U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: JUNE 30, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission file number 0-26721
SYNERGY TECHNOLOGIES CORPORATION
(Exact name of small business issuer
as specified in its charter)
COLORADO 84-1379164
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
1689 Hawthorne Drive, Conroe, Texas 77301-3284
(936) 788-8220
(Issuer's telephone number)
NOT APPLICABLE
(Former name, former address and former
fiscal year, if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 ___
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the last practicable date:
45,028,212 shares of Common Stock, $0.002 par value, as of July 31, 2002.
Transitional Small Business Disclosure Format
(check one): Yes__ No _X_
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
SYNERGY TECHNOLOGIES CORPORATION
AND SUBSIDIARIES
FINANCIAL STATEMENTS
(UNAUDITED)
PREPARED BY MANAGEMENT
JUNE 30, 2002
2
SYNERGY TECHNOLOGIES CORPORATION
AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(PREPARED BY MANAGEMENT) FOR THE
SIX MONTH PERIOD ENDED JUNE 30, 2002
TABLE OF CONTENTS
PAGE
Financial Statements:
Consolidated Balance Sheet - As at June 30, 2002 and year ended 4
December 31, 2001
Consolidated Statement of Operations for the three and six months 5
ended June 30, 2002 and 2001, and for the period from February
10, 1997 (Date of Inception) to June 30, 2002)
Consolidated Statement of Cash Flows for the three and six months 6
six months ended June 30, 2002 and 2001, and for the period from
February 10, 1997 (Date of Inception) to June 30, 2002
Consolidated Statement of Changes in Stockholders' Equity for the 7
six months ended June 30, 2002 and the years ended December 31,
2001 and 2000
Notes to Consolidated Financial Statements 8
3
SYNERGY TECHNOLOGIES CORPORATION
AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
ASSETS
AS AT AS AT
JUNE 30, 2002 DECEMBER 31, 2001
(UNAUDITED)
--------------------------- ----------------------------
CURRENT ASSETS
Cash $ 5,384 $ 38,746
Receivables (Note 5) 24,543 38,560
Prepaid expenses 78,357 39,727
--------------------------- ----------------------------
TOTAL CURRENT ASSETS 108,284 117,033
INVESTMENTS (Note 3)
SynGen Technologies 3,500,000 3,500,000
CPJ Technologies 5,064,099 1,432,500
Investment in Private US corporation - 1,000,000
--------------------------- ----------------------------
8,564,099 5,932,500
Investment in joint venture (Note 3(c)) 59,720 80,768
--------------------------- ----------------------------
TOTAL INVESTMENTS 8,623,819 6,013,268
Office equipment and computers, net of accumulated
depreciation of $64,836 59,199 59,780
--------------------------- ----------------------------
TOTAL ASSETS $ 8,791,302 $ 6,190,081
=========================== ============================
CURRENT LIABILITIES
Accounts payable $ 791,360 $ 1,018,649
Accrued expenses (Note 6(a)) 454,243 74,744
Notes payable (Note 6(b)) 290,000 2,250,000
Accrued interest on notes (Note 6(c)) 250,425 368,182
--------------------------- ----------------------------
TOTAL CURRENT LIABILITIES 1,786,028 3,711,575
LONG TERM LIABILITIES
Notes payable (Note 7) 1,005,000 135,223
Investment in joint venture - 97,490
--------------------------- ----------------------------
--------------------------- ----------------------------
TOTAL LIABILITIES 2,791,028 3,944,288
STOCKHOLDERS' EQUITY
Common stock, $0.002 par value, 100,000,000 shares
authorized, 43,781,328 shares issued and outstanding 88,543 69,333
Additional paid in capital 56,839,509 49,633,286
Deferred compensation - (13,879)
Deficit accumulated during development stage (50,927,778) (47,442,947)
--------------------------- ----------------------------
--------------------------- ----------------------------
TOTAL STOCKHOLDERS' EQUITY 6,000,274 2,245,793
=========================== ============================
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 8,791,302 $ 6,190,081
=========================== ============================
The accompanying notes are an integral part of these financial statements.
4
SYNERGY TECHNOLOGIES CORPORATION
AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
CUMULATIVE
PERIOD FROM
FEBRUARY 10,
FOR THE THREE MONTHS FOR THE SIX MONTHS 1997 (DATE OF
ENDED JUNE 30, ENDED JUNE 30, INCEPTION) TO
2002 2001 2002 2001 JUNE 30, 2002
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
-----------------------------------------------------------------------------------------------------------------------------------
REVENUE
Interest Income 7 491 63 1,053 35,872
Consulting Income - - - - 8,927
-----------------------------------------------------------------------------------------------------------------------------------
7 491 63 1,053 44,799
EXPENSES
General and administrative 886,216 608,940 1,708,410 1,004,522 7,540,432
Stock option compensation - 21,603 13,879 43,210 997,830
Compensation related to warrants - - - - 343,744
Technology development 209,299 176,579 293,189 407,572 3,255,845
Other technology costs (Note 6(a)) 415,200 - 415,200 - 415,200
Dry well expenses - - - - 722,210
-----------------------------------------------------------------------------------------------------------------------------------
TOTAL EXPENSES 1,510,715 807,122 2,430,678 1,455,304 13,275,261
-----------------------------------------------------------------------------------------------------------------------------------
LOSS FROM OPERATIONS (1,510,708) (806,631) (2,430,615) (1,454,251) (13,230,462)
OTHER EXPENSES
Amortization of debt discount and offering
costs - - - - (2,250,000)
Conversion inducement (888,548) - (888,548) - (888,548)
Interest accrued on notes payable (76,209) (52,973) (131,689) (120,671) (499,870)
Share of expenses incurred by joint venture (22,016) (137,379) (33,980) (174,694) (332,862)
Write-down of technology - - - - (34,528,244)
Gain on disposition - 90,263 - 114,643 802,208
-----------------------------------------------------------------------------------------------------------------------------------
(986,773) (100,089) (1,054,217) (180,722) (37,697,316)
-----------------------------------------------------------------------------------------------------------------------------------
NET LOSS BEFORE TAXES (2,497,481) (906,720) (3,484,832) (1,634,973) (50,927,778)
-----------------------------------------------------------------------------------------------------------------------------------
PROVISION FOR INCOME TAX - - - - -
-----------------------------------------------------------------------------------------------------------------------------------
NET LOSS $(2,497,481) $(906,720) $ (3,484,832) $ (1,634,973) $ (50,927,778)
===================================================================================================================================
BASIC AND DILUTED LOSS PER COMMON SHARE $ (0.06) $ (0.03) $ (0.09) $ (0.05) $ (2.72)
===================================================================================================================================
WEIGHTED AVERAGE NUMBER OF COMMON SHARES USED 40,442,432 31,194,005 38,288,807 30,724,302 18,736,515
===================================================================================================================================
The accompanying notes are an integral part of these financial statements.
