Staff notified SES that since it failed to timely file its Annual Report on Form 10-K for the year ended
June 30, 2019, it no longer complied with Nasdaq Listing Rule 5250(c)(1). SES was given until December 16, 2019, to submit a plan
of compliance for consideration by the Staff. However, pursuant to Nasdaq Listing Rule 5810(c)(2)(A), the Staff has informed SES
that it can no longer consider the Company’s plan, and, as a result, the failure to file the Form 10-K serves as an additional
and separate basis for delisting. On November 21, 2019, SES received an additional delinquency notification letter from the Staff
due to SES’s continued non-compliance with Nasdaq Listing Rule 5250(c)(1) as a result of the Company’s failure to
timely file its Quarterly Report on Form 10-Q for the quarter ended September 30, 2019.
SES has requested a hearing
before the Nasdaq Hearings Panel. The hearing request automatically stayed any suspension/delisting action through December 5,
2019. On December 13, 2019, we received notification from the Panel that it had determined to extend the stay of suspension
through the completion of the hearings process, which will take place on December 19, 2019. At the hearing, the Company will request
the stay be extended through the closing of the previously announced Merger with AFE. However, there can be no assurance that
the Panel will grant a further extension to enable the Company to demonstrate compliance that it has regained
compliance with all applicable requirements.
Note
8 — Property, Plant and Equipment
Property,
plant and equipment consisted of the following (in thousands):
|
|
|
Estimated
|
|
June 30,
|
|
|
|
|
useful lives
|
|
2019
|
|
|
2018
|
|
|
Furniture and fixtures
|
|
2 to 3 years
|
|
$
|
11
|
|
|
$
|
243
|
|
|
Leasehold improvements
|
|
Lease term
|
|
|
—
|
|
|
|
23
|
|
|
Computer hardware
|
|
3 years
|
|
|
12
|
|
|
|
336
|
|
|
Computer software
|
|
3 years
|
|
|
687
|
|
|
|
875
|
|
|
Office equipment
|
|
3 years
|
|
|
6
|
|
|
|
149
|
|
|
Motor vehicles
|
|
5 years
|
|
|
39
|
|
|
|
39
|
|
|
|
|
|
|
|
755
|
|
|
|
1,665
|
|
|
Less: Accumulated depreciation
|
|
|
|
|
(755
|
)
|
|
|
(1,655
|
)
|
|
Net carrying value
|
|
|
|
$
|
—
|
|
|
$
|
10
|
|
Note
9 — Detail of Selected Balance Sheet Accounts
Accrued
expenses and other payables consisted of the following (in thousands):
|
|
|
June 30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Accounts payable — trade
|
|
$
|
154
|
|
|
$
|
496
|
|
|
Accrued payroll, vacation and bonuses
|
|
|
82
|
|
|
|
80
|
|
|
Deferred revenue
|
|
|
120
|
|
|
|
206
|
|
|
GTI royalty expenses due to GTI
|
|
|
750
|
|
|
|
250
|
|
|
Interest payable
|
|
|
220
|
|
|
|
220
|
|
|
Other
|
|
|
478
|
|
|
|
429
|
|
|
|
|
$
|
1,804
|
|
|
$
|
1,681
|
|
Note
10 — Intangible Assets
GTI
License Agreement
In
November 2009, we entered into an Amended and Restated License Agreement, (the “GTI Agreement”), with the Gas Technology
Institute, (“GTI”), replacing the Amended and Restated License Agreement between us and GTI dated August 31, 2006,
as amended. Under the GTI Agreement, we maintain our exclusive worldwide right to license the U-GAS® technology
for all types of coals and coal/biomass mixtures with coal content exceeding 60%, as well as the non-exclusive right to license
the U-GAS® technology for 100% biomass and coal/biomass blends exceeding 40% biomass.
In
order to sublicense any U-GAS® system, we are required to comply with certain requirements set forth in the GTI
Agreement. In the preliminary stage of developing a potential sublicense, we are required to provide notice and certain information
regarding the potential sublicense to GTI and GTI is required to provide notice of approval or non-approval within ten business
days of the date of the notice from us, provided that GTI is required to not unreasonably withhold their approval. If GTI does
not respond within the ten-business day period, they are deemed to have approved of the sublicense. We are required to provide
updates on any potential sublicenses once every three months during the term of the GTI Agreement. We are also restricted from
offering a competing gasification technology during the term of the GTI Agreement.
For
each U-GAS® unit which we license, design, build or operate for ourselves or for a party other than a sub-licensee
and which uses coal or a coal and biomass mixture or biomass as the feedstock, we must pay a royalty based upon a calculation
using the MMBtu per hour of dry syngas production of a rated design capacity, payable in installments at the beginning and at
the completion of the construction of a project, or the Standard Royalty. If we invest, or have the option to invest, in a specified
percentage of the equity of a third party, and the royalty payable by such third party for their sublicense exceeds the Standard
Royalty, we are required to pay to GTI an agreed percentage split of third party licensing fees, or the Agreed Percentage, of
such royalty payable by such third party. However, if the royalty payable by such third party for their sublicense is less than
the Standard Royalty, we are required to pay to GTI, in addition to the Agreed Percentage of such royalty payable by such third
party, the Agreed Percentage of our dividends and liquidation proceeds from our equity investment in the third party. In addition,
if we receive a carried interest in a third party, and the carried interest is less than a specified percentage of the equity
of such third party, we are required to pay to GTI, in our sole discretion, either (i) the Standard Royalty or (ii) the Agreed
Percentage of the royalty payable to such third party for their sublicense, as well as the Agreed Percentage of the carried interest.
