SYNTHESIS ENERGY SYSTEMS INC - Quarter Report: 2013 March (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

________________

FORM 10-Q

(Mark One)

For the quarterly period ended March 31, 2013

For the transition period from: ________ to: ________

Commission file number: 001-33522

________________

SYNTHESIS ENERGY SYSTEMS, INC.

(Exact name of registrant as specified in its charter)

________________

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 x 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 x No ¨

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

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

Yes ¨ No x

As of May 7, 2013 there were 63,437,907 shares of the registrant’s common stock, par value $.01 per share, outstanding.

TABLE OF CONTENTS

PART I

Item 1. Financial Statements

SYNTHESIS ENERGY SYSTEMS, INC.

(A Development Stage Enterprise)

Consolidated Balance Sheets

(In thousands, except per share amount)

(Unaudited)

See accompanying notes to the consolidated financial statements.

SYNTHESIS ENERGY SYSTEMS, INC.

(A Development Stage Enterprise)

Consolidated Statements of Operations

(In thousands, except per share amounts)

(Unaudited)

See accompanying notes to the consolidated financial statements.

SYNTHESIS ENERGY SYSTEMS, INC.

(A Development Stage Enterprise)

Consolidated Statements of Operations

(In thousands, except per share amounts)

(Unaudited)

See accompanying notes to the consolidated financial statements.

SYNTHESIS ENERGY SYSTEMS, INC.

(A Development Stage Enterprise)

Consolidated Statements of Comprehensive Loss

(In thousands)

(Unaudited)

See accompanying notes to the consolidated financial statements

SYNTHESIS ENERGY SYSTEMS, INC.

(A Development Stage Enterprise)

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

See accompanying notes to the consolidated financial statements.

SYNTHESIS ENERGY SYSTEMS, INC.

(A Development Stage Enterprise)

Consolidated Statement of Stockholder’s Equity

(In thousands)

(Unaudited)

See accompanying notes to the consolidated financial statements.

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 technology, equipment and services into projects where lower cost low quality coals, coal wastes, municipal wastes, agricultural biomass, and other biomass feedstocks can be profitably converted through our proprietary fluidized bed gasification technology into synthesis gas, or syngas (a mixture of primarily hydrogen, carbon monoxide, and methane), which is then used to produce high value products. The Company’s initial projects to date have been focused on coal, but it intends to pursue other project opportunities relating to municipal wastes, agricultural biomass, and other biomass feedstocks as it continues to develop its business. 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 and nine month periods ended March 31, 2013 are not necessarily indicative of results to be expected for the fiscal year ending June 30, 2013.

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. Certain reclassifications have been made in prior period financial statements to conform to current period presentation. These reclassifications had no effect on net loss. 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, 2012. 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, 2012 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 under the equity method of accounting and includes its net investment on its consolidated balance sheets. 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.

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 Shandong Weijiao Group Xuecheng Energy Company Ltd., (“ Xuecheng Energy”) (previously Hai Hua), 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 will 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. In addition, the Company considered whether the terms of the syngas purchase and sale agreement with Xuecheng Energy contained a lease. The factors considered included (i) the Company’s ability to operate and control the plant during the initial 20 years; and (ii) whether it was more than remote that one or more parties other than Xuecheng Energy would purchase more than a minor amount (considered to be 10%) of the plant’s output during the term of the syngas purchase and sale agreement. Because the Company determined that the syngas purchase and sale agreement did not contain a lease, the Company accounts for the revenues from that agreement in accordance with the Company’s revenue recognition policy for product sales.

The following tables provide additional information on the ZZ Joint Venture’s assets and liabilities as of March 31, 2013 and June 30, 2012 which are consolidated within the Company’s consolidated balance sheets (in thousands):

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.

The Company has determined that SES Resource Solutions, Ltd. (“SRS”) that 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 due to each having 50% ownership interest in SRS and each sharing control, risks and benefits of SRS equally. SRS had no assets or liabilities as of March 31, 2013.

The Company’s joint venture with Golden Concord (“GC Joint Venture”) was formed to (i) develop, construct and operate a coal gasification, methanol and dimethyl either (“DME”) production plant utilizing U-GAS^®. The GC Joint Venture project is not currently being developed. 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. Although the Company includes the financial information of the GC Joint Venture in its consolidated financial statements, there are no significant assets within the GC Joint Venture. There were however current liabilities of approximately $1.2 million as of March 31, 2013 and June 30, 2012 related to unpaid settlements of amounts due to various contractors from the initial construction work for the project.

(d) Revenue Recognition

Revenue from sales of products, which includes the capacity fee and energy fee earned by the ZZ Joint Venture, and byproducts 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 including feasibility studies or feedstock testing, 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:

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 March 31, 2013 and June 30, 2012 (in thousands):

The carrying values of the certificates of deposit and money market funds approximate fair value, which was estimated using quoted market prices for those or similar investments. The carrying value of the Company’s other financial instruments, including accounts receivable, accounts payable and long-term debt, approximate their fair values.

Note 2 – Recently Issued Accounting Standards

In June 2011, the Financial Accounting Standards Board (“FASB”) issued new guidance on the presentation of comprehensive income. The new guidance allows an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The new guidance eliminates the current option to report other comprehensive income and its components in the statement of changes in stockholders equity. This new guidance is effective for fiscal years beginning after December 15, 2011, however the provision of the new guidance which requires reclassifications out of comprehensive income be shown separately in the financial statements has been deferred to allow the FASB to reconsider alternatives. The Company adopted these requirements as of July 1, 2012.

In July 2012 the FASB issued ASU 2012-02: Intangibles: Goodwill and Other: Testing Indefinite-Lived Intangible Assets for Impairment (Topic 350) which is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. This update is intended to reduce cost and complexity by providing an entity with the option to make a qualitative assessment about the likelihood that an indefinite-lived intangible asset is impaired to determine whether it should perform a quantitative impairment test. The Company does not expect the adoption of this guidance to have a significant impact on its consolidated financial statements.

Note 3 – 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. (“Hai Hua”), which established Synthesis Energy Systems (Zao Zhuang) New Gas Company Ltd., (“ 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, including ash and elemental sulphur. In August 2012, Hai Hua’s name was changed to Xuecheng Energy, after a change in control transaction. The Company owns 97.5% of the ZZ Joint Venture and Xuecheng Energy owns the remaining 2.5%. The Company consolidates the results of the ZZ Joint Venture in its consolidated financial statements.

Syngas Purchase and Sale Agreement

The ZZ Joint Venture is also party to a purchase and sale agreement with Xuecheng Energy for syngas produced by the plant, whereby Xuecheng Energy will pay the ZZ Joint Venture an energy fee and capacity fee, as described below, based on the syngas production. The syngas to be purchased by Xuecheng Energy is subject to certain quality component requirements set forth in the contract. In late December 2008, the plant declared commercial operations status for purposes of the purchase and sale agreement. The energy fee is a per normal cubic meters, or Ncum, of syngas calculation based on a formula which factors in the monthly averages of the prices of design base coal, coke, coke oven gas, power, steam and water, all of which are components used in the production of syngas. The capacity fee is paid based on the capacity of the plant to produce syngas, factoring in the number of hours (i) of production and (ii) of capability of production as compared to the guaranteed capacity of the plant, which for purposes of the contract is 22,000 Ncum per hour of net syngas. Xuecheng Energy is obligated to pay the capacity fee regardless of whether they use the gasification capacity, subject only to availability of the plant, quality of the syngas and exceptions for certain events of force majeure. Due to worldwide reductions in methanol prices, as well as reliability issues with respect to Xuecheng Energy’s plant, Xuecheng Energy has operated at a reduced rate of syngas consumption. Xuecheng Energy has used approximately 35% to 45% of the syngas guarantee capacity from 2009 until September 2011 when the plant was shut down.

