Synthesis Energy Systems, Inc.
SYNTHESIS ENERGY SYSTEMS INC (Form: 10-Q, Received: 11/13/2013 15:54:32)
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
________________
 
FORM 10-Q
(Mark One)
 
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
  
For the quarterly period ended September 30, 2013
 
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from: ________   to: __________                       
 
Commission file number: 001-33522
________________
 
SYNTHESIS ENERGY SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
 
Delaware
20-2110031
(State of Incorporation)
(I.R.S. Employer Identification No.)
 
 
Three Riverway, Suite 300, Houston, Texas
77056
(Address of principal executive offices)
(Zip code)
________________
 
Registrant’s telephone number, including area code: (713) 579-0600
 
Former name, former address and former fiscal year, if changed since last report: N/A
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
Yes þ No ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
 
Yes þ No ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer ¨
Accelerated filer ¨
Non-accelerated filer ¨
Smaller reporting company þ
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No þ
 
As of November 8, 2013 there were 63,719,640 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
3
 
 
Consolidated Balance Sheets as of September 30, 2013 and June 30, 2013 (unaudited)
3
 
 
Consolidated Statements of Operations for the Three Months ended September 30, 2013 and 2012 and the period from November 4, 2003 (inception) to September 30, 2013 (unaudited)
4
 
 
Consolidated Statements of Comprehensive Loss for the Three Months ended September 30, 2013 and 2012 and the period from November 4, 2003 (inception) to September 30, 2013 (unaudited)
5
 
 
Consolidated Statements of Cash Flows for the Three Months ended September 30, 2013 and 2012 and the period from November 4, 2003 (inception) to September 30, 2013 (unaudited)
6
 
 
Consolidated Statements of Stockholders’ Equity for the period from June 30, 2013 to September 30, 2013 (unaudited)
7
 
 
Notes to the Consolidated Financial Statements   (unaudited)
8
 
 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
21 
 
 
Item 3. Quantitative and Qualitative Disclosure about Market Risk
 35
 
 
Item 4. Controls and Procedures
 36
 
 
PART II. Other Information
 
 
 
Item 1. Legal Proceedings
 36
 
 
Item 1A. Risk Factors
 36
 
 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 37
 
 
Item 3. Defaults Upon Senior Securities
 37
 
 
Item 4. Mine Safety Disclosures
 37
 
 
Item 5. Other Information
 37
 
 
Item 6. Exhibits
 39
 
 
2

 
  PART I
 
Item 1.   Financial Statements
 
SYNTHESIS ENERGY SYSTEMS, INC.
(A Development Stage Enterprise)
 
Consolidated Balance Sheets
(In thousands, except per share amount)
(Unaudited)
 
 
 
 
September 30,
 
 
June 30,
 
 
 
 
2013
 
 
2013
 
ASSETS
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
15,070
 
$
15,870
 
Accounts receivable, net
 
 
2
 
 
2
 
Prepaid expenses and other currents assets
 
 
2,486
 
 
2,636
 
 
 
 
 
 
 
 
 
Total current assets
 
 
17,558
 
 
18,508
 
 
 
 
 
 
 
 
 
Property, plant and equipment, net
 
 
32,424
 
 
32,641
 
Intangible asset, net
 
 
1,043
 
 
1,060
 
Investment in joint ventures
 
 
34,856
 
 
33,311
 
Other long-term assets
 
 
2,845
 
 
2,844
 
 
 
 
 
 
 
 
 
Total assets
 
$
88,726
 
$
88,364
 
 
 
 
 
 
 
 
 
LIABILITIES AND EQUITY
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
Accrued expenses and accounts payable
 
$
8,898
 
$
7,632
 
Short-term bank loan
 
 
3,253
 
 
 
Current portion of long-term bank loan
 
 
1,187
 
 
2,428
 
 
 
 
 
 
 
 
 
Total current liabilities
 
 
13,338
 
 
10,060
 
 
 
 
 
 
 
 
 
Total liabilities
 
 
13,338
 
 
10,060
 
 
 
 
 
 
 
 
 
Commitment and contingencies
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common stock, $0.01 par value: 200,000 shares authorized: 63,720 and 63,583 shares
     issued and outstanding, respectively
 
 
637
 
 
636
 
Additional paid-in capital
 
 
225,482
 
 
224,337
 
Deficit accumulated during development stage
 
 
(155,903)
 
 
(151,741)
 
Accumulated other comprehensive income
 
 
6,077
 
 
5,958
 
Total stockholders’ equity
 
 
76,293
 
 
79,190
 
Noncontrolling interests in subsidiaries
 
 
(905)
 
 
(886)
 
 
 
 
 
 
 
 
 
Total equity
 
 
75,388
 
 
78,304
 
 
 
 
 
 
 
 
 
Total liabilities and equity
 
$
88,726
 
$
88,364
 
 
See accompanying notes to the consolidated financial statements.
 
 
3

 
SYNTHESIS ENERGY SYSTEMS, INC.
(A Development Stage Enterprise)
 
Consolidated Statements of Operations
(In thousands, except per share amounts)
(Unaudited)
 
 
 
 
 
 
 
 
November 4, 2003
 
 
 
Three Months Ended
 
(inception) to
 
 
 
September 30,
 
September 30,
 
 
 
 
2013
 
2012
 
2013
 
 
 
 
 
 
 
 
 
 
 
 
Revenue:
 
 
 
 
 
 
 
 
 
 
Product sales and other — related parties
 
$
 
$
 
$
21,556
 
Technology licensing and related services
 
 
 
 
71
 
 
3,367
 
Other
 
 
 
 
 
 
607
 
Total revenue
 
 
 
 
71
 
 
25,530
 
 
 
 
 
 
 
 
 
 
 
 
Costs and Expenses:
 
 
 
 
 
 
 
 
 
 
Costs of sales and plant operating expenses
 
 
97
 
 
131
 
 
33,197
 
General and administrative expenses
 
 
2,423
 
 
3,080
 
 
102,643
 
Asset impairment losses
 
 
 
 
 
 
9,075
 
Stock-based compensation expense
 
 
1,046
 
 
164
 
 
25,237
 
Depreciation and amortization
 
 
565
 
 
577
 
 
14,974
 
 
 
 
 
 
 
 
 
 
 
 
Total costs and expenses
 
 
4,131
 
 
3,952
 
 
185,126
 
 
 
 
 
 
 
 
 
 
 
 
Operating loss
 
 
(4,131)
 
 
(3,881)
 
 
(159,596)
 
 
 
 
 
 
 
 
 
 
 
 
Non-operating (income) expense:
 
 
 
 
 
 
 
 
 
 
Equity in losses of joint ventures
 
 
1
 
 
517
 
 
3,657
 
Foreign currency (gains) losses, net
 
 
(12)
 
 
38
 
 
(2,446)
 
Interest income
 
 
(5)
 
 
(14)
 
 
(3,192)
 
Interest expense
 
 
69
 
 
96
 
 
3,651
 
 
 
 
 
 
 
 
 
 
 
 
Net loss
 
 
(4,184)
 
 
(4,518)
 
 
(161,266)
 
 
 
 
 
 
 
 
 
 
 
 
Less:net income attributable to noncontrolling interests
 
 
22
 
 
33
 
 
5,363
 
 
 
 
 
 
 
 
 
 
 
 
Net loss attributable to stockholders
 
$
(4,162)
 
$
(4,485)
 
$
(155,903)
 
 
 
 
 
 
 
 
 
 
 
 
Net loss per share:
 
 
 
 
 
 
 
 
 
 
Basic and diluted
 
$
(0.07)
 
$
(0.09)
 
$
(3.80)
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average common shares outstanding:
 
 
 
 
 
 
 
 
 
 
Basic and diluted
 
 
63,671
 
 
52,334
 
 
41,068
 
 
See accompanying notes to the consolidated financial statements.  
 
 
4

 
SYNTHESIS ENERGY SYSTEMS, INC.
(A Development Stage Enterprise)
 
Consolidated Statements of Comprehensive Loss
(In thousands)
(Unaudited)
 
 
 
 
 
 
November 4,
 
 
 
 
 
2003
 
 
 
 
 
 
 
 
 
(inception)
 
 
 
Three Months Ended
 
to
 
 
 
September 30,
 
September 30
 
 
 
2013
 
2012
 
2013
 
Net loss, as reported
 
$
(4,184)
 
$
(4,518)
 
$
(161,266)
 
Translation adjustment
 
 
122
 
 
(119)
 
 
6,077
 
Comprehensive loss
 
 
(4,062)
 
 
(4,637)
 
 
(155,189)
 
Less comprehensive income attributable to noncontrolling interests
 
 
19
 
 
32
 
 
5,363
 
Comprehensive loss attributable to the Company
 
$
(4,043)
 
$
(4,605)
 
$
(149,826)
 
 
See accompanying notes to the consolidated financial statements
 
 
5

 
  SYNTHESIS ENERGY SYSTEMS, INC.
(A Development Stage Enterprise)
 
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
 
 
 
 
 
 
 
 
 
November 4, 2003
 
 
 
Three Months Ended
 
(inception) to
 
 
 
September 30,
 
September 30,
 
 
 
2013
 
2012
 
2013
 
Cash flows from operating activities:
 
 
 
 
 
 
 
 
 
 
Net loss
 
$
(4,184)
 
$
(4,518)
 
$
(161,266)
 
Adjustments to reconcile net loss to net cash used in operating
     activities:
 
 
 
 
 
 
 
 
 
 
Stock-based compensation expense
 
 
1,046
 
 
164
 
 
25,237
 
Depreciation of property, plant and equipment
 
 
509
 
 
522
 
 
13,412
 
Amortization of intangible and other assets
 
 
56
 
 
55
 
 
1,562
 
Equity in losses of joint ventures
 
 
1
 
 
517
 
 
3,657
 
Foreign currency (gains) losses
 
 
(12)
 
 
38
 
 
(2,446)
 
Loss on disposal of property, plant and equipment
 
 
 
 
1
 
 
167
 
Write-off of deferred financing costs
 
 
 
 
 
 
1,004
 
Asset impairment losses
 
 
 
 
 
 
9,075
 
Changes in operating assets and liabilities:
 
 
 
 
 
 
 
 
 
 
Accounts receivable
 
 
 
 
264
 
 
197
 
Prepaid expenses and other current assets
 
 
162
 
 
(492)
 
 
(1,698)
 
Inventory
 
 
 
 
(2)
 
 
(536)
 
Other long-term assets
 
 
(28)
 
 
11
 
 
(1,494)
 
Accrued expenses and payables
 
 
(326)
 
 
802
 
 
2,833
 
Net cash used in operating activities
 
 
(2,776)
 
 
(2,638)
 
 
(110,296)
 
Cash flows from investing activities:
 
 
 
 
 
 
 
 
 
 
Capital expenditures
 
 
(132)
 
 
(2)
 
 
(38,231)
 
Equity investment in joint ventures
 
 
(1)
 
 
(109)
 
 
(32,225)
 
Purchase of marketable securities
 
 
 
 
 
 
(45,000)
 
Redemption of marketable securities
 
 
 
 
 
 
45,000
 
GTI license royalty payments – Yima joint ventures
 
 
 
 
 
 
(1,500)
 
Other license royalty payments
 
 
 
 
 
 
(1,250)
 
Restricted cash – redemptions of certificates of deposit
 
 
 
 
 
 
(50)
 
Amendment to GTI license rights
 
 
 
 
 
 
(500)
 
Purchase of land use rights
 
 
 
 
 
 
(1,896)
 
Receipt of Chinese governmental grant
 
 
 
 
 
 
556
 
Project prepayments
 
 
 
 
 
 
(3,210)
 
Net cash used in investing activities
 
 
(133)
 
 
(111)
 
 
(78,306)
 
Cash flows from financing activities:
 
 
 
 
 
 
 
 
 
 
Payments on long-term bank loan
 
 
(1,252)
 
 
(1,214)
 
 
(13,002)
 
Proceeds from long-term bank loan
 
 
 
 
 
 
12,081
 
Proceeds from short-term bank loan
 
 
3,253
 
 
 
 
3,253
 
Proceeds from exercise of (repurchase of) stock options, net
 
 
 
 
 
 
929
 
Proceeds from issuance of common stock, net
 
 
100
 
 
8,658
 
 
194,946
 
Prepaid interest
 
 
 
 
 
 
(276)
 
Financing costs
 
 
 
 
 
 
(143)
 
Contributions from noncontrolling interest partners
 
 
 
 
 
 
4,456
 
Loans from shareholders
 
 
 
 
 
 
11
 
Net cash provided by financing activities
 
 
2,101
 
 
7,444
 
 
202,255
 
Net increase (decrease) in cash
 
 
(808)
 
 
4,695
 
 
13,653
 
Cash and cash equivalents, beginning of period
 
 
15,870
 
 
18,035
 
 
 
Effect of exchange rates on cash
 
 
8
 
 
(5)
 
 
1,417
 
Cash and cash equivalents, end of period
 
$
15,070
 
$
22,725
 
$
15,070
 
 
See accompanying notes to the consolidated financial statements.
 
 
6

 
SYNTHESIS ENERGY SYSTEMS, INC.
(A Development Stage Enterprise)
  Consolidated Statement of Equity
(In thousands)
(Unaudited)
 
 
 
 
 
 
 
 
 
 
 
Deficit
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated
 
Accumulated
 
 
 
 
 
 
 
 
 
Common Stock
 
 
 
 
During the
 
Other
 
Non-
 
 
 
 
 
 
 
 
Common
 
Additional
 
Development
 
Comprehensive
 
controlling
 
 
 
 
 
 
Shares
 
Stock
 
Paid-in Capital
 
Stage
 
Income
 
Interest
 
Total
 
Balance at June 30, 2013
 
63,583
 
$
636
 
$
224,337
 
$
(151,741)
 
$
5,958
 
$
(886)
 
$
78,304
 
Net loss
 
 
 
 
 
 
 
(4,162)
 
 
 
 
(22)
 
 
(4,184)
 
Currency translation adjustment
 
 
 
 
 
 
 
 
 
119
 
 
3
 
 
122
 
Comprehensive loss
 
 
 
 
 
 
 
 
 
 
 
 
 
(4,062)
 
Net proceeds from issuance of common stock
 
137
 
 
1
 
 
99
 
 
 
 
 
 
 
 
100
 
Stock-based compensation expense
 
 
 
 
 
1,046
 
 
 
 
 
 
 
 
1,046
 
Balance at September 30, 2013
 
63,720
 
$
637
 
$
225,482
 
$
(155,903)
 
$
6,077
 
$
(905)
 
$
75,388
 
 
  See accompanying notes to the consolidated financial statements.
 
 
7

 
SYNTHESIS ENERGY SYSTEMS, INC.
(A Development Stage Enterprise)
 
Notes to Consolidated Financial Statements
(Unaudited)
 
 
Note 1 — Summary of Significant Accounting Policies
 
(a) Organization and description of business
 
Synthesis Energy Systems, Inc. (“SES”), together with its wholly-owned and majority-owned controlled subsidiaries (collectively, the “Company”) is a development stage global energy and gasification technology company that provides products and solutions to the energy and chemical industries. The Company’s business is to create value by supplying its technology, equipment and services into global projects where lower cost low quality coals, coal wastes, municipal wastes, agricultural biomass, and other biomass feedstocks can be profitably converted through its proprietary gasification technology into clean synthesis gas, or syngas (a mixture of primarily hydrogen, carbon monoxide, and methane), which is then used to produce a variety of high value energy and chemical products.  The Company’s initial operating projects to date convert high ash coal and coal wastes to chemical grade methanol, and the Company is pursuing a variety of additional global projects  under development by customers who may use its technology platform to convert low quality coals such as lignite, coal wastes, municipal wastes and agricultural waste biomass to high value products such as electric power, transportation fuels, substitute natural gas fuel for direct reduction iron steel making and other products. The Company’s technology is originally based on the U-GAS ® process developed by the Gas Technology Institute and the Company has augmented and differentiated the technology through design, detailed engineering, constructing, starting up and operating two commercial plants in China. The Company’s headquarters are located in Houston, Texas.
 
