UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)

[X]

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

For the quarterly period ended ~~September~~December 3031, 2019

[ ]

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

For the transition period from: ____________ to: ____________

Commission file number: 001-33522

SYNTHESIS ENERGY SYSTEMS, INC.

(Exact name of registrant as specified in its charter)

Delaware		20-2110031
(State of Incorporation)		(I.R.S. Employer Identification No.)

One Riverway, Suite 1700, Houston, Texas		77056
(Address of principal executive offices)		(Zip code)

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

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

Securities registered pursuant to Section 12(b) of the Act:

Title of each class		Ticker Symbol		Name of each exchange on which registered
Common		SES		Nasdaq

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes [X] No [ ]

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

Large accelerated filer [ ]	Accelerated filer [ ]	Non-accelerated filer [ ]	Smaller reporting company [X]
Emerging growth company [ ]

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]

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

Yes [ ] No [X]

As of ~~January~~February 229, 2020, there were 1,576,500 shares of the registrant’s common stock, par value $.01 per share, outstanding.

TABLE OF CONTENTS

	Page
PART 1. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 2019 (unaudited) and June 30, 2019	3
Condensed Consolidated Balance Sheets as of December 31, 2019 (unaudited) and June 30, 2019	3
Condensed Consolidated Statements of Operations for the Three Months ended September 30, 2019 and 2018 (unaudited)	4
Condensed Consolidated Statements of Operations for the Three and Six Months ended December 31, 2019 and 2018 (unaudited)	4
Condensed Consolidated Statements of Comprehensive Loss for the Three Months ended September 30, 2019 and 2018 (unaudited)	5
Condensed Consolidated Statements of Comprehensive Loss for the Three and Six Months ended December 31, 2019 and 2018 (unaudited)	5
Condensed Consolidated Statements of Cash Flows for the Three Months ended September 30, 2019 and 2018 (unaudited)	6
Condensed Consolidated Statements of Cash Flows for the Six Months ended December 31, 2019 and 2018 (unaudited)	6
Condensed Consolidated Statements of Equity for the period from June 30, 2019 to September 30, 2019 and June 30, 2018 to September 30, 2018 (unaudited)	7
Condensed Consolidated Statements of Equity for the period from June 30, 2019 to December 31, 2019 and June 30, 2018 to December 31, 2018 (unaudited)	7
Notes to the Condensed Consolidated Financial Statements (unaudited)	8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	2733
Item 3. Quantitative and Qualitative Disclosure about Market Risk	3646
Item 4. Controls and Procedures	3646
PART II. Other Information
Item 1. Legal Proceedings	3847
Item 1A. Risk Factors	3847
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	3949
Item 3. Defaults Upon Senior Securities	3949
Item 4. Mine Safety Disclosures	3949
Item 5. Other Information	3949
Item 6. Exhibits	4050

PART I

Item 1. Financial Statements

SYNTHESIS ENERGY SYSTEMS, INC.

Condensed Consolidated Balance Sheets

(In thousands, except per share amount)

	September 30, 2019			June 30, 2019
	December 31, 2019			June 30, 2019
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	~~382~~378		$	871
Prepaid expenses		~~676~~668			768
Other currents assets		199			199
Loan receivable – related party		359			—
Total current assets		1,257			1,838
Other currents assets		205			199
Total current assets	$	1,610		$	1,838
Non-current assets:
Property, plant and equipment, net		—			—
Intangible asset, net		~~785~~772			794
Investment in joint ventures		19			19
Investment in affiliates		17			19
Other long-term assets		23			5
Total assets	$	2,~~063~~402		$	2,656
LIABILITIES AND EQUITY
Current liabilities:
Accrued expenses and accounts payable	$	~~736~~996		$	834
Accrued interest payable		~~440~~683			220
Accrued royalty expenses	$	~~875~~1,000		$	750
Total current liabilities		2,051			1,804
Liability in excess of basis of equity method investment		350			—
Senior secured debenture principal		8,000			8,000
Total current liabilities	$	3,029		$	1,804
Less unamortized discount and debt issuance costs		(2,041	)		(2,165	)
Non-current liabilities:
Total senior secured debenture		5,959			5,835
Senior secured debenture principal at amortized cost	$	—		$	8,000
Derivative liabilities		53			87
Less unamortized discount and debt issuance costs		—			(2,165	)
Total long-term liabilities		6,012			5,922
Total senior secured debenture at amortized cost	$	—		$	5,835
Total liabilities	$	8,063		$	7,726
Senior secured debenture principal at fair value	$	18,707		$	—
Derivative liabilities		6,284			87
Total long-term liabilities	$	24,991		$	5,922
Total liabilities	$	28,020		$	7,726
Commitment and contingencies (Note 11)
Stockholders’ equity:
Preferred stock, $0.01 par value- 20,000 shares authorized – no shares issued and outstanding		—			—
Preferred stock, $0.01 par value: 20,000 shares authorized – no shares issued and outstanding		—			—
Common stock, $0.01 par value: 200,000 shares authorized: 1,395 and 1,395 shares issued and outstanding, respectively		14			14
Common stock, $0.01 par value: 200,000 shares authorized: 1,577 and 1,395 shares issued and outstanding, respectively	$	16		$	14
Additional paid-in capital		~~265~~267,~~534~~261			265,533
Accumulated deficit		(~~271~~293,~~715~~062	)		(270,784	)
Accumulated other comprehensive income		244			244
Total stockholders’ equity to SES stockholders	$	(525,~~923~~541	)	$	(4,993	)
Noncontrolling interests in subsidiaries		(77	)		(77	)
Total stockholders’ equity	$	(625,~~000~~618	)	$	(5,070	)
Total liabilities and equity	$	2,~~063~~402		$	2,656

See accompanying notes to the condensed consolidated financial statements.

SYNTHESIS ENERGY SYSTEMS, INC.

Condensed Consolidated Statements of Operations

(In thousands, except per share amounts)

(Unaudited)

	Three Months Ended						Six Months Ended
	September 30,
	December 31,						December 31,
	2019			2018			2019			2018
Revenue:
Related party consulting services	$	—		$	—
Technology licensing-related party	$	—		$	—		$	—		$	—
Total revenue		—			—
Technology licensing and related services		—			—			—			—
Costs and Expenses:
Total revenue		—			—			—			—
Costs of sales		—			—
Costs and Expenses:
General and administrative expenses		598			1,463
Costs of sales and operating		—			—			—			—
Stock-based expense		1			214
General and administrative expenses		1,332			1,793			1,932			3,257
Depreciation and amortization		13			11
Stock-based expense		577			102			577			316
Total costs and expenses		612			1,688
Depreciation and amortization		14			8			27			19
Operating loss		(612	)		(1,688	)
Total costs and expenses		1,923			1,903			2,536			3,592
Non-operating income (expense):
Operating loss		(1,923	)		(1,903	)		(2,536	)		(3,592	)
Equity in gain of joint ventures		—			75
Non-operating (income)/expense:
Gain on fair value adjustments of derivative liabilities		34			808
Equity losses of Joint Ventures		322			100			322			24
Foreign currency losses, net		(11	)		(122	)
Foreign currency (gain)/ losses, net		1			(31	)		11			91
Interest expense		~~(344~~257	)		~~(324~~329	)		601			653
Interest income		2(10	)		17(7	)		(12	)		(24	)
Net loss		(931	)		(1,234	)
Loss on extinguishment of debenture		17,941			—			17,941			—
Net loss attributable to SES stockholders	$	(931	)	$	(1,234	)
Loss on fair value adjustments of derivative liabilities		913			(702	)		879			(1,510	)
Net loss per share (Basic and diluted):
Net Loss		(21,347	)		(1,592	)		(22,278	)		(2,826	)
Net loss per share attributable to SES stockholders	$	(0.67	)	$	(0.90	)
Less: net loss attributable to noncontrolling interests		—			—			—			—
Weighted average common shares outstanding:
Net income/(loss) attributable to SES stockholders	$	(21,347	)	$	(1,592	)	$	(22,278	)	$	(2,826	)
Basic and diluted		1,395			1,377
Net income/(loss) per share (Basic and Diluted):
Net income/(loss) attributable to SES stockholders	$	(13.78	)	$	(1.16	)	$	(15.13	)	$	(2.05	)
Weighted average common shares outstanding (Basic):		1,550			1,378			1,472			1,378

See accompanying notes to the condensed consolidated financial statements.

SYNTHESIS ENERGY SYSTEMS, INC.

Condensed Consolidated Statements of Comprehensive Loss

(In thousands)

(Unaudited)

	Three Months Ended September 30,
	Three Months Ended December 31,						Six Months Ended December 31,
	2019			2018			2019			2018
Net loss	$	(931	)	$	(1,234	)
Net loss, as reported	$	(21,347	)	$	(1,592	)	$	(22,278	)	$	(2,826	)
Currency translation adjustment		—			(27	)		—			—
Comprehensive loss		(931	)		(1,207	)
Comprehensive income/(loss)		(21,347	)		(1,619	)		(22,278	)		(2,826	)
Less comprehensive loss attributable to noncontrolling interests		—			—
Less:
Comprehensive loss attributable to the Company	$	(931	)	$	(1,207	)
Comprehensive income/(loss) attributable to noncontrolling interests		—			—			—			—
Comprehensive loss attributable to the Company	$	(21,347	)	$	(1,619	)	$	(22,278	)	$	(2,826	)

See accompanying notes to the condensed consolidated financial statements

SYNTHESIS ENERGY SYSTEMS, INC.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

	Three Months Ended
	Six Months Ended
	September 30,
	December 31,
	2019			2018
Cash flows from operating activities:
Net loss	$	(~~931~~22,278	)	$	(12,~~234~~826	)
Adjustments to reconcile net loss to net cash flow from operating activities:
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based expense		1577			~~214~~316
Depreciation of property, plant and equipment		—			3
Amortization of debenture issuance cost		138			213
Amortization of debenture issuance cost		126			104
Depreciation and amortization		27			19
Amortization of intangible and other assets		13			8
Loss on extinguishment of debenture		17,941			—
Gain on fair value adjustment of derivative		(34	)		(808	)
Loss on fair value adjustment of derivative liabilities		879			(1,510	)
Equity in (income) losses of joint ventures		—			(75	)
Equity in losses of joint ventures		322			24
Bad debt expense		30			—
Changes in operating assets and liabilities:
Prepaid expenses and other current assets		92			90
Accounts receivable		—			272
Other long-term assets		(3	)		(17	)
Interest receivable – related party		(9	)		—
Accrued expenses and accounts payable		247			77
Prepaid expenses and other current assets		94			(93	)
Net cash used in operating activities		(489	)		(1,638	)
Other long-term assets		(2	)		(21	)
Accrued expenses and payables		875			(26	)
Net cash used in operating activities		(1,406	)		(3,632	)
Cash flows from investing activities:
Loan to AFE		—			(260	)
Short term loan to affiliate		(350	)		—
Repayment of loan from AFE		—			260
Equity investment in joint ventures		—			(11	)
Net cash provided by or (used in) investing activities		—			(11	)
Net cash provided by/(used in) investing activities		(350	)		(11	)
Cash flows from financing activities:
Net cash provided by (used in) financing activities		—			—
Proceeds from issuance of debenture		1,000			—
Net increase (decrease) in cash		(489	)		(1,649	)
Proceeds from exercise of stock warrants		263			—
Net cash provided by financing activities		1,263			—
Net increase (decrease) in cash		(493	)		(3,643	)
Cash and cash equivalents, beginning of period		871			7,071
Effect of exchange rates on cash		—			~~(74~~—	)
Cash and cash equivalents, end of period	$	~~382~~378		$	53,~~348~~428
Supplemental Disclosures:
Cash paid for interest expense during the quarter:	$	—		$	220
Cash paid for interest expense during the six months:	$	—		$	440

See accompanying notes to the condensed consolidated financial statements.

SYNTHESIS ENERGY SYSTEMS, INC.

Condensed Consolidated Statement of Equity

(In thousands)

(Unaudited)

	Common Stock				~~Additional~~					Accumulated Other			Non-
	Shares		Common Stock		Additional Paid-in Capital		Accumulated Deficit			Comprehensive Income			controlling Interest			Total
Balance at June 30, 2018		1,377	$	14	$	265,162	$	(260,068	)	$	244		$	(73	)	$	5,279
Net loss		—		—		—		(1,234	)		—			—			(1,234	)
Currency translation adjustment		—		—		—		—			27			—			27
Stock-based expense		3		—		214		—			—			—			214
Balance at September 30, 2018		1,380	$	14	$	265,376	$	(261,302	)	$	271		$	(73	)	$	4,286
Net loss		—		—		—		(1,592	)		—			—			(1,592	)
Currency translation adjustment		—		—		—		—			(27	)		—			(27	)
Stock-based expense		—		—		102		—			—			—			102
Balance at December 31, 2018		1,380	$	14	$	265,478	$	(262,894	)	$	244		$	(73	)	$	2,769
Balance at June 30, 2019		1,395	$	14	$	265,533	$	(270,784	)	$	244		$	(77	)	$	(5,070	)
Net loss		—		—		—		(931	)		—			—			(931	)
Stock-based expense		—		—		1		—			—			—			1
Balance at September 30, 2019		1,395	$	14	$	265,534	$	(271,715	)	$	244		$	(77	)	$	(6,000	)
Net loss		—		—		—		(21,347	)		—			—			(21.347	)
Stock-based expense		70		1		576		—			—			—			577
Exercise of stock warrants		112		1		1,151		—			—			—			1,152
Balance at December 31, 2019		1,577	$	16	$	267,261	$	(293,062	)	$	244		$	(77	)	$	(25,618	)

See accompanying notes to the condensed consolidated financial statements.

Note 1 — Business and Liquidity

(a) Organization and ~~description~~Description of ~~business~~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 “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 SGT 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. z o.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 in China over a ten-year period, in which the projects utilize twelve ~~SES~~ proprietary SGT systems. We believe the completion of ~~these~~ 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, as described further in Note 134 – ~~Subsequent Events –~~ The Proposed Merger with AFE.

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 ~~September~~December 3031, 2019, we had $0.4 million in cash and cash equivalents and negative $01.84 million in working capital.

As of March 2, 2020, we had $269,000 in cash and cash equivalents. Of the $269,000 in cash and cash equivalents, $235,000 resides in the United States or easily accessed foreign countries and approximately $34,000 resides in China.

We have determined that we do 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 or other global regions. As a result, we suspended our global SGT commercialization efforts, we undertook operating expense reductions, we ceased providing funds for project developments, we continue to explore the divesting of assets such as our Yima Joint Venture, as defined in Note 5 – Current Projects – Yima Joint Venture, and TSEC Joint Ventures and we formed a special committee of the board of directors to evaluate financing and restructuring alternatives.

