Item 1. Business
Overview
Syntroleum Corporation (the Company or
Syntroleum) began business as GTG, Inc. on November 15, 1984. On August 7, 1998 Syntroleum merged into SLH Company and became the surviving entity. The Company was later re-incorporated in Delaware on June 17, 1999. The
focus of the Company and subsidiaries is the commercialization of our Technologies to produce synthetic liquid hydrocarbons.
The Technologies consist of Fischer-Tropsch (FT) technology to convert syngas to FT wax, and hydroprocessing technology. Our hydro-processing technology can be utilized either for conversion
of FT wax (Synfining
®
) or fats oils and greases
(Bio-Synfining
®
) into naphtha, diesel and liquefied petroleum gases (LPG). We are currently commercializing our
FT coal-to-liquids or (CTL) technology via China Petroleum and Chemical Corporation (Sinopec) and our Bio-Synfining
®
technology through the Dynamic Fuels, LLC joint venture.
The Companys revenue is derived from significant customers. Two customers, Dynamic Fuels and Sasol Technology (Pty) Ltd. (Sasol), made up 97% of revenue in 2012 and 99% of revenue in
2011, while three customers made up 93% of revenue in 2010.
Bio-Synfining
®
ProjectsDynamic Fuels
On June 22, 2007, we entered into definitive agreements with Tyson Foods, Inc. (Tyson) to form a
joint venture, Dynamic Fuels, LLC, a Delaware limited liability company (Dynamic Fuels), to construct and operate facilities in the United States using our Bio-Synfining
®
technology. The first facility began commercial operations in November 2010. The facility produces renewable diesel fuel that meets ASTM D975 standards, the same
standards as conventional petroleum diesel. Renewable diesel fuel can be used in existing infrastructure and engines and be blended with petroleum diesel. We can also produce ASTM D7566, commercial jet fuel, as well as HRJ-5, military jet fuel.
Dynamic Fuels has sold ASTM D7566 and HRJ-5 for commercial and military aviation. The plant also produces naphtha and propane.
In 2012, Dynamic Fuels delivered 450,000 gallons of renewable fuels to the U.S. Navy which included 100,000 gallons of jet fuel, HRJ-5
and 350,000 gallons of marine distillate fuel. The fuel was used in demonstration testing in the Navys efforts to develop a Green Strike Group composed of vessels and ships powered by biofuel. This represents the single largest
purchase of biofuel in government history, as reported by the Navy and USDA.
The renewable fuels industry benefits from
economic incentives to produce biomass based diesel. The American Jobs Creation Act of 2004, the Energy Policy Act of 2005, or EPAct, and the Energy Independence and Security Act of 2007, or EISA, are the primary pieces of federal legislation that
have established the groundwork for renewable fuels market development.
In August 2005, the EPAct established a Renewable
Fuel Standard program, or RFS, requiring a specific amount of renewable fuel to be used in motor vehicle fuel nationwide. This requirement has been delegated to refiners and importers in the 48 contiguous states. Beginning in 2008, EISA amended the
EPAct to increase the number of gallons of renewable fuel required to be used in motor vehicle fuel nationwide.
On
July 1, 2010, an updated Renewable Fuel Standard program, or RFS2, was implemented. RFS2 requires certain volume minimums for the amount of biomass-based diesel that must be utilized each year. Under the program, obligated parties, including
petroleum refiners and fuel importers, must show compliance with these standards. Currently, Dynamic Fuels renewable diesel meets two categories of an obligated partys required volume obligationbiomass-based diesel and advanced
biofuel. Consistent with the RFS program, the Environmental Protection Agency, or EPA, announced it would require the domestic use of 800 million gallons of renewable or biodiesel in 2011, one billion gallons in 2012 and 1.28 billion in 2013.
Our renewable diesel fuel generates 1.7 D4 RINs per gallon. At December 31, 2012, D4 RIN prices were $0.64 per
gallon. As of January 31, 2013, D4 RIN prices were $0.52 per gallon. During 2012, Dynamic Fuels received EPA Part 79, which allows its naphtha to be blended up to 10% in gasoline motor vehicle fuel and also registered the naphtha it produces
with the EPA for D Code 5 RINs. D5 RINS were $0.55 at December 31, 2012 and were $0.49 on January 31, 2013. Dynamic Fuels can generate D Code 5 RINS for its naphtha if it is blended with gasoline and if the feedstock utilized does not
include inedible corn oil produced by corn ethanol plants. While inedible corn oil is an approved feedstock for renewable diesel, it is not for renewable naphtha.
EISA and EPAct designated a tax credit of $1.00 per gallon for the production of renewable diesel and $0.50 per gallon alternative fuels mixture credit (AFMC) for the production of qualified alternative
fuels, of which Dynamic Fuels renewable naphtha qualifies. These tax credits are generated upon mixture with allowed motor vehicle fuels such as petroleum diesel and gasoline. Prior to receiving EPA Part 79 registration on August 16,
2012, Dynamic Fuels renewable naphtha was not eligible to generate the $.50 per gallon AFMC. These tax credits are typically renewed at the end of each year in what is known as tax extenders bills. These tax credits expired on
December 31, 2009 and were not renewed until November 2010, retroactively for 2010 and extended through December 31, 2011. These tax credits again expired unrenewed on December 31, 2011. On January 3, 2013, President Obama signed
into law the American Taxpayer Relief Act of 2012, which reinstated the credits for 2013 and retroactively reinstated the credits for 2012. Dynamic Fuels or its owners will receive a combined total of approximately $23 million for 2012 production
from the $1 tax credit and will receive the alternative fuels mixture credit of $0.50 per gallon for a portion of the renewable naphtha also produced during 2012.