(b) Basis of presentation and principles of consolidation
 
The consolidated financial statements for the periods presented are unaudited and reflect all adjustments, consisting of normal recurring items, which management considers necessary for a fair statement.   Operating results for the three month periods ended September 30, 2013 are not necessarily indicative of results to be expected for the fiscal year ending June 30, 2014.  
 
The consolidated financial statements are in U.S. dollars.   Noncontrolling interests in consolidated subsidiaries in the consolidated balance sheets represents minority stockholders’ proportionate share of the equity in such subsidiaries.   All significant intercompany balances and transactions have been eliminated in consolidation.   These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto reported in the Company’s Annual Report on Form 10-K for the year ended June 30, 2013.   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, 2013 are included below.   The consolidated financial statements have been prepared in accordance with the rules of the United States Securities and Exchange Commission (“SEC”) for interim financial statements and do not include all annual disclosures required by generally accepted accounting principles in the United States.
 
(c) Accounting for Variable Interest Entities (“VIEs”) and Financial Statement Consolidation Criteria
 
The joint ventures which the Company enters into may be considered VIEs. The Company consolidates all VIEs where it is the primary beneficiary. This determination is made at the inception of the Company’s involvement with the VIE and is continuously assessed. The Company considers qualitative factors and forms a conclusion that the Company, or another interest holder, has a controlling financial interest in the VIE and, if so, whether it is the primary beneficiary. In order to determine the primary beneficiary, the Company considers who has the power to direct activities of the VIE that most significantly impacts the VIE’s performance and has an obligation to absorb losses from or the right to receive benefits of the VIE that could be significant to the VIE. The Company does not consolidate VIEs where it is not the primary beneficiary. The Company accounts for these unconsolidated VIEs using either the equity method of accounting or the cost method of accounting and includes its net investment on its consolidated balance sheets. Under the equity method, the Company’s equity interest in the net income or loss from its unconsolidated VIEs is recorded in non-operating (income) expense on a net basis on its consolidated statement of operations. Equity investments in which the Company exercises significant influence but does not control and is not the primary beneficiary are accounted for using the equity method. In the event of a change in ownership, any gain or loss resulting from an investee share issuance is recorded in earnings. Investments in which the Company is not able to exercise significant influence over the investee are accounted for under the cost method. Controlling interest is determined by majority ownership interest and the ability to unilaterally direct or cause the direction of management and policies of an entity after considering any third-party participatory rights.
 
 
8

   
The Company has determined that the ZZ Joint Venture is a VIE and has determined that the Company is the primary beneficiary. In making the initial determination, the Company considered, among other items, the change in profit distribution between the Company and Xuejiao after 20  years. The expected negative variability in the fair value of the ZZ Joint Venture’s net assets was considered to be greater during the first 20 years of the ZZ Joint Venture’s life, which coincided with our original 95 % profit/loss allocation, versus the latter 30  years in which the Company’s profit/loss allocation would be reduced to 10 %. As the result of an amendment to the ZZ Joint Venture agreement in 2010, the profit distribution percentages will remain in place after the first 20 years, providing further support to the determination that the Company is the primary beneficiary.
 
The following tables provide additional information on the ZZ Joint Venture’s assets and liabilities as of   September 30, 2013 and June 30, 2013 which are consolidated within the Company’s consolidated balance sheets (in thousands):
 
 
 
September 30, 2013
 
 
 
Consolidated
 
ZZ Joint Venture
(1)
 
% (2)
 
 
 
 
 
 
 
 
 
 
Current assets
 
$
17,558
 
$
2,123
 
12
%
Long-term assets
 
 
71,168
 
 
34,473
 
48
%
Total assets
 
$
88,726
 
$
36,596
 
41
%
 
 
 
 
 
 
 
 
 
 
Current liabilities
 
$
13,338
 
$
6,531
 
49
%
Equity
 
 
75,388
 
 
30,065
 
40
%
Total liabilities and equity
 
$
88,726
 
$
36,596
 
41
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2013
 
 
 
Consolidated
 
ZZ Joint Venture
(1)
 
% (2)
 
 
 
 
 
 
 
 
 
 
Current assets
 
$
18,508
 
$
523
 
3
%
Long-term assets
 
 
69,856
 
 
34,742
 
50
%
Total assets
 
$
88,364
 
$
35,265
 
40
%
 
 
 
 
 
 
 
 
 
 
Current liabilities
 
$
10,060
 
$
4,529
 
45
%
Equity
 
 
78,304
 
 
30,736
 
39
%
Total liabilities and equity
 
$
88,364
 
$
35,265
 
40
%
 
(1)    Amounts reflect information for the ZZ Joint Venture and exclude intercompany items.
(2)    ZZ Joint Venture’s percentage of the amount on the Company’s consolidated balance sheets.
 
The Company has determined that the Yima Joint Ventures are VIEs and that Yima, the joint venture partner, is the primary beneficiary since Yima has a 75 % ownership interest in the Yima Joint Ventures and has the power to direct the activities of the VIE that most significantly influence the VIE’s performance.
 
Until May 31, 2013, the Company accounted for its equity interest in the Yima Joint Ventures under the equity method of accounting. Under this method, the Company recorded its proportionate share of the Yima Joint Ventures’ net income or loss based on the Yima Joint Venture’s financial results. As of June 1, 2013, the Company changed to the cost method of accounting because the Company concluded that it is unable to exercise significant influence over the Yima Joint Ventures. The Company’s conclusion regarding of its lack of significant influence is due to various circumstances including limited participation in operating and financial policymaking processes and the Company’s limited ability to influence technological decisions.
 
   
9

 
The Company has determined that SES Resource Solutions, Ltd. (“SRS”) which was formed in June 2011 is a VIE and that the Company is not the primary beneficiary since neither the Company nor Midas Resources AG control SRS since each have a 50 % ownership interest in SRS and the control, risks and benefits of SRS are shared equally. SRS had no assets or liabilities as of September 30, 2013.
 
The Company has determined that the GC Joint Venture is a VIE and has determined that it is the primary beneficiary since the Company has a 51 % ownership interest in the GC Joint Venture and since there are no qualitative factors that would preclude the Company from being deemed the primary beneficiary. There were no significant assets recorded within the GC Joint Venture as of September 30, 2013 or June 30, 2013. There were however, current liabilities of approximately $ 1.2 million as of September 30, 2013 and June 30, 2013 related to unpaid settlements of amounts due to various contractors from the initial construction work for the project.   The GC Joint Venture project is not currently being developed and the Company is continuing to work to liquidate and ultimately dissolve the GC Joint Venture.
 
(d) Revenue Recognition
 
Revenue from sales of products, which has included the capacity fee and energy fee earned at the ZZ Joint Venture  plant and is expected to include sale of methanol under the ZZ Cooperation Agreement, and sales of equipment are recognized when the following elements are satisfied: (i) there are no uncertainties regarding customer acceptance; (ii) there is persuasive evidence that an agreement exists; (iii) delivery has occurred; (iv) the sales price is fixed or determinable; and (v) collectability is reasonably assured.
 
Technology licensing revenue is typically received over the course of a project’s development as milestones are met. The Company may receive upfront licensing fee payments when a license agreement is entered into. Typically, the majority of a license fee is due once project financing and equipment installation occur. The Company recognizes license fees as revenue when the license fees become due and payable under the license agreement, subject to the deferral of the amount of the performance guarantee. Fees earned for engineering services, such as services that relate to integrating our technology to a customer’s project, are recognized using the percentage-of-completion method.
 
(e) Fair value measurements
 
Accounting standards require that fair value measurements be classified and disclosed in one of the following categories:
 
 
Level 1
Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
 
 
 
 
Level 2
Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability; and
 
 
 
 
Level 3
Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).
 
The Company’s financial assets and liabilities are classified based on the lowest level of input that is significant for the fair value measurement. The following table summarizes the valuation of the Company’s financial assets by pricing levels, as of   September 30, 2013 and June 30, 2013 (in thousands):
 
 
 
September 30, 2013
 
 
 
Level 1
 
Level 2
 
 
Level 3
 
Total
 
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Certificates of Deposit
 
$
 
$
50
(1)
 
$
 
$
50
 
Money Market Funds
 
 
 
 
7,756
(2)
 
 
 
 
7,756
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Short-term bank loan
 
 
 
 
3,253
(3)
 
 
 
 
3,253
 
Long-term bank loan
 
 
 
 
1,187
(4)
 
 
 
 
1,187
 
 
 
10

 
 
 
June 30, 2013
 
 
 
Level 1
 
Level 2
 
 
Level 3
 
Total
 
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Certificates of Deposit
 
$
 
$
50
(1)
 
$
 
$
50
 
Money Market Funds
 
 
 
 
8,752
(2)
 
 
 
 
8,752
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Long-term bank loan
 
 
 
 
2,428
(4)
 
 
 
 
2,428
 
 
(1)   Amount included in current assets on the Company’s consolidated balance sheets.
(2)   Amount included in cash and cash equivalents on the Company’s consolidated balance sheets.
(3)   Amount included in current liabilities on the Company’s consolidated balance sheets.
(4)   Amount comprised of current portion of bank loan on the Company’s consolidated balance sheets.
 
The carrying values of the certificates of deposit, money market funds, short-term and long-term debt approximate fair value, which was estimated using quoted market prices for those or similar investments. The carrying value of the Company’s other financial instruments, including accounts receivable and accounts payable, approximate their fair values.

Note 2 – Joint Ventures
 
Zao Zhuang Joint Venture
 
Joint Venture Agreement
 
On July 6, 2006, the Company entered into a cooperative joint venture contract with Shandong Hai Hua Coal & Chemical Company Ltd., or Hai Hua, which established Synthesis Energy Systems (Zao Zhuang) New Gas Company Ltd., or the ZZ Joint Venture, a joint venture company that has the primary purposes of (i) developing, constructing and operating a syngas production plant utilizing the U-GAS ® technology in Zao Zhuang City, Shandong Province, China and (ii) producing and selling syngas and the various byproducts of the plant. In August 2012, Hai Hua’s name was changed to Shandong Weijiao Group Xuecheng Energy Company Ltd., or Xuecheng Energy, after a change in control transaction. We own 97.6 % of the ZZ Joint Venture and Xuecheng Energy owns the remaining 2.4 %. We consolidate the results of the ZZ Joint Venture in our consolidated financial statements.
 
On July 24, 2013, the ZZ Joint Venture entered into a cooperation agreement (the “ZZ Cooperation Agreement”) with Xuecheng Energy and its parent company, Shandong Xuejiao Chemical Co., Ltd. (collectively referred to as “Xuejiao”), which serves to supersede the existing syngas purchase and sale agreement among the parties dated October 22, 2006 and supplemented previously in 2008. The Agreement represents the basis for an integrated syngas to methanol operation and resolution of the nonpayment of the contractual capacity fees by Xuejiao.   The ZZ Cooperation Agreement became effective on October 31, 2013.   The Company will be consolidating the financial results from the ZZ Cooperation Agreement effective November 1, 2013.
 
 Under the terms of the ZZ Cooperation Agreement, Xuejiao will (i) provide the ZZ Joint Venture with use of their methanol plant for ten years at no cost to the ZZ Joint Venture, (ii) provide a bank loan guarantee of approximately $ 3.2 million for a majority of the financing necessary for the ZZ Joint Venture for the retrofit and related costs of the ZZ Joint Venture plant, (iii) waive certain advances previously made to the ZZ Joint Venture and (iv) supply discounted coke oven gas produced by its existing coke ovens to be used in combination with synthesis gas to produce refined methanol from the new ZZ Joint Venture integrated syngas methanol operation. The new integrated operation will be managed by the Company. Effective October 31, 2013, the Company terminated and waived its claims to past due capacity fees owed by Xuejiao under the prior syngas purchase and sale agreement.
 
 
11

 
Additionally, the Company is also evaluating alternative products and partnership structures for a possible expansion of the ZZ Joint Venture plant for its longer term use. In 2010, the ZZ Joint Venture received the necessary government approval for an expansion and this project is under evaluation by the Company. The Company is also evaluating certain new downstream technologies to produce high value products. 
 
In March 2012, Xuecheng Energy advanced approximately $ 1.0 million to the ZZ Joint Venture. In September 2012, Xuejiao advanced an additional approximately $ 0.8 million to the ZZ Joint Venture.  Pursuant to the ZZ Cooperation Agreement, these advances are to be applied to settling the prior payments due under the syngas purchase and sale agreement, therefore the Company will recognize these advances as revenue during the three months ending December 31, 2013.
 
Until the ZZ Joint Venture generates sufficient cash flows to cover its operating costs and debt service, the Company will also need to make additional contributions to the ZZ Joint Venture in order for it to meet its obligations, including the outstanding balance under the loan with ICBC, and the ZZ Short-term Loan (defined below) due in September 2014 unless such loan can be refinanced.
 
Loan Agreement with ICBC
 
On March 22, 2007, the ZZ Joint Venture entered into a seven-year loan agreement and received approximately $ 12.6 million of loan proceeds pursuant to the terms of a Fixed Asset Loan Contract with the Industrial and Commercial Bank of China (“ICBC”) to complete the project financing for the ZZ Joint Venture. Key terms of the Fixed Asset Loan Contract with ICBC are as follows:
 
·     Term of the loan is seven years from the commencement date (March 22, 2007) of the loan;
 
·     Interest is adjusted annually based upon the standard rate announced each year by the People’s Bank of China, and as of   September 30, 2013, the applicable annual interest rate was 6.55 % and is payable monthly;
 
·     A principal payment of RMB 7.7 million (approximately $ 1.2 million based on current currency exchange rates) was paid in September 2013 and the final payment of the same amount is due in March 2014;
 
·     Xuecheng Energy is the guarantor of the entire loan;
 
·     Plant and equipment assets of the ZZ Joint Venture are pledged as collateral for the loan;
 
·     Covenants include, among other things, prohibiting pre-payment without the consent of ICBC and permitting ICBC to be involved in the review and inspection of the ZZ Joint Venture plant; and
 
·     Subject to customary events of default which, should one or more of them occur and be continuing, would permit ICBC to declare all amounts owing under the contract to be due and payable immediately.
 
As of   September 30, 2013, the ZZ Joint Venture was in compliance with all covenants and obligations under the Fixed Asset Loan Contract.
 
Short-term Loan Agreement with Zaozhuang Bank Co., Ltd
 
On September 10, 2013, the ZZ Joint Venture entered into a short-term loan agreement with Zaozhuang Bank Co., Ltd., (the "ZZ Short-term Loan"), and received approximately $ 3.2 million of loan proceeds for the retrofit and related costs contemplated by the ZZ Cooperation Agreement. Key terms of the ZZ Short-term Loan are as follows:
 
·     Term of the loan is one year, due on   September 9, 2014;
 
·     Interest is payable monthly at an annual  rate of 10.8 %;
 
·     Xuecheng Energy is the guarantor of the entire loan;  
 
·     Certain assets of the ZZ Joint Venture, including land use rights and the administration building, are pledged as collateral for the loan; and
 
 
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·     Subject to customary events of default which, should one or more of them occur and be continuing, would permit Zaozhuang Bank Co., Ltd. to declare all amounts owing under the agreement to be due and payable immediately.
 