We will be required to pay the Standard Royalty to GTI if the percentage of the equity of a third party that we (a) invest in,
(b) have an option to invest in, or (c) receive a carried interest in, exceeds the percentage of the third party specified in
the preceding sentence.
We
are required to make an annual payment to GTI for each year of the term, with such annual payment due by the last day of January
of the following year; provided, however, that we are entitled to deduct all royalties paid to GTI in a given year under the GTI
Agreement from this amount, and if such royalties exceed the annual payment amount in a given year, we are not required to make
the annual payment. We must also provide GTI with a copy of each contract that we enter into relating to a U-GAS®
system and report to GTI with our progress on development of the technology every six months.
For
a period of ten years, beginning in May 2016, we and GTI are restricted from disclosing any confidential information (as defined
in the GTI Agreement) to any person other than employees of affiliates or contractors who are required to deal with such information,
and such persons will be bound by the confidentiality provisions of the GTI Agreement. We have further indemnified GTI and its
affiliates from any liability or loss resulting from unauthorized disclosure or use of any confidential information that we receive.
We
continue to innovate and modify the SGT process to a point where we maintain certain intellectual property rights over SGT. Since
the original licensing in 2004, we have maintained a strong relationship with GTI and continue to benefit from the resources and
collaborative work environment that GTI provides us. In relation to the Merger with AFE, AFE and GTI have agreed upon new terms
which, subject to a definitive agreement being completed prior to the Merger closing, would replace the current GTI Agreement.
The
cost and accumulated amortization of intangible assets were as follows (in thousands):
|
|
|
June 30, 2019
|
|
|
June 30, 2018
|
|
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
|
Use rights of U-GAS®
|
|
$
|
1,886
|
|
|
$
|
1,886
|
|
|
$
|
—
|
|
|
$
|
1,886
|
|
|
$
|
1,886
|
|
|
$
|
—
|
|
|
Other intangible assets
|
|
|
1,116
|
|
|
|
322
|
|
|
|
794
|
|
|
|
1,149
|
|
|
|
111
|
|
|
|
1,038
|
|
|
Total
|
|
$
|
3,002
|
|
|
$
|
2,208
|
|
|
$
|
794
|
|
|
$
|
3,035
|
|
|
$
|
1,997
|
|
|
$
|
1,038
|
|
The
use rights of U-GAS® have an amortization period of ten years. Amortization expense was zero for the year ended
June 30, 2018 as it was fully amortized as of August 2016. Other intangible assets are primarily patents.
Note
11 — Income Taxes
For
financial reporting purposes, net loss showing domestic and foreign sources was as follows (in thousands):
|
|
|
Year Ended June 30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Domestic
|
|
$
|
(3,218
|
)
|
|
$
|
(5,174
|
)
|
|
Foreign
|
|
|
(7,498
|
)
|
|
|
(4,560
|
)
|
|
Net loss
|
|
$
|
(10,716
|
)
|
|
$
|
(9,734
|
)
|
Provision
for income taxes
The
effective income tax rate was 0.0% and 1.3% for the years ended June 30, 2019 and 2018 respectively. The following table reconciles
the income tax benefit with income tax expense that would result from application of the statutory federal tax rate, 21% and 28%
for the years ended June 30, 2019 and 2018, respectively, to loss before income tax expense (benefit) recorded (in thousands):
|
|
|
June 30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Net loss before income tax
|
|
$
|
(10,716
|
)
|
|
$
|
(9,734
|
)
|
|
Computed tax benefit at statutory rate
|
|
|
(2,250
|
)
|
|
|
(2,726
|
)
|
|
Taxes in foreign jurisdictions with rates different than US
|
|
|
1,782
|
|
|
|
1,210
|
|
|
Impact of U.S. tax reform
|
|
|
—
|
|
|
|
11,633
|
|
|
Other
|
|
|
551
|
|
|
|
895
|
|
|
Deferred Tax Adjustments (1)
|
|
|
1,574
|
|
|
|
10,988
|
|
|
Valuation allowance
|
|
|
(1,657
|
)
|
|
|
(22,129
|
)
|
|
Income tax expense/(benefit)
|
|
$
|
—
|
|
|
$
|
(129
|
)
|
|
|
(1)
|
The
net of adjustments of $1.6 million primarily related to stock option
forfeitures in the amount of approximately $2 million, offset by part by the
changes in accrued accounts.