As a result of ~~January~~our 10efforts evaluating financing and restructuring alternatives, ~~2020~~on October 10, 2019 we ~~had~~entered ~~$0.4~~into ~~million~~an Agreement and Plan of Merger (the “Merger Agreement”) with AFE as described further in ~~cash~~Note ~~and~~4 ~~cash~~– ~~equivalents~~The Proposed Merger with AFE. OfCurrently our focus is on completing the ~~$0.4~~steps ~~million~~to incomplete ~~cash~~the ~~and~~merger, ~~cash equivalents~~which include but not limited to, ~~$347~~(i) completion of all Company required filings,~~000~~ ~~resides~~(ii) incuring the ~~United~~Nasdaq ~~States~~listing orrequirement ~~easily~~deficiencies, ~~accessed~~(iii) ~~foreign~~completion ~~countries~~of the Form S-4, Form S-1 and ~~approximately~~Proxy ~~$40~~related to the merger,~~000~~ (iv) completion of the Batchfire share exchange pre-emptive rights process and (v) all other ~~resides~~tasks inrequired ~~China.~~to complete the merger

WeIn ~~have~~connection ~~determined~~with ~~that~~the entry into the Merger Agreement, we doentered ~~not~~into ~~have~~a ~~adequate~~securities ~~cash~~purchase toand ~~continue~~exchange ~~the~~agreements ~~commercialization~~(each, a “New Purchase Agreements”) with each of ~~SGT~~the ~~due~~existing ~~primarily~~holders toof our ~~inability~~11% tosenior ~~realize~~secured debentures issued in October 2017 (the ~~financial~~“Debentures”), ~~results~~whereby ~~from~~each ~~our~~of ~~two~~the ~~investments~~holders ~~into~~agreed ~~projects~~to inexchange ~~China~~their asDebentures ~~well~~and asaccompanying ~~our~~warrants ~~inability~~(the to“Debenture Warrants”) ~~quickly~~for ~~develop~~new ~~alternative~~debentures ~~technology~~(the “New Debentures”) and warrants (the “New Debenture Warrants”), ~~income~~and ~~sources~~certain inof ~~Australia~~the holders agreed to provide $2,000,000 ~~Poland~~of oradditional ~~other~~debt ~~global~~financing ~~regions~~(the “Interim Financing”). AsPursuant to athe ~~result,~~New wePurchase ~~suspended~~Agreements, ~~our~~the ~~global~~Company ~~SGT~~also ~~commercialization~~issued ~~efforts~~$2, we000,000 ~~ceased~~of ~~providing~~11% ~~funds~~senior ~~for~~secured ~~project~~debentures ~~developments~~(the ~~and~~“Merger weDebentures”) to ~~continue~~certain accredited investors, along with warrants to ~~explore~~purchase ~~the~~1,333,338 ~~divesting~~shares of ~~assets~~Common ~~such~~Stock, ashalf ~~our~~of ~~Yima~~which were Series A Common Stock Purchase Warrants (the “Series A Merger Warrants”) and ~~TSEC~~half of which were Series B Common Stock Purchase ~~Joint~~Warrants ~~Ventures~~(the “Series B Merger Warrants” and, wetogether ~~formed~~with athe ~~special~~Series ~~committee~~A ofMerger Warrants, the ~~board~~“Merger Warrants”), as part of ~~directors~~the Interim Financing. The Company shall receive the $2,000,000 pursuant to ~~evaluate~~the ~~financing~~Merger ~~and~~Debentures ~~restructuring~~according ~~alternatives.~~to the Onfollowing schedule: (i) $1,000,000 on or before October 1014, 2019, we(ii) ~~announced~~$500,000 upon the ~~proposed~~filing ~~merger~~of the proxy statement for the Company stockholders approval of the Merger, as defined in Note 4 – The Proposed Merger with AFE, ~~described~~and ~~above~~(iii) ~~and~~$500,000 within two business days of Company stockholders approval of the ~~acquisition~~proposed merger . The terms of ~~additional~~the ~~ownership~~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 ~~BFR~~of the Merger.

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 13 – Subsequent Events – The Proposed Merger with AFE. Currently our focus is on completing the steps to complete the merger, which include but 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, we 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 Warrants”). We have also agreed to reimburse certain expenses of the Placement Agent.

The $1,000,000 scheduled payment on or before October 14, 2019 was subsequently received less certain legal costs and escrow fees in the amount of $966,000.

~~The~~As ~~Company~~part ~~has~~of the Interim Financing, we had 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~~On ~~loan~~October is24, ~~subject~~2019, towe ~~interest~~entered atinto the ~~rate~~loan ofagreement ~~11%~~which is ~~per~~due ~~annum payable~~ in full on the ~~repayment date~~later ~~in conjunction with the repayment~~ of ~~the~~March ~~principal~~31, ~~amount.~~2020 ~~The~~or ~~repayment~~within ~~date~~five isdays following the ~~earlier~~closing of ~~five~~the ~~days~~Merger. ~~after~~If ~~completion of~~ the Merger ~~transaction~~does ornot close, the ~~later~~loan ofwill mature on March 31, 2020 or three months following the ~~vote~~special ofstockholder ~~the~~meeting ~~shareholders~~called onto approve the merger ~~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.

On ~~October~~February 2419, ~~2019~~2020, we entered into a ~~loan~~securities purchase agreement ~~with~~(the ~~AFE~~“Securities ~~whereby~~Purchase weAgreement”) ~~loaned~~with acertain holders ~~portion~~ of the ~~$2.0~~Company’s ~~million~~11% ~~proceeds~~Senior ~~received~~Secured ~~under the~~Convertible ~~New~~Debentures, ~~Purchase~~pursuant ~~Agreements.~~to ~~Under~~which, ~~the~~among ~~loan~~other ~~agreement~~things, wethe ~~loaned~~holders ~~$350~~purchased,~~000~~ in toaccordance ~~AFE,~~with ~~which~~a isprivate ~~due~~placement inoffering ~~full~~of on the ~~later~~Company, $450,000 in principal amount of ~~March~~additional ~~31,~~11% Senior Secured ~~2020~~Convertible orDebentures ~~within~~(together, ~~five~~the ~~days~~“Additional ~~following~~Interim ~~the~~Debentures”) ~~closing~~and ofwarrants ~~the~~exercisable ~~Merger.~~for Ifup ~~the~~to ~~Merger~~300,004 shares ~~does~~of ~~not~~common ~~close~~stock, ~~the~~half ~~loan~~of ~~will~~which ~~mature~~are onSeries ~~March~~A ~~31, 2020~~common orstock ~~three~~purchase ~~months~~warrants ~~following~~and ~~the~~half ~~special~~of ~~stockholder~~which ~~meeting~~are ~~called~~Series toB ~~approve~~common stock purchase warrants (together, the ~~merger~~“Additional ~~transactions~~Interim Warrants”). The ~~loan~~Additional ~~accrues~~Interim ~~interest~~Debentures and Additional atInterim ~~11%~~Warrants ~~per~~are ~~annum~~issued on substantially the same terms as the Merger Debentures and isMerger ~~also~~Warrants ~~due~~issued in ~~full~~October ~~upon repayment~~2019, provided ~~subject~~that tothe Additional Interim Debentures include an ~~increased~~adjustment ~~default~~to ~~interest~~the conversion price in the event of certain ~~limited~~dilutive equity ~~circumstances~~issuances by the Company.

We can make no assurances that the proposed merger transaction will be completed on a timely basis or at all. We may also need to raise additional capital through equity and debt financing to complete the Merger or to otherwise strengthen our balance for our corporate general and administrative expenses. We cannot provide any assurance that any financing will be available to us in the future on acceptable terms or at all. Any such financing could be dilutive to our existing stockholders. In addition, we may be forced to seek relief to avoid or end insolvency through other proceedings including bankruptcy. Based on the historical negative cash flows and the continued limited cash inflows in the period subsequent to year end there is substantial doubt about the Company’s ability to continue as a going concern.9

As compensation for its services, we paid to the Placement Agent: (i) a cash fee of $31,500 (representing an aggregate fee equal to 7% of the face amount of the Additional Interim Debentures); and (ii) a warrant to purchase 22,500 shares of Common Stock (the “Interim Placement Agent Warrant”). We have also agreed to reimburse certain expenses of the Placement Agent. The Interim Placement Agent Warrant has been issued on substantially the same terms as the Additional Interim Warrants.

On February 18, 2020, we entered into an amended loan agreement (the “Amended Loan Agreement”) with AFE, amending the Loan Agreement entered into with AFE in October 2019. The Loan Agreement contemplates that we would loan a portion of the $2,450,000 proceeds that we received under the New Purchase Agreements dated October 10, 2019 as well as under the Securities Purchase Agreement.

We had previously loaned $350,000 to AFE at the time of entering into the Loan Agreement, and on February 19, 2020, we have loaned an additional $100,000 out of the proceeds of the Additional Interim Debentures. An additional $115,000 will be loaned to AFE upon the receipt of the next tranche of funds under the New Purchase Agreements. These loaned amounts are due in full within five days following the closing of the transactions contemplated by the Merger Agreement dated October 10, 2019. If the Merger does not close, the loan will mature three months following the special meeting of the Company’s stockholders called to approve the Merger. The loan accrues interest at 11% per annum and is also due in full upon repayment, subject to an increased default interest rate in certain limited circumstances.

We can make no assurances that the proposed merger transaction will be completed on a timely basis or at all. We may also need to raise additional capital through equity and debt financing to complete the merger transaction or to otherwise strengthen our balance sheet for our corporate general and administrative expenses. We cannot provide any assurance that any financing will be available to us in the future on acceptable terms or at all. Any such financing could be dilutive to our existing stockholders. In addition, we may be forced to seek relief to avoid or end insolvency through other proceedings including bankruptcy. Based on the historical negative cash flows and the continued limited cash inflows in the period subsequent to year end there is substantial doubt about the Company’s ability to continue as a going concern.

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 condensed consolidated financial statements have been retroactively restated to reflect the reverse stock split.

(b) Basis of Presentation and Principles of Consolidation

The condensed consolidated financial statements for the periods presented are unaudited. Operating results for the three and six month ~~period~~periods ending ~~September~~December 3031, 2019 are not necessarily indicative of results to be expected for the fiscal year ending June 30, 2020.

The condensed 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. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto reported in the Company’s Annual Report on Form 10-K for the year ended June 30, 2019. Significant accounting policies that are new or updated from those presented in the Company’s Annual Report on Form 10-K for the year ended June 30, 2019 are included below. The condensed consolidated financial statements have been prepared in accordance with the rules of the United States Securities and Exchange Commission (“SEC”) for interim financial statements and do not include all annual disclosures required by generally accepted accounting principles in the United States.

The accompanying condensed consolidated interim financial statements have been prepared on the basis of a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. As such, conditions exist the may raise substantial doubt regarding the Company’s ability to continue as a going concern. These condensed consolidated interim financial statements do no give effect to any adjustment that would be necessary should the Company be unable to continue as a going concern and therefore need to realize its assets and liquidate its liabilities and commitments in other than the normal course of business and at amounts different from those in the accompanying condensed consolidated interim financial statements. In the opinion of management, all adjustments which are necessary for fair statements of the results for interim periods have been included.

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 condensed consolidated balance sheet. Under the equity method, our equity interest in the net income or loss from our investments are recorded in non-operating income/expense on a net basis on our condensed 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.

The accompanying condensed consolidated interim financial statements have been prepared on the basis of a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. As such, conditions exist the may raise substantial doubt regarding the Company’s ability to continue as a going concern. These condensed consolidated interim financial statements do not give effect to any adjustment that would be necessary should the Company be unable to continue as a going concern and therefore need to realize its assets and liquidate its liabilities and commitments in other than the normal course of business and at amounts different from those in the accompanying condensed consolidated interim financial statements. In the opinion of management, all adjustments which are necessary for fair statements of the results for interim periods have been included.

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

We have equity investments in various privately held entities. We account for these equity investments either under the equity method or the cost method of accounting depending on our ownership interest and the level of our influence in each investment. 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 equity investments 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 condensed consolidated balance sheet. Under the equity method, our equity interest in the net income or loss from our investments are recorded in non-operating income/expense on a net basis on our condensed 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.

(d) Revenue Recognition

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 ~~quarter~~three and six months ending ~~September~~December 3031, 2019 or 2018. There were no revenues related to the sales of services or equipment in the ~~quarter~~three and six months ending ~~September~~December 3031, 2019 or 2018.

(e) Use of estimates

The preparation of condensed 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 accounting principles generally accepted 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 often 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).

11The Company’s financial assets and liabilities are classified based on the lowest level of input that is significant for the fair value measurement. The Company measures equity investments without readily determinable fair value on a non-recurring basis. The following table summarizes the assets of the Company measured at fair value as of December 31, 2019 and June 30, 2019 (in thousands):

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 Company measures equity investments without readily determinable fair value on a non-recurring basis. The following table summarizes the assets of the Company measured at fair value as of September 30, 2019 and June 30, 2019 (in thousands):

	December 31, 2019
	Level 1			Level 2			Level 3		Total
Assets:
Certificates of Deposit	$	—		$	50	⁽¹⁾	$	—	$	50
Money Market Funds		288	⁽²⁾		—			—		288

Liabilities:
Senior secured debenture at fair value	$	—		$	—		$	18,707	$	18,707
Derivative Liabilities		—			—			6,284		6,284

	September 30, 2019
	Level 1			Level 2			Level 3		Total
Assets:
Certificates of Deposit	$	—		$	50	(1)	$	—	$	50
Money Market Funds		220	(2)		—			—		220
Liabilities:
Derivative Liabilities	$	—		$	—		$	53	$	53

	June 30, 2019
	Level 1			Level 2			Level 3		Total
Assets:
Certificates of Deposit	$	—		$	50	⁽¹⁾	$	—	$	50
Money Market Funds		369	⁽²⁾		—			—		369

Liabilities:
Derivative Liabilities	$	—		$	—		$	87	$	87

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

The following table sets forth the changes in the estimated fair value for our Level 3 classified derivative liabilities (in thousands):

Derivative liabilities balance - June 30, 2019	$	87
	As of			As of
Change in fair value		(34	)
	December 31,			June 30,
Derivative liabilities balance – September 30, 2019	$	53
	2019			2019
Beginning Balance – Senior secured debenture at fair value	$	—		$	—
Senior secured debenture issued upon fair value election		18,715			—
Change in fair value		(8	)		—
Ending balance - Senior debenture at fair value	$	18,707		$	—
Beginning Balance - Derivative liabilities	$	87		$	1,964
Derivative liability modification costs		(53	)
Derivative liabilities issued		6,252			—
Exercise of derivative warrants		(889	)
Change in fair value		887			(1,877	)
Ending balance - Derivative liabilities	$	6,284		$	87

The carrying values of the certificates of deposit and money market funds approximate fair value, which was 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~~The ~~Debentures~~senior ~~are~~secured ~~recorded~~debenture at ~~face value of $8.0 million and~~ 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~~were measured at fair value using a Monte Carlo simulation valuation methodology. (See also Note 6 –— Derivative Liabilities -Senior Secured Debentures & Debenture Warrants for more details related to the valuation and assumptions of the Company’s derivative liabilities).

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 adopted ASC Topic 842. “Leases” beginning July 1, 2019. We currently do not have any leases for which this standard applies using the election to exclude leases for less than one year and therefore the standard had no effect on our financial condition, results of operations, cash flows or financial disclosures.

In July 2017, the FASB issued ASU 2017-11, “Earnings Per Share” ASC Topic 260, “Distinguishing Liabilities from Equity” ASC Topic 480, “Derivatives and Hedging” ASC Topic 815: (Part I) “Accounting for Certain Financial Instruments with Down Round Features.” These amendments simplify the accounting for certain financial instruments with down round features. The amendments require companies to disregard the down round feature when assessing whether the instrument is indexed to its own stock, for purposes of determining liability or equity classification. The Company adopted the guidance as of July 1, 2019. The adoption had no material effect 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 specifies 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 adopted ASC 718, “Compensation – Stock Compensation” beginning July 1, 2019. The adoption of the standard had no material effect on our financial condition, results of operations, cash flows or financial disclosures.

1213

Note 4 – ~~Current~~The ~~Projects~~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 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.

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 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 approximately 37% 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 connection with the entry into the Merger Agreement, the Company entered into New Purchase Agreements with each of the Purchasers of the Debentures, whereby each of the Purchasers agreed to exchange their Debentures and Debenture Warrants for New Debentures and New Debenture Warrants, and certain of the Purchasers agreed to provide $2,000,000 of 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; and (ii) New Placement Agent Warrants”). We have also agreed to reimburse certain expenses of the Placement Agent.

The New Debenture 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 $3.00 or $6.00 per common share dependent upon their participation in the Interim Financing (subject to adjustment). The New Debenture Warrants and the New Placement Agent Warrants will terminate five years after they become exercisable. The New Debenture 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 Debenture 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 Purchasers, 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 Debenture Warrants change the exercise price to $3.00 or $6.00 per share dependent upon their participation in the Interim Financing and makes certain other modifications to the Debenture Warrants. The New Debenture Warrants were issued upon the announcement of the Merger.

