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
annual report. Some of the information contained in this discussion and analysis
or set forth elsewhere in this annual report, including information with respect
to our plans and strategy for our business and related financing, includes
forward-looking statements that involve risks and uncertainties. You should
review the "Risk Factors" section of this annual report 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
Synthesis Energy Systems, Inc. (referred to herein as "we," "us" and "our"),
together with its wholly-owned and majority-owned controlled subsidiaries is a
global clean energy company that owns proprietary technology, SES Gasification
Technology ("SGT"), for the low-cost and environmentally responsible production
of synthetic gas (referred to as "syngas"). Syngas is used to produce a wide
variety of high-value clean energy and chemical products, such as synthetic
natural gas, power, methanol, and fertilizer. Our focus has been on
commercializing our technology both in China and globally through the regional
business platforms we have created with partners in Australia, via Australian
Future Energy Pty Ltd ("AFE"), in Poland, via SES EnCoal Energy sp. zo. o
("SEE") and in China, via Tianwo-SES Clean Energy Technologies Limited ("TSEC
Joint Venture").
SGT produces syngas that can provide a competitive alternative to other forms of
energy such as natural gas, LNG, crude oil and the conventional utilization of
coal in boilers for power generation. Our syngas can provide a lower cost energy
source in markets where coal, low quality coal, coal wastes, biomass and
municipal wastes are available and where natural gas, LNG, and crude oil are
expensive or constrained due to lack of infrastructure such as distribution
pipelines or power transmission lines, such as Australia, Asia, Eastern Europe
and parts of South America. In addition to the economic advantages, we believe
our syngas also provides an environmentally responsible option for the
manufacturing of chemical, hydrogen, industrial fuel gas and a cleaner option
for the generation of power from coal. We believe that our technology is well
positioned to be an important solution that addresses the market needs of a
changing global energy landscape.
Over the past twelve years, we have successfully commercialized SGT, primarily
through our efforts in China where, between 2006 and 2016, we invested in and
built two commercial scale gasification projects together with Chinese partners
and sub-licensed the SGT into three additional projects in China. In the
aggregate, we have completed five commercial scale industrial projects in China
over a ten-year period, in which the projects utilize twelve SES proprietary SGT
systems. These projects represent a total project level investment of
approximately $450 million. We believe the completion of these projects in China
propelled SGT into a globally recognized gasification technology.
In 2014, we undertook efforts to expand into other regions of the world and
created AFE, a joint venture with partners Ambre Investments PTY Limited
("Ambre") in Australia, and in 2017, created SEE in Poland, with its partners
from EnInvestments sp. z o.o. These regions are ideal locations for industrial
projects utilizing the SGT due to high energy prices and limited access to
affordable natural gas, combined with an abundance of low-quality, low-cost coal
resources, renewable biomass and municipal solid wastes.
Australia's lack of both domestic gas and a uniform energy policy has created a
shortage of reliable energy supply and rising consumer prices, creating a need
and demand for more environmentally friendly and cleaner energy solutions. AFE
was established for the purpose of building large-scale vertically integrated
projects using SGT to produce syngas used in manufacturing fuel gas, synthetic
natural gas, agricultural and other chemicals, transportation fuels, explosives
and for power generation and also to secure ownership positions in local
resources, such as coal and biomass. AFE is able to leverage the unique flexible
feedstock capability of SGT to build industrial projects with low production
costs that can also reduce carbon dioxide emissions and support Australian
industry and regional growth.
Since its formation, AFE has made significant commercial progress, creating
Batchfire Resources Pty Ltd ("BFR"), which acquired one of the largest operating
coal mines in Queensland, acquiring a coal resource mine development lease near
Pentland, Queensland, and advancing the development of its flagship Gladstone
Energy and Ammonia Project (the "Gladstone Project"). The AFE business underpins
the future value of the Company and, to that end, on October 10, 2019, we and
AFE entered into a definitive agreement to merge the two entities, among other
transactions.