|
Deferred
tax assets
Net
deferred tax assets of continuing operations consisted of the following (in thousands):
|
|
|
June 30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Deferred tax assets (liabilities):
|
|
|
|
|
|
|
|
|
|
Net operating loss carry forward
|
|
$
|
11,028
|
|
|
$
|
10,594
|
|
|
Warrant FMV Change
|
|
|
(394
|
)
|
|
|
(26
|
)
|
|
Depreciation and amortization
|
|
|
18
|
|
|
|
1
|
|
|
Stock-based expense
|
|
|
2,338
|
|
|
|
4,506
|
|
|
Investment in joint ventures
|
|
|
1,694
|
|
|
|
1,381
|
|
|
Accruals
|
|
|
244
|
|
|
|
129
|
|
|
Subtotal
|
|
|
14,928
|
|
|
|
16,585
|
|
|
Valuation allowance
|
|
|
(14,928
|
)
|
|
|
(16,585
|
)
|
|
Net deferred assets
|
|
$
|
—
|
|
|
$
|
—
|
|
At
June 30, 2019, the Company had approximately $51.2 million of U.S. federal net operating loss (“NOL”) carry forwards,
and $0.9 million of China NOL carryforward. The China NOL carryforward have expiration dates through 2024 and the U.S. NOL carryforward
begin expiring in 2028, with NOLs for the fiscal years ending after 2017 carryforward indefinitely, approximately $6.2 million.
The
Company’s tax returns are subject to periodic audit by the various taxing jurisdictions in which the Company operates, which
can result in adjustments to its NOLs. There are no significant audits underway at this time.
In
assessing the Company’s ability to utilize its deferred tax assets, management considers whether it is more likely than
not that some portion or all of the deferred tax assets will not be realized. Based on the level of historical taxable income
and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes
it is more likely than not that the Company will not realize the benefits of these deductible differences. Future changes in estimates
of taxable income or in tax laws may change the need for the valuation allowance.
The
Company and two of its subsidiaries file income tax returns in the U.S. federal jurisdiction, and various states and foreign jurisdictions.
Generally, the Company will inventory tax positions related to tax items for all years where the statute of limitations for the
assessment of income taxes has not expired. The Company’s open tax years are from June 30, 2009 forward through and including
June 30, 2018. Since these periods all have NOL carryforwards, the normal statute of limitations will technically not expire unless
and until the NOLs expire or are utilized. As of June 30, 2019, the domestic and foreign tax authorities have not proposed any
adjustments to the Company’s material tax positions. The Company establishes reserves for positions taken on tax matters
which, although considered appropriate under the regulations, could potentially be successfully challenged by authorities during
a tax audit or review. The Company did not have any liability for uncertain tax positions as of June 30, 2019 or 2018.
Note
12 — Net Loss Per Share Data
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 had outstanding for the periods presented. For the years ended June 30, 2019
and 2018, options and warrants to purchase common stock excluded from the computation of diluted earnings per share as their effect
would have been anti-dilutive as the Company incurred net losses during those periods. The total number of shares excluded from
diluted earnings per share equivalents amounted to approximately 0.4 million for both the year ended June 30, 2019 and 2018.
Note
13 — Commitments and Contingencies
Litigation
The
Company is currently not a party to any legal proceedings.
Contractual
Obligations
On December 31, 2019,
we extended the office lease agreement through March 31, 2020 with rental related payments of approximately $3,900 per month,
subject to additions based on additional services and usages each month.
In
November 2018, the Company entered into a new office lease agreement for 12 months ending December 31, 2019 with rental related
payment of approximately $3,300 per month, subject to additions based on additional services and usages each month.
In
October 2017, the Company extended its corporate office lease term for an additional 13 months ending January 31, 2019 with rental
payments of approximately $18,000 per month, subject to additions based on actual utility usage each month.
Consolidated
rental expense incurred under operating leases was $0.1 million for the year ended June 30, 2019 and $0.2 million for the year
ended June 30, 2018.
The
Debentures have a term of 5 years and will mature in October 2022.
Governmental
and Environmental Regulation
The
Company’s operations are subject to stringent federal, state and local laws and regulations governing the discharge of materials
into the environment or otherwise relating to environmental protection. Numerous governmental agencies, such as the U.S. Environmental
Protection Agency, and various Chinese authorities, issue regulations to implement and enforce such laws, which often require
difficult and costly compliance measures that carry substantial administrative, civil and criminal penalties or may result in
injunctive relief for failure to comply. These laws and regulations may require the acquisition of a permit before operations
at a facility commence, restrict the types, quantities and concentrations of various substances that can be released into the
environment in connection with such activities, limit or prohibit construction activities on certain lands lying within wilderness,
wetlands, ecologically sensitive and other protected areas, and impose substantial liabilities for pollution resulting from our
operations. The Company believes that it is in substantial compliance with current applicable environmental laws and regulations
and it has not experienced any material adverse effect from non-compliance with these environmental requirements.
Note
14 — Equity
Preferred
Stock
At
the Annual Meeting of Stockholders of the Company on June 30, 2015, the Company’s stockholders approved an amendment to
the Company’s certificate of incorporation to authorize a class of preferred stock, consisting of 20,000,000 authorized
shares, which may be issued in one or more series, with such rights, preferences, privileges and restrictions as shall be fixed
by the Company’s board of directors. No shares of preferred stock have been issued or outstanding since approved by the
stockholders.