Impairment Assessment
 
Due to the continued shut down of the ZZ Joint Venture plant and new economic and financial assumptions based on negotiations of the Cooperation Agreement with Xuejiao, the Company believed an impairment assessment of the ZZ Joint Venture plant was warranted as of March 31, 2013. The Company performed an analysis of the ZZ Joint Venture plant and determined that these assets were not impaired based upon management’s estimated cash flow projections for the plant. Such estimated cash flow projections included a case based on the completion of the ongoing negotiations between us and Xuecheng Energy to restructure the current business arrangement to create an integrated syngas to methanol operation. This restructuring would include a combination of technical improvements being made to Xuecheng Energy’s methanol unit allowing for increased syngas off-take and other repairs and improvements being made to the plant enabling more efficient joint production of methanol for a five-year period. After this period, this case assumes that an additional downstream facility to produce a higher value product such as glycol is developed with the additional capital investment made by a strategic partner and that we retain a minority interest in the combined project. An alternative case assumed the same five-year period of the same integrated syngas to methanol operation as the prior case but that the ZZ Joint Venture plant’s assets are sold after the five-year period. If the Company is not successful in restructuring the joint venture or otherwise improving the ZZ Joint Venture’s profitability, or if management’s estimated cash flow projections for these assets decrease, the ZZ Joint Venture plant could become impaired which could have a material effect on its consolidated financial statements. As no significant adverse changes to the Company’s assumptions or financial projections have occurred since the impairment assessment as of March 31, 2013, an updated impairment assessment was not necessary as of September 30, 2013.
 
Yima Joint Ventures
 
In August 2009, the Company entered into amended joint venture contracts with Yima Coal Industry (Group) Co., Ltd. (“Yima”), replacing the prior joint venture contracts entered into in October 2008 and April 2009. The joint ventures were formed for each of the gasification, methanol/methanol protein production, and utility island components of the plant (collectively, the “Yima Joint Ventures”). The parties obtained government approvals for the project’s feasibility study during the three months ended December 31, 2008 and for the project’s environmental impact assessment during the three months ended March 31, 2009, which were the two key approvals required to proceed with the project. The amended joint venture contracts provide that: (i) the Company and Yima contribute equity of 25 % and 75 %, respectively, to the Yima Joint Ventures; (ii) Yima will guarantee the repayment of loans from third party lenders for 50 % of the project’s cost and, if debt financing is not available, Yima is obligated to provide debt financing via shareholder loans to the project until the project is able to secure third-party debt financing; and (iii) Yima will supply coal to the project from a mine located in close proximity to the project at a preferential price subject to a definitive agreement to be subsequently negotiated. In connection with entering into the amended contracts, the Company and Yima contributed their remaining cash equity contributions of $ 29.3  million and $ 90.8  million, respectively, to the Yima Joint Ventures during the three months ended September 30, 2009. In exchange for their capital contributions, the Company owns a 25 % interest in each joint venture and Yima owns a 75 % interest.
  
The Yima Joint Venture plant’s commissioning is in its final stages and methanol production has been ramped up to as high as 80 % of total design capacity and has been selling its methanol product to a local industrial company since December 2012. All three of the gasifiers have been operated at various ranges of throughput and pressure. The current focus is on completing the installations of char removal systems for the syngas production and commissioning of the downstream units that prepare the syngas for methanol production as well as the continued commissioning of the methanol production unit itself. There have been a variety of minor construction related shutdowns which are normally seen in the startup of these units, but they have generally not been related to the Company’s gasifier systems. The plant is designed to produce 300,000 tonnes per year of methanol from two operating gasifiers.
 
The estimate of the total required capital of the project was approximately $ 250  million. The remaining capital for the project has been funded with project debt obtained by the Yima Joint Ventures. Yima agreed to guarantee the project debt in order to secure debt financing from domestic Chinese banking sources. The Company has agreed to pledge to Yima its ownership interests in the joint ventures as security for the Company’s obligations under any project guarantee. In the event that the necessary additional debt financing is not obtained, Yima has agreed to provide a loan to the joint ventures to satisfy the remaining capital needs of the project with terms comparable to current market rates at the time of the loan.
 
 
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Under the terms of the joint venture agreements, the Yima Joint Ventures are to be governed by a board of directors consisting of eight directors, two of whom were appointed by the Company and six of whom were appointed by Yima. The joint ventures also have officers that are nominated by the Company, Yima and/or the board of directors pursuant to the terms of the joint venture contracts. The Company and Yima shall share the profits, and bear the risks and losses, of the joint ventures in proportion to their respective ownership interests. The term of the joint venture shall commence upon each joint venture company obtaining its business license and shall end 30  years after commercial operation of the plant.
 
The Company has included approximately $ 3.0  million of royalty costs due to GTI for the Yima Joint Ventures’ U-GAS ® license as part of its investment in  joint ventures on its consolidated balance sheet including a $ 1.5 million payment paid to GTI in June 2009 (when the amended joint venture contracts were signed) and an additional royalty payment of approximately $ 1.5 million payable to GTI which was accrued as of September 30, 2013 .   The $ 1.5 million royalty due for the Yima Joint Ventures’ license is payable in  three equal installments,   one of which was made in October 2013 with the others due in   January 2014 and February 2014 .
 
Until May 31, 2013, the Company accounted for its equity interest in the Yima Joint Ventures under the equity method of accounting. Under this method, the Company recorded its proportionate share of the Yima Joint Ventures’ net income or loss based on the Yima Joint Venture’s financial results. As of June 1, 2013, the Company changed to the cost method of accounting because the Company concluded that it is unable to exercise significant influence over the Yima Joint Ventures. The Company’s conclusion regarding its lack of significant influence is based on its interactions with the Yima Joint Ventures related to the start-up and operations and due to various other circumstances including limited participation in operating and financial policymaking processes and the Company’s limited ability to influence technological decisions.   There was no equity in losses of the Yima Joint Ventures recognized for financial reporting purposes for the three month period ended September 30, 2013 since the Company changed from the equity method to the cost method of accounting as of June 1, 2013.   The   Company’s equity in losses of the Yima Joint Ventures for the three-month period ended September 30, 2012 was $0.2 million.
 
SES Resource Solutions
 
SRS is a joint venture owned 50 % by us and 50 % by Midas Resources AG, or Midas, that was formed in June 2011 to provide additional avenues of commercialization for the Company’s U-GAS® technology. Key objectives of the joint venture are to identify and procure low cost, low rank coal resources for which the Company’s technology represents the best route to commercialization; to provide investment opportunities in both gasification facilities and coal resources; and to facilitate the establishment of gasification projects globally based on the Company’s technology. Terms of the SRS joint venture agreement include:
 
      SRS has the exclusive right to promote our gasification technology for the purpose of securing low-cost coal resources in projects worldwide that have been approved by the board of directors of SRS;
 
      Midas provides expertise to originate and execute the above projects;
 
      the Company provides SRS with technology licenses and engineering development support for use in developing the joint integrated coal resource projects;
 
      SRS being managed by a four person board of directors, two of which are appointed by the Company and two of which are appointed by Midas;
 
      the Company agreeing to provide up to $ 2.0 million in funding to SRS, although it has the ability to discontinue funding at any point in time; and
 
      revenue and profits are equally divided between the joint venture partners.
 
As of September 30, 2013, the Company had funded approximately $ 1.7 million to SRS. In December 2012, SRS suspended its activities due to the unavailability of financing for coal resources, therefore the Company’s contributions to SRS are expected to be minimal until its activities resume.
 
The Company’s investment in SRS is accounted for using the equity method. SRS has no assets or liabilities as amounts are funded by the Company as costs are incurred. The following table presents summarized unconsolidated income statement data for SRS (in thousands):
 
 
14

 
 
 
Three Months Ended
 
 
September 30,
 
 
 
2013
 
2012
 
Income statement data:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue
 
$
 
$
 
Operating loss
 
 
(2)
 
 
(541)
 
Net loss
 
 
(2)
 
 
(541)
 

Note 3 – GTI License Agreement
 
On November 5, 2009, the Company entered into an Amended and Restated License Agreement (the “GTI Agreement”) with GTI, replacing the Amended and Restated License Agreement between the Company and GTI dated August 31, 2006, as amended. Under the GTI Agreement, the Company maintains its exclusive worldwide right to license the U-GAS® technology for all types of coals and coal/biomass mixtures with coal content exceeding 60 %, as well as the non-exclusive right to license the original U-GAS® technology for 100 % biomass and coal/biomass blends exceeding 40 % biomass.  
 
In order to sublicense any U-GAS ® system, the Company is required to comply with certain requirements set forth in the GTI Agreement. In the preliminary stage of developing a potential sublicense, the Company is required to provide notice and certain information regarding the potential sublicense to GTI and GTI is required to provide notice of approval or non-approval within ten business days of the date of the notice from the Company, provided that GTI is required to not unreasonably withhold their approval. If GTI does not respond within that ten business day period, they are deemed to have approved of the sublicense. The Company is required to provide updates on any potential sublicenses once every three months during the term of the GTI Agreement. The Company is also restricted from offering a competing gasification technology during the term of the GTI Agreement.
 
For each U-GAS® unit which the Company licenses, designs, builds or operates for itself or for a party other than a sublicensee and which uses coal or a coal and biomass mixture or biomass as the feed stock, the Company must pay a royalty based upon a calculation using the MMBtu per hour of dry syngas production of a rated design capacity, payable in installments at the beginning and at the completion of the construction of a project (the “Standard Royalty”). If the Company invests, or has the option to invest, in a specified percentage of the equity of a third party, and the royalty payable by such third party for their sublicense exceeds the Standard Royalty, the Company is required to pay to GTI, an agreed percentage split of third party licensing fees (the “Agreed Percentage”) of such royalty payable by such third party. However, if the royalty payable by such third party for their sublicense is less than the Standard Royalty, the Company is required to pay to GTI, in addition to the Agreed Percentage of such royalty payable by such third party, the Agreed Percentage of its dividends and liquidation proceeds from its equity investment in the third party. In addition, if the Company receives a carried interest in a third party, and the carried interest is less than a specified percentage of the equity of such third party, the Company is required to pay to GTI, in its sole discretion, either (i) the Standard Royalty or (ii) the Agreed Percentage of the royalty payable to such third party for their sublicense, as well as the Agreed Percentage of the carried interest. The Company will be required to pay the Standard Royalty to GTI if the percentage of the equity of a third party that the Company (a) invests in, (b) has an option to invest in, or (c) receives a carried interest in, exceeds the percentage of the third party specified in the preceding sentence.
 
The Company is required to make an annual payment to GTI for each year of the term, with such annual payment due by the last day of January of the following year; provided, however, that the Company is entitled to deduct all royalties paid to GTI in a given year under the GTI Agreement from this amount, and if such royalties exceed the annual payment amount in a given year, the Company is not required to make the annual payment. The Company accrues the annual royalty expense ratably over the calendar year as adjusted for any royalties paid during year as applicable. The Company must also provide GTI with a copy of each contract that it enters into relating to a U-GAS® system and report to GTI with its progress on development of the technology every six months.
 
For a period of ten years, the Company and GTI are restricted from disclosing any confidential information (as defined in the GTI Agreement) to any person other than employees of affiliates or contractors who are required to deal with such information, and such persons will be bound by the confidentiality provisions of the GTI Agreement. The Company has further indemnified GTI and its affiliates from any liability or loss resulting from unauthorized disclosure or use of any confidential information that the Company receives.
 
 
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The GTI Agreement expires on August 31, 2016, but may be extended for two additional ten-year periods at the Company’s option.

Note 4 – Consulting Agreement with Crystal Vision Energy
 
Effective January 1, 2013, the Company entered into a consulting services agreement (the “CVE Agreement”) with Crystal Vision Energy Limited (“CVE”), pursuant to which CVE provided strategic, executive leadership and management services for the Company and its China business platform. The CVE Agreement replaced a prior services agreement that the Company had in place with CVE dated effective April 1, 2012. CVE received a monthly services fee of $ 150,000 plus expense reimbursement, $ 100,000 of which is payable in cash each month and the remaining $ 50,000 accrues monthly and is payable quarterly in common stock. CVE was also  entitled to nonforfeitable  incentive warrants upon signing.A warrant to purchase up to 1,200,000 shares of the Company’s common stock with an exercise price of $ 1.50 was granted in February 2013, becomes vested and fully exercisable on December 31, 2013 and has a term of five years.
 
In February 2013, the Company entered into a Unit Purchase Agreement with CVE under which the Company received proceeds of $ 400,000 and issued 449,438 shares of its common stock and warrants to acquire 449,438 shares of the Company’s common stock (the “CVE Unit Purchase Warrants”). The CVE Unit Purchase Warrants have an exercise price of $ 1.11 per share and have a term of 5 years.
 
As of September 30, 2013, the Company had issued 279,480 shares of common stock to CVE as part of their monthly compensation payable in common stock under the CVE Agreement. These shares were valued based upon the volume-weighted-average share price for the month preceding the month in which services are performed.
 
On July 29, 2013, the Company entered into an amendment (the “CVE Amendment”) to the CVE Agreement between CVE and the Company effective January 1, 2013.   Pursuant to the CVE Amendment, CVE made a $ 100,000 investment in the Company’s common stock on August 1, 2013 and received 136,986 shares and warrants to purchase 136,986 shares of the Company common stock. The shares of the Company’s common stock were issued at a price of $ 0.73 which was equal to 80 % of the volume weighted average price of the Company’s common stock on the NASDAQ Stock Market over the three months prior to August 1, 2013. The associated warrants have an exercise price which is equal to $ 0.91 , the volume weighted average price of the Company’s common stock on the NASDAQ over the three months prior to August 1, 2013.   The CVE Agreement was terminated effective as of August 31, 2013.

Note 5 – Stock-Based Compensation
 
As of   September 30, 2013, the Company had outstanding stock option and restricted stock awards granted under the Company’s Amended and Restated 2005 Incentive Plan, as amended (the “Incentive Plan”), under which the Company’s stockholders have authorized a total of   9,800,000 shares of common stock for   awards under the Incentive Plan. As of September 30, 2013, there were 550,902 shares authorized for future issuance pursuant to the Incentive Plan. Under the Incentive Plan, the Company may grant incentive and non-qualified stock options, stock appreciation rights, restricted stock units and other stock-based awards to officers, directors, employees and non-employees. Stock option awards generally vest ratably over a one to four year period and expire ten years after the date of grant.
 