We have determined that we did not have adequate cash to continue the
commercialization of SGT due primarily to our inability to realize financial
results from our two investment into projects in China and three technology
licensed projects in China as well as our inability to quickly develop
alternative technology income sources in Australia, Poland and other global
regions. As a result, in our fiscal third quarter and the current quarter, we
suspended our global SGT commercialization efforts, we undertook operating
expense reductions, we severed our SGT technology resources, we ceased providing
funds to project developments, we continue to explore the divesting of assets
such as our Yima and TSEC Joint Ventures and we formed a special committee of
the board of directors to evaluate financing and restructuring alternatives. On
October 10, 2019, we announced the proposed merger with AFE and the acquisition
of additional ownership in Batchfire Resources.
For a discussion on the proposed Merger with AFE and the related transactions,
see "Liquidity and Capital Resources."
37
Results of Operations
Year Ended June 30, 2019 ("Current Year") Compared to the Year Ended June 30,
2018 ("Prior Year")
Revenue. There was no revenue for the Current Year as compared to $1.5 million
for the Prior Year. The revenue for the Prior Year was primarily due to $0.9
million of payments of past due invoices related to technical consulting and
engineering services provided to our Yima Joint Venture during the construction
and commissioning period, due to uncertainty of receipts from the Yima Joint
Venture, we only record revenues upon receipt of payment, $0.2 million related
to our collection of past due invoices from our TSEC Joint Venture in
conjunction with our transfer of ownership, $0.1 million related to services
provided to AFE and $0.3 million from a third-party paid feasibility study.
There was no related party consulting revenue for the Current Year as compared
to $1.2 million for the Prior Year, which primarily resulted from technical
consulting and engineering services provided to AFE, and the past due invoices
collected during the Prior Year from our Yima and TSEC joint ventures.
Costs of sales and operating expenses. There was no costs of sales and operating
expenses for the Current Year compared to $0.4 million costs of sales and
operating expenses for the Prior Year, which resulted from costs incurred for
engineering services provided to customers.
General and administrative expenses. General and administrative expenses was
$5.4 million during the Current Year as compared to $6.5 million during the
Prior Year. The decrease of $1.1 million was due primarily to the reduction of
employee related compensation costs, professional fees and other general and
administrative expenses.
Stock-based expense. Stock-based expense decreased by $0.9 million to $0.4
million for the Current Year compared to $1.3 million for the Prior Year. This
decrease is primarily due to fewer stock options and warrants issued during the
Current Year as compared with the Prior Year.
Depreciation and amortization expense. Depreciation and amortization expense was
approximately $0.3 million for the Current Year compared with $37,000 for the
Prior Year related to amortization of our global patents, the increase was
primarily due to the abandon of certain global patents.
Impairments. Impairment was $5.0 million for the Current Year as compared to
$3.5 million for the Prior Year. We evaluated the conditions of the Yima Joint
Venture to determine whether an other-than-temporary decrease in value had
occurred in both the Current Year and Prior Year. We determined that there were
triggering events that were other-than-temporary in both the Current Year and
the Prior Year. In the Current Year, production levels exceeded expectations yet
the facility continued to experience losses, experienced an increase in working
capital deficits and the external debt was restructured to related Chinese
partners as a result of the credit worthiness of the facility. In the Prior
Year, production levels in the fourth quarter ended June 30, 2018 reduced the
annual production below expectations which resulted in a net increase in the
working capital deficit and increased the debt levels. An impairment analysis
led to the conclusion that the investment in the Yima Joint Venture was impaired
in the Current Year and the Prior Year, therefore, we recorded a $5.0 million
impairment in the Current Year and a $3.5 million impairment in the Prior Year.
Equity in losses of joint venture. The equity in losses of joint venture was
$0.2 million during the Current Year as compared to $0.7 million in the Prior
Year, which primarily relates to our 35% share of the start -up losses incurred
by AFE.
Gain on fair value adjustments of derivative liabilities. The net gain on fair
value adjustments of derivative liabilities was approximately $1.9 million for
the Current Year compared with 0.1 million for the Prior Year, which resulted
from the lower fair market value for our Debenture Warrants and the Placement
Agent Warrants as of June 30, 2019 versus June 30, 2018. The change in the
derivative liability was primarily due to movements in our stock price. Other
changes in the assumptions related to the passage of time, interest rate
fluctuations and stock market volatility.
Foreign currency gain (losses). Foreign currency loss was $58,000 for the
Current Year as compared to foreign currency gain of $143,000 for the Prior
Year. The Current Year loss of $58,000 resulted from the 3% depreciation of the
Chinese Renminbi yuan ("RMB") to the U.S. dollar during the Current Year.