Common
Stock
On
July 12, 2018, we issued 2,862 shares of common stock to ILL-Sino Development Inc. (“ILL-Sino”), the Company’s
business development advisor, pursuant to the term of the consulting agreement, as amended on July 1, 2018, between the Company
and ILL-Sino. The shares are fully vested and non-forfeitable at the time of issuance. The fair value of the common stock was
$24.64 per share on the date of issuance, and the Company recorded approximately $71,000 of expense for the year ended June 30,
2019 relating to the issuance of these shares.
On
November 10, 2017, we issued 2,131 shares of common stock to Market Development Consulting Group, Inc. (“MDC”), our
investor relations advisor, pursuant to the term of the consulting agreement, as amended on October 28, 2016. The shares were
fully vested and non-forfeitable at the time of issuance. The fair value of the common stock was $28.16 per share, and we recorded
$60,000 of expense for the year ended June 30, 2018 related to issuance of these shares.
On
May 13, 2016, we entered into an At The Market Offering Agreement (the “Offering Agreement”) with T.R. Winston &
Company (“T.R. Winston”) to sell, from time to time, shares of our common stock having an aggregate sales price of
up to $20.0 million through an “at the marketing offering” program under which T.R. Winston would act as sales agent,
which we refer to as the ATM Offering. The shares that may be sold under the Offering Agreement, if any, would be issued and sold
pursuant to the Company’s $75.0 million universal shelf registration statement on Form S-3 that was declared effective by
the Securities and Exchange Commission on April 21, 2016. We had no obligation to sell any of our common stock under the Offering
Agreement. The Offering Agreement expired in April 2018.
Stock-Based
Awards
As
of June 30, 2019, the Company has outstanding stock option and restricted stock awards granted under the Company’s 2015
Long Term Incentive Plan (the “2015 Incentive Plan”) and Amended and Restated 2005 Incentive Plan (the “2005
Incentive Plan”), under which the Company’s stockholders have authorized a total of 328,125 shares of common stock
for awards under the 2015 and 2005 Incentive Plan. The 2005 Incentive Plan expired as of November 7, 2015 and no future awards
will be made thereunder. As of June 30, 2019, there were approximately 31,409 shares authorized for future issuance pursuant to
the 2015 Incentive Plan. Under the 2015 Incentive Plan, we 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.
On
April 9, 2018 and 2019, the Company authorized the issuance of 2,141 and 13,587 shares of restricted stock respectively under
the 2015 Incentive Plan to Mr. Francis Lau according to the term of the Consulting Service Agreement dated April 9, 2018 between
the Company and Mr. Francis Lau. The fair value of the restricted stock was approximately $ 50,000 based on the market value as
of the date of the awards for both the year ended June 30, 2019 and 2018.
Restricted
stock activity during the two years ended June 30, 2019 and 2018 was as follows:
|
|
|
Restricted
stock
outstanding
June 30, 2019
|
|
|
|
|
|
|
|
Unvested shares outstanding at June 30, 2017
|
|
|
3,810
|
|
|
Granted
|
|
|
3,842
|
|
|
Vested
|
|
|
(6,422
|
)
|
|
Forfeited
|
|
|
—
|
|
|
Unvested shares outstanding at June 30, 2018
|
|
|
1,230
|
|
|
Granted
|
|
|
13,587
|
|
|
Vested
|
|
|
(14,817
|
)
|
|
Forfeited
|
|
|
—
|
|
|
Unvested shares outstanding at June 30, 2019
|
|
|
—
|
|
Assumptions
There
were no stock options granted during the year ended June 30, 2019, the fair values for the stock options granted during the year
ended June 30, 2018 were estimated at the date of grant using a Black-Scholes-Morton option-pricing model with the following weighted-average
assumptions.
|
|
|
June 30, 2018
|
|
|
Risk-free rate of return
|
|
|
2.60
|
%
|
|
Expected life of award
|
|
|
5.0
years
|
|
|
Expected dividend yield
|
|
|
0.00
|
%
|
|
Expected volatility of stock
|
|
|
86
|
%
|
|
Weighted-average grant date fair value
|
|
$
|
18.72
|
|
The
expected volatility of stock assumption was derived by referring to changes in the historical volatility of the Company. We used
the “simplified” method for “plain vanilla” options to estimate the expected term of options granted during
the year ended June 30, 2018.
Stock
option activity during the two years ended June 30, 2019 and 2018 were as follows:
|
|
|
Number
of
Stock
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Term
(years)
|
|
|
Aggregate
Intrinsic
Value
(in millions)
|
|
|
Outstanding at June 30, 2017
|
|
|
182,717
|
|
|
$
|
64.40
|
|
|
|
5.5
|
|
|
$
|
0.10
|
|
|
Granted
|
|
|
42,881
|
|
|
|
27.28
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Cancelled/forfeited
|
|
|
(10,546
|
)
|
|
|
66.64
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2018
|
|
|
215,052
|
|
|
|
56.91
|
|
|
|
5.4
|
|
|
$
|
0.02
|
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Cancelled/forfeited
|
|
|
(48,575
|
)
|
|
|
43.84
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2019
|
|
|
166,477
|
|
|
|
60.73
|
|
|
|
4.5
|
|
|
$
|
0.00
|
|
|
Exercisable at June 30, 2019
|
|
|
166,127
|
|
|
|
60.73
|
|
|
|
4.5
|
|
|
$
|
0.00
|
|
As
discussed in Note 6, on October 24, 2017, in connection with the issuance of the Debentures, the Company issued warrants to purchase
125,000 shares of common stock at exercise price of $32.00 per share to the investors and issued to the Placement Agent, for the
Debenture offering, warrants to purchase 8,750 shares of common stock at exercise price of $32.00 per share.