In April 2009, the ZZ Joint Venture entered into a Supplementary Agreement with Xuecheng Energy, amending the terms of the purchase and sale agreement. The Supplementary Agreement was entered into to provide more clarity regarding the required syngas quality and volume to be delivered, recovery of the energy fee during turndown periods and operations coordination during unscheduled outages. Under the Supplementary Agreement, the syngas quality specification was amended to provide more clarity as to the minor constituents allowable in the syngas. For purposes of the Supplemental Agreement, syngas that meets these specifications is deemed “compliant gas” and syngas that does not meet these specifications is deemed “non-compliant gas.” The Supplementary Agreement also added a requirement for Xuecheng Energy to pay the ZZ Joint Venture the capacity fee and 70% of the energy fee for all non-compliant gas which is taken by Xuecheng Energy. However, if more than 50% of the syngas taken by Xuecheng Energy during any operating day is non-compliant gas, all of the syngas for that day is deemed to be non-compliant gas for purposes of calculating the energy fee. In addition, the Supplementary Agreement accommodates periods of turndown operation by Xuecheng Energy by establishing a minimum threshold gas off take volume of 7,500 Ncum per hour of net syngas for the purpose of calculating the energy fee during such periods. The Supplementary Agreement also provides that, to the extent Xuecheng Energy has an unscheduled shutdown, and the plant continues to operate on standby during such period, Xuecheng Energy is still required to pay the energy fee to the ZZ Joint Venture. In the event that the plant has an unscheduled shutdown and does not provide at least three hours prior notice to Xuecheng Energy, the ZZ Joint Venture may be required to provide certain compensation to Xuecheng Energy.

Since April 2011, Xuecheng Energy has not paid the capacity fees owed to the ZZ Joint Venture. The unpaid amount totaled approximately $7.9 million as of March 31, 2013. The plant continued to operate and provide syngas to Xuecheng Energy through September 2011 with the expectation that Xuecheng Energy would pay the capacity fee. Xuecheng Energy has paid other contractual obligations such as the energy fees and by-product sales due under the contract. Since April 2011, the Company has not recognized these capacity fee revenues and will not recognize any capacity fees until collection is reasonably assured. In late September 2011, the plant was shut down for scheduled maintenance and the ZZ Joint Venture plant has been kept idle while the ZZ Joint Venture develops its revised commercial arrangement with Xuecheng Energy. In March 2012, Xuecheng Energy advanced approximately $1.0 million to the ZZ Joint Venture. In September 2012, Xuecheng Energy advanced an additional approximately $0.8 million to the ZZ Joint Venture. These advances are to be applied to the costs of the future commercial arrangements or to future syngas sales. 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 the Industrial and Commercial Bank of China (“ICBC”).

To date, Xuecheng Energy has been unable to off take the volume of syngas originally expected for the original plant design and as a result the plant has incurred operating losses. Because of these circumstances, the ZZ Joint Venture is working on various arrangements to increase the syngas off take volume. Such arrangements involve a combination of technical improvements to Xuecheng Energy’s methanol unit, as well as restructuring the current business arrangement to create an integrated syngas to methanol operation. The Company and Xuecheng Energy are working collaboratively to complete a definitive agreement that will provide the basis for a fully integrated syngas to methanol operation and to resolve the commercial issues. Discussions regarding the nonpayment of the contractual capacity fees and the restructuring of the joint venture are progressing. The Company intends to restart the ZZ Joint Venture as soon as feasible after all commercial agreements are completed. However, in the event that the Company is not successful in reaching agreement with Xuecheng Energy, the Company may seek to recover the outstanding capacity fees through binding arbitration.

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 Company 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 higher value products.

Loan Agreement

On March 22, 2007, the ZZ Joint Venture entered into a seven-year loan agreement and received $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:

As of March 31, 2013, the ZZ Joint Venture was in compliance with all covenants and obligations under the Fixed Asset Loan Contract.

Impairment Assessment

Due to the continued shut down of the plant and new economic and financial assumptions based on recent negotiations of an agreement with Xuecheng Energy, 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 the Company 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 the Company retains 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 the Company’s consolidated financial statements.

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. Notwithstanding this, in connection with an expansion of the project, the Company has the option to contribute a greater percentage of capital for the expansion, such that as a result, the Company would have up to a 49% ownership interest in the Yima Joint Ventures. The investment in the Yima Joint Ventures is accounted for using the equity method.

The Yima Joint Venture plant’s start-up and commissioning are progressing as all three of the gasifiers have been operated at various ranges of throughput and pressure. The current focus is on completing 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 start-up or commissioning could cause delays in methanol production.

Based on the project’s current scope of methanol only, the current estimate of the total required capital of the project is approximately $250 million. The remaining capital for the project has been funded with by project debt obtained by the Yima Joint Ventures. Yima has 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 its obligations under any project guarantee.

The Yima Joint Ventures are 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 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.

The Company has included the $1.5 million payment paid to the GTI in June 2009 toward future royalties due to GTI for the Yima Joint Ventures’ project as part of the Company’s investment in the Yima project. An additional future royalty payment of approximately $1.5 million will be due to GTI upon the commissioning of the gasifier equipment for the Yima project which is expected in fiscal 2013.

The Company’s equity in losses of the Yima Joint Ventures for the three-month and nine month periods ended March 31, 2013 and 2012 were $0.2 million, $0.6 million, $0.2 million and $0.6 million, respectively. The following table presents summarized unconsolidated financial information for the Yima Joint Ventures (in thousands):

SES Resource Solutions

SRS is a joint venture owned 50% by the Company 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 and the SRS’ know-how represent 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:

As of March 31, 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):

Note 4 – GTI License Agreement

On November 5, 2009, the Company entered into an Amended and Restated License Agreement (the “New Agreement”) with GTI, replacing the Amended and Restated License Agreement between the Company and GTI dated August 31, 2006, as amended (the “Original Agreement”). Under the New 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. The New Agreement differs from the Original Agreement most critically by allowing the Company to sublicense U-GAS ® to third parties for coal, coal and biomass mixtures or 100% biomass projects (subject to the approval of GTI, which approval shall not be unreasonably withheld), with GTI to share the revenue from such third party licensing fees based on an agreed percentage split (the “Agreed Percentage”). In addition, the prior obligation to fabricate and put into operation at least one U-GAS ® system for each calendar year of the Original Agreement in order to maintain the license has been eliminated in the New Agreement.

In order to sublicense any U-GAS ® system, the Company is required to comply with certain requirements set forth in the New 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 New Agreement. The Company is also restricted from offering a competing gasification technology during the term of the New 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”). Although it is calculated using a different unit of measurement, the Standard Royalty is effectively the same as the royalty payable to GTI under the Original Agreement. 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 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 beginning December 31, 2010, 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 New 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. 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 New 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 New 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.

The term of the New Agreement is the same as the Original Agreement, expiring on August 31, 2016, but may be extended for two additional ten-year periods at the Company’s option.

Note 5 – Consulting Agreement with Crystal Vision Energy

Effective January 1, 2013, the Company entered into a consulting services agreement (the “Agreement”) with Crystal Vision Energy Limited (“CVE”), pursuant to which CVE will provide strategic, executive leadership and management services for the Company and its China business platform. The Agreement replaces a prior services agreement that the Company had in place with CVE dated effective April 1, 2012. The Agreement includes providing representatives for a steering committee to advise on the Company’s China business (“SES China”) and providing a managing director to advise and consult as to the management of such business. The Agreement has a term of two years, ending on December 31, 2014, but is terminable by (i) either party on 30 days’ notice at any time after November 30, 2013 and (ii) the Company at any time without further obligation with cause (as defined in the Agreement).