5
SYNERGY TECHNOLOGIES CORPORATION AND SUBSIDARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOW
CUMULATIVE
PERIOD FROM
FEBRUARY 10,
FOR THE THREE MONTHS FOR THE SIX MONTHS 1997 (DATE OF
ENDED JUNE 30, ENDED JUNE 30, INCEPTION) TO
2002 2002 2002 2002 JUNE 30, 2002
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
------------------------------------------------------------------------------------------------------------------------------------
CASH FROM OPERATING ACTIVITIES
Net loss (2,497,481) (906,720) (3,484,832) (1,634,973) (50,927,778)
Adjustments to reconcile net loss to net cash
from operations
Dry well expense - - - - 722,210
Depreciation, amortization and write-downs 11,344 30,353 35,228 62,013 37,853,723
Conversion inducement 888,548 - 888,548 - 888,548
Accrued interest on notes payable 76,209 52,973 99,593 120,671 467,775
Issuance of shares for services 798,648 565,806 1,176,725 565,806 2,483,683
Issuance of warrants for services - - - - 343,744
Settlement of debt and acquisition of CPJ - - 357,529 - 357,529
Re-issue of founders shares - - 38,500 - 145,000
Investment in joint ventures 22,016 36,839 24,190 36,839 40,909
Exchange rate loss 12,191 (11,512) 17,672 930 80,003
Loss on disposition of assets - 904 - 904 (684,239)
Changes in assets and liabilities
Accounts receivable 58,207 34,162 14,017 59,804 (24,544)
Prepaid expenses and deposits (6,774) (14,289) (38,629) 13,066 (78,373)
Accounts receivable - related parties - (4,187) - (57,386) -
Accounts payable 82,637 127,205 (227,287) 169,509 1,109,341
Accounts payable - related parties - 142,943 - 142,943 153,088
Accrued expenses 219,614 (37,325) 379,499 (31,825) 454,242
------------------------------------------------------------------------------------------------------------------------------------
NET CASH FLOWS FROM OPERATING ACTIVITIES (334,841) 17,152 (719,247) (551,699) (6,615,139)
CASH FROM INVESTING ACTIVITIES
Acquisition of oil and gas properties - - - - (688,188)
Acquisition of property and equipment (6,748) 152 (20,770) (1,483) (140,175)
Acquisition of equity security - - - - (100,000)
------------------------------------------------------------------------------------------------------------------------------------
NET CASH FLOWS FROM INVESTING ACTIVITIES (6,748) 152 (20,770) (1,483) (928,363)
CASH FROM FINANCING ACTIVITIES
Proceeds from (payments to) notes payable
-related parties - (214,139) - 62,844 531,933
Proceeds from (payments to) notes payable 80,000 - (55,223) - 768,296
Net proceeds from convertible debt - - - - 2,137,500
Sales of common stock 269,650 39,000 779,550 269,500 3,788,660
Other - 266,521 - 266,521 402,500
-----------------------------------------------------------------------------------
NET CASH FLOWS FROM FINANCING ACTIVITIES 349,650 91,382 724,327 598,865 7,628,889
EFFECT OF EXCHANGE RATE CHANGES ON CASH (12,191) 11,512 (17,672) (930) (80,003)
NET CHANGE IN CASH (4,130) 120,198 (33,362) 44,753 5,384
CASH AT BEGINNING OF PERIOD 9,514 614 38,746 76,059 -
-----------------------------------------------------------------------------------
CASH AT END OF PERIOD $ 5,384 $ 120,812 $ 5,384 $ 120,812 $ 5,384
====================================================================================================================================
The accompanying notes are an integral part of these financial statements.
