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Item
1.01
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Entry
into a Material Definitive Agreement.
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Merger
Agreement
On
October 10, 2019 (the “Agreement Date”), Synthesis Energy Systems, Inc., a Delaware corporation (the “Company”),
SES Merger Sub, Inc., a Delaware corporation and wholly-owned subsidiary of the Company (“Merger Subsidiary”), and
Australian Future Energy Pty Ltd, an Australian proprietary limited company (“AFE”), entered into an Agreement and
Plan of Merger (the “Merger Agreement”) pursuant to which, among other things, AFE will, subject to the satisfaction
or waiver of the conditions set forth in the Merger Agreement, merge with and into Merger Subsidiary (the “Merger”),
the separate corporate existence of Merger Subsidiary shall cease and AFE shall be the successor or surviving corporation of the
Merger and a wholly owned subsidiary of the Company. The Merger is intended to qualify for federal income tax purposes as a tax-free
reorganization under the provisions of Section 368(a) of the Internal Revenue Code of 1986, as amended. Upon the consummation
of the Merger, it is contemplated that the Company will also change its name.
Upon
consummation of the Merger, and subject to the terms and conditions of the Merger Agreement, holders of AFE ordinary shares will
receive, in exchange for such ordinary shares, 3,875,000 shares of the Company’s common stock, par value $0.01 per share
(the “Common Stock”). All outstanding Company stock options and restricted stock will remain outstanding post-Merger
on the same terms and conditions as currently applicable to such awards, provided that outstanding awards for departing directors
shall be amended to extend exercisability for the term of the award.
The
respective boards of directors of the Company, Merger Subsidiary and AFE have determined that the Merger Agreement and the transactions
contemplated by the Merger Agreement are fair to, advisable and in the best interests of their respective stockholders, and have
approved the Merger and the Merger Agreement. The transactions contemplated by the Merger Agreement are subject to the approval
of the Company’s and AFE’s respective shareholders at shareholders’ meetings to be called and held by the Company
and AFE, respectively, and other closing conditions, including, among other things, the filing and effectiveness of a registration
statement on Form S-4 with the Securities and Exchange Commission (the “SEC”), and the consummation of the transactions
contemplated by the Share Exchange Agreements and the Purchase Agreements Agreements.
The
Merger Agreement contains representations and warranties by the Company and Merger Subsidiary, on the one hand, and by AFE, on
the other hand, made solely for the benefit of the other. The assertions embodied in those representations and warranties are
qualified by information in confidential disclosure schedules that the parties have exchanged in connection with signing the Merger
Agreement. The disclosure schedules contain information that modifies, qualifies and creates exceptions to the representations
and warranties set forth in the Merger Agreement. Moreover, certain representations and warranties in the Merger Agreement were
made as of a specified date, may be subject to a contractual standard of materiality different from what might be viewed as material
to shareholders, or may have been used for the purpose of allocating risk between the Company and Merger Subsidiary, on the one
hand, and AFE, on the other hand. Accordingly, the representations and warranties and other disclosures in the Merger Agreement
should not be relied on by any persons as characterizations of the actual state of facts about the Company, Merger Subisidiary
or AFE at the time they were made or otherwise.
Under
the Merger Agreement, at the closing of the Merger, the directors of the Company will be Messrs. Stephen Lonie, Edward Choros,
Richard Barker, Robert Rigdon and an additional independent director to be identified, and the officers of the Company will be
Messrs. Kerry Parker (President and Chief Executive Officer), Ronald Higson (Chief Operating Officer) and David Hiscocks (Corporate
Controller).
The
Merger Agreement contains certain termination rights for both the Company and AFE, including, among other things, if the Merger
is not consummated on or before April 15, 2020.
The
Merger Agreement is included herein as Exhibit 2.1 and is incorporated herein by reference. The foregoing description of the Merger
Agreement does not purport to be complete and is qualified in its entirety by reference to such agreement.
Batchfire
Share Exchange
In
connection with the entry into the Merger Agreement, the Company entered into Share Exchange Agreements (each, a “Share
Exchange Agreement”) with certain of the shareholders of Batchfire Resources Pty Ltd (“Batchfire”), whereby
such shareholders will exchange their shares of Batchfire for shares of the Common Stock at a ratio of 10 Batchfire shares for
one share of Common Stock. As a result of these exchanges, the Company would own 25% of the outstanding shares of Batchfire. The
closing of the exchange is subject to certain conditions specified in the Share Exchange Agreements, including, without limitation,
the consummation of the transactions contemplated by the Merger Agreement. In addition, the Company is making an offer to the
remaining shareholders of Batchfire such that the Company would acquire 100% of the shares if the offers are all accepted.
The
foregoing summary does not purport to be complete and is qualified in its entirety by reference to the form of the Share Exchange
Agreement which is attached as Exhibit 10.1 hereto and incorporated by reference herein in their entirety.
Debt
Financing and Amendments
In
connection with the entry into the Merger Agreement, the Company entered into a securities purchase and exchange agreements (each,
a “Purchase Agreement”) with each of the existing holders of its 11% senior secured debentures issued in October 2017
(the “2017 Debentures”), whereby each of the holders agreed to exchange their 2017 Debentures and accompanying warrants
(the “2017 Warrants”) for new debentures (the “New Debentures”) and warrants (the “New Warrants”),
and certain of the holders agreed to provide $2,000,000 of additional debt financing (the “Interim Financing”).
As
compensation for its services, the Company 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 “Placement Agent Warrant”). We have also agreed
to reimburse certain expenses of the Placement Agent.