Under terms of the Agreement, CVE will provide executive leadership and management services focused upon delivering key objectives for SES China over the next 12 months, including (i) restructuring of the ZZ Joint Venture plant; (ii) development of methanol sales from the Yima Joint Venture plant; and (iii) delivering SES China subsidiary level funding and financing required for acquisition initiatives currently under development by SES China. In addition, CVE will assist SES China to secure a full time chief executive officer with significant experience in managing an infrastructure business in China, as well as successfully executing and integrating mergers and acquisitions. The Company has a senior level executive steering committee for SES China, led by Colin Tam of CVE, which reports to the Company’s chief executive officer. As part of the services provided by CVE, Stephen Chow, a representative of CVE, is acting as the Managing Director of SES China.

CVE receives 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 is also entitled to incentive warrants upon signing and in February 2014 if the Agreement is still in effect. In connection with fundraising on behalf of the Company, CVE is entitled to a success fee for the total of any investment from a third party (subject to certain exclusions) for use in China, or directly invested into the Company’s China business. In addition, CVE can receive a carried interest in any joint venture formed by the Company with a strategic investment partner (as defined in the Agreement).

In the event that funding of capital raised by CVE of at least $15,000,000 has not been approved by the Company’s board of directors by June 30, 2013, the Company shall have the right to request a review of the scope of the services for the remainder of the term and CVE shall then have 30 days to provide funding of capital to the Company in an amount between $300,000 and $1,000,000. In the event the funding is provided by CVE or its nominee within such 30 day period, the scope of the services for the remainder of the term shall remain unchanged. In the event that, within such 30 day period, (i) CVE or its nominee fails to provide the funding, or (ii) CVE and the Company are unable to mutually agree on the scope of the services going forward, then (1) the cash portion of the services fee will be $50,000 monthly and the remaining $50,000 will be accrued on a monthly basis until the capital is funded. 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 and becomes vested and fully exercisable on December 31, 2013 and has a term of five years. In addition, the Company will grant a warrant to purchase up to 1,200,000 shares of the Company’s common stock with an exercise price of $1.50 on or before February 15, 2014 and such warrant will become vested and fully exercisable on December 31, 2014 and has a term of five years. If the Agreement is terminated prior to February 15, 2014, the warrant due to be granted in 2014 shall not be issued to CVE. These warrants to CVE are collectively referred to as the “CVE Incentive Warrants”.

In February 2013, the Company entered into and closed 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 March 31, 2013, the Company had issued 134,733 shares of common stock to CVE as part of their monthly compensation payable in common stock under the Agreement. These shares are valued based upon the volume-weighted-average share price for the month preceding the month in which services are performed.

Note 6 – Stock-Based Compensation

The Company has outstanding stock option and restricted stock awards granted under the Company’s Amended and Restated 2005 Incentive Plan, as amended (the “Incentive Plan”). On December 21, 2012, the Company’s stockholders authorized an additional 1,800,000 shares of common stock for future awards under the Incentive Plan. As of March 31, 2013, there were 1,070,601 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.

The number of shares of nonvested restricted stock issued under the Incentive Plan was as follows:

Stock option activity during the nine months ended March 31, 2013 was as follows:

The fair values for the stock options granted during the nine months ended March 31, 2013 were estimated at the date of grant using a Black-Scholes-Morton option-pricing model with the following weighted-average assumptions:

The fair values of the CVE Incentive Warrants and the CVE Unit Purchase Warrants were estimated using a Black-Scholes-Morton option-pricing model and their fair values were estimated to be approximately $1.2 million and $375,000, respectively, using an estimated forfeiture rate and the following weighted-average assumptions:

The Company recognizes the stock-based compensation expense related to warrants issued to CVE over the vesting periods of the warrants on a straight-line basis. 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):

Note 7 – 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 nine months ended March 31, 2013 and 2012 and the period from November 4, 2003 (inception) to March 31, 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 8 – 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.

As described under Note 3, Xuecheng Energy has not made the capacity fee payments to the ZZ Joint Venture since April 2011. Although the Company is continuing to work with Xuecheng Energy on alternatives to resolve the issue, there can be no assurances that the Company will collect any amounts or that the joint venture will be restructured. The Company’s revenue and results of operations have been and would continue to be adversely affected if Xuecheng Energy continues to not pay the capacity fee or if it is unable to retain Xuecheng Energy as a customer or secure new customers. The Company has shut down the ZZ Joint Venture plant since late September 2011 and expects the plant to remain idle until it is able to restructure the joint venture with Xuecheng Energy to jointly produce methanol, as contemplated by the framework agreement executed in December 2011 as described under Note 3, or find an alternative purchaser of its production or a different use for the plant. Discussions regarding the nonpayment of the contractual capacity fees and the restructuring of the joint venture are ongoing. The Company intends to restart the ZZ Joint Venture as soon as feasible after all commercial agreements are completed. In the event that the Company is not successful reaching agreement with Xuecheng Energy, the Company may seek to recover the outstanding capacity fees through binding arbitration.

The Yima Joint Venture plant’s start-up and commissioning are progressing as all three of the gasifiers have been operated at various ranges of throughput and pressure. The current focus is on completing 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. If there are no delays or impediments to the ongoing start-up, Yima Joint Ventures are anticipating and targeting to produce and sell approximately 210,000 tonnes of methanol in calendar 2013. Any delays in the start-up or commissioning could cause delays in methanol production.

As described in Note 3, as of March 31, 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 expects to continue for a period of time to have negative operating cash flows until it can generate sufficient cash flows from SES China (including the ZZ Joint Venture and the Yima Joint Ventures) or its technology, equipment and services business 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. Despite this, the Company will continue to pursue the development of selective projects with strong and credible partners or off-takers where the Company believes equity and debt can be raised or where the Company believes it can attract a financial partner to participate in the project and where the project would utilize our technology equipment and services.

The Company currently plans to use its available cash for (i) general and administrative expenses, (ii) capital contributions to the ZZ Joint Venture to fund its debt service; (iii) working capital; (iv) project, third party licensing and technical development expenses; (v) payments to GTI due under our licensing agreements including the $1.5 million due for the Yima Joint Ventures license; and (vi) general corporate purposes. 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.

Note 9 – Share Purchase Agreements

Share Purchase Agreements with Hongye and Zhongmo

On June 18, 2012, the Company entered into a Share Purchase Agreement (the “Hongye Agreement”) with Hongye International Investment Group Co., Ltd. (“Hongye”), pursuant to which Hongye acquired 6,175,093 shares (the “Hongye Shares”) of the Company’s common stock for $1.50 per share, for an aggregate purchase price of $9,262,639, and entered into a Share Purchase Agreement (the “Zhongmo Agreement”) with Shanghai Zhongmo Investment Management Co., Ltd. (“Zhongmo”), pursuant to which Zhongmo acquired 4,177,335 shares (the “Zhongmo Shares,” and together with the Hongye Shares, the “Shares”) of common stock for $1.50 per share, for an aggregate purchase price of $6,266,002. In June 2012, the Company received a $1.0 million advance from Hongye towards the Share Purchase Agreement (which was repaid to Hongye in connection with the funding described below).