6
SYNERGY TECHNOLOGIES CORPORATION
AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
-------------- ----------- ---------------- -------------- ---------------- --------------
TOTAL
ADDITIONAL ACCUMULATED UNEARNED STOCKHOLDERS'
SHARES AMOUNT PAID IN DEFICIT COMPENSATION EQUITY
CAPITAL (DEFICIT)
-------------- ----------- ---------------- -------------- ---------------- --------------
BALANCE AT DECEMBER 31, 1999 11,989,327 $23,980 $ 1,484,455 $(2,958,385) $(1,449,950)
Cancellation of founders shares (496,736) - - - - -
Issuance of shares for cash 710,000 1,420 353,580 - - 355,000
Issuance of shares for royalty 500,000 1,000 1,061,500 - - 1,062,500
Issuance of stock options - - 981,330 - - 981,330
Issuance of warrants for services
September 29, 2000 - - 343,744 - - 343,744
Issuance of convertible debt - - 2,137,500 - - 2,137,500
Issuance of shares from escrow 14,943,510 29,887 37,998,357 - - 38,028,244
Warrants for stock, January through
December 2000 431,000 862 430,138 - - 431,000
Issuance of shares for services
February 16, 2000 at average
prices 1,359,063 2,718 890,919 - - 893,637
Options exercised 105,000 210 104,790 - - 105,000
Unearned compensation - - - - (89,770) (89,770)
Net loss for the period - - - (6,072,071) - (6,072,071)
-------------- ----------- ---------------- -------------- ---------------- --------------
BALANCE AT DECEMBER 31, 2000 29,541,164 $60,077 $45,786,313 $(9,030,456) $ (89,770) $ 36,726,164
============== =========== ================ ============== ================ ==============
Warrants for stock -- debenture 1,000,000 2,000 998,000 - - 1,000,000
Warrants for stock -- cash 264,000 528 263,472 - - 264,000
Options exercised -- cash 5,500 11 5,489 - - 5,500
Re-issue of founders shares 157,143 300 106,200 - - 106,500
Issuance of stock options - - 120,000 - - 120,000
Shares for services 893,154 1,786 858,443 - - 860,229
Issuance of shares for cash 2,315,382 4,631 1,495,369 - - 1,500,000
Unearned compensation - - - - 75,891 75,891
Net loss for the period - - - (38,412,491) - (38,412,491)
-------------- ----------- ---------------- -------------- ---------------- --------------
BALANCE AT DECEMBER 31, 2001 34,176,343 $ 69,333 $49,633,286 $(47,442,947) $ (13,879) $2,245,793
-------------- ----------- ---------------- -------------- ---------------- --------------
Issuance of shares for cash 1,039,400 2,078 777,472 - - 779,550
Shares for services 1,295,244 2,591 692,702 - - 695,293
Shares for debt 2,504,966 5,010 1,514,415 - - 1,519,425
Shares for technology acquisition 4,291,334 8,583 3,081,177 - - 3,089,760
Re-issue of founders shares 50,000 100 38,400 - - 38,500
Shares for financing services 424,041 848 173,009 - - 173,857
Issuance of warrants - - 40,500 - - 40,500
Unearned compensation - - - - 13,879 13,879
Conversion inducement - - 888,548 888,548
Net loss for the period - - - (3,484,831) - (3,484,831)
-------------- ----------- ---------------- -------------- ---------------- --------------
BALANCE AT JUNE 30, 2002 43,781,328 $ 88,543 $56,839,509 $(50,927,778) $ - $ 6,000,274
============== =========== ================ ============== ================ ==============
The accompanying notes are an integral part of these financial statements.
7
SYNERGY TECHNOLOGIES CORPORATION AND SUBSIDARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
All dollar amounts used herein refer to U.S. dollars unless otherwise indicated.
These statements are prepared using Generally Accepted Accounting Principals as
well as the terms outlined or explained in the year end 10-KSB filing.
All significant transactions between the parent and consolidated affiliates have
been eliminated. The consolidated quarterly financial statements are unaudited.
These statements include all adjustments (consisting of normal recurring
accruals) considered necessary by management to present a fair statement of the
results of operations, financial position and cash flows. The results reported
in these consolidated financial statements should not be regarded as necessarily
indicative of results that may be expected for the entire year.
NOTE 2 - UNCERTAINTY ABOUT THE COMPANY'S ABILITY TO CONTINUE AS A GOING CONCERN
The Company is in the development stage and has not realized any revenues, has
incurred losses and had negative cash flows from operations in the first six
months of 2002 and each year since its inception. The Company's efforts have
been focused on the development of its technologies and raising capital
necessary to finance its development and administrative activities. To date, a
substantial portion of its activities have been paid for by the issuance of
common shares, options and warrants.
Synergy's business is the development and licensing of technologies related to
the oil and gas industry. Synergy's efforts are directed to the commercial
application of technologies in two areas:
1. technologies for the conversion of stranded natural gas into
synthetic naphtha and diesel (GTL), including Syngen, a cold
plasma technology to produce hydrogen rich streams from
natural gas, gasoline and diesel; and
2. technologies for the upgrading of heavy oil to lighter oils
(CPJ).
Uncertainty Regarding Future Operations
The conditions described above raise substantial doubt about the ability of the
Company to continue as a going concern. These financial statements have been
prepared on the going concern basis, which assumes that the Company will be able
to realize its assets and discharge its liabilities in the normal course, which
would require the raising of additional capital sufficient to finance its
development activities and administrative costs. However, there can be no
assurance that the Company will be able to raise the necessary additional
capital or successfully complete the development of its technologies. If these
assumptions were determined to no longer be appropriate, the going concern basis
would no longer be appropriate and the assets and liabilities would be adjusted
to their liquidation values.
NOTE 3 - INVESTMENTS, ACQUISITIONS AND TECHNOLOGY DEVELOPMENT
Investments reported on the Consolidated Balance Sheet of the Company include
the following:
JUNE 30, DECEMBER 31,
2002 2001
----------------- -------------------
Investment in SynGen Technology (See Note 3(a) below) $ 3,500,000 $ 3,500,000
Investment in CPJ Technology (See Note 3(b) below) 5,064,099 1,432,500
Investment in private U.S. corporation - 1,000,000
----------------- -------------------
$ 8,564,099 $ 5,932,500
================= ===================
8
(a) SynGen: There were no changes during the current year.
(b) CPJ: During the quarter ended March 31, 2002, Synergy entered into an
agreement with Texas T Petroleum Ltd. (Texas T), Capital Reserve
Corporation, Carbon Resources Limited (Carbon) and Pierre Jorgensen to
purchase the remaining 50% of Carbon from Texas T. The details of this
agreement are as follows:
1) Texas T transferred to Synergy all of its right, title and
interest in and to the Carbon stock.
2) Synergy issued to Texas T 400,000 shares common stock of
Synergy.
3) Synergy also issued in the name of Texas T 1,900,000 common
shares of Synergy and delivered the stock to an escrow agent to be held
pursuant to an escrow agreement.
Under the terms of an agreement entered into September 2000 to
renegotiate the terms of the royalty agreement, the Corporation and
Texas T had each issued shares to Mr. Jorgenson together with a
commitment to make up the difference between the proceeds received on
the sale of shares and $1 million. As at December 31, 2001 the
Corporation had accrued $370,000 for its share of the shortfall between
the value of the shares and $500,000. In connection with the
acquisition of the additional shares of Carbon, the Corporation assumed
the remaining 50% of this obligation to Mr. Jorgenson, agreed to an
increase in the minimum value to $1,100,000, and issued an additional
1,491,334 shares to Mr. Jorgenson for settlement of this obligation.