Pursuant to the New Purchase Agreements, each of the Purchasers (i) waived the events of default resulting from the failure by the Company to timely file its Annual Report on Form 10-K for the fiscal year ended June 30, 2018, its Annual Report on Form 10-K for the fiscal year ended June 30, 2019 and for this Quarterly Report, (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 1, 2020, and (iii) consented to the consummation of the Merger and the issuance of the Merger Debentures and the Merger Warrants, notwithstanding any limitations in the Debentures to the contrary.

As mentioned above, pursuant to the New Purchase Agreements, the Company also issued Merger Debentures to certain accredited investors, half of which were Series A Merger Warrants and half of which were 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’s stockholders approval of the Merger, and (iii) $500,000 within two business days of Company’s stockholders 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 (provided that the Company can only issue up to 19.99% of the outstanding shares as of the date the Merger was announced without shareholder approval) 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 Debenture Warrants. The New Placement Agent Warrants have the same terms as the Merger Warrants 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 Purchase Agent Warrants, the Merger Debentures and the Merger Warrants.

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 SEC, and the consummation of the transactions contemplated by the Share Exchange Agreements and the New 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.

As part of the Interim Financing, we had 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. On October 24, 2019, we entered into the loan agreement 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. 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.

Note 5 – Current Projects

Australian Future Energy Pty Ltd

In February 2014, we established AFE together with an Australian company, Ambre. AFE is an independently managed Australian business platform established for the purpose of building a large-scale, vertically integrated business in Australia based on developing, building and owning equity interests in financially attractive and environmentally responsible projects that produce low-cost syngas as a competitive alternative to expensive local natural gas and LNG.

On May 10, 2017, we entered into a project technology license agreement with AFE in connection with a project being developed by AFE in Queensland, Australia. AFE intends to form a subsidiary project company and assign the project technology license agreement to that company which will assume all of the obligations of AFE thereunder. Pursuant to the project technology license agreement, we granted a non-exclusive license to use our technology at the project to manufacture syngas and to use 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. License fees shall be paid as project milestones are reached throughout the planning, construction and first five years of plant operations. The success and timing of the project being developed by AFE will affect if and/or when we will be able to receive all the payments related to this technology license agreement. However, there can be no assurance that AFE will be successful in developing this or any other project.

On April 4, 2019, we entered into a Technology Purchase Option Agreement (the “Option Agreement”) with AFE providing AFE has an exclusive option through July 31, 2019 to purchase 100% ownership of Synthesis Energy Systems Technology, LLC, our wholly-owned subsidiary which owns our interest in the SGT. In addition, ownership rights to SGT are carved out of the transaction and retained by us for China and we have a three-year option period post-closing to monetize SGT for India, Brazil, Poland and for the DRI technology market segment. On July 31, 2019, we entered into an Amendment to the Option Agreement with AFE extending the exclusive option provided in the Option Agreement through August 31, 2019. On August 31, 2019, we mutually agreed with AFE to allow the Option Agreement to terminate pursuant to its terms and no penalties or payments were due as a result of the termination of the agreement.

AFE issued one million shares to us in connection with the execution of the Option Agreement. AFE would also pay (i) an additional $2.0 million in three equal installments, with the first installment paid at closing and the remainder over the subsequent twelve months, and (ii) $3.8 million on the earlier of the closing of a construction financing by AFE or five years from closing. The closing of the transaction was subject to the negotiation of definitive agreements and other conditions specified in the Option Agreement. In addition to the payment schedule above, AFE issued an additional one million shares with the execution of the Option Agreement and would also pay an additional $100,000 with the first installment paid at closing as full and final settlement of outstanding invoices owing AFE to us at the date of this Option Agreement. As a result of the termination of the Option Agreement, we retained the two million shares AFE issued in connection with the Option Agreement. We accounted for the first million shares as an additional investment in AFE for $70,000 and a reduction of receivable amounts due from AFE with a fair value of $100,000 with a write-off for the remaining $30,000. The second million shares were accounted for as an additional investment in AFE and a deferred liability in the amount of $70,000 as a down payment on the purchase of our subsidiary. In the quarter ending September 30, 2019, we recognized the $70,000 down payment as an other gain due to the termination of the Option Agreement.

13On October 24, 2019 we entered into a loan agreement with AFE in connection with the proposed Merger where we loaned $350,000 to AFE as mentioned above in Note 4 – The Proposed Merger with AFE.

For our ownership interest in AFE, we have been contributing cash, ~~and~~ engineering support and most recently made a loan mentioned above, for AFE’s business development while Ambre contributed cash and services. Additional ownership in AFE has been granted to the AFE management team and staff individuals providing services to AFE. In April 2019, we were issued two million shares in connection with the Option Agreement and its subsequent termination.

We account for our investment in AFE under the equity method. Our ownership interest of approximately 35% makes us the second largest shareholder. We also maintain a seat on the board of directors which allows us to have significant influence on the operations and financial decisions, but not control, of AFE. Our carrying value of our AFE investment as of both ~~September~~December 3031, 2019 and June 30, 2019 was zero.

~~The~~As ~~following~~we ~~summarizes~~account ~~unaudited~~for ~~condensed~~AFE ~~financial~~under ~~information~~the ofequity method and currently AFE’s ~~for~~losses ~~the~~exceed ~~three~~our ~~months~~investment ~~ended~~carrying ~~September~~value, 30therefore we have not been recording our equity loss pickup related to AFE’s losses. Due to the loan mentioned above, ~~2019~~we ~~and~~are required, ~~2018~~under ~~and~~ASC as323-10 to record our share of ~~September~~losses 30related to the additional support to AFE which includes the loan. Additional equity loss of $350,000 ~~2019~~was ~~and~~recorded ~~June~~in 30the quarter ended December 31, 2019 (due to the execution of the loan agreement with AFE and creating a liability in ~~thousands):~~excess of basis of equity method investment.

	September 30, 2019			September 30, 2018
Income Statement data:
Net Income (Loss)	$	(293	)	$	313
	September 30, 2019			June 30, 2019
Balance sheet data:
Total assets	$	1,322		$	1,555
Total Equity		610			324

The following summarizes unaudited condensed financial information of AFE for the three and six months ended December 31, 2019 and 2018 and as of December 31, 2019 and June 30, 2019 (in thousands):

For more on the Merger and related transactions, see Note 13 – Subsequent Events – The Proposed Merger with AFE.

	Three Months Ended						Six Months Ended
	December 31,						December 31,
Income Statement data:	2019			2018			2019			2018
Net income/(loss)	$	(304	)	$	(289	)	$	(608	)	$	9

Balance sheet data:	December 31, 2019		June 30, 2019
Total assets	$	1,388	$	1,555
Total Equity		684		324

For more on the Merger and related transactions, see Note 4 – The Proposed Merger with AFE above.

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~~accounted for our investment in CRR under the equity method. Our ownership interest of approximately 38% ~~makes~~made us the second largest shareholder. We may ~~appoint~~have appointed one board director for each 15% ownership interest we ~~hold~~held in CRR which ~~allows~~allowed us to have ~~significant~~ 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.

Batchfire Resources Pty Ltd

As a result of AFE’s early stage business development efforts associated with the Callide coal mine in Central Queensland, Australia, AFE created 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.

On April 29, 2019, BFR issued additional shares as part of a rights offering. We did not execute our rights in this offering and therefore after the completion of the offering process and the issuance of the additional shares, our ownership interest was diluted from approximately 11% to approximately 7%.

We account for our investment in BFR under the cost method. Our limited ownership interest in BFR was approximately 7% and we do not have significant influence over the operation or financial decisions made by the company. At the time of the spin-off, the carrying amount of our investment in AFE was reduced to zero through equity losses. As such, the value of the investment in BFR post spin-off was also zero. As of ~~September~~December 3031, 2019, our ownership interest in BFR was approximately 7% and the carrying value of our investment in BFR as of both ~~September~~December 3031, 2019 and June 30, 2019 was zero.

14For additional information on our investment in BFR and the Share Exchange Agreements, please see Note 4 – The Proposed Merger with AFE.

Townsville Metals Infrastructure Pty Ltd

In August 2018, AFE formed a separate unrelated company, Townsville Metals Infrastructure Pty Ltd (“TMI”) for the purpose of completing the development of the required infrastructure such as rail and port modifications related to the transport of mined products including coal from the Pentland resource to the Townsville port. Ownership in TMI was distributed proportionately to the shareholders of AFE. Our ownership in TMI is approximately 38% upon the formation of TMI through our ownership interest in AFE.

We account for our investment in TMI under the equity method. Our ownership interest of approximately 38% makes us the second largest shareholder. We may appoint one board director for each 15% ownership interest we hold in TMI which allows us to have significant influence on the operations and financial decisions, but not control, of TMI. Our carrying value of our TMI investment as of both ~~September~~December 3031, 2019 and June 30, 2019 was zero.

SES EnCoal Energy sp. z o. o.

In October 2017, we entered into agreements with Warsaw-based EnInvestments sp. z o.o. Under the terms of the agreements, we and EnInvestments are equal shareholders of SEE and SEE will exclusively market, develop, and commercialize projects in Poland which utilize our technology, services and proprietary equipment and we share with SEE a portion of the technology license payments, net of fees, we receive from Poland. The goal of SEE is to establish efficient clean energy projects that provide Polish industries superior economic benefits as compared to the use of expensive, imported natural gas and LNG, while providing energy independence through our technological capabilities to convert the wide range of Poland’s indigenous coals, coal waste, biomass and municipal waste to valuable syngas products. SEE has developed a pipeline of projects and together we are actively working with Polish customers and partners to complete necessary project feasibility, permitting, and SGT technology 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. In August 2018 we contributed additional cash of approximately $11,000.

We account for our investment in SEE under the equity method. Our ownership interest of 50% makes us an equal shareholder and we also maintain two of the four seats on the board of directors which allows us to have significant influence on the operations and financial decisions, but not control, of SEE. On ~~September~~December 3031, 2019, as an equal shareholder, our ownership was 50% of SEE and our carrying value of our investment in SEE as of ~~both~~December ~~September 30~~31, 2019 and June 30, 2019 was approximately $17,000 and $19,000 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”). We continue to own a 25% interest in the Yima Joint Venture and Yima owns a 75% interest.

In December 2017 and January 2018, on-going development cooperation and discussions with the Yima Joint Venture management resulted in the joint venture agreeing to pay various costs incurred by us during the construction and commissioning period of the facility in the amount of approximately 16 million Chinese Renminbi yuan, (“RMB”), (approximately $2.5 million). As of June 30, 2018, we had received 6.15 million RMB (approximately $0.9 million) of payments from the Yima Joint Venture related to these costs. Since June 2018, no additional payments have been received. Due to uncertainty, revenues will be recorded upon receipt of payment. Despite our continuous efforts, we have not received any further payments from the Yima Joint Venture.

Since 2014, we have accounted for this joint venture under the cost method of accounting. Our conclusion to account for this joint venture under this methodology is based upon our historical lack of significant influence in the Yima Joint Venture. The lack of significant influence was determined based upon our interactions with the Yima Joint Venture related to our limited participation in operating and financial policymaking processes coupled with our limited ability to influence decisions which contribute to the financial success of the Yima Joint Venture. We continue to evaluate our level of influence over the Yima Joint Venture.

The carrying value of our Yima Joint Venture investment as of both ~~September~~December 3031, 2019 and June 30, 2019 was zero.

Tianwo-SES Clean Energy Technologies Limited

Joint Venture Contract

In February 2014, SES Asia Technologies Limited, one of our wholly owned subsidiaries, entered into a Joint Venture Contract (the “JV Contract”) with Zhangjiagang Chemical Machinery Co., Ltd., which subsequently changed its legal name to Suzhou Thvow Technology Co. Ltd. (“STT”), to form the TSEC Joint Venture. In August 2017, we entered into a restructuring agreement which changed the share ownership in the TSEC Joint Venture, reduced the registered capital and brought an additional party, The Innovative Coal Chemical Design Institute (“ICCDI”), into the JV Contract. Current ownership interests of the TSEC Joint Venture are STT owning 50%, ICCDI owning 25% and we own the remaining 25%. The purpose of the TSEC Joint Venture is to establish SGT as the leading gasification technology in the TSEC Joint Venture territory (which is China, Indonesia, the Philippines, Vietnam, Mongolia and Malaysia) by becoming a leading provider of proprietary equipment and engineering services for the technology. The scope of the TSEC Joint Venture is to market and license SGT via project sublicenses; procurement and sale of proprietary equipment and services; coal testing; and engineering, procurement and research and development related to SGT.

TSEC Joint Venture financial data

The following summarizes unaudited condensed financial information of TSEC Joint Venture for the three and six months ended ~~September~~December 3031, 2019 and 2018 and as of ~~September~~December 3031, 2019 and June 30, 2019 (in thousands):

Income Statement data:	September 30, 2019			September 30, 2018
	Three Months Ended						Six Months Ended
Revenue	$	—		$	—
	December 31,						December 31,
Operating loss		(287	)		(207	)
Income Statement data:	2019			2018			2019			2018
Net loss		(287	)		(207	)
Revenue	$	—		$	—		$	—		$	—
Balance sheet data:		September 30, 2019			June 30, 2019
Operating loss		(27	)		(259	)		(314	)		(466	)
Current assets	$	3,393		$	3,491
Net loss		(27	)		(259	)		(314	)		(466	)
Noncurrent assets		83			86
Current liabilities		3,841			3,661
Noncurrent liabilities		—			—
Equity		(365	)		(84	)

The TSEC Joint Venture is accounted for under the equity method. Our initial capital contribution in the formation of the venture was the Technology Usage and Contribution Agreement (“TUCA”), which is an intangible asset. As such, we did not record a carrying value at the inception of the venture. The carrying value of our investment in the TSEC Joint Venture as of both September 30, 2019 and June 30, 2019 was zero.

Balance sheet data:	December 31, 2019			June 30, 2019
Current assets	$	3,433		$	3,491
Noncurrent assets		85			86
Current liabilities		3,917			3,661
Noncurrent liabilities		—			—
Equity		(399	)		(84	)

16The TSEC Joint Venture is accounted for under the equity method. Our initial capital contribution in the formation of the venture was the Technology Usage and Contribution Agreement (“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 December 31, 2019 and June 30, 2019 was zero.

Under the equity method of accounting, 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 technology or our other intellectual property; (iv) provide engineering and design services for joint venture projects and (v) take over the development of projects in the TSEC Joint Venture territory that have previously been developed by us and our affiliates. As a result of the Restructuring Agreement, ICCDI was added as a party to the TUCA, but all other material terms remained the same.

Note 56 — Derivative Liabilities - Senior Secured Debentures & Debenture Warrants

On October 24, 2017, we 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 Debenture Warrants to purchase 125,~~000~~006 shares of common stock at $32.00 per common share. 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 and commenced 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 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 Debenture 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 2017.20

The ~~Debenture~~net ~~Warrants~~offering ~~and~~proceeds ~~Placement~~to ~~Agent~~us ~~Warrant~~from ~~contain~~the ~~provisions~~sale ~~providing~~of ~~for~~ the ~~adjustment~~Debentures ofand the ~~purchase~~Debenture ~~price~~Warrants, ~~and~~after ~~number of~~deducting ~~shares~~the ~~into~~Placement ~~which~~Agent’s fee ~~the~~and ~~securities~~associated ~~are~~costs ~~exercisable~~and inexpenses, ~~certain~~was ~~events~~approximately $7.4 ~~Also~~million, ~~under~~not ~~certain~~including ~~events~~the proceeds, weif ~~shall~~any, atfrom the ~~holder’s option,~~exercise ~~purchase~~ of the warrants ~~from~~issued ~~the~~in ~~holder~~this byoffering. ~~paying~~As compensation for their services, we paid the ~~holder~~Placement anAgent: ~~amount~~(i) ina cash ~~based~~fee onof a$0.56 million ~~Black~~(representing ~~Scholes~~an ~~Option~~aggregate ~~Pricing~~fee ~~Model for~~equal ~~remaining~~to ~~unexercised~~7% ~~warrants.~~of ~~Under~~the ~~U.S.~~face ~~GAAP,~~amount ~~this~~of ~~potential~~the ~~cash~~Debentures); ~~transaction~~and ~~requires~~(ii) usa warrant to ~~record~~purchase ~~the~~8,750 shares ~~fair~~of ~~market~~common ~~value~~ stock, representing 7% of the ~~warrants~~Debenture asWarrants aissued ~~liability~~to asthe ~~opposed~~Purchasers to(the ~~equity~~“Placement Agent Warrant”). We ~~Management~~also ~~used~~reimbursed acertain ~~Monte~~expenses ~~Carlo~~of ~~Simulation~~the ~~method~~Placement toAgent. The fair market value of the warrants ~~with Anti-Dilution~~was ~~Protection~~approximately ~~with~~$137,000 at the ~~assistance~~time of aissuance ~~third-party~~and ~~valuation~~recorded ~~expert~~as debt issuance cost. ToA ~~execute~~total ~~the~~of ~~model~~approximately $1.0 million debt issuance cost was recorded as a result and ~~value~~was being amortized to interest expense over the ~~warrants,~~term ~~certain assumptions~~of ~~were~~the ~~needed~~Debentures asby ~~noted~~using ~~below:~~effective interest method beginning in October 2017.