On September 21, 2012, the Company received gross proceeds of approximately $8.7 million from Hongye and issued 5,777,700 of the Hongye Shares to Hongye. On October 10, 2012, the Company received gross proceeds of approximately $6.3 million from Zhongmo and issued the Zhongmo Shares to Zhongmo. Also, on October 16, 2012, the Company received gross proceeds of approximately $0.6 million from Hongye and issued the remaining 397,393 of the Hongye Shares to Hongye. The Company incurred transaction costs of approximately $1.3 million related to closing the Hongye Agreement of which approximately $0.3 million was paid with shares of the Company’s common stock in January 2013.

The Hongye Agreement and the Zhongmo Agreement include several post-closing covenants and agreements:

In addition, under the Hongye Agreement, the Company has agreed to certain additional post-closing covenants and agreements:

Share Purchase Agreements with ZJX

On March 31, 2011, the Company entered into a Share Purchase Agreement (the “Agreement”) with China Energy Industry Holdings Group Co, Ltd. (“China Energy”) and Zhongjixuan Investment Management Company Ltd. (“ZJX”). For a summary description of the terms of this Agreement, see the Company’s Current Report on Form 8-K filed on March 31, 2011.

Closing of the transaction with China Energy and ZJX is subject to approval by the Company’s stockholders and other customary closing conditions. Although the Agreement was not extended at March 31, 2012 and may be terminated by either party at any time upon notice, the Company and ZJX have continued to keep the Agreement in effect. Although the Company believes that ZJX remains active in securing the funding for China Energy with various investor groups, the Company cannot predict the likelihood of ZJX’s success with this effort or the amount of time it could take to close the transaction. The Company also expects that a transaction, if any, which is ultimately entered into with ZJX is likely to be on different terms than previously disclosed. As of March 31, 2013, the Company has incurred approximately $1.0 million of costs related to the Agreement which have been accounted for as deferred financing costs. In the event that the Agreement is terminated or deemed to be unlikely of closing, these deferred finance costs would be written off and recognized as general and administrative expenses.

Note 10 – Segment Information

The Company’s reportable operating segments have been determined in accordance with the Company’s internal management reporting structure. The segment reporting has been revised during fiscal 2013 to 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.

The following table presents the revenue, operating loss and total assets by segment (in thousands):

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, include 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, 2012 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 products and solutions to the energy and chemical industries. Our business is to create value by supplying technology, equipment and services into projects where lower cost low quality coals, coal wastes, municipal wastes, agricultural biomass, and other biomass feedstocks can be profitably converted through our proprietary fluidized bed gasification technology into synthesis gas, or syngas (a mixture of primarily hydrogen, carbon monoxide, and methane), which is then used to produce high value products. Our initial projects to date have been focused on coal, but we intend to pursue other project opportunities relating to municipal wastes, agricultural biomass, and other biomass feedstocks as we continue to develop our business. 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 design, detailed engineering, constructing, starting up and operating two commercial plants in China.

We are seeking to develop projects globally together with our partners, but our principal operating activities to date have focused in China and India. We have built two projects in China. 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 and operated through September 2011 and is designed to produce clean methanol. It is currently offline while we work with the offtake customer, Xuecheng Energy, to resolve certain commerical issues. We intend to restart the plant as soon as feasible after all commercial arrangements are completed. Our Yima project in Henan Province, China is currently in its final stages of commissioning and start-up and is designed to produce 300,000 tonnes per year of chemical grade methanol. Our corporate strategy is to deploy our technology via supplying technology, equipment, and technology related services into projects on a global basis into strategic regional and market-based partnerships or business verticals. Building on our accomplishments 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 General Electric Company (“GE”), which began in 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 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.

We believe our existing operating projects in China have clearly demonstrated that we have several advantages over commercially available competing gasification technologies, such as entrained flow, fixed bed, and moving bed gasification technologies. The first of which is our ability to use a wide range of coals (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. Secondly, our technology’s advanced fluidized bed design is extremely tolerant to changes in feedstock, which allows for flexible fuel purchasing for our customers. Additionally, our simple design leads to the fabrication cost of our equipment and resulting plant costs being lower compared to other commercially available technology due to the use of more widely available construction materials. We believe these important factors position our technology for future deployment of gasification worldwide because we believe that our technology enables projects to become a lower cost producer of products. Depending on local market need and fuel sources, our syngas can be used to produce many valuable products including power, synthetic natural gas, or SNG, chemicals such as methanol, dimethyl ether and glycol, ammonia for fertilizer production, reducing gas for direct reduction iron processes, and transportation fuels such as gasoline and diesel.

The key elements of our business strategy include:

Results of Operations

We are in our development stage and therefore have had limited operations. We have sustained cumulative net losses of approximately $151.4 million from November 4, 2003, the date of our inception, to March 31, 2013.

Three Months Ended March 31, 2013 Compared to the Three Months Ended March 31, 2012

Revenue. Total revenue increased to $0.3 million for the three months ended March 31, 2013 compared to $0.1 million for the three months ended March 31, 2012, all of which related to technology licensing and related services. Technology licensing and related services revenues for the three months ended March 31, 2013 were attributable to two customers, one of which is a global leader in iron ore processing and steel production who is studying the integration of our technology with their steel production technology, and the other is a project developer studying the use of renewable feedstock combinations for the production of chemicals. The studies being conducted for these two customers are expected to result in contracted revenues to us of $850,000, of which $303,000 has been recognized through March 31, 2013.

There were no product sales revenues for both the three months ended March 31, 2013 and 2012 due primarily to no capacity fee revenue being received for both the three months ended March 31, 2013 and 2012, and the suspension of syngas production at the ZZ Joint Venture plant in late September 2011.

In May 2011, Shangdong Xuecheng Energy Group Xuecheng Energy Company Ltd., or Xuecheng Energy (previously Hai Hua), notified the ZZ Joint Venture plant that it will would not continue payment of capacity fees beyond April 2011. The plant continued to operate and provide syngas to Xuecheng Energy until operations were suspended in late September 2011, and Xuecheng Energy has paid other contractual obligations such as the energy fees and by-product sales due under the contract. We are continuing to work with Xuecheng Energy on alternatives to resolve this issue including restructuring the current business arrangement to create an integrated syngas to methanol operation.

Costs of sales and plant operating expenses. Costs of sales and plant operating expenses increased by $29,000 to $275,000 for the three months ended March 31, 2013 compared to $246,000 for the three months ended March 31, 2012. The increase was due primarily to an increase in outside engineering services related to our technology licensing services provided during the period.

General and administrative expenses. General and administrative expenses decreased by $0.4 million to $3.3 million for the three months ended March 31, 2013 compared to $3.7 million for the three months ended March 31, 2012. The decrease was due primarily to a $0.5 million charge in March 2012 to recognize the loss related to a matter with a consulting firm which was settled in May 2012 offset, in part, to an increase in employee related costs including severance. 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 $1.2 million for the three months ended March 31, 2013 compared to $0.3 million for the three months ended March 31, 2012. The increase was due primarily to 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 that closed in February 2013, the expensing of shares and warrants issued in connection with CVE’s consulting agreement and expensing the estimated fair values of stock options awarded to directors and employees during the period.

Depreciation and amortization. Depreciation and amortization expense was $0.6 million for both of the three months ended March 31, 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 $0.2 million to $0.2 million for the three months ended March 31, 2013 compared with $0.4 million for the three months ended March 31, 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. In December 2012, SRS suspended its activities due to the unavailability of financing for coal resources, therefore our contributions to SRS are expected to be minimal until its activities resume.