Shares issued to Mr. Jorgenson in excess of those required to achieve
the committed resale proceeds of $1,100,000 will be returned to the
Corporation. A value of $1,073,760 was attributed to this transaction
based on the five-day average share price of $0.72 per share. An
additional 500,000 shares were issued in order to replace the 500,000
Capital Reserve Corporation shares that were returned to Texas T
pursuant to the purchase agreement. A value of $360,000 was attributed
to this transaction based on a five-day average share price of $0.72
per share.
This transaction closed on March 5, 2002. Up to that date the
investment in Carbon was recorded using the equity method. From the
closing date forward Carbon has been recorded using the consolidation
method. The investment in private US corporation at December 31, 2001
was eliminated upon the closing of this agreement.
There were no changes during the current quarter.
(c) Investment in Drake Synergy Petroleum as at June 30, 2002:
---------------------------------------------------------------------------
o Shares of Drake Synergy Petroleum Ltd.
2,500,000 shares valued at Naira 1.00 per share 22,104
o Advances to Drake Synergy Petroleum 121,813
o 50% of net liabilities of Drake Synergy Petroleum (84,197)
-------------------
$ 59,720
---------------------------------------------------------------------------
NOTE 4 - RELATED PARTY TRANSACTIONS
a) During the quarter ended June 30, 2002, the Company was charged $13,500
for consulting services by Huntingtown Associates LLC (a Connecticut
corporation) of which Mr. Baumert is the sole proprietor and a member
of the Company's Board of Directors. Huntingtown Associates charges
consulting services provided by Mr. Baumert at a rate of $1,500 per day
plus expenses. At June 30, 2002 an amount of $24,131 remained due and
payable to Huntingtown Associates.
b) During the quarter ended June 30, 2002, various officers and directors
subscribed to a private placement offering as described in Note 8(a) in
the amount of $392,317 for 26.2 units.
9
NOTE 5 - RECEIVABLES
Certain expenses for services rendered and supplies acquired in Canada
are subject to a federal Goods and Services Tax of 7% which is
refundable to the Company in Canadian Dollars upon filing of a GST
return. Total receivables include a GST refund due to the Company of
$4,543, as well as $20,000 that is due from Mr. Barry Coffey by August
2002.
NOTE 6 - CURRENT LIABILITIES
(a) Accrued expenses: In connection with the acquisition by the Company in
the first quarter of 2002 of the remaining 50% of the shares of Carbon
it did not own, the Company agreed to issue 1,491,334 common shares to
Mr. Jorgenson for resale by him. In the event that Mr. Jorgenson
realizes proceeds of $1,100,000 from the sale of these shares as well
as the sale of certain other shares previously issued by the Company to
Mr. Jorgenson, he is required to return any unsold shares to the
Company. In the event the sale of these shares and the shares
previously issued results in proceeds of less than $1,100,000, the
Company will be required to issue additional shares sufficient for Mr.
Jorgenson to realize total proceeds of $1,100,000. At June 30, 2002,
the Company recorded a liability of $415,200 to Mr. Jorgensen because,
based on the closing stock price on that date of $0.38 per share, the
value of the shares held by Mr. Jorgenson on that date was $415,200
less than our remaining obligation to Mr. Jorgenson.
(b) Notes payable: As of July 29, 2002, holders of notes in the amount of
$1,035,000, exclusive of accrued interest, have agreed to exchange
their notes for stock and warrants (Note 8(h)); holders of notes in the
amount of $210,000, exclusive of accrued interest, have elected not to
exchange their notes and request repayment; and holders of notes in the
amount of $1,005,000 (Note 7), exclusive of accrued interest, have
elected to hold their notes and accrue interest at the rate of 10% per
annum, payable quarterly. The terms of the notes being held are
unaltered, and accordingly these amounts are shown as long-term
liabilities (Note 7). The $210,000 of Convertible Promissory note's
whose holders have requested repayment are included in Notes Payable.
These values are reflected in the statements as of June 30, 2002.
A short-term loan from a Company employee for $80,000 was received
during the quarter. This loan bears interest at the rate of Prime plus
one percent per annum and is due by December 9, 2003.
(c) Accrued interest on notes: Interest in the amount of $250,173, related
to the Convertible promissory notes, plus $252, related to the Company
employee loan, has been accrued to June 30, 2002.
NOTE 7 - LONG TERM LIABILITIES
(a) The $1,005,000 of Convertible Promissory notes that have elected to
hold their notes and accrue interest at the rate of 10% per annum,
payable quarterly, are included in Notes Payable. Each note will mature
five years from the date of the issuance.
NOTE 8 - COMMON STOCK
(a) Cash proceeds of $269,650 were received during the second quarter for
the purchase of 18 units at $0.75 per unit pursuant to an offering that
commenced November 2001. An additional $83,325 of outstanding accounts
payable were converted into 5.6 units during the three months ended
June 30, 2002. Each unit consists of 20,000 shares of common stock and
10,000 warrants to purchase an additional share for $0.72, exercisable
at any time three years from June 2, 2002, the closing of the offering.
The exercise price of the warrants issued during the three months ended
March 31, 2002 was adjusted to $0.72 as per the terms of the revised
offering memorandum.
Pursuant to the terms of a consulting agreement with Huntingtown
Associates LLC, of which Duane Baumert, a director of Synergy, is the
sole proprietor, Synergy issued 407,658 options to purchase shares of
common stock in consideration of services rendered during 2001 in the
amount of $103,500, all as reported in the company's annual report on
Form 10-KSB for the year ended December 31, 2001. Management has
renegotiated the manner of the payment due under said consulting
agreement so that the options the Company agreed to issue were
cancelled and the outstanding amount due was applied to the purchase of
the Company's securities offered in a private placement completed in
June 2002. Specifically, the $103,500 due to
10
Huntingtown Associates under the consulting agreement was settled for
6.9 units of the Company's securities consisting of an aggregate of
138,000 shares of common stock and warrants to purchase 69,000 shares
of common stock at a price of $0.72 per share through June 1, 2005.