38
Other gain: There was no other gain for the Current Year as compared to other
gain of $1.7 million for the Prior Year, which was primarily due to the
restructuring of the TSEC Joint Venture. The TSEC Joint Venture is accounted for
under the equity method. The Company's contribution in the formation of the
venture was the TUCA, which is an intangible asset granting certain exclusive
rights to our gasification technology. As such, the Company did not record a
carrying value of the investment in the TSEC Joint Venture at the inception of
the venture. In August 2017, the Company entered into a Restructuring Agreement
and received $1.7 million related to its transfer of ownership, reducing its
ownership from 35% to 25% and final transfer and registration of shares with
local government authorities was completed in December 2017. The $1.7 million
gain was deferred in August and recognized upon the completed registration
process in December 2017, as the joint venture has no carrying value and
therefore the $1.7 million received related to the transfer of ownership
resulted in a gain.
Interest expenses: Interest expenses was $1.3 million for the Current Year as
compared with $0.9 million for the Prior Year, which was primarily due to the
interest payments related to the Debenture and the amortization of debenture
discount and issuance costs for the Debentures issued on October 24, 2017.
Liquidity and Capital Resources
As of June 30, 2019, we had $0.9 million in cash and cash equivalents and
$34,000 of working capital. As of January 10, 2020, we had $0.4 million in cash
and cash equivalents. Of the $0.4 million in cash and cash equivalents, $347,000
resides in the United States or easily accessed foreign countries and
approximately $40,000 resides in China.
We have determined that we did not have adequate cash to continue the
commercialization of SGT due primarily to our inability to realize financial
results from our two investments into projects in China and three technology
licensed projects in China as well as our inability to quickly develop
alternative technology income sources in Australia, Poland and other global
regions. As a result, in our fiscal third quarter and the current quarter, we
have suspended our global SGT commercialization efforts, we undertook operating
expense reductions, we ceased providing funds to project developments as we
continue to explore the divesting of assets such as our Yima and TSEC Joint
Ventures and we formed a special committee of the board of directors to evaluate
financing and restructuring alternatives.
On March 29, 2019, our Board of Directors engaged Clarksons Platou Securities,
Inc. ("CPS") to act as our financial advisors to advise us as we conducted a
process to evaluate financing options and strategic alternatives such as but not
limited to a strategic merger, a sale, a recapitalization and/or a financing
consisting of equity and/or debt securities focused on maximizing shareholder
value and protecting the interests of our debtholders.
As a result of our efforts evaluating financing and strategic options, on
October 10, 2019, we entered into an Agreement and Plan of Merger (the "Merger
Agreement") with AFE as previously discussed and also described in Note 16 -
Subsequent Events - The Proposed Merger with AFE. Currently our focus is on
completing the steps required to complete the merger, which include but are not
limited to, (i) completion of all Company required filings, (ii) curing the
NASDAQ listing requirement deficiencies, (iii) completion of the Form S-4 and
Proxy related to the merger, (iv) completion of the Batchfire Share Exchange
pre-emptive rights process and (v) all other tasks required to complete the
merger. We believe the merger will be completed during our third fiscal quarter
ending March 31, 2020.
In connection with the entry into the Merger Agreement, the Company entered into
a securities purchase and exchange agreements (each, a "New Purchase
Agreements") with each of the existing holders of its 11% senior secured
debentures issued in October 2017 (the "Debentures"), whereby each of the
holders agreed to exchange their Debentures and accompanying warrants (the
"Debenture Warrants") for new debentures (the "New Debentures") and warrants
(the "New Warrants"), and certain of the holders agreed to provide $2,000,000 of
additional debt financing (the "Interim Financing"). Pursuant to the New
Purchase Agreements, the Company also issued $2,000,000 of 11% senior secured
debentures (the "Merger Debentures") to certain accredited investors, along with
warrants to purchase $4,000,000 of shares of Common Stock, half of which were
Series A Common Stock Purchase Warrants (the "Series A Merger Warrants") and
half of which were Series B Common Stock Purchase Warrants (the "Series B Merger
Warrants" and, together with the Series A Merger Warrants, the "Merger
Warrants"), as part of the Interim Financing. The Company shall receive the
$2,000,000 pursuant to the Merger Debentures according to the following
schedule: (i) $1,000,000 on or before October 14, 2019, (ii) $500,000 upon the
filing of the proxy statement for the Company stockholder approval of the
Merger, and (iii) $500,000 within two business days of Company stockholder
approval of the Merger. The terms of the Merger Debentures are the same as the
New Debentures. The Merger Debentures are intended to assist the Company in
financing its business through the closing of the Merger.