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 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 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. 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.

17The Company 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 warrants issued to the Purchasers and Placement Agent, which was be amortized to interest expense over the term of the Debenture.

The ~~results~~effective ofannual ~~the~~interest ~~valuation~~rate ~~exercise~~of ~~valued~~ the ~~Debenture~~Debentures ~~Warrants~~was ~~and~~approximately ~~the~~18% ~~Placement~~after ~~Agent~~considering ~~Warrant~~this ~~issued at~~ $~~15.62 per share, or approximately $~~2.0 million indiscount ~~total~~related to the Debentures.

The total proceeds received are first allocated to the fair value of all the derivative instruments, and the remaining proceeds are then allocated to the Debentures, resulting in the Debentures being recorded at a discount from the face value.

The Company 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 warrants issued to the Purchasers and Placement Agent, which is be amortized to interest expense over the term of the Debenture which resulted in a charge to interest expense of $0.3 million for both the quarters ended September 30, 2019 and 2018.

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 13 – Subsequent Events – The Proposed Merger with AFE.~~21

~~Note~~In connection with the entry into the Merger Agreement, the Company entered into New Purchase Agreements with each of the Purchasers of the Debentures, whereby each of the Purchasers agreed to exchange their Debentures and Debenture Warrants for New Debentures and New Debenture Warrants, and certain of the Purchasers agreed to provide $2,000,000 of Interim Financing. The certain holders that provided the Interim Financing received Merger Warrants with a fair value total of approximately $6,113,000, —see ~~Derivative~~calculation below ~~Liabilities~~for Series A Warrants and Series B Warrants.

~~The~~As ~~warrants~~compensation ~~issued to the Purchasers and the Placement Agent contain provisions providing~~ for ~~the~~its ~~adjustment of the purchase price and number of shares into which the securities are exercisable under certain events. Under certain events~~services, the Company ~~shall, at~~paid ~~the~~to ~~holder’s option, purchase~~ the ~~warrants~~Placement ~~from~~Agent: ~~the~~(i) ~~holder~~a ~~by paying the holder an amount in~~ cash ~~based~~fee onof ~~a Black Scholes Option Pricing Model for remaining unexercised warrants. ASC 815~~$140,000 ~~which~~(representing ~~establishes~~an ~~accounting and reporting standards for derivative~~aggregate ~~instruments~~fee ~~including~~equal ~~certain~~to ~~derivative~~7% ~~instruments embedded in other financial instruments or contracts and requires recognition~~ of ~~all derivatives on~~ the ~~balance~~face ~~sheet~~amount atof ~~fair value. Management used a Monte Carlo Simulation method to value~~ the ~~warrants~~Merger ~~with Anti-Dilution~~Debentures); ~~Protection~~and ~~with~~(ii) ~~the~~New ~~assistance~~Placement ofAgent ~~a third-party valuation expert to initially record the fair value of these derivatives~~Warrants”. ~~The~~ ~~third-party~~We ~~valuation~~have ~~expert~~ also ~~assisted~~agreed to ~~management~~reimburse incertain ~~valuing~~expenses ~~the derivatives as~~ of the ~~year~~Placement ~~ended June 30, 2019 and the quarter ended September 30, 2019 with the changes in the fair value reported as non-operating income or expense~~Agent.

18The New Debenture Warrants and the New Placement Agent Warrants are exercisable into shares of common stock at any time from and after the closing date (provided that the Company can only issue up to 19.99% of the outstanding shares as of the date the Merger was announced without shareholder approval) at an exercise price of $3.00 or $6.00 per common share dependent upon their participation in the Interim Financing (subject to adjustment). The New Debenture Warrants and the New Placement Agent Warrants will terminate five years after they become exercisable. The New Debenture Warrants and the New Placement Agent Warrants contain provisions providing for the adjustment of the purchase price and number of shares into which the securities are exercisable.

ToThe ~~execute~~New Debentures and the ~~model~~New Debenture Warrants have similar terms to the Debentures and ~~value~~Debenture Warrants, including as to maturity and security, except that the ~~derivatives~~New Debentures, among other differences, (i) provide for the payment to certain ~~assumptions~~Purchasers, 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 Debenture Warrants change the exercise price to $3.00 or $6.00 per share dependent upon their participation in the Interim Financing and makes certain other modifications to the Debenture Warrants. The New Debenture Warrants were ~~needed~~issued upon asthe ~~noted~~announcement ~~below:~~of the Merger.

Assumptions	Year Ended June 30, 2019			Quarter Ended September 30, 2019
Warrant Issue Date:		October 24, 2017			October 24, 2017
Valuation Date:		June 30, 2019			September 30, 2019
Warrant Expiration Date:		October 31, 2022			October 31, 2022
Total Number of Warrants Issued:		133,750			133,750
Warrant Exercise Price (USD):		32.00			32.00
Next Capital Raise Date:(1)		February 29, 2020			February 29, 2020
Threshold Exercise Price Post Capital Raise:		6.40			6.40
Spot Price (USD):		2.48			1.75
Expected Life (Years):		3.3			3.1
Volatility:		75.0	%		80.0	%
Volatility (Per-period Equivalent):		21.7	%		23.1	%
Risk Free Interest Rate:		1.73	%		1.56	%
Risk Free Rate (Per-period Equivalent):		0.14	%		0.13	%
Nominal Value (USD Mn):		4.3			4.3
No. of Shares on Conversion (Mn):		0.1			0.1
Contracted Conversion Ratio:		1:1			1:1
Fair Values (in thousands)
Fair Value without Anti-Dilution Protection:	$	15		$	9
Fair Value of Embedded Derivative:		72			44
Fair Value of the Warrants Issued:	$	87		$	53
Gain/(Loss) on Fair Value Adjustments to Derivative Liabilities	$	1,877		$	34

As mentioned above, pursuant to the New Purchase Agreements, the Company also issued Merger Warrants to certain accredited investors, half of which were Series A Merger Warrants and half of which were 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) ~~Next~~$500,000 ~~Capital~~upon the ~~Raise~~filing ~~Date~~of ~~was~~the ~~assumed~~proxy tostatement befor the Company’s stockholders approval of the Merger, and (iii) $500,000 within atwo ~~year~~business days of Company’s stockholders approval of the ~~debt~~Merger. ~~offering~~The ~~and~~terms ~~each~~of ~~valuation~~the ~~date~~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 ~~change in the derivative liability was mostly due to the Company’s stock price movements. Other changes in assumptions are listed above~~$1, ~~some change with the passage time~~000,000 ~~interest~~scheduled ~~rate~~payment ~~fluctuations~~on ~~and~~or ~~stock~~before ~~market~~October ~~volatility. In addition~~14, a2019 ~~change of control scenario~~ was ~~added~~subsequently toreceived ~~the~~less ~~valuation~~certain ~~calculation~~legal ~~due~~costs toand ~~the~~escrow ~~status~~fees in of the ~~proposed~~amount ~~merger transaction. The change~~ of ~~value~~ ~~due to the addition was immaterial~~$966,000.

~~For~~Interest ~~more~~ on the Merger Debentures is payable quarterly in arrears, ~~Debenture~~at ~~Warrants~~the ~~and~~option ~~Placement~~of ~~Agent~~the ~~Warrant~~holder, ~~see~~in ~~Note~~the 13form –of ~~Subsequent~~shares ~~Events~~of –common ~~The~~stock, ~~Proposed~~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 ~~with~~Debentures ~~AFE~~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 Debentures and Merger Warrants also include a fundamental transaction clause, under certain circumstances, including the merger or consolidation of the Company or disposition of all or substantially all of the Company’s assets, then upon subsequent conversion, the holder shall have the right to receive an equivalent number of shares of common stock of the successor and any additional consideration receivable as a result of such a transaction. The Merger Warrants are required to be recorded as liability awarded the fair market value as a derivative liability. Upon the modification of the debentures that are required to be treated as an extinguishment, management has elected the fair value for the debentures. Management, with the assistance of a third-party valuation expert, used a Monte Carlo Simulation method to value both the Merger Debenture and the Merger Warrants with Anti-Dilution Protection.

To execute the model and value the face value of the $9.0 million of Merger Debentures, certain assumptions were needed as noted below:

Assumptions	At Issuance October 15, 2019			Quarter Ended December 31, 2019
Debenture Issue Date:		10/15/2019			10/15/2019
Valuation Date:		10/15/2019			12/31/2019
Maturity Date:		10/24/2022			10/24/2022
Spot Price (USD):		5.68			5.70
Maturity Years		3.03			2.82
Volatility:		100.0	%		120.0	%
Dividend Rate:		0.00	%		0.00	%
Risk Free Interest Rate:		1.60	%		1.61	%
Stated Interest Rate:		11	%		11	%
Market Interest Rate:		19	%		22	%

Fair Values (in thousands)
Fair Value (convert at $3.00):	$	12,333		$	12,302
Fair Value (convert at $6:00):		6,382			6,405
Total Debenture Fair Value:	$	18,715		$	18,707

Gain on Fair Value Adjustments to Debenture		Not Applicable		$	8

To execute the model and value the Merger Series A Warrants, certain assumptions were needed as noted below:

Assumptions	At Issuance October 15, 2019			Quarter Ended December 31, 2019
Warrant Issue Date:		10/15/2019			10/15/2019
Valuation Date:		10/15/2019			12/31/2019
Maturity Date:		10/14/2024			10/14/2024
Warrants Shares Valued:		766,669			766,669
Spot Price (USD):		5.68			5.70
Expiration Years		5.00			4.79
Annualized Volatility:		90.00	%		103.00	%
Dividend Rate:		0.00	%		0.00	%
Risk Free Interest Rate:		1.59	%		1.82	%
Strike Price:	$	3.00		$	3.00

Fair Value:	$	3,416		$	3,476
Loss on Fair Value Adjustments to Debenture		Not Applicable		$	(60	)

To execute the model and value the Merger Series B Warrants, certain assumptions were needed as noted below:

Assumptions	At Issuance October 15, 2019			Quarter Ended December 31, 2019
Warrant Issue Date:		10/15/2019			10/15/2019
Valuation Date:		10/15/2019			12/31/2019
Maturity Date:		10/14/2024			10/14/2024
Warrants Shares Valued:		666,669			666,669
Spot Price (USD):		5.68			5.70
Expiration Years		5.00			4.79
Annualized Volatility:		90.00	%		103.00	%
Dividend Rate:		0.00	%		0.00	%
Risk Free Interest Rate:		1.59	%		1.82	%
Strike Price:	$	6.00		$	6.00

Fair Value:	$	2,697		$	2,699
Loss on Fair Value Adjustments to Debenture		Not Applicable		$	(2	)

The Debentures were accounted for as an extinguishment of debt and the New Debentures, Merger Debentures and the Merger Warrants were recorded at their fair value. Based on the fair value described above, the Company recorded approximately $18.7 million as the fair value of the Merger Debentures and the New Debentures and approximately $6.3 million derivative warrants liabilities for the Merger Warrants and Placement Agent Warrants issued in October 2019, and realized approximately $17.9 million of loss on extinguishment of the Debentures which included write-off of approximately $2.1 million of unamortized debt discount and issuance costs, and $15.8 million fair value adjustment to the Merger Debenture and Merger Warrants in the quarter ended December 31, 2019.

The Debenture Warrants were modified and the New Warrants were re-priced from $32.00 to $3.00 and $6.00 depending on participation in the Interim Financing. The assumptions used to value the New Warrants were as follows:

Valuation Date:	October 10, 2019⁽¹⁾	December 31, 2019⁽²⁾
Warrant Expiration Date:	October 15, 2024	October 15, 2024
Total Number of Warrants Issued:	133,750	22,667
Contracted Conversion Ratio:	1:1	1:1
Warrant Exercise Price (USD)	$3.00 / $6.00	$3.00 / $6.00
Spot Price (USD):	$1.80	$5.70
Expected Life (Years):	5.0	4.8
Volatility:	125.0%	128.9%
Risk Free Interest Rate:	1.59%	1.68%

⁽¹⁾

Debenture Warrants were modified upon the announcement of the Merger on October 10, 2019, modification included a re-pricing of the warrants to $3.00 and $6.00, fair value was calculated using a Black Scholes model.

⁽²⁾

Unexercised New Warrants were recorded at fair value on December 31, 2019 using a Black Scholes model.

The fair value of the modification of the re-pricing of the New Warrants was approximately $87,000.

For more on the Debentures, see Note 4 – The Proposed Merger with AFE.

Note 7 — Risks and Uncertainties

As discussed in Note 1 – Business and Liquidity – (b) Liquidity, Management’s Plan and Going Concern, and as a result of the Merger announced on October 10, 2019 as described further in Note 134 – ~~Subsequent~~The ~~Events~~Proposed Merger -with AFE, we are currently focused 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~~Nasdaq listing requirement deficiencies, (iii) completion of the ~~form~~ Form S-4, Form S-1 and Proxy related to the merger, (iv) completion of the ~~Batchfire~~ Share Exchange Agreements 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 New Purchase Agreements with each of the Purchasers of its Debentures, whereby each of the Purchasers agreed to exchange their Debentures and Debenture Warrants for New Debentures and New Debenture Warrants, and certain of the Purchasers agreed to provide $2,000,000 of Interim Financing. Pursuant to the New ~~Purchase~~ Purchase Agreements, the Company also issued Merger Debentures to certain accredited investors, along with 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 ~~paid~~agreed to pay 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 New Placement Agent Warrant. We ~~have~~ also agreed to reimburse certain expenses of the Placement Agent.

The $1,000,000 scheduled payment on or before October 14, 2019 was subsequently received less certain legal costs and escrow fees in the amount of $966,000.

WeAs ~~can~~compensation ~~make~~for noits ~~assurances~~services, ~~that~~we paid to the ~~proposed~~Placement ~~Merger~~Agent: ~~will~~(i) bea ~~completed~~cash onfee aof ~~timely~~$31,500 ~~basis~~(representing oran ataggregate ~~all.~~fee Inequal to ~~addition,~~7% weof ~~may~~the beface ~~forced~~amount ~~to seek~~of ~~relief~~the toAdditional ~~avoid~~Interim orDebentures); ~~end~~and ~~insolvency~~(ii) ~~through~~a ~~other~~warrant ~~proceedings~~to ~~including~~purchase ~~bankruptcy.~~22,500 ~~Based~~shares onof Common Stock (the “Interim ~~historical~~Placement ~~negative~~Agent ~~cash~~Warrant”). ~~flows and~~We ~~the~~have ~~continued~~also ~~limited~~agreed ~~cash~~to ~~inflows~~reimburse incertain expenses of the ~~period~~Placement ~~subsequent~~Agent. toThe Interim ~~year~~Placement ~~end~~Agent ~~there~~Warrant ishas ~~substantial~~been ~~doubt~~issued ~~about~~on substantially the ~~Company’s ability~~same toterms ~~continue~~ as athe ~~going~~Additional ~~concern~~Interim Warrants.