(b) 213,209 shares were issued to certain firms for services provided to
the Company. The shares are recorded in the Consolidated Statement of
Operations as a General and administrative expense at the five-day
average trading value of the stock on the date of execution of the
settlement agreements. A value of $128,669 is recorded in the
statements relating to these transactions.
(c) 140,000 shares were issued to a third party for assignment of patents
related to the Company's sulfur related technologies. The shares are
recorded as an expense under Technology development with a value of
$84,000 based on the five-day average share price of $0.60.
(d) 171,433 shares were issued to a third party for settlement of loans
provided to the Company. A value of $122,022 is recorded related to
this transaction at $0.71 per share. Included in this value is an
expense of $7,637 related to the premium paid on the principal amount
of the converted debt.
(e) 247,500 shares were issued to a certain investment firm for investor
relation services. A value of $101,475 was attributed to the shares
based on a five-day average share price of $0.41 per share.
(f) On June 20, 2002, we entered into a common stock purchase agreement
with Fusion Capital Fund II, LLC pursuant to which Fusion Capital
agreed to purchase on each trading day during the term of the
agreement, $10,000 of our common stock or an aggregate of $6.0 million.
We may increase the amount Fusion must purchase per trading day as the
market price of our common stock achieves certain predefined levels.
The $6.0 million of common stock is to be purchased over a 30-month
period, subject to a six-month extension or earlier termination at our
discretion. The purchase price of the shares of common stock will be
equal to a price based upon the future market price of the common stock
without any fixed discount to the market price. We have the right to
set a minimum purchase price at any time; however, the purchase price
cannot be less than $0.30 without the consent of Fusion Capital. We
issued 424,041 shares representing a commitment fee paid upon execution
of the stock purchase agreement. A value of $173,857 was attributed to
the shares based on a five-day average share price of $0.41 per share
and is recorded as a General and administrative expense in the
Consolidated Statement of Operations.
(g) On January 3, 2002, we entered into a settlement agreement with John
Gradek, our former Chief Executive Officer, which extinguished a
lawsuit filed by Mr. Gradek against us on February 27, 2001. In that
suit, Mr. Gradek claimed that Synergy breached its employment agreement
with him by terminating him without cause and asserted that Synergy
owed him his monthly salary of $10,000 for 32 months plus paid vacation
days and attorney fees of up to $80,000. Pursuant to the settlement
agreement, we agreed to (i) pay to Mr. Gradek the sum of $100,000 in
two installments of $50,000 each, the first on or before February 1,
2002 which sum was paid and the second by May 1, 2002 which sum was
paid, and (ii) issue to Mr. Gradek 150,000 shares of common stock. In
addition, each party released the other from all actions or claims with
respect to Mr. Gradek's employment with Synergy.
During the second quarter, founding shareholders transferred 60,000
shares to Mr. Gradek in partial settlement of the above mentioned
agreement and the Company issued the remaining 90,000 shares from
treasury. The shares were recorded as an expense in the financial
statements during 2001 and had been carried as a liability during 2002.
(h) Holders of notes in the amount of $1,252,350, inclusive of accrued
interest as of June 30, 2002, have agreed to exchange their notes into
securities of the Company. For every $3 of principal and interest
accrued thereon the Company issued a new unit comprised of the
following:
o 5 shares of our common stock.
o 3 warrants, each entitling the holder to purchase 1 share of
common stock at an exercise price of $0.90 per share for a
period of 5 years after the date of issue.
In exchange for the notes mentioned above, the Company issued 2,087,250
shares and 1,252,350 warrants during the quarter. The total amount of
principal and interest has been removed from the liabilities and
recorded in the equity section of the Balance Sheet. In addition, a
value of $888,548 has been recorded as an
11
expense in the Consolidated Statement of Operations relating to the
fair value of additional securities issued to induce conversion of
debt.
(i) 50,000 warrants were issued to a consulting firm for assistance in
developing a business plan. These warrants have an exercise price of
$0.02 per share for a period of 5 years after the date of issue. An
expense of $34,000 is recorded in the General and administrative
section based on the Black-Scholes option-pricing model with the
following assumptions: dividend yield of 0.0%, expected volatility of
18.16%, interest rate of 4.25% and expected life of one year.
(j) 100,000 warrants were issued to a consulting firm for serving as the
placement agent for the private offering of Synergy securities. These
warrants have an exercise price of $0.90 per share for a period of 3
years after the date of issue. An expense of $5,000 is recorded in the
General and administrative section based on the Black-Scholes
option-pricing model with the following assumptions: dividend yield of
0.0%, expected volatility of 18.16%, interest rate of 4.25% and
expected life of one year.
(k) On June 2, 2002, we entered into a consulting agreement with William R.
Engles, Jr. to serve as our Chief Financial Officer. The agreement
provides that Mr. Engles would furnish consulting services to Synergy
consistent with the duties and responsibilities of a Chief Financial
Officer. This agreement extends through September 2, 2002, as may be
extended by mutual agreement of the parties. We have agreed to pay to
Mr. Engles $2,500 per week for his services. We shall also reimburse
Mr. Engles for all out-of-pocket expenses associated with the work
performed pursuant to this agreement. In addition, we have agreed to
pay to Mr. Engles the equivalent of $3,500 per week in shares of our
common stock as shall be calculated by dividing said amount by the
average of the closing price per share over the five trading days prior
to the payment date. We also have agreed to grant to Mr. Engles options
representing the right to purchase 100,000 shares of common stock at an
exercise price of $0.72 per share. The options shall vest at a pro rata
rate over 13 weeks from June 3, 2002 and shall have a term of 10 years.