As compensation for its services, the Company will pay to T.R. Winston &
Company, LLC (the "Placement Agent"): (i) a cash fee of $140,000 (representing
an aggregate fee equal to 7% of the face amount of the Merger Debentures, as
defined below); and (ii) a warrant to purchase 100,000 shares of Common Stock
(the "New Placement Agent Warrant"). We have also agreed to reimburse certain
expenses of the Placement Agent. of the Merger.
The Company has also agreed to loan $350,000 of the proceeds from the Merger
Debentures to AFE to assist AFE in financing its business through the closing of
the Merger. The loan is subject to interest at the rate of 11% per annum payable
in full on the repayment date in conjunction with the repayment of the principal
amount. The repayment date is the earlier of five days after completion of the
Merger transaction or the later of March 31, 2020 or three months following the
vote of the shareholders on the Merger.
The $1,000,000 scheduled payment on or before October 14, 2019 was subsequently
received less certain legal costs and escrow fees in the amount of $966,000
On October 24, 2019 we entered into a loan agreement with AFE whereby we loaned
a portion of the $2.0 million proceeds received under the New Purchase
Agreements. Under the loan agreement, we loaned $350,000 to AFE, which is due in
full on the later of March 31, 2020 or within five days following the closing of
the Merger. If the Merger does not close, the loan will mature on March 31, 2020
or three months following the special stockholder meeting called to approve the
merger transactions. The loan accrues interest at 11% per annum and is also due
in full upon repayment, subject to an increased default interest in certain
limited circumstances.
We can make no assurances that the proposed Merger will be completed on a timely
basis or at all. We may also need to raise additional capital through equity and
debt financing to complete the Merger or to otherwise strengthen our balance for
our corporate general and administrative expenses. We cannot provide any
assurance that any financing will be available to us in the future on acceptable
terms or at all. Any such financing could be dilutive to our existing
stockholders. If we cannot raise required funds on acceptable terms, we may
further reduce our expenses and 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 implement our
business strategy; (iii) make additional capital contributions to our joint
ventures; (iv) fund certain obligations as they become due; (v) respond to
competitive pressures or unanticipated capital requirements; or (vi) repay our
indebtedness. In addition, we may elect to sell certain investments as a source
of cash to develop additional projects or for general corporate purposes.
39
The following summarized the sources and uses of cash during the Current Year:
? Operating Activities: During the Current Year, we used $6.2 million in cash
for operating activities compared to $6.1 million during the Prior Year. These
funds were utilized to pay a full year of interest on our Debentures,
additional consultants and prepayment certain expenses related to the
evaluation of strategic alternatives and our general and administrative
expenses.
? Investing Activities: During the Current Year, we used approximately $11,000
to invest in our SEE joint venture and received approximately $1,000 for
disposal of fixed assets in investing activities. During the Prior Year, we
had a net source of cash of $1.1 million in investing activities, which
included $1.7 million proceeds from the TSEC Joint Venture share transfer, and
$0.6 million additional investment in AFE and SEE.
? Financing Activities: There was no financing activities for the Current Year.
During the Prior Year, we had a net source of cash of $7.2 million in which we
received net proceeds of $7.4 million from issuance of the debentures and paid
legal fees of $0.2 million related to issuance costs of our Debentures.
Project Accounting
Australian Future Energy Pty Ltd
We account for our investment in AFE under the equity method. Our ownership of
approximately 36% makes us the second largest shareholder. We also maintain a
seat on the board of directors which allows us to have significant influence on
the operations and financial decisions, but not control, of AFE. On June 30,
2019, we owned approximately 36% of AFE and the carrying value of our investment
in AFE as of both June 30, 2019 and June 30, 2018 was zero.
