As filed with the Securities and Exchange Commission on September 4, 2002
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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SYNERGY TECHNOLOGIES CORPORATION
(Exact name of registrant as specified in its charter)
COLORADO 1311 84-1379164
(State or other jurisdiction of (Primary standard industrial (IRS employer
incorporation or organization) Classification number) identification number)
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1689 Hawthorne Drive
Conroe, Texas, 77301-3284
(936) 788-8220
(Address and telephone number of principal executive offices)
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1689 Hawthorne Drive
Conroe, Texas, 77301-3284
(Address of principal place of business)
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Barry Coffey, Chief Executive Officer
Synergy Technologies Corporation
1689 Hawthorne Drive
Conroe, Texas, 77301-3284
(936) 788-8220
(Name, address and telephone number of agent for service)
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Copies to:
William P. Ruffa, Esq.
Ruffa & Ruffa, P.C.
150 East 58th Street
New York, New York 10155
Telephone No. (212) 355-0606
Telecopier No. (212) 759-7696
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this registration statement.
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
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TITLE OF EACH CLASS OF PROPOSED AMOUNT PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
SECURITIES\TO BE REGISTERED REGISTERED (1) OFFERING PRICE PER SHARE (2) OFFERING PRICE (2) REGISTRATION FEE (3)
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Common Stock,
$.002 par value......... 15,350,000(4) $0.17 $2,609,500.0070 $240.08
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Common Stock,
$.002 par value......... 150,000(5) $0.17 $25,500 $2.35
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Total................... 15,500,000 $0.17 $2,635,000 $242.43
(1) In accordance with Rule 416(a), this Registration Statement also covers
a presently indeterminable number of additional shares that may become
issuable as a result of the operation of the anti-dilution provisions
of certain Common Stock Purchase Warrants, the underlying shares of
which are being registered herein.
(2) This price is used solely for the purposes of computing the amount of
the registration fee pursuant to Rule 457 of the Securities Act and is
estimated, based on the high and low prices of the common stock on
August 30, 2002.
(3) Paid by electronic transfer.
(4) Includes (a) 12,000,000 shares which we currently estimate will be sold
to Fusion Capital Fund II, LLC pursuant to a common stock purchase
agreement, (b) 424,041 shares previously issued representing a
commitment fee paid upon execution of the stock purchase agreement, (c)
202,020 shares representing the remaining number of shares which may be
issuable to Fusion Capital as a commitment fee for entering the stock
purchase agreement assuming we sell the full 12,,000,000 shares to
Fusion Capital as mentioned above, and (d) 3,350,000 shares currently
held by our shareholders.
(5) Represents shares of common stock issuable upon the exercise of common
stock purchase warrants at prices ranging from $0.02 to $0.90. The
warrants may be exercised by the holders at various times through
January 10, 2007.
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
ii
SUBJECT TO COMPLETION, DATED SEPTEMBER 3, 2002.
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING OFFERS TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
PROSPECTUS
SYNERGY TECHNOLOGIES CORPORATION
15,500,000 SHARES OF COMMON STOCK
This prospectus relates to the sale of up to 15,500,000 shares of our
common stock by certain selling shareholders, including 12,000,000 shares by
Fusion Capital Fund II, LLC. The prices at which the selling shareholders may
sell the shares will be determined by the prevailing market price for the shares
or in negotiated transactions. We will not receive any proceeds from the sale of
our shares by the selling shareholders.
Our common stock is quoted on the Nasdaq Over-the-Counter Bulletin
Board under the symbol "OILS." On August 30, 2002, the last reported sale price
for our common stock as reported on the Nasdaq Over-the-Counter Bulletin Board
was $0.17 per share.
Fusion Capital is an "underwriter" within the meaning of the Securities
Act of 1933, as amended.
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THE SECURITIES OFFERED IN THIS PROSPECTUS INVOLVE A HIGH DEGREE OF
RISK. YOU SHOULD CONSIDER THE "RISK FACTORS" BEGINNING ON PAGE 5 BEFORE
PURCHASING OUR COMMON STOCK.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this prospectus is September 3, 2002.
TABLE OF CONTENTS
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Prospectus Summary........................................................................................3
Risk Factors..............................................................................................5
Cautionary Note Regarding Forward-Looking Statements......................................................8
Use of Proceeds...........................................................................................9
Market for Common Equity and Related Shareholder Matters..................................................9
Management's Discussion and Analysis of Financial Condition
and Plan of Operation................................................................................10
Our Business..............................................................................................16
Our Management............................................................................................25
Security Ownership of Certain Beneficial Owners and Management............................................32
Certain Relationships and Related Party Transactions......................................................33
The Fusion Transaction....................................................................................35
Selling Shareholders......................................................................................38
Description of Capital Stock..............................................................................40
Shares Eligible for Future Sale...........................................................................42
Plan of Distribution......................................................................................43
Legal Proceedings.........................................................................................44
Disclosure of Commission Position of Indemnification for Securities Act Liabilities.......................44
Legal Opinion.............................................................................................44
Experts...................................................................................................44
Additional Information....................................................................................45
Index to Financial Statements.............................................................................F-1
UNLESS OTHERWISE SPECIFIED, THE INFORMATION IN THIS PROSPECTUS IS SET FORTH AS
OF SEPTEMBER 3, 2002, AND WE ANTICIPATE THAT CHANGES IN OUR AFFAIRS WILL OCCUR
AFTER SUCH DATE. WE HAVE NOT AUTHORIZED ANY PERSON TO GIVE ANY INFORMATION OR TO
MAKE ANY REPRESENTATIONS, OTHER THAN AS CONTAINED IN THIS PROSPECTUS, IN
CONNECTION WITH THE OFFER CONTAINED IN THIS PROSPECTUS. IF ANY PERSON GIVES YOU
ANY INFORMATION OR MAKES REPRESENTATIONS IN CONNECTION WITH THIS OFFER, DO NOT
RELY ON IT AS INFORMATION WE HAVE AUTHORIZED. THIS PROSPECTUS IS NOT AN OFFER TO
SELL OUR COMMON STOCK IN ANY STATE OR OTHER JURISDICTION TO ANY PERSON TO WHOM
IT IS UNLAWFUL TO MAKE SUCH OFFER.
2
PROSPECTUS SUMMARY
The following summary highlights selected information from this
prospectus and may not contain all the information that is important to you. To
understand our business and this offering fully, you should read this entire
prospectus carefully, including the financial statements and the related notes
beginning on page F-1. When we refer in this prospectus to the "company," "we,"
"us," and "our," we mean Synergy Technologies Corporation, a Colorado
corporation, together with our subsidiaries. This prospectus contains
forward-looking statements and information relating to Synergy Technologies
Corporation. See "Cautionary Note Regarding Forward Looking Statements"
on page 8.
OUR COMPANY
Synergy Technologies Corporation is commercializing two separate and
distinct proprietary and patented processes, SynGen and CPJ. Our SynGen
technology converts natural gas and other fossil fuels into hydrogen and carbon
monoxide, referred to as synthetic gas or syngas, for use in a variety of
applications. This process can also be used to extract hydrogen from hydrocarbon
feedstocks for use as fuel for fuel cells and to separate hydrogen from hydrogen
sulfide for use in the refining process. Our CPJ process is a super-heated steam
application that converts heavy oil into more valuable, lighter crude oil.
SYNGEN - ECONOMIC SYNGAS PRODUCTION
Our SynGen process efficiently produces syngas, a common building block
for liquid fuels, fuels for fuel cells, plastics, industrial uses, clean-burning
fuels and several other applications. We are focused on three principal
applications for SynGen: (i) full-scale gas-to-liquids, or GTL, plants for the
production of ultra-clean burning fuels; (ii) a process for recovering hydrogen
in the refining process using our proprietary SulfArc technology; and (iii)
extracting hydrogen as a feedstock for fuel cell power generation. Environmental
applications, including improvements resulting from the reduction of greenhouse
gases by converting currently flared and/or vented natural gas into synthetic
fuels, make SynGen attractive to companies around the world that must respond to
new more stringent environmental regulations.
CPJ - HEAVY CRUDES UPGRADED TO A CUSTOMIZED COMPOSITION
Our CPJ heavy oil upgrading process converts heavy crude oils into
lighter synthetic crude oils. Heavy crude oils are denser and more viscous than
lighter crude oils, are more difficult to transport by pipeline and require more
refining than lighter crude oils and, consequently, are not as valuable. The
technology is based upon the application of an instantaneous transfer of energy
from super-heated steam to a fine mist of heavy crude feedstock via a specially
designed injector. CPJ is capable of producing upgraded product of the
end-user's desired viscosity and/or composition.
COMMERCIALIZATION OF OUR TECHNOLOGIES
As of the date hereof, we have not entered into any agreements for the
use of our technologies on a commercial scale and have not derived revenues from
operations. We continue to refine our technologies to improve process
engineering and efficiency; however, we believe that our technologies are ready
for commercialization.
We are a Colorado corporation. Our offices and research and development
laboratory are located at 1689 Hawthorne Drive Conroe, Texas, 77301-3284 . Our
telephone number is (936) 788-8220. The address of our website is
www.synergytechnologies.com. Information on our website is not part of this
prospectus.
3
THE OFFERING
This prospectus covers up to 12,000,000 shares of our common stock
being offered and sold by Fusion Capital Fund II, LLC as amended September 3,
2002, and 3,500,000 shares of common stock offered by certain other persons who
currently hold shares of our common stock or warrants exercisable for shares of
our common stock.
On June 20, 2002, we entered into a common stock purchase agreement
with Fusion Capital Fund II, LLC, pursuant to which Fusion Capital has agreed to
purchase, on each trading day, $10,000 of our common stock up to an aggregate,
under certain conditions, of $6.0 million. As of September 3, 2002, there were
46,670,083 shares outstanding, including the 424,041 shares that we have issued
to Fusion Capital as compensation for its purchase commitment, but excluding the
other 11,575,959 shares offered by Fusion Capital pursuant to this prospectus.
Fusion Capital does not have the right nor the obligation to purchase our stock
in the event that the stock is trading below $0.15.
Certain persons not related to Fusion Capital are offering an aggregate
of 3,500,000 shares of our common stock for sale. Of the shares offered by these
persons, 150,000 underlie common stock purchase warrants.
We will not receive any proceeds from the sale of any of the shares
offered and sold by any of the above mentioned selling shareholders. However, we
may receive up to $6 million in proceeds from the sale of our common stock to
Fusion Capital under the common stock purchase agreement. Any proceeds from
Fusion Capital we receive under the common stock purchase agreement will be used
for working capital and general corporate purposes.
The number of shares offered by this prospectus represents
approximately 26.6% of the total common stock outstanding as of September 3,
2002. The number of shares ultimately offered for sale by Fusion Capital is
dependent upon the number of shares purchased by Fusion Capital under the common
stock purchase agreement.
RISK FACTORS
Investing in our common stock involves various risks, including those
described below. You should consider carefully these risk factors, together with
all other information in this prospectus, before you decide to purchase shares
of our common stock. Additional risks and uncertainties not presently known to
us or that we currently deem immaterial may also impair our business operations.
If any of the following risks actually occur, our business, financial condition
or operating results could be materially adversely affected. In such case, the
trading price of our common stock could decline and you may lose part or all of
your investment.
RISKS RELATING TO OUR COMPANY
WE HAVE A LIMITED OPERATING HISTORY WITH SIGNIFICANT LOSSES AND EXPECT LOSSES TO
CONTINUE FOR THE FORESEEABLE FUTURE.
We commenced our energy technology development operations in 1998 with
the acquisition of our SynGen and CPJ technologies. To date, our limited
operations have consisted primarily of the development of our technologies and
the construction of small pilot units to prove the efficacy and commercial
viability of our technologies. We have recently commenced marketing efforts with
respect to our technologies and have not entered into any licenses, joint
venture or partnering agreements with respect to any of them from which we could
derive significant revenues during the next 12 months.
4
Since our inception, we have not generated any revenues from operations
related to our technologies, have not achieved profitability and expect to
continue to incur operating losses for the foreseeable future. For the years
ended December 31, 2001 and 2000, we incurred net losses of $38,412,491 and
$6,072,071, respectively, and for the period from inception through December 31,
2001, we have incurred losses of $47,442,947. Specifically, to be profitable, we
must demonstrate that the results achieved in our laboratory are scalable and
can be duplicated at larger facilities. We have not yet attempted to implement
our technologies on such basis, and there can be no assurance that they will
function within design parameters under such circumstances.
WE WILL REQUIRE ADDITIONAL FINANCING TO SUSTAIN OUR OPERATIONS AND WITHOUT IT WE
WILL NOT BE ABLE TO CONTINUE OPERATIONS.
At June 30, 2002, we had a working capital deficit of $1,677,744. The
independent auditors' report to our financial statements for the year ended
December 31, 2001, includes an explanatory paragraph to their audit opinion
stating that our recurring losses from operations and working capital deficiency
raise substantial doubt about our ability to continue as a going concern. The
financial statements do not include adjustments as a result of that uncertainty.
We had a negative cash flow from operating activities of $719,247 for the six
months ended June 30, 2002, a negative cash flow from operating activities of
$551,699 for the six months ended June 30, 2001 and a negative cash flow from
operating activities of $1,743,338 for the year ended December 31, 2001.
We do not currently have sufficient financial resources to fund our
operations. We will require significant additional capital to fund our future
operations.
We only have the right to receive $10,000 per trading day under the
agreement with Fusion Capital. However, as the market price of our stock
increases, we have the right from time to time to increase the daily purchase
amount at our option. Fusion Capital shall not have the right nor be obligated
to purchase any shares of our common stock on any trading days that the market
price of our common stock is less than $0.150. Since we initially registered
11,373,939 shares for sale by Fusion Capital pursuant to this prospectus, the
selling price of our common stock to Fusion Capital will have to average at
least $0.53 per share for us to receive the maximum proceeds of $6.0 million
without registering additional shares of common stock. Assuming a purchase price
of $0.15 per share (the lowest price at which at which Fusion may purchase our
common stock) and the purchase by Fusion Capital of the full 11,373,939 shares
under the common stock purchase agreement, proceeds to us would only be
$1,706,0910 unless we choose to register more than 11,373,939 shares, which we
have the right, but not the obligation, to do.
The extent to which we rely on Fusion Capital as a source of funding
will depend on a number of factors including, the prevailing market price of our
common stock and the extent to which we are able to secure working capital from
other sources, such as from other investments and the marketing, licensing and
sale of our technologies. If obtaining sufficient financing from Fusion Capital
were to prove prohibitively expensive and if we are unable to commercialize our
SynGen and CPJ technologies on a scale that allows us to generate significant
revenues in a short time frame, we will need to secure another source of funding
in order to satisfy our working capital needs. Even if we are able to access the
full $6.0 million under the common stock purchase agreement with Fusion Capital,
we anticipate that we will need additional capital to fully implement our
business, operating and development plans.
IF WE ARE FOUND TO BE FINANCIALLY INCAPABLE OF COMMERCIALLY EXPLOITING THE CPJ
TECHNOLOGY, WE MAY HAVE TO RETURN THE TECHNOLOGY TO A FORMER CO-OWNER, WHICH
WOULD HAVE AN ADVERSE AFFECT ON OUR BUSINESS.
Under the terms of the agreement by which we acquired Texas T.
Petroleum, Ltd.'s 50% ownership interest in the CPJ technology, we could be
required to return the technology to said entity if we are found to be bankrupt,
insolvent or are otherwise financially incapable of commercially exploiting it.
We are in receipt of a letter from Texas T. demanding that we return the CPJ
technology to it on the basis that we are financially incapable of commercially
exploiting the technology. Our response to Texas T. disputes this analysis and
advises that we will vigorously contest any action brought for breach of the
technology acquisition agreement. If we were found to be in breach of the
agreement by which we acquired the CPJ technology and we are ordered to return
the CPJ technology to Texas T., our business prospects would be adversely
affected.
WORLD CRUDE OIL AND NATURAL GAS PRICES MAY NEGATIVELY AFFECT DEMAND FOR OUR CPJ
AND SYNGEN TECHNOLOGIES WHICH COULD ADVERSELY AFFECT OUR BUSINESS PROSPECTS.
Our CPJ technology transforms heavy crude oils into lighter, more
valuable, easily transported and refined crude oils. CPJ technology is
economically viable only when the price spread between light and heavy crude
oils is wide enough to justify the use of the process. This spread is adversely
affected
5
when base crude oil prices drop worldwide. Heavy oils are generally in less
demand because they require significantly more refining than light crude oils.
Our business is predicated somewhat on the world economy and the demand for oil.
CPJ processing facilities are inherently very capital intensive. As crude oil
prices fall, rates of return for CPJ plants decline, thereby reducing the
likelihood of implementation. In addition, a reduction in world oil demand also
reduces the emphasis on heavy oil production and promotes increased usage of
lighter crude oils. Long cycles of low light crude oil prices could negatively
impact demand for our CPJ technology and adversely affect our business
prospects.
One of the primary applications of our SynGen technology is
transformation of natural gas into liquid fuels at commercial-scale GTL plants.
High natural gas prices relative to prices for oil and refined products, or a
decrease in prices for oil and refined products, could adversely affect the
operating results of these plants.
BECAUSE WE HAVE A LIMITED OPERATING HISTORY, WE DON'T KNOW IF THE MARKET WILL
ACCEPT OUR TECHNOLOGIES.
To date, we have focused on developing and proving the efficacy of our
technologies and have engaged in only limited marketing activities. Accordingly,
our technologies have not been used on a commercial basis. Our growth and future
financial performance, in large measure, will depend upon our ability to
demonstrate to prospective licensees, joint venture and collaborative partners
and other users the commercial viability of our technologies and the advantages
they possess over alternative similar technologies. If we are unable to prove
the commercial viability of our technologies on a commercial- scale to potential
licensees and other end-users, either in theory or by the construction of
commercial- scale facilities, our business would be materially adversely
effected. Even if we are able to prove our technologies perform on a commercial
scale, we cannot assure you that our products will gain wide-scale market
acceptance given the number of competing technologies similar to those we are
developing. In addition, wide-scale markets for the synthetic products generated
by our SynGen technology may never develop or may develop more slowly than we
expect. If sufficient markets fail to develop or develop more slowly than we
anticipate, we may be unable to recover the losses we will have incurred in the
development of our SynGen technology and may never achieve profitability.
WE FACE SIGNIFICANT COMPETITION FROM ENTITIES THAT HAVE SIGNIFICANTLY GREATER
RESOURCES THAN US, THAT MAY BE ABLE TO RESPOND TO CHANGING MARKET CONDITIONS
MORE QUICKLY THAN WE CAN AND THAT ARE ABLE TO ALLOCATE GREATER RESOURCES TO THE
MARKETING OF THEIR PRODUCTS.
Gas to liquid, heavy oil upgrading and hydrocarbon reforming
technologies are rapidly evolving with new technologies being developed
frequently and, as such, we face intense competition. Other companies have
developed technologies with capabilities similar to our technologies. Many of
our existing and potential competitors are multinational corporations and have
greater technological, financial, marketing and personnel resources than we have
and are able to compete effectively against us. These entities may be able to
respond more quickly to changing market conditions by developing new
technologies to meet a changing economic landscape. They may be able to more
effectively market their products than we can because of the financial and
personnel resources they possess. We cannot assure you that we will be able to
distinguish ourselves in a competitive market. To the extent that we are unable
to successfully compete against existing and future competitors, our business,
operating results and financial condition will be harmed.
LENGTHY MARKETING AND SALES CYCLES COULD RESULT IN WIDE FLUCTUATIONS IN RESULTS
OF OPERATIONS.
We offer technologies that require a substantial capital investment
from the end-user both in connection with the licensing of the technology and
the construction of commercial scale plants incorporating the technology.
Accordingly, marketing of our technologies occurs over an extended period of
time as prospective end-users undertake significant due diligence with respect
to the technology they may seek to license. A customer may pay us little or no
licensing fee upon the execution of the license agreement. Many months may
elapse from the time we commence marketing efforts until the time we recognize
any licensing or royalty revenues. Consequently, we may suffer extreme
fluctuations in
6
operating results from quarter to quarter which are tied to marketing efforts
and the generation of revenues from the licensing of our technologies.
FACILITIES THAT EMPLOY OUR TECHNOLOGIES, INCLUDING OUR LABORATORIES, ARE AND
WILL BE SUBJECT TO ENVIRONMENTAL AND OTHER REGULATIONS. FAILURE TO COMPLY WITH
THESE REGULATIONS COULD RESULT IN SUBSTANTIAL FINES AND PENALTIES TO US AND
OTHER USERS OF OUR TECHNOLOGIES. IN ADDITION, THE COST OF COMPLIANCE WITH THESE
REGULATIONS COULD EITHER PREVENT CONSTRUCTION OF A PLANT IN A GIVEN LOCALE OR
SEVERELY TAX THE CONSTRUCTION OR OPERATIONS IN A MANNER THAT MAKE THE PLANT
UNECONOMICAL.
Our current technology testing operations and any future facilities
that utilize our technologies are and will be subject to extensive federal,
state and local laws and regulations relating to the protection of the
environment, including laws and regulations relating to the release, emission,
use, storage, handling, cleanup, transportation and disposal of hazardous
materials and employee health and safety. In addition, any SynGen or CPJ
facilities will be subject to the environmental and health and safety laws and
regulations of any foreign countries in which these plants may be located.
Violators of these laws and regulations, including us in connection with our
laboratory operations, may be subject to substantial fines, criminal sanctions
or third party lawsuits. Moreover, environmental laws and regulations may
require the acquisition of a permit or other authorization before activities may
be conducted. Compliance with laws and regulations, and any requisite permits,
can increase the costs of designing, installing and operating SynGen and CPJ
facilities which could either prevent construction of a plant in a given locale
or severely tax the construction or operations in a manner that make the plant
uneconomical. The impact of environmental laws on us or users of our
technologies could have a material adverse affect on our business, operating
results and financial condition.
LIMITATIONS ON LIABILITY AND INDEMNIFICATION MATTERS.
As permitted by the corporate laws of the State of Colorado, we have
included in our articles of incorporation a provision to eliminate the personal
liability of its directors for monetary damages for breach or alleged breach of
their fiduciary duties as directors, subject to certain exceptions. In addition,
our by-laws provide that we are required to indemnify our officers and directors
under certain circumstances, including those circumstances in which
indemnification would otherwise be discretionary, and we are required to advance
expenses to our officers and directors as incurred in connection with
proceedings against them for which they may be indemnified.
RISKS RELATING TO OUR COMMON STOCK
THE SALE OF OUR COMMON STOCK TO FUSION CAPITAL MAY CAUSE DILUTION AND THE SALE
OF THE SHARES OF COMMON STOCK ACQUIRED BY FUSION CAPITAL AND HELD BY THE OTHER
SELLING SHAREHOLDERS COULD CAUSE THE PRICE OF OUR COMMON STOCK TO DECLINE.
The purchase price for the common stock to be issued to Fusion Capital
pursuant to the common stock purchase agreement will fluctuate based on the
price of our common stock. All shares in this offering are freely tradable.
Fusion Capital and the other selling shareholders may sell none, some or all of
the shares of common stock purchased from us at any time. We expect that the
shares offered by Fusion Capital by this prospectus will be sold over a period
of up to 30 months from the date of this prospectus. Depending upon market
liquidity at the time, a sale of shares under this offering at any given time
could cause the trading price of our common stock to decline. The sale of a
substantial number of shares of our common stock under this offering, or
anticipation of such sales, could make it more difficult for us to sell equity
or equity-related securities in the future at a time and at a price that we
might otherwise wish to effect sales.
7
THE MARKET PRICE OF OUR COMMON STOCK IS HIGHLY VOLATILE.
The market price of our common stock has been and is expected to
continue to be highly volatile. Prices for our common stock will be influenced
by many factors and may fluctuate widely as a result of factors beyond our
control. General factors which will bear on the price of our common stock
include the depth and liquidity of the market for the common stock, investor
perception of us and our technologies and general economic and market
conditions.