We have agreed to register all shares issued to Mr. Engles pursuant to
this agreement and all shares underlying his option for public resale
under the Securities Act of 1933. An expense of $1,500 is recorded in
the General and administrative section based on the Black-Scholes
option-pricing model with the following assumptions: dividend yield of
0.0%, expected volatility of 18.16%, interest rate of 4.25% and
expected life of one year.
WARRANTS
--------
The following table summarizes the warrants issued, exercised and expired during
the six months ended June 30, 2002 and the fiscal year ended December 31, 2001
and those warrants which remain outstanding as at June 30, 2002:
Balance at December 31, 2000 914,666
Warrants issued during 2001
At $1.30 per share 2,315,382
At $3.00 per Unit 1,264,000
At $3.50 per share -
Warrants expired unexercised during the period, $1.00 per share (130,000)
--------------------
Warrants to purchase common shares, balance at December 31, 2001 4,364,048
Warrants issued during the six months ended June 30, 2002
At $1.00 per share 250,000
At $0.02 per share (Note 8(i)) 50,000
At $0.72 per share (Note 8(a)) 644,250
At $0.90 per share (Note 8(h)(j)) 1,352,350
--------------------
Outstanding at June 30, 2002 6,660,648
====================
STOCK OPTIONS
-------------
The Company has six stock option plans outstanding. The 2002 Stock Option Plan
was approved at the special meeting on February 18, 2002 authorizing a maximum
of 10,000,000 options.
On June 2, 2002, the Company offered Mr. Engles options representing the right
to purchase 100,000 shares of common stock at an exercise price of $0.72 per
share. The options shall vest at a pro rata rate over 13 weeks and shall have a
term of 10 years. We have agreed to register all shares underlying his option
for public resale under the Securities Act of 1933. A
12
value of $1,500 is recorded in the General and administrative section based on
the Black-Scholes option-pricing model with the following assumptions: dividend
yield of 0.0%, expected volatility of 18.16%, interest rate of 4.25% and
expected life of one year.
On May 2, 2002, the Company offered Mr. Graham H. Batcheler a position on the
Company's Board of Directors along with a grant of 200,000 options at an
exercise price of $1.00 per share which vest over a three-year period and are
exercisable for ten years.
Options granted to employees and directors for their services as directors
and employees are accounted for using the intrinsic value method. There was
no value attributed to options granted during the quarter.
The following table summarizes the status of the Company's stock options as at
June 30, 2002:
WEIGHTED
SHARES AVERAGE
EXERCISE PRICE
---------------- -----------------
Outstanding at end of year, December 31, 2000 2,795,000 $ 1.05
Granted during 2001 325,000 1.31
Cancelled during 2001 (335,000) 1.10
Exercised during 2001 (5,500) 1.00
---------------- -----------------
---------------- -----------------
Outstanding at end of year, December 31, 2001 2,779,500 $ 1.08
Granted during the six months ended June 30, 2002 4,800,000 0.73
================ =================
Outstanding at June 30, 2002 7,579,500 $ 0.86
================ =================
NOTE 9 - OTHER EVENTS
In July 2002, we agreed with Nielson & Associates, Inc., an oil and gas
exploration and production company of which James Nielson, one of our directors
is the principal shareholder, to establish a joint venture company to finance
(or cause to be financed), build and operate an approximately 1,000 or greater
barrel per day heavy oil upgrading facility or facilities in Wyoming and/or
Montana. The Company agreed.to license the CPJ technology to the joint venture
company, and Nielson & Associates agreed to provide the oil well or wells and
necessary land or lands for the facility or facilities to the joint venture
company.
On July 9, 2002, Synergy completed a $500,000 common stock private placement
with one of the company's institutional shareholders. The fund purchased
1,246,884 restricted shares of Synergy common stock at $.401 per share. As a
result of the current and two earlier private placements with Synergy, this
particular institutional shareholder has made an aggregate investment of $1.75
million in Synergy and now controls 3,118,545 shares, or 6.9 percent, of the
company's 45,028,212 outstanding common shares.
NOTE 10 - COMMITMENTS AND CONTINGENCIES
(a) Operating Lease - Effective September 1, 2000 the Company entered into a
five-year non-cancelable lease which provided for monthly lease payments,
including operating costs, of $19,171. Minimum future rental payments under this
lease with remaining terms in excess of one year are as follows:
2002 115,026
2003 230,052
2004 230,052
2005 153,368
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
We are addressing problems that historically have affected the petroleum and
petrochemical industries. We offer these industries advanced technologies and
processes by which oil and gas producers can economically enter markets which
heretofore have been unattractive for reasons of production costs, end price,
logistics or environmental issues.
Over the past several years, we have developed our technologies to the point
where we believe they are ready for commercial application. In order to
accelerate the commercialization of our technologies, we hired Barry Coffey in
January 2002 as our Chief Executive Officer. Mr. Coffey has a wide range of
management experience with a variety of companies, from large multinational
corporations to start-up companies. Mr. Coffey has served as a member of our
board of directors since January 2001. We intend to selectively hire additional
seasoned managers who we believe can assist in bringing our technologies to
market.
To date in 2002, our efforts to commercialize our technologies have yielded the
memorandums of understandings described below:
o In April 2002, we agreed with H-Power, a well-known
manufacturer of fuel cells to explore the establishment of a
joint-venture company to manufacture a fuel cell system using
Synergy's fuel reforming process (SynGen) and H-Power's fuel
cell. We have completed a joint research and development plan
to develop the fuel cell system and are currently seeking
financing to begin the development activities. If the
development work is successful, then the companies could begin
manufacturing and marketing products in 2003.
o In July 2002, we agreed with Nielson & Associates, Inc., an
oil and gas exploration and production company of which James
Nielson, one of our directors is the principal shareholder, to
establish a joint venture company to finance (or cause to be
financed), build and operate an approximately 1,000 or greater
barrel per day heavy oil upgrading facility or facilities in
Wyoming and/or Montana. The Company agreed.to license the CPJ
technology to the joint venture company, and Nielson &
Associates agreed to provide the oil well or wells and
necessary land or lands for the facility or facilities to the
joint venture company.