Stock option activity during the three months ended September 30, 2013 was as follows:
 
 
 
Shares of Common
 
 
 
Stock Underlying
 
 
 
Stock Options
 
Outstanding at June 30, 2013
 
7,404,692
 
Granted
 
372,414
 
Exercised
 
 
Forfeited
 
 
Outstanding at September 30, 2013
 
7,777,106
 
Exercisable at September 30, 2013
 
6,524,328
 
 
 
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The fair values for the stock options granted during the three months ended September 30, 2013 were estimated at the date of grant using a Black-Scholes-Morton option-pricing model with the following weighted-average assumptions:
 
Risk-free rate of return
 
 
1.81
%
Expected life of award
 
 
5.4 years
 
Expected dividend yield
 
 
0.00
%
Expected volatility of stock
 
 
106
%
Weighted-average grant date fair value
 
$
0.59
 
 
Stock warrants activity during the three months ended September 30, 2013 were as follows:
 
 
 
Shares of Common
 
 
 
Stock Underlying
 
 
 
Stock Warrants
 
Outstanding at June 30, 2013
 
1,649,438
 
Warrants Granted
 
136,986
 
Exercised
 
 
Forfeited
 
 
Outstanding at September 30, 2013
 
1,786,424
 
 
The fair values of the warrants issued on August 1, 2013 to CVE were estimated using a Black-Scholes-Morton option-pricing model and the fair values was estimated to be approximately $ 0.1 million, using an estimated forfeiture rate and the following weighted-average assumptions:  
 
Risk-free rate of return
 
 
1.38
%
Expected life of award
 
 
5 years
 
Expected dividend yield
 
 
0.00
%
Expected volatility of stock
 
 
107
%
Weighted-average grant date fair value
 
$
0.64
 
 
The Company recognized all the previously unrecognized stock-based compensation expense related to warrants issued to CVE as of September 30, 2013 based on the termination of CVE Agreement on August 31, 2013. The following table presents stock based compensation expense attributable to stock option awards issued under the Incentive Plan and attributable to warrants and stock issued or sold to CVE (in thousands):
 
 
 
Three Months Ended
 
 
 
September 30,
 
 
 
2013
 
2012
 
Incentive Plan
 
$
333
 
$
164
 
CVE warrants and stock
 
 
713
 
 
 
Total stock-based compensation expense
 
$
1,046
 
$
164
 
 
On November 1, 2013, the Company issued warrants to Market Development Consulting Group, Inc. for the right to acquire up to 750,000 shares of the Company’s common stock. The warrants have an exercise price of $ 0.70 per share and have a term of 10 years.

Note 6 – Net Loss Per Share
 
Historical net loss per share of common stock is computed using the weighted average number of shares of common stock outstanding. Basic loss per share excludes dilution and is computed by dividing net loss available to common stockholders by the weighted average number of shares of common stock outstanding for the period. Stock options,   warrants and unvested restricted stock are the only potential dilutive share equivalents the Company has outstanding for the periods presented. For the three months ended September 30, 2013 and 2012 and the period from November 4, 2003 (inception) to September 30, 2013, options and warrants to purchase common stock were excluded from the computation of diluted earnings per share as their effect would have been antidilutive as the Company incurred net losses during those periods.

Note 7 – Risks and Uncertainties
 
Any future decrease in economic activity in China, India or in other regions of the world, in which the Company may in the future do business, could significantly and adversely affect its results of operations and financial condition in a number of other ways. Any decline in economic conditions may reduce the demand for prices from the products from our plants. In addition, the market for commodities such as methanol has been under significant pressure and the Company is unsure of how much longer this pressure will continue. As a direct result of these trends, the Company’s ability to finance and develop its existing projects, commence any new projects and sell its products could be adversely impacted.
 
 
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As disclosed in Note 2, under the terms of the ZZ Cooperation Agreement effective October 31, 2013, Xuejiao will (i) provide the ZZ Joint Venture with use of their methanol plant for ten years to the ZZ Joint Venture, (ii) provide a bank loan guarantee of approximately $ 3.2 million for a majority of the financing necessary for the ZZ Joint Venture for the retrofit and related costs, (iii) waive certain advances previously made to the ZZ Joint Venture and (iv) supply discounted coke oven gas produced by its existing coke ovens at a fixed price per unit to be used in combination with synthesis gas to produce refined methanol from the new ZZ Joint Venture integrated syngas methanol operation. The new integrated operation will be managed by the Company. Effective October 31, 2013, the Company terminated and waived its claims to past due capacity fees owed by Xuejiao under the prior syngas purchase and sale agreement. There can be no assurances that the methanol production operations contemplated by the ZZ Cooperation Agreement will be profitable. Profitability will be dependent on, among other things, our management of the operations of the plant, methanol pricing, and maintaining necessary government approvals.
 
The Yima Joint Venture plant’s commissioning is in its final stages and methanol production has been ramped up to as high as  80 % of total design capacity and has been selling its methanol product to a local industrial company since December 2012. All three of the gasifiers have been operated at various ranges of throughput and pressure. The current focus is on completing the installations of char removal systems for the syngas production and commissioning of the downstream units that prepare the syngas for methanol production as well as the continued commissioning of the methanol production unit itself. The plant is designed to produce 300,000 tonnes per year of methanol from two operating gasifiers. Any delays in the commissioning could cause delays in full methanol production. The Company has limited influence on the operating and financial policymaking of the Yima Joint Ventures. There can be no assurances that the Yima Joint Ventures’ operations will be profitable or that dividends will be paid to the Company. There have been a variety of minor construction related shutdowns which are normally seen in the startup of these units, but they have generally not been related to our gasifier systems.
 
The Company expects to continue for a period of time to have negative operating cash flows until it can generate sufficient cash flows from its technology, equipment and services business and SES China (including the ZZ Joint Venture and the Yima Joint Ventures) to cover its general and administrative expenses and other operating costs. In addition, the Company may need to aggressively pursue additional partners in China and may need to seek other equity financing or reduce its operating expenses. The Company will also limit the development of any further projects until it has assurances that acceptable financing is available to complete the project.
 
The Company currently plans to use its available cash for (i) general and administrative expenses; (ii) repairs, capital expenditures and other costs totaling approximately $ 2.5 million related to the restart of the ZZ Joint Venture plant for the ZZ Cooperation Agreement operations; (iii) debt service for the ZZ Joint Venture, including $ 1.2 million of principal due to ICBC in March 2014, and $ 3.2 million of principal due in September 2014 under the ZZ Short-term Loan unless it can be refinanced; (iv) the $ 1.5 million royalty due for the Yima Joint Ventures’ license which is payable in three equal installments, one of which was made in October 2013 with the others due in January 2014 and February 2014; and (v) working capital and other general corporate purposes. The Company may also need to make additional contributions to the ZZ Joint Venture in order for it to meet its obligations until the ZZ Joint Venture generates sufficient cash flows to cover its operating costs and debt service. The actual allocation and timing of these expenditures will be dependent on various factors, including changes in the Company’s strategic relationships, commodity prices and industry conditions, and other factors that the Company cannot currently predict. In particular, any future decrease in economic activity in China or in other regions of the world in which the Company may in the future do business could significantly and adversely affect its results of operations and financial condition. Operating cash flows from joint venture operating projects can be positively or negatively impacted by changes in coal and methanol prices. These are commodities where market pricing can be cyclical in nature.
 
The Company does not currently have all of the financial and human resources to fully develop and execute on all of its other business opportunities; however, the Company intends to finance their development through paid services, technology access fees, equity financings and by securing financial and strategic partners focused on development of these opportunities. The Company can make no assurances that its business operations will provide it with sufficient cash flows to continue its operations. The Company will need to raise additional capital through equity and debt financing for any new ventures that are developed, to support its existing projects and possible expansions thereof and for its corporate general and administrative expenses. As a result of its focus on financing activities, particularly in China, the Company has identified strategic parties that have expressed interest in helping it grow SES China’s business and the Company is evaluating these options. The Company is considering a full range of financing options in order to create the most value in the context of the increasing interest the Company is seeing in its technology. The Company cannot provide any assurance that any financing will be available to it in the future on acceptable terms or at all. Any such financing could be dilutive to its existing stockholders. If the Company cannot raise required funds on acceptable terms, it may not be able to, among other things, (i) maintain its general and administrative expenses at current levels including retention of key personnel and consultants; (ii) successfully develop its licensing and related service businesses; (iii) negotiate and enter into new gasification plant development contracts and licensing agreements; (iv) make additional capital contributions to its joint ventures; (v) fund certain obligations as they become due; and (vi) respond to competitive pressures or unanticipated capital requirements.
 
 
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On August 2, 2013, the Company received a letter from NASDAQ informing it that the closing bid price of its common stock has been below $ 1.00 per share for a period of 30 consecutive trading days, which is outside the requirements of NASDAQ for continued listing. Under NASDAQ Listing Rule 5810(c)(3)(A), the Company has a grace period of 180 calendar days, or until January 29, 2014, in which to regain compliance with the minimum bid price rule. To regain compliance, the closing bid price of the Company’s common stock must meet or exceed $1.00 per share for a minimum of ten consecutive business days during this grace period. If the Company does not regain compliance before January 29, 2014, it may be eligible for an additional grace period if we meet the initial listing standards, with the exception of bid price, for The NASDAQ Capital Market, and the Company successfully applies for a transfer of its securities to that market. Such a transfer would provide the Company with an additional 180 calendar day period to regain compliance with the minimum bid requirement.
 
The Company is subject to concentration of credit risk with respect to our cash and cash equivalents, which it attempts to minimize by maintaining our cash and cash equivalents with major high credit quality financial institutions. At times, the Company's cash balances in a particular financial institution may exceed limits that are insured by the U.S. Federal Deposit Insurance Corporation or equivalent agencies in foreign countries such as Hong Kong.

Note 8 – Segment Information
 
The Company’s reportable operating segments have been determined in accordance with the Company’s internal management reporting structure and include SES China, Technology Licensing and Related Services, and Corporate. The SES China reporting segment includes all of the assets and operations and related administrative costs for China including the investment in the Yima Joint Ventures. The Technology Licensing and Related Services reporting segment includes all of the Company’s current operating activities outside of China. The Corporate reporting segment includes the executive and administrative expenses of the corporate office in Houston. The Company evaluates performance based upon several factors, of which a primary financial measure is segment operating income or loss. Reclassifications have been made in the prior period financial statements to conform to the current period presentation.
 
 
19

 
The following table presents statements of operations data and assets by segment (in thousands):  
 
 
 
Three Months Ended
 
 
 
September 30,
 
 
 
2013
 
2012
 
Revenue:
 
 
 
 
 
 
 
SES China
 
$
 
$
5
 
Technology licensing and related services
 
 
 
 
66
 
Total revenue
 
$
 
$
71
 
 
 
 
 
 
 
 
 
Depreciation and amortization:
 
 
 
 
 
 
 
SES China
 
$
515
 
$
518
 
Technology licensing and related services
 
 
47
 
 
47
 
Corporate & other
 
 
3
 
 
12
 
Total depreciation and amortization
 
$
565
 
$
577
 
 
 
 
 
 
 
 
 
Operating loss:
 
 
 
 
 
 
 
SES China
 
$
(2,664)
 
$
(2,435)
 
Technology licensing and related services
 
 
(90)
 
 
(533)
 
Corporate & other
 
 
(1,377)
 
 
(913)
 
Total operating loss
 
$
(4,131)
 
$
(3,881)
 
 
 
 
 
 
 
 
 
Interest expense:
 
 
 
 
 
 
 
SES China
 
$
69
 
$
96
 
Technology licensing and related services
 
 
 
 
 
Corporate & other
 
 
 
 
 
Total interest expense
 
$
69
 
$
96
 
 
 
 
 
 
 
 
 
Equity in losses of joint ventures:
 
 
 
 
 
 
 
SES China
 
$
 
$
247
 
Technology licensing and related services
 
 
 
 
 
Corporate & other
 
 
1
 
 
270
 
Total equity in losses of joint ventures
 
$
1
 
$
517
 
 
 
 
September 30,
 
June 30,
 
 
 
2013
 
2013
 
Assets:
 
 
 
 
 
 
 
SES China
 
$
76,671
 
$
76,316
 
Technology licensing and related services
 
 
1,014
 
 
1,030
 
Corporate & other
 
 
11,041
 
 
11,018
 
Total assets
 
$
88,726
 
$
88,364
 
 
 
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Item 2.       Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and the related notes and other financial information included elsewhere in this quarterly report.   Some of the information contained in this discussion and analysis or set forth elsewhere in this quarterly report, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties.   You should review the “Risk Factors” section of our Annual Report on Form 10-K for the fiscal year ended June 30, 2013 for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
 
Business Overview
 
We are a development stage global energy and gasification technology company that provides proprietary gasification technology systems and solutions to the energy and chemical industries. Our business is to create value by supplying our technology, equipment and services into global projects where lower cost low quality coals, coal wastes, municipal wastes, agricultural biomass, and other biomass feedstocks can be profitably converted through our proprietary gasification technology into clean synthesis gas, or syngas (a mixture of primarily hydrogen, carbon monoxide, and methane), which is then used to produce a variety of high value energy and chemical products.   Our initial operating projects to date convert high ash coal and coal wastes to chemical grade methanol, and we are pursuing a variety of additional global projects under development by customers who may use our technology platform to convert low quality coals such as lignite, coal wastes, municipal wastes and agricultural waste biomass to high value products such as electric power, transportation fuels, substitute natural gas, or SNG, fuel for direct reduction iron, or DRI, steel making and other products. Our technology is originally based on the U-GAS ® process developed by the Gas Technology Institute and we have augmented and differentiated the technology through newly developed intellectual property related to design, detailed engineering, constructing, starting up and operating our two commercial joint venture plants in China.
 
We intend to commercialize our technology through supplying our gasification systems consisting of technology, equipment and services to projects globally and to accomplish this largely via value accretive partnerships and collaborations with other companies which operate in the energy and chemical market segments where we believe our technology is highly advantaged.   This is a low capital intensity business approach which we believe can generate attractive margins for us through providing our technology differentiated equipment and services in multiple market segments globally with a potential to build meaningful sales opportunities over time.   However, to date our principal operating activities have focused in China where we have invested and built two commercial projects.   We made these investments to fully demonstrate our technology and our capabilities to build and operate, but with this step of commercializing our technology successfully completed, we no longer intend to make such extensive capital investments in the foreseeable future. Our ZZ Joint Venture project is our first commercial scale coal gasification plant and is located in Shandong Province, China. It achieved commercial operation in December 2008.   The ZZ Joint Venture is designed to produce clean syngas for sale to an immediately adjacent industrial company who manufactures methanol from the syngas.   Under the new commercial structure completed effective October 31, 2013, we assumed control of the methanol facilities and the ZZ Joint Venture plant will operate as an integrated plant which converts coal   to syngas and then converts syngas and coke oven gas into methanol, as described in more detail under “Current Operations and Projects – Zao Zhuang Joint Venture.”   The Yima Joint Venture project in Henan Province, China generated its first methanol production in December 2012, and is currently in its start-up phase as described in more detail under “Current Operations and Projects – Yima Joint Ventures.” It is designed to produce 300,000 tons per year of chemical grade methanol and has achieved as high as 80% of its design raw methanol production capacity during start-up.
 
Our business model is to deploy our technology on a global basis via supplying a technology package, containing license rights to operate a project using our technology, gasification system equipment, and technology related services.   As part of our overall strategy we intend to form strategic regional and market-based partnerships or business verticals where our technology offers advantages and through cooperating with these partners grow an installed base of projects. Through collaborative partnering arrangements we believe we will commercialize our technology much faster than entering these markets alone.  Building on our success in China, we are formalizing a China region business unit, that we refer to as SES China, with plans to capitalize this business locally with strategic partners that we believe can help accelerate our growth in China. In addition to regional business units, we are continuing to evaluate and develop our business in markets such as power, steel, fuels, substitute natural gas, chemicals and renewables which can benefit from deploying our technology offering to create these products from low cost coal and renewable feedstocks. We are developing these market-based business vertical opportunities together with strategic partners which have established businesses or interests in these markets with the goal of growing and expanding these businesses by partnering with us and deployment of our technology offering. Our collaboration with GE Packaged Power, Inc., a subsidiary of GE, which began in early 2013 to jointly evaluate and market a small scale power generation unit combining our gasification technology with GE’s aeroderivative gas turbines, is an ongoing example of our market-based business vertical developments underway. We are also advancing developments via technology integration studies with potential partners for business verticals in DRI steel and “green” chemicals derived from municipal wastes. We have also formalized agreements for marketing our technology in India which we believe is an important growth region for which our technology is uniquely well suited.
 