Foreign currency (gain) loss. Foreign currency loss was $22,000 for the three months ended March 31, 2013 and foreign currency gain was $2,000 for the three months ended March 31, 2012. These amounts resulted from the appreciation and depreciation, as applicable, of the Renminbi Yuan relative to the U.S. dollar and are generated on U.S. dollar denominated shareholder loans payable by our Chinese operations.

Interest expense. Interest expense was $74,000 for the three months ended March 31, 2013 compared to $140,000 for the three months ended March 31, 2012. Our interest expense relates primarily to the ZZ Joint Venture’s outstanding principal balance on its loan with the Industrial and Commercial Bank of China, or ICBC.

Nine months ended March 31, 2013 Compared to the Nine Months Ended March 31, 2012

Revenue. Total revenue was $0.4 million for the nine months ended March 31, 2013 compared to $2.8 million for the nine months ended March 31, 2012.

Technology licensing and related services revenues were $0.4 million for the nine months ended March 31, 2013 compared to $0.6 million for the nine months ended March 31, 2012 and resulted primarily from engineering feasibility studies and coal testing services for customers who are actively developing projects and may license and build plants using our technology. Revenues for the nine months ended March 31, 2013 were primarily attributable to two customers, one of which is a global leader in iron ore processing and steel production who is studying the integration of our technology with their steel production technology, and the other is a project developer studying the use of renewable feedstock combinations for the production of chemicals. The studies being conducted for these two customers are expected to result in contracted revenues to us of $850,000, of which $303,000 has been recognized through March 31, 2013.

There were no product sales revenues for the nine months ended March 31, 2013 due primarily to no capacity fee revenue being received for the nine months ended March 31, 2013 and the suspension of syngas production at the ZZ Joint Venture plant in late September 2011. Product sales were $2.1 million for the nine months ended March 31, 2012 and were derived from the sale of syngas and byproducts produced at the ZZ Joint Venture plant to Xuecheng Energy before the suspension of syngas production at the ZZ Joint Venture plant.

In May 2011, Xuecheng Energy notified the ZZ Joint Venture plant that it would not continue payment of capacity fees beyond April 2011. The plant continued to operate and provide syngas to Xuecheng Energy until operations were suspended in late September 2011, and Xuecheng Energy has paid other contractual obligations such as the energy fees and by-product sales due under the contract. We are continuing to work with Xuecheng Energy on alternatives to resolve this issue including restructuring the current business arrangement to create an integrated syngas to methanol operation.

Costs of product sales and plant operating expenses. Costs of product sales and plant operating expenses were $0.5 million for the nine months ended March 31, 2013 compared to $4.3 million for the nine months ended March 31, 2012. The decrease was due primarily to the suspension of syngas production at the ZZ Joint Venture plant in late September 2011 and ongoing repairs and maintenance costs incurred through March 2012.

General and administrative expenses. General and administrative expenses decreased $0.3 million to $9.6 million for the nine months ended March 31, 2013 compared with $9.9 million for the nine months ended March 31, 2012. The decrease was due primarily to a $0.5 million charge in March 2012 to recognize the loss related to a matter with a consulting firm which was settled in May 2012 offset, in part, by an increase in consulting costs due primarily to CVE’s consulting engagement which began in April 2012 and to certain employee related costs including severance. 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 $0.8 million to $1.5 million for the nine months ended March 31, 2013 compared to $0.7 million for the nine months ended March 31, 2012. The increase was due primarily to 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 that closed in February 2013, the expensing of shares and warrants issued in connection with CVE’s consulting agreement and expensing the estimated fair values of stock options awarded to directors and employees during the period.

Depreciation and amortization. Depreciation and amortization expense was $1.7 million for the nine month ended March 31, 2013 compared to $1.9 million for the nine months ended March 31, 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 were $1.2 million for both of the nine months ended March 31, 2013 and 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. In December 2012, SRS suspended its activities due to the unavailability of financing for coal resources, therefore our contributions to SRS are expected to be minimal until its activities resume.

Foreign currency gains. Foreign currency gains were $26,000 for the nine months ended March 31, 2013 compared to $617,000 for the nine months ended March 31, 2012. These amounts result from the appreciation of the Renminbi Yuan relative to the U.S. dollar and are generated on U.S. dollar denominated shareholder loans payable by our Chinese operations.

Interest expense. Interest expense was $0.2 million and $0.5 million for the nine months ended March 31, 2013 and 2012, respectively. Our interest expense relates primarily to the ZZ Joint Venture’s outstanding principal balance on its loan with ICBC.

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 public offerings of our common stock in November 2007 and in June 2008. We have used the proceeds of these offerings primarily for the development of and investments in our joint ventures in China, including our investments in the ZZ Joint Venture and the Yima Joint Ventures, and to pay for business development and general and administrative expenses. In addition, we entered into a loan agreement with ICBC to fund certain of the costs of the ZZ Joint Venture under which we owed $2.4 million as of March 31, 2013.

As of March 31, 2013, we had $18.5 million in cash and cash equivalents and $11.7 million of working capital available to us. During the nine months ended March 31, 2013, we used $10.4 million in operating activities compared to $9.3 million for the nine months ended March 31, 2012. For both the nine months ended March 31, 2013 and 2012, we used $0.6 million in investing activities due primarily to funding the start-up and development of SRS. For both the nine months ended March 31, 2013 and 2012, we used $2.4 million in financing activities for the scheduled semi-annual principal payments on the ZZ Joint Venture’s loan with ICBC. On September 21, 2012, we received gross proceeds of approximately $8.7 million from Hongye International Investment Group Co., Ltd., or Hongye, and issued 5,777,700 of the Hongye Shares to Hongye. On October 10, 2012, we received gross proceeds of approximately $6.3 million from Shanghai Zhongmo Investment Management Co., Ltd., or Zhongmo, and issued the Zhongmo Shares to Zhongmo. Also, on October 16, 2012, we received gross proceeds of approximately $596,000 from Hongye and issued the remaining 397,393 of the Hongye Shares to Hongye. Upon completion of the Hongye and Zhongmo transactions, we refunded the $1.0 million advance that Hongye paid to us in June 2012. The net proceeds received by us from Hongye and Zhongmo were applied to our operations and projects in China and the balance of the proceeds are to be deposited into a bank account in Hong Kong controlled by SES China. In February 2013, we received proceeds of $400,000 and issued 449,438 shares of our common stock and issued warrants to acquire 449,438 shares of our common stock under a Unit Purchase Agreement with CVE.

Share Purchase Agreements

Unit Purchase Agreement with CVE

In February 2013, we entered into and closed a Unit Purchase Agreement with CVE under which we received proceeds of $400,000 and issued 449,438 shares of our common stock and issued warrants to acquire 449,438 shares of our common stock.

Share Purchase Agreements with Hongye and Zhongmo

On June 18, 2012, we entered into a Share Purchase Agreement with Hongye pursuant to which Hongye acquired 6,175,093 shares of our common stock for $1.50 per share, for an aggregate purchase price of approximately $9.3 million, and entered into a Share Purchase Agreement with Zhongmo pursuant to which Zhongmo acquired 4,177,335 shares of the Common Stock for $1.50 per share, for an aggregate purchase price of approximately $6.3 million. The net were fully applied to our operations and projects in China and were deposited into a bank account in China or Hong Kong controlled by SES China. The terms and conditions of the Agreement are summarized in Note 9 to the consolidated financial statements included herein.

On September 21, 2012, we received gross proceeds of approximately $8.7 million from Hongye and issued 5,777,700 of the Hongye Shares to Hongye. On October 10, 2012, we received gross proceeds of approximately $6.3 million from Zhongmo and issued the Zhongmo Shares to Zhongmo. Also, on October 16, 2012, we received gross proceeds of approximately $596,000 from Hongye and issued the remaining 397,393 of the Hongye Shares to Hongye.