OUR COMMON STOCK IS TRADED OVER THE COUNTER, WHICH MAY DEPRIVE SHAREHOLDERS OF
THE FULL VALUE OF THEIR SHARES.
Our common stock is quoted via the Over The Counter Bulletin Board
(OTCBB). As such, our common stock may have fewer market makers, lower trading
volumes and larger spreads between bid and asked prices than securities listed
on an exchange such as the New York Stock Exchange or the NASDAQ Market. These
factors may result in higher price volatility and less market liquidity for the
common stock.
A LOW MARKET PRICE MAY SEVERELY LIMIT THE POTENTIAL MARKET FOR OUR COMMON STOCK.
Our common stock is currently trading at a price substantially below
$5.00 per share, subjecting trading in the stock to certain SEC rules requiring
additional disclosures by broker-dealers. These rules generally apply to any
non-NASDAQ equity security that has a market price of less than $5.00 per share,
subject to certain exceptions (a "penny stock"). Such rules require the
delivery, prior to any penny stock transaction, of a disclosure schedule
explaining the penny stock market and the risks associated therewith and impose
various sales practice requirements on broker-dealers who sell penny stocks to
persons other than established customers and institutional or wealthy investors.
For these types of transactions, the broker-dealer must make a special
suitability determination for the purchaser and have received the purchaser's
written consent to the transaction prior to the sale. The broker-dealer also
must disclose the commissions payable to the broker-dealer, current bid and
offer quotations for the penny stock and, if the broker-dealer is the sole
market maker, the broker-dealer must disclose this fact and the broker-dealer's
presumed control over the market. Such information must be provided to the
customer orally or in writing before or with the written confirmation of trade
sent to the customer. Monthly statements must be sent disclosing recent price
information for the penny stock held in the account and information on the
limited market in penny stocks. The additional burdens imposed upon
broker-dealers by such requirements could discourage broker-dealers from
effecting transactions in our common stock.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements within the meaning
of Section 27A of the Securities Act and Section 21E of the Exchange Act. We
have based these forward-looking statements largely on our current expectations
and projections about future events and financial trends affecting the financial
condition of our business. All statements regarding our expected financial
position and operating results, business strategy, financing plans, and the
outcome of any contingencies are forward-looking statements. These statements
can sometimes be identified by our use of forward-looking words such as "may,"
"believe," "plan," "will," "anticipate," "estimate," "expect," "intend" and
other phrases of similar meaning. Known and unknown risks, uncertainties, and
other factors could cause the actual results to differ materially from those
contemplated by the statements. The forward-looking information is based on
various factors and was derived using numerous assumptions.
Forward-looking statements included in this prospectus speak only as of
the date of this prospectus and we do not undertake any obligation to release
publicly any revisions to any forward-looking statements to reflect events or
circumstances after the date of this prospectus or to reflect the occurrence of
unanticipated events.
We undertake no obligation to update publicly or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise after the date of this prospectus. In light of these risks
and uncertainties, the forward-looking events and circumstances discussed in
this prospectus
8
may not occur and actual results could differ materially from those anticipated
or implied in the forward-looking statements.
USE OF PROCEEDS
This prospectus relates to shares of our common stock that may be
offered and sold from time to time by Fusion Capital and certain other selling
shareholders. We will receive no proceeds from the sale of shares of common
stock in this offering. However, we may receive up to $6 million in proceeds
from the sale of our common stock to Fusion Capital under the common stock
purchase agreement. Any proceeds from Fusion Capital we receive under the common
stock purchase agreement will be used for working capital and general corporate
purposes.
MARKET FOR OUR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
MARKET PRICE
Our common stock trades on the OTC Bulletin Board under the trading
symbol "OILS." The prices set forth below reflect the quarterly high and low
sales prices for shares of our common stock during the last two fiscal years as
reported by The National Quotation Bureau. These quotations reflect inter-dealer
prices, without retail markup, markdown or commission, and may not represent
actual transactions.
HIGH LOW
2002 ---- ---
----
Second Quarter $1.00 $0.35
First Quarter $1.12 $0.56
2001
----
Fourth Quarter $0.97 $0.60
Third Quarter $1.18 $0.57
Second Quarter $1.43 $0.58
First Quarter $2.25 $0.75
2000
----
Fourth Quarter $2.00 $0.75
Third Quarter $3.00 $1.94
Second Quarter $4.43 $1.94
First Quarter $6.00 $0.50
On August 30, 2002, the closing price of our common stock was $0.17 per
share.
As of June 30, 2002, we had approximately 2,430 holders of common stock
of record.
DIVIDENDS
We have not paid any dividends on our common stock and do not
anticipate paying cash dividends in the foreseeable future. We intend to retain
any earnings to finance the growth of our business. We cannot assure you that we
will ever pay cash dividends. Whether we pay cash dividends in the future will
be at the discretion of our board of directors and will depend upon our
financial condition, results of operations, capital requirements and any other
factors that the board of directors decides is relevant. See Management's
Discussion and Analysis of Financial Condition and Plan of Operation below.
9
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIALCONDITION AND PLAN OF OPERATION
The following discussion should be read together with our financial
statements and the notes related to those statements, as well as the other
financial information included in this prospectus. Some of our discussion is
forward-looking and involves risks and uncertainties. For information regarding
risk factors that could have a material adverse effect on our business, refer to
the Risk Factors section of this prospectus.
THE COMPANY
We are in the process of commercializing two separate and distinct
proprietary and patented processes, SynGen and CPJ.
o The SynGen Process: A process that economically, and without catalysts,
converts natural gas or liquid hydrocarbons, such as naphtha or diesel
oil, into their basic components of hydrogen and carbon monoxide to
make synthesis gas, or syngas. Syngas can be used as feedstock for a
process to produce high-grade liquid fuels and has a number of
applications in the petroleum, petrochemical and fuel cell industries.
The SynGen process also can be used to separate hydrogen sulfide into
elemental sulfur and hydrogen, which is valuable in the oil refining
and petrochemical industries.
o The CPJ Process: A steam-driven hydrocarbon breaking process that
converts lower value, heavy crude oils into higher value, lighter
synthetic crude. The process can be tailored to suit crude feedstock
composition and can vary the viscosity and/or composition of the output
to match the optimum requirements of the refiner.
To date, we have not generated any revenues and have funded our
operations through the sale of debt and equity in private transactions. We
believe that our technologies are ready for commercialization. However, we will
require substantial additional capital to support our future operations,
including funding for additional research and development of our technologies,
marketing and commercialization efforts and working capital. Therefore, the
financial statements included in this registration statement for the years ended
December 31, 2001 and 2000 are not necessarily indicative of our future
operations.
During 2000 and 2001, we tested and refined our technologies. During
2002, we began taking steps to consolidate our assets and commence marketing
efforts, including: (i) hiring a new chief executive officer; (ii) acquiring the
remaining 50% equity interest in Carbon Technologies Limited, the owner of the
CPJ related patents; (iii) entering into a memorandum of understanding with
H-Power Corp., a manufacturer of fuel cells, to establish a joint venture
company that would exploit our technologies; and (iv) entering into a memorandum
of understanding with Nielson & Associates, Inc., an oil and gas exploration and
production company, to construct a heavy oil upgrading facility in Wyoming.
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.
10
We intend to selectively hire additional seasoned managers who we believe can
assist in bringing our technologies to market.
We recently commenced efforts to commercialize our technologies.
Initial results from our efforts have yielded the memorandums of understandings
with respect to our technologies described below:
o In April 2002, we agreed with H-Power, a 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
preliminary 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, to pursue the
establishment of a joint venture company in order to finance (or
cause to be financed), build and operate a 1,000 or greater barrel
per day heavy oil upgrading facility or facilities in Wyoming
and/or Montana. Under the agreement, we will license the CPJ
technology and Nielson will 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 infrastructure. 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 Identify additional oil industry partners for CPJ plants;
o Form additional research and development partnerships with fuel
cell manufacturers to develop 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.
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.
11
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.
Long-Term (2005 and Beyond)
We intend to more fully commercialize our various technologies and
leverage our partnerships to become a leading technology provider for heavy oil
upgrading, transforming stranded natural gas into useful fuels, hydrogen
generation, and recovery of hydrogen from refinery acid gas streams.
RESULTS OF OPERATIONS
Comparison of the six-months' ended June 30, 2002 and 2001
Research and development expenses decreased by $114,383 to $293,189
from $407,572. During the six month period ended June 30, 2002, we expended
$114,383 on GTL related activities, $64,963 on CPJ related activities and
$113,503 on patent fees versus $244,589 on GTL related activities, $104,367 on
CPJ related activities and $58,616 on patent fees during the same period in
2001.
General and administrative expenses increased by $703,888 to $1,708,410
over the six months ended June 30, 2002 from $1,004,522 for the like period
during 2001. The increase is attributable to increased costs associated with
legal services, investor relations services, SEC filings, a non-recurring
compensation expense to Pierre Jorgensen in recognition of untimely payments
under our agreement with him, and employee salaries and benefits.
Comparison for the years ended 2001 and 2000
Research and development expenses decreased by $687,602 to $715,445 for
the year ended December 31, 2001 from $1,403,047 for the year ended December 31,
2000. During 2001, we spent $389,838 on GTL related activities, $166,002 on CPJ
related activities, $137,394 on patent fees related to our technologies and
$22,211 on development of other technologies.
Other general and administrative expenses increased by $893,800 to
$2,662,442 for year ended December 31, 2001 from $1,768,642 for the year ended
December 31, 2000. The increase is attributable principally to increased costs
associated with consulting fees for promotional purposes, legal fees, SEC
filings and employee benefits.
Interest income/other income decreased by $27,078 to $4,365 for year
ended December 31, 2001 from $31,443 for the year ended December 31, 2000. The
decrease results from a smaller amount of cash on hand during 2001 compared to
2000.
Analysis of Expenses
For the six months ended June 30, 2002, our expenses included: (i)
approximately $1,009,400 for costs related to technology development and our
commercialization efforts, including approximately $293,200 of technology
development expense, $415,200 related to the accrued value of incremental costs
to issue shares to Pierre Jorgensen as per his agreement and approximately
$301,000 of general and administrative expenses relating to the cost of our
laboratories, the salaries and other expenses of our technical staff, and travel
and entertainment; (ii) approximately $180,600 for legal services, including
those relating to the protection of our intellectual property, and (iii)
approximately $1,240,700 for other general and administrative expenses (of which
approximately $187,800 was satisfied by the issuance of common stock), including
investor relations, advertising, promotion, certain consulting fees, accounting
12
services, rent, utilities, insurance, and costs related to employees other than
our technical staff. Technology expenses included approximately $65,000 related
to our CPJ technology, including evaluating samples of heavy Guatemalan crude
oil and relocating the CPJ demonstration unit from Calgary, Alberta to Conroe,
Texas, and approximately $114,700 related to our SynGen technology, including
relocating our SynGen demonstration unit to Conroe, Texas and continuing our
efforts to commercialize our SynGen technology in Nigeria.
For the fiscal year ended December 31, 2001, our expenses included: (i)
approximately $826,000 for costs related to technology development and our
commercialization efforts, including approximately $715,400 of technology
development expense and approximately $110,600 of general and administrative
expenses relating to the cost of our laboratories, the salaries and other
expenses of our technical staff, and travel and entertainment; (ii)
approximately $252,900 for legal services, including those relating to the
protection of our intellectual property, and (iii) approximately $2,299,000 for
other general and administrative expenses (of which approximately $966,700 were
paid for with common stock, including $397,500 of marketing expenses), including
investor relations, advertising, promotion, certain consulting fees, accounting
services, rent, utilities, insurance, and costs related to employees other than
our technical staff. Technology expenses included approximately $389,800 for the
further development and commercialization of the SynGen technology, including
funds to refine the hydrocarbon breaking catalyst used in connection with the
GTL process, the construction of a small demonstration SynGen reactor, research
directed at fuel cell applications for the SynGen process and activities
relating to the potential licensing of the SynGen/GTL technology to our Nigerian
joint venture company; approximately $166,000 for the further development and
refinement of our CPJ technology, the major portion of which was used in
connection with the operation of our CPJ pilot unit; and approximately $159,600
for other technology development.
For the fiscal year ended December 31, 2000, our expenses included: (i)
approximately $1,621,700 for costs related to technology development and our
commercialization efforts, including approximately $1,403,000 of technology
development expense and approximately $218,700 of general and administrative
expenses relating to the cost of our laboratories, the salaries and other
expenses of our technical staff, and travel and entertainment; (ii)
approximately $114,700 for legal services, including those relating to the
protection of our intellectual property, and (iii) approximately $1,435,200 for
other general and administrative expenses (of which approximately $7,800 were
paid for with common stock ), including investor relations, advertising,
promotion, certain consulting fees, accounting services, rent, utilities,
insurance, and costs related to employees other than our technical staff.
Technology expenses included approximately $889,300 for the development,
construction, and operation of a GTL facility, as more fully described below;
approximately $438,100 for the upgrading of our laboratory in Calgary where we
maintained our CPJ demonstration unit; and approximately $75,600 for the
preparation and filing of patents covering our technologies. The GTL facility
described above demonstrated that the SynGen process efficiently reformed
natural gas rich in propane plus hydrocarbons into a hydrogen rich syngas
stream. However, the plant that was providing the natural gas being processed at
this facility, which was owned by an unrelated third party, was not operational
for a large portion of 2001, and no further work was completed or is planned at
this site. We plan to incorporate the developments from this facility in a
multicluster SynGen reactor design to be constructed at our Conroe, Texas
research center.
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 $5,288,558 compared with negative working
capital of $6,000,274 and positive stockholders' equity of $2,245,793 as of
December 31, 2001. For the six-month period ended June 30, 2002, our
stockholders' equity increased primarily due to the acquisition of the remaining
50% of Carbon Resources Limited. For the six months ended June 30, 2002, cash
flows from operating activities were negative $619,247, compared with negative
$551,699 for the six months ended June 30, 2001, cash flows from
13
investing activities were negative $20,770 compared with negative $1,483, and
cash flows provided by financing activities were $724,327 compared with $598,865
over the same periods.
At December 31, 2001, we had negative working capital of $3,594,542 and
positive stockholders' equity of $2,245,793 compared with negative working
capital of $60,855 and positive stockholders' equity of $36,726,164 as of
December 31, 2000. At December 31, 2001, stockholders' equity had declined
because (i) our operating losses increased due primarily to the fact that we
wrote down certain assets relating to our SynGen technology because we
determined that the expected cash flows from the exploitation of the Syngen
technology used to support the previous valuation of these assets could not be
supported by sufficient objectively verifiable information to satisfy the
requirements of the applicable asset impairment tests; and (ii) we were unable
to obtain infusions of additional capital in amounts sufficient to fund our
operating losses and our other uses of cash described in our financial
statements and otherwise discussed below. Working capital declined in the period
because the company accounted for promissory notes which became due in June and
July in the aggregate amount of $2,722,500, inclusive of interest, as a current
liability. However, of this amount, holders of notes in the aggregate amount of
$1,252,350, inclusive of interest, have agreed to convert their notes into our
securities, as described below.
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. Given our current cash position, if holders of the notes were
to demand prepayment, we would not have sufficient funds to satisfy our
obligations to them. During June 2002, we offered each holder of a promissory
note the opportunity to exchange their note for our securities, as a means of
eliminating or reducing the amount we might be obligated to repay to note
holders on the two-year anniversary of the notes. Specifically, 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 $.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 amount of $254,100, inclusive of
accrued interest, have elected not to exchange their notes; 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.
On August 1, 2002, we received notice from the holder of a note in the
amount of $345,000 that we were in default to with respect payment of $72,000 of
interest due thereunder. The notice provided that, in accordance with the terms
of the note, we would have thirty days in which to cure such default. Under the
terms of the note, if a payment default has not been cured within a 30 day
period, the holder may elect to accelerate the maturity date of the note and
make the payment immediately due and payable. Since August 1, 2002, we have been
participating in discussions with the holder of the note to develop a revised
interest payment schedule. As of September 4, 2002, we were still in discussions
with the note holder but had not yet reached an agreement. On that date, we
remitted the full interest payment due to the note holder out, but with the
expressed intent to continue the negotiation process.
Financing Activities
To date, in 2002, our primary financing activities have included:
o $918,458 from the issuance of units consisting, in the aggregate, of
1,224,611 shares of common stock and warrants to purchase an additional
612,306 shares of our common stock at $0.72 per share;
o $500,000 from the issuance of 1,246,884 shares of common stock; and
o $315,000 from the issuance of1,575,000 shares of common stock
On June 20, 2002, we entered into a common stock purchase agreement
with Fusion Capital Fund II, LLC, as amended September 3, 2002, 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 does not have the right nor the obligation to purchase
our stock in the event that purchase price is below $0.150. Consequently, the
14
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.
During 2001, we received approximately $1,769,500 from the following
primary financing activities:
o $1,500,000 from the issuance of units consisting of, in the aggregate,
2,315,382 shares of common stock and warrants to purchase an additional
2,315,382 shares of our common stock at $1.30 per share;
o $264,000 from the exercise of warrants;
o $5,500 from the exercise of stock options.
During 2000, we received approximately $2,678,500 from the following
primary financing activities:
o $2,137,500 from the issuance of convertible promissory notes;
o $86,000 from the exercise of warrants;
o $105,000 from the exercise of stock options;
o $350,000 from the issuance of units consisting of, in the aggregate,
700,000 shares of common stock and warrants to purchase an additional
700,000 shares of our common stock at $1.00 per share.
We have not yet realized any revenues from operations, and we do not
expect to generate material revenues during 2002. We are in discussions with
various parties regarding licensing and royalty arrangements, joint ventures,
and other structures to monetize the value of our technologies. We are hopeful
that we will begin recognizing revenues in 2003, most likely in the form of
license or royalty payments for our technology. However, our ability to realize
revenues is dependent on a number of factors, including our success at
negotiating commercialization arrangements and our ability to continue to obtain
funding for our operations.
Our cash balance as of August 30, 2002 was approximately $6,220 (not
including the $315,000 we will receive during the week of September 2, 2002).
Even including the amount to be received during the week of September 2, 2002,
this amount is not sufficient to fund our current liabilities and our planned
expenditures for operations through 2002. Consequently, our ability to execute
our plans for the remainder of 2002, as well as into 2003, is dependent on our
ability to obtain funding other than from operations.
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
assure you 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 assure you that we will be able to realize revenues
from our technologies or that we will achieve profitability.
CRITICAL ACCOUNTING POLICIES
Accounting for costs of acquiring and developing technologies.
All costs incurred for research and development are charged to expenses
as incurred. Costs incurred for the acquisition or improvement of identifiable
assets resulting from research and development
15
activities, such as the acquisition of our interest in and rights to the Syngen
technologies, are recorded as an asset at the fair value of the consideration
given. We regularly review each of the technologies for indicators of
impairment.
Where we have identified the presence of one or more indicators, we
perform an analysis of the future discounted cash flows that we expect the
technology to produce. This analysis enables us to determine a recoverable
amount for each technology. The recoverable amount is compared with the carrying
value of the technology to determine if any impairment exists. Where an
impairment is identified, the magnitude of the impairment is determined by
discounting the recoverable amount to calculate the fair value of the
technology. The impairment is calculated as the difference between the book
value of the technology and the calculated fair value. The impairment is charged
to earnings in the period in which it is identified.
Our ability to recover the amounts recorded for our technologies are
dependent on our ability to construct or otherwise participate in a plant using
the technology, or to enter into licensing or other arrangements for the use of
the technology. As at December 31, 2001 we determined that the cash flows from
the exploitation of the Syngen technology expected to be received through the
construction of a plant, licensing or other arrangements cannot be supported by
sufficient objectively verifiable information to satisfy the requirements of the
applicable asset impairment tests. Accordingly, the net book value of the Syngen
technology and other associated assets has been written down to $3.5 million
representing the value of the associated pilot plants, fuel cells, catalysts and
associated patents.
BUSINESS
OVERVIEW
Synergy Technologies Corporation has developed and currently markets
two proprietary technologies, SynGen and CPJ, that convert lower value liquid
and gaseous hydrocarbon feedstocks into commercially valuable fuels. The focuses
of our technologies include:
o enhancing the value of uneconomical or marginal hydrocarbon
feedstocks such as heavy or low-grade crude oils;
o lowering operational costs of converting low-grade feedstocks
into commercially valuable products; and
o reducing the environmental impact of existing fuel technologies
by, among other things, (i) producing ultra-clean burning fuels,
(ii) producing fuels for low- or zero-pollution fuel cells, and
(iii) eliminating waste generated by the flaring of natural gas
co-produced with crude oil.
THE FUEL INDUSTRY
Over the last several decades, fossil fuels have generally been widely
available and relatively inexpensive, reducing the demand for new energy
technologies offered by development-stage companies like Synergy. Today,
however, the economics of fossil fuels have changed because:
o Worldwide demand for all forms of energy has increased
dramatically causing prices for fuel products to rise. Energy
consumption is expected to grow at 3% to 4% per year through
2020, as developing economies are forecast to consume energy
at higher rates. According to the Energy Information
Administration, worldwide demand in 2002 is expected to
increase by about 0.7 million barrels per day (bpd), to 76.5
million bpd.
16
o World events over the last several years are compelling
Western nations to reduce reliance on OPEC generated oil.
Incidents in the Middle East, South America and other oil
producing regions suggest that reliance on unfettered supply
from these sources may be imprudent.
o The demand for the implementation and use of environmentally
friendly fuels is increasing as public opinion compels
national governments to address the deterioration of the
world's environment. As science continues to generate data
which suggests that burning fossil fuels may be the cause of
the greenhouse effect and global warming, environmental groups
and public opinion are influencing governments more than ever.
Our technologies are designed to provide solutions for a number of the
problems and concerns facing the petroleum and petrochemical industries. We
offer these industries advanced technologies and processes that provide new
economics for the exploitation of marginal hydrocarbons, such as heavy oil and
natural gas that cannot otherwise be economically brought to market,
conventional oil refining and byproduct treatment.
OUR TECHNOLOGIES
SynGen Technology.
-----------------
Applications.
Synergy's proprietary, patented SynGen process:
o transforms liquid and gaseous fuels into hydrogen-rich gas which can be
used to power fuel cells, electrochemical devices that combine hydrogen
with oxygen to produce electric power without combustion;
o transforms marginal natural gas and liquid hydrocarbons into synthetic
gas, or syngas, a combination of hydrogen and carbon monoxide, which
can be used as the feedstock for a process to produce high-grade liquid
hydrocarbon fuels and has a number of applications in the petrochemical
industry;
o when used in conjunction with a proprietary process, converts natural
gas into ultra-clean sulfur-free gasoline, diesel fuels and
transportable (liquid as opposed to gaseous) fuels; and
o when used on hydrogen sulfide, a proprietary process we call SulfArc
separates the hydrogen from the hydrogen sulfide so that it can be
reused by the petroleum industry.
Fuel Cell Applications
Fuel-cell power generators have advantages over conventional power
generation systems including low or no pollution, higher fuel efficiency,
greater flexibility in installation and operation, quiet operation, low
vibration and potentially lower maintenance and capital costs. Fuel cells are
being developed to support a variety of markets, including transportation and
continuous stationary (residential and commercial) power. The high cost of
hydrogen has proven to be an impediment to wide-scale adoption of fuel cells as
a source of energy because it increases the overall cost to operate the units,
thereby making them uneconomical. The SynGen process resolves this problem
because it produces relatively inexpensive hydrogen. Internal testing using the
SynGen process has successfully reformed pipeline-grade natural gas, commercial
propane, gasoline and diesel fuel at standard atmospheric pressure and with
relatively low electrical power requirements.