 
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We believe our existing operating projects in China have clearly demonstrated that we have several advantages which differentiate our technology over other commercially available gasification technologies, such as entrained flow, fixed bed, and moving bed gasification technologies. The first of these advantages is our ability to use a wide range of feedstocks (including low rank, high ash and high moisture coals, which are significantly cheaper than higher grade coals), coal wastes, municipal wastes, agricultural wastes, and other biomass feedstocks to make clean syngas.   Our feedstock advantage opens up many of these global resources for use to manufacture energy and chemical products which otherwise could not be done with other currently available commercial gasification technologies. Secondly, our technology’s advanced fluidized bed design is extremely tolerant to a wide range changes in feedstock during operation, which allows for flexible fuel purchasing for our customers. Additionally, our technology can use much less water and its simple design leads to the fabrication cost of our equipment and resulting plant costs being lower compared to other commercially available technologies. We believe these important factors position our technology for future deployment of gasification worldwide because our technology can enable projects to become a lower cost producer of products. Depending on local market needs and fuel sources, our syngas can be used to produce many valuable products including electric power, SNG, chemicals such as methanol, dimethyl ether, or DME, and glycol, ammonia for fertilizer production, reducing gas for DRI processes, and transportation fuels such as gasoline and diesel.
 
The key elements of our business strategy include:
 
     Secure a partner for China business platform.   SES China is intended to be a stand-alone business platform that encompasses all of our current and future business activities and initiatives in China. We believe that SES China will better enable us to grow faster in China than otherwise possible and to better protect our intellectual property and technology in China. In addition, we expect to work more effectively with our existing partners to efficiently leverage the other business verticals we are developing including clean renewable fuels and power businesses, direct reduction iron for the steel industry, clean coal-to-chemicals projects, and for longer term value creation, larger scale SNG projects utilizing low rank coal resources and biomass. We are seeking to partner SES China with a financially strong and highly skilled Chinese companies which desires to invest into the growth of China’s clean energy space and who recognize the opportunity afforded by our technology capability and business model. We believe partnering a significant portion of SES China can, with the right Chinese partner, accelerate the commercialization of our technology on a global basis and will enable to reduce our capital requirements to achieve this acceleration.
 
      Operation of existing plants.   The Yima Joint Venture plant generated its first methanol production in December 2012, and is currently in its start-up phase. It is designed to produce 300,000 tons per year of chemical grade methanol and has been ramping up plant production up since it was initially started.  It has achieved as high as 80% of its design raw methanol, production capacity.  The current focus is on completing the installations of char removal systems for the syngas production and commissioning of the downstream units that prepare the syngas for methanol production as well as the continued commissioning of the methanol production unit itself. There have been a variety of minor construction related shutdowns which are normally seen in the startup of these units, but they have generally not been related to our gasifier systems . This plant will provide a commercial demonstration of our technology on a much larger scale than the ZZ Joint Venture plant. The ZZ Joint Venture plant is designed to produce clean syngas for sale to an immediately adjacent industrial company who manufactures methanol from coke oven gas and syngas. We successfully operated the ZZ Joint Venture plant for over three years through September 2011, and since then have held it idle while an expanded commercial structure was negotiated with Hai Hua, the former syngas off-taker. During this operating period, the plant demonstrated robust technology performance, high efficiency and leading capability to process a wide range of coals, coal washery wastes and lignite coals from Inner Mongolia China and Australia.  Xuejiao acquired the plant in 2012 and the new commercial structure and definitive agreements were completed July 2013.   Under this revised commercial structure, we are assumed control of the methanol facilities as of October 31, 2013 and the ZZ Joint Venture plant will operate as an integrated plant which converts coal to syngas, then converts syngas and coke oven gas into methanol. The plant is now undergoing maintenance repairs along with some minor modifications which enable it to operate as an integrated syngas to methanol production operation.   It is expected that this work will be completed and the plant returned to service in December 2013.
 
 
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     Strategic partnerships and collaborations in key market segments through new business verticals. We intend to commercialize our technology through supplying our gasification systems consisting of technology, equipment and services to projects globally and to accomplish this largely via value accretive partnerships and collaborations with other companies which operate in the energy and chemical market segments where we believe our technology is highly advantaged. This is a low capital intensity business approach which we believe can generate attractive margins for us through providing our technology differentiated equipment and services in multiple market segments globally with a potential to build meaningful sales opportunities over time. As part of our overall strategy we intend to form strategic regional and market-based partnerships or business verticals where our technology offers advantages and through cooperating with these partners grow an installed base of projects. This includes our transactions with Hongye and Zhongmo for SES China and strategic collaborations in specific markets that will enable us to expand our business. Building on our success in China, we have formalized other business vertical relationships through marketing agreements including with GE’s Packaged Power Inc. for global distributed power generation projects and with Simon India Ltd, a subsidiary of Zuari Global Ltd, to exclusively market our technology in India. The most modern and environmentally friendly types of new steel plants include an iron ore processing step called DRI that replaces dirty blast furnaces.  Syngas produced by our technology has a composition that is especially well-suited for use in DRI, and our process’ ability to utilize low-cost coal and coal wastes makes it especially economical in this application.  In addition, we are also developing additional business vertical opportunities to integrate our technology with DRI steel making technology for a coal-to-steel solution and for evaluating projects that can make methanol and derivatives from refuse derived fuels from our technology. We have completed two paid studies during fiscal 2013 with potential partners to assess integrating our technology into these applications and the results of these studies indicated a very cost effective solution with highly efficient integrations. In the fastest growing regions of Asia, including India and China, new infrastructure additions create a strong market for steel.    
 
      Leveraging our proprietary technology through licensing, equipment sales and related services to increase revenues and position us for future growth .  We provide a proprietary technology package whereby we license our technology rights to third parties, deliver an engineered technology package and sell proprietary equipment components to customers who have contracted to own and operate projects using our technology. We intend to focus on developing opportunities for our proprietary technology package whereby we may (i) integrate our gasification process technology package with downstream technologies to provide a fully integrated offering where we may invest in projects either directly or through an investment partner or (ii) may partner with engineering, equipment and technology companies to provide our gasification process technology package into an integrated and modular product offering. We anticipate that we can increase revenues through collecting technology licensing fees and royalties, engineering and technical service fees, as well as equipment product sales to customers who have contracted to own and operate projects and desire to incorporate our proprietary technology. We also believe that our licensing activities will provide insight into project development activities, which may allow us to make selective equity investments in such projects in the future, or take options in projects for which we provide a license.
 
     Developing value where we have a competitive advantage and have access   of rights to feedstock resources. We believe that we have the greatest competitive advantage using our gasification technology in situations where there is a ready source of low cost coal, coal waste or biomass to utilize as a feedstock. We are focusing our efforts globally together with our partners in countries with large low rank coal resources, but our principal operating activities to-date have focused on China and India. In the U.S. and certain other countries, we believe there may be opportunities for us to leverage the capability of our technology to efficiently and cleanly gasify coal wastes or biomass material to make renewable fuels or “green chemicals”. Today’s regulatory environment in the U.S. is favorable for these types of projects because increased environmental concerns are creating a market demand for renewable fuels and companies are under increasing pressure to reduce their carbon footprint. 
 
 
23

   
    Continue to develop and improve our technology.   We are continually seeking to improve the overall plant availability, plant efficiency and fuel handling capabilities of our gasification technology. We are continuing to work with our prospective customers to determine the suitability of their low rank coals for our technology through proprietary coal characterization testing and bench scale gasification tests. Additionally, we are growing our technology base through (i) continued development of know-how with our engineering and technical staff, (ii) growing and protecting our trade secrets as a result of patenting improvements tested at our ZZ and Yima Joint Venture plants, (iii) developing improvements resulting from integration of our technology with downstream processes, and (iv) developing improvements resulting from scaling up the design of our technology in pressure and capacity. Examples of our technology development include our Fines Management System and Ash Management System which increase overall efficiency. We have several patent applications pending relating to these improvements to the technology in addition to a number of other improvements to increase the availability of the gasifier or to lower the cost of the gasifier and its operation.
 
    Grow earnings through increased revenues, joint venture projects and control of expenses.   We remain intently focused on control of our expenses while we grow revenues from our technology business and operating projects. We believe our strategy will allow us to develop revenues and operating cash flows necessary for sustainable long term growth. We anticipate that we can generate revenues through equipment supply, engineering and technical service fees, and licensing fees and royalties on products sold by our licensees that incorporate our proprietary technology without incurring the significant capital costs required to develop and construct a plant. We also believe that our licensing activities will provide additional insight into project development activities, which may allow us to make selective equity investments in such projects in the future and also the development of integrated, modular product offerings. We have also initiated discussions with companies that have expressed interest in partnering with us on a strategic basis to accelerate our business and in some cases who are willing to pay us to bring our technology into an industry-specific joint venture. We intend to minimize project development expense until we have assurances that acceptable financing is available to complete our projects. Until we have such assurances, our strategy will be to operate using our current capital resources and to leverage the resources of strategic relationships or financing partners. We have taken and may take additional steps to significantly reduce expenses, particularly in China, to align our development efforts with available cash resources until we can find such a partner.
 
Results of Operations
 
We are in our development stage and therefore have had limited operations.   We have sustained cumulative net losses of approximately $161.3 million from November 4, 2003, the date of our inception, to September 30, 2013.
 
Three Months Ended September 30, 2013 Compared to the Three Months Ended September 30, 2012
 
Revenue .   There was no revenue for the three months ended September 30, 2013 compared to $71,000 for the three months ended September 30, 2012, all of which related to technology licensing and related services.
 
 In March 2012, Xuecheng Energy advanced approximately $1.0 million to the ZZ Joint Venture. In September 2012, Xuejiao advanced an additional approximately $0.8 million to the ZZ Joint Venture. Under the cooperation agreement agreed to in July 2013 and effective as of October 31, 2013, or the ZZ Cooperation Agreement, these advances are to be applied to settling the prior payments due under the syngas purchase and sale agreement.   We are preparing to re-start ZZ Joint Venture plant in December 2013 for the production of syngas to be used to produce methanol, therefore these $1.8 million of advances will be recognized as revenue in the three months ending December 31, 2013. Additionally, we expect to begin to recognize revenue during the three months ending December 31, 2013 from sales of methanol produced under the ZZ Cooperation Agreement using Xuecheng Energy’s coke oven gas supply until the ZZ Joint Venture plant is restarted.
 
There were no technology licensing and related services revenues for the three months ended September 30, 2013, compared to $71,000 of technology licensing and related services revenues for the three months ended September 30, 2012 which resulted from engineering feasibility studies and coal testing services for customers who may license and build plants using our technology.
 
 
24

   
Costs of sales and plant operating expenses. Costs of sales and plant operating expenses decreased by $34,000 to $97,000 for the three months ended September 30, 2013 compared to $131,000 for the three months ended September 30, 2012 which related primarily to operating and maintenance expenses during the suspension of syngas production at the ZZ Joint Venture plant since late September 2011, and the costs related to engineering and coal testing costs during the three months ended September 30, 2012.
 
General and administrative expenses. General and administrative expenses decreased by $0.7 million to $2.4 million for the three months ended September 30, 2013 compared to $3.1 million for the three months ended September 30, 2012. The decrease was due primarily to   a reduction in royalty expense due under our licensing agreement with GTI, due in part, to royalty payments paid to GTI which are capitalized as part our investment in the Yima Joint Ventures, and $0.2 million of non-recurring fees charged for the three months ended September 30, 2012 associated with collecting an advance of approximately $0.8 million from Xuecheng Energy.   Recurring general and administrative expenses consist primarily of compensation, professional and consulting fees, travel, and other costs of our corporate, development and administrative functions in Houston and Shanghai, and project and technical development expenses.  
 
Stock-based compensation expense. Stock-based compensation expense increased by $0.9 million to $1.1 million for the three months ended September 30, 2013 compared to $0.2 million for the three months ended September 30, 2012. The increase was due primarily to the expensing of the fair values of shares and warrants issued in connection with our consulting agreement with Crystal Vision Energy Limited, or CVE expensing the excess of the fair value over the consideration paid for shares of common stock and warrants issued to CVE under a unit purchase agreement in August 2013, and expensing the estimated fair values of stock options awarded to employees and directors during the period.
 
Depreciation and amortization. Depreciation and amortization expense was $0.6 million for both of the three months ended September 30, 2013 and 2012 and was primarily related to depreciation of our ZZ Joint Venture plant’s assets.
 
Equity in losses of joint ventures. The equity in losses of joint ventures decreased by $0.5 million to $1,000 for the three months ended September 30, 2013 compared with $0.5 million for the three months ended September 30, 2012 and relates to our 25% share of the start-up losses incurred by the Yima Joint Ventures and our 50% share of the start-up losses incurred by SES Resource Solutions, Ltd., or SRS.   The losses of the Yima Joint Ventures related to non-capitalizable costs incurred during the design, construction, commissioning and start-up phases. The losses of SRS related to development costs including the value of Midas’ contributed services, consulting and travel expenses.   The decrease in equity in losses of joint ventures was due primarily to the suspension of the SRS joint ventures activities in December 2012, and due to our change from the equity method to the cost method of accounting for Yima Joint Ventures as of June 1, 2013.
 
Foreign currency (gain) loss .   Foreign currency gain was $12,000 for the three months ended September 30, 2013 and foreign currency loss was $38,000 for the three months ended September 30, 2012.   These amounts resulted from the appreciation and depreciation, as applicable, of the Renminbi Yuan relative to the U.S. dollar.
 
Interest expense. Interest expense decreased by $27,000 to $69,000 for the three months ended September 30, 2013 compared to $96,000 for the three months ended September 30, 2012.   Our interest expense relates to the ZZ Joint Venture’s loans with Industrial and Commercial Bank of China, or ICBC, and its short-term loan with Zaozhuang Bank Co. Ltd., or the ZZ Short-term Loan, as of September 2013. The decrease in interest expense is a result of a lower average outstanding principal balances on ZZ Joint Venture’s loans due to scheduled repayments of principal on the ICBC loan.
 
Liquidity and Capital Resources
 
We are in our development stage and have financed our operations to date through private placements of our common stock and two public offerings, one in November 2007 and one in June 2008. We have used the proceeds of these offerings primarily for the development of our technology including the investments in the ZZ Joint Venture and the Yima Joint Ventures, and to pay other business development and general and administrative expenses. In addition, (as described below) the ZZ Joint Venture has a loan agreement with ICBC which funded certain of its plant’s construction costs, and the ZZ Short-term Loan funded in September 2013 to finance costs related to the ZZ Cooperation Agreement.
 
 
25

   
As of September 30, 2013, we had $15.1 million in cash and cash equivalents and $4.2 million of working capital available to us.   During the three months ended September 30, 2013, we used $2.8 million in operating activities compared to $2.6 million for the three months ended September 30, 2012.   We used $0.1 million in investing activities for the three months ended September 30, 2013 for capital expenditures related to the ZZ Cooperation Agreement and we used $0.1 million in investing activities for the three months ended September 30, 2012 to funding the start-up and development of SRS.   For both the three months ended September 30, 2013 and 2012, we used $1.2 million in financing activities for the scheduled semi-annual principal payments on the ZZ Joint Venture’s loan with ICBC.   On September 10, 2013, the ZZ Joint Venture received proceeds of approximately $3.3 million under a short-term bank loan with ZaoZhuang Bank which is due and payable on September 9, 2014.   On August 1, 2013, we received proceeds of $100,000 and issued 136,986 shares of our common stock and issued warrants to acquire 136,986 shares of our common stock under a Unit Purchase Agreement with CVE.   In September 2012, we received $8.7 million of gross proceeds from sales of our common stock to Hongye and Zhongmo.
 