Share Purchase Agreement with ZJX

On March 31, 2011, we entered into a Share Purchase Agreement, or the Agreement, with China Energy Industry Holdings Group Co, Ltd., or China Energy, and Zhongjixuan Investment Management Company Ltd., or ZJX, pursuant to which we will issue on the closing date to China Energy 37,254,475 shares of our common stock, in exchange for approximately $83.8 million, or the Consideration. Within 20 business days after the accomplishment of the Milestone, as defined, we shall further issue directly to China Energy an amount of shares of common stock which, when combined with the shares issued on the closing date, equals 60.0% of the outstanding common stock on a fully-diluted basis.

Closing of the transaction with China Energy and ZJX is subject to approval by our stockholders and other customary closing conditions. Although the Agreement was not extended at March 31, 2012 and may be terminated by either party at any time upon notice, we and ZJX have continued to keep the Agreement in effect. Although we believe that ZJX remains active in securing the funding for China Energy with various investor groups, we cannot predict the likelihood of ZJX’s success with this effort or the amount of time it could take to close the transaction. We also expect that a transaction, if any, which is ultimately entered into with ZJX is likely to be on different terms than previously disclosed. As of March 31, 2013, we have incurred approximately $1.0 million of costs related to the Agreement which have been accounted for as deferred financing costs. In the event that the Agreement is terminated or deemed to be unlikely of closing, these deferred finance costs would be written off and recognized as general and administrative expenses.

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, including ash and elemental sulphur. 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 97.5% of the ZZ Joint Venture and Xuecheng Energy owns the remaining 2.5%. We consolidate the results of the ZZ Joint Venture in our consolidated financial statements.

Syngas Purchase and Sale Agreement

The ZZ Joint Venture is also party to a purchase and sale agreement with Xuecheng Energy for syngas produced by the plant, whereby Xuecheng Energy will pay the ZZ Joint Venture an energy fee and capacity fee, as described below, based on the syngas production. The syngas to be purchased by Xuecheng Energy is subject to certain quality component requirements set forth in the contract. In late December 2008, the plant declared commercial operations status for purposes of the purchase and sale agreement. The energy fee is a per normal cubic meters, or Ncum, of syngas calculation based on a formula which factors in the monthly averages of the prices of design base coal, coke, coke oven gas, power, steam and water, all of which are components used in the production of syngas. The capacity fee is paid based on the capacity of the plant to produce syngas, factoring in the number of hours (i) of production and (ii) of capability of production as compared to the guaranteed capacity of the plant, which for purposes of the contract is 22,000 Ncum per hour of net syngas. Xuecheng Energy is obligated to pay the capacity fee regardless of whether they use the gasification capacity, subject only to availability of the plant, quality of the syngas and exceptions for certain events of force majeure. Due to worldwide reductions in methanol prices, as well as reliability issues with respect to Xuecheng Energy’s plant, Xuecheng Energy has operated at a reduced rate of syngas consumption. Xuecheng Energy used approximately 35% to 45% of the syngas guarantee capacity from 2009 until September 2011 when the plant was shut down.

In April 2009, the ZZ Joint Venture entered into a Supplementary Agreement with Xuecheng Energy, amending the terms of the purchase and sale agreement. The Supplementary Agreement was entered into to provide more clarity regarding the required syngas quality and volume to be delivered, recovery of the energy fee during turndown periods and operations coordination during unscheduled outages. Under the Supplementary Agreement, the syngas quality specification was amended to provide more clarity as to the minor constituents allowable in the syngas. For purposes of the Supplemental Agreement, syngas that meets these specifications is deemed “compliant gas” and syngas that does not meet these specifications is deemed “non-compliant gas.” The Supplementary Agreement also added a requirement for Xuecheng Energy to pay the ZZ Joint Venture the capacity fee and 70% of the energy fee for all non-compliant gas which is taken by Xuecheng Energy. However, if more than 50% of the syngas taken by Xuecheng Energy during any operating day is non-compliant gas, all of the syngas for that day is deemed to be non-compliant gas for purposes of calculating the energy fee. In addition, the Supplementary Agreement accommodates periods of turndown operation by Xuecheng Energy by establishing a minimum threshold gas off take volume of 7,500 Ncum per hour of net syngas for the purpose of calculating the energy fee during such periods. The Supplementary Agreement also provides that, to the extent Xuecheng Energy has an unscheduled shutdown, and the plant continues to operate on standby during such period, Xuecheng Energy is still required to pay the energy fee to the ZZ Joint Venture. In the event that the plant has an unscheduled shutdown and does not provide at least three hours prior notice to Xuecheng Energy, the ZZ Joint Venture may be required to provide certain compensation to Xuecheng Energy.

Since April 2011, Xuecheng Energy has not paid the capacity fees owed to the ZZ Joint Venture. The unpaid amount totaled approximately $7.9 million as of March 31, 2013. The plant continued to operate and provide syngas to Xuecheng Energy through September 2011 with the expectation that Xuecheng Energy would pay the capacity fee. Xuecheng Energy has paid other contractual obligations such as the energy fees and by-product sales due under the contract. Since April 2011, we have not recognized these capacity fee revenues and will not recognize any capacity fees until collection is reasonably assured. In late September 2011, the ZZ Joint Venture plant was shut down for scheduled maintenance and the ZZ Joint Venture plant has been kept idle while the ZZ Joint Venture develops its revised commercial arrangement with Xuecheng Energy. In March 2012, Xuecheng Energy advanced approximately $1.0 million to the ZZ Joint Venture. In September 2012, Xuecheng Energy advanced an additional approximately $0.8 million to the ZZ Joint Venture. These advances are to be applied to the costs of the future commercial arrangements or to future syngas sales. 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.

Since initial start-up, Xuecheng Energy (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. In addition, in April 2011, Hai Hua stopped paying the contractual capacities fees owed to the ZZ Joint Venture plant, and in September 2011, we stopped syngas production at the ZZ Joint Venture until this commercial issue could be remedied. We and Xuecheng Energy, which acquired the Hai Hua facility in 2012, are now working collaboratively to complete necessary agreements that will provide the basis to resolve the commercial issues and allow us to return the ZZ JV to operation with an improved financial outlook. We intend to restart the ZZ Joint Venture as soon as feasible after all commercial agreements are completed. In the event we are not successful in reaching an agreement with Xuecheng Energy, we may seek to recover the outstanding capacity fees through binding arbitration.

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.

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 investment in the Yima Joint Ventures is accounted for using the equity method.

The Yima Joint Venture plant’s start-up and commissioning are progressing as all three of the gasifiers have been operated at various ranges of throughput and pressure. The current focus is on completing 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 start-up or commissioning could cause delays in methanol production.

Based on the project’s current scope of methanol production, the current estimate of the total required capital of the project is approximately $250 million. The remaining capital for the project is to be provided by project debt to be obtained by the Yima Joint Ventures. Yima has 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.

The Yima Joint Ventures are 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.

We have included the $1.5 million payment paid to GTI in June 2009 (when the amended joint venture contracts were signed) toward future royalties due to GTI for the Yima Joint Ventures’ project as part of our investment in the Yima project. An additional future royalty payment of approximately $1.5 million will be due to GTI upon the commissioning of the gasifier equipment for the Yima project which is expected in fiscal 2013.