On
October 31, 2018 and November 1, 2017, the Company issued a warrant to Market Development Group, Inc. (“MDC”), the
Company’s investor relations advisor, to acquire 12,500 and 6,250 shares of the Company’s common stock respectively
at an exercise price of $10.4 and $28.16 per share respectively according to the terms of the consulting agreement, as amended
on October 31, 2018 and October 28, 2016 respectively, between the Company and MDC. The fair value of each warrant was estimated
to be approximately $0.1 million and 0.2 million respectively at the issuance. On January 31, 2019, the Company terminated the
consulting agreement between the Company and MDC, which resulted in 9,375 shares of warrants issued in 2018 being cancelled accordingly.
The
fair values of the warrants issued to MDC were estimated using a Black-Scholes-Morton option-pricing, and the following weighted-average
assumptions for the years ended June 30, 2019 and 2018:
|
|
|
Year Ended June 30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Risk-free rate of return
|
|
|
3.15
|
%
|
|
|
2.37
|
%
|
|
Expected life of award
|
|
|
10 years
|
|
|
|
10
years
|
|
|
Expected dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
Expected volatility of stock
|
|
|
94
|
%
|
|
|
98
|
%
|
|
Weighted-average grant date fair value
|
|
$
|
8.96
|
|
|
$
|
24.48
|
|
Stock
warrants activity during the two years ended June 30, 2019 and 2018 were as follows:
|
|
|
Number
of
Stock
Warrants
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Outstanding at June 30, 2017
|
|
|
161,180
|
|
|
$
|
110.72
|
|
|
Granted
|
|
|
140,000
|
|
|
|
31.84
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
Cancelled/forfeited
|
|
|
(91,667
|
)
|
|
|
130.08
|
|
|
Outstanding at June 30, 2018
|
|
|
209,513
|
|
|
|
49.44
|
|
|
Granted
|
|
|
12,500
|
|
|
|
10.40
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
Cancelled/forfeited
|
|
|
(9,375
|
)
|
|
|
10.40
|
|
|
Outstanding at June 30, 2019
|
|
|
212,638
|
|
|
|
48.86
|
|
|
Exercisable at June 30, 2019
|
|
|
212,638
|
|
|
|
48.86
|
|
The
Company recognizes the stock-based expense related to the Incentive Plans awards and warrants over the requisite service period.
The following table presents stock- based expense attributable to stock option awards issued under the Incentive Plans and attributable
to warrants and common stocks issued to consulting firms (in thousands):
|
|
|
Year Ended June 30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Incentive Plans
|
|
$
|
273
|
|
|
$
|
1,045
|
|
|
Common Stock and Warrants
|
|
|
98
|
|
|
|
213
|
|
|
Total stock-based compensation expense
|
|
$
|
371
|
|
|
$
|
1,258
|
|
In
January 2018, the Company granted additional stock options exercisable for 47,133 shares to employees in connection with salary
reduction agreements for a six months period of January to June 2018. The fair value of these options was approximately $92,000
at the date of grant. These options and restricted shares vest ratably over the six-month service period.
As
of June 30, 2019, approximately $4,000 of estimated expense with respect to non-vested stock option and restricted shares awards
have yet to be recognized and will be recognized in expense over the remaining weighted average period of approximately 17.3 months.
Note
15 – Segment Information
The
Company’s reportable operating segments have been determined in accordance with its internal management reporting structure
and include SES Foreign Operating, Technology Licensing and Related Services, and Corporate. The SES Foreign Operating reporting
segment includes all of the assets, operations and related administrative costs for China and our equity positions and earnings
related to our joint ventures including AFE, BFR, the Yima Joint Venture and the TSEC Joint Venture. The Technology Licensing
and Related Services reporting segment includes all operating activities related to our technology group. 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 and cash flow or usage.