In August 2013, we entered into and closed a Unit Purchase Agreement with CVE under which we received proceeds of $100,000 and issued 136,986 shares of our common stock and issued warrants to acquire 136,986 shares of our common stock.
 
We currently plan to use our available cash for (i) general and administrative expenses; (ii) repairs, capital expenditures and other costs totaling approximately $2.5 million related to the restart of the ZZ Joint Venture plant for the ZZ Cooperation Agreement operations; (iii) debt service for the ZZ Joint Venture, including $1.2 million of principal due to ICBC in March 2014, and $3.2 million of principal due in September 2014 under the ZZ Short-term Loan unless it can be refinanced; (iv) the $1.5 million royalty due for the Yima Joint Ventures’ license which is payable in three equal installments, one of which was made in October 2013 with the others due in January 2014 and February 2014; and (v) working capital and other general corporate purposes. We may need to make additional contributions to the ZZ Joint Venture in order for it to meet its obligations until the ZZ Joint Venture generates sufficient cash flows to cover its operating costs and debt service.
 
Loan Agreement with ICBC
 
On March 22, 2007, the ZZ Joint Venture entered into a seven-year loan agreement and received approximately $12.6 million of loan proceeds pursuant to the terms of a Fixed Asset Loan Contract with ICBC to complete the project financing for the ZZ Joint Venture. Key terms of the Fixed Asset Loan Contract with ICBC are as follows:
 
    Term of the loan is seven years from the commencement date (March 22, 2007) of the loan;
 
    Interest is adjusted annually based upon the standard rate announced each year by the People’s Bank of China, and as of   September 30, 2013, the applicable annual interest rate was 6.55% and is payable monthly;
 
    A principal payment of RMB 7.7 million (approximately $1.2 million based on current currency exchange rates) was paid in September 2013 and the final payment of the same amount is due in March 2014;
 
    Xuecheng Energy is the guarantor of the entire loan;
 
    Plant and equipment assets of the ZZ Joint Venture are pledged as collateral for the loan;
 
    Covenants include, among other things, prohibiting pre-payment without the consent of ICBC and permitting ICBC to be involved in the review and inspection of the ZZ Joint Venture plant; and
 
    Subject to customary events of default which, should one or more of them occur and be continuing, would permit ICBC to declare all amounts owing under the contract to be due and payable immediately.
 
As of September 30, 2013, the ZZ Joint Venture was in compliance with all covenants and obligations under the Fixed Asset Loan Contract.
 
Short-term Loan Agreement with Zaozhuang Bank Co., Ltd
 
On September 10, 2013, the ZZ Joint Venture entered into a short-term loan agreement with Zaozhuang Bank Co., Ltd., and received approximately $3.2 million of loan proceeds for the retrofit and related costs contemplated by the ZZ Cooperation Agreement. Key terms of the ZZ Short-term Loan are as follows:
 
    Term of the loan is one year, due on September 9, 2014;
 
    Interest is payable monthly at an annual rate of 10.8%;
 
 
26

   
    Certain assets of the ZZ Joint Venture, including land use rights and the administration building, are pledged as collateral for the loan; and
 
    Subject to customary events of default which, should one or more of them occur and be continuing, would permit Zaozhuang Bank Co., Ltd. to declare all amounts owing under the agreement to be due and payable immediately.
 
Current Operations and Projects
 
Zao Zhuang Joint Venture
 
Joint Venture Agreement
 
On July 6, 2006, we entered into a cooperative joint venture contract with Shandong Hai Hua Coal & Chemical Company Ltd., or Hai Hua, which established Synthesis Energy Systems (Zao Zhuang) New Gas Company Ltd., or the ZZ Joint Venture, a joint venture company that has the primary purposes of (i) developing, constructing and operating a syngas production plant utilizing the U-GAS ® technology in Zao Zhuang City, Shandong Province, China and (ii) producing and selling syngas and the various byproducts of the plant. In August 2012, Hai Hua’s name was changed to Shandong Weijiao Group Xuecheng Energy Company Ltd., or Xuecheng Energy, after a change in control transaction. We own 97.6% of the ZZ Joint Venture and Xuecheng Energy owns the remaining 2.4%. We consolidate the results of the ZZ Joint Venture in our consolidated financial statements.
 
On July 24, 2013, the ZZ Joint Venture entered into a cooperation agreement, or the ZZ Cooperation Agreement, with Xuecheng Energy and its parent company, Shandong Xuejiao Chemical Co., Ltd., or collectively referred to as Xuejiao, which serves to supersede the existing syngas purchase and sale agreement among the parties dated October 22, 2006 and supplemented previously in 2008. The ZZ Cooperation Agreement represents the basis for an integrated syngas to methanol operation and resolution of the nonpayment of the contractual capacity fees by Xuejiao.
 
Under the terms of the ZZ Cooperation Agreement, Xuejiao will (i) provide the ZZ Joint Venture with use of their methanol plant for ten years at no cost to the ZZ Joint Venture, (ii) has provided a bank loan guarantee of approximately $3.2 million for a majority of the financing necessary for the ZZ Joint Venture for the retrofit and related costs of the ZZ Joint Venture plant, (iii) waive certain advances previously made to the ZZ Joint Venture and (iv) supply discounted coke oven gas, or COG, produced by its existing coke ovens to be used in combination with synthesis gas to produce refined methanol from the new ZZ Joint Venture integrated syngas to methanol operation. The new integrated operation will be managed by us. Effective October 31, 2013, we terminated and waived our claims to past due capacity fees owed by Xuejiao under the prior syngas purchase and sale agreement. 
 
On October 31, 2013, the ZZ Cooperation Agreement took full effect as all of the required conditions precedent were completed including: (i) all necessary consents and approvals being obtained by each of the parties, (ii) completion of final due diligence on the methanol plant, as well as the scheduled overhaul of the facility (as described in more detail in the Agreement) and the handover to the ZZ Joint Venture, and (iii) execution of the Xuejiao financing guarantee and the financial closing of the ZZ Joint Venture bank financing for the retrofit, which occurred on September 10, 2013.   We will be consolidating the financial results from the ZZ Cooperation Agreement effective November 1, 2013. 
 
Additionally, we are also evaluating alternative products and partnership structures for a possible expansion of the ZZ Joint Venture plant for its longer term use. In 2010, the ZZ Joint Venture received the necessary government approval for an expansion and this project is under evaluation by us. We are also evaluating certain new downstream technologies to produce high value products.
 
In March 2012, Xuecheng Energy advanced approximately $1.0 million to the ZZ Joint Venture. In September 2012, Xuejiao advanced an additional approximately $0.8 million to the ZZ Joint Venture. These advances are to be applied to settling the prior payments due under the syngas purchase and sale agreement, therefore we will recognize these advances as revenue during the three months ending December 31, 2013.
 
Until the ZZ Joint Venture generates sufficient cash flows to cover its operating costs and debt service, we will also need to make additional contributions to the ZZ Joint Venture in order for it to meet its obligations, including the outstanding balance under the loan with ICBC, and the ZZ Short-term Loan due in September 2014 unless such loan can be refinanced.
 
 
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Yima Joint Ventures
 
In August 2009, we entered into amended joint venture contracts with Yima Coal Industry (Group) Co., Ltd., or Yima, replacing the prior joint venture contracts entered into in October 2008 and April 2009. The joint ventures were formed for each of the gasification, methanol/methanol protein production, and utility island components of the plant, or collectively, the Yima Joint Ventures. The parties obtained government approvals for the project’s feasibility study during the three months ended December 31, 2008 and for the project’s environmental impact assessment during the three months ended March 31, 2009, which were the two key approvals required to proceed with the project. The amended joint venture contracts provide that: (i) we and Yima contribute equity of 25% and 75%, respectively, to the Yima Joint Ventures; (ii) Yima will guarantee the repayment of loans from third party lenders for 50% of the project’s cost and, if debt financing is not available, Yima is obligated to provide debt financing via shareholder loans to the project until the project is able to secure third-party debt financing; and (iii) Yima will supply coal to the project from a mine located in close proximity to the project at a preferential price subject to a definitive agreement to be subsequently negotiated. In connection with entering into the amended contracts, we and Yima contributed remaining cash equity contributions of $29.3 million and $90.8 million, respectively, to the Yima Joint Ventures during the three months ended September 30, 2009. We will also be responsible for our share of any cost overruns on the project.
   
In exchange for such capital contributions, we own a 25% interest in each joint venture and Yima owns a 75% interest. Notwithstanding this, in connection with an expansion of the project, we have the option to contribute a greater percentage of capital for the expansion, such that as a result, we would have up to a 49% ownership interest in the Yima Joint Ventures.
 
The Yima Joint Venture plant’s commissioning is in its final stages and methanol production has been ramped up to as high as 80% of total design capacity and has been selling its methanol product to a local industrial company since December 2012.   All three of the gasifiers have been operated at various ranges of throughput and pressure. The current focus is on completing the installations of char removal systems for the syngas production and commissioning of the downstream units that prepare the syngas for methanol production as well as the continued commissioning of the methanol production unit itself. There have been a variety of minor construction related shutdowns which are normally seen in the startup of these units, but they have generally not been related to our gasifier systems. The plant is designed to produce 300,000 tonnes per year of methanol from two operating gasifiers.
 
The estimate of the total required capital of the project was approximately $250 million. The remaining capital for the project has been funded with project debt obtained by the Yima Joint Ventures. Yima agreed to guarantee the project debt in order to secure debt financing from domestic Chinese banking sources. We have agreed to pledge to Yima our ownership interests in the joint ventures as security for our obligations under any project guarantee. In the event that the necessary additional debt financing is not obtained, Yima has agreed to provide a loan to the joint ventures to satisfy the remaining capital needs of the project with terms comparable to current market rates at the time of the loan.
   
Under the terms of the joint venture agreements, the Yima Joint Ventures are to be governed by a board of directors consisting of eight directors, two of whom were appointed by us and six of whom were appointed by Yima. The joint ventures also have officers that are nominated by us, Yima and/or the board of directors pursuant to the terms of the joint venture contracts. We and Yima shall share the profits, and bear the risks and losses, of the joint ventures in proportion to our respective ownership interests. The term of the joint venture shall commence upon each joint venture company obtaining its business license and shall end 30 years after commercial operation of the plant.
   
As of June 1, 2013, we concluded that we are unable to exercise significant influence over the Yima Joint Ventures, resulting in certain accounting changes described in “Note 2 – Joint Ventures - Yima Joint Ventures.” Our conclusion regarding our lack of significant influence is based on our interactions with the Yima Joint Ventures related to the start-up and operations and due to various other circumstances including limited participation in operating and financial policymaking processes and our limited ability to influence technological decisions.
 
We have included approximately $3.0 million of royalty costs due to GTI for the Yima Joint Ventures’ U-GAS ® license as part of our investment in the Yima project including a payment paid to GTI in June 2009 (when the amended joint venture contracts were signed) and the remaining additional royalty payment of approximately $1.5 million payable to GTI which was accrued as of September 30, 2013. The $1.5 million royalty due for the Yima Joint Ventures’ license is expected to be paid in three equal installments, one of which was made in October 2013 with the others due in January 2014 and February 2014.
 
 
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GTI Agreement
 
On November 5, 2009, we entered into an Amended and Restated License Agreement, or the GTI Agreement, with GTI, replacing the Amended and Restated License Agreement between us and GTI dated August 31, 2006, as amended. Under the GTI Agreement, we maintain our exclusive worldwide right to license the U-GAS ® technology for all types of coals and coal/biomass mixtures with coal content exceeding 60%, as well as the non-exclusive right to license the U-GAS ® technology for 100% biomass and coal/biomass blends exceeding 40% biomass.
 
In order to sublicense any U-GAS ® system, we are required to comply with certain requirements set forth in the GTI Agreement. In the preliminary stage of developing a potential sublicense, we are required to provide notice and certain information regarding the potential sublicense to GTI and GTI is required to provide notice of approval or non-approval within ten business days of the date of the notice from us, provided that GTI is required to not unreasonably withhold their approval. If GTI does not respond within that ten business day period, they are deemed to have approved of the sublicense. We are required to provide updates on any potential sublicenses once every three months during the term of the GTI Agreement. We are also restricted from offering a competing gasification technology during the term of the GTI Agreement.
   
For each U-GAS ® unit which we license, design, build or operate for ourselves or for a party other than a sublicensee and which uses coal or a coal and biomass mixture or biomass as the feed stock, we must pay a royalty based upon a calculation using the MMBtu per hour of dry syngas production of a rated design capacity, payable in installments at the beginning and at the completion of the construction of a project, or the Standard Royalty. If we invest, or have the option to invest, in a specified percentage of the equity of a third party, and the royalty payable by such third party for their sublicense exceeds the Standard Royalty, we are required to pay to GTI an agreed percentage split of third party licensing fees, or the Agreed Percentage, of such royalty payable by such third party. However, if the royalty payable by such third party for their sublicense is less than the Standard Royalty, we are required to pay to GTI, in addition to the Agreed Percentage of such royalty payable by such third party, the Agreed Percentage of our dividends and liquidation proceeds from our equity investment in the third party. In addition, if we receive a carried interest in a third party, and the carried interest is less than a specified percentage of the equity of such third party, we are required to pay to GTI, in our sole discretion, either (i) the Standard Royalty or (ii) the Agreed Percentage of the royalty payable to such third party for their sublicense, as well as the Agreed Percentage of the carried interest. We will be required to pay the Standard Royalty to GTI if the percentage of the equity of a third party that we (a) invest in, (b) have an option to invest in, or (c) receive a carried interest in, exceeds the percentage of the third party specified in the preceding sentence.
 
We are required to make an annual payment to GTI for each year of the term, with such annual payment due by the last day of January of the following year; provided, however, that we are entitled to deduct all royalties paid to GTI in a given year under the GTI Agreement from this amount, and if such royalties exceed the annual payment amount in a given year, we are not required to make the annual payment. We must also provide GTI with a copy of each contract that we enter into relating to a U-GAS ® system and report to GTI with our progress on development of the technology every six months.
   
For a period of ten years, we and GTI are restricted from disclosing any confidential information (as defined in the GTI Agreement) to any person other than employees of affiliates or contractors who are required to deal with such information, and such persons will be bound by the confidentiality provisions of the GTI Agreement. We have further indemnified GTI and its affiliates from any liability or loss resulting from unauthorized disclosure or use of any confidential information that we receive.
   
The GTI Agreement expires on August 31, 2016, but may be extended for two additional ten-year periods at our option.
 
 
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Outlook
 
Our strategies are focused on the completion of the Yima Joint Venture plant, the restart of the ZZ Joint Venture plant, developing our business verticals and finding a partner for SES China. Our business is to create value by supplying our technology, equipment and services into global projects where lower cost low quality coals, coal wastes, municipal wastes, agricultural biomass, and other biomass feedstocks can be profitably converted through our proprietary gasification technology into clean synthesis gas, or syngas (a mixture of primarily hydrogen, carbon monoxide, and methane), which is then used to produce a variety of high value energy and chemical products.
 