GTI Agreement

On November 5, 2009, we entered into an Amended and Restated License Agreement, or the New Agreement, with GTI, replacing the Amended and Restated License Agreement between us and GTI dated August 31, 2006, as amended, or the Original Agreement. Under the New 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. The New Agreement differs from the Original Agreement most critically by allowing us to sublicense U-GAS ® to third parties for coal, coal and biomass mixtures or 100% biomass projects (subject to the approval of GTI, which approval shall not be unreasonably withheld), with GTI to share the revenue from such third party licensing fees based on an agreed percentage split, or the Agreed Percentage. In addition, the prior obligation to fabricate and put into operation at least one U-GAS ® system for each calendar year of the Original Agreement in order to maintain the license has been eliminated in the New Agreement.

In order to sublicense any U-GAS ® system, we are required to comply with certain requirements set forth in the New 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 New Agreement. We are also restricted from offering a competing gasification technology during the term of the New 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. Although it is calculated using a different unit of measurement, the Standard Royalty is effectively the same as the royalty payable to GTI under the Original Agreement. 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 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 New 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 New 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 New 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 term of the New Agreement is the same as the Original Agreement, expiring on August 31, 2016, but may be extended for two additional ten-year periods at our option.

Outlook

Our strategy is to create value by operating our existing projects and providing technology, equipment and services in regions where low rank coals and biomass feedstocks can be profitably converted into high value products through our proprietary fluidized bed gasification technology. Our operating projects are intended to provide meaningful cash flows to us from joint venture operations. Our Yima project is in the commission and start-up stage now and we anticipate it reaching full design production rates during mid-year 2013. We are holding our ZZ Joint Venture Project idle while we complete a commercial restructuring effort after which we intend to resume operations.

We intend to deploy our technology via market based business verticals in partnership with industry leaders and well-capitalized project development sponsors. 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 intend to generate revenues and earnings through sales of proprietary gasification related equipment, engineering and technical service fees and licensing royalties to customers. 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. As an example we have been selected by a Chinese company named Henghe Development which intends to use our technology for a large scale SNG project in Jiangxi Province, China. This project plans to convert low quality coal and coal mining wastes into two billion cubic meters of SNG per year. Henghe expects to start construction sometime in 2014. We have an exclusive agreement with Henghe through March 2014 to negotiate acceptable commercial terms for supplying our technology equipment and services to this project.

We and GE Packaged Power, Inc., a subsidiary of General Electric Company, or 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 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 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.

We are currently advancing business vertical opportunities for waste and renewable feedstocks for fuels and chemicals and separate power and steel market verticals. In December 2012, we announced an agreement with a global leader in iron ore processing and steel production to fund our study of the integration of our technology with this steel production technology. We believe that the study will result in a highly feedstock flexible means of producing steel in developing areas with attractive economics and environmental characteristics. We have targeted this market segment as a key global business vertical growth platform for our technology. Additionally, in January 2013 we announced a similar agreement with a confidential customer to study the optimal use of renewable feedstock combinations for the production of “green chemicals”. These feedstocks may include auto shredder residue, refuse-derived fuels and other waste materials that can be efficiently and cost-effectively used to produce valuable chemicals. The plants being contemplated are expected to have an attractive environmental footprint as they would process these waste streams with an exceptionally low emissions profile. In addition, these plants have the potential to include carbon capture capability.

SES China is a separately reported operating segment and is intended to grow into a stand-alone, business platform that will encompass all current and future SES business activities and initiatives in China, including our Yima Joint Venture. We also entered into a consulting services agreement with CVE, pursuant to which CVE will provide executive leadership and management services focused upon delivering key objectives for SES China over the next 12 months, including (i) restructuring of the ZZ plant; (ii) development of methanol sales from the Yima Joint Venture plant; and (iii) delivering SES China subsidiary level funding and financing required for acquisition initiatives currently under development by SES China. In addition, CVE will assist SES China to secure a full time chief executive officer with significant experience in both managing an infrastructure business in China, as well as successfully executing and integrating mergers and acquisitions. We have established a senior level executive steering committee for SES China, led by Colin Tam of CVE, which reports to our chief executive officer. As part of the services provided by CVE, Stephen Chow, a representative of CVE, is acting as the Managing Director of SES China. We believe the formation of SES China will enable us to attract financially strong and highly skilled Chinese partners who desire to invest into the growth of China’s clean energy space and who recognize the opportunity afforded by our technology capability and business model. Business verticals that we can address through SES China include ammonia retrofit projects, clean coal-to-chemicals projects, clean renewable fuels and power businesses, direct reduced iron for the steel industry, and for longer term value creation, larger scale SNG projects utilizing our low rank coal resources and biomass.

We are also actively pursuing new project partners to invest in our ongoing development efforts. The Yima Joint Venture plant’s start-up and commissioning are progressing as all three of the gasifiers have been operated at various ranges of throughput and pressure. The current focus is on completing 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. 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 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, Xuecheng Energy (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. In addition, in April 2011, Hai Hua stopped paying the contractual capacities fees owed to the ZZ Joint Venture plant, and in September 2011, we stopped syngas production at the ZZ Joint Venture until this commercial issue could be remedied. We and Xuecheng Energy, which acquired the Hai Hua facility in 2012, are now working collaboratively to complete necessary agreements that will provide the basis to resolve the commercial issues and allow us to return the ZZ JV to operation with an improved financial outlook. We intend to restart the ZZ Joint Venture as soon as feasible after all commercial agreements are completed. In the event we are not successful in reaching an agreement with Xuecheng Energy, we may seek to recover the outstanding capacity fees through binding arbitration.

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 2011 International Energy Outlook from the U.S. Energy Information Administration, China’s natural gas consumption is estimated to reach 6.8 trillion cubic feet in 2020 but domestic production of natural gas in China is estimated to be 3.7 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.

In December 2012, SRS suspended its activities due to the unavailability of financing for coal resources. We may leverage work done within SRS to date to bring coal resource ownership opportunities to our partners in regions such as China who intend to build projects and need access to low cost coal.

We expect to continue for a period of time to have negative operating cash flows until we are generating sufficient cash flows from SES China (including the ZZ Joint Venture and the Yima Joint Ventures) or our technology, equipment and services business 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) capital contributions to the ZZ Joint Venture to fund its debt service; (iii) working capital; (iv) project, third party licensing and technical development expenses; (v) payments to GTI due under our licensing agreements including the $1.5 million due for the Yima Joint Ventures license; and (vi) general corporate purposes. 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.

Although the agreement with ZJX and China Energy was not extended at March 31, 2012, we and ZJX have continued to keep the Agreement in effect. Although we believe that ZJX remains active in securing the funding for China Energy with various investor groups, we cannot predict the likelihood of ZJX’s success with this effort or the amount of time it could take to close the transaction. We also expect that a transaction, if any, which is ultimately entered into with ZJX may be on different terms than previously disclosed.

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 includes the capacity fee and energy fee earned at the ZZ Joint Venture plant, and byproducts 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.

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 equity method investments such as our equity 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 recent negotiations of an agreement with Xuecheng Energy, 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 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 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 our consolidated financial statements.

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 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 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. In addition, we considered whether the terms of the syngas purchase and sale agreement with Xuecheng Energy contained a lease. The factors considered included (i) our ability to operate and control the plant during the initial 20 years; and (ii) whether it was more than remote that one or more parties other than Xuecheng Energy would purchase more than a minor amount (considered to be 10%) of the plant’s output during the term of the syngas purchase and sale agreement. Because we determined that the syngas purchase and sale agreement did not contain a lease, we account for the revenues from this agreement in accordance with our revenue recognition policy for product sales.

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 have determined 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.