Gas-to-Liquid Applications
The SynGen process can be utilized as a gas-to-liquid, or GTL,
technology that creates liquid hydrocarbon fuels directly from syngas. After
converting natural gas or other low quality liquid
17
hydrocarbons into syngas in the SynGen reactor vessel, Synergy further processes
the syngas utilizing a secondary reactor system using a proprietary catalyst to
synthesize high-grade diesel and naphtha. These fuels are similar to
conventional refinery products; however, they are extremely high grade,
aromatic-free, and posses clean-burning properties, making them desirable for a
multitude of purposes. All conventional GTL technologies produce a wax
byproduct; however, the Syngen/GTL process produces virtually no wax and,
consequently, improves the yield of desirable hydrocarbons such as naphtha and
diesel. End users of competing GTL technologies must further refine the wax
byproducts to produce the high quality liquid hydrocarbons which are the
hallmark of GTL processes; however, any further refining must incorporate
another catalyst, which adds cost to the final product. The limited wax
formation resulting from the SynGen/GTL process obviates the use of a secondary
catalyst and additional refining, thereby reducing both capital and operating
expenses of the SynGen/GTL process, resulting in more economically attractive
processing plants.
The high grade, aromatic-free, and clean-burning properties of the
liquid fuels produced using the SynGen/GTL process make them suitable for a
variety of purposes including blending the products with normal refinery-grade
fuels to meet increasingly stringent environmental regulations.
The efficient and economical production of high-grade diesel and
naphtha from syngas using the SynGen/GTL process opens the vast natural gas
reserves that currently have no economic value and which have been designated
"stranded gas." The term "stranded gas" generally refers to gas which exists in
reservoirs that have been discovered, but for which no economic market can be
found. Solomon Smith Barney estimates that worldwide reserves of natural gas
total 5,100 trillion cubic feet (tcf), of which 2,500 tcf are considered
stranded. Many of these remote reserves, which are flared (burned at the site),
vented into the atmosphere or reinjected with the more valuable associated oil
production, are essentially valueless to their owners. Moreover, because natural
gas is impractical to ship via tanker in its gaseous state, it must be converted
into liquefied natural gas or subjected to a GTL processes for transportation.
We believe that energy companies with stranded natural gas reserves
will be able to cost-effectively use our SynGen/GTL technology to produce high
grade fuels and products that can be sold in well-developed global markets.
We believe that the second major opportunity for SynGen/GTL is the
reformation of coalbed methane, or CBM, into syngas, and the subsequent
conversion of the syngas into synthetic fuels. CBM is contained within coal
seams and surrounding rock strata and generally does not escape into the
atmosphere unless exposed by coal mining activity. When released into the mines,
the gas becomes coal mine methane, which must be removed from the mines for
safety reasons. However, once in the atmosphere, CBM becomes a greenhouse gas
that is 21 times more potent than carbon dioxide. Recovery and use of CBM not
only yields financial rewards, but it contributes substantially to emission
reduction, benefiting the global environment.
The U.S., China, Canada, Australia, UK, Germany and the Ukraine have
substantial CBM reserves. Typically, a CBM well will only produce some 170,000
standard cubic feet per day (SCFD) per well, but these wells have extremely long
lifetimes. China's CBM resource is said to be 1,306 Tcf.
The SulfArc Solution for Hydrogen Sulfide Recovery
The SynGen reactor can be used to generate hydrogen and sulfur from
hydrogen sulfide, a byproduct of the oil refining process, a process Synergy
refers to as SulfArc. Refineries are a major source of atmospheric emissions of
noxious chemicals and are a significant source of sulfur, reduced sulfur
compounds and oxides of sulfur. Significant quantities of sulfur must be removed
from fuel oils to satisfy existing clean air legislation. Refineries reduce or
eliminate sulfur by hydro-treating their products, that is, cleaning them with
hydrogen. The additional cost incurred by refiners to acquire sufficient
hydrogen to clean their products can be reduced significantly using Synergy's
SulfArc process. The SulfArc process breaks down, or cracks, a hydrogen sulfide
molecule into its elements, pure hydrogen and pure sulfur. By employing the
SulfArc process, refiners can recapture hydrogen that they may otherwise have to
purchase to permit them to produce products which comply with clean air
legislation.
18
The hydrogen captured in the process may be used to hydrogenate fuels such as
diesel or gasoline to produce higher quality and cleaner burning fuels. By
capturing and retaining the pure hydrogen and sulfur released from hydrogen
sulfide by-products emitted in the refining process, refineries can reduce
operating costs and may resell to third parties the hydrogen not required for
operations.
Market Opportunity.
We believe that the following factors will drive the commercialization
of our SynGen technology:
o Increasing Demand for Ultra-Clean Fuels. The market demand for
ultra-clean fuels is increasing due to more stringent
environmental standards in most of the world's industrialized
countries that promote emissions reductions and the need for
vehicle manufacturers to respond to the challenge of producing
fuel-efficient engines that meet these standards. Producing these
cleaner fuels from conventional crude oil is expected to
substantially increase refining costs. We believe that these
factors will promote the creation of markets for premium
ultra-clean fuels such as those produced by the SynGen process.
In addition, we believe that fuels produced using the SynGen
process, either alone or blended with conventional fuels, can be
used in existing and new generation diesel engines on a
cost-effective basis to meet or exceed current and scheduled fuel
specifications and emissions standards.
o Increasing Demand of Hydrogen-Rich Fuel for Fuel Cells. We
believe that the hydrogen-rich fuels produced by our SynGen
reactor represent the ideal fuels for fuel cells and enhance
commercial opportunities for many current fuel-cell applications.
The absence of sulfur, aromatics and heavy metals from SynGen
produced fuels allows for simplified fuel cell processor design,
construction and operation. As the storage and processing of the
fuel for a fuel cell are simplified, the physical size of
fuel-cell components can be reduced.
o Increasing Demand for Refined Fuels. As developing nations
continue to grow, so will demand for refined fuels. We believe
that the large existing supply of stranded natural gas and
coalbed methane worldwide can be tapped as a source of refined
fuel. The application of our SynGen/GTL process can transform
these currently uneconomical power sources into readily usable
fuels.
The Process.
The processes required to reform natural gas and liquid hydrocarbons
into syngas or reform hydrogen sulfide into hydrogen and sulfur occur in our
proprietary SynGen reactor vessel. Feedstocks are injected into the reactor and
are combined with an oxidant (such as air) where they are subjected to electric
discharges to promote the partial oxidation of the natural gas resulting in the
production of the syngas. By changing the type of feedstock, a user can produce
syngas of a desired composition. Synergy's compact SynGen reactors are powerful,
inexpensively manufactured and produce an easily controllable electrical
discharge. The reactors require no cooling, operate using simple power supplies,
and the components that generate the electrical discharge, electrodes,
experience limited corrosion, which allows the reactors to be integrated easily
into other processes. The reactors may be modularized and scaled to an end-users
requirements. SynGen processes can replace high energy-consuming and/or
troublesome classical processes. No catalysts are required in the process which,
in and of itself, significantly reduces the operating and maintenance costs.
Syngas produced using the SynGen process may be further chemically
recombined in a secondary reactor system to produce (i) ultra-clean
hydrocarbons; (ii) fuels for fuel cells; (iii) alcohols, plastics and other
industrial chemicals; (iv) liquid fuels from stranded natural gas or coalbed
methane; and (v) hydrogen.
19
SynGen's economics are dependent on the type of project and the size of
the scalable SynGen reactor. Feedstock costs will vary depending on type of
fuel, its location and the application. However, the primary driver for the use
of SynGen in these applications is the lower cost of constructing and operating
the syngas facility relative to other existing technologies.
Advantages of SynGen Technology
We believe the SynGen process possesses the following advantages over
existing competing technologies:
o SynGen reactors are relatively simple to manufacture and operate;
o the process requires no expensive catalysts to reform feedstock;
o SynGen reactors have low power demand, a benefit to the fuel cell
industry because the cost and energy to produce the fuel on which fuel
cells operate increases the overall cost to operate the units, which
has been the greatest barrier to mass adoption of fuel cell technology;
o the process reforms a wide variety of feedstocks, including low-grade-
low cost, fuels, into syngas, a boon for manufacturers of fuel cells;
o SynGen systems may be scaled up or down in size in accordance with a
user's needs, which allows for the construction of smaller scale syngas
production facilities in geographic locations where it previously has
not been economically feasible to build such plants, which can provide
access to stranded natural gas reserves;
o in the context of the SynGen/GTL technology, produces liquid
hydrocarbon products that are free of undesirable aromatics, nitrogen,
or sulfur compounds;
o the process limits the formation of wax residue compared to existing
competing technologies, thereby avoiding the need for further
processing of the wax with additional catalysts to obtain valuable
hydrocarbons; and
o the SulfArc application of the process allows for the recovery of
hydrogen from refinery hydrogen sulfide (acid gas) and reuse in the
refining process, thereby improving refinery economics.
Commercialization.
We have constructed a small demonstration SynGen reactor which we
maintain at our research center in Conroe, Texas. We have used this reactor to
demonstrate the efficacy and commercial viability of SynGen technology and
related applications to potential licensees and other business partners on a
laboratory basis.
We expect to market our SynGen technology to:
o Refiners and oil companies that can benefit from (i) our SynGen/GTL
technology, on the basis that it produces clean, aromatic-free,
high-grade diesel fuel or naphtha, which already are marketable at
premium prices, and which will become more attractive as environmental
regulations are enacted because the SynGen/GTL produced fuels can be
mixed with low grade fuels to raise the level of the end product to
comply with existing regulations, (ii) the process as a means of
capturing stranded gas which will allow refiners to utilize what is
now unused product and increase output and revenues, and (iii) our
SulfArc solution, as a means both of promoting refining plant
efficiency, in that refiners will be able to reduce purchases of
hydrogen from outside
20
sources, and create an additional revenue stream in that they may sell
the excess hydrogen resulting from this application.
o Fuel cell manufacturers, which use syngas as a power source for their
devices, with which we will seek to establish alliances to supply
reforming technology. We expect to generate revenues in this market
segment from licensing fees, royalty streams, and joint development
contracts such as our non-binding memorandum of understanding with
H-Power Corp, with which we agreed to establish a joint-venture company
to design, develop, test, manufacture, sell and distribute a fuel cell
system incorporating Synergy's SynGen fuel reforming process and
H-Power's fuel cell.
Intellectual Property.
Patents covering the SynGen technology have been issued in theU.S.,
patents, 5,993,761 and 6,007,742; France, patents 2,758,317; 2,768,424 and
2,786,409; Australia, the OAPI states, Eurasia and Nigeria. Patents are pending
in the ARIPO states (Africa), Brazil, Canada, China, Europe, Georgia, Indonesia,
Japan, Korea, Mexico, Mongolia, New Zealand, Ukraine, Uzbekistan and Vietnam. We
expect to file patents in other countries which cover the intellectual property
included in existing patents, as well as patents covering improvements to the
SynGen and SulfArc technologies in all countries where we deem patent protection
is desirable.
Investment.
We completed the acquisition of the SynGen technology in August 2000 in
consideration of the issuance of 14,943,510 shares of common stock. Through
December 31, 2001, we have invested approximately $2,070,000 on the development
of the various applications of the technology, including operation of our pilot
plant, development of our hydrocarbon limiting catalyst used to transform syngas
into liquid fuels and fuel cell application research. These costs include
materials, testing, and various fees including consulting and travel expenses .
CPJ Technology.
--------------
Applications.
Synergy's proprietary, patented CPJ heavy oil upgrading process
converts lower value, heavy crude oils into higher value, lighter synthetic
crude oils. Heavy crude oils are not as valuable or desirable as light crude
oils because they are denser and more viscous and requiring more refining at
additional cost. The ability to upgrade heavy crude oil is attractive to oil
producers given the ever-increasing depletion of light crude oil and limited
available proven reserves of light crude.
Processing facilities based upon CPJ technology are characterized by
simple design and flexibility of supply sources (the quality of the oil used as
feedstock) and output characteristics (the viscosity and composition of the
crude oil after having been subjected to the process). CPJ processing plants are
easily adapted to a variety of applications within the three primary segments
(upstream, midstream and downstream) of the crude oil value chain, as follows:
o Upstream: CPJ allows crude oil producers (the upstream segment) to
increase the value of their production, lighter crude oils can be sold
at higher prices than heavier crude oils, thereby enhancing the value
of the reserves in the ground.
o Midstream: For pipeline companies (the midstream segment), the CPJ
process converts lower-value crude oil into higher-value lighter
synthetic crude oil which flow more easily through a pipeline, thereby
reducing transportation costs. Additionally, by blending heavy crude
oil upgraded with the CPJ process with other heavy crude oils, CPJ
increases the total value of the blended stream.
21
o Downstream: Refiners (the downstream segment) can use the process to
enhance overall margins by converting refinery produced heavy streams
to higher-value, lighter crude products as well as lowering their costs
by minimizing unwanted by-products.
The CPJ process is flexible and can be adjusted to optimize output
characteristics of the synthetic crude (producing degrees of lighter or heavier
oils) in order to maximize final product value. For example, the characteristics
of the synthetic crude oil can be altered to allow refineries to maximize
heating oil or gasoline production as seasonal demands change.
Pilot Unit Test Results
We operate a one-half barrel per day CPJ pilot unit at our research
center in Conroe, Texas. We have used the pilot unit to substantiate the
efficacy of the technology and demonstrate the CPJ process to potential
customers. We have tested many different heavy crude oils of varying densities
from a variety of geographic locations, several of which have been assayed by
independent organizations. Test results evidence that the CPJ process
successfully transformed heavy crude oils into significantly lighter crude oils.
Results of these tests must be viewed in light of the small size of the
pilot unit and the minimal amount of the sample tested. We cannot be certain
that we will achieve similar results if and when we conduct such tests on a
commercial-scale basis.
Market Opportunity
We believe that significant market potential exists for the CPJ process
and its products due to the following factors:
o increasing world demand for petroleum products;
o the decline of light crude oil reserves;
o the extent of heavy crude oil reserves; and
o government regulations mandating the use of cleaner burning fuels
The U.S. Energy Information Administration indicates that energy
consumption is expected to grow at 3% to 4% per year through 2020, as emerging
economies are forecast to consume more energy at higher rates. According to the
Energy Information Administration, worldwide demand in 2002 is expected to
increase by about 0.7 million barrels per day (bpd), to 76.5 million bpd. As
demand for energy rises, additional sources of petroleum will be required.
Historically, oil depletion of light reserves has increased at an
average of 2.6% per year. Cumulatively, the world has consumed 45% of all known
light oil reserves, while new reserves of light oil become harder to find and
more costly to extract. Remaining known reserves and additional new discoveries
of light crude oils are forecast to total 1,020 billion barrels. Heavy crude
oil, as defined in the petroleum industry, is abundant, with worldwide reserves
of 6.3 trillion barrels of heavy crude, according to a 1998 Chevron Petroleum
Technology publication.
The so called "energy crisis" in the United States during the winter of
2000-2001 refocused attention on the importance of identifying and utilizing
marginal sources of petroleum. Hundreds of millions of dollars are budgeted for
fiscal year 2002 energy conservation and research devoted to the use of marginal
hydrocarbons by the U.S. Department of Energy. In both Canada and the U.S.,
various levels of federal and state government are actively working with the
upstream and downstream sectors of the petroleum industry to increase energy
efficiencies and to reduce greenhouse gas emissions. These include reduction in
sour gas flaring (the burning of any unusable combustible substance) and
improving pipeline transportation efficiencies for heavy crude oils.
22
We believe that our CPJ technology can help achieve many of these goals
and is ready for commercial-scale implementation on a worldwide basis.
Advantages of CPJ Technology
We believe that there are several advantages to the CPJ process over
existing competing technologies, including the following:
o Higher Yields: Heavy oils subjected to the CPJ process return
approximately 90% liquid volume of the heavy feedstock crude as
compared with 70% to 80% from competing technologies.
o Variable Composition of Resulting Crude Oil. Composition and viscosity
of resulting crude oils after application of the CPJ process can be
adjusted to suit the needs of the refiner, thereby allowing refiners to
maximize heating oil or gasoline fractions to meet seasonal demand
changes.
o Minimal By-Products: The process produces very little soot and gas
by-product.
o No Catalyst: The process requires neither a catalyst nor the addition
of hydrogen which contributes to an operating cost advantage over
competing systems.
o Sulfur Reduction: The process reduces sulfur levels roughly in half in
the synthetic crude it produces, making it more environmentally
friendly for refinery processing.
Commercialization.
We believe that the laboratory results of the limited heavy oil
upgrading testing using our CPJ technology substantiate that the technology is
ready for commercialization. We have demonstrated the pilot unit to potential
licensees and partners and supplied them with the test results achieved. We
expect to continue to make improvements to the technology and the process in the
future based on further testing of heavy oil reaction to the CPJ process.
We expect to pursue commercialization of our CPJ technology both by
licensing the process and by participating in the ownership of CPJ processing
plants. Our primary targets will be oil refiners and pipeline owners who may
require that heavy viscous crude oil be lightened and made more fluid for
transportation. Our memorandum of understanding with Nielson & Associates, Inc.
to jointly commercialize the CPJ heavy oil upgrading technology represents a
first step in the commercialization process of the CPJ technology.
The Process
The underlying principle of the CPJ process is to apply an
instantaneous thermal shock to the crude using superheated steam. The hot
reactants then are allowed to "stabilize" in a soaker vessel with adequate void
space to achieve a minimum residence time. The resulting liquid is then flashed
through the control valve to a separator where the heaviest product stream is
drawn-off and used as fuel for the process. The overhead stream from this
separator is cooled and flowed to another tank where the vacuum gas oil fraction
is drawn off and pumped back to the reactor for additional upgrading. The
overhead stream is further cooled and condensed water is drawn off and the
upgraded synthetic crude is pumped to external tanks.
The CPJ process employs fewer steps (meaning less equipment) than
conventional existing competing heavy oil upgrading technologies and, therefore,
requires less up-front capital. In addition, operating costs compared to
competing technologies are lower since the process does not require a catalysts
or utilize additional hydrogen. The CPJ process is efficient, producing very
little by-product matter, and results in synthetic crude oil yields in excess of
90% by volume. The small amounts of pitch ( a by-product of the process) that
are produced can be used as fuel to power the process.
23
In contrast, alternative technologies generally average only about 70% to 80%
yields based on volume and create high levels of less valuable by-products, such
as pitch/coke and waste gas.
Intellectual Property.
CPJ technology was developed in France and is covered by French patent
2,785,289. Patents are pending in the U.S. and Canada as well as other European
countries, ARIPO (Africa), Australia, Brazil, China, Costa Rica, Cuba, Eurasia,
Georgia, Indonesia, Japan, Korea, Mexico, Mongolia, New Zealand, Norway, OAPI
(Africa), Poland, the Russian Federation, Sweeden and the Ukraine, among other
countries. Management expects to file patents in other countries which cover the
intellectual property included in existing patents, as well as patents covering
improvements to the CPJ technology in all countries where it deems patent
protection is desirable.
Investment.
Through December 31, 2001, we have invested approximately $1,284,000,
including amounts invested by Synergy and our former joint venture partner, on
the development of our CPJ technology, including costs of materials, testing,
and various fees including consulting and travel.
COMPETITION
While we believe that our products offer advantages over existing
competing technologies, we find that our technologies are targeted at highly
competitive markets. Due to the nature and size of the entities that would use
our technologies, including some governments, there are sometimes other
competitors who may have significantly greater name recognition and greater
financial and other resources than we do. We believe however, the proprietary
nature of our products when partnered with our level of technical expertise and
the quality of our services give us a competitive advantage against some of the
entities against which we compete.
SynGen: We expect to compete against major multinational oil and gas
corporations and refiners in the licensing of our SynGen technology. These
entities generally possess significantly greater financial and personnel
resources than we do and we cannot be certain that we will be able to compete
effectively in this environment. We believe that our SynGen technology can
compete with technologies and processes that purport to accomplish similar
results as those obtained by SynGen. We believe that SynGen possesses a number
of advantages over competing technologies, including decreased capital
investments for a plant employing the SynGen process over the typical investment
in a conventional plant; SynGen reactors can handle a wide variety of feedstocks
and can economically convert these to acceptable syngas; because SynGen plants
could be constructed using a simple and efficient design and the process
requires no catalysts, the plants are suitable for remote sites; and
SynGen-produced gas-to-liquids products are free of undesirable aromatics,
nitrogen, or sulfur compounds, making them suitable for a multitude of purposes.
CPJ technology: Heavy oil upgrading processes have been developed and
in use for many decades and are the subject of significant research and
development by a wide range of entities from multinational oil companies and
refiners to small businesses and individuals. Most of these entities possess
significantly greater financial and personnel resources than Synergy and we
cannot be certain that we will effectively compete against such entities.
However, we believe that our CPJ technology can compete against other existing
technologies that have been developed to upgrade heavy oil on the basis of
performance and economics of use. CPJ facility designs are flexible and the
process can be adjusted to optimize output characteristics of the synthetic
crude in order to maximize final product value, the ability to produce synthetic
crude yields in excess of 90% liquid volume; the ability to split the large
heavy oil molecules roughly in half, to various light oil fractions, while
producing very little soot and gas; the fact that the process requires neither a
catalyst nor the addition of hydrogen which contributes to an operating cost
advantage over competing systems; and the process reduces sulfur levels roughly
in half in the synthetic crude it produces, making it more environmentally
friendly for downstream refinery processing.
24
EMPLOYEES
As of September 3, 2002, we had nine full-time employees, including our
officers.
None of our employees are covered by a collective bargaining agreement.
We consider our employee relations to be satisfactory and have not experienced
any labor problems.
PROPERTIES
Our offices and research and development facility are located at 1689
Hawthorne Drive, Conroe, Texas 77301-3284, where we lease approximately 9,160
square feet of space divided among administrative (3,050 sq. feet) and
laboratory (6,110 sq. feet) space. We have leased this space through December
31, 2006 at a rent of $4,537 per month. We have the option to cancel this lease
by written notice 90 days prior to the end of any year. We also lease
approximately 12,780 square feet of space divided among administrative (8,414
sq. feet) and laboratory (4,364 sq. feet) space at 335 - 25th Street SE,
Calgary, Alberta, Canada T2A 7H8. We have leased this space through August 31,
2005 at a cost of $19,171 per month. We believe that our facility in Conroe,
Texas is sufficient for our current requirements and we are seeking to sublease
the space in Calgary.
CORPORATE HISTORY AND STRUCTURE
We were incorporated under the laws of the State of Colorado in 1997
under the name Automated Transfer Systems Corporation. In February 1999, we
amended our certificate of incorporation to change our name to Synergy
Technologies Corporation. In May 1998, we commenced the acquisition of our two
technologies and have devoted substantially all of our efforts to the
development of our technologies. We have two wholly owned subsidiaries, both of
which are incorporated in Cyprus, and one subsidiary incorporated in Nigeria in
which we own a 50% interest.
OUR MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The following table sets forth the names, ages and positions of all
directors and executive officers of Synergy as of September 3, 2002:
NAME AGE POSITION
---- --- --------
Barry Coffey 50 Chairman, President and Chief Executive Officer
Thomas E. Cooley 61 Chief Technology Officer and member of the Board of Directors
Marc Cernovitch 28 Vice President-Corporate Development
Kelly Warrack 34 Controller, Secretary and Treasurer
James E. Nielson 70 Member of the Board of Directors and Audit Committee
Duane F. Baumert 61 Member of the Board of Directors and Audit Committee
James Shone 27 Member of the Board of Directors and Audit Committee
Cameron Haworth 42 Member of the Board of Directors
Graham H. Batcheler 57 Member of the Board of Directors
The members of the board of directors are elected by the holders of
outstanding common stock. The term of office of directors ends at the next
annual meeting of shareholders or when the successors are elected and qualified.
The annual meeting of shareholders is specified in our bylaws to be held within
six months of the end of each fiscal year and the last annual meeting was held
on July 24, 2002. The term of office of each officer ends at the next annual
meeting of the board of directors, expected to take
25
place immediately after the next annual meeting of shareholders, or when his
successor is elected and qualified.
Barry Coffey has been our Chief Executive Officer and President since
January 2002 and a member of the Board of Directors since January 2001. Mr.