We are currently in discussions with various potential partners with
respect to our CPJ technology, SynGen/GTL process, and hydrogen reforming
technology. However, there can be no assurance that any of these discussions
will lead to meaningful business opportunities for us.
Near-Term Goals (2002)
Our immediate goal is to raise sufficient capital to further develop our
technologies and commercial opportunities. Specifically, we intend to enhance
our new Conroe, Texas laboratory facilities, complete development of a
multi-cluster reactor to demonstrate the commercial viability and scalability of
our SynGen and SulfArc technologies, complete work on our hydrogen reforming
systems for the petroleum, petrochemical and fuel cell industries, and continue
to improve our patent position.
Our specific goals are summarized below. Our ability to achieve these goals is
contingent upon our continued ability to raise capital to fund our operations:
o Expand and secure existing patents and file patents to cover
new developments;
o Continue to develop and refine all of our technologies;
o Form additional research and development partnerships with
fuel cell manufacturers to develop a fuel cells based on
SynGen technology;
o Identify a refinery partner to begin on-site testing of our
SulfArc technology;
o Demonstrate the viability of a scaled-up SynGen multi-cluster
reactor for transforming stranded gas to syngas and begin to
build or license commercial-scale facilities; and
o Secure a long-term gas supply contract to enable us to
construct a GTL facility.
14
Intermediate-Term (2003 - 2004)
Building on our near-term initiatives, our intermediate-term goals include:
o Complete arrangements with an industry partner for the siting, design,
engineering and construction of a commercial CPJ plant capable of producing
1,000 bpd to 5,000 bpd of light synthetic crude. We believe our best chance
for success in this area is with a co-development and marketing arrangement
with a North, Central or South American heavy oil producer or pipeline
operator.
o Attract development and pre-production funds in partnership with additional
established fuel cell systems designers and manufacturers from government
or industry sources that require inexpensive, reliable, relatively sulfur
free, hydrogen or carbon monoxide as fuel.
o Complete negotiations with a large gas producer to develop a gas-to-liquids
plant using our proprietary process for converting gas to liquids.
LIQUIDITY AND CAPITAL RESOURCES
Summary of Working Capital and Stockholders' Equity
At June 30, 2002, we had negative working capital of $1,677,744 and
positive stockholders' equity of $6,000,274 compared with negative working
capital of $3,594,542 and positive stockholders' equity of $2,245,793 as of
December 31, 2001. For the three-month period ended June 30, 2002, our
stockholders' equity increased primarily due to the issuance of shares related
to the conversion of promissory notes. For the three-months ended June 30, 2002,
cash flows from operating activities were negative $334,841, compared with
positive $17,152 for the three months ended June 30, 2001, cash flows from
investing activities were negative $6,748 compared with positive $152, and cash
flows provided by financing activities were $349,650 compared with $91,382 over
the same periods.
Convertible Debentures
During June and July 2000, we sold and issued five-year promissory
notes to certain persons in the aggregate principal amount of $2,250,000 bearing
interest at the rate of 10% per annum. These promissory notes provide, among
other things, that on the second anniversary of their issuance, holders may
demand prepayment of the principal amount of the notes and interest accrued
through such date. During June 2002, we offered note holders the opportunity to
exchange each $3 of principal and interest accrued on the notes into five shares
of common stock and warrants to purchase three shares of common stock at a price
of $0.90 per share. As of the date hereof, holders of notes in the amount of
$1,252,350, inclusive of accrued interest, have agreed to exchange their notes;
holders of notes in the principal amount of $254,100, inclusive of accrued
interest, have elected not to exchange their notes and have requested repayment;
and holders of notes in the amount of $1,216,050, inclusive of accrued interest,
have elected to hold their notes and collect interest on the principal, which,
at the two-year anniversary of these notes aggregated $211,050. We do not
currently have sufficient funds to satisfy our obligations with respect to
principal and interest currently payable to those holders who have elected to
request repayment of their notes and with respect to interest currently payable
to those holders who have elected to hold their notes. In the event we are
unsuccessful in raising additional capital or negotiating a deferred payment
plan with the note holders, we will not be able to meet these obligations.
Financing Activities
During the three months ended June 20, 2002, our primary financing
activities included:
o On June 2, 2002 we completed an offering of units consisting,
in the aggregate, of 1,288,500 shares of common stock and
warrants to purchase an additional 644,250 shares of our
common stock at $0.72 per share. We received total gross
proceeds from the offering of $966,375. The offering commenced
in
15
November 2001 and we received offering proceeds over the
period the offering was open. We used the proceeds from this
offering for working capital and general corporate purposes.
o On July 9, 2002, we completed an offering of 1,246,884 shares
of our common stock at a price of $0.401 per share, which
resulted in gross proceeds to the Company of $500,000.
On June 20, 2002, we entered into a common stock purchase agreement
with Fusion Capital Fund II, LLC pursuant to which Fusion Capital agreed to
purchase on each trading day during the term of the agreement, $10,000 of our
common stock or an aggregate of $6.0 million. We may increase the amount
purchased per trading day if the market price of our common stock achieves
certain pre-defined levels. The $6.0 million of common stock is to be purchased
over a 30-month period, subject to a six-month extension or earlier termination
at our discretion. The purchase price of the shares of common stock will be
equal to a price based upon the future market price of the common stock without
any fixed discount to the market price. However, Fusion Capital is not obligated
to purchase our stock in the event that purchase price is below $0.30.
Consequently, the amount and timing of proceeds to the company under the Fusion
agreement, including whether we will receive any proceeds at all under the stock
purchase agreement, is uncertain. Upon execution of the common stock purchase
agreement, we issued 424,041 shares of our common stock to Fusion Capital as a
commitment fee, in reliance upon an exemption from registration provided by
Section 4(2) of the Securities Act.
The Company's ability to execute its plan significantly depends on its
ability to raise additional funds from sources other than operations and under
the Fusion stock purchase agreement. The Company's future liquidity and capital
requirements will depend on a number of factors, including its ability to raise
additional capital in a timely manner through additional investment and its
ability to generate market interest in its technologies.