Our business model is to deploy our technology on a global basis via supplying a technology package, containing license rights to operate a project using our technology, gasification system equipment, and technology related services.   As part of our overall strategy we intend to form strategic regional and market-based partnerships or business verticals where our technology offers advantages and through cooperating with these partners grow an installed base of projects. Through collaborative partnering arrangements we believe we will commercialize our technology much faster than entering these markets alone. This is a low capital intensity business approach which we believe can generate attractive margins for us through providing our technology differentiated equipment and services in multiple market segments globally with a potential to build meaningful sales opportunities over time. We also believe that our technology business activities will help advance our capabilities and provide opportunities which may allow us to selectively participate as equity partners in such projects in the future. Additionally, we are continuing to improve our technology in ways we believe will enhance our competitive position. We are pursuing other possible technology licensing opportunities with third parties allowing us to build on our capability demonstrated at the ZZ Joint Venture and the Yima Joint Venture. We are focusing our efforts globally with our partners in countries with large low rank coal resources, but our principal operating activities to-date have focused on China and India.
 
We and GE Packaged Power, Inc., a subsidiary of GE, have agreed to jointly evaluate and market a small scale power generation unit combining our gasification technology with GE’s aeroderivative gas turbines. This application marketing agreement will focus on regions of the world where conversion of non-conventional feedstock sources such as lignite and coal wastes into synthesis gas fuel via our technology may be advantaged over conventional gas turbine fuel sources such as natural gas and fuel oil.  Together with GE, we have completed a preliminary evaluation of this application of our combined technologies. Under the terms of this agreement, the two businesses on a non-exclusive basis will complete the market evaluation and seek initial customers for this small scale power product. We also recently announced plans to seek deployment of our technology as a gas turbine fuel generation package into a standardized plant design in the 50 to 100 MW range. We believe the power segment offers opportunity over time to provide meaningful sales opportunities for our gasification technology and equipment systems. We intend to focus on the continued development of this business vertical.
 
We are working on licensing opportunities and other business arrangements with high-profile steel companies who are active in the DRI industry. In addition, we are also developing additional business vertical opportunities to integrate our technology with DRI steel making technology for a coal-to-steel solution and for evaluating projects that can make methanol and derivatives from refuse derived fuels from our technology. We have completed two paid studies during fiscal 2013 with potential partners to assess integrating our technology into these applications and the results of these studies indicated a very cost effective solution with highly efficient integrations.   Our goal for these two business verticals is to find strategic partnering to provide a complete technology and equipment package offering.
 
We intend to focus on developing new opportunities for our proprietary technology whereby we may (i) integrate our technology package with downstream technologies to provide a fully integrated offering, (ii) partner with engineering, equipment and technology companies to provide our technology package into an integrated modular product offering, (iii) provide technology to enable coal resources to be integrated together with our technology where the coal resources may be of little commercial value without our conversion technology, or (iv) acquire or partner with owners of these coal resources to create more value and opportunity for us through the integration of our technology with the coal resource. We understand the need to partner in certain markets, and plan to do so with companies that we believe can help us accelerate our business. For example, we have entered into an agreement with Simon India Ltd, a subsidiary of Zuari Global Ltd, to exclusively market our technology in India where we believe the market for coal gasification plants is now developing due to large infrastructure growth demands and an increasing need for a variety of basic chemical and energy products. Our partnering approach in some cases is country specific and in some cases is industry or market segment specific. Additionally, where strategic relationships and capital and/or financing is available, we may acquire operating assets with potential to generate near term earnings and give us advantages in deploying our technology. Examples of such assets include methanol fuel-blending facilities, compressed natural gas fuel operations and operating coal mines. We are also actively pursuing business verticals in the segments of transportation fuels, steel and fertilizers where our technology is specifically well suited and developing new downstream coal-to-chemicals and coal-to-energy projects which may expand our initial focus to include facilities producing SNG, MTG, glycol, and power and reducing gas for the steel industry.
 
 
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SES China is intended to be a stand-alone business platform that encompasses all of our current and future business activities and initiatives in China. We believe that SES China will better enable us to grow faster in China than otherwise possible and to better protect our intellectual property and technology in China. In addition, we expect to work more effectively with our existing partners to efficiently leverage the other business verticals we are developing including clean renewable fuels and power businesses, direct reduction iron for the steel industry, clean coal-to-chemicals projects, and for longer term value creation, larger scale SNG projects utilizing low rank coal resources and biomass. We are seeking to partner SES China with a financially strong and highly skilled Chinese companies which desires to invest into the growth of China’s clean energy space and who recognize the opportunity afforded by our technology capability and business model. We believe partnering a significant portion of SES China can, with the right Chinese partner, accelerate the commercialization of our technology on a global basis and will enable to reduce our capital requirements to achieve this acceleration.
 
We are also actively pursuing new project partners to invest in our ongoing development efforts. The Yima Joint Venture plant’s commissioning is in its final stages and methanol production has been ramped up to as high as 80% of total design capacity and has been selling its methanol product to a local industrial company since December 2012.   All three of the gasifiers have been operated at various ranges of throughput and pressure. The current focus is on completing the installations of char removal systems for the syngas production and commissioning of the downstream units that prepare the syngas for methanol production as well as the continued commissioning of the methanol production unit itself. The plant is designed to produce 300,000 tonnes per year of methanol from two operating gasifiers. There have been a variety of minor construction related shutdowns which are normally seen in the startup of these units, but they have generally not been related to our gasifier systems. The Yima Joint Venture plant is being closely watched by our potential customers and partners in China and globally, and we expect the Yima project to be a major catalyst for securing much of the new business we have been developing. We are a 25% partner in the Yima Joint Venture and will report dividend income only when future dividends are paid. 
 
We believe that the ZZ Joint Venture plant has achieved significant success demonstrating our technology as well as our technical and operating capabilities. We are of the view that by improving financial performance and reducing operating costs at the ZZ Joint Venture plant our overall financial performance can be improved. Since initial start-up, Xuejiao (originally owned by Hai Hua) has been unable to off take the full volume amount of syngas as required by the initial syngas sales agreement for which the ZZ Joint Venture plant’s original design was based and as a result the plant incurred operating losses. On July 24, 2013, the ZZ Joint Venture entered into the ZZ Cooperation Agreement with Xuejiao, which serves to supersede the existing syngas purchase and sale agreement among the parties dated October 22, 2006 and supplemented previously in 2008. The ZZ Cooperation Agreement represents the basis for an integrated syngas to methanol operation and resolution of the nonpayment of the contractual capacity fees by Xuejiao. Under the terms of the Agreement, Xuejiao will (i) provide the ZZ Joint Venture with use of their methanol plant for ten years at no cost to the ZZ Joint Venture, (ii) has provided a bank loan guarantee of approximately $3.2 million for a majority of the financing necessary for the ZZ Joint Venture for the retrofit and related costs of the ZZ Joint Venture plant, (iii) waive certain advances previously made to the ZZ Joint Venture and (iv) supply discounted coke oven gas produced by its existing coke ovens to be used in combination with synthesis gas to produce refined methanol from the new ZZ Joint Venture integrated syngas to methanol operation. The new integrated operation is being managed by us effective October 31, 2013. 
 
 We believe that there is currently a shift in the coal gasification business toward the use of low quality, and therefore low cost, coals for coal-to-energy and chemicals projects and we believe that China is a good example of this new direction in coal gasification. According to the International Energy Outlook 2013 from the U.S. Energy Information Administration, China’s natural gas consumption is estimated to reach 7.8 trillion cubic feet in 2020 but domestic production of natural gas in China is estimated to be 4.2 trillion cubic feet in 2020. Today, coal to SNG projects are beginning to progress and the Chinese government supports these types of coal to energy projects. Due to this estimated shortfall in natural gas, combined with the current encouragement from the Chinese government for these projects, we believe there is potential in China for several of these SNG projects which are anticipated to be very large scale as compared to previous coal-to-chemical projects that have been built in China. In addition, we believe many of these projects will be located in regions such as Inner Mongolia where very low cost lignite coals can be made available and are necessary to reduce the production cost of SNG. Our technology is well suited for this location due to its ability to process these low quality coals and to meet local requirements for clean production of syngas, without tars and oils produced by other technologies, and very low water usage for the overall process. In addition, Inner Mongolia government regulations permit higher quality coals to be made available to those companies that can cleanly gasify the low quality lignite coals. This creates the potential to sell the high quality coals directly to the market while operating the project on low cost lignite, further enhancing the overall financial performance and value created by the project.
 
 
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We expect to continue for a period of time to have negative operating cash flows until we are generating sufficient cash flows from our technology, equipment and services business and SES China (including our ZZ Joint Venture and the Yima Joint Ventures) to cover our general and administrative expenses and other operating costs. We will also limit the development of any further projects until we have assurances that acceptable financing is available to complete the project. We may pursue the development of selective projects with strong and credible partners or off-takers where we believe equity and debt can be raised or where we believe we can attract a financial partner to participate in the project and where the project would utilize our technology, equipment and services.
 
We currently plan to use our available cash for (i) general and administrative expenses; (ii) repairs, capital expenditures and other costs totaling approximately $2.5 million related to the restart of the ZZ Joint Venture plant for the ZZ Cooperation Agreement operations; (iii) debt service for the ZZ Joint Venture, including $1.2 million of principal due to ICBC in March 2014, and $3.2 million of principal due in September 2014 under the ZZ Short-term Loan unless it can be refinanced; (iv) the $1.5 million royalty due for the Yima Joint Ventures’ license which is payable in three equal installments, one of which was made in October 2013 with the others due in January 2014 and February 2014; and (v) working capital and other general corporate purposes. The Company may also need to make additional contributions to the ZZ Joint Venture in order for it to meet its obligations until the ZZ Joint Venture generates sufficient cash flows to cover its operating costs and debt service. The actual allocation and timing of these expenditures will be dependent on various factors, including changes in our strategic relationships, commodity prices and industry conditions, and other factors that we cannot currently predict. In particular, any future decrease in economic activity in China or in other regions of the world in which we may in the future do business could significantly and adversely affect our results of operations and financial condition. Operating cash flows from our joint venture operating projects can be positively or negatively impacted by changes in coal and methanol prices. These are commodities where market pricing can be cyclical in nature.
 
We do not currently have all of the financial and human resources to fully develop and execute on all of our other business opportunities; however, we intend to finance our development through paid services, technology access fees, equity financings and by securing financial and strategic partners focused on development of these opportunities. We can make no assurances that our business operations will provide us with sufficient cash flows to continue our operations. We will need to raise additional capital through equity and debt financing for any new ventures that are developed, to support our existing projects and possible expansions thereof and for our corporate general and administrative expenses. As a result of our focus on financing activities, particularly in China, we have identified strategic parties that have expressed interest in helping us grow SES China’s business and we are evaluating these options. We are considering a full range of financing options in order to create the most value in the context of the increasing interest we are seeing in our technology. We cannot provide any assurance that any financing will be available to us in the future on acceptable terms or at all. Any such financing could be dilutive to our existing stockholders. If we cannot raise required funds on acceptable terms, we may not be able to, among other things, (i) maintain our general and administrative expenses at current levels including retention of key personnel and consultants; (ii) successfully develop our licensing and related service businesses; (iii) negotiate and enter into new gasification plant development contracts and licensing agreements; (iv) make additional capital contributions to our joint ventures; (v) fund certain obligations as they become due; and (vi) respond to competitive pressures or unanticipated capital requirements.
 
     On August 2, 2013, we received a letter from NASDAQ informing us that the closing bid price of its common stock has been below $1.00 per share for a period of 30 consecutive trading days, which is outside the requirements of NASDAQ for continued listing. Under NASDAQ Listing Rule 5810(c)(3)(A), we have a grace period of 180 calendar days, or until January 29, 2014, in which to regain compliance with the minimum bid price rule. To regain compliance, the closing bid price of our common stock must meet or exceed $1.00 per share for a minimum of ten consecutive business days during this grace period.  If we do not regain compliance before January 29, 2014, we may be eligible for an additional grace period if we meet the initial listing standards, with the exception of bid price, for The NASDAQ Capital Market, and we successfully apply for a transfer of our securities to that market. Such a transfer would provide us with an additional 180 calendar day period to regain compliance with the minimum bid requirement.
 
 
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Critical Accounting Policies
 
The preparation of financial statements in accordance with U.S. generally accepted accounting principles, or GAAP, requires our management to make certain estimates and assumptions which are inherently imprecise and may differ significantly from actual results achieved. We believe the following are our critical accounting policies due to the significance, subjectivity and judgment involved in determining our estimates used in preparing our consolidated financial statements. We evaluate our estimates and assumptions used in preparing our consolidated financial statements on an ongoing basis utilizing historic experience, anticipated future events or trends and on various other assumptions that are believed to be reasonable under the circumstances. The resulting effects of changes in our estimates are recorded in our consolidated financial statements in the period in which the facts and circumstances that give rise to the change in estimate become known.
 
We believe the following describes significant judgments and estimates used in the preparation of our consolidated financial statements:
 
Revenue Recognition
 
Revenue from sales of products, which has included the capacity fee and energy fee earned at the ZZ Joint Venture plant and is expected to include sale of methanol under the ZZ Cooperation Agreement, and sales of equipment are recognized when the following elements are satisfied: (i) there are no uncertainties regarding customer acceptance; (ii) there is persuasive evidence that an agreement exists; (iii) delivery has occurred; (iv) the sales price is fixed or determinable; and (v) collectability is reasonably assured.
 
Technology licensing revenue is typically received over the course of a project’s development as milestones are met. We may receive upfront licensing fee payments when a license agreement is entered into. Typically, the majority of a license fee is due once project financing and equipment installation occur. We recognize license fees as revenue when the license fees become due and payable under the license agreement, subject to the deferral of the amount of the performance guarantee. Fees earned for engineering services, such as services that relate to integrating our technology to a customer’s project, are recognized using the percentage-of-completion method.
 
Impairment Evaluation of Long-Lived Assets
 
We evaluate our long-lived assets, such as property, plant and equipment, construction-in-progress, equity method investments and specifically identified intangibles, when events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. When we believe an impairment condition may have occurred, we are required to estimate the undiscounted future cash flows associated with a long-lived asset or group of long-lived assets at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities for long-lived assets that are expected to be held and used. We evaluate our operating plants as a whole. Production equipment at each plant is not evaluated for impairment separately, as it is integral to the assumed future operations of the plant. All construction and development projects are reviewed for impairment whenever there is an indication of potential reduction in fair value. If it is determined that it is no longer probable that the projects will be completed and all capitalized costs recovered through future operations, the carrying values of the projects would be written down to the recoverable value. If we determine that the undiscounted cash flows from an asset to be held and used are less than the carrying amount of the asset, or if we have classified an asset as held for sale, we estimate fair value to determine the amount of any impairment charge.
 
The following summarizes some of the most significant estimates and assumptions used in evaluating if we have an impairment charge.
 
Undiscounted Expected Future Cash Flows . In order to estimate future cash flows, we consider historical cash flows and changes in the market environment and other factors that may affect future cash flows. To the extent applicable, the assumptions we use are consistent with forecasts that we are otherwise required to make (for example, in preparing our other earnings forecasts). The use of this method involves inherent uncertainty. We use our best estimates in making these evaluations and consider various factors, including forward price curves for energy, fuel costs, and operating costs. However, actual future market prices and project costs could vary from the assumptions used in our estimates, and the impact of such variations could be material.
 
 
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Fair Value . Generally, fair value will be determined using valuation techniques such as the present value of expected future cash flows. We will also discount the estimated future cash flows associated with the asset using a single interest rate representative of the risk involved with such an investment. We may also consider prices of similar assets, consult with brokers, or employ other valuation techniques. We use our best estimates in making these evaluations; however, actual future market prices and project costs could vary from the assumptions used in our estimates, and the impact of such variations could be material.
 
