The amount of volatility in Synthesis Energy Systems (NASDAQ:SES) has been incredible in the last year. In November 2018, SES stock was trading at $11.92; the stock price subsequently trended lower by 85% to reach a low of $1.80 in the second week of October 2019.
With news of an acquisition (which I will discuss later) the stock skyrocketed by 983% to $19.5 in four trading sessions to $19.50. The cool-off has been sharp with SES stock lower by 65% in just over a month.
Currently, SES trades at $6.90 and I believe that the stock will continue to trend lower. For a company with a market capitalization of $9.53 million, volatility can continue to be significant. However, beyond the sharp stock movement that might excite traders, I don’t see fundamental reasons to be bullish on the stock.
SES Has High Financial Risk
As a quick overview, SES was founded in 2004 and listed on NASDAQ since 2007. The company owns a proprietary technology for low cost, environmentally responsible generation of synthesis gas. However, it is clear that the technology has failed to gain traction. For the nine months ending March 2019, the company reported no revenue.
It is also worth noting that 3Q19 quarterly results were the last the company reported in May 2019. Considering the most recent news, NASDAQ has sent a notice of non-compliance to SES, which could lead to potential delisting.
The company has been seeking an extension of filing for the merger transaction to be completed. The company will appeal against the potential de-listing. However, a delay in filing does result in suspicion on the accounts.
In particular, SES reported cash used in operations of $4.7 million for the first nine months of 2019. With the company just having $2.4 million in cash and equivalents, continuity in business operations is a concern. The last 10Q filing itself states – “We believe that with the strategies above, we can continue to operate for the next five months.”
By “strategies,” the company implies possible divestiture, cash conservation and joint venture monetization. However, this provides little clarity on the actual line of action and it’s more than five months since the filing.
Therefore, the markets have a reason to be concerned and the NASDAQ non-compliance news is likely to send SES stock lower.
The Acquisition of Australian Future Energy
It was in April 2018 when Synthesis Energy Systems entered into a Technology Purchase Option Agreement with Australian Future Energy. This was for the sale of its subsidiary company, Synthesis Energy Systems Technologies, which owns the SES Gasification Technology (SGT). However, this deal was terminated in September 2019.
In October 2019, SES announced a deal to acquire 100% of Australian Future Energy. In addition, the company made an offer to acquire 100% of Batchfire Resources. The company has set the transaction closure date for the first quarter of 2020. It is this deal that sent the SES stock skyrocketing. However, the vertical rally was short-lived.
While SES talks about the creation of a vertically integrated energy company after the acquisition, there is little clarity on the business plan. Additionally, SES will issue 3,875,000 new shares of SES common stock for the acquisition of AFE. This implies meaningful equity dilution.
I believe that the markets would look at the pro-forma financials and the growth plans before any potential rally. The markets will also await the compliance issue related to the NASDAQ, which can result in stock de-listing.
Overall, there are too many concerns at this point in time. The fact that SES stock trades at a market capitalization of $9.5 million indicates that value creation post-merger is unlikely soon.
Concluding Thoughts on SES Stock
There are too many questions and very few answers from the management at this point in time. The 10K report needs to be published soon so that investors have more clarity on the financial headroom.
In addition, the company needs to provide investors with a value creation roadmap post the acquisition of Australian Future Energy.
Until then, I don’t see the stock moving higher. A small exposure to the stock can be considered as a speculative bet. However, there are no fundamental factors that support a “buy” thesis on SES stock.
As of this writing, Faisal Humayun did not hold a position in any of the aforementioned securities.