The
following table presents statements of operations data and assets by segment (in thousands):
|
|
|
Year Ended
|
|
|
|
|
June 30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
SES Foreign Operating
|
|
$
|
—
|
|
|
$
|
894
|
|
|
Technology licensing and related services
|
|
|
—
|
|
|
|
613
|
|
|
Corporate
|
|
|
—
|
|
|
|
—
|
|
|
Total revenue
|
|
$
|
—
|
|
|
$
|
1,507
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization:
|
|
|
|
|
|
|
|
|
|
SES Foreign Operating
|
|
$
|
6
|
|
|
$
|
10
|
|
|
Technology licensing and related services
|
|
|
—
|
|
|
|
—
|
|
|
Corporate
|
|
|
252
|
|
|
|
27
|
|
|
Total depreciation and amortization
|
|
$
|
258
|
|
|
$
|
37
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment loss:
|
|
|
|
|
|
|
|
|
|
SES Foreign Operating
|
|
|
5,000
|
|
|
|
3,500
|
|
|
Technology licensing and related services
|
|
|
—
|
|
|
|
—
|
|
|
Corporate
|
|
|
—
|
|
|
|
—
|
|
|
Total impairment loss
|
|
$
|
5,000
|
|
|
$
|
3,500
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss:
|
|
|
|
|
|
|
|
|
|
SES Foreign Operating
|
|
|
(5,620
|
)
|
|
|
(3,682
|
)
|
|
Technology licensing and related services
|
|
|
(1,284
|
)
|
|
|
(1,138
|
)
|
|
Corporate
|
|
|
(4,162
|
)
|
|
|
(5,331
|
)
|
|
Total operating loss
|
|
$
|
(11,066
|
)
|
|
$
|
(10,151
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expenses:
|
|
|
|
|
|
|
|
|
|
SES Foreign Operating
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Technology licensing and related services
|
|
|
—
|
|
|
|
—
|
|
|
Corporate
|
|
|
1,326
|
|
|
|
869
|
|
|
Total interest expenses
|
|
$
|
1,326
|
|
|
$
|
869
|
|
|
Equity in losses of joint ventures:
|
|
|
|
|
|
|
|
|
|
SES Foreign Operating
|
|
$
|
198
|
|
|
$
|
715
|
|
|
Technology licensing and related services
|
|
|
—
|
|
|
|
—
|
|
|
Corporate
|
|
|
—
|
|
|
|
—
|
|
|
Total equity in losses of joint ventures
|
|
$
|
198
|
|
|
$
|
715
|
|
|
|
|
June 30,
2019
|
|
|
June 30,
2018
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
SES Foreign Operating
|
|
$
|
215
|
|
|
$
|
7,402
|
|
|
Technology licensing and related services
|
|
|
1,018
|
|
|
|
984
|
|
|
Corporate
|
|
|
1,423
|
|
|
|
5,928
|
|
|
Total assets
|
|
$
|
2,656
|
|
|
$
|
14,314
|
|
Note
16 — Subsequent Events
The
Proposed Merger with AFE
On
October 10, 2019, we, SES Merger Sub, Inc., a Delaware corporation and a wholly-owned subsidiary of us (“Merger Subsidiary”),
and AFE, entered into an Agreement and Plan of Merger (the “Merger Agreement”) pursuant to which, among other things,
AFE will, subject to the satisfaction or waiver of the conditions set forth in the Merger Agreement, merge with and into Merger
Subsidiary (the “Merger”), the separate corporate existence of Merger Subsidiary shall cease and AFE shall be the
successor or surviving corporation of the Merger and a wholly owned subsidiary of us. The Merger is intended to qualify for federal
income tax purposes as a tax-free reorganization under the provisions of Section 368(a) of the Internal Revenue Code of 1986,
as amended. Upon the consummation of the Merger, it is contemplated that we will also change our name.
Upon
consummation of the Merger, and subject to the terms and conditions of the Merger Agreement, holders of AFE ordinary shares will
receive, in exchange for such ordinary shares, 3,875,000 shares of our common stock. All outstanding stock options and restricted
stock will remain outstanding post-Merger on the same terms and conditions as currently applicable to such awards, provided that
outstanding awards for departing directors shall be amended to extend exercisability for the term of the award.
The
respective boards of directors of the Company, Merger Subsidiary and AFE have determined that the Merger Agreement and the transactions
contemplated by the Merger Agreement are fair to, advisable and in the best interests of their respective stockholders and have
approved the Merger and the Merger Agreement. The transactions contemplated by the Merger Agreement are subject to the approval
of the Company’s and AFE’s respective shareholders at shareholders’ meetings to be called and held by the Company
and AFE, respectively, and other closing conditions, including, among other things, the filing and effectiveness of a registration
statement on Form S-4 with the Securities and Exchange Commission (the “SEC”), and the consummation of the transactions
contemplated by the Share Exchange Agreements and the Purchase Agreements.
The
Merger Agreement contains representations and warranties by the Company and Merger Subsidiary, on the one hand, and by AFE, on
the other hand, made solely for the benefit of the other. The assertions embodied in those representations and warranties are
qualified by information in confidential disclosure schedules that the parties have exchanged in connection with signing the Merger
Agreement. The disclosure schedules contain information that modifies, qualifies and creates exceptions to the representations
and warranties set forth in the Merger Agreement. Moreover, certain representations and warranties in the Merger Agreement were
made as of a specified date, may be subject to a contractual standard of materiality different from what might be viewed as material
to shareholders, or may have been used for the purpose of allocating risk between the Company and Merger Subsidiary, on the one
hand, and AFE, on the other hand. Accordingly, the representations and warranties and other disclosures in the Merger Agreement
should not be relied on by any persons as characterizations of the actual state of facts about the Company, Merger Subsidiary
or AFE at the time they were made or otherwise.