19On February 18, 2020, we entered into an amended loan agreement (the “Amended Loan Agreement”) with AFE, amending the Loan Agreement entered into with AFE in October 2019. The Loan Agreement contemplates that we would loan a portion of the $2,450,000 proceeds that we received under the New Purchase Agreements dated October 10, 2019 as well as under the Securities Purchase Agreement.

We can make no assurances that the proposed Merger will be completed on a timely basis or at all. We may also need to raise additional capital through equity and debt financing to complete the Merger or to otherwise strengthen our balance sheet for our corporate general and administrative expenses. We cannot provide any assurance that any financing will be available to us in the future on acceptable terms or at all. Any such financing could be dilutive to our existing stockholders. In addition, we may be forced to seek relief to avoid or end insolvency through other proceedings including bankruptcy. Based on the historical negative cash flows and the continued limited cash inflows in the period subsequent to year end there is substantial doubt about the Company’s ability to continue as a going concern.

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 ~~this~~its Quarterly Report on Form 10-Q for the quarter ended September 30, 2019.

SES ~~has~~ requested a hearing before the 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~~requested ~~the~~an ~~stay~~exception ~~be extended~~ through the closing of the previously announced Merger with AFE. ~~However,~~The ~~there~~Panel ~~can~~granted ~~be no assurance that~~ the ~~Panel will grant a further~~ extension tountil ~~enable~~May ~~the~~11, ~~Company~~2020 subject to ~~demonstrate~~certain ~~compliance~~milestones ~~that~~being itmet ~~has~~throughout ~~regained~~the ~~compliance with~~timeframe ~~all~~of ~~applicable~~the ~~requirements~~stay.

On February 20, 2020, the Company received an additional delinquency notification letter from the Staff due to the Company’s continued non-compliance with Nasdaq Listing Rule 5250(c)(1) as a result of the Company’s failure to timely file this Quarterly Report for the quarter ended December 31, 2019. The Company was required and delivered a plan with respect to this deficiency to the Panel on February 27, 2020.

Note 8 — 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.

2026

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.

Note 9 – 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~~October 1210, ~~2018~~2019, the Company issued 270,~~862~~000 shares of common stock to ~~ILL-Sino~~Market Development Consulting Group, Inc. (“~~ILL-Sino~~MDC”), the Company’s ~~business~~ ~~development~~investor relation advisor, pursuant to the ~~term~~terms of the management consulting agreement, ~~as amended on July 1, 2018,~~ between the Company and ~~ILL-Sino~~MDC. The shares are fully vested and non-forfeitable at the time of issuance. The fair value of the common stock was $241.64 80 per share on the date of issuance, and the Company recorded approximately $71126,000 of stock-based expense for the quarter ended ~~September~~ ~~30,~~December ~~2018~~2019 relating to the issuance of these shares.

On July 12, 2018, the Company 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 stock-based expense for the quarter ended September 30, 2018 relating to the issuance of these shares.

Stock-Based Compensation

As of ~~September~~December 3031, 2019, the Company has outstanding stock option 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 ~~September~~December 3031, 2019, there were 41,880 shares authorized for future issuance pursuant to the 2015 Incentive Plan. Under the 2015 Incentive Plan, the Company may grant incentive and non-qualified stock options, stock appreciation rights, restricted stock units and other stock-based awards to officers, directors, employees and non-employees. Stock option awards generally vest ratably over a one to four year period and expire ten years after the date of grant.

21There were no unvested restricted stock outstanding for the six months ended December 31, 2019 and the year ended June 30, 2019.

~~There~~Stock ~~were~~option noactivity ~~unvested~~during ~~restricted stock outstanding for~~ the ~~three~~six months ended ~~September~~December 3031, 2019 ~~and~~was ~~the~~as ~~year ended June 30, 2019.~~follows:

Stock option activity during the three months ended September 30, 2019 was as follows:

	Number of Underlying Stock Options

Outstanding at June 30, 2019		166,477
Granted		—
Exercised		—
Forfeited		(15,709	)
Outstanding at December 31, 2019		150,768
Exercisable at December 31, 2019		150,418

	Number of Underlying
	Stock Options
Outstanding at June 30, 2019		166,477
Granted		—
Exercised		—
Forfeited		(14,784	)
Outstanding at September 30, 2019		151,693
Exercisable at September 30, 2019		151,343

Warrant Activity

~~Stock~~In connection with the ~~warrants~~entry ~~activity~~into ~~during~~the New Purchase Agreements with each of the ~~three~~Purchasers ~~months~~of ~~ended~~the ~~September~~Debentures, 30whereby each of the Purchasers agreed to exchange their Debenture Warrants for New Debenture Warrants, ~~2019~~the ~~were~~New asDebenture ~~follows:~~Warrants was repriced from $32 to $3.00 or $6.00 per share, dependent upon their participation in the Interim Financing, with a term of five year starting from the day of exchange. The fair value of the incremental cost was approximately $87,000.

	Number of Underlying
	Warrants
Outstanding at June 30, 2019		212,638
Granted		—
Exercised		—
Forfeited		—
Outstanding at September 30, 2019		212,638
Exercisable at September 30, 2019		212,638

As discussed above, in connection with the entry into the New Purchase Agreements with each of the Purchasers of the Merger Debentures, the Company issued Merger Warrants for the purchase of 1,333,338 shares and New Purchase Agent Warrants for the purchase of 100,000 shares in October 2019.

~~The~~On ~~Company~~October ~~recognizes~~10, 2019, the ~~stock-based~~Company ~~expense~~issued ~~related~~warrants to Market Development Consulting Group, Inc. (“MDC”), the ~~2015~~Company’s investor ~~Incentive~~relations ~~Plan~~advisor, ~~awards~~to ~~and~~acquire ~~warrants~~300,000 ~~over~~shares of the ~~requisite~~Company’s ~~service~~common ~~period. The~~stock ~~following~~at ~~table~~an ~~presents~~exercise ~~stock~~price ~~based~~of ~~compensation~~$3.00 ~~expense~~per ~~attributable~~share according to ~~stock~~the ~~option~~term ~~awards~~of ~~issued~~the ~~under~~consulting ~~the~~agreement ~~2015~~dated ~~Incentive Plan~~October 10, 2019, between the Company and ~~attributable~~MDC. toThe warrants will terminate ten years after the grant date and ~~common~~the ~~stock~~fair ~~issued~~value of the warrants was estimated to ~~consulting~~be ~~firms~~approximately as$0.5 ~~compensation~~million ~~(in~~by ~~thousands):~~using Black-Scholes-Morton model at the date of grant.

	Three Months Ended
	September 30,
	2019		2018
Incentive Plans	$	1	$	143
Common stock		—		71
Total stock-based expense	$	1	$	214

Stock warrants activity during the six months ended December 31, 2019 were as follows:

	Number of Underlying Warrants

Outstanding at June 30, 2019		212,638
Granted		1,733,338
Exercised		(134,528	)
Forfeited		—
Outstanding at December 31, 2019		1,811,448
Exercisable at December 31, 2019		1,811,448

The fair value of the Warrants issued to MDC were estimated at the date of grant using Black-Scholes-Morton model with the following weighted-average assumptions:

Risk-free rate of return		1.67	%
Expected life of warrant		10 years
Expected dividend yield		0.00	%
Expected volatility of stock		90	%
Weighted-average grant date fair value	$	1.47

In October 2019, the Company also modified the exercise price of warrants issued in May 2015 to the Placement Agent to purchase 23,438 shares of common stock from $138.24 to $3.00 per share, which were immediately exercised by the warrant holder. The incremental fair value of the modified warrants was approximately $10,000, and the Company recognized $10,000 of stock compensation expense related to the modification of warrants during the three months ended December 31, 2019.

The incremental fair value for the modified warrants for the Placement Agent was based on the difference between the fair value of the modified warrants and the fair value of the original warrants immediately before they were modified. The following is the weighted average of the assumptions used in calculating the fair value of the warrants modified using the Black-Scholes-Morton method:

Risk-free rate of return		1.68	%
Expected life of warrant		0.57 years
Expected dividend yield		0.00	%
Expected volatility of stock		129	%
Weighted-average grant date fair value	$	0.41

The Company recognizes the stock-based expense related to the 2015 Incentive Plan awards over the requisite service period. The following table presents stock based compensation expense attributable to stock option awards issued under the 2015 Incentive Plan and attributable to warrants and common stock issued to consulting advisors as compensation (in thousands):

	Three Months Ended				Six Months Ended
	December 31,				December 31,
	2019		2018		2019		2018

2005 and 2015 Incentive Plans	$	1	$	75	$	1	$	218
Warrants and common stock		576		27		576		98
Total stock-based compensation expense	$	577	$	102	$	577	$	316

Note 10 – Net Loss Per Share

All share amounts and number of shares used in the calculation of earnings per share have been adjusted for the 1 for 8 reverse stock split which became effective on July 22, 2019.

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~~warrants ~~restricted stock~~ are the only potential dilutive share equivalents the Company had outstanding for the periods presented. For the ~~three~~six months ended ~~September 30~~December 31, 2019 and 2018, stock options, restricted shares and warrants to purchase common stock of approximately 2.0 million shares and approximately 0.4 million shares respectively, were 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~~, amounted to 0~~.~~4 million.~~

Note 11 — 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 $34,~~900~~000 per month, subject to additions based on additional services and usages each month. On February 6, 2020, the office lease was extended through June 30 under the same terms.

InThe ~~November~~Debentures ~~2018,~~and the ~~Company~~Merger ~~entered~~Debentures ~~into~~will amature ~~new~~in ~~office~~October ~~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~~2022.

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 12 – Segment Information

The Company’s reportable operating segments have been determined in accordance with 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.

2330

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

	Three Months Ended						Six Months Ended
	September 30,
	December 31,						December 31,
	2019			2018			2019			2018
Depreciation and amortization:
SES Foreign Operating	$	—		$	2		$	—		$	6
Technology licensing and related services		—			—			—			—
Corporate		13			9
Corporate & other		14			6			27			13
Total depreciation and amortization	$	1314		$	118		$	27		$	19
Operating loss:
SES Foreign Operating	$	(7025	)	$	(~~106~~243	)	$	(95	)	$	(349	)
Technology licensing and related services		(125	)		(~~495~~477	)		(250	)		(972	)
Corporate		(417	)		(1,087	)
Corporate & other		(1,773	)		(1,183	)		(2,191	)		(2,271	)
Total operating loss	$	(~~612~~1,923	)	$	(1,~~688~~903	)	$	(2,536	)	$	(3,592	)
Equity income of joint ventures:
Interest Expense:
SES Foreign Operating	$	—		$	75—		$	—		$	—
Technology licensing and related services		—			—			—			—
Corporate		—			—
Corporate & other		257			329			601			653
Total equity income (losses) of joint ventures	$	—		$	75
Total interest expense	$	257		$	329		$	601		$	653
Interest expense
SES Foreign Operating	$	—		$	—
Technology licensing and related services		—			—
Corporate		344			324
Total interest expense	$	344		$	324

	September 30, 2019		June 30, 2019
	December 31, 2019		June 30, 2019
Assets:
SES Foreign Operating	$	~~103~~83	$	215
Technology licensing and related services		~~1,015~~772		1,018
Corporate		~~945~~1,547		1,423
Total assets	$	2,~~063~~402	$	2,656

Note 13 — Subsequent Events

~~The~~Filing ~~Proposed~~Preliminary ~~Merger~~S-1 ~~with~~and ~~AFE~~S-4

On ~~October~~January 1029, ~~2019~~2020, ~~we,~~the ~~SES~~Company ~~Merger~~filed ~~Sub, Inc.,~~ a ~~Delaware~~registration ~~corporation~~statement ~~and~~on aForm ~~wholly~~S-~~owned~~1 ~~subsidiary~~with ~~of us (“Merger Subsidiary”), and AFE, entered into~~ the ~~Merger~~SEC ~~Agreement pursuant~~ to ~~which,~~register ~~among~~the ~~other~~shares ~~things,~~related ~~AFE will, subject~~ to the ~~satisfaction or waiver~~conversion of ~~the~~debt ~~conditions~~into ~~set~~shares, ~~forth~~potential ininterest ~~the~~payable ~~Merger~~to ~~Agreement,~~be ~~merge~~paid ~~with~~by ~~and~~the ~~into~~issuance ~~Merger~~of ~~Subsidiary (the “Merger”)~~shares, the ~~separate corporate existence of~~ Merger ~~Subsidiary~~Debentures ~~shall~~principal ~~cease~~ and ~~AFE~~interest payable ~~shall~~to be ~~the~~paid ~~successor~~by ~~or surviving corporation of~~ the ~~Merger~~issuance ~~and a wholly owned subsidiary~~ of ~~us.~~shares, ~~The~~the Merger isWarrants ~~intended~~ to ~~qualify~~be ~~for~~issued ~~federal~~and ~~income~~shares ~~tax~~to ~~purposes~~be asissued ain ~~tax-free~~relation ~~reorganization under~~to the ~~provisions of Section 368(a) of the Internal Revenue Code of 1986, as amended. Upon the consummation of the Merger,~~Batchfire itShare isExchange ~~contemplated that we will also change our name~~Agreement.

~~Upon~~Also ~~consummation~~on ofJanuary ~~the~~29, ~~Merger~~2020, ~~and subject to~~ the ~~terms~~Company ~~and~~filed ~~conditions~~a ofregistration ~~the~~statement ~~Merger~~on ~~Agreement,~~Form ~~holders~~S-4 ofwith ~~AFE~~the ~~ordinary~~SEC ~~shares~~related ~~will receive,~~to inits ~~exchange~~merger ~~for~~with ~~such~~AFE ~~ordinary shares, 3,875,000 shares of our common stock. All outstanding stock options~~ and ~~restricted~~its ~~stock~~upcoming ~~will~~shareholder ~~remain~~vote ~~outstanding post-Merger~~ on the ~~same~~merger ~~terms~~ and ~~conditions~~the asregistering ~~currently~~of ~~applicable~~the toshares ~~such~~related ~~awards, provided that outstanding awards for departing directors shall be amended~~ to ~~extend exercisability for~~ the ~~term~~proposed ~~of the award~~Merger.

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.31

~~The~~Additional ~~Merger~~Interim 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.Financing

24On February 19, 2020, we entered into the Securities Purchase Agreement with certain holders of the Company’s 11% Senior Secured Convertible Debentures, pursuant to which, among other things, the holders purchased, in accordance with a private placement offering of the Company, $450,000 in principal amount of Additional Interim Debentures and Additional Interim Warrants exercisable for up to 300,004 shares of common stock. The Additional Interim Debentures and Additional Interim Warrants are issued on substantially the same terms as the debentures and warrants issued in October 2019, provided that the debentures include an adjustment to the conversion price in the event of certain dilutive equity issuances by the Company.

~~The~~As ~~Merger~~compensation ~~Agreement~~for ~~contains~~its ~~certain~~services, ~~termination~~we ~~rights~~paid ~~for~~to ~~both~~the Placement Agent: (i) a cash fee of $31,500 (representing an aggregate fee equal to 7% of the ~~Company~~face amount of the Additional Interim Debentures); and ~~AFE,~~(ii) ~~including,~~an ~~among~~Interim ~~other~~Placement ~~things~~Agent Warrant to purchase 22,500 shares ifof Common Stock. We have also agreed to reimburse certain expenses of the ~~Merger~~Placement Agent. The Interim Placement Agent isWarrant ~~not~~has ~~consummated~~been issued on orsubstantially ~~before~~the ~~April~~same ~~15,~~terms ~~2020~~as the Additional Interim Warrants.