Coffey is a senior human resources and operations executive with broad domestic
and international experience spanning more than 20 years. He has held several
senior management positions including RJR Nabisco (1984-1991), Sony Corporation
(1991-1995), and QED Consulting (1995-2001), a global management-consulting firm
of which he was a founder and managing partner. In addition, Mr. Coffey has
experience with the operation of both start-up and growth stage corporations.
Mr. Coffey earned a B.A. degree and a M.A. degree from Scarritt College in 1976
and 1977 and a Ph.D. (ABD) from Drew University in 1980.
Thomas E. Cooley has been our Chief Technology Officer since October
1997 and became a member of the Board of Directors in August 2000. Mr. Cooley
served as our Chief Executive Officer from January 16, 2001 until December 31,
2001. Mr. Cooley previously served as President of Kvaerner Membrane Systems,
Inc. from August 1994 through October 1997. Prior to that, from 1984 through
August 1994, Mr. Cooley was the General Manager - Marketing and Engineering for
Grace Membrane Systems, which was acquired by Kvaerner in August 1994. Mr.
Cooley is a registered professional engineer in the State of Texas and the
Province of Alberta, Canada. Mr. Cooley holds three U.S. patents and two
Canadian patents and has published eight papers. Mr. Cooley is a pioneer in the
development application of gas permeable membranes for natural gas processing.
Mr. Cooley earned a B.A. degree in Chemical Engineering from Rice University in
1963 and a B.S. degree in Chemical Engineering from Rice University in 1964.
Duane F. Baumert was elected to the Board of Directors in September
2000 and has been a member of the Audit Committee since March 2001. Mr. Baumert
has experience in the area of worldwide licensing of technology and intellectual
property rights. Mr. Baumert has been the Business Director of UNICARB(R)Systems
Business of the Union Carbide Corporation since 1990. Mr. Baumert has been with
Union Carbide since 1966 and during that time has held the positions of Director
of Marketing, National Sales Management and International Business Director. Mr.
Baumert received a B.S. in Business Administration and Management from the
University of Nebraska in 1963.
Marc Cernovitch has been actively involved in the management and
financing of Synergy since we acquired our technologies. Mr. Cernovitch began
his career as a securities broker in the financial services industry. He has
extensive experience in the financing of new technology and energy companies.
Mr. Cernovitch manages investor relations, planning and administration for
Synergy. He was awarded a B.A. in Economics from McGill University, Montreal,
Canada.
Cameron Haworth has been a Director of Synergy since December 1997, and
served as our President during 1998 and 1999. He obtained his B.Sc. Petroleum
Engineering in December 1987 from the University of Wyoming and a Degree in
Petroleum Technology from Southern Alberta Institute of Technology in 1984. Mr.
Haworth was previously employed by Schlumberger (formerly REDA Services) as
sales manager. Mr. Haworth has several years of experience in the oil and gas
industry supervising and coordinating the marketing, sales and field services
and order initiation for the Canadian market. Mr. Haworth has extensive
experience in preparing business plans and presentation material.
James E. Nielson has served on Synergy's Advisory Board from January
2000 until his election to the Board of Directors in September 2000. Mr. Nielson
has been a member of the Audit Committee since March 16, 2001. With an extensive
career as an oil and gas executive, Mr. Nielson brings an understanding of the
industry to Synergy. Mr. Nielson was President and Chief Executive Officer of
Husky Oil of Calgary, Alberta, Canada, from 1973 to 1979, during which time
Husky Oil experienced tremendous growth, a four-fold increase in operating
revenues and a six-fold increase in profits. He also began the planning that led
to the development of Husky's heavy oil upgrader at Lloydminster, Alberta. Upon
his return to Wyoming in 1979, Mr. Nielson formed JN Oil and Gas, a privately
owned exploration and production company. After 12 years at the helm of JN Oil
and Gas, he formed Nielson and
26
Associates, Inc. Mr. Nielson, currently serves as a director at the American
Petroleum Institute, the Shoshone First Bank of Cody, Wyoming, Y-Tex Corporation
of Cody, Wyoming and Ultra Petroleum Corp.
James Shone has been a Director of Synergy since December 1997 and has
been a member of the Audit Committee since March 2001. Mr. Shone is currently
employed by the Business Development Bank of Canada (BDC) in the finance
department. Previously employed with the Trust Company of the Bank of Montreal
as a client service officer. Mr. Shone has knowledge of financial statement
review and preparation, budgeting and financial forecasting. Mr. Shone is a
graduate of McGill University with a Bachelor of Commerce degree in finance in
1996.
Graham H. Batcheler has joined our board of directors in July 2002.
Most recently, since 1999, Mr. Batcheler founded and was the principal officer
of TESI, a corporation that focuses on opportunities related to fuel cell energy
systems, hydrocarbon to liquids processing and alternate fuels. From 1981
through 1999, he was employed by various entities within the Texaco family of
corporations. During the last half of 1997, he served as President of Texaco
Global Gas and Power's International Marketing & Business Development. Earlier
in 1997, he was the President of Texaco Natural Gas International. From 1993
through 1997, he acted as the President of Texaco Natural Gas based in Texaco's
Houston headquarters. Mr. Batcheler graduated from Loughborough University of
Technology in England with a Bachelor of Technology degree in 1974.
Kelly Warrack has served as our Controller since January 2000 and was
appointed Secretary-Treasurer in July 2001. Mr. Warrack previously served as
Divisional Controller for Tesco Corporation from June 1995 through December
1999. Prior to that, from 1988 through 1995, Mr. Warrack held positions as
Accounting Supervisor and Budget Coordinator for Texaco Canada Petroleum Inc.
Mr. Warrack became a Certified Management Accountant in the Province of Alberta,
Canada in 1991.
ACTING CHIEF FINANCIAL OFFICER
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, and has been extended by mutual agreement of the
parties through October 2, 2002. 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. In lieu of this stock payment, we may pay Mr. Engles $2,500
per week in cash. 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 $.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 issued
to Mr. Engles pursuant to this agreement and all shares underlying his option
for public resale under the Securities Act of 1933.
From 1987 to 1992, Mr. Engles was a member of the corporate finance
department at Salomon Brothers. From 1992 to 2000, he worked in the corporate
finance group at Bear Stearns, most recently as a Managing Director, where he
advised a variety of companies in the media, telecom, and technology sectors. In
January 2000, Mr. Engles became the Chief Financial Officer of PartMiner, Inc.,
a broker in the semiconductor industry where he was responsible for implementing
numerous changes with respect to budgeting and controls, raising approximately
$50 million in capital, negotiating strategic partner agreements, selling
non-strategic assets, and helping direct the company's overall strategy. Mr.
Engles received his A.B. degree in economics from Harvard College and his J.D.
and M.B.A. degrees from the University of Chicago. He also served as law clerk
to the Hon. Stephen Reinhardt of the Ninth Circuit Court of Appeals.
27
ADVISORY BOARD
We have created an Advisory Board for the purpose of obtaining the
advice of experienced, knowledgeable business people and professionals. We
believe that this is a means by which advice may be obtained in areas that it
needs assistance, such as finance, government environmental policy,
international relations and law and publishing. The Advisory Board has no
control or direct influence over our policies, management or board of directors.
Our Advisory Board is comprised of the following individuals:
Senator Alan K. Simpson, Retired, was elected to the United States
Senate for the first of three terms. His political career included a period as
the Assistant Majority Leader and a great deal of high profile committee work.
During his service to the Environment and Public Works Committee, Mr. Simpson
co-sponsored the Clean Air Act of 1994. Prior to his time on Capitol Hill, Mr.
Simpson had a long career in the Wyoming State Legislature serving as the
Majority Whip, Majority Floor Leader and Speaker Pro-Tem. He practiced law for
eighteen years including a short term as the Wyoming Assistant Attorney General.
Mr. Simpson sits on numerous Boards, including the Board of Directors for IDS
Mutual Fund Group, Biogen Corporation and PacifiCorp.
Gordon Barrows has had a long and distinguished career as a publisher
and world authority on the structure and suitability of oil and gas contracts
and legislation. As the publisher of Petroleum Legislation, Basic Oil Laws and
Concession Contracts, Mr. Barrows travels around the world advising private and
government organizations. Mr. Barrows is the President of Barrows Company Inc.,
and is an advisor to various international organizations including the United
Nations, the World Bank and various national governments. Mr. Barrows has a
Bachelor of Arts in mathematics and languages from the University of Wyoming and
a Master of Arts in international relations and law from John Hopkins. He speaks
fluent French and Spanish.
H.S. Hartley brings an entrepreneurial drive to the Synergy Board with
a background that spans a wide range of petroleum-related projects. In addition
to being the current Chairman of the Board of Prism Petroleum Ltd. and President
of Faster Oilfield Services Ltd., Mr. Hartley was the President and co-founder
of Cayenne Energy Corporation, the owner and President of Sea Hawk Resources,
and the President of Smith International Canada, Ltd. Mr. Hartley sits as a
Director on the Boards of the Heritage Park Society, Production Operators
Canada, Inc., and iCore, Alberta Informantics Circle of Research, among others.
Charles C. Rumsey, Jr. brings a diverse range of talents to Synergy.
As a private financier of oil and gas investments, Mr. Rumsey has a
well-established network of contacts on Wall Street. Over the years, Mr. Rumsey
has been a significant investor in several new oil companies, some of which
became publicly traded. The founder and President of Sunshine Pacific Corp., a
privately held oil company, Mr. Rumsey has been an investor with Synergy since
the beginning. Mr. Rumsey is a graduate of Harvard Law School and practiced law
in New York for many years before devoting his full-time efforts to oil and gas
and fine art investments.
TECHNICAL STAFF AND INVENTORS
Dr. Albin Czernichowski, the co-inventor of SynGen, consults for the
company. He also continues his activities as a 1st class professor at the
University of Orleans (France). A graduate in Chemical Engineering at the
Technical University of Wroclaw (Poland), he also received his Ph.D. and
Habilitation grades in Physical Chemistry and then the full professor position
(1979). For almost 40 years he has been involved in different fields of Plasma
Chemistry. Supervisor of 21 Master's and 18 Ph.D. theses, he is the author of
six monographs and textbooks, 63 papers published in scientific journals, 155
other papers (conferences, communications), 30 patents and more than 62 reports.
For more than 10 years he has been developing plasma reactors for hydrocarbon
conversion processes such as heavy hydrocarbons cracking and hydrogenation,
light hydrocarbons cracking, reforming or partial oxidation in order to produce
H2, CO, C2H2, C2H4 as well as the hydrogen sulfide destruction and its full or
partial
28
utilization in the oil & gas and geothermal industries. Work related to
environmental clean up has included such applications as VOC abatement in flue
gases, flue-gas SOX or NOX reduction, soot after-burning, and CO2 dissociation.
Dr. Pierre Jorgensen, the inventor of the "CPJ" process, is a retired
French process engineer and Ph.D. who spent his career dealing with fluid
catalytic crackers, cokers, visbreakers and bottom of the barrel refinery
economics. Dr. Jorgensen retired from British Petroleum in the late 80's. His
technical career spanned not only oil refining for BP, but also the French
military nuclear program and glassmaking. While at BP he focused improving the
economics of bottom of the barrel processes such as fluid catalytic cracking,
hydrocracking, and delayed coking. He therefore became very interested in
molecular bond structures as they relate to the heaviest fractions in crude oil.
When he retired from BP, Dr. Jorgensen enrolled at the university in Orleans,
France and pursued his doctorate. His thesis was on the energy required to break
certain molecular bond structures. Out of this thesis work came his conception
of the process, which he developed and named CPJ. CPJ stands for Conversion
Pierre Jorgensen. Dr. Jorgensen continues to assist us in process development,
assay of client crudes, and commercialization activities for the CPJ process.
Dr. Vladimir S. Boudtsov joined us full time in June 2000. He is a
highly specialized, leading technologist and the former Chief of the
Novocherkassk Plant of Synthetic Products located in Novocherkassk, Russia. Dr.
Boudtsov graduated with a degree in chemical technology from the Technical
University of Don in 1984 and then began work at the Novocherkassk plant. He
continued his studies concerning Fischer-Tropsch technology under the direction
of the world's leading specialist in the field, Professor Albert Lapidus, Dr. of
Sciences, Member of the Russian Academy of Sciences, and Head of Laboratory at
the N.D. Zelinsky Institute of Organic Chemistry of Moscow. His experimental
work on catalyst development was performed using the large laboratory facilities
and also the Fischer-Tropsch industrial reactors of the Novocherkassk plant. In
1995, Dr. Boudtsov received his Ph.D. on development and industrial application
of new Fischer-Tropsch catalysts with a controlled selectivity of hydrocarbon
production. Dr. Boudtsov is the author of five publications and one Russian
patent, all concerning the Fischer-Tropsch technology.
COMMITTEES OF THE BOARD OF DIRECTORS
Audit Committee.
Our Audit Committee is composed of James E. Nielson, Duane F. Baumert
and James Shone. The Audit Committee is responsible for recommending to our
board the engagement of independent auditors and reviewing with the independent
auditors the scope and results of the audits, our internal accounting controls,
audit practices and the professional services furnished by the independent
auditors.
Compensation Committee.
Our Compensation Committee consists of Jim Nielson and Duane Baumert.
The Compensation Committee reviews and determines the compensation of the
company's executive officers and recommends the granting of awards to eligible
employees pursuant to the 2002 Stock Option Plan.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The table below sets forth certain information concerning the annual
and long-term compensation of each person who has served as our Chief Executive
Officer during the last three fiscal years. No other person received annual
compensation in excess of $100,000 during since January 1, 1999.
29
Securities
Other Annual Underlying All Other
Name and Principal Position Year Salary Compensation Options Compensation
--------------------------- ---- ------ ------------ ------- ------------
Cameron Haworth, President 1999 - - 150,000(1) -
and Director
Cameron Haworth, President 2000 66,134 - - -
and Director
John Gradek, Chief Executive 2000 44,018 - - -
Officer and Director
Thomas E. Cooley, Chief 1999 - - 220,648(2) -
Technical Officer
Thomas E. Cooley, Chief 2000 140,000 10,673 250,000 1,583
Technical Officer
Thomas E. Cooley, Chief 2001 140,000 6,588 - 18,583
Technical Officer and Acting
Chief Executive Officer
1. Mr. Haworth received options to purchase 250,000 shares of common stock
in consideration of serving as our President and a member of the Board
of Directors for the years 1998 and 1999. Since the exercise price for
such options exceeded the market price for the shares during the time
that they were earned, no value has been ascribed to such options for
these purposes.
2. Mr. Cooley received 220,648 shares of Synergy as compensation for his
services in 1999, which were valued at $143,921.
OPTION GRANTS IN THE LAST FISCAL YEAR
We did not grant any options during the fiscal year ended December 31,
2001
FISCAL YEAR-END OPTION NUMBERS AND VALUES
The following table sets forth certain information concerning the number
and value of unexercised options held by the Named Executives at the end of the
last fiscal year (December 31, 2001). There were no stock options exercised by
the Named Executives during the fiscal year ended December 31, 2001.
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Options at Fiscal Year-End: at Fiscal Year-End:
Name Exercisable/Unexercisable Exercisable/Unexercisable
---- ------------------------- -------------------------
Thomas Cooley 250,000 $0
COMPENSATION OF NON-EMPLOYEE DIRECTORS
We do not compensate our Directors for participation in Board or
Committee meetings. We reimbursed non-employee Directors for travel expenses for
meetings attended during 2001.
On May 2, 2002, we granted to Graham Batcheler, who was elected to
serve as a director on July 24, 2002, options to purchase up to 200,000 shares
of our common stock at a price of $1.00 per share for a period of ten years in
connection with his agreement to stand for nomination and serve as a director of
Synergy, if elected. Mr. Batcheler shall be entitled to exercise options to
acquire 66,667 shares during the first year after the date of the option
agreement, options to acquire 66,667 shares during the second year after the
date of the option agreement, and options to acquire 66,666 shares during the
third year after the date of the option agreement.
30
EMPLOYMENT AGREEMENTS
On January 1, 2001, we entered into an agreement with Barry Coffey to
serve as our Chief Executive Officer and President for a period of 3 years,
automatically renewable for successive 12 month periods thereafter unless either
party gives notice of its intention not to renew the agreement 60 days prior to
an expiration date. We have agreed to pay to Mr. Coffey a base salary equal to
$240,000 per year and to make him eligible for a bonus equal to up to 100% of
that amount based upon the achievement of certain milestones to be agreed upon
between Mr. Coffey and the Board of Directors. In addition, we granted Mr.
Coffey options under the 2002 Stock Option Plan to purchase up to 4,500,000
options at a price of $.72 per share. An aggregate of 1,500,000 options vest to
Mr. Coffey in each of the three years of the employment agreement. We also have
agreed to furnish Mr. Coffey with payments to cover expenses for insurance not
to exceed $20,000 per annum and to reimburse him for all reasonable expenses
incurred by him in connection with maintaining his home office in New York City.
The employment agreement contains customary confidentiality and non-competition
clauses. If we terminate Mr. Coffey for "cause" or if he resigns for other than
"good reason," as such terms are defined in the agreement, all of his rights to
receive his salary shall terminate on such date and all options granted shall
expire immediately. If Mr. Coffey terminates his employment for "good reason" or
we terminate his employment without "cause," we are required to pay him his base
salary for a period of 12 months after the date of such termination and all
stock options shall fully vest on such date. In the event that Mr. Coffey dies
or if he becomes "disabled," as such term is defined in the agreement, for 90
consecutive days or 120 days during the course of any twelve month period, all
compensation rights terminate under the agreement except that he shall be
entitled to the benefit of any stock options that have vested as of such date.
2002 STOCK OPTION PLAN.
On December 14, 2001, the Board of Directors adopted the 2002 Stock
Option Plan ("Plan") to take effect on January 1, 2002, subject to the approval
of the shareholders. Our shareholders approved the Plan at the Special Meeting
of Shareholders held on February 18, 2002.
The following is a brief summary of the Plan, which is designed to
enhance our long-term profitability and shareholder value by aligning the
interests of selected directors, officers, employees and consultants with our
performance targets.
The Plan authorizes the issuance of statutory and non-statutory options
to purchase up to 10,000,000 shares of our common stock.
The Plan is administered by the Board of Directors, which may empower a
committee to administer the Plan. The Board is generally empowered to interpret
the Plan, prescribe rules and regulations relating thereto, determine the terms
of the option agreements, amend them with the consent of the optionee, determine
the individuals to whom options are to be granted, and determine the number of
shares subject to each option and the exercise price thereof. The per share
exercise price for options granted under the Plan is determined by the Board,
provided that the exercise price of incentive stock options is not be less than
100% of the fair market value of a share of the common stock on the date the
option is granted (110% of fair market value on the date of grant of an
incentive stock option if the optionee owns more than 10% of our common stock).
Upon exercise of an option, the optionee may pay the purchase price with
previously acquired securities of the company.
Options will be exercisable for a term determined by the Board, which
will not be greater than ten years from the date of grant and five years in the
case of incentive stock options, unless such grant is for a period of ten years,
as determined by the Board, except that an Incentive Stock Option granted to the
beneficial owner of more than 10% of the outstanding shares of our common stock
shall expire, to the extent that it has not theretofore been exercised, at the
close of business five (5) years from the date of grant. Options may be
exercised only while the original grantee has a relationship with us which
confers eligibility to be granted options or within three months after
termination of such relationship with us, or up
31
to one year after death or total and permanent disability. In the event of the
termination of such relationship between the original grantee and us for cause,
as defined in the Plan, all options granted to that original optionee terminate
immediately. In the event of certain basic changes in the company, including a
reorganization, merger or consolidation of the company, or the purchase of
shares pursuant to a tender offer for shares of our common stock, in the
discretion of the Board or administering committee, each option may become fully
and immediately exercisable. Incentive stock options are not transferable other
than by will or the laws of descent and distribution. Non-qualified stock
options may be transferred to the optionee's spouse or lineal descendants,
subject to certain restrictions. Options may be exercised during the holder's
lifetime only by the holder, his or her guardian or legal representative.
Options granted pursuant to the Plan may be designated as incentive
stock options ("ISO"), with the attendant tax benefits provided under Sections
421 and 422 of the Internal Revenue Code of 1986. Accordingly, the Plan provides
that the aggregate fair market value determined at the time an ISO is granted of
the common stock subject to incentive stock options exercisable for the first
time by an employee during any calendar year under all our plans may not exceed
$100,000. The Board may modify, suspend or terminate the Plan; provided, that
certain material modifications affecting the Plan must be approved by the
shareholders, and any change in the Plan that may adversely affect an optionee's
rights under an option previously granted under the Plan requires the consent of
the optionee.
As of the date hereof, we have granted options to purchase up to
4,500,000 shares of common stock to our President and Chief Executive Officer
pursuant to his employment agreement with us.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
PRINCIPAL SHAREHOLDERS.
On September 3, 2002, 46,670,083 shares of our common stock were
outstanding. The following table tells you, as of September 3, 2002, about:
o Each beneficial owner of more than 5% of our common stock;
o Beneficial ownership of shares of our common stock by each of our
current directors and officers; and beneficial ownership of shares of
our common stock by all of our directors and officers as a group; and
o Beneficial ownership of shares of our common stock by all of our
directors and officers as a group.
For the purpose of this table, the beneficial ownership of a person
includes shares as to which that person has sole or shared voting or investment
power as well as shares that the person has the right to acquire within 60 days
(such as upon conversion of convertible securities or exercise of warrants or
options) as of September 3, 2002.
32
NUMBER PERCENT OF CLASS
BENEFICIAL OWNER OF SHARES PERCENT OF CLASS AFTER OFFERING (1)
---------------- --------- ----------------- ------------------
Barry Coffey (2) 1,725,000 3.6% 2.89%
Thomas Cooley (3) 1,151,493 2.5% 2.0%
Duane F. Baumert(4) 365,500 0.8% 0.6%
Marc Cernovitch(5) 2,160,922 4.7% 3.6%
Cameron Haworth (6) 275,537 0.6% 0.5%
James E. Nielson(7) 953,847 2.1% 1.6%
James Shone(8) 154,400 0.33% 0.36%
Kelly Warrack(9) 210,300 0.45% 0.36%
Graham H.Batcheler 66,667 0.14% 0.11%
Laxarco Holdings Limited 14,793,510 31.7% 25.4%
All officers and directors as a group (8 persons) 7,063,664 15.1% 11.6%
1. Gives effect to the sale and issuance of 11,575,959 shares of common
stock to Fusion Capital Fund pursuant to the stock purchase agreement.
2. Coffey's total shareholdings includes options to purchase 1,525,000
shares of common stock.
3. Mr. Cooley's total shareholdings includes options to purchase 250,000
shares. Mr. Cooley is also a shareholder of Laxarco Holdings Limited
but disclaims any investment control over or beneficiary interest in
the shares of Synergy owned by Laxarco Holdings, for purposes hereof.
4. Mr. Baumert's total shareholdings include options to purchase 125,000
shares; his wife Dorothy T. Baumert, owns 3,500 shares in her
retirement plan.
5. Mr. Cernovitch's total shareholdings include options to purchase
235,000 shares, 554,136 shares owned directly; 549,600 shares owned by
CMJ Consulting Ltd. of which Mr. Cernovitch is the sole officer,
director and shareholder; warrants to purchase 822,186 shares
subscribed for by CMJ Consulting Ltd. but unissued as of the date
referenced above.
6. Mr. Haworth's total shareholdings include options to purchase 244,500
shares.
7. Mr. Nielson's total shareholdings include options to purchase 200,000
shares.
8. Mr. Shone's total shareholdings include options to purchase 100,000
shares.
9. Mr. Warrack's total shareholdings include options to purchase 170,000
shares.
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Pursuant to a series of transactions among Synergy and its
subsidiaries, and Texas T Petroleum Ltd. (the principal shareholder of which is
also a holder of our shares and formerly was the president and a director of
Synergy) and its subsidiaries, and Pierre Jorgensen, the inventor of the CPJ
technology, commencing in May, 1998 and concluding in March 2002, Synergy
acquired all right, title and interest in and to the CPJ technology.