The
Warrants and the Placement Agent Warrant will be exercisable into shares of Common Stock at any time from and after the closing
date at an exercise price of $6.00 per common share (subject to adjustment). The Warrants and the Placement Agent Warrant will
terminate five years after they become exercisable. The Warrants and the Placement Agent Warrant contain provisions providing
for the adjustment of the purchase price and number of shares into which the securities are exercisable
The
New Debentures and the Warrants have substantially similar terms to the 2017 Debentures and 2017 Warrants, including as to maturity
and security, except that the New Debentures, among other differences, (i) provide for the payment to certain holders, at their
election, of interest payments in shares of the Common Stock or in kind, and (ii) provide for certain optional conversion features.
The New Warrant changes the exercise price of the Warrant to $6.00 per share and make certain other modifications to the 2017
Warrants. The New Debentures and New Warrants will be issued at the closing of the transactions contemplated by the Merger Agreement.
Pursuant
to the Purchase Agreements, each Debenture holder (i) waived the events of default resulting from the failure by the Company to
timely file its Annual Reports on Form 10-K for the fiscal year ended June 30, 2018, for the fiscal year ended June 30, 2019 and
for the fiscal quarter ended September 30, 2019, (ii) waived the event of default resulting from the failure by the Company to
make interest payments due on July 1, 2019, October 1, 2019 and January 31, 2020, and (iii) consented to the consummation of the
Merger and the issuance of the Merger Debentures and the Merger Warrants (each as defined below), notwithstanding any limitations
in the Debentures to the contrary.
As
mentioned above, pursuant to the 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.
Interest
on the Merger Debentures is payable quarterly in arrears, at the option of the holder, in the form of shares of Common Stock,
to be issued at a price of the lower of $3.00 per share and the 10-day trailing VWAP for the period immediately prior to the due
date of the interest payment, or in kind. The Merger Debentures are convertible at any time by the holders into shares of Common
Stock at a price of $3.00 per share, and the Company can require conversion into shares of Common Stock at a price of $3.00 per
share if the Common Stock trades at or above $10.00 per share for ten consecutive trading days.
The
Merger Warrants will be exercisable into shares of Common Stock at any time from and after the issue date at an exercise
price of $3.00 per share of Common Stock, in the case of the Series A Merger Warrants, or $6.00 per share of Common
Stock, in the case of the Series B Merger Warrants. The Merger Warrants will terminate five years after they become
exercisable. The Merger Warrants contain provisions providing for the adjustment of the purchase price and number of shares
into which the securities are exercisable. The terms of the Merger Warrants are the same as the New Warrants. The Placement
Agent Warrant has the same terms as the Merger Warrant with an exercise price of $3.00 per share.
In
connection with entering into the Purchase Agreement, the Company also entered into a Registration Rights Agreement with the investors
whereby the Company agreed to register the shares of Common Stock underlying the New Debentures, the New Warrants, the Merger
Debentures and the Merger Warrants.
The
Company has also agreed to loan $350,000 of the proceeds from the Merger Debentures to AFE to assist AFE in financing its business
through the closing of the Merger. The terms of this loan will be disclosed once finalized between the Company and AFE.
The
foregoing summary does not purport to be complete and is qualified in its entirety by reference to the forms of the Purchase Agreement,
the Registration Rights Agreement, the New Debentures, the New Warrants, the Series A Merger Warrants and the Series
B Merger Warrants which are attached as Exhibits 10.2, 10.3, 10.4, 10.5, 10.6 and 10.7 hereto and incorporated by reference
herein in their entirety.
Management
Consulting Agreement
On
the Agreement Date, the Company entered into a management consulting agreement (the “Consulting Agreement”) with Market
Development Consulting Group, Inc. d/b/a MDC Group (“MDC”). The Consulting Agreement has a term of one year, ending
on September 30, 2019, but is terminable by either party on 30 days notice in connection with an annual review of the services
provided by MDC under the Consulting Agreement.
Under
terms of the Consulting Agreement, MDC will, among other things, (a) be responsible for the Company’s communications strategy
to current and potential stockholders; (b) serve as advisor to Company management and primary point of contact for media and stockholder
relations; and (c) provide management and guidance for Company market and investor awareness initiatives.
Until
the earlier of the closing of the Merger or the sixth month anniversary of the Agreement Date, MDC will receive a monthly fee
of $10,000 plus expense reimbursement. Thereafter, MDC will receive a monthly fee of $25,000 plus expense reimbursement.
On
the Agreement Date, the Company issued 70,000 shares of Common Stock to MDC (the “MDC Agreement Date Shares”) and
upon the closing of the Merger, the Company will issue an additional 30,000 shares of Common Stock to MDC (the “MDC Merger
Closing Shares” and, in together with the MDC Agreement Date Shares, the “MDC Engagement Shares”).
MDC
also received a warrant to acquire 300,000 shares of Common Stock upon signing of the Consulting Agreement and will receive additional
warrants to acquire 1% of the then fully diluted Common Stock on each annual anniversary prior to termination of the Consulting
Agreement (together, the “MDC Warrants”). Subject to specified limitations in the Consulting Agreement, MDC also has
certain piggyback registration rights with respect to the shares of Common Stock underlying the MDC Warrants.
The
foregoing description is qualified in its entirety by reference to the full text of the Consulting Agreement and the MDC Warrant,
which are filed with this Current Report on Form 8-K as Exhibit 10.8 and Exhibit 10.9, respectively.