InAdditional ~~connection~~AFE 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 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.Loan

InOn ~~connection~~February ~~with~~18, ~~the~~2020, ~~entry~~we entered into ~~the~~an ~~Merger~~Amended Loan Agreement with AFE, amending the ~~Company~~Loan Agreement entered into ~~New Purchase Agreements~~ with ~~each~~AFE ofin ~~the Purchasers~~October of2019. ~~the~~The ~~Debentures,~~Amended ~~whereby~~Loan ~~each~~Agreement ofcontemplates ~~the~~that ~~Purchasers~~we ~~agreed~~would toloan ~~exchange~~a ~~their~~portion ~~Debentures~~of ~~and~~the ~~Debenture~~$2,450,000 ~~Warrants~~proceeds ~~for~~that ~~New~~we ~~Debentures and~~received under the New ~~Debenture~~Purchase ~~Warrants,~~Agreements ~~and~~dated ~~certain~~October of10, ~~the~~2019 ~~Purchasers~~as ~~agreed~~well toas ~~provide~~under ~~$2,000,000~~the ofSecurities ~~Interim~~Purchase ~~Financing~~Agreement.

AsWe ~~compensation~~had ~~for~~previously ~~its~~loaned ~~services~~$350,000 to AFE at the ~~Company~~time ~~paid~~of toentering into the ~~Placement~~Loan ~~Agent:~~Agreement, ~~(i)~~and aon ~~cash~~February ~~fee~~19, 2020, we have loaned an additional $100,000 out of the proceeds of the Additional Interim Debentures. An additional $~~140~~115,000 ~~(representing~~will anbe ~~aggregate~~loaned to AFE ~~fee~~upon ~~equal~~the toreceipt 7%of the next tranche of funds under the ~~face~~New ~~amount~~Purchase Agreements. These loaned amounts are due in full within five days following the closing of the ~~Merger~~transactions ~~Debentures;~~contemplated ~~and~~by ~~(ii)~~the ~~New~~Merger ~~Placement~~Agreement ~~Agent~~dated ~~Warrants”)~~October 10, 2019. WeIf ~~have~~the ~~also~~Merger ~~agreed~~does tonot ~~reimburse~~close, ~~certain~~the ~~expenses~~loan will mature three months following the special meeting of the ~~Placement~~Company’s ~~Agent~~stockholders called to approve the Merger. The loan accrues interest at 11% per annum and is also due in full upon repayment, subject to an increased default interest rate in certain limited circumstances.

The New Debenture 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 Debenture Warrants and the New Placement Agent Warrants will terminate five years after they become exercisable. The New Debenture 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.32

The New Debentures and the New Debenture 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 Purchasers, 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 Debenture Warrants change the exercise price to $6.00 per share and makes certain other modifications to the Debenture Warrants. The New Debentures and New Debenture Warrants will be issued at the closing of the transactions contemplated by the Merger Agreement.

As mentioned above, pursuant to the New Purchase Agreements, the Company also issued Merger Debentures to certain accredited investors, along Series A Merger Warrants and half of which were 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.

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 Warrants have the same terms as the Merger Warrants 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 Debenture Warrants, the New Purchase Agent 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. 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 October 17, 2019, we received a notification letter from the Staff indicating that, as a result of our delay in filing the Annual Report on Form 10-K for the year ending June 30, 2019, 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 the Annual Report with the SEC.

On November 13, 2019, we received a notification from the Staff 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. 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.

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

You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and the related notes and other financial information included elsewhere in this quarterly report. Some of the information contained in this discussion and analysis or set forth elsewhere in this quarterly report, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. You should review the “Risk Factors” section of our Annual Report on Form 10-K for the fiscal year ended June 30, 2019 for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

Forward-Looking Statements

This Quarterly Report on Form 10-Q includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act. All statements other than statements of historical fact are forward-looking statements and are subject to certain risks, trends and uncertainties that could cause actual results to differ materially from those projected. Among those risks, trends and uncertainties are the ability that our proposed merger transaction with Australian Future Energy Pty Ltd may be unable to obtain stockholder approval or satisfy the other conditions to closing; the ability to to achieve the necessary consents to acquire the additional share of Batchfire Resources Pty Ltd; the ability of Batchfire , Australian Future Energy Pty Ltd , and Cape River Resources Pty Ltd management to successfully grow and develop their Australian assets and operations, including Callide, Pentland and the Gladstone Energy and Ammonia Project; the ability of Batchfire to produce ~~earnings~~ earnings and pay dividends; the ability of SES EnCoal Energy sp. z o. o. management to successfully grow and develop projects, assets and operations in Poland; our ability to raise additional capital; our indebtedness and the amount of cash required to service our indebtedness; our ability to find a partner for our technology business; our ability to develop and expand business of the TSEC Joint Venture in the joint venture territory; our ability to develop our business verticals, including DRI steel, through our marketing arrangement with Midrex Technologies; our ability to successfully develop our licensing business; our ability to continue as a going concern; the ability of our project with Yima to produce earnings and pay dividends; the economic conditions of countries where we are operating; events or circumstances which result in an impairment of our assets; our ability to reduce operating costs; our ability to make distributions and repatriate earnings from our Chinese operations; our ability to maintain our listing on the NASDAQ Stock Market; our ability to successfully commercialize our technology at a larger scale and higher pressures; commodity prices, including in particular natural gas, crude oil, methanol and power; the availability and terms of financing; our customers’ and/or our ability to obtain the necessary approvals and permits for future projects; our ability to estimate the sufficiency of existing capital resources; the sufficiency of internal controls and procedures; and our results of operations in countries outside of the U.S., where we are continuing to pursue and develop projects. Although we believe that in making such forward-looking statements our expectations are based upon reasonable assumptions, such statements may be influenced by factors that could cause actual outcomes and results to be materially different from those projected by us. We cannot assure you that the assumptions upon which these statements are based will prove to be correct.

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

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

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

Business Overview

Synthesis Energy Systems, Inc. (referred to herein as “we”, “us”, and “our”), together with its wholly-owned and majority-owned controlled subsidiaries, is a global clean energy company that owns proprietary technology, SES Gasification Technology (“SGT”), for the low-cost and environmentally responsible production of synthesis gas (referred to as “syngas”). Syngas is used to produce a wide variety of high-value clean energy and chemical products, such as synthetic natural gas, power, methanol, and fertilizer. Our current focus has been on commercializing our technology both in China and globally through the regional business platforms we have created with partners in Australia, via Australian Future Energy Pty Ltd (“AFE”), in Poland, via SES EnCoal Energy sp. z o.o (“SEE”) and in China, via Tianwo-SES Clean Energy Technologies Limited (“TSEC Joint Venture”).

SGT produces syngas that can provide a competitive alternative to other forms of energy such as natural gas, LNG, crude oil and the conventional utilization of coal in boilers for power generation. Our syngas can provide a lower cost energy source in markets where coal, low quality coal, coal wastes, biomass and municipal wastes are available and where natural gas, LNG, and crude oil are expensive or constrained due to lack of infrastructure such as distribution pipelines or power transmission lines, such as Australia, Asia, Eastern Europe and parts of South America. In addition to the economic advantages, we believe our syngas also provides an environmentally responsible option for the manufacturing of chemical, hydrogen, industrial fuel gas and a cleaner option for the generation of power from coal. We believe that our technology is well positioned to be an important solution that addresses the market needs of a changing global energy landscape.

Over the past twelve years, we have successfully commercialized SGT, primarily through our efforts in China where, between 2006 and 2016, we invested in and built two commercial scale gasification projects together with Chinese partners and sub-licensed the SGT into three additional projects in China. In the aggregate, we have completed five commercial scale industrial projects in China over a ten-year period, in which the projects utilize twelve SES proprietary SGT systems. These projects represent a total project level investment of approximately $450 million. We believe the completion of these projects in China propelled SGT into a globally recognized gasification technology.

For a discussion on the proposed Merger with AFE and the related transactions, see “Liquidity and Capital Resources.”

We have determined that we did not have adequate cash to continue the commercialization of SGT due primarily to our inability to realize financial results from our two investments into projects in China and three technology licensed projects in China as well as our inability to quickly develop alternative technology income sources in Australia, Poland and other global regions. As a result, we suspended our global SGT commercialization efforts, we undertook operating expense reductions, we ceased providing funds to project developments, we continue to explore the divesting of assets such as our Yima and TSEC Joint Ventures and we formed a special committee of the board of directors to evaluate financing and restructuring alternatives. On October 10, 2019, we announced the proposed merger with AFE and the acquisition of additional ownership in BFR.34

We operate our business from our headquarters located in Houston, Texas and our offices in Shanghai, China.

Outlook

As a result of our efforts evaluating financing and strategic options, on October 10, 2019, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with AFE as previously discussed and also described in Note 134 – ~~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~~Nasdaq listing requirement deficiencies, (iii) completion of the Form S-4, Form S-1 and Proxy related to the merger, (iv) completion of the Batchfire ~~Share~~share ~~Exchange~~ exchange pre-emptive rights process and (v) all other tasks required to complete the merger transaction.

We can make no assurances that the proposed ~~Merger~~merger transaction will be completed on a timely basis or at all. We may also need to raise additional capital through equity and debt financing to complete the ~~Merger~~merger transaction or to otherwise strengthen our balance sheet for our corporate general and administrative expenses. We cannot provide any assurance that any financing will be available to us in the future on acceptable terms or at all. Any such financing could be dilutive to our existing stockholders. IfIn ~~we cannot raise required funds on acceptable terms~~addition, we may ~~further~~be ~~reduce~~forced ~~our~~to ~~expenses~~seek ~~and~~relief weto ~~may~~avoid ~~not~~or beend ~~able~~insolvency ~~to,~~through ~~among~~ other ~~things,~~proceedings ~~(i)~~including ~~maintain~~bankruptcy. ~~our~~Based ~~general~~on ~~and~~the ~~administrative~~historical ~~expenses~~negative atcash ~~current~~flows ~~levels including retention of key personnel~~ and ~~consultants;~~the ~~(ii)~~continued ~~successfully~~limited ~~implement~~cash ~~our~~inflows ~~business~~in ~~strategy; (iii)~~the ~~make~~period ~~additional~~subsequent ~~capital contributions~~ to ~~our~~year ~~joint~~end ~~ventures;~~there ~~(iv)~~is ~~fund~~substantial ~~certain~~doubt ~~obligations as they become due; (v) respond~~about tothe ~~competitive~~Company’s ~~pressures~~ability ~~or unanticipated capital requirements; or (vi) repay our indebtedness. In addition, we may elect~~ to ~~sell certain~~continue ~~investments~~ as a ~~source~~going ~~of cash to develop additional projects or for general corporate purposes~~concern.

Results of Operations

Three Months Ended ~~September~~December 3031, 2019 (“Current Quarter”) Compared to the Three Months Ended ~~September~~December 3031, 2018 (“Comparable Quarter”)

Revenue. Total ~~revenue~~revenues were zero for both the Current Quarter and the Comparable Quarter.

Costs of sales expenses. There were no costs of sales expenses for both the Current Quarter and the Comparable Quarter.

General and administrative expenses. General and administrative expenses were $01.63 million in the Current Quarter compared with $1.5 8 million for the Comparable Quarter. The decrease of $0.95 million was due primarily to the reduction of employee related ~~compensation~~ compensation costs, professional fees, and other general and administrative expenses.

Stock-based expense. Stock-based expense was approximately $~~1,000~~0.6 million for the Current Quarter compared with $0.21 million for the Comparable Quarter~~. There were no new options and warrants issued for both the Current Quarter and the Comparable Quarter~~, ~~the~~which ~~decrease was~~ primarily ~~due~~related to ~~fewer~~the stock ~~options~~warrants ~~and~~issued ~~warrants~~to ~~vested~~our ~~and~~investor ~~amortized~~relations advisor during the Current Quarter ~~as compared with~~ and the Comparable Quarter.

Depreciation and amortization. Depreciation and amortization expense was $1314,000 for the Current Quarter compared with $118,000 for the Comparable Quarter, which relates to the amortization of our global patents.

Equity in income of joint ventures. The equity ~~income~~losses of joint ventures was ~~zero~~approximately $0.3 million during the Current Quarter as compared to $~~75,000~~ 0.1 million for the Comparable Quarter., ~~The~~which ~~$75,000~~primarily ~~equity~~relates ~~income~~to ~~for~~our share of losses in AFE and the ~~Comparable~~recognition of ~~Quarter~~past ~~primarily~~losses ~~relates~~due to ~~our~~additional ~~share~~support in the form of ~~income~~the inloan to AFE.

Gain on fair value adjustments of derivative liabilities. The net gain on fair value adjustments of derivative liabilities was approximately $34,000 for the Current Quarter compared with $0.8 million for the Comparable Quarter, which resulted from the lower fair market value for our Debentures Warrants and the Placement Agent Warrants as of September 30, 2019 versus June 30, 2019. The change in the derivative liability was primarily due to movements in our stock price. Other changes in the assumptions related to the passage of time, interest rate fluctuations and stock market volatility.35

29Loss on fair value adjustments of derivative liabilities. The loss on fair value adjustments of derivative liabilities was approximately $0.9 million for the Current Quarter compared with net gain of $0.7 million for the Comparable Quarter, which resulted from the change of fair market value for the Merger Debenture and Merger Warrants accounted for as liabilities, the change in the fair value was primarily due to movements in our stock price with minor movements related to the passage of time, interest rate fluctuations and stock market volatility.

~~Foreign~~Loss ~~currency~~on ~~gain~~Extinguishment ~~losses~~of Debentures. ~~Foreign~~The ~~currency~~loss ~~losses~~on ~~were~~extinguishment ~~approximately~~of the debentures was $~~11,000~~17.9 million for the Current Quarter compared with azero ~~gain of $122,000~~ for the Comparable Quarter, which ~~were~~was ~~the~~related ~~result~~to write-off of aapproximately 4%$2.1 ~~depreciation~~million of ~~the~~unamortized ~~Chinese~~debt ~~Renminbi~~discount and ~~yuan~~issuance ~~(“RMB”)~~costs, toand ~~the U~~$15.S.8 ~~dollar~~million ~~for~~fair ~~both~~value adjustment to the ~~Current~~Merger ~~Quarter~~Debenture and Merger Warrants for the ~~Comparable~~quarter ~~Quarter~~ended December 31, 2019.

Interest expenses: Interest expenses were $0.3 million for both the Current Quarter and the Comparable Quarter, which was ~~primarily due~~related to the interest payments ~~related~~for to the ~~Debenture~~Debentures and the amortization of debenture discount and issuance costs ~~for the Debentures issued on October 24~~, ~~2017.~~

Foreign currency gain losses. Foreign currency losses were approximately $1,000 for the Current Quarter compared with a gain of $31,000 for the Comparable Quarter, which resulted from the lower value and volume of transactions in China.

Six Months Ended December 31, 2019 (“Current Period”) Compared to the Six Months Ended December 31, 2018 (“Comparable Period”)

Revenue. The total revenues were zero for both the Current Period and the Comparable Period.

Costs of sales expenses. There were no costs of sales expenses for both the Current Period and the Comparable Period.

General and administrative expenses. General and administrative expenses were $1.9 million in the Current Period compared with $3.3 million for the Comparable Period. The $1.4 million decrease was primarily due to the reduction of employee related compensation costs, professional fees, and other general and administrative expenses.

Stock-based expense. Stock-based expense was $0.5 million for the Current Period as compared to $0.3 million for the Comparable Period. The increase of $0.2 million was due primarily to common shares issued to our investor relations advisor in October 2019.

Depreciation and amortization. Depreciation and amortization expense was $27,000 for the Current Period compared with $19,000 for the Comparable Period, which primarily related to the amortization of our global patents.

Equity in losses of joint ventures. The equity losses of joint ventures was $322,000 during the Current Period as compared to $24,000 for the Comparable Period, which primarily relates to our share of losses in AFE and the recognition of past losses due to additional support in the form of the loan to AFE.

Loss on fair value adjustments of derivative liabilities. The loss on fair value adjustments of derivative liabilities was approximately $0.9 million for the Current Period compared with net gain of $1.5 million for the Comparable Period, which resulted from the change of fair market value for the Merger Debenture and Merger Warrants accounted for as liabilities, the change in the fair value was primarily due to movements in our stock price with minor movements related to the passage of time, interest rate fluctuations and stock market volatility.

Loss on Extinguishment of Debentures. The loss on extinguishment of debentures was $17.9 million for the Current Period compared with zero for the Comparable Period which was related to write-off of approximately $2.1 million of unamortized debt discount and issuance costs, and $15.8 million fair value adjustment to the Merger Debenture and Merger Warrants for the quarter ended December 31, 2019.