Batchfire Resources Pty Ltd
We account for our investment in BFR under the cost method due to our limited
investment, approximately 7%, and lack of significant influence. At the time of
the spin-off, the carrying amount of our investment in AFE was reduced to zero
through equity losses. As such, the value of the investment in BFR post spin-off
was also zero. On June 30, 2019, our ownership in BFR was approximately 7% and
the carrying value of our investment in BFR was zero as of June 30, 2019 and
June 30, 2018.
Cape River Resources Pty Ltd
We account for our investment in CRR under the equity method. Our ownership of
approximately 37% makes us the second largest shareholder. We also maintain a
seat on the board of directors which allows us to have significant influence on
the operations and financial decisions, but not control, of CRR. On June 30,
2019, we owned approximately 37% of AFE and the carrying value of our investment
in AFE as of both June 30, 2019 and June 30, 2018 was zero.
Townsville Metals Infrastructure Pty Ltd
We account for our investment in TMI under the equity method. Our ownership of
38% makes us the second largest shareholder. We also maintain a seat on the
board of directors which allows us to have significant influence on the
operations and financial decisions, but not control, of TMI. On June 30, 2019,
we owned approximately 38% of AFE and the carrying value of our investment in
AFE as of both June 30, 2019 and June 30, 2018 was zero.
SES EnCoal Energy sp. z o. o.
We account for our investment in SEE under the equity method. Our ownership of
50% makes us an equal shareholder and we also maintain two of the four seats on
the board of directors which allows us to have significant influence on the
operations and financial decisions, but not control, of SEE. On June 30, 2019,
as an equal shareholder, our ownership was 50% of SEE and the carrying value of
our investment in SEE as of June 30, 2019 and 2018 was approximately $19,000 and
$36,000 respectively.
40
Yima Joint Venture
The Yima Joint Venture is accounted for under the cost method of accounting. Our
conclusion to account for this joint venture under this methodology is based
upon our current and historical lack of significant influence in the Yima Joint
Venture. The lack of significant influence was determined based upon our
interactions with the Yima Joint Venture related to our limited participation in
operating and financial policymaking processes coupled with our limited ability
to influence decisions which contribute to the financial success of the Yima
Joint Venture. The carrying value of our Yima Joint Venture investment as of
June 30, 2019 and June 30, 2018 was approximately zero and $5.0 million
respectively.
Tianwo-SES Clean Energy Technologies Limited
The TSEC Joint Venture is accounted for under the equity method. Our initial
capital contribution in the formation of the venture was the TUCA, which is an
intangible asset. As such, we did not record a carrying value at the inception
of the venture. The carrying value of our investment in the TSEC Joint Venture
as of both June 30, 2019 and 2018 was zero. As such in December 2017, the
proceeds related to the transfer of shares, 11.15 million RMB (approximately
$1.7 million) was recorded as a gain when the final transfer of shares with
local government authorities was completed.
Under the equity method of accounting, losses in the venture are not recorded if
the losses cause the carrying value to be negative and there is no requirement
of the Company to contribute additional capital. As we are not required to
contribute additional capital, we have not recognized losses in the venture, as
this would cause the carrying value to be negative. Had we recognized our share
of the losses related to the venture, we would have recognized losses of
approximately $0.3 million and $0.5 million for the years ended June 30, 2019
and 2018, respectively, and $3.7 million from inception to date.
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:
Reverse Stock Split
On July 22, 2019, we enacted a 1 for 8 reverse stock split as approved by the
shareholders at the Annual Meeting of Stockholders held in June 2019. All share
and per share amounts in the consolidated financial statements and this
discussion and analysis have been retroactively restated to reflect the reverse
stock split.
Revenue Recognition
We adopted Accounting Standards Codification No. 606, Revenue from Contracts
with Customers (ASC 606) beginning July 1, 2018. We have elected to adopt ASC
606 under the modified retrospective method, under the modified retrospective
method, we applied the guidance retrospectively only to the most current period
presented in the Company's consolidated financial statements. To do so, we have
to recognize the cumulative effect of initially applying the standard as an
adjustment to the opening balance of retained earnings at the date of initial
application with the prior period presented without change. Since an entity may
elect to apply the modified retrospective method to either all contracts as of
the date of initial application or only to contracts that are not completed as
of this date, we have elected to apply the modified retrospective method only to
those contracts not completed before the date of initial application. Due to the
limited number of contracts and revenue related to these contracts, we had no
cumulative adjustment.