The
Merger Agreement contains certain termination rights for both the Company and AFE, including, among other things, if the Merger
is not consummated on or before April 15, 2020.
In
connection with the entry into the Merger Agreement, the Company entered into Share Exchange Agreements (each, a “Share
Exchange Agreement”) with certain of the shareholders of Batchfire Resources Pty Ltd (“BFR”), whereby such shareholders
will exchange their shares of BFR for shares of the Common Stock at a ratio of 10 BFR shares for one share of Common Stock. As
a result of these exchanges, the Company would own 25% of the outstanding shares of BFR. The closing of the exchange is subject
to certain conditions specified in the Share Exchange Agreements, including, without limitation, the consummation of the transactions
contemplated by the Merger Agreement. In addition, the Company is making an offer to the remaining shareholders of BFR such that
the Company would acquire 100% of the shares if the offers are all accepted.
In
connection with the entry into the Merger Agreement, the Company entered into a securities purchase and exchange agreements (each,
a “New Purchase Agreements”) with each of the existing holders of the Debentures, whereby each of the holders agreed
to exchange their Debentures and Debenture Warrants for new debentures (the “New Debentures”) and warrants (the “New
Warrants”), and certain of the holders agreed to provide $2,000,000 of additional debt financing (the “Interim Financing”).
As
compensation for its services, the Company paid to the Placement Agent: (i) a cash fee of $140,000 (representing an aggregate
fee equal to 7% of the face amount of the Merger Debentures, as defined below); and (ii) a warrant to purchase 100,000 shares
of Common Stock (the “New Placement Agent Warrant”). We have also agreed to reimburse certain expenses of the Placement
Agent.
The
New Warrants and the New Placement Agent Warrants are exercisable into shares of common stock at any time from and after the closing
date at an exercise price of $6.00 per common share (subject to adjustment). The New Warrants and the New Placement Agent Warrants
will terminate five years after they become exercisable. The New Warrants and the New Placement Agent Warrant contain provisions
providing for the adjustment of the purchase price and number of shares into which the securities are exercisable.
The
New Debentures and the New Warrants have substantially similar terms to the Debentures and Debenture Warrants, including as to
maturity and security, except that the New Debentures, among other differences, (i) provide for the payment to certain holders,
at their election, of interest payments in shares of the Common Stock or in kind, and (ii) provide for certain optional conversion
features. The New Warrant changes the exercise price of the Warrant to $6.00 per share and make certain other modifications to
the Debenture Warrants. The New Debentures and New Warrants will be issued at the closing of the transactions contemplated by
the Merger Agreement.
Pursuant
to the New Purchase Agreements, each Debenture holder (i) waived the events of default resulting from the failure by the Company
to timely file its Annual Reports on Form 10-K for the fiscal year ended June 30, 2018, this Annual Report and for the Quarterly
Report on Form 10-Q for the fiscal quarter ended September 30, 2019, (ii) waived the event of default resulting from the failure
by the Company to make interest payments due on July 1, 2019, October 1, 2019 and January 31, 2020, and (iii) consented to the
consummation of the Merger and the issuance of the Merger Debentures and the Merger Warrants (each as defined below), notwithstanding
any limitations in the Debentures to the contrary.
As
mentioned above, pursuant to the New Purchase Agreements, the Company also issued $2,000,000 of 11% senior secured debentures
(the “Merger Debentures”) to certain accredited investors, along with warrants to purchase $4,000,000 of shares of
Common Stock, half of which were Series A Common Stock Purchase Warrants (the “Series A Merger Warrants”) and half
of which were Series B Common Stock Purchase Warrants (the “Series B Merger Warrants” and, together with the Series
A Merger Warrants, the “Merger Warrants”), as part of the Interim Financing. The Company shall receive the $2,000,000
pursuant to the Merger Debentures according to the following schedule: (i) $1,000,000 on or before October 14, 2019, (ii) $500,000
upon the filing of the proxy statement for the Company stockholder approval of the Merger, and (iii) $500,000 within two business
days of Company stockholder approval of the Merger. The terms of the Merger Debentures are the same as the New Debentures. The
Merger Debentures are intended to assist the Company in financing its business through the closing of the Merger.
The
$1,000,000 scheduled payment on or before October 14, 2019 was subsequently received less certain legal costs and escrow fees
in the amount of $966,000.
Interest
on the Merger Debentures is payable quarterly in arrears, at the option of the holder, in the form of shares of Common Stock,
to be issued at a price of the lower of $3.00 per share and the 10-day trailing VWAP for the period immediately prior to the due
date of the interest payment, or in kind. The Merger Debentures are convertible at any time by the holders into shares of Common
Stock at a price of $3.00 per share, and the Company can require conversion into shares of Common Stock at a price of $3.00 per
share if the Common Stock trades at or above $10.00 per share for ten consecutive trading days.
The
Merger Warrants are exercisable into shares of common stock at any time from and after the issue date at an exercise price of
$3.00 per share of common stock, in the case of the Series A Merger Warrants, or $6.00 per share of common stock, in the case
of the Series B Merger Warrants. The Merger Warrants will terminate five years after they become exercisable. The Merger Warrants
contain provisions providing for the adjustment of the purchase price and number of shares into which the securities are exercisable.