As a result of these transactions, we:
o agreed to invest a minimum of $1,000,000 in the development of the CPJ
process. The combined investment from all sources to date is
$1,284,000;
o issued to Pierre Jorgensen an aggregate of 2,491,334 shares of common
stock and agreed to register 1,991,334 of said shares for public resale
under the Securities Act of 1933, subject to the provision that the
sale of such shares would yield $1,100,000 in proceeds to Dr. Jorgensen
and that in the event of any deficiency from such amount Synergy would
issue additional shares to achieve proceeds of $1,100,000 and in the
further event that a lesser number of shares was required to achieve
proceeds of that amount, the balance of the shares would be returned to
us for cancellation;
33
o agreed to pay to Dr. Jorgensen a royalty equal to 5% of the net
proceeds generated from the CPJ technology;
o agreed to appoint Dr. Jorgensen as scientific director for CPJ
technology development and agreed to pay a monthly fee in Synergy
stock equivalent to $5,000;
o agreed to appoint Dr. Jorgensen as a member of a scientific advisory
board when it is created by us.
o agreed to pay to Texas T a 2.5% royalty in connection with and upon
income realized from the CPJ technology. Said royalty rights shall last
for a period of five years, and shall commence on the date that the
first 5,000 BOPD or greater CPJ technology plant operates at 80% plus
capacity.
o issued to Texas T an aggregate of 2,300,000 shares of common stock, of
which 1,900,000 shares are being held in escrow to be released to Texas
T on December 20, 2004 or upon the happening of certain other events,
subject to the provision that if Synergy conveys the CPJ technology to
Texas T, the shares held in escrow will be cancelled and Texas T shall
(i) be obligated to pay to Synergy a royalty equal to 2.5% of the
revenues derived by Texas T from the CPJ technology for five years and
(ii) issue to Synergy 500,000 shares of its common stock (or the
capital stock in whatever entity Texas T places ownership of the CPJ
Technology), which it agrees to register under the Securities Act of
1933 for public resale.
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 which we
will license the CPJ technology and to which Nielson & Associates will provide
the oil well or wells and necessary land or lands for the facility or facilities
to the joint venture company. The parties agreed jointly to finance (or cause to
be financed) build and operate an approximately 1,000 or greater barrel per day
heavy oil upgrading facility and/or facilities exclusively in the States of
Wyoming and/or Montana
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 we 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, 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 us.
During the fiscal years ended December 31, 2001 and 2000, we paid an
aggregate of $196,210 and $146,919, respectively, to Glidarc Technologies Inc.
for process management services and technical personnel. Mr. Thomas Cooley is an
officer of Glidarc Technologies and is also our Chief Technology Officer and a
member of our Board of Directors. Mr. Cooley also serves on the Board of
Directors of Syngen Technologies Limited and Carbon Resources Limited, wholly
owned subsidiaries of the company. At December 31, 2001 and 2000, we owed
Glidarc $30,783 and $23,515, respectively, for services rendered.
On October 19, 2000, we issued a three-year promissory note in the
principal amount of $1,000,000 in favor of Stone Canyon Resources, Inc., a
former affiliate of Synergy by virtue of common officers, directors and
shareholders, in settlement of the terms of a certain Share Exchange Agreement,
previously filed with, and described in, past filings made by us with the
Securities and Exchange Commission. We issued the promissory note to Stone
Canyon to settle what Stone Canyon alleged was a breach of the Share Exchange
Agreement resulting from our inability to develop certain oil and gas
34
producing properties. On February 9, 2001, Stone Canyon converted the promissory
note into shares of common stock at the price of $1.00 per share.
As a result of a series of transactions commencing in May 1998 and
consummated in August 2000, we acquired all right, title and interest in and to
SynGen from Laxarco Holdings Limited in consideration of the issuance of an
aggregate of 14,943,510 shares of common stock to Laxarco. Thomas Cooley, one of
our directors and our Chief Technology Officer and former President, is a
principal shareholder of Laxarco Holdings as is Albin Czernichowski, one of our
consultants.
On July 1, 2001, we entered into a Management and Consulting Agreement
with Huntingtown Associates LLC, which is wholly owned by Mr. Duane Baumert, a
member of our Board of Directors. Pursuant to this agreement, we engaged
Huntingtown Associates for a minimum of 40 days during 2001 and a minimum of 80
days up to a maximum of 120 days during 2002 to provide assistance with the
development of product licensing, business and patent strategies, business plan
development and certain other matters. The agreement provides that during 2001
we would compensate Huntingtown Associates at the rate of $1,500 per day payable
in stock options valued at 33% of the higher of $1 or the average market price
for our common stock during the month in which the services were rendered.
During 2002, we have agreed to compensate Huntingtown Associates at the rate of
$1,500 per day payable $350 in cash and the balance ($1,150) in stock options
valued at 33% of the higher of $1 or the average market price for our common
stock during the month in which the services were rendered. We have agreed to
register the common stock issued to Huntingtown Associates pursuant to the
agreement for public resale under the Securities Act of 1933. During the fiscal
year ended December 31, 2001, we incurred $138,674 consulting services and
reimbursement of actual expenses pursuant to the agreement in favor of
Huntingtown Associates LLC for, $25,631 of which remained outstanding at
December 31, 2001. Thus far during 2002, we have not incurred any charges for
consulting fees or expenses to Huntingtown Associates. Mr. Duane Baumert is the
sole proprietor of Huntingtown Associates. At June 30, 2002, we owed Huntingtown
Associates $24,131 in respect of the fees payable to him during 2001 and 2002.
On January 14, 2000, we entered into a Financing and Security Agreement
with James Nielson and the Wood River Trust whereby the parties loaned Synergy
$300,000, of which $125,000 is attributable to Mr. Nielson. The loan accrued
interest at the rate of 8% per annum and was convertible into shares of
Synergy's common stock at the rate of $0.50 per share. Upon conversion of the
loan, all accrued interest thereon would be forgiven. On June 13, 2000, the loan
was converted and Mr. Nielson received 250,000 shares of common stock. Mr.
Nielson became a member of Synergy's Board of Directors on September 27, 2000.
THE FUSION TRANSACTION
GENERAL
On June 20, 2002, we entered into a common stock purchase agreement
with Fusion Capital Fund II, LLC, as amended September 3, 2002, 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 Capital 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.
However, Fusion Capital does not have the right nor the obligation to purchase
our common stock at a price of less than $0.15 per share.
We estimate that the maximum number of shares we will sell to Fusion
Capital under the common stock purchase agreement will be 11,373,939 shares
(exclusive of the 626,061 shares issued or
35
issuable to Fusion Capital as a commitment fee) assuming Fusion Capital
purchases all $6.0 million of common stock.
PURCHASE OF SHARES UNDER THE COMMON STOCK PURCHASE AGREEMENT
Under the common stock purchase agreement, on each trading day Fusion
Capital is obligated to purchase a specified dollar amount of our common stock.
Subject to our right to suspend such purchases at any time, and our right to
terminate the agreement with Fusion Capital at any time, each as described
below, Fusion Capital shall purchase on each trading day during the term of the
agreement $10,000 of our common stock. This daily purchase amount may be
decreased by us at any time. We also have the right to increase the daily
purchase amount as the market price of our common stock increases. The purchase
price per share is equal to the lesser of:
o the lowest sale price of our common stock on the purchase date; or
o the average of the three (3) lowest closing sale prices of our
common stock during the ten (10) consecutive trading days prior to the date of a
purchase by Fusion Capital.
The purchase price will be adjusted for any reorganization,
recapitalization, non-cash dividend, stock split, or other similar transaction
occurring during the trading days in which the closing bid price is used to
compute the purchase price. Fusion Capital may not purchase shares of our common
stock under the common stock purchase agreement if Fusion Capital, together with
its affiliates, would beneficially own more than 9.9% of our common stock
outstanding at the time of the purchase by Fusion Capital. However, even though
Fusion Capital may not receive additional shares of our common stock in the
event that the 9.9% limitation is ever reached, Fusion Capital is still
obligated to pay to us $10,000 (or whatever other amount is applicable at that
time) on each trading day, unless the common stock purchase agreement is
suspended, an event of default occurs or the agreement is terminated. Under
these circumstances, Fusion Capital would have the right to acquire additional
shares in the future should its ownership subsequently become less than the
9.9%. Fusion Capital has the right at any time to sell any shares purchased
under the common stock purchase agreement which would allow it to avoid the 9.9%
limitation. Therefore, we do not believe that Fusion Capital will ever reach the
9.9% limitation.
The following table sets forth the number of shares of our common stock
that would be sold to Fusion Capital under the common stock purchase agreement
at varying purchase prices:
PROCEEDS FROM THE SALE OF
NUMBER OF SHARES PERCENTAGE OF OUTSTANDING 11,373,939 SHARES TO FUSION
ASSUMED AVERAGE TO BE ISSUED AFTER GIVING EFFECT TO THE CAPITAL UNDER THE COMMON STOCK
PURCHASE PRICE IF FULL PURCHASE ISSUANCE TO FUSION CAPITAL(1) PURCHASE AGREEMENT
--------------------------------------------------------------------------------------------------------------------
$0.15 11,373,939 20.4% $1,706,090.80
$0.17 (2) 11,373,939 20.4% $1,933,569.60
$0.30 11,373,939 20.5% $2,843,485
$0.50 11,373,939 20.6% $5,686,970
$0.75 8,000,000 15.7% $6,000,000
$1.00 6,000,000 12.5% $6,000,000
$2.00 3,000,000 7.3% $6,000,000
$3.00 2,000,000 5.4% $6,000,000
(1) Based on 46,670,083 shares outstanding as of September 3, 2002.
Includes the issuance of 626,061 shares of common stock issuable to
Fusion Capital as a commitment fee and the number of shares issuable at
the corresponding assumed purchase price set forth in the adjacent
column.
36
(2) Closing sale price of our common stock on August 30, 2002.
We estimate that we will issue no more than 12,000,000 shares to Fusion
Capital under the common stock purchase agreement, including the shares issuable
as a commitment fee, all of which are included in this offering. If more than
12,000,000 shares are issuable to Fusion Capital under the common stock purchase
agreement, we have the right to terminate the agreement without any payment or
liability to Fusion Capital.
MINIMUM PURCHASE PRICE
Fusion Capital shall not have the right nor the obligation to purchase
any shares of our common stock in the event that the purchase price is less than
the floor price of $0.15.
OUR RIGHT TO SUSPEND PURCHASES
We have the unconditional right to suspend purchases at any time for
any reason effective upon one trading day's notice. Any suspension would remain
in effect until our revocation of the suspension. To the extent we need to use
the cash proceeds of the sales of common stock under the common stock purchase
agreement for working capital or other business purposes, we do not intend to
restrict purchases under the common stock purchase agreement.
OUR RIGHT TO INCREASE AND DECREASE THE DAILY PURCHASE AMOUNT
We have the unconditional right to decrease the daily amount to be
purchased by Fusion Capital at any time for any reason effective upon one
trading day's notice. We also have the right to increase the daily purchase
amount effective upon five trading day's notice as the market price for our
common stock increases. Specifically, for every $.25 increase in the threshold
price of our stock above $.50, we have the right to increase the daily purchase
amount by up to an additional $2,500. For example, if the threshold price is
$0.75, we would have the right to increase the daily purchase amount to up to an
aggregate of $12,500. If the threshold price is $2.00, we have the right to
increase the daily purchase amount to up to an aggregate of $25,000. The
"threshold price" is the average of the lowest sales price of our common stock
during the five trading days immediately preceding our notice to Fusion Capital
to increase the daily purchase amount. For any trading day that the sale price
of our common stock is below the threshold price, the increase in the daily
purchase amount in excess of the applicable maximum daily purchase amount shall
be void.
OUR TERMINATION RIGHTS
We have the unconditional right at any time for any reason to give
notice to Fusion Capital terminating the common stock purchase agreement. Such
notice shall be effective one trading day after Fusion Capital receives such
notice.
EFFECT OF PERFORMANCE OF THE COMMON STOCK PURCHASE AGREEMENT ON OUR SHAREHOLDERS
All shares registered in this offering will be freely tradable. It is
anticipated that shares registered in this offering will be sold over a period
of up to 30 months from the date of this prospectus. The sale of a significant
amount of shares registered in this offering at any given time could cause the
trading price of our common stock to decline and to be highly volatile. Fusion
Capital may ultimately purchase all of the shares of common stock issuable under
the common stock purchase agreement, and it may sell some, none or all of the
shares of common stock it acquires upon purchase. Therefore, the purchases under
the common stock purchase agreement may result in substantial dilution to the
interests of other holders
37
of our common stock. However, we have the right at any time for any reason to:
(1) reduce the daily purchase amount, (2) suspend purchases of the common stock
by Fusion Capital and (3) terminate the common stock purchase agreement .
NO SHORT-SELLING OR HEDGING BY FUSION CAPITAL
Fusion Capital has agreed that neither it nor any of its affiliates
shall engage in any direct or indirect short-selling or hedging of our common
stock during any time prior to the termination of the common stock purchase
agreement.
EVENTS OF DEFAULT
Generally, Fusion Capital may terminate the common stock purchase
agreement without any liability or payment to us upon the occurrence of any of
the following events of default:
o the effectiveness of the registration statement of which this
prospectus is a part of lapses for any reason (including,
without limitation, the issuance of a stop order) or is
unavailable to Fusion Capital for sale of our common stock
offered hereby and such lapse or unavailability continues for
a period of ten (10) consecutive trading days or for more than
an aggregate of thirty (30) trading days in any 365-day
period;
o suspension by our principal market of our common stock from
trading for a period of three consecutive trading days;
o the de-listing of our common stock from our principal market
provided our common stock is not immediately thereafter
trading on the Nasdaq National Market, the Nasdaq National
SmallCap Market, the New York Stock Exchange or the American
Stock Exchange;
o the transfer agent's failure for five trading days to issue to
Fusion Capital shares of our common stock which Fusion Capital
is entitled to under the common stock purchase agreement;
o any material breach of the representations or warranties or
covenants contained in the common stock purchase agreement or
any related agreements which has or which could have a
material adverse affect on us subject to a cure period of ten
trading days;
o a default by us of any payment obligation in excess of $1.0
million; or
o any participation or threatened participation in insolvency or
bankruptcy proceedings by or against us.
COMMITMENT SHARES ISSUED TO FUSION CAPITAL
Under the terms of the common stock purchase agreement Fusion
Capital has received 424,041 shares of our common stock as a commitment fee. In
connection with each purchase of our common stock by Fusion Capital, we will
issue to Fusion Capital up to an additional 202,020 shares of our common stock
as a commitment fee. The 202,020 additional shares are issuable to Fusion
Capital pro rata based upon our receipt of the $6.0 million aggregate amount
under the common stock purchase agreement. Unless an event of default occurs,
these shares must be held by Fusion Capital until 30 months from the date of the
common stock purchase agreement or the date the common stock purchase agreement
is terminated.
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SELLING SHAREHOLDERS
The following table sets forth certain information known to us at
September 3, 2002 regarding beneficial ownership of the 15,500,000 shares of
common stock being registered. The shares offered will be sold, if at all,
solely by and at the discretion of the selling shareholders. We will not receive
any proceeds from any sales. Except as otherwise indicated, (i) we believe that
the beneficial owners listed below, based on information furnished by such
owners, have sole investment and voting power with respect to such securities,
subject to community property laws where applicable and (ii) none of the persons
named below are affiliated with the Synergy.
The selling shareholders may offer their shares for sale on a
continuous basis pursuant to Rule 415 under the Securities Act of 1933.
All of the selling shareholders shares registered hereby will become
freely tradable on the effective date of the registration statement of which
this prospectus forms a part.
OWNED SHARES TO PERCENTAGE
BEFORE BE SOLD IN OWNED AFTER
NAME OFFERING (1) THE OFFERING (2) OFFERING
---------------------------------------------------------------------------------------------------
Fusion Capital Fund II, LLC (1), (2) 424,041 12,000,000 *
Pierre Jorgensen (3) 2,402,334 402,417 4.3%
Texas T. Petroleum Ltd. (4) 2,300,000 2,300,000 *
Pendleton, Friedberg, Wilson,
Hennessey, P.C. 63,650 63,650 *
Jack Bruce 171,433 171,433 *
John Gradek (5) 105,000 90,000 *
Park Capital Securities 100,000 100,000 *
Pendragon Capital Resources 50,000 50,000 *
Kenneth Baumert 95,000 75,000 *
Stockbroker Associates Corp. 247,500 247,500 *
* Denotes less than 1%.
(1) As of the date hereof, 424,041 shares of Fusion Capital have been acquired
by Fusion Capital under the common stock purchase agreement. Fusion Capital
may acquire up to an additional 11,575,959 shares under the common stock
purchase agreement. Percentage of outstanding shares is based on 46,670,083
shares of common stock outstanding as of September 3, 2002, together with
such additional 11,373,939 shares of common stock that may be acquired by
Fusion Capital from us under the common stock purchase agreement after the
date hereof. Fusion Capital may not purchase shares of our common stock
under the common stock purchase agreement if Fusion Capital, together with
its affiliates, would beneficially own more than 9.9% of our common stock
outstanding at the time of the purchase by Fusion Capital. However, even
though Fusion Capital may not receive additional shares of our common stock
in the event that the 9.9% limitation is ever reached, Fusion Capital is
still obligated to pay to us $10,000 on each trading day (or whatever other
amount is applicable at that time), unless the common stock purchase
agreement is suspended, an event of default occurs or the agreement is
terminated. Under these circumstances, Fusion Capital would have the right
to acquire additional shares in the future should its ownership
subsequently become less than the 9.9%. Fusion Capital has the right at any
time to sell any shares purchased under the common stock purchase agreement
which would allow it to avoid the 9.9% limitation. Therefore, we do not
believe that Fusion Capital will ever reach the 9.9% limitation.
39
(2) Steven G. Martin and Joshua B. Scheinfeld, the principals of Fusion
Capital, are deemed to be beneficial owners of all of the shares of common
stock owned by Fusion Capital. Messrs. Martin and Scheinfeld have shared
voting and investment power over the shares being offered under this
prospectus.
(3) Dr. Jorgensen is a consultant of Synergy.
(4) 1,900,000 of these shares are being held in escrow to be released to Texas
T on the earlier of December 20, 2004 or upon our sale of any interest in
the subsidiary in which the CPJ technology is held, except if such sale of
the technology is to Texas T, in which case, these shares shall be
cancelled.
(5) Mr. Gradek was our president during 2000.
DESCRIPTION OF CAPITAL STOCK
GENERAL
Our authorized capital consists of 100,000,000 shares of common stock,
par value $.002 per share. At September 3, 2002, there were 46,670,083 shares of
common stock outstanding.
COMMON STOCK
Each outstanding share of common stock has one vote on all matters
requiring a vote of the shareholders. There is no right to cumulative voting;
thus, the holders of fifty percent or more of the shares outstanding can, if
they choose to do so, elect all of the directors. In the event of a voluntary or
involuntary liquidation, all shareholders are entitled to a pro rata
distribution after payment of liabilities and after provision has been made for
each class of stock, if any, having preference over the common stock. The
holders of the common stock have no preemptive rights with respect to offerings
of our securities. Holders of common stock are entitled to dividends if, as and
when declared by the Board out of the funds legally available therefor. It is
our present intention to retain earnings, if any, for use in our business.
Dividends are, therefore, unlikely in the foreseeable future.
COMMON STOCK PURCHASE WARRANTS
At September 3, 2002, we had outstanding an aggregate of 6,628,704
warrants to purchase shares of common stock, as follows:
o 1,538,461 warrants are exercisable at a price of $1.30 per share
through August 30, 2006.
o 1,252,350 warrants are exercisable at price of $.90 per share through
June 11, 2007.
o 1,264,000 warrants are exercisable at a price of $3.50 per share
through April 7, 2003.
o 776,921 warrants are exercisable at a price of $1.30 per share through
August 30, 2003.
o 700,000 warrants exercisable at a price of $1.00 per share through
December 15, 2002.
o 612,306 warrants exercisable at a price of $.72 per share through June
2, 2005. We may redeem these warrants at a price of $.001 commencing
on June 2, 2003 provided that the average closing bid price per share
of common stock for the thirty day period ending five days prior to
the date of the redemption notice for the warrants is at least $3.00
per share.
o 250,000 warrants are exercisable at a price of $1.00 per share through
April 15, 2006.
40
o 100,000 warrants are exercisable at a price of $.90 per share through
June 1, 2004.
o 84,666 warrants are exercisable at a price of $3.00 per share through
May 25, 2005.
o 50,000 warrants are exercisable at a price of $.02 per share through
January 10, 2006.
All of the above-referenced warrants are subject to adjustment in the
event of any stock dividend, stock split, subdivision or combination, or any
reclassification of the outstanding shares of common stock at any time after
issuance until the expiration of the warrants. All of the shares of common stock
underlying the above warrants are being registered in the registration statement
of which this prospectus forms a part.
OPTIONS
We have issued options outside of the terms of the 2002 Stock Option
Plan to purchase an aggregate of 431,833 shares of Common Stock. These options
are exercisable at an exercise price of $1.00 per share commencing on July 1,
2001 and expiring on February 21, 2012. None of these options are being
registered in the registration statement of which this prospectus forms a part.
CONVERTIBLE PROMISSORY NOTES
During June and July 2000, we issued 5-year convertible promissory
notes in the aggregate principal amount of $2,250,000 bearing interest at the
rate of 10% per annum. During the first two (2) years after issuance, interest
shall accrue and compound annually but will not be payable until the fifteenth
day following such two (2) year period, unless a note was converted prior to the
second anniversary, in which case all interest accrued will be forgiven. After
the second anniversary date of the issuance of a note, interest accrues on a
quarterly basis and is payable on the fifteenth day (15th) day following the end
of each calendar quarter. A holder may convert a note at any time into units
each consisting of one share of common stock, one warrant to purchase one share
of common stock at an exercise price of $4 per share and one warrant to purchase
one share of common stock at an exercise price of $8 per share. If the note is
converted during the first two years after issuance, all interest shall be
forgiven and only the principal amount of the note shall be convertible,
however, if the note is converted after two from issuance, principal and accrued
interest shall be convertible into the units. In the event that our common stock
has traded at a price of at least $6 for thirty consecutive days and a holder
has not converted a note during the 60-day period subsequent to this 30 day
period, we may pre-pay all principal and interest due under the note within
thirty days following the expiration of the sixty-day period.
Holders of the notes have the right to demand prepayment of the
principal amount of their note, along with all accrued and unpaid interest
thereon, during a fifteen (15) day period which commences on the two (2) year
anniversary of the issuance of the note. If a note holder makes a demand for
prepayment during the designated time period, we must repay the principal
balance of such holder's note and accrued and unpaid interest thereon within
ninety (90) days.
In the event we default on any payment obligation under the notes, and
have not cured such default within thirty (30) days of receiving written
notification from the holder of a note of such default, the note holder may
either (i) accelerate the maturity date of the note and make the principal
amount accrued and all unpaid interest thereof immediately due and payable; or
(ii) demand that the $4.00 warrant and the $8.00 warrant included within the
units into which the note is convertible must automatically be issued to such
holder.
During May 2002, we offered each holder of a promissory note the
opportunity to exchange their note for our securities, as a means of eliminating
or reducing the amount we might be obligated to repay to note holders as of the
two-year anniversary of the notes. Specifically, we offered note holders the
opportunity to exchange each $3.00 of principal and interest accrued on the
notes into five shares of common stock and warrants to purchase three shares of
41
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 amount of $254,100, inclusive of
accrued interest, have elected not to exchange their notes; 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
REGISTRATION RIGHTS
We are registering 15,500,000 shares for public resale in the
registration statement of which this prospectus forms a part, including 150,000
shares which underlie convertible securities. We are obligated to register an
additional 9,980,265 shares of common stock.