The evaluation and measurement of impairments for investments such as our investment in the Yima Joint Ventures involve the same uncertainties as described for long-lived assets that we own directly. Similarly, our estimates that we make with respect to our equity and cost-method investments are subjective, and the impact of variations in these estimates could be material.
 
ZZ Joint Venture Plant Impairment Analysis
 
Due to the continued shut down of the plant and new economic and financial assumptions based on the negotiations of the ZZ Cooperation Agreement, we believed an impairment assessment of the ZZ Joint Venture plant was warranted as of March 31, 2013. We performed an analysis of the ZZ Joint Venture plant and determined that these assets were not impaired based upon management’s estimated cash flow projections for the plant. Such estimated cash flow projections included a case based on the completion of the negotiations between us and Xuejiao to restructure the current business arrangement to create an integrated syngas to methanol operation. This restructuring would include a combination of technical improvements being made to Xuejiao’s methanol unit allowing for increased syngas off-take and other repairs and improvements being made to the plant enabling more efficient joint production of methanol for a five-year period. After this period, this case assumes that an additional downstream facility to produce a higher value product such as glycol is developed with the additional capital investment made by a strategic partner and that we retain a minority interest in the combined project. An alternative case assumed the same five-year period of the same integrated syngas to methanol operation as the prior case but that the ZZ Joint Venture plant’s assets are sold after the five-year period.
 
If we are not successful in restructuring the joint venture or otherwise improving the ZZ Joint Venture’s profitability, or if management’s estimated cash flow projections for these assets decrease, the ZZ Joint Venture plant could become impaired which could have a material effect on its consolidated financial statements. As no significant adverse changes to our assumptions or financial projections have occurred since the impairment assessment as of March 31, 2013, an updated impairment assessment was not necessary as of September 30, 2013 .
 
Accounting for Variable Interest Entities and Financial Statement Consolidation Criteria
 
The joint ventures which we enter into may be considered variable interest entities, or VIEs. We consolidate all VIEs where we are the primary beneficiary. This determination is made at the inception of our involvement with the VIE. We consider both qualitative and quantitative factors and form a conclusion that we, or another interest holder, absorb a majority of the entity’s risk for expected losses, receive a majority of the entity’s potential for expected residual returns, or both. We do not consolidate VIEs where we are not the primary beneficiary. We account for these unconsolidated VIEs under the equity method or cost method of accounting and include our net investment in investments on our consolidated balance sheets. Our equity interest in the net income or loss from our unconsolidated VIEs under the equity method of accounting is recorded in non-operating (income) expense on a net basis on our consolidated statement of operations.
 
We have determined that the ZZ Joint Venture is a VIE and that we are the primary beneficiary. We have determined that the Yima Joint Ventures are VIEs and that Yima is the primary beneficiary since Yima has a 75% ownership interest in the Yima Joint Ventures. We have determined that SRS is a VIE and that we are not the primary beneficiary since we and Midas each have a 50% ownership interest in SRS and the control, risks and benefits of SRS are shared equally. We have determined that the GC Joint Venture is a VIE and that we are the primary beneficiary since we have a 51% ownership interest in the GC Joint Venture and since there are no qualitative factors that would preclude us from being deemed the primary beneficiary.
 
 
34

 
Item 3.       Quantitative and Qualitative Disclosure About Market Risk
 
Qualitative disclosure about market risk.
 
We are exposed to certain qualitative market risks as part of our ongoing business operations, including risks from changes in foreign currency exchange rates and commodity prices that could impact our financial position, results of operations and cash flows. We manage our exposure to these risks through regular operating and financing activities, and may, in the future, use derivative financial instruments to manage this risk. We have not entered into any derivative financial instruments to date.
 
Foreign currency risk
 
We conduct operations in China and our functional currency in China is the Renminbi Yuan. Our financial statements are expressed in U.S. dollars and will be negatively affected if foreign currencies, such as the Renminbi Yuan, depreciate relative to the U.S. dollar. In addition, our currency exchange losses may be magnified by exchange control regulations in China or other countries that restrict our ability to convert into U.S. dollars. The People’s Bank of China, the monetary authority in China, sets the spot rate of the Renminbi Yuan, and may also use a variety of techniques, such as intervention by its central bank or imposition of regulatory controls or taxes, to affect the exchange rate relative to the U.S. dollar. In the future, the Chinese government may also issue a new currency to replace its existing currency or alter the exchange rate or relative exchange characteristics by devaluation or revaluation of the Renminbi Yuan in ways that may be adverse to our interests.
 
Commodity price risk
 
Our business plan is to purchase coal and other consumables from suppliers and to sell commodities, such as syngas, methanol and other products. Coal is the largest component of our costs of product sales and in order to mitigate coal price fluctuation risk for future projects, we expect to enter into long-term contracts for coal supply or to acquire coal assets. For the sale of commodities from our projects, fixed price contracts will not be available to us in certain markets, such as China, which will require us to purchase some portion of our coal and other consumable needs, or sell some portion of our production, into spot commodity markets or under short term supply agreements. Hedging transactions may be available to reduce our exposure to these commodity price risks, but availability may be limited and we may not be able to successfully hedge this exposure at all. To date, we have not entered into any hedging transactions.
 
Interest rate risk
 
We are exposed to interest rate risk through our ZZ Joint Venture’s loans. Interest under these loans is adjusted annually based upon the standard rate announced each year by the People’s Bank of China. As of September 30, 2013, the applicable interest rate on the ZZ Joint Venture’s ICBC loan was 6.55% and the interest rate on the ZZ Joint Venture’s short-term bank loan with Zaozhuang Bank was 10.8%. We could also be exposed to the risk of rising interest rates through our future borrowing activities or refinancings. This is an inherent risk as borrowings mature and are renewed at then current market rates. The extent of this risk as to these loans, or any future borrowings, is not quantifiable or predictable because of the variability of future interest rates. 
 
Customer credit risk
 
When our projects, including the ZZ Joint Venture plant’s methanol production, progress to commercial operation, we will be exposed to the risk of financial non-performance by customers. To manage customer credit risk, we intend to monitor credit ratings of customers and seek to minimize exposure to any one customer where other customers are readily available.
 
 
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Item 4.     Controls and Procedures
 
Evaluation of Disclosure Controls and Procedures
 
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements. Because of inherent limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
Our management, with the participation of the Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness of our internal control over financial reporting as of September 30, 2013 based on criteria set forth in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on our evaluation, management has concluded that we did maintain effective internal control over financial reporting as of September 30, 2013.
 
Changes in Internal Control Over Financial Reporting
 
There have been no changes in our internal control over financial reporting during the three months ended September 30, 2013 that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.
 
PART II
 
Item 1.    Legal Proceedings.
 
None.
 
Item 1A. Risk Factors.
 
We will require substantial additional funding, and our failure to raise additional capital necessary to support and expand our operations could reduce our ability to compete and could harm our business.
 
As of September 30, 2013, we had $15.1 million in cash and cash equivalents. We currently plan to use our available cash for (i) general and administrative expenses; (ii) repairs, capital expenditures and other costs totaling approximately $2.5 million related to the restart of the ZZ Joint Venture plant for the ZZ Cooperation Agreement operations; (iii) debt service for the ZZ Joint Venture, including $1.2 million of principal due to ICBC in March 2014, and $3.2 million of principal due in September 2014 under the ZZ Short-term Loan unless it can be refinanced; (iv) the $1.5 million royalty due for the Yima Joint Ventures’ license which is payable in three equal installments, one of which was made in October 2013 with the others due in January 2014 and February 2014; and (v) working capital and other general corporate purposes. We may also need to make additional contributions to the ZZ Joint Venture in order for it to meet its obligations until the ZZ Joint Venture generates sufficient cash flows to cover its operating costs and debt service. The actual allocation and timing of these expenditures will be dependent on various factors, including changes in our strategic relationships, commodity prices and industry conditions, and other factors that we cannot currently predict. In particular, any future decrease in economic activity in China or in other regions of the world in which we may in the future do business could significantly and adversely affect our results of operations and financial condition. Operating cash flows from our joint venture operating projects can be positively or negatively impacted by changes in coal and methanol prices. These are commodities where market pricing can be cyclical in nature.
 
 
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We expect to continue for a period of time to have negative operating cash flows until we are generating sufficient cash flows from our technology, equipment and services business and SES China (including the ZZ Joint Venture and the Yima Joint Ventures) to cover our general and administrative expenses and other operating costs. We will also limit the development of any further projects until we have assurances that acceptable financing is available to complete the project. We may pursue the development of selective projects with strong and credible partners or off-takers where we believe equity and debt can be raised or where we believe we can attract a financial partner to participate in the project and where the project would utilize our technology, equipment and services.
 
 We do not currently have all of the financial and human resources to fully develop and execute on all of our other business opportunities; however, we intend to finance our development through paid services, technology access fees, equity financings and by securing financial and strategic partners focused on development of these opportunities. We can make no assurances that our business operations will provide us with sufficient cash flows to continue our operations. We will need to raise additional capital through equity and debt financing for any new ventures that are developed, to support our existing projects and possible expansions thereof and for our corporate general and administrative expenses. As a result of our focus on financing activities, particularly in China, we have identified strategic parties that have expressed interest in helping us grow SES China’s business and we are evaluating these options. We are considering a full range of financing options in order to create the most value in the context of the increasing interest we are seeing in our technology.
 
We cannot provide any assurance that any financing will be available to us in the future on acceptable terms or at all. Any such financing could be dilutive to our existing stockholders. If we cannot raise required funds on acceptable terms, we may not be able to, among other things, (i) maintain our general and administrative expenses at current levels including retention of key personnel and consultants; (ii) successfully develop our licensing and related service businesses; (iii) negotiate and enter into new gasification plant development contracts and licensing agreements; (iv) make additional capital contributions to our joint ventures; (v) fund certain obligations as they become due; and (vi) respond to competitive pressures or unanticipated capital requirements.
 
Item 2.       Unregistered Sales of Equity Securities and Use of Proceeds.
 
On August 1, 2013, we issued 136,986 shares of common stock to CVE pursuant to the terms of a Unit Purchase Agreement with them.   Additionally, we issued warrants to CVE for the right to acquire up to 136,986 shares of our common stock.   The warrants have an exercise price of $0.91 per share and have a term of 5 years. The securities were sold pursuant to exemptions under the Securities Act and the rules and regulations promulgated thereunder, including pursuant to Section 4(2).
 
On November 1, 2013, we issued warrants to Market Development Consulting Group, Inc. for the right to acquire up to 750,000 shares of our common stock.   The warrants have an exercise price of $0.70 per share and have a term of 10 years. The securities were sold pursuant to exemptions under the Securities Act and the rules and regulations promulgated thereunder, including pursuant to Section 4(2).  
 
Item 3.       Defaults Upon Senior Securities.
 
        None.
 
Item 4.       Mine Safety Disclosures
 
Not Applicable.
 
Item 5.       Other Information.
 
        None.
 
 
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Forward-Looking Statements
 
This Quarterly Report on Form 10-Q includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act.   All statements other than statements of historical fact are forward-looking statements. Forward-looking statements are subject to certain risks, trends and uncertainties that could cause actual results to differ materially from those projected. Among those risks, trends and uncertainties are the development stage of our operations, our estimate of the sufficiency of existing capital sources, our ability to successfully develop our licensing business, our ability to raise additional capital to fund cash requirements for future investments and operations including our China platform initiative, our ability to reduce operating costs as necessary, the limited history and viability of our technology, commodity prices and the availability and terms of financing opportunities, our results of operations in foreign countries, our ability to diversify, the ability of the ZZ joint venture to effectively operate XE's methanol plant and produce methanol, our ability to obtain the necessary approvals and permits for our future projects, the estimated timetables for achieving mechanical completion and commencing commercial operations for the Yima project as well as the ability of the Yima project to produce earnings and pay dividends, the sufficiency of internal controls and procedures, our ability to grow our business and generate revenues and earnings as a result of our proposed China and India platform initiatives, and our ability to develop our power business unit and marketing arrangement with a subsidiary of GE and our other business verticals for steel and renewables. Although we believe that in making such forward-looking statements our expectations are based upon reasonable assumptions, such statements may be influenced by factors that could cause actual outcomes and results to be materially different from those projected. We cannot assure you that the assumptions upon which these statements are based will prove to have been correct.
 
When used in this Form 10-Q, the words “expect,” “anticipate,” “intend,” “plan,” “believe,” “seek,” “estimate” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. Because these forward-looking statements involve risks and uncertainties, actual results could differ materially from those expressed or implied by these forward-looking statements for a number of important reasons, including those discussed under “Risk Factors” in our Annual Report on Form 10-K for the year ended June 30, 2013, as well as in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and elsewhere in this Form 10-Q.
 
You should read these statements carefully because they discuss our expectations about our future performance, contain projections of our future operating results or our future financial condition, or state other “forward-looking” information. You should be aware that the occurrence of certain of the events described in this Form 10-Q could substantially harm our business, results of operations and financial condition and that upon the occurrence of any of these events, the trading price of our common stock could decline, and you could lose all or part of your investment.
 
We cannot guarantee any future results, levels of activity, performance or achievements. Except as required by law, we undertake no obligation to update any of the forward-looking statements in this Form 10-Q after the date hereof.
 
 
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Item 6.       Exhibits
 
Number
Description of Exhibits
 
 
 
4.1
 
Warrant issued to Market Development Consulting Group, Inc. dated November 1, 2013 (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on November 5, 2013).
 
 
 
10.1+
 
Employment Letter between the Company and Donald P. Bunnell dated July 16, 2013 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on July 17, 2013).
 
 
 
10.28***
 
Cooperation Agreement among SES (Zaozhuang) New Gas Co., Ltd., Shandong Weijiao Group Xuecheng Energy Co., Ltd. and Shandong Xuejiao Chemical Co., Ltd. (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on July 26, 2013).
 
 
 
10.3
 
Amendment to Consulting Services Agreement between the Company and Crystal Vision Energy Limited dated July 29, 2013 (incorporated by reference to Exhibit 10.29 to the Company’s Annual Report on Form 10-K filed on September 24, 2013).
 
 
 
10.4+
 
Employment Letter between the Company and Charles Costenbader dated effective September 3, 2013 (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on September 4, 2013).
 
 
 
10.5
 
Loan Agreement between Synthesis Energy Systems (Zaozhuang) New Gas Co., Ltd and Zaozhuang Bank dated September 10, 2013 — English translation from original Chinese document (incorporated by reference to Exhibit 10.31 to the Company’s Annual Report on Form 10-K filed on September 24, 2013).
 
 
 
10.6
 
Management Consulting Agreement between the Company and Market Development Consulting Group, Inc. dated November 1, 2013 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on November 5, 2013).
 
 
 
31.1*
 
Certification of Chief Executive Officer of Synthesis Energy Systems, Inc. pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended.
 
 
 
31.2*
 
Certification of Chief Financial Officer of Synthesis Energy Systems, Inc. pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended.
 
 
 
32.1*
 
Certification of Chief Executive Officer of Synthesis Energy Systems, Inc. pursuant to Rule 13a-14(b) promulgated under the Securities Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the United States Code.
 
 
 
32.2*
 
Certification of Chief Financial Officer of Synthesis Energy Systems, Inc. pursuant to Rule 13a-14(b) promulgated under the Securities Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the United States Code.
 
 
 
101.INS
 
XBRL Instance Document.**
 
 
 
101.SCH
 
XBRL Taxonomy Extension Schema Document.**