The terms of the Merger Warrants are the same as the New Warrants. The New Placement Agent Warrant has the same terms as the Merger
Warrant with an exercise price of $3.00 per share.
In
connection with entering into the New Purchase Agreements, the Company also entered into a Registration Rights Agreement with
the investors whereby the Company agreed to register the shares of Common Stock underlying the New Debentures, the New Warrants,
the Merger Debentures and the Merger Warrants.
The
Company has also agreed to loan $350,000 of the proceeds from the Merger Debentures to AFE to assist AFE in financing its business
through the closing of the Merger. The loan is subject to interest at the rate of 11% per annum payable in full on the repayment
date in conjunction with the repayment of the principal amount. The repayment date is the earlier of five days after completion
of the Merger transaction or the later of March 31, 2020 or three months following the vote of the shareholders on the Merger.
On
October 24, 2019 we entered into a loan agreement with AFE whereby we loaned a portion of the $2.0 million proceeds received under
the New Purchase Agreements. Under the loan agreement, we loaned $350,000 to AFE, which is due in full on the later of March 31,
2020 or within five days following the closing of the Merger. If the Merger does not close, the loan will mature on March 31,
2020 or three months following the special stockholder meeting called to approve the merger transactions. The loan accrues interest
at 11% per annum and is also due in full upon repayment, subject to an increased default interest in certain limited circumstances.
Other
Subsequent Events
On
July 22, 2019, we enacted a 1 for 8 reverse stock split as approved at the Annual Meeting of Stockholders held in June 2019. All
share and per share amounts in the consolidated financial statements have been retroactively restated to reflect the reverse stock
split.
On
July 1, 2019, we submitted a plan of compliance to Nasdaq addressing how it intended to regain compliance with Nasdaq Listing
Rule 5550(b) within 180 days of the notification or November 12, 2019. The plan of compliance we submitted was accepted by NASDAQ
on July 29, 2019.
On
July 31, 2019, we and AFE entered into an Amendment to Technology Purchase Option Agreement pursuant to which AFE has an amended
exclusive option through August 31, 2019, previously July 31, 2019 per the Technology Purchase Option Agreement. All terms of
the Technology Purchase Option Agreement remain binding with the exception of the option period being extended to August 31, 2019.
On
August 6, 2019, we received notice from The Nasdaq Stock Market that we regained compliance with the minimum $1.00 per share bid
price requirement. As required under Nasdaq’s Listing Rules, in order to regain compliance, the Company was required to
evidence a closing bid price of $1.00 per share or more for at least ten consecutive trading days.
On
August 31, 2019, the Technology Purchase Option Agreement between us and AFE dated April 4, 2019, as amended effective July 31,
2019, terminated pursuant to the terms of the agreement. No penalties or payments were due as a result of the termination of the
agreement.
On
September 15, 2019, AFE repurchased all of the shares in CRR in exchange for AFE shares. The CCR shareholders received one share
of AFE for every ten shares of CRR. As a result of the transaction, CRR is a wholly-owned subsidiary of AFE.
On
October 17, 2019, we received a notification letter from the Listing Qualifications Department of The Nasdaq Stock Market LLC
indicating that, as a result of our delay in filing this Annual Report, we are not in compliance with the timely filing requirements
for continued listing under Nasdaq Listing Rule 5250(c)(1). The notification letter stated that under Nasdaq rules, we had until
December 16, 2019 to submit a plan to regain compliance with Nasdaq’s continued listing requirements. We regained compliance
with this continued listing requirement by filing this Annual Report with the SEC.
On
November 13, 2019, we received a notification from the Listing Qualifications Staff of The Nasdaq Stock Market LLC that we did
not meet the terms of the previously granted extension and as a result, the Staff determined that the Company’s securities
would be subject to delisting unless we timely request a hearing before the Nasdaq Hearings Panel (the “Panel”).
As noted above, the Company was given until December 16, 2019 to submit a plan of compliance for consideration by the Staff,
however, pursuant to Nasdaq Listing Rule 5810(c)(2)(A), the Staff informed us that it can longer consider our plan, and as a result,
the failure to file the Form 10-K serves as an additional and separate basis for delisting.
On
November 21, 2019, we received an additional delinquency notification from the Listing Qualifications Staff of The Nasdaq Stock
Market LLC due to the continued noncompliance with Nasdaq Listing Rule 5250(c)(1) as a result of the failure to timely file the
Quarterly Report on Form 10-Q for the quarter ended September 30, 2019. We have requested a hearing before the Nasdaq Hearings
Panel. The hearing request automatically stayed any suspension/delisting action through December 5, 2019. On December 13, 2019,
we received notification from the Panel that it had determined to extend the stay of suspension through the completion of the
hearings process, which will take place on December 19, 2019. At the hearing, the Company will request the stay be extended through
the closing of the previously announced Merger with AFE. However, there can be no assurance that the Panel will grant a
further extension to enable the Company to demonstrate compliance that it has regained compliance with all applicable
requirements.