Recently Issued Accounting Standards

In June 2011, the FASB issued new guidance on the presentation of comprehensive income. The new guidance allows an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The new guidance eliminates the current option to report other comprehensive income and its components in the statement of changes in stockholders equity. This new guidance is effective for fiscal years beginning after December 15, 2011, however the provision of the new guidance which requires reclassifications out of comprehensive income be shown separately in the financial statements was deferred to allow the FASB to reconsider alternatives. We adopted these requirements as of July 1, 2012.

In July 2012 the FASB issued ASU 2012-02: Intangibles: Goodwill and Other: Testing Indefinite-Lived Intangible Assets for Impairment (Topic 350) which is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. This update is intended to reduce cost and complexity by providing an entity with the option to make a qualitative assessment about the likelihood that an indefinite-lived intangible asset is impaired to determine whether it should perform a quantitative impairment test. We do not expect the adoption of this guidance to have a significant impact on our consolidated financial statements.

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 loan with ICBC. Interest under this loan is adjusted annually based upon the standard rate announced each year by the People’s Bank of China. As of March 31, 2013, the applicable interest rate was 6.55%. We could also be exposed to the risk of rising interest rates through our future borrowing activities. This is an inherent risk as borrowings mature and are renewed at then current market rates. The extent of this risk as to our ICBC loan, or any future borrowings, is not quantifiable or predictable because of the variability of future interest rates.

Customer credit risk

When our projects other than the ZZ Joint Venture plant progress to commercial production, 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. As of March 31, 2013, Xuecheng Energy, a related party, is our only customer for syngas sales and as such, we are exposed to significant customer credit risk due to this concentration. In addition, as described under “–Results of Operation,” Xuecheng Energy has not made the capacity fee payments to the ZZ Joint Venture since April 2011. The unpaid amount totals approximately $7.9 million as of March 31, 2013. Although we are continuing to work with Xuecheng Energy on alternatives to resolve the issue, there can be no assurances that we will collect these amounts. Our revenue and results of operations will be adversely affected if Xuecheng Energy continues to not pay the capacity fee or if we are otherwise unable to retain Xuecheng Energy as a customer and secure new customers and we may need to continue the shutdown of the ZZ Joint Venture plant until we are able to either find an alternative purchaser of our production or a different use for the plant.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in our annual and periodic reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. In addition, we designed these disclosure controls and procedures to ensure that this information is accumulated and communicated to our management, including the Chief Executive Officer and Chief Accounting Officer, to allow timely decisions regarding required disclosures.

Our management, with the participation of the Chief Executive Officer and the Chief Accounting Officer, assessed the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Securities and Exchange Act of 1934, as amended, or the Exchange Act, as of March 31, 2013. Based upon that evaluation, our Chief Executive Officer and Chief Accounting Officer have concluded that our disclosure controls and procedures were effective as of March 31, 2013.

Changes in Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting during the quarter ended March 31, 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 March 31, 2013, we had $18.5 million of cash and cash equivalents and $11.7 million of working capital available to us. We plan to use our cash for: (i) general and administrative expenses, (ii) capital contributions to the ZZ Joint Venture to fund its debt service; (iii) working capital; (iv) project, third party licensing and technical development expenses; (v) payments to GTI due under our licensing agreements including the $1.5 million due for the Yima Joint Ventures license; and (vi) general corporate purposes. 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 expect to continue for a period of time to have negative operating cash flows until we are generating sufficient cash flows from SES China (including the ZZ Joint Venture and the Yima Joint Ventures) or our technology, equipment and services business 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.

Joint ventures that we enter into present a number of challenges that could have a material adverse effect on our business and results of operations.

We have developed two projects in China, the ZZ Joint Venture and the Yima Joint Ventures. In addition, as part of our business strategy, we plan to enter into other joint ventures or similar transactions, some of which may be material. These transactions typically involve a number of risks and present financial, managerial and operational challenges, including the existence of unknown potential disputes, liabilities or contingencies that arise after entering into the joint venture related to the counterparties to such joint ventures, with whom we share control. We could experience financial or other setbacks if transactions encounter unanticipated problems due to challenges, including problems related to execution or integration. Any of these risks could reduce our revenues or increase our expenses, which could adversely affect our results of operations.

Additionally, we are now a minority owner in the Yima Joint Ventures and we will be relying on Yima to provide the management and operational support for the project. As a result, the success and timing of development activities on the Yima project will depend upon a number of factors that will be largely outside of our control. Dependence on Yima, and other owners of future projects in which we have a minority interest, or extended negotiations regarding the scope of the projects, could delay or prevent the realization of targeted returns on our capital invested in these projects.

We also include the financial statements of the ZZ Joint Venture in our consolidated financial statements. We rely on personnel in China to compile this information and deliver it to us in a timely fashion so that the information can be incorporated into our consolidated financial statements prior to the due dates for our annual and quarterly reports. Any difficulties or delays in receiving this information or incorporating it into our consolidated financial statements could impair our ability to timely file our annual and quarterly reports.

Uncertainties with respect to the Chinese legal system could limit the legal protections available to you and us.

We conduct substantially all of our business through our operating subsidiaries in China. Our operating subsidiaries are generally subject to Chinese laws and regulations including those applicable to foreign investments in China and, in particular, laws applicable to foreign-invested enterprises. The Chinese legal system is a civil law system based on written statutes. Unlike common law systems, decided legal cases have little precedential value in China. In 1979, the Chinese government began to promulgate a comprehensive system of laws and regulations governing economic matters in general. The overall effect of legislation since 1979 has significantly enhanced the protections afforded to various forms of foreign investment in China. However, Chinese laws and regulations change frequently and the interpretation of laws and regulations is not always uniform and enforcement thereof can involve uncertainties. For instance, we may have to resort to administrative and court proceedings to enforce the legal protection that we are entitled to by law or contract. However, since Chinese administrative and court authorities have significant discretion in interpreting statutory and contractual terms, it may be difficult to evaluate the outcome of administrative court proceedings and the level of law enforcement that we would receive in more developed legal systems. Such uncertainties, including the potential inability to enforce our contracts, could limit legal protections available to you and us and could affect our business and operations. In addition, intellectual property rights and confidentiality protections in China may not be as effective as in the United States or other countries. Accordingly, we cannot predict the effect of future developments in the Chinese legal system, particularly with regard to the industries in which we operate, including the promulgation of new laws. This may include changes to existing laws or the interpretation or enforcement thereof, or the preemption of local regulations by national laws. These uncertainties could limit the availability of law enforcement, including our ability to enforce our agreements with Chinese government entities and other foreign investors.

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

On January 7, 2013, we issued 259,079 shares of common stock to Crystal Vision Energy, or CVE, as compensation pursuant to the terms of our consulting agreement with them. Additionally, on February 4, 2013, the Company issued warrants to CVE for the right to acquire up to 1.2 million shares of the Company’s common stock. CVE was entitled to the warrants under the terms of the consulting agreement entered into with CVE effective as of January 1, 2013. The warrants have an exercise price of $1.50 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 February 25, 2013, we issued 449,438 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 449,438 shares of the Company’s common stock. The warrants have an exercise price of $1.11 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 March 27, 2013, we issued 134,733 shares of common stock to Crystal Vision Energy as compensation pursuant to the terms of our consulting agreement with them. 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.

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, 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, our ability to complete the restructuring of the ZZ joint venture, 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 revenues and earnings, 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 relationship with Crystal Vision Energy, as well as our joint venture with Midas Resource Partners, and our ability to develop our marketing arrangement with GE and our other business verticals for power, 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, 2012, 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.

Item 6. Exhibits

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SIGNATURES

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