Interest expenses. Interest expense was $0.6 million for the Current Period compared with $0.7 million for the Comparable Period, which was primarily due to the interest payments to the purchasers of debentures and the amortization of debt discount and issuance cost for the Debentures issued in October 2017.

Foreign currency gain / loss. Foreign currency loss was $11,000 for the Current Period as compared to $91,000 for the Comparable Period which resulted from the lower value and volume of transaction in China.

Liquidity and Capital Resources

As of ~~September~~December 3031, 2019, we had $0.4 million in cash and cash equivalents and negative $01.84 million in working capital. As of ~~January 10~~March 2, 2020, we had $~~0.4~~269,000 ~~million~~ in cash and cash equivalents. Of the $~~0.4~~269,000 ~~million~~ in cash and cash equivalents, $~~347~~235,000 resides in the United States or easily accessed foreign countries and approximately $4034,000 resides in China.

In connection with the entry into the Merger Agreement, the Company entered into a securities purchase and exchange agreements (each, a “New Purchase Agreements”) with each of the existing holders of its 11% senior secured debentures issued in October 2017 (the “Debentures”), whereby each of the holders agreed to exchange their Debentures and accompanying warrants (the “Debenture Warrants”) for new debentures (the “New Debentures”) and warrants (the “New Debenture Warrants”), and certain of the holders agreed to provide $2,000,000 of additional debt financing (the “Interim Financing”). ~~Pursuant~~ 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 $41,~~000~~333,~~000~~338 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~~stockholders approval of the ~~Merger~~proposed merger, and (iii) $500,000 within two business days of Company ~~stockholder~~stockholders approval of the ~~Merger~~ proposed merger transaction. 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~~proposed merger transaction.

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~~Warrants”). We have also agreed to reimburse certain expenses of the Placement Agent.

The $1,000,000 scheduled payment on or before October 14, 2019 was subsequently received less certain legal costs and escrow fees in the amount of $966,000.

~~The~~As ~~Company~~part ~~has~~of the Interim Financing, we had 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~~proposed merger transaction. ~~The~~On ~~loan~~October is24, ~~subject~~2019, towe ~~interest~~entered atinto the loan ~~rate~~agreement ofwhich ~~11%~~is ~~per~~due ~~annum payable~~ in full on the ~~repayment date~~later ~~in conjunction with the repayment~~ of ~~the~~March ~~principal~~31, ~~amount.~~2020 ~~The~~or ~~repayment~~within ~~date~~five isdays following the ~~earlier~~closing of ~~five~~the ~~days~~proposed ~~after completion~~merger oftransaction. If the ~~Merger~~merger ~~transaction~~does ornot close, the ~~later~~loan ofwill mature on March 31, 2020 or three months following the ~~vote~~special ofstockholder meeting ~~the~~called ~~shareholders~~to onapprove the ~~Merger~~merger. 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.

On ~~October~~February 2419, ~~2019~~2020, we entered into athe ~~loan~~Securities ~~agreement~~Purchase Agreement with ~~AFE~~certain ~~whereby~~holders ~~we loaned a portion~~ of the ~~$2.0~~Company’s ~~million~~11% ~~proceeds~~Senior ~~received under~~Secured ~~the~~Convertible ~~New~~Debentures, ~~Purchase~~pursuant ~~Agreements.~~to ~~Under~~which, ~~the~~among ~~loan~~other ~~agreement~~things, wethe ~~loaned~~holders ~~$350~~purchased,~~000~~ toin ~~AFE,~~accordance ~~which~~with isa ~~due~~private inplacement ~~full~~offering of on the ~~later~~Company, ~~of March 31~~$450, ~~2020~~000 orin ~~within~~principal ~~five~~amount ~~days~~of ~~following~~Additional ~~the~~Interim ~~closing~~Debentures ofand ~~the~~Additional ~~Merger.~~Interim IfWarrants ~~the~~exercisable ~~Merger~~for up ~~does~~to ~~not close~~300,004 ~~the~~shares ~~loan~~of ~~will~~common ~~mature~~stock. onThe ~~March~~Additional ~~31, 2020~~Interim orDebentures ~~three~~and ~~months~~Additional ~~following~~Interim ~~the~~Warrants ~~special~~are ~~stockholder~~issued ~~meeting~~on ~~called~~substantially the tosame ~~approve~~terms as the ~~merger~~debentures ~~transactions.~~and ~~The~~warrants ~~loan~~issued ~~accrues~~in ~~interest at~~October ~~11%~~2019, ~~per~~provided ~~annum~~that ~~and~~the isdebentures ~~also~~include ~~due~~an inadjustment ~~full~~to ~~upon~~the conversion ~~repayment,~~price ~~subject~~in tothe anevent ~~increased~~of ~~default~~certain ~~interest~~dilutive inequity ~~certain~~issuances ~~limited~~by ~~circumstances~~the Company.

We can make no assurances that the proposed Merger will be completed on a timely basis or at all. We may also need to raise additional capital through equity and debt financing to complete the Merger or to otherwise strengthen our balance for our corporate general and administrative expenses. We cannot provide any assurance that any financing will be available to us in the future on acceptable terms or at all. Any such financing could be dilutive to our existing stockholders. In addition, we may be forced to seek relief to avoid or end insolvency through other proceedings including bankruptcy. Based on the historical negative cash flows and the continued limited cash inflows in the period subsequent to year end there is substantial doubt about the Company’s ability to continue as a going concern.37

30As compensation for its services, we paid to the Placement Agent: (i) a cash fee of $31,500 (representing an aggregate fee equal to 7% of the face amount of the Additional Interim Debentures); and (ii) an Interim Placement Agent Warrant to purchase 22,500 shares of Common Stock. We have also agreed to reimburse certain expenses of the Placement Agent. The Interim Placement Agent Warrant has been issued on substantially the same terms as the Additional Interim Warrants.

On February 18, 2020, we entered into an Amended Loan Agreement with AFE, amending the Loan Agreement entered into with AFE in October 2019. The Amended Loan Agreement contemplates that we would loan a portion of the $2,450,000 proceeds that we received under the New Purchase Agreements dated October 10, 2019 as well as under the Securities Purchase Agreement.

We can make no assurances that the proposed merger with AFE will be completed on a timely basis or at all. We may also need to raise additional capital through equity and debt financing to complete the merger transaction or to otherwise strengthen our balance for our corporate general and administrative expenses. We cannot provide any assurance that any financing will be available to us in the future on acceptable terms or at all. Any such financing could be dilutive to our existing stockholders. In addition, we may be forced to seek relief to avoid or end insolvency through other proceedings including bankruptcy. Based on the historical negative cash flows and the continued limited cash inflows in the period subsequent to year end there is substantial doubt about the Company’s ability to continue as a going concern.

The following summarizes the sources and uses of cash during the Current Quarter:

● Operating Activities: During the Current ~~Quarter~~Period, we used $01.54 million in cash for operating activities compared to $13.6 million during the Comparable ~~Quarter~~Period. The decrease was primarily due to our reduced employee related compensation costs; other general and administrative expenses; and zero payment of interest expense on the Debentures as compared with the Comparable ~~Quarter~~Period. ● Investing Activities: ~~There~~During ~~was~~the noCurrent ~~investing~~Period, ~~activities~~we ~~for~~loaned $350,000 of the ~~Current~~proceeds ~~Quarter~~from the Merger Debentures to AFE joint venture to assist AFE in financing its business through the closing of the Merger. During the Comparable ~~Quarter~~Period, we used approximately $11,000 to invest in our SEE joint venture . ● Financing Activities: ~~There~~During ~~were~~the noCurrent ~~financing~~Period, ~~activities~~we received gross proceeds of $1 million related to the issuance of the Merger Debentures, and approximately proceeds of $0.3 million for ~~both~~exercise of stock warrants related to the ~~Current~~New ~~Quarter~~Debenture Warrants and the Placement Agent Warrants. There were no financing activities for the Comparable ~~Quarter~~Period.

Current Operations and Projects

The Proposed Merger with AFE

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); and (ii) New Placement Agent Warrants”. We have also agreed to reimburse certain expenses of the Placement Agent.

As mentioned above, pursuant to the New Purchase Agreements, the Company also issued Merger Debentures to certain accredited investors, half of which were Series A Merger Warrants and half of which were 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 stockholders approval of the Merger, and (iii) $500,000 within two business days of Company stockholders 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.

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 Merger Debentures, the New Placement Agent Warrants and the Merger Warrants.

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.

Australian Future Energy Pty Ltd

In February 2014, we established AFE together with an Australian company, Ambre . AFE is an independently managed Australian business platform established for the purpose of building a large-scale, vertically integrated business in Australia based on developing, building and owning equity interests in financially attractive and environmentally responsible projects that produce low-cost syngas as a competitive alternative to expensive local natural gas and LNG.

On May 10, 2017, we entered into a project technology license agreement with AFE in connection with a project being developed by AFE in Queensland Australia. AFE intends to form a subsidiary project company and assign the project technology license agreement to that company which will assume all of the obligations of AFE thereunder. Pursuant to the project technology license agreement, we granted a non-exclusive license to use our technology at the project to manufacture syngas and to use the technology in the design of the facility. In consideration, the project technology license agreement calls for a license fee to be finalized based on the designed plant capacity and a separate fee of $2.0 million for the delivery of a process design package. License fees shall be paid as project milestones are reached throughout the planning, construction and first five years of plant operations. The success and timing of the project being developed by AFE will affect if and/or when we will be able to receive all of the payments related to this technology license agreement. However, there can be no assurance that AFE will be successful in developing this or any other project.

In September 2018, AFE’s Gladstone Project was formally announced in Queensland Parliament by Minister for State Development, Manufacturing, Innovation and Planning, Mr. Cameron Dick and was declared by the Queensland Co-Ordinator General as a Co-Ordinated Project. A coordinated project approach also means that all the potential impacts and benefits of the project are considered in an integrated and comprehensive manner and the Coordinator-General’s decision to declare this project a Coordinated Project is expected to help streamline approvals and fast-track delivery of the project.

The project will be located in the State Development Area in Gladstone, Queensland and is planned to process 1.5 million mtpa of low-quality coal using SGT, to produce up to 330,000 mtpa of ammonia product, and up to 8 petajoules of pipeline quality gas for the east coast domestic gas market. In addition, the proposed project will generate approximately 90 MW of electrical power, with approximately 25 MW of this being available for export to the local domestic grid. The ammonia and gas produced is to be used by major industrial users, including those focusing on agriculture, the mining industry and advanced manufacturing. The project is estimated by AFE to commence construction by early-2021, with the first ammonia production proposed in early-2023.

AFE issued one million shares to us in connection with the execution of the Option Agreement. AFE would also pay (i) an additional $2.0 million in three equal installments, with the first installment paid at closing and the remainder over the subsequent twelve months, and (ii) $3.8 million on the earlier of the closing of a construction financing by AFE or five years from closing. The closing of the transaction was subject to the negotiation of definitive agreements and other conditions specified in the Option Agreement. In addition to the payment schedule above, AFE issued an additional one million shares with the execution of the Option Agreement and would also pay an additional $100,000 with the first installment paid at closing as full and final settlement of outstanding invoices owing AFE to us at the date of this Option Agreement. As a result of the termination of the Option Agreement, we retained the two million shares AFE issued in connection with the Option Agreement. We accounted for the first million shares as an additional investment in AFE for $70,000 and a reduction of the receivable amounts due from AFE with a fair value of $100,000 with a write-off for the remaining $30,000. The second million shares were accounted for as an additional investment in AFE and a deferred liability in the amount of $70,000 as a down payment on the purchase of our subsidiary. In the quarter ending September 30, 2019, we recognized the $70,000 down payment as an other gain due to the termination of the Option Agreement.

For our ownership interest in AFE, we have been contributing cash and engineering support for AFE’s business development while Ambre contributed cash and services. Additional ownership in AFE has been granted to the AFE management team and staff individuals providing services to AFE. In April 2019, we were issued two million shares in connection with the Option Agreement and its subsequent termination.41

On October 24, 2019 we entered into a loan agreement with AFE in connection with the proposed Merger where we loaned $350,000 to AFE as mentioned above in “Liquidity and Capital Resources.”

For our ownership interest in AFE, we have been contributing cash, engineering support and most recently a loan mentioned above for AFE’s business development while Ambre contributed cash and services. Additional ownership in AFE has been granted to the AFE management team and staff individuals providing services to AFE. In April 2019, we were issued two million shares in connection with the Option Agreement and its subsequent termination.

We account for our investment in AFE under the equity method. Our ownership interest of approximately 35% makes us the second largest shareholder. We also maintain a seat on the board of directors, which allows us to have significant influence on the operations and financial decisions, but not control, of AFE. Our carrying value of our AFE investment as of both September 30, 2019 and June 30, 2019 was zero.

~~See~~As ~~“Liquidity~~we account for AFE under the equity method and ~~Capital~~currently ~~Resources”~~AFE’s ~~for~~losses aexceed ~~discussion~~our investment carrying value, therefore we have not been recording our equity loss pickup related to AFE’s losses. Due to the loan mentioned above, we are required, under ASC 323-10 to record our share of losses related to the ~~Merger~~additional ~~with~~support to AFE ~~under~~which ~~Subsequent~~includes ~~Event~~the loan. Additional equity loss of $350,000 was recorded in the quarter ended December 31, 2019 due to the execution of the loan agreement 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~~accounted for our investment in CRR under the equity method. Our ownership interest of approximately 38% makes us the second largest shareholder. We may ~~appoint~~appointed one board director for each 15% ownership interest we hold in CRR which allows us to have significant influence on the operations and financial decisions, but not control, of CRR. Our carrying value of our CRR investment as of June 30, 2019 was zero.

Batchfire Resources Pty Ltd

As a result of AFE’s early stage business development efforts associated with the Callide coal mine in Central Queensland, Australia, AFE created ~~Batchfire Resources Pty Ltd (“~~BFR”). BFR was a spin-off company for which ownership interest was distributed to the existing shareholders of AFE and to the new BFR management team in December 2015. BFR is registered in Australia and was formed for the purpose of purchasing the Callide thermal coal mine from Anglo-American plc (“Anglo-American”). The Callide mine is one of the largest thermal coal mines in Australia and has been in operation for more than 20 years. As reported by BFR at the time of the acquisition, Callide has approximately 230 million metric tons of recoverable reserves and an additional 850 million metric tons of proven resources.

In October 2016, BFR stated that it had received investment support for the acquisition from Singapore-based Lindenfels Pte, Ltd, a subsidiary of commodity traders Avra Commodities, and as a result the acquisition of the Callide thermal coal mine from Anglo-American was completed in October 2016. Since then, BFR has been implementing its plan at Callide intended to lower the per unit mining costs and deliver profitable financial results.

In January 2018, the Minister of Natural Resources, Mines and Energy approved BFR’s mining lease application through to 2043 for Callide coal mine’s Boundary Hill South Project. The Callide mining tenure extends across 180 square kilometers and contains an estimated coal resource of up to 1.7 billion metric tons and saleable coal production averages 10 million metric tons per year. BFR is implementing its mining plan at Callide intended to lower the per unit mining costs and deliver profitable financial results.42

32In January 2018, the Minister of Natural Resources, Mines and Energy approved BFR’s mining lease application through to 2043 for Callide’s Boundary Hill South Project. The Callide mining tenure extends across 180 square kilometers and contains an estimated coal resource of up to 1.7 billion metric tons and saleable coal production averages 10 million metric tons per year. BFR is implementing its mining plan at Callide intended to lower the per unit mining costs and deliver profitable financial results.