Registration of Shares of Common Stock Included in this Prospectus
12,000,000 shares of common stock are being registered for public
resale under the Securities Act of 1933 on behalf of Fusion Capital Fund II LLC
in accordance with the provisions of a Registration Rights Agreement between us
and Fusion Capital. We have agreed to maintain the effectiveness of the
registration statement covering these shares until shares sold to Fusion under
the stock purchase agreement have been sold. In addition we and Fusion have
agreed to cross-indemnify the other, as may be permitted by federal law, in
connection with material misstatements or omissions made in the registration
statement.
3,500,000 shares are being registered for public resale under the
Securities Act of 1933 in behalf of various persons, including 3,350,000 shares
of common stock and shares of common stock underlying 150,000 common stock
purchase warrants.
TRANSFER AGENT
The transfer agent for our common stock is American Stock Transfer &
Trust Company, 59 Maiden Lane, New York, New York 10038. We serve as our own
transfer agent and registrar for all of the warrants described above.
SHARES ELIGIBLE FOR FUTURE SALE
FREELY TRADABLE SHARES
On the effective date of the registration statement of which this
prospectus forms a part, after giving effect to the issuance of common stock
being registered herein upon the exercise of certain convertible securities, and
assuming the sale of an additional 11,575,959 shares of common stock to Fusion
Capital, we will have a total of 58,396,042 shares of common stock outstanding
of which 35,067,862 shares will be freely tradable without restriction by or
further registration under the Securities Act of 1933, as amended.
RESTRICTED SHARES
As of the date hereof, after giving effect to the registration of
common stock herein, 28,299,814 shares of common stock outstanding are
"restricted securities." Under Rule 144, the term "restricted securities" is
defined as having been issued and sold by us in reliance on exemptions from the
registration requirements of the Securities Act. These shares may be sold in the
public market only if registered or pursuant to an exemption from registration,
such as Rule 144, Rule 144(k) or Rule 701 under the Securities Act.
We can make no prediction as to the effect, if any, that market sales
of shares of common stock or the availability of shares for sale will have on
the market price prevailing from time to time. Nevertheless, sales of
significant numbers of shares of common stock in the public market could
42
adversely affect the market price of the common stock and could impair our
future ability to raise capital through an offering of its equity securities.
RULE 144
Under Rule 144 as currently in effect, a person who beneficially has
owned restricted securities for at least one year, including persons who may be
deemed affiliates of Synergy are entitled to sell within any three-month period
a number of shares that does not exceed the greater of:
o one percent of the number of shares of common stock then
outstanding; or
o the average weekly trading volume of the common stock during
the four calendar weeks preceding the filing of a Form 144
with respect to such sale.
Sales of restricted securities under Rule 144 also are subject to
certain manner of sale provisions and notice requirements and to the
availability of current public information about us. These limitations apply to
both restricted and unrestricted shares held by persons who are our affiliates.
RULE 144(K)
Under Rule 144(k), a person who is not deemed to have been an affiliate
of Synergy at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years,
including the holding period of any prior owner except an affiliate, is entitled
to sell those shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144.
PLAN OF DISTRIBUTION
The common stock offered by this prospectus is being offered by Fusion
Capital Fund II, LLC and certain other selling shareholders. The common stock
may be sold or distributed from time to time by Fusion Capital and the selling
shareholders directly to one or more purchasers or through brokers, dealers, or
underwriters who may act solely as agents at market prices prevailing at the
time of sale, at prices related to the prevailing market prices, at negotiated
prices, or at fixed prices, which may be changed. The sale of the common stock
offered by this prospectus may be effected in one or more of the following
methods:
o ordinary brokers' transactions;
o transactions involving cross or block trades;
o through brokers, dealers, or underwriters who may act solely as
agents
o "at the market" into an existing market for the common stock;
o in other ways not involving market makers or established trading
markets, including direct
sales to purchasers or sales effected through agents;
o in privately negotiated transactions; or
o any combination of the foregoing.
In order to comply with the securities laws of certain states, if
applicable, the shares may be sold only through registered or licensed brokers
or dealers. In addition, in certain states, the shares may not be sold unless
they have been registered or qualified for sale in the state or an exemption
from the registration or qualification requirement is available and complied
with.
Brokers, dealers, underwriters, or agents participating in the
distribution of the shares as agents may receive compensation in the form of
commissions, discounts, or concessions from the selling shareholder and/or
purchasers of the common stock for whom the broker-dealers may act as agent. The
compensation paid to a particular broker-dealer may be less than or in excess of
customary commissions.
43
Fusion Capital is an "underwriter" within the meaning of the Securities
Act. The other selling shareholders may deemed to be "underwriters" within the
meaning of the Securities Act.
Neither we, Fusion Capital nor the other selling shareholders can
presently estimate the amount of compensation that any agent will receive. We
know of no existing arrangements between Fusion Capital or the selling
shareholders, and any other shareholder, broker, dealer, underwriter, or agent
relating to the sale or distribution of the shares offered by this prospectus.
At the time a particular offer of shares is made, a prospectus supplement, if
required, will be distributed that will set forth the names of any agents,
underwriters, or dealers and any compensation from the selling shareholders and
any other required information.
We will pay all of the expenses incident to the registration, offering,
and sale of the shares to the public other than commissions or discounts of
underwriters, broker-dealers, or agents. We have also agreed to indemnify Fusion
Capital and related persons as well as the other selling shareholders against
specified liabilities, including liabilities under the Securities Act.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to our directors, officers, and controlling persons, we
have been advised that in the opinion of the SEC this indemnification is against
public policy as expressed in the Securities Act and is therefore,
unenforceable.
Fusion Capital and its affiliates have agreed not to engage in any
direct or indirect short selling or hedging of our common stock during the term
of the common stock purchase agreement.
We have advised Fusion Capital that while it is engaged in a
distribution of the shares included in this Prospectus it is required to comply
with Regulation M promulgated under the Securities Exchange Act of 1934, as
amended. With certain exceptions, Regulation M precludes the selling
shareholder, any affiliated purchasers, and any broker-dealer or other person
who participates in the distribution from bidding for or purchasing, or
attempting to induce any person to bid for or purchase any security which is the
subject of the distribution until the entire distribution is complete.
Regulation M also prohibits any bids or purchases made in order to stabilize the
price of a security in connection with the distribution of that security. All of
the foregoing may affect the marketability of the shares offered by this
prospectus.
LEGAL PROCEEDINGS
We are not presently party to any material legal proceedings.
DISCLOSURE OF COMMISSION POSITION OF
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Our directors and officers are indemnified as provided by the Colorado
Business Corporation Act, our Certificate of Incorporation and our Bylaws. We
have been advised that in the opinion of the Securities and Exchange Commission
indemnification for liabilities arising under the Securities Act is against
public policy as expressed in the Securities Act, and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities is asserted by one of our directors, officers, or controlling
persons in connection with the securities being registered, we will, unless in
the opinion of our legal counsel the matter has been settled by controlling
precedent, submit the question of whether such indemnification is against public
policy to a court of appropriate jurisdiction. We will then be governed by the
court's decision.
LEGAL OPINION
The validity of the shares offered hereby has been passed upon for us
by Ruffa & Ruffa, P.C., New York, New York.
44
EXPERTS
The consolidated financial statements of Synergy Technologies
Corporation as of December 31, 2001 and 2000, and for the years then ended, have
been included herein and in the registration statement in reliance upon the
report of KPMG LLP, independent accountants, appearing elsewhere herein, and
upon the authority of said firm as experts in accounting and auditing. The audit
report covering the December 31, 2001 consolidated financial statements contains
an explanatory paragraph that states that the Company's negative cash flows from
operations and requirement for additional financing raise substantial doubt
about the entity's ability to continue as a going concern. The consolidated
financial statements do not include any adjustments that might result from the
out come of that uncertainty.
ADDITIONAL INFORMATION
We are subject to the reporting requirements of the Securities Exchange
Act of 1934, as amended, and file reports, proxy statements and other
information with the Securities and Exchange Commission. These reports, proxy
statements and other information may be inspected and copied at the public
reference facilities maintained by the Securities and Exchange Commission at 450
Fifth Street, N.W., Washington, D.C. 20549 and at the Securities and Exchange
Commission's regional offices located at the Northwestern Atrium Center, 500
West Madison Street, Suite 1400, Chicago, IL 60661. You can obtain copies of
these materials from the Public Reference Section of the Securities and Exchange
Commission upon payment of fees prescribed by the Securities and Exchange
Commission. You may obtain information on the operation of the Public Reference
Room by calling the Securities and Exchange Commission at 1-800-SEC-0330. The
Securities and Exchange Commission's Web site contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Securities and Exchange Commission. The address of that
site is http://www.sec.gov.
We have filed a registration statement on Form SB-2 with the Securities
and Exchange Commission under the Securities Act with respect to the securities
offered in this prospectus. This prospectus, which is filed as part of a
registration statement, does not contain all of the information set forth in the
registration statement, some portions of which have been omitted in accordance
with the Securities and Exchange Commission's rules and regulations. Statements
made in this prospectus as to the contents of any contract, agreement or other
document referred to in this prospectus are not necessarily complete and are
qualified in their entirety by reference to each such contract, agreement or
other document which is filed as an exhibit to the registration statement. The
registration statement may be inspected without charge at the public reference
facilities maintained by the Securities and Exchange Commission, and copies of
such materials can be obtained from the Public Reference Section of the
Securities and Exchange Commission at prescribed rates.
45
INDEX TO FINANCIAL STATEMENTS
Financial Statements:
Audited Financial Statements for the Years Ended December 31, 2001 and 2000
Report of Independent Auditors.............................................................. F-2
Consolidated Balance Sheet - December 31, 2001 and December 31, 2000........................ F-3
Consolidated Statement of Operations for the years ended December 31, 2001 and 2000 and
for the Period from February 10, 1997 (Date of Inception) to December 31, 2001 ............. F-4
Consolidated Statement of Cash Flows for the years ended December 31, 2001 and 2000 and
for the Period from February 10, 1997 (Date of Inception) to December 31, 2001. ............ F-5
Consolidated Statement of Changes in Stockholders' Equity for the year ended December 31,
2001 and December 31, 2000 ................................................................. F-6
Notes to Consolidated Financial Statements.................................................. F-7-F-17
Unaudited Financial Information for the Three Months Ended June 30, 2002 and 2001
Unaudited Consolidated Balance Sheets at June 30, 2002 and year ended December 31, 2001..... F-18
Unaudited Consolidated Statements of Operations for the three months ended June 30, 2002
and 2001, and for the period from February 10, 1997 (Date of Inception) to June 30, 2002... F-19
Unaudited Consolidated Statement of Cash Flows for the three months ended June 30, 2002
and 2001, and for the period from February 10, 1997 (Date of Inception) to June 30, 2002... F-20
Unaudited Consolidated Statement of Changes in Stockholders' Equity for the three months
ended June 30, 2002 and the years ended December 31, 2001 and 2000......................... F-21
Notes to Unaudited Consolidated Financial Statements........................................ F-22-F-27
F-1
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS AND STOCKHOLDERS
---------------------------------------
SYNERGY TECHNOLOGIES CORPORATION:
---------------------------------
We have audited the accompanying consolidated balance sheets of Synergy
Technologies Corporation (and subsidiaries) (a development stage enterprise) as
of December 31, 2001 and 2000 and the related consolidated statements of
operations, cash flows and changes in stockholders equity for each of the two
years in the period ended December 31, 2001 and for the period from February 10,
1997 (inception) to December 31, 2001. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audit. The cumulative statements of operations, cash flows, and changes in
stockholders equity for the period from February 10, 1997 (inception) to
December 31, 2001 include amounts for the period from February 10, 1997
(inception) to December 31, 1999 which were audited by other auditors whose
report has been furnished to us, and our opinion, insofar as it relates to the
amounts included for the period February 10, 1997 (inception) to December 31,
1999 is based solely on the report of other auditors.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Synergy Technologies Corporation
(and subsidiaries) (a development stage enterprise) as of December 31, 2001 and
2000 and the related consolidated statements of operations, cash flows and
changes in stockholders equity for each of the two years in the period then
ended and for the period from February 10, 1997 (inception) to December 31,
2001, in conformity with accounting principles generally accepted in the United
States of America.
The accompanying consolidated financial statements have been prepared assuming
that the company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has suffered negative cash flows
from operations and requires additional financing that raise substantial doubt
about its ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 2. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/ KPMG LLP
------------
Calgary, Canada
March 28, 2002
F-2
SYNERGY TECHNOLOGIES CORPORATION
AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
ASSETS
AS AT DECEMBER 31, 2001 AS AT DECEMBER 31, 2000
--------------------------- ----------------------------
CURRENT ASSETS
Cash $ 38,746 $ 76,059
Receivables (Note 5) 38,560 84,761
Receivables - related parties - 2,842
Prepaid expenses 39,727 73,714
--------------------------- ----------------------------
TOTAL CURRENT ASSETS 117,033 237,376
INVESTMENTS (NOTE 3)
SynGen Technologies and associated assets 3,500,000 38,028,244
CPJ Technologies and associated assets 1,432,500 1,062,500
Investment in Private US corporation 1,000,000 1,000,000
--------------------------- ----------------------------
5,932,500 40,090,744
Investment in joint venture (Note 3) 80,768 -
--------------------------- ----------------------------
TOTAL INVESTMENTS 6,013,268 40,090,744
Office equipment and computers, net of accumulated
depreciation $43,486 59,780 80,361
--------------------------- ----------------------------
TOTAL ASSETS $ 6,190,081 $ 40,408,481
=========================== ============================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,018,649 $ 212,794
Accrued expenses 74,744 85,437
Notes payable (Note 6) 2,250,000 -
Accrued interest on notes (Note 6) 368,182 -
--------------------------- ----------------------------
TOTAL CURRENT LIABILITIES 3,711,575 298,231
LONG TERM LIABILITIES
Notes payable (Note 7) 135,223 2,250,000
Notes payable - related parties - 1,000,000
Accrued interest on notes - 134,086
Investment in joint venture (Note 3) 97,490 -
--------------------------- ----------------------------
Total Liabilities 3,944,288 3,682,317
STOCKHOLDERS' EQUITY
Common stock, $0.002 par value, 50,000,000 shares
authorized, 34,176,343 Shares issued and outstanding 69,333 60,077
Additional paid in capital 49,633,286 45,786,313
Deferred compensation (13,879) (89,770)
Deficit accumulated during development stage (47,442,947) (9,030,456)
--------------------------- ----------------------------
TOTAL STOCKHOLDERS' EQUITY 2,245,793 36,726,164
=========================== ============================
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 6,190,081 $ 40,408,481
=========================== ============================
Uncertainty about the Company's Ability to Continue as a
Going Concern (Note 2)
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
FINANCIAL STATEMENTS.
F-3
SYNERGY TECHNOLOGIES CORPORATION
AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
CUMULATIVE
PERIOD FROM
FOR THE YEARS ENDED FEBRUARY 10, 1997
DECEMBER 31 (DATE OF
INCEPTION) TO
2001 2000 DEC. 31, 2001
--------------------------------------------------------------------------------------------------------------------------------
OTHER INCOME
Interest income 4,365 31,443 35,808
Consulting income - - 8,927
--------------------------------------------------------------------------------------------------------------------------------
4,365 31,443 44,735
EXPENSES
General and administrative 2,662,442 1,768,642 5,832,021
Stock option compensation 92,391 891,560 983,951
Compensation related to warrants - 343,744 343,744
Technology development 715,445 1,403,047 2,962,657
Dry well expenses - - 722,210
--------------------------------------------------------------------------------------------------------------------------------
TOTAL EXPENSES 3,470,278 4,406,993 10,844,583
--------------------------------------------------------------------------------------------------------------------------------
LOSS BEFORE THE FOLLOWING (3,465,913) (4,375,550) (10,799,848)
OTHER EXPENSES
Amortization of debt discount and offering costs - (2,250,000) (2,250,000)
Accrued interest on notes payable (234,096) (134,086) (368,182)
Share of expenses incurred by joint venture (298,881) - (298,881)
Write-down of Syngen technology (34,528,244) - (34,528,244)
Gain on disposition 114,643 687,565 802,208
--------------------------------------------------------------------------------------------------------------------------------
(34,946,578) (1,696,521) (36,643,099)
--------------------------------------------------------------------------------------------------------------------------------
NET LOSS BEFORE TAXES (38,412,491) (6,072,071) (47,442,947)
--------------------------------------------------------------------------------------------------------------------------------
PROVISION FOR INCOME TAX - - -
--------------------------------------------------------------------------------------------------------------------------------
NET LOSS $ (38,412,491) $ (6,072,071) $ (47,442,947)
================================================================================================================================
BASIC AND DILUTED LOSS PER COMMON SHARE $ (1.19) $ (0.31) $ (2.83)
================================================================================================================================
WEIGHTED AVERAGE NUMBER OF COMMON SHARES USED IN CALCULATION 32,326,988 19,622,578 16,747,215
================================================================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
FINANCIAL STATEMENTS.
F-4
SYNERGY TECHNOLOGIES CORPORATION AND SUBSIDARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOW
Cumulative
For the Years Ended period from
December 31 February 10,
1997 (Date of
Inception)
2001 2000 to Dec. 31, 2001
---------------------------------------------------------------------------------------------------------------------------
CASH FROM OPERATING ACTIVITIES
Net loss (38,412,491) (6,072,071) (47,442,947)
Adjustments to reconcile net loss to net cash from operations
Dry well expense - - 722,210
Depreciation, amortization and write downs 34,657,482 3,160,418 37,818,495
Accrued interest on notes payable 234,096 134,086 368,182
Issuance of shares for services 963,729 397,829 1,361,558
Issuance of warrants for services - 343,744 343,744
Re-issue of founders shares 106,500 - 106,500
Investment in joint ventures 16,720 - 16,720
Exchange rate loss 27,353 30,891 62,330
Loss on disposition of assets 1,993 (687,565) (684,239)
Changes in assets and liabilities
Accounts receivable 46,199 (63,475) (38,560)
Prepaid expenses and deposits 33,986 (49,803) (39,743)
Accounts receivable - related parties 2,843 29,225 -
Accounts payable 435,859 (232,037) 1,336,627
Accounts payable - related parties 153,088 - 153,088
Accrued expenses (10,695) 52,604 74,742
---------------------------------------------------------------------------------------------------------------------------
NET CASH FLOWS FROM OPERATING ACTIVITIES (1,743,338) (2,956,153) (5,841,293)
CASH USED IN INVESTING ACTIVITIES
Acquisition of property and equipment (18,257) (97,374) (119,405)
Other - - (788,188)
---------------------------------------------------------------------------------------------------------------------------
NET CASH FLOWS FROM INVESTING ACTIVITIES (18,257) (97,374) (907,593)
CASH FROM FINANCING ACTIVITIES
Proceeds from (payments to) notes payable - related parties (26,983) (13,143) 531,933
Proceeds from (payments to) notes payable 9,118 492,040 823,519
Net proceeds from convertible debt - 2,137,500 2,137,500
Sales of common stock 1,769,500 540,999 2,954,510
Other - - 402,500
--------------------------------------------------
NET CASH FLOWS FROM FINANCING ACTIVITIES 1,751,635 3,157,396 6,849,962
EFFECT OF EXCHANGE RATE CHANGES ON CASH (27,353) (30,891) (62,330)
NET CHANGE IN CASH (37,313) 72,977 38,746
CASH AT BEGINNING OF PERIOD 76,059 3,082 -
--------------------------------------------------
CASH AT END OF PERIOD $ 38,746 $ 76,059 $ 38,746
===========================================================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
FINANCIAL STATEMENTS.
F-5
SYNERGY TECHNOLOGIES CORPORATION
AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
--------------------------------------------------------------------------------------------
DEFICIT
ADDITIONAL ACCUMULATED UNEARNED TOTAL
SHARES AMOUNT PAID IN DURING COMPENSATION STOCK-HOLDERS'
CAPITAL DEVELOPMENT EQUITY (DEFICIT)
STAGE
--------------------------------------------------------------------------------------------
INCEPTION TO DECEMBER 31, 1999
Shares issued in recapitalization 2,549,500 5,099 (5,099) - - -
Issuance of shares for services 4,740,963 9,482 547,456 - - 556,938
Issuance of shares for cash 4,090,007 8,180 635,830 - - 644,010
Other 608,857 1,219 306,268 - - 307,487
Losses - - - (2,958,385) - (2,958,385)
--------------------------------------------------------------------------------------------
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 - - 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 431,000 862 430,138 - - 431,000
Issuance of shares for services 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 year - - - (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
Units for stock - debenture 1,000,000 2,000 998,000 - - 1,000,000
Units for stock - cash 264,000 528 263,472 - - 264,000
Options exercised 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 year - - - (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
============================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
FINANCIAL STATEMENTS.
F-6
SYNERGY TECHNOLOGIES CORPORATION AND SUBSIDARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Financial Instruments - The amounts reported as cash, receivables, accounts
payable, and accrued liabilities are considered to be reasonable approximations
of their fair values. The fair value estimates presented herein were based on
market information available to management at the time of preparation of the
financial statements. For the purpose of the statement of cash flows, cash and
cash equivalents are defined as demand deposits as well as other funds with
original maturities of three months or less.
Foreign Currency Translation - Exchange gains and losses from holding foreign
currencies and having liabilities paid in foreign currencies are included in the
results of operations.
Property and Equipment - Property and equipment are reported at cost. Minor
repairs, enhancements, and maintenance costs are expensed when incurred.
Depreciation is computed using the straight-line and accelerated methods over
the estimated useful lives of the assets. Major categories of property and
equipment and estimated useful lives are as follows:
Estimated Useful Life
---------------------
Furniture and fixtures 3-5 years
Computer equipment 2 years
Intangibles - Intangible assets will be amortized over the estimated useful life
of the asset which will be determined at the time of commencement of their
commercial application. Each respective technology has patents in effect for a
17-19 year period. No amortization expense has been recorded on these amounts
for 2001 or prior periods.
Basic and Diluted Loss Per Share - Basic loss per common share is computed by
dividing net loss by the weighted average number of common shares outstanding
during the period. Diluted loss per share is calculated to give effect to
potentially issuable common shares except during loss periods when those
potentially issuable common shares would decrease the loss per share.
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 2001 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, PLG, gasoline and
diesel; and
2. technologies for the upgrading of heavy oil to lighter oils (CPJ).
F-7
Syngen and GTL technologies
The Company acquired the remaining interest in a subsidiary owning the Syngen
technology and other associated assets during 2000 through the issue of shares
with an ascribed value of $38,028,244. The Company is pursuing several
initiatives to complete the commercial application of the Syngen technology. In
particular, through Drake Synergy Petroleum Limited, a joint venture in Nigeria,
the Company is pursing opportunities to participate in a plant utilizing some of
its GTL technologies including Syngen. The construction or other participation
in a plant to utilize the GTL technologies would require considerable additional
financing. The Company and its joint venture partner are in the process of
negotiating various operating and construction agreements. The Company believes
that the successful completion of these agreements is necessary before it would
be possible to obtain the financing necessary to construct or otherwise
participate in a plant. The completion of licensing or other arrangements may
also require additional capital and may take considerable time to complete. The
Company's ability to recover the amounts recorded for the Syngen technology are
dependent on its ability to construct or otherwise participate in a plant using
the technology, or to enter into licensing or other arrangements for the use of
the technology. As at December 31, 2001 the Company determined that the cash
flows expected to be received through the construction of a plant, licensing or
other arrangements cannot be supported by sufficient objectively verifiable
information to satisfy the requirements of the applicable asset impairment
tests. Accordingly, the net book value of the Syngen technology and other
associated assets has been written down to $3.5 million representing the value
of the associated pilot plants, fuel cells, catalysts and associated patents.
The Company continues to actively pursue the initiatives related to Syngen
technology.