Technology licensing revenue is typically received over the course of a
project's development as milestones are met. We may receive upfront licensing
fee payments when a license agreement is entered into. Typically, the majority
of a license fee is due once project financing and equipment installation occur.
We recognize license fees as revenue when the license fees become due and
payable under the license agreement, subject to the deferral of the amount of
the performance guarantee. Fees earned for engineering services, such as
services that relate to integrating our technology to a customer's project, are
recognized using the percentage-of-completion method or as services are
provided.
41
Accounting for Variable Interest Entities and Financial Statement Consolidation
Criteria
The joint ventures which we have entered into may be considered a variable
interest entity, ("VIE"). We consolidate all VIEs where we are the primary
beneficiary. This determination is made at the inception of our involvement with
the VIE and is continuously assessed. We consider qualitative factors and form a
conclusion that we, or another interest holder, has a controlling financial
interest in the VIE and, if so, whether it is the primary beneficiary. In order
to determine the primary beneficiary, we consider who has the power to direct
activities of the VIE most significantly impacts the VIE's performance and has
the obligation to absorb losses from or receive benefits of the VIE that could
be significant to the VIE. We do not consolidate VIEs where we are not the
primary beneficiary. We account for these unconsolidated VIEs using either the
equity method if we have significant influence but not control, or cost method
and include our net investment on our consolidated balance sheet. Under the
equity method, our equity interest in the net income or loss from our
unconsolidated VIEs is recorded in non-operating income/expense on a net basis
on our consolidated statements of operations. In the event of a change in
ownership, any gain or loss resulting from an investee share issuance is
recorded in earnings. Controlling interest is determined by majority ownership
interest and the ability to unilaterally direct or cause the direction of
management and policies of an entity after considering any third-party
participation rights.
Investment in Joint Ventures
We have equity investments in various privately held entities. We account for
these investments either under the equity method or cost method of accounting
depending on our ownership interest and level of influence in each joint
venture. Investments accounted for under the equity method are recorded based
upon the amount of our investment and adjusted each period for our share of the
investee's income or loss. Investments are reviewed for changes in circumstance
or the occurrence of events that suggests other-than-temporary event where our
investment may not be recoverable.
Impairment Evaluation of Long-Lived Assets
We evaluate our long-lived assets 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 or
"triggering event" 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. 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, feedstock costs, and other 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.
42
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 use different valuation models, such as Black-Scholes, to assist in the
determining the value of certain options or in valuing the optionality of
investments in equity. 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.
Off Balance Sheet Arrangements
In November 2018, we entered into a new office lease agreement for 12 months
expiring on December 31, 2019 for our corporate offices in Houston, Texas, on
December 31, 2019, we extended the office lease agreement through March 31,
2020.
Recently Issued Accounting Standards
In February 2016, the FASB issued ASU No. 2016-02, which creates ASC Topic 842,
"Leases." This update increases transparency and comparability among
organizations by recognizing lease assets and lease liabilities on the balance
sheet and disclosing key information about leasing arrangements. This guidance
is effective for interim and annual reporting periods beginning after December
15, 2018. We are evaluating what impact, if any, the adoption of this guidance
will have on our financial condition, results of operations, cash flows or
financial disclosures.
In June 2018, the FASB issued ASU No. 2018-07, which expands the scope of Topic
718, "Compensation - Stock Compensation", to include share-based payment
transactions for acquiring goods and services from non-employees. An entity
should apply the requirements of Topic 718 to non-employee awards except for
specific guidance on inputs to an option pricing model and the attribution of
cost. This amendment specify that Topic 718 applies to all share-based payment
transactions in which a grantor acquires goods or services to be used or
consumed in a grantor's own operations by issuing share-based payment awards.
This amendment also clarifies that Topic 718 does not apply to share-based
payments used to effectively provide (1) financing to the issuer or (2) awards
granted in conjunction with selling goods or services to customers as part of a
contract accounted for under Topic 606, Revenue from Contracts with Customers.
The standard is effective for fiscal years beginning after December 15, 2018,
including interim periods within that fiscal year. We do not expect the standard
to have a material effect on our financial condition, results of operations,
cash flows or financial disclosures.
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