InWe ~~connection~~account ~~with~~for ~~the~~our ~~entry~~investment ~~into~~in ~~the~~BFR ~~Merger~~under ~~Agreement,~~the wecost ~~entered~~method. ~~into~~Our ~~Share~~limited ~~Exchange~~ownership ~~Agreements~~interest ~~(each,~~in ~~a “Share Exchange Agreement”) with certain of the shareholders of~~ BFR, ~~whereby~~was ~~such~~approximately ~~shareholders~~7% ~~will~~and ~~exchange~~we ~~their shares of BFR for shares~~do ofnot ~~common~~have ~~stock~~significant atinfluence aover ~~ratio~~the ofoperation 10or ~~BFR~~financial ~~shares~~decisions ~~for~~made ~~one~~by ~~share~~the ~~of common stock~~company. AsAt athe ~~result~~time of ~~these~~the ~~exchanges~~spin-off, wethe carrying ~~would~~amount ~~own 25%~~ of ~~the~~ ~~outstanding~~our ~~shares~~investment ofin ~~BFR.~~AFE ~~The~~was ~~closing~~reduced ofto ~~the~~zero ~~exchange~~through isequity ~~subject~~losses. toAs ~~certain~~such, ~~conditions~~the ~~specified~~value inof the ~~Share~~investment ~~Exchange~~in ~~Agreements,~~BFR ~~including,~~post ~~without~~spin-off ~~limitation,~~was ~~the~~also ~~consummation~~zero. As of ~~the~~December ~~transactions~~31, ~~contemplated~~2019, byour ~~the~~ownership ~~Merger~~interest ~~Agreement.~~in InBFR ~~addition,~~was weapproximately ~~are making~~7% anand ~~offer to~~ the ~~remaining~~carrying ~~shareholders~~ value of ~~BFR~~our ~~such~~investment ~~that~~in weBFR ~~would~~as ~~acquire~~of ~~100%~~both ofDecember ~~the~~31, ~~shares~~2019 ifand ~~the~~June ~~offers~~30, ~~are~~2019 ~~all~~was ~~accepted~~zero.

WeFor ~~account~~additional ~~for~~information on 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~~Share orExchange ~~financial decisions made by the company. At the time of the spin-off~~Agreements, ~~the carrying~~please ~~amount~~see ofThe ~~our~~Proposed ~~investment~~Merger inwith AFE ~~was reduced to zero through equity losses. As such, the value of the investment in BFR~~ ~~post spin-off was also zero~~above. ~~As of September 30, 2019, our ownership interest in BFR was approximately 7% and the carrying value of our investment in BFR as of both September 30, 2019 and June 30, 2019 was zero.~~

Townsville Metals Infrastructure Pty Ltd

SES EnCoal Energy sp. z o.o

In October 2017, we entered into agreements with Warsaw-based EnInvestments sp. z o.o. Under the terms of the agreements, we and EnInvestments are equal shareholders of SEE and SEE will exclusively market, develop, and commercialize projects in Poland which utilize our technology, services and proprietary equipment and we share with SEE a portion of the technology license payments, net of fees, we receive from Poland. The goal of SEE is to establish efficient clean energy projects that provide Polish industries superior economic benefits as compared to the use of expensive, imported natural gas and LNG, while providing energy independence through our technological capabilities to convert the wide range of Poland’s indigenous coals, coal waste, biomass and municipal waste to valuable syngas products. SEE has developed a pipeline of projects and together we are actively working with Polish customers and partners to complete the necessary project feasibility, permitting and SGT technology agreement steps required prior to starting construction on the projects.

Tauron Wytwarzanie S.A., (“Tauron”), has contracted Poland’s Institute of Coal Chemistry (“IChPW”) to complete a detailed preliminary design assessment and economic study for the conversion of its 200MW conventional power boilers to clean syngas which would be Poland’s first SGT facility. The project feasibility study concluded in March 2018 with positive results. The results presented by IChPW to Tauron have shown that the conversion of Tauron’s 200 MW power boiler utilizing SGT can be both economically attractive and environmentally beneficial. We believe that SGT power boiler conversions are an ideal solution capable of meeting EU and IED targets.

3343

For our ownership interest in SEE, we have been contributing cash and assisting in the development of SEE. In August 2018, we contributed additional cash of approximately $11,000.

We account for our investment in SEE under the equity method. Our ownership interest of 50% makes us an equal shareholder and we also maintain two of the four seats on the board of directors which allows us to have significant influence on the operations and financial decisions, but not control, of the company. On ~~September 30~~December31, 2019, as an equal shareholder, our ownership was 50% of SEE and the carrying value of our investment in SEE as of both ~~September~~December 3031, 2019 and June 30, 2019 was approximately $17,000 and $19,000 respectively.

Midrex Technologies

Yima Joint Venture

In December 2017 and January 2018, on-going development cooperation and discussions with the Yima Joint Venture management resulted in the joint venture agreeing to pay various costs incurred by us during the construction and commissioning period of the facility in the amount of approximately 16 million Chinese Renminbi yuan, (“RMB”). As of June 30, 2018, we have received 6.15 million RMB (approximately $0.9 million) of payments from the Yima Joint Venture related to these costs. Since June 2018, no additional payments have been received. Due to uncertainty, revenues will be recorded upon receipt of payment.

The carrying value of our Yima Joint Venture investment as of both ~~September~~December 3031, 2019 and June 30, 2019 was zero.

Tianwo-SES Clean Energy Technologies Limited

Joint Venture Contract

3444

The TSEC Joint Venture is accounted for under the equity method. Our initial capital contribution in the formation of the venture was the TUCA, which is an intangible asset. As such, we did not record a carrying value at the inception of the venture. The carrying value of our investment in the TSEC Joint Venture as of both ~~September~~December 3031, 2019 and June 30, 2019 was zero.

TUCA

GTI Agreement

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Not Applicable.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

In connection with the preparation of this Quarterly Report on Form 10-Q, as of ~~September~~December 3031, 2019, an evaluation was performed under the supervision and with the participation of our management, including our Chief Executive Officer (and principal financial officer) and Corporate Controller (and principal accounting officer), of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on that evaluation, our Chief Executive Officer and Corporate Controller concluded that as of ~~September~~December 3031, 2019, as a result of the material weakness in our internal control over financial reporting discussed below and in the Company’s Annual Report on Form 10-K, for the year ended June 30, 2019, our disclosure controls and procedures were not effective in ensuring that the information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized, and reported, within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Corporate Controller, as appropriate to allow timely decisions regarding disclosure.

Material Weaknesses

As disclosed in our Annual Report on Form 10-K for the year ended June 30, 2019, we did not maintain effective internal controls over financial reporting. Specifically, we identified material weaknesses over management’s review controls and the lack of segregation of duties over accounting transactions due to the limited resources available. During our quarterly review for the three and six months ended December 31, 2019, we identified an additional weakness that the Company does not have personnel in financial oversight roles with the knowledge to properly account for non-routine and complex accounting transactions.

Management is reviewing our controls related to ~~the~~management’s ~~non-routine,~~review ~~complex~~controls ~~transactions~~ and the lack of segregation of duties due to the limited number of resources available to the Company and a remediation plan is being addressed.

Management is committed to improving our internal control processes with oversight from our Audit Committee and believes once the review of these controls is completed, the measures to be taken should remediate the material weakness identified. We will not be able to conclude the material weakness has been remediated until we are able to test its operational effectiveness as we must maintain such effectiveness over multiple quarters to ensure full remediation. We do not believe we will be able to mitigate the material weakness until after the Merger with AFE due to limited resources available.

Notwithstanding the identified material weaknesses, management, including our Chief Executive Officer and Corporate Controller, believe the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q fairly represent in all material respects our financial condition, results of operations and cash flows at and for the periods presented in accordance with U.S. GAAP.

Changes in Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting during the three-months and six-months ended ~~September~~December 3031, 2019 that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.

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PART II

Item 1. Legal Proceedings.

None.

Item 1A. Risk Factors.

There are numerous factors that affect our business and results of operations, many of which are beyond our control. In addition to information set forth in this quarterly report, you should carefully read and consider “Item 1A. Risk Factors” in Part I and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II of our annual report on Form 10-K for the year ended June 30, ~~2018~~2019, which contains descriptions of significant risks that might cause our actual results of operations in future periods to differ materially from those currently anticipated or expected. Except as discussed below, there have been no material changes from the risks previously disclosed in our annual report on Form 10-K for the year ended June 30, ~~2018~~2019.

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

As of ~~September~~December 3031, 2019, we had $0.4 million in cash and cash equivalents and negative $01.84 million in working capital.

As of ~~January~~March 102, 2020, we had $~~0.4~~269,000 ~~million~~ in cash and cash equivalents. Of the $~~0.4~~269,000 ~~million~~ in cash and cash equivalents, $~~347~~235,000 resides in the United States or easily accessed foreign countries and approximately $4034,000 resides in China.

In connection with the entry into the Merger Agreement, we entered into ~~a securities purchase and exchange agreements (each, a “~~New Purchase Agreements”) with each of the existing holders of ~~its~~our ~~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 Debenture 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~~Merger Warrants to purchase $41,~~000~~333,~~000~~333 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~~agreed ~~pay~~ to ~~T.R.~~pay ~~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 ~~Warrants”)~~Warrant. We have also agreed to reimburse certain expenses of the Placement Agent.

The $1,000,000 scheduled payment on or before October 14, 2019 was subsequently received less certain legal costs and escrow fees in the amount of $966,000.

~~The~~As part of the Interim Financing, the Company ~~has~~had 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~~On ~~loan~~October is24, ~~subject~~2019, towe ~~interest~~entered atinto the ~~rate~~loan ofagreement which ~~11%~~is ~~per~~due ~~annum payable~~ in full on the ~~repayment date~~later ~~in conjunction with the repayment~~ of ~~the~~March ~~principal~~31, ~~amount.~~2020 ~~The~~or ~~repayment~~within ~~date~~five isdays following the ~~earlier~~closing of ~~five~~the ~~days~~Merger. ~~after~~If ~~completion of~~ the Merger ~~transaction~~does not orclose, the ~~later~~loan ofwill mature on March 31, 2020 or three months following the ~~vote~~special ofstockholder ~~the~~meeting ~~shareholders~~called onto approve the ~~Merger~~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.

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.47

WeOn ~~can~~February ~~make~~19, no2020, ~~assurances~~we ~~that~~entered into a securities purchase agreement (the ~~proposed~~“Securities ~~Merger~~Purchase ~~will~~Agreement”) bewith ~~completed~~certain holders onof the Company’s 11% Senior Secured Convertible Debentures, pursuant to which, among other things, the holders purchased, in accordance with a ~~timely~~private ~~basis~~placement oroffering atof ~~all.~~the InCompany, ~~addition~~$450,000 wein ~~may~~principal beamount ~~forced~~of toadditional 11% Senior Secured ~~seek~~Convertible ~~relief~~Debentures (together, the “Additional Interim Debentures”) and warrants exercisable for up to ~~avoid~~300,004 shares orof ~~end~~common ~~insolvency~~stock, ~~through~~half ~~other~~of ~~proceedings~~which ~~including~~are ~~bankruptcy.~~Series ~~Based~~A oncommon ~~the~~stock ~~historical~~purchase ~~negative~~warrants ~~cash~~and ~~flows~~half of which are Series B common stock purchase warrants (together, the “Additional Interim Warrants”). The Additional Interim Debentures and Additional Interim Warrants are issued on substantially the ~~continued~~same ~~limited~~terms ~~cash~~as ~~inflows~~the Merger Debentures and Merger Warrants issued in October 2019, provided that the ~~period~~Additional ~~subsequent~~Interim toDebentures ~~year~~include ~~end~~an ~~there~~adjustment isto ~~substantial~~the ~~doubt~~conversion ~~about~~price in the ~~Company’s ability~~event toof ~~continue~~certain asdilutive equity aissuances ~~going~~by ~~concern~~the Company.

38As compensation for its services, we paid to the Placement Agent: (i) a cash fee of $31,500 (representing an aggregate fee equal to 7% of the face amount of the Additional Interim Debentures); and (ii) a warrant to purchase 22,500 shares of Common Stock (the “Interim Placement Agent Warrant”). We have also agreed to reimburse certain expenses of the Placement Agent. The Interim Placement Agent Warrant has been issued on substantially the same terms as the Additional Interim Warrants.

We are at risk of being de-listed from The NASDAQ Stock Market if we do not regain compliance with the minimum amount of stockholders’ equity for continued listing required by NASDAQ rules and certain other deficiencies.

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 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~~requested ~~the~~an ~~stay~~exception ~~be extended~~ through the closing of the previously announced Merger with AFE. ~~However,~~The ~~there~~Panel ~~can~~granted ~~be no assurance that~~ the ~~Panel will grant a further~~ extension tountil ~~enable~~May ~~the~~11, ~~Company~~2020, subject to ~~demonstrate~~certain ~~compliance~~milestones ~~that~~being itmet ~~has~~throughout ~~regained~~the ~~compliance~~timeframe ~~with all~~of ~~applicable~~the ~~requirements~~stay.

On February 20, 2020, the Company received an additional delinquency notification letter from the Staff due to the Company’s continued non-compliance with Nasdaq Listing Rule 5250(c)(1) as a result of the Company’s failure to timely file this Quarterly Report for the quarter ended December 31, 2019. The Company is required and delivered a plan with respect to this deficiency to the Panel on February 27, 2020.

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

~~None~~See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources” for a discussion of the Interim Financing.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures

Not Applicable.

Item 5. Other Information.

None.

3949

Item 6. Exhibits

Number		Description of Exhibits
10.1		Form of Share Exchange Agreement between the Company and certain shareholders of Batchfire Resources Pty Ltd. (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on October 11, 2019).
10.2		Form of Securities Purchase and Exchange Agreement between the Company and each of the holders of the 11% Senior Secured Debentures (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on October 11, 2019).
10.3		Form of Registration Rights Agreement between the Company and each of the holders of the 11% Senior Secured Debentures (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on October 11, 2019).
10.4		Form of New Debenture (incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on October 11, 2019).
10.5		Form of New Warrant (incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed on October 11, 2019).
10.6		Form of Series A Merger Warrant. (incorporated by reference to Exhibit 10.6 to the Company’s Current Report on Form 8-K filed on October 11, 2019).
10.7		Form of Series B Merger Warrant (incorporated by reference to Exhibit 10.7 to the Company’s Current Report on Form 8-K filed on October 11, 2019).
10.8		Management Consulting Agreement between the Company and Market Development Consulting Group, Inc. dated October 10, 2019 (incorporated by reference to Exhibit 10.8 to the Company’s Current Report on Form 8-K filed on October 11, 2019).
10.9		Warrant issued to Market Development Consulting, Inc. dated October 10, 2019 (incorporated by reference to Exhibit 10.9 to the Company’s Current Report on Form 8-K filed on October 11, 2019).
10.10		Loan Agreement between Synthesis Energy Systems, Inc. and Australian Future Energy Pty Ltd dated October 24, 2019 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on October 25, 2019).
10.11		Form of Amendment to Transaction Documents issued under the Securities Purchase and Exchange Agreement between the Company and each of the holders of the 11% Senior Secured Debentures dated October 10, 2019 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on November 8, 2019)
31.1*		Certification of Principal Executive Officer and Principal Financial Officer of Synthesis Energy Systems, Inc. pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended.
32.1*		Certification of Principal Executive Officer and Principal Financial Officer of Synthesis Energy Systems, Inc. pursuant to Rule 13a-14(b) promulgated under the Securities Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the United States Code.

+		Management contract or compensatory plan or arrangement.
*		Filed herewith.
**		In accordance with Rule 406T of Regulation S-T, the XBRL information in Exhibit 101 to this quarterly report on Form 10-Q shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (“Exchange Act”), or otherwise subject to the liability of that section, and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act of 1933, as amended, or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.

4050

SIGNATURES

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

	SYNTHESIS ENERGY SYSTEMS, INC.
Date: January 10, 2020	By:	/s/ Robert Rigdon
Date: March 2, 2020	By:	/s/ Robert Rigdon
		Robert Rigdon
		President and Chief Executive Officer
		(Principal Executive Officer and Principal Financial Officer)
Date: January 10, 2020	By:	/s/ David Hiscocks
Date: March 2, 2020	By:	/s/ David Hiscocks
		David Hiscocks
		Corporate Controller

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