CPJ
The Company's efforts to further develop its CPJ technology have been conducted
primarily through its 50% owned joint venture, Carbon Resources Limited
(Carbon). Subsequent to December 31, 2001 the Company acquired the remaining 50%
interest in Carbon. The Company currently owns a test facility and is in
discussions with oil and gas producers to construct a commercial scale facility
utilizing the CPJ technology. The Company's ability to recover its investment in
the CPJ technology and Carbon are dependent on its ability to enter into
arrangements for the construction of commercial scale facility, the licensing of
the technology or other arrangements, each of which may require the raising of
additional capital and may take considerable time to complete.
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 and 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:
December 31, December 31,
2001 2000
-------------------- --------------------
Investment in SynGen Technology and associated assets
(See Note 3(a) below) $ 3,500,000 $ 38,028,244
Investment in CPJ Technology and associated assets
(See Note 3(b) below) 1,432,500 1,062,500
Investment in private U.S. corporation 1,000,000 1,000,000
-------------------- --------------------
$ 5,932,500 $ 40,090,744
==================== ====================
F-8
(a) SynGen: During 2000, the Company completed the acquisition of the shares of
the company holding the Syngen technology and associated assets for
consideration including the issue and release from escrow of 14,943,510 common
shares of Synergy to Laxarco Holdings Limited ("Laxarco"). The shares were
ascribed a value of $2.5448 per share on the basis of the five-day average
closing price of the Company's shares. The aggregate value of the shares issued,
$38,028,244, was allocated to the Syngen technology rights and associated
assets.
As at December 31, 2001 the Company determined that the cash flows expected to
be received through the construction of a plant, licensing or other arrangements
had not been achieved. Accordingly, the net book value of the Syngen technology
and other associated assets has been written down to $3,500,000 representing the
value of the associated pilot plants, fuel cells, catalysts and associated
patents. The Company continues to actively pursue the initiatives related to
Syngen technology as indicated above.
Upon the completion of the acquisition of the Syngen technology and associated
assets in 2000, the Company moved to complete the divesture of its interest in
Stone Canyon Resources Inc. to Stone Canyon Resources Limited, a related party.
On October 19, 2000 the Company agreed to transfer its interest in Stone Canyon
Resources Inc. and to issue a promissory note to Stone Canyon Resources Ltd.
with a principal amount of $1,000,000 bearing interest at the Bank of America's
prime lending rate less 1% due and payable three years from the date of issue.
The shares of Stone Canyon Resources Inc. were transferred to Stone Canyon
Resources Ltd. This series of transactions resulted in a loss on disposition of
$945,194 being recorded in 2000.
(b) CPJ: During the fiscal year ended December 31, 2000, the Company and
technology development partner Texas T Petroleum Ltd. renegotiated the royalty
agreement with the Inventor of the CPJ technology, Dr. Pierre Jorgensen which
resulted in the execution of an Amended and Restated Technology Transfer
Agreement on September 25, 2000 by the Company, Carbon, Jorgensen and Capital
Reserve Corporation, an affiliate of Texas T Petroleum Ltd. Under the terms of
this amended and restated agreement Dr. Jorgensen agreed to reduce his royalty
to five percent of the net proceeds realized from the licensing and/or
sublicensing of the CPJ technology and was issued 500,000 shares of common stock
of the Company and 500,000 shares of common stock of Capital Reserve
Corporation. The 500,000 shares of the Company issued to Dr. Jorgensen in
respect of the royalty reduction were recorded on the balance sheet as an
investment in the amount of $1,062,500 which amount represents a fair market
value for the issued shares of $2.125 per share, which was the closing price on
the Company's common shares traded on the Over the Counter Bulletin Board on the
date of the agreement.
During the year ended December 31, 2001, the Company recorded a liability of
$370,000 to the inventor, Dr. Jorgensen, based on the amended royalty agreement
signed in fiscal 2000, whereby, Dr. Jorgensen was to receive proceeds of not
less than $250,000 from the sale of 100,000 shares of Synergy Technologies
Corporation by February 28, 2001 and an additional $250,000 from the sale of a
further 100,000 shares by February 28, 2002. As of December 31, 2001, Dr.
Jorgensen had not sold any of the shares and therefore, based on the closing
stock price of $0.65 per share, the difference in net proceeds is $370,000.
(c) Joint Ventures: The company has a 50% interest in two corporate joint
ventures, each of which is accounted for by the equity method of accounting,
except that the financial statements of Carbon were consolidated up to November
1, 2000.
On October 20, 2000, Texas T Petroleum Ltd. fulfilled the terms of an agreement
and acquired a 50% interest in Carbon and thereby a 50% interest in the CPJ
technology. In accordance with the terms of the June 26, 1999 agreement, Synergy
transferred a 50% interest in Carbon to Texas T Petroleum Ltd. effective
November 1, 2000 and Texas T Petroleum Ltd. issued a total of 2,000,000 Units of
its common stock to Synergy. The 2,000,000 Units of Texas T Petroleum Ltd.
issued to Synergy represent a 9% interest in Texas T Petroleum Ltd. The proceeds
of $1,000,000 (2,000,000 Units of Texas T Petroleum Ltd.), received on the
disposition of the 50% interest in Carbon exceeded the carrying value of the
associated net liabilities by $1,747,402. Only the portion of the gain in excess
of the remaining carrying value in Carbon was included in income at the time of
the disposition. The amount of the deferred gain was subsequently reduced by the
amount of the Company's 50% interest in the post disposition losses of Carbon of
$51,662 during 2000 and $494,503 during 2001 (Synergy's portion - $25,831 and
$247,252 respectively).
F-9
Investment in Carbon as at December 31, 2001:
2001 2000
--------------------------------------------------------------------------------------------------------------------------
o Shares of Carbon
o 2,500 shares valued at Cyprus 1.00 per share $ 5,029 5,029
o Advances to Carbon 712,937 677,818
o 50% of net liabilities of Carbon (815,456) (568,204)
o Deferred gain in disposition of shares - (114,643)
---------------------------------------------------
$ (97,490) $ -
--------------------------------------------------------------------------------------------------------------------------
On February 7, 2001, Synergy and Drake Oil Limited entered into a joint venture
in Nigeria, Africa to carry on in Nigeria and other parts of Africa all such
acts and things incidental to the adaptability and application of the
proprietary process known as GlidArc, which converts associated natural gas into
synthetic gas, together with Fischer-Tropsch technology used for the conversion
of synthetic gas into liquid hydrocarbons, and also to utilize any other
gas-to-liquids conversion technology.
Investment in Drake Synergy Petroleum as at December 31, 2001:
2001
----------------------------------------------------------------------------------------
o Shares of Drake Synergy Petroleum Ltd.
o 2,500,000 shares valued at Naira 1.00 per share
$ 22,104
o Advances to Drake Synergy Petroleum 110,294
o 50% of net liabilities of Drake Synergy Petroleum (51,630)
--------------------
$ 80,768
----------------------------------------------------------------------------------------
NOTE 4 - RELATED PARTY TRANSACTIONS
(a) During the year ended December 31, 2001, the Company and its
subsidiaries were charged a total of $196,210 (2000: $146,919) in
consulting fees by Glidarc Technologies Inc. (a Texas corporation) for
process management services and technical personnel. Mr. Thomas Cooley,
an officer of Glidarc Technologies, is also the Company's Chief
Executive Officer and a member of the Board of Directors. Mr. Cooley
also serves on the Board of Directors of Syngen Technologies Limited, a
wholly owned subsidiary of the Company, and Carbon, the Company's 50%
joint venture. At December 31, 2001 an amount of $30,783 (2000:
$23,515) relating to services provided by Glidarc Technologies remained
due and payable to Glidarc.
(b) During the year ended December 31, 2001, the Company was charged
$138,674 (2000: $15,083) for consulting services and reimbursement of
actual expenses by Huntingtown Associates LLC (a Connecticut
corporation) of which Mr. Baumert is the sole proprietor. Mr. Baumert
is 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 December 31, 2001 an amount of $25,631 (2000:
$7,230) remained due and payable to Huntingtown Associates.
(c) Under terms of an agreement, dated October 19, 2000, between Synergy
and Stone Canyon Resources Ltd. (SCRL) where SCRL acquired a 100%
interest in Stone Canyon Resources Inc., Synergy issued a $1,000,000
promissory note to SCRL which remained due at December 31, 2000. During
the year ended December 31, 2001, the Company converted the promissory
note issued to Stone Canyon Resources Ltd. in the amount of $1,000,000
into units of Synergy stock and warrants (Note 9(a)). Stone Canyon
Resources Ltd. shared a common Director, Jacqueline Danforth until her
resignation on June 15, 2001.
(d) During the year ended December 31, 2001, various officers and directors
subscribed to the private placement offering as described in Note 9(g)
in the amount of $114,415 for 176,023 units.
F-10
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 at fiscal year end. This amount is refundable to the Company in Canadian
Dollars upon filing of a GST return. Total receivables of $38,560 include a GST
refund due to the Company of $5,873, as well as certain other receivables
totaling $32,687.
NOTE 6 - CURRENT LIABILITIES
(a) Notes payable include $2,250,000 resulting from the private placement
of convertible promissory notes commenced on May 25, 2000. The notes
carry a term of five (5) years, bearing interest at a rate of 10% per
annum, and are convertible into units of Synergy at $3.00 per Unit,
each promissory note unit consisting of one share of common stock, a
warrant to purchase one share of common stock at $4.00 per share and
another warrant to purchase an additional share of common stock at
$8.00 per share. During the first two years from the date of issuance
interest on the Notes compounds annually on the principal amount of the
loan and continues for each year thereafter. During the initial
two-year period the interest on the Notes accrues but is not payable
until the fifteenth day following each two-year period. After the
initial two year period, interest shall accrue on a quarterly basis and
be payable on the fifteenth day following the end of each calendar
quarter. Terms of the notes further state that any and all interest
accrued on any notes converted within two years from the date of
issuance will be forgiven.
(b) Convertible promissory note's interest in the amount of $368,182 has
been accrued to December 31, 2001 and included on the Consolidated
Balance Sheet as Accrued interest on notes.
NOTE 7 - LONG TERM LIABILITIES
(a) Notes payable include $135,223 representing cash advances from Stone
Canyon Resources Ltd. in respect of general operations. This amount has
no set terms of repayment.
NOTE 8 - INCOME TAXES
The Company did not have a current or deferred provision for income taxes for
the years ended December 31, 2001 and 2000. Deferred tax assets comprise of the
following at December 31, 2001 and 2000.
2001 2000
--------------------------------------------
Operating loss carry forwards $ 3,279,671 $ 2,098,521
Organizational costs - -
Less: Valuation allowance (3,279,671) (2,098,521)
--------------------------------------------
Net Deferred Tax Asset $ - $ -
============================================
The following is a reconciliation of the amount of benefit that would result
from applying the federal statutory rate to pretax loss with the provision for
income taxes for the years ended December 31:
2001 2000
-------------------------------------------
Tax benefit at statutory rate (34%) $ (13,060,247) $ (2,064,504)
Non-deductible expenses 69,641 1,154,306
State taxes, net of federal benefit (1,260,853) (88,343)
Offshore rate differential 13,070,309 -
Deferred tax asset valuation change 1,181,150 998,541
-------------------------------------------
Total Income Tax Benefit $ - $ -
===========================================
F-11
NOTE 9 - COMMON STOCK
(a) During the fiscal year ended December 31, 2000, the Company offered to
certain subscribers under a previous Rule 504 private placement the
option of canceling the warrant portion of the subscribed for 504 Units
and participating in an offering of New Units, with each New Unit
consisting of a share of common stock and a warrant to purchase an
additional share for $3.50, exercisable at any time two years from the
time of subscription. The price of these New Units is $1.00, which is
the same price as the share purchase warrants that have been canceled.
Prior to the expiration date, 1,264,000 units were converted by the way
of cash for $264,000 and the conversion of the outstanding promissory
note to Stone Canyon Resources Ltd. in the amount of $1,000,000 (Note
4(c)).
(b) In August 2000, the Company canceled a total of 1,642,858 shares
originally issued to certain founding shareholders of the Company due
to the fact that the Company believed adequate consideration had not
been given for such shares at the time of issue. As a result of claims
by the founding shareholders and associated negotiations, the Company
entered into agreements with certain founding shareholders effective
October 31, 2000 whereunder a total of 1,146,122 shares were
reinstated. Of a total of 1,146,122 shares reinstated, 179,016 shares
were reinstated to Stone Canyon Resources Inc., its employees and
related entities, to provide compensation for development and
exploration investments lost as a result of certain undisclosed lease
expiration dates.
During 2001, an additional 150,000 of the 263,910 Knight's and Duncan's
shares were re-issued with a value of $106,500 based on the average
trading value of the stock from the date of issuance. An additional
103,650 shares were issued in the year 2002. (See Note 11-Knights and
Duncans.)
(c) During 2001, 88,010 shares were issued to a certain investment firm for
financial advisory services. The shares are recorded in the
Consolidated Statement of Operations under the General and
administrative category at the average trading value of the stock prior
to the date of execution of the agreement. A value of $75,000 is
recorded in the Statement of Operations relating to these transactions.
(d) During 2001, 370,144 shares were issued pursuant to an S-8 registration
under the 2001 Employee Stock Option and Award Plan for fees related to
various employees and consultants for services rendered. The shares
were issued at an average trading value of $0.90.
(e) During 2001, 375,000 shares were issued to a certain investment firm
for investor relation and promotional support. The shares are recorded
in the Consolidated Statement of Operations under the General and
administrative category at the value of the stock on the date of
execution of the agreement. A value of $397,500 is recorded in the
Statement of Operations relating to these transactions.
(f) During 2001, 60,000 shares were issued to a third party for assignment
of patents related to the Syngen technology. The shares are recorded
under Technology with a value of $54,600 based on an average share
price of $0.91 per share.
(g) During 2001, Cash proceeds of $1,500,000 were received on the issue of
2,215,382 Units at $0.65 per Unit and 100,000 Units at $0.60 per Unit
pursuant to an offering commenced during the second quarter of 2001.
Each Unit consists of a share of common stock and a warrant to purchase
an additional share for $1.30, exercisable at any time two years from
the time of subscription.
(h) In December 1999, the Company commenced a private placement of its
common stock, each Unit consisting of one share of common stock and one
warrant exercisable for a period of one year from the date of issuance
at $1.00 per share. A total of 53,000 Units were sold to the end of
December 31, 1999. In January 2000, an additional 10,000 Units under
this offering were sold for total proceeds of $5,000, and the offering
was closed. As at December 31, 2001 all share purchase warrants, which
remained unexercised, had expired.
(i) On January 14, 2000, a Financing and Security Agreement was entered
into by and among Stone Canyon Resources Ltd., and the Company
(collectively the "Borrowers") and James E. Nielson and Wood River
Trust and Caribbean Overseas Investments Ltd. (collectively the
"Lenders"), in regard to a loan to Stone
F-12
Canyon Resources Ltd. in the amount of $350,000 for allocation towards
development of the 4 bbl per day SynGen demonstration plant. Stone
Canyon Resources Ltd. agreed to hold in trust an equal amount of funds
receivable by way of a refund from Natural Resources Canada as
collateral for a period of ninety days following the initial start up
of the SynGen demonstration plant, at which time the Lenders may choose
either (i) to convert the loaned amount into 700,000 Units of Synergy,
at which time an amount of $350,000 would be due to Synergy from the
Stone Canyon Resources Ltd. as consideration for the units; or (ii) a
release of the funds held in trust in an amount equal to the principal
balance and all accrued interest therein, with any additional trust
funds to be released to Stone Canyon Resources Ltd. Each Unit consisted
of one share of common stock of Synergy and one warrant to purchase an
additional share of common stock for $1.00 per share. During the year
2000, the lenders advised the Company of their election to convert the
loaned amounts to Synergy Units. As a result 700,000 shares of common
stock were issued during the year ended December 31, 2000, along with
warrants to purchase an additional 700,000 shares. As of December 31,
2001 the warrants remained outstanding.
(j) On May 25, 2000, the Company commenced a private placement of up to
$2,250,000 of its convertible promissory notes (the "Notes"). The Notes
are convertible into Promissory Note Units of the Company, with each
promissory note unit comprised of one share of common stock, a warrant
to purchase one share of common stock at $4.00 per share and another
warrant to purchase an additional share of common stock at $8.00 per
share, at the price of $3.00 per Promissory Note Unit. As of July 26,
2000 the private placement was fully subscribed and closed. The net
proceeds were allocated between the beneficial conversion feature (ie.
the warrant) and the promissory notes based on their relative fair
values. The fair value of the Promissory Note Units was determined
using the fair value of the underlying common stock and the warrants on
the commitment date. The fair value of the warrants was determined
using the Black-Scholes option pricing model with the following
assumptions: dividend yield of 0%, volatility of 169%, risk-free
interest rate of 6.38% and estimated life of two years. The beneficial
conversion feature was allocated all of the net proceeds resulting in a
discount on the Notes of $2,250,000. Since the Notes are convertible
upon issuance, the discount was immediately amortized and resulted in
amortization expense of $2,250,000. The Company used the services of
Belle Haven Investments L.P. as selling agent for the private
placement. Belle Haven received a cash commission of five percent (5%)
of every Note sold. Belle Haven also received a warrant to purchase up
to 52,666 Promissory Note Units at the exercise price of $3.00 per
Unit. The Company also issued warrants for 32,000 Promissory Note Units
to other individuals for finders' fees in completing this private
placement.
The following table summarizes the warrants issued, exercised and expired
during the two year period ended December 31, 2001:
Balance at December 31, 1999 1,863,000
Warrants issued during the period
At $1.00 per share 710,000
At $3.00 per Unit 84,666
Warrants exercised during the period, $1.00 per share (431,000)
Warrants cancelled during the period, $1.00 per share (1,264,000)
Warrants expired unexercised during the period, $1.00 per share (48,000)
--------------------
--------------------
Warrants to purchase common shares, balance at December 31, 2000 914,666
Warrants issued during the period
At $1.30 per share (Note 9(g)) 2,315,382
At $3.50 per share (Note 9(a)) 1,264,000
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
====================
STOCK OPTIONS
The Company has five stock option plans as follows:
o 1998 Directors and Employees Stock Option Plan (Plan "A");
F-13
o 1999 Directors and Employees Stock Option Plan (Plan "B");
o 1999 Directors and Advisory Board Members Stock Option Plan (Plan "C");
o 2000 Employees Stock Option and Stock Award Plan (Plan "D"); and,
o 2001 Employees Stock Option and Stock Award Plan (Plan "E")
The following table will summarize options and awards granted, and options and
awards available for grant for the year ended December 31, 2001:
Plan A Plan B Plan C Plan D Plan E
1998 1999 1999 2000 2001
------------- -------------- -------------- -------------- --------------
Total shares authorized under plan: 900,000 1,000,000 1,100,000 1,500,000 1,000,000
Options/awards granted:
Employees 250,000 340,000 - 131,573 30,907
Directors 400,000 425,000 400,000 36,315 106,674
Non-employees, consultants 250,000 200,000 - 1,316,175 232,563
Advisory Board members - - 500,000 - -
------------- -------------- -------------- -------------- --------------
Total options granted 900,000 965,000 900,000 1,484,063 370,144
Expired or cancelled (a) - 35,000 200,000 15,937 -
------------- -------------- -------------- -------------- --------------
Available for grant at December 31, 2001 - - - - 629,856
============= ============== ============== ============== ==============
(a) Employees:
(i) 35,000 employee stock options granted to various employees, under
the 1999 Directors and Employees Option Plan, expired or were
cancelled.
(ii) 200,000 stock options issued to Mr. Gradek were cancelled upon
settlement of his legal claim.
(iii) 15,000 options granted under the 2000 Employees Stock Option and
Stock award Plan expired and an additional 937 were cancelled.
(b) Non-employees and consultants:
(i) During 2001, 100,000 options were granted to the Company's new
legal counsel, Burg Simpson Eldredge Hersh Jardine PC, 50,000
options were granted to a member of the advisory board for
consulting services; 407,658 options were granted to Huntingtown
Associates LLC (a Connecticut corporation) of which Mr. Baumert is
the sole proprietor. Mr. Baumert is a member of the Company's
Board of Directors; 235,000 options were granted to a third party
investment firm for services to be provided over the next two
years. All of these grants were issued outside of all Company
stock option plans and have a strike price of $1.00.
(ii) The options granted to non-employees and advisory board members
are accounted for by the fair value method. The aggregate fair
value of options granted and shares issued during the year ended
December 31, 2001 was $120,000, of which $109,475 was charged to
earnings in the current year. The remaining $10,525 was deferred
until future periods. The fair value of the options was determined
by using the Black-Scholes option-pricing model with the following
assumptions: dividend yield of 0.0%, weighted average expected
volatility of 18.16%, weighted average risk-free interest rate of
4.25% and expected life of 2 years.
F-14
The following table summarizes the status of the Company's stock options
(excluding stock awards) and changes thereto during the year ended December 31,
2001:
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
------------------------- -----------------------
Balance at December 31, 1999 - -
Granted during year 3,035,000 1.10
Canceled during year (135,000) 2.03
Exercised during year (105,000) 1.00
------------------------- -----------------------
Outstanding at end of year, December 31, 2000 2,795,000 $ 1.05
------------------------- -----------------------
Granted during period 325,000 1.31
Cancelled during period (335,000) 1.10
Exercised during period (5,500) 1.00
------------------------- -----------------------
Outstanding at end of year, December 31, 2001 2,779,500 $ 1.08
========================= =======================
Options exercisable at end of year 2,505,998 1.06
Weighted average fair value of options $ 0.63
Weighted remaining contractual life 5.57 years
Range of exercise prices $ 1.00 - 1.56
The Company measures compensation to employees under stock-based options and
plans using the intrinsic value method prescribed in Accounting Principles Board
Opinion 25, Accounting for Stock Issued to Employees, and related
interpretations. Compensation for options to outside directors is measured using
the fair value method set forth under Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation. Had compensation
cost for the Company's options granted to employees been determined based on the
fair value at the grant dates consistent with the alternative method set forth
under Statement of Financial Accounting Standards No. 123, net loss and loss per
share would have increased to the pro forma amounts indicated below:
FOR THE FISCAL YEARS ENDED CUMULATIVE FROM (DATE OF
DECEMBER 31, INCEPTION) THROUGH
2001 2000 DECEMBER 31, 2001
-----------------------------------------------------------
NET LOSS:
AS REPORTED $ 38,412,491 $ 6,072,071 $ 47,442,947
PRO FORMA $ 38,616,741 $ 6,650,691 $ 48,225,817
BASIC AND DILUTED LOSS PER SHARE:
AS REPORTED $ 1.19 $ 1.31 $ 2.83
PRO FORMA $ 1.19 $ 1.34 $ 2.88
===========================================================
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. A portion of the lease payments are
invoiced monthly to Carbon Limited, a 50% owned subsidiary of the Company, for
use of laboratory and office space. Minimum future rental payments under this
lease with remaining terms in excess of one year are as follows:
2002 230,052
2003 230,052
2004 230,052
2005 153,368
F-15
There are no outstanding legal matters as of the date of filing of this
document. Refer to Note 11.
NOTE 11 - OTHER EVENTS
Mr. Barry Coffey
Effective January 1, 2002, the Board of Directors approved the appointment of
Mr. Barry Coffey to the position of Chief Executive Officer. Mr. Coffey replaces
acting CEO Thomas T. Cooley who has now returned to his primary focus as Chief
Technology Officer.
Mr. John Gradek
On January 2, 2002 an agreement was made between the Company and Mr. Gradek in
relation to the claim filed with the American Arbitration Association. As a
result, Mr. Gradek will receive cash consideration in the amount of $100,000
payable in two installments of $50,000 each payable on February 14, 2002 and May
1, 2002 as well as 150,000 shares of common stock of Synergy issued in
increments of 15,000 shares each on the first of each month effective February
1, 2002 until November, 2002. A value of $208,000 has been recorded under
Accounts Payable on the Consolidated Balance Sheet representing the fair value
of the stock at December 31, 2001 of $0.72 per share for $108,000 plus cash
consideration of $100,000.