We expect that we will require up to $20 million over the next three
years to fully implement our business plan, which includes significant marketing
efforts, the continued development of the technologies, expansion of management
resources, support of day-to-day operations and the pursuit of commercialization
efforts. In the past, we have been successful raising money to fund our
operations through the sale of debt and equity securities. However, we cannot be
sure that the additional capital we may need to finance our future operations
will be available on acceptable terms, if at all. If we are unable to secure
financing on acceptable terms, we may be forced to modify our business plan. In
addition, we cannot be sure that we will be able to realize revenues from our
technologies or that we will achieve profitability.
FORWARD-LOOKING STATEMENTS
Our company and its representatives may from time to time make written
or verbal forward-looking statements, including statements contained in this
report and other Company filings with the Securities and Exchange Commission and
in our reports to shareholders. Statements that relate to other than strictly
historical facts, such as statements about our plans and strategies,
expectations for future financial performance, new and existing products and
technologies, and markets for our products are forward-looking statements.
Generally, the words "believe," "expect," "intend," "estimate," "anticipate,"
"will" and other similar expressions identify forward-looking statements. The
forward-looking statements are and will be based on our management's
then-current views and assumptions regarding future events and operating
performance, and speak only as of their dates. Investors are cautioned that such
statements involve risks and uncertainties that could cause actual results to
differ materially from historical or anticipated results due to many factors
including, but not limited to, our company's limited revenues, accumulated
deficit, future capital needs, uncertainty of capital funding, dependence on
limited product line, uncertainty of market acceptance, competition, limited
marketing and manufacturing experience, and other risks detailed in our
company's most recent Annual Report on Form 10-KSB and other Securities and
Exchange Commission filings. We undertake no obligation to publicly update or
revise any forward-looking statements.
16
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
N/A
ITEM 2. CHANGES IN SECURITIES.
(a) N/A
(b) N/A
(c) Recent Sales of Unregistered Securities; Use of Proceeds from Registered
Securities
On June 1, 2002, the Company issued 90,000 shares of Common Stock to
John Gradek pursuant to terms of a settlement agreement between the parties
dated January 3, 2002, as reported in the Company's annual report on Form 10-KSB
for the year ended December 31, 2001. The Company issued the shares pursuant to
Rule 4(2) of the Securities Act of 1933.
On June 20, 2002, the Company entered into a common stock purchase
agreement with an investment fund, Fusion Capital II, LLC (Fusion Capital) for
the issuance and purchase of our common stock. Under the agreement, Fusion
Capital committed up to $6 million to purchase shares of the Company's Common
Stock over a thirty-month period that commences upon the effectiveness of a
registration statement that the Company filed with the U.S. Securities and
Exchange Commission for the underlying shares on July 26, 2002. The agreement
also establishes an equity line of credit or equity draw-down facility. Once
during each draw-down pricing period, the Company could request a draw, subject
to a daily base amount, currently set at $10,000. The number of shares the
Company will issue to Fusion Capital in return for that money is based on the
lower of (a) the closing sale price for our common stock on the day of the draw
request or (b) the average of the three lowest closing sales prices during a
twelve day period prior to the draw request. No shares may be sold to Fusion
Capital at lower than a floor price currently set at $0.50, but in no case below
$0.30 without Fusion Capital's prior consent. Upon execution of the common stock
purchase agreement, the Company issued 424,041 shares of Common Stock to Fusion
Capital as a commitment fee, in reliance upon an exemption from registration
provided by Section 4(2) of the Securities Act.
On June 12, 2002, the Company issued 2,087,250 shares of common stock
and warrants to purchase up to 1,252,350 shares of common stock upon the
exchange of certain outstanding promissory notes in the aggregate principal
amount of $1,035,000 plus accrued interest of $217,350. The Company issued these
securities to 13 accredited investors (as such term is defined in Rule 501 of
Regulation D promulgated under the Securities Act of 1933) pursuant to the
exemption from the registration provisions of the Securities Act afforded by
Section 3(a)(9). The Company did not generate any proceeds from this offering.
On June 2, 2002, Synergy completed a private placement of 1,288,500
shares of common stock and warrants to purchase an additional 644,250 shares of
common at an exercise price of $0.72 per share until June 1, 2005 pursuant to
Rule 506 of Regulation D promulgated by the SEC under the Securities Act of
1933. The offering was made and sold to accredited investors (as such term is
defined in Rule 501 of Regulation D promulgated under the Securities Act) to 15
persons. The Company raised an aggregate of $966,375. Synergy paid no
commissions in connection with the placement of these securities. The Company
used the proceeds derived from this offering for working capital and general
corporate purposes.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
N/A
17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On July 24, 2002, Synergy held its Annual General Meeting. At this meeting, the
following directors were elected: Mr. Barry J. Coffey; Mr. Thomas E. Cooley; Mr.
Graham H. Batcheler, Mr. Duane F. Baumert; Mr. Cameron Haworth; Mr. James E.
Nielson, and Mr. James Shone.
At the meeting, the shareholders voted on each of the following
matters:
- appointment of KPMG, LLP as independent auditors of Synergy;
- to elect Directors for the year end; and set the number of
members of the Board of Directors at seven.
There were 30,603,916 shares represented at the meeting, representing a majority
of the 39,203,477 outstanding shares, either by shareholders attending in person
or by proxy. The votes for each of the matters at this meeting were as follows:
Item Votes for Votes Against Votes Withheld
1. Appointment of Auditors 30,506,441 72,875 24,600
2. Election of Directors
Mr. Coffey 27,736,108 - 2,867,808
Mr. Cooley 27,781,983 - 2,821,933
Mr. Batcheler 27,736,108 - 2,867,808
Mr. Baumert 27,781,983 - 2,821,933
Mr. Haworth 27,736,108 - 2,867,808
Mr. Nielson 27,781,983 - 2,821,933
Mr. Shone 27,736,108 - 2,867,808
18