Knights and Duncans
On January 11, 2002 an agreement between the Company and Richard and Anita
Knight and Tedd and Mary Duncan was settled. The Company agreed to issue a total
of 395,865 shares of Synergy common stock. Of the total shares issuable, 53,650
shares will be issued from treasury and the remaining shares will be contributed
from founding shareholders based on the original agreement with founding
shareholders. In addition to this, a cash payment of $11,451 was made for legal
fees.
Carbon Resources Ltd.
On December 20, 2001, Synergy entered into an agreement with Texas T Petroleum
Ltd., Capital Reserve Corporation, Pierre Jorgensen and Carbon Resources Limited
to purchase the remaining 50% of Carbon Resources Limited from Texas T Petroleum
Ltd. The agreement was subject to various regulatory approvals that were
received in the early part of 2002. As of December 31, 2001 the Company's
investment remained recorded under the currently applied Equity Accounting
Method. The details of the agreement are as follows:
1) Texas T will transfer to Synergy all of its right, title and
interest in and to the Carbon stock.
2) Synergy will issue to Texas T 400,000 shares common stock of
Synergy.
3) Synergy will also issue in the name of Texas T 1,900,000 common
shares of Synergy and deliver the stock to an escrow agent to be
held pursuant to an escrow agreement.
This transaction was finalized on March 4, 2002.
Dr. Pierre Jorgensen
On March 4, 2002, Synergy entered into a new agreement with Pierre Jorgensen
upon the successful closing of the purchase and sale of Carbon Resources Limited
with Texas T Petroleum Ltd. This agreement replaces the Amended and Restated
Technology Transfer Agreement dated September 25, 2000. The following is a list
of items related to this agreement:
1) Synergy will issue to Mr. Jorgensen 500,000 shares of Synergy
common stock to replace the 500,000 shares of Capital Reserve
shares that were returned to Texas T Petroleum Ltd.
2) Synergy will issue 1,491,334 shares of Synergy common stock to Mr.
Jorgensen with a value of $0.60 per share in order to fulfill the
payment obligation to the amount of $1,000,000, resulting from the
Amended and Restated Technology Transfer agreement dated September
25, 2000 of which $500,000 is recorded in the
F-16
financial statements as of December 31, 2001 and the additional $500,000 is
based on the revised agreement dated March 4, 2002 whereby Synergy assumes the
obligations of Texas T Petroleum Ltd. This amount of shares has been reduced
based on the amount of cash and shares remaining in Mr. Jorgensen's account from
his initial 200,000 shares issued to him in September 2000.
3) An additional $100,000 will be paid to Mr. Jorgensen as
recognition of late payment of his original $1,000,000 agreement.
Special Meeting
On February 18, 2002, Synergy held a special meeting of
shareholders to consider and act upon (i) an amendment to Synergy's
Articles of Incorporation to increase the number of shares it is
authorized to issue from 50,000,000 shares of common stock to
100,000,000 shares of common stock and (ii) adopt a stock option plan
titled the 2002 Stock Option Plan. The meeting was held at Synergy's
offices in Calgary, Alberta. There were 27,580,445 shares represented
at the meeting 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. Amendment of Articles of Incorporation 26,970,478 285,180 324,787
2. Adoption of 2002 Stock Option Plan 21,021,366 391,895 6,167,184
F-17
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.
F-18
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.
F-19
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.
F-20
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.
F-21
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
================= ===================
F-22
(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.
F-23
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
F-24
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
F-25
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
F-26
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
F-27
PART II - INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Sections 7-109-102 and 7-109-107 of the Colorado General Corporate Law
provide that a corporation may indemnify directors and officers, as well as
employees, fiduciaries and agents, against reasonable expenses actually incurred
by any such person in connection with any proceeding in which such person is
made a party by reason of such person being or having been a director, officer,
employee or agent of the Registrant. The Colorado General Corporate Law provides
that Section 7-109-107 is not exclusive of other rights to which those seeking
indemnification may be entitled under any bylaw, general or specific action of
the board of directors or shareholders or by contract. Article X of the
Registrant's Articles of Incorporation and Article V of the Registrant's Bylaws
provide for indemnification by the Registrant of its directors, officers,
employees, fiduciaries and agents to the fullest extent permitted by the
Colorado General Corporate Law.
The Registrant has not, as of this time, obtained any directors' and/or
officers' insurance providing for indemnification of the Registrant's directors,
officers and/or employees for certain liabilities, but it expects to do so in
the future.
The Registrant has not entered into any indemnification agreements with
any of its current or past directors or officers providing for indemnification
under certain circumstances for acts and omissions which may not be covered by
any directors' and officers' liability insurance.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the expenses (other than the underwriting
discounts and commissions) expected to be incurred in connection with the
issuance and distribution of the securities being registered.
SEC Registration.................................... $ 242.43
Legal Fees and Expenses*............................ $21,000
Accounting Fees*.................................... $ 5,000
Miscellaneous*...................................... $ 5,000
Printing* .......................................... $ 5,000
Total*.............................................. $36,242.43
------------------
* Estimated
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
The following sets forth certain information regarding the sale of
equity securities of our company during the last three years that were not
registered under the Securities Act of 1933 (the Securities Act).
2002
On August 30, 2002, the Company issued 63,650 shares of common stock to
Pendleton, Friedberg, Wilson Hennessey, P.C. in full satisfaction of an amount
due for legal services rendered by this firm in behalf of certain holders of
common stock with whom the Company settled a claim. The settlement provided for
the payment of the shareholders' legal services by the Company. The Company
valued the share at $.17 per share or an aggregate of $10,820.50. The Company
issued the shares pursuant to the exemption from the registration requirements
of the Securities Act of 1933 afforded by Section 4(2) thereof.
On August 30, 2002, the Company completed an offering of1,575,000
shares of common stock at a price of $0.20 per share pursuant to Rule 506 of
Regulation D promulgated under the Securities Act of 1933. The offering was sold
to three affiliated accredited investors (as such term is defined in Rule 501 of
Regulation D promulgated under the Securities Act). The Company realized
proceeds of $315,000 from the offering. 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.
On July 9, 2002, the Company completed an offering of 1,246,884 shares
of common stock at a price of $0.401 per share pursuant to Rule 506 of
Regulation D promulgated under the Securities Act of 1933. The offering was sold
to three affiliated accredited investors (as such term is defined in Rule 501 of
Regulation D promulgated under the Securities Act). The Company realized
proceeds of $500,000 from the offering. 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.
On June 20, 2002, the Company entered into a common stock purchase
agreement with Fusion Capital Fund II, LLC, as amended August 27, 2002, 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.
The Company 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 does not have the right nor the obligation to purchase
our stock in the event that purchase price is below $0.20. Consequently, the
amount and timing of proceeds to the Company under the Fusion agreement,
including whether the company 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.
On June 12, 2002, we issued 2,147,750 shares of common stock and
warrants to purchase up to 1,288,650 shares of common stock upon the exchange of
certain outstanding promissory notes in the aggregate principal amount of
$1,065,000 plus accrued interest of $223,650. The Company issued these
securities to 15 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).
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 $.72 per share until June 2, 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.
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
thee exemption from the registration of the Securities Act of 1933 afforded by
Section 4(2) thereof.
On March 8, 2002, the Company and its subsidiaries entered into an
agreement with Texas T Petroleum Ltd. and its subsidiaries, and Pierre
Jorgensen, the inventor of the CPJ technology, pursuant to
II-2
which the Company completed the acquisition of all of the outstanding shares of
capital stock of Carbon Resources, Inc., the owner of the CPJ technology. In
consideration for the shares of capital stock of Carbon Resources acquired by
the Company, it issued (i) 2,300,000 shares of common stock to Texas T,
1,900,000 of which are beiong held in escrow to be released to Texas T on the
earlier of December 20, 2004 or upon our sale of any interest in the subsidiary
in which the CPJ technology is held, except if such sale of the technology is to
Texas T, in which case, these shares shall be cancelled and (ii) 2,491,334
shares of common stock to Pierre Jorgensen. The Company issued the shares
pursuant to the exemption from the registration requirements of the Securities
Act of 1933, as amended afforded by Section 4(2) thereof.
In June 2002, the Company issued warrants to purchase 50,000 shares of
common stock to Park Capital Securities, LLC. The warrants may be exercised any
time until June 1, 2005 at an exercise price of $.90 per share. The warrants
were issued pursuant to the exemption from the registration requirements of the
Securities Act of 1933, as amended afforded by Section 4(2) thereof in
connection with an agreement by Park to place shares of the Company's common
stock in a private offering.
In May 2002, the Company issued options to purchase 200,000 shares of
common stock to Graham Batcheler for serving on the Board of Directors. The
options are exercisable at a price of $1.00 per share for a period of ten years.
Mr. Batcheler shall be entitled to exercise options to acquire 66,667 shares
during the first year after the date of the option agreement, options to acquire
66,667 shares during the second year after the date of the option agreement, and
options to acquire 66,666 shares during the third year after the date of the
option agreement. The options were issued pursuant to the exemption from the
registration requirements of the Securities Act of 1933, as amended afforded by
Section 4(2) thereof.
In February 2002, the Company issued 46,833 shares of common stock to
IONNUOU
In January 2002, the Company issued warrants to purchase 50,000 shares
of common stock to Pendragon Capital Resources, LLC. The warrants may be
exercised any time until January 10, 2006 at an exercise price of $.02 per
share. The warrants were issued pursuant to the exemption from the registration
requirements of the Securities Act of 1933, as amended afforded by Section 4(2)
thereof in partial consideration of a consulting agreement between the parties.
2001
On February 9, 2001, Stone Canyon Resources Ltd., a former affiliate of
Synergy, converted a promissory note in the principal amount of $1,000,000 into
1,000,000 shares of common stock at an exercise price of $1.00 per share. We
issued the shares pursuant to the exemption from registration afforded by
Section 4(2) of the Securities Act of 1933.
On February 16, 2001, Filgrave Investments, an unaffiliated third
party, exercised warrants to purchase 80,000 shares of common stock at an
exercise price of $1.00 per share. We issued the shares pursuant to the
exemption from registration afforded by Section 4(2) of the Securities Act of
1933.
On February 22 and April 2, 2001, Buccaneer Holdings Inc., an
unaffiliated third party, exercised warrants to purchase 65,000 shares and
39,000 shares of common stock, respectively, at an exercise price of $1.00 per
share. We issued the shares pursuant to the exemption from registration afforded
by Section 4(2) of the Securities Act of 1933.
During February, March and April 2001, the Company issued an aggregate
of 1,264,000 shares of common stock to five affiliates entities upon the
exercise of a like number of warrants pursuant to the exemption from
registration afforded by Section 4(2) of the Securities Act of 1933. The holders
of the warrants exercised the warrants at a price of $1.00 per share.
II-3
During February and March 2001, the Company issued an aggregate of
5,500 shares of common stock to one affiliate, upon the exercise of a like
number of options pursuant to the exemption from registration afforded by
Section 4(2) of the Securities Act of 1933. The options were exercised at a
price of $1.00 per share.
On March 13, 2001, Caribbean Overseas Investment Fund, an unaffiliated
third party, exercised warrants to purchase 80,000 shares of common stock at an
exercise price of $1.00 per share. The Company issued the shares pursuant to the
exemption from registration afforded by Section 4(2) of the Securities Act of
1933.
On March 16, 2001, we issued 375,000 shares of common stock at a price
of $1.06 per share to James Cromwell, an unaffiliated third party, in
consideration of services rendered to Synergy aggregating $397,500. The Company
issued the shares pursuant to the exemption from registration afforded by
Section 4(2) of the Securities Act of 1933.
On August 31, 2001, Synergy completed a private placement of
2,315,382 units of its securities at a price of $.65 per unit pursuant to Rule
506 of Regulation D promulgated under the Securities Act of 1933. Each unit
consisted of one share of common stock and one warrant exercisable at a price of
$1.30 per share at any time two years from the date of subscription. Synergy did
not pay any commissions, fees or other selling expenses in connection with this
offering. The Company sold the Units to accredited investors as such term is
defined in Rule 501 of Regulation D promulgated under the Securities Act to 11
persons who are residents of the United States and to 32 non United States
persons. The Company sold 176,023 of these units, aggregating $114,415, to
persons who are officers and/or directors of Synergy.
On July 27, 2001, we issued 53,763 shares of common stock to CIBC World
Markets Corp. at a price of $0.93 per share in consideration of investment
banking services rendered pursuant to the terms of an agreement between the
parties dated July 16, 2001. The Company issued the shares pursuant to the
exemption from registration afforded by Section 4(2) of the Securities Act of
1933.
On October 1, 2001, we issued 34,247 shares of common stock to CIBC
World Markets Corp. at a price of $0.73 per share in consideration of investment
banking services rendered pursuant to the terms of an agreement between the
parties dated July 16, 2001. The Company issued the shares pursuant to the
exemption from registration afforded by Section 4(2) of the Securities Act of
1933.
On November 18, 2001, we issued 60,000 shares of common stock, which we
valued at an aggregate price of $54,600 or $0.91 per share, to Etudes Chimiques
et Physiques in consideration of the assignment of a patent by that entity to
Synergy relating to electrical control of plasma arc. The Company issued the
shares pursuant to the exemption from registration afforded by Section 4(2) of
the Securities Act of 1933.
On December 31, 2001, we issued options to Huntingtown Associates Inc.
to purchase 407,658 shares of common stock at an exercise price of $1.00 per
share through December 31, 2006. The options were issued pursuant to the terms
of a management consulting agreement between Synergy and Huntingtown Associates.
We assigned a value to the options at $103,500, the value of the services
rendered giving rise to the issuance of the options. Duane Baumart, a director
of Synergy, is the sole shareholder of Huntingtown Associates. We issued the
options pursuant to the exemption from registration afforded by Section 4(2) of
the Securities Act of 1933.
2000
During March and April 2000, the Company issued an aggregate of 431,000
shares of common stock to five non-affiliated entities upon the exercise of a
like number of warrants pursuant to the exemption from registration afforded by
Section 4(2) of the Securities Act of 1933. The holders of the warrants
exercised the warrants at a price of $1.00 per share.
II-4
During March, May and December 2000, the Company issued an aggregate of
105,000 shares of common stock to five persons, two of whom are affiliates and
three of whom are non-affiliates of the Company, upon the exercise of a like
number of options pursuant to the exemption from registration afforded by
Section 4(2) of the Securities Act of 1933. The options were exercised at a
price of $1.00 per share.
On July 25, 2000, Synergy completed a private placement of convertible
promissory notes pursuant to Rule 506 of Regulation D promulgated under the
Securities Act of 1933. The notes were in $15,000 increments with a minimum
investment of $30,000. Synergy sold notes aggregating $2,250,000 in principal
amount. The notes are convertible into "units" at the rate of $3.00 per unit;
each unit being comprised of one share of common stock, a warrant to purchase
another share at $4.00 per share, and another warrant to purchase an additional
share of $8.00 per share. 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 28 persons. This offering was made without the use of any
underwriters. Synergy employed the services of a licensed broker-dealer, Belle
Haven Investments L.P., which received cash commissions in the amount of
$112,750, along with a warrant to purchase 52,333 of the above-described units
at $3.00 per unit.
On August 2, 2000, the Company issued 14,943,510 shares of common stock
to Laxarco Holdings, Ltd. pursuant to the provisions of an agreement whereby the
Company acquired all of Laxarco's right, title and interest in and to the CPJ
technology. The Company valued the shares at $2.54 per share for an aggregate
value of $38,028,244. Laxarco is an affiliate of the Company by virtue of the
fact that several of its shareholders are officers, directors and/or
shareholders of the Company. The Company issued the shares pursuant to the
exemption from registration afforded by Section 4(2) of the Securities Act of
1933.
From September 2000 through November 2000, Synergy issued 700,000
shares of its common stock in connection with the conversion of two promissory
notes in the aggregate principal amount of $350,000. These notes, which were
issued in January 2000, were convertible at the election of the holders at the
rate of $0.50 per share. Pursuant to the terms of the promissory notes, upon
their conversion Synergy also issued to the note holders warrants to purchase an
additional 700,000 shares at $1.00 per share. All interest accrued on the notes
was forgiven upon election to convert the notes. No commission fees or other
selling expenses were paid in connection with these securities. The Company
issued these securities pursuant to the exemption from registration afforded by
Section 4(2) of the Securities Act of 1933.
1999
During April 199, two non-affiliates of the Company exercised warrants to
purchase 40,000 shares of common stock at a price of $1.00 per share. We issued
the shares pursuant to the exemption from registration afforded by Section 4(2)
of the Securities Act of 1933.
In December 1999, Synergy sold 53,000 units to nine person in an
offering conducted pursuant to Regulation S. Each unit consisted of one share of
common stock and a warrant to purchase another share of common stock for $1.00
per share. Synergy received proceeds of $26,500 from this offering. In January
2000, Synergy sold an additional 10,000 units from this offering receiving
$5,000.00 in proceeds. No commission fees or other selling expenses were paid.
This offering was closed on January 31, 2000.
ITEM 27. EXHIBITS.
Exhibit No. Description Location Reference
----------- ----------- ------------------
3(i) Articles of Incorporation 2
3(i)(a) Amendment to Articles of Incorporation 5
3(ii) By-Laws 2
II-5
4 Specimen Stock Certificate 2
4.1 2002 Stock Option Plan. 5
5.1 Opinion of Ruffa & Ruffa, P.C. 6
10.1 Assignment of Technology Agreement by and between 1
Laxarco Holding Limited and Carbon Resources Limited
dated May 1, 1998
10.2 Share Exchange Agreement by and among Laxarco Holding
Limited, Carbon Resources Limited, the Registrant and
Stone Canyon Resources Ltd. dated May 5, 1998 1
10.3 Amended and Restated Escrow Agreement by and between the
Registrant and Laxarco Holding Limited dated June 25, 1999 1
10.4 Option Letter Agreement by and between Laxarco Holding Ltd.,
Texas T. Petroleum Inc. and the Registrant dated June 25, 1999 2
10.5 Amendment No. 1 to the Assignment of Technology Agreement
by and between Laxarco Holding Limited and Carbon Resources
Limited dated June 25, 1999 1
10.6 Amendment No. 1 to the Share Exchange Agreement by and
among Laxarco Holding Limited, Carbon Resources Limited,
the Registrant and Stone Canyon Resources Ltd. dated
June 25, 1999 1
10.7 Amendment No. 2 to the Share Exchange Agreement by and
among Laxarco Holding Limited, Carbon Resources Limited,
Synergy and Stone Canyon Resources Ltd. dated June 25, 1999 3
10.8 Amendment No. 3 to the Share Exchange Agreement by and
among Laxarco Holding Limited, Carbon Resources Limited,
the Registrant and Stone Canyon Resources Ltd. dated October
31, 2000 3
10.9 Share Exchange Agreement by and among Laxarco Holding
Limited, Carbon Resources Limited and the Registrant dated
June 25, 1999 1
10.10 Share Exchange Agreement by and between Texas T Petroleum
Inc. and the Registrant dated June 25, 1999 1
10.11 Amended and Restated Assignment of Technology Transfer
Agreement by and between Pierre Jorgensen, Synergy, Lanisco
Holdings Limited, a subsidiary of the Registrant, and Capital
Reserve Corporation, dated September 25, 2000 2
10.12 Agreement by and between Pierre Jorgensen, Synergy, Lanisco
Holdings Limited, a subsidiary of the Registrant, and Capital
Reserve Corporation, dated September 25, 2000 relating to the
acquisition of shares of Carbon Resources Limited by Synergy 5
II-6
10.13 Employment Agreement between Synergy and Barry Coffey
dated as of January 1, 2002. 5
10.14 Lease between Synergy and T..W. Manufacturing, dated
January 1, 2001. 5
10.15 Agreement dated December 20, 2002 among Synergy, Texas
T. Petroleum Ltd., Capital Resources Corporation, Pierre
Jorgensen, Carbon Resources, Limited and Lanisco Holdings,
Limited. 6
10.16 Common Stock Purchase Agreement dated June 22, 2002
between Synergy and Fusion Capital Fund II, LLC. 6
10.17 Registration Rights Agreement dated June 22, 2002 between
Synergy and Fusion Capital Fund II, LLC. 6
10.18 Consulting Agreement dated as of June 2, 2002 between Synergy
and William R. Engles, Jr. 6
10.19 Amendment dated September 3, 2002 between Synergy and Fusion
Capital Fund II, LLC 6
16 Letter on change in certifying accountant 4
21 List of Subsidiaries of the Registrant 3.
23.1 Consent of KPMG LLP 6
23.2 Consent of Ruffa & Ruffa, P.C. (included in Exhibit 5.1). 6
Legend
1. Incorporated by reference to such exhibit filed with Synergy's
Registration Statement on Form 10-SB filed with the Commission on July
15, 1999.
2. Incorporated by reference to such exhibit filed with Synergy's
Registration Statement on Form SB-2 filed with the Commission on
October 13, 2000.
3. Incorporated by reference to such exhibit filed with Synergy's Annual
Report on Form 10-KSB for the fiscal year ended December 31, 2000 filed
with the Commission April 1, 2001.
4. Incorporated by reference to such exhibit filed with Synergy's Current
Report on Form 8-K/A Filed on December 11, 2000.
5. Incorporated by reference to such exhibit filed with Synergy's Annual
Report on Form 10-KSB for the fiscal year ended December 31, 2001 filed
with the Commission April 1, 2002.
6. Filed herewith.
II-7
ITEM 28. UNDERTAKINGS.
The undersigned hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events which,
individually or in the aggregate, represent a fundamental change
in the information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume
of securities offered (if the total dollar value of securities
offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate,
the changes in volume and price represent no more than a 20%
change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective
registration statement; and
(iii) To include any additional or changed material information on the
plan of distribution.
(2) That, for the purpose of determining any liability under the Securities Act
of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) To file a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to the registrant's directors, officers, and controlling
persons pursuant to the foregoing provisions, or otherwise, the registrant has
been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a directors, officers or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer, or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
II-8
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, as amended,
the registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements of filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned in the City of New York,
New York, on September 3, 2002.
SYNERGY TECHNOLOGIES CORPORATION
By: /s/ Barry Coffey
-------------------------------------
Barry Coffey, Chief Executive Officer
POWER OF ATTORNEY
We, the undersigned directors and officers of Synergy Technologies
Corporation (the "Company"), do hereby severally constitute and appoint Barry
Coffey as our true and lawful attorney and agent, to do any and all things and
acts in our names in the capacities indicated below and to execute any and all
instruments for us and in our names in the capacities indicated below which said
Barry Coffey may deem necessary or advisable to enable the Company to comply
with the Securities Act of 1933, as amended, and any rules, regulations and
requirements of the Securities and Exchange Commission, in connection with the
Registration Statement on Form SB-2 relating to the offering of the Company's
Common Stock, including specifically, but not limited to, power and authority to
sign, for any of us in our names in the capacities indicated below, the
Registration Statement and any and all amendments (including post-effective
amendments) thereto; and we hereby ratify and confirm all that said Barry Coffey
shall do or cause to be done by virtue hereof. Pursuant to the requirements of
the Securities Act of 1933, this Registration Statement has been signed below by
the following persons in the capacities indicated as of the date indicated.
Name Title Date
---- ----- ----
/s/ Barry Coffey Chief Executive Officer and Director September 3, 2002
-----------------------
Barry J. Coffey
/s/ Thomas E. Cooley Chief Technical Officer and Director September 3, 2002
-----------------------
Thomas E. Cooley
/s/ Cameron Haworth Director September 3, 2002
-----------------------
Cameron Haworth
/s/ James Shone Director September 3, 2002
-----------------------
James Shone
/s/ James E. Nielson Director September 3, 2002
-----------------------
James E. Nielson
/s/ Duane F. Baumert Director September 3, 2002
-----------------------
'Duane F. Baumert
/s/ Graham H. Batcheler Director September 3, 2002
-----------------------
Graham H. Batcheler