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Dynamic Fuels began commercial operations in November of 2010. As of September 30,
2012, the plant had sold 63.0 million gallons of renewable products such as diesel, naphtha, and LPG. Nameplate capacity for the plant is 75.0 million gallons per year. During its fiscal year ended September 30, 2012, the plant
produced renewable products at an average rate of 49% of design capacity compared to 35% during the fiscal year ended September 30, 2011.
The plant has experienced mechanical issues, hydrogen supply disruptions and feedstock adulterants, which have contributed to plant down time and higher than expected operational costs. Upgrades to the
feedstock pre-treatment area were installed during 2012. The quality of the feedstock has not impacted the quality of the finished product which has in all cases met or exceeded ASTM standards.
After completion of the maintenance turnaround on December 10, 2012 the plant was placed in standby mode as Dynamic Fuels monitored
economic conditions to determine the appropriate time to resume production. As of the date these financial statements were issued, the plant continues to be in standby mode. While economic conditions have improved in 2013, Syntroleum and Tyson have
not agreed on the economic conditions required for plant start-up. As start-up costs may require each of us to make additional loans to Dynamic Fuels, receipt of the tax credits, sometime during 2013, may play a role in start-up timing.
Business Strategy
Our
objective is to be the leading independent provider of Syntroleum technologies for the production of synthetic fuels. Our business strategy to achieve this objective involves the following key elements:
Focus on Commercialization.
The Dynamic Fuels facility is the first of what we envision to be several production facilities
utilizing our technologies in the business model.
Transfer our Technologies.
We executed a transfer of our technology
to Sinopec in 2009. Sinopec has reconstructed our Catoosa Demonstration Facility (CDF) in China for further research and development. The demonstration plant is operating successfully in China.
Provide Engineering Services
. We continue to provide support to our licensees and prospective licensees through engineering
services. Engineering services consist of design engineering, project management, application engineering and site support.
Syntroleum
Technologies
Our Technologies produces synthetic liquid hydrocarbons that are compatible with refined products made from
crude oil. These products include:
Middle Distillates
for use in reciprocating and jet/turbine engines; and
Specialty Products
, such as synthetic lubricants, process oils, high melting point waxes, liquid normal paraffins, and
chemical feedstocks.
We believe the key advantages of the Syntroleum
®
Process over other GTL technologies are our (1) proprietary attrition-resistant slurry catalyst, (2) FT
catalyst regeneration technology, and (3) capability to operate with both dilute and non-dilute syngas.
Based on our
research, we believe our single-train design 17,000 barrels per day (b/d) facility can be economically developed subject to market conditions.
The Carbon to Liquids Process
The carbon to liquids process involves two
catalytic reactions: (1) conversion of carbon containing material into synthesis gas and (2) conversion of the synthesis gas into hydrocarbons over our proprietary Fischer-Tropsch catalyst.
Syngas may be generated from various carbon-bearing feedstocks by means of several commercial processes. Oxygen based natural gas, coal
and biomass gasifiers are commercially available from licensors.
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The
Synfining
®
Process
We have also developed
hydroprocessing for conversion of the Fischer-Tropsch wax into diesel fuel, jet fuel, lubricants, naphtha and other materials. This technology has been used to produce fuels for testing by the Department of Energy (DOE), the Department
of Defense (DOD), U.S. Department of Transportation (DOT) and manufacturers globally.
The
Bio-Synfining
®
Process
We have also adapted our Synfining
®
Process to accommodate fats, oils, greases, fatty acids and similar feedstocks in the production of renewable fuels. These feedstocks are similar in chemical
structure to the products produced from the FT process. This refining technology was used to produce jet fuels for testing by the DOD in 2008 and is currently used in our Dynamic Fuels facility in Geismar, Louisiana for the production of diesel,
naphtha, and LPG. Commercial certification of ASTM D7566 was obtained in 2011, resulting in our jet fuel being used as a 50/50 blend in commercial flights with KLM and Alaska Airlines. Phase change material can also be produced and is currently
being tested for commercial application, through funding by the DOE.
Syntroleum Advantage
We believe the Syntroleum
®
Technologies will be attractive for companies reviewing methods of commercializing natural gas, coal and biomass reserves by converting them into synthetic liquid
hydrocarbons.
Bio-Feedstocks
Renewable diesel can be used as a finished product and does not require blending however it can also be blended with petroleum-based fuels in any ratio. Our products can be transported through existing
distribution infrastructures and our renewable middle distillates are fungible products meeting ASTM standards which can be used as a drop in replacement fuel for existing diesel and jet engines.
Vegetable Oils. Soybean oil is the most commonly used feedstock in the U.S., and the most commonly used feedstock in
traditional biodiesel refining processes. Approximately 18.6 billion pounds of soybean oil were produced in the U.S. during the 2011 crop year according to the U.S. Department of Agriculture. Corn oil extraction technology has been
installed on an estimated 40% of all ethanol plants as of March 31, 2012 and is estimated to increase to 70% to 80% of all ethanol plants by the end of 2012. According to The Jacobsen, as of December 31, 2012 inedible corn oil production
was nearly 5 million pounds per day, or nearly 1.8 billion pounds per year, which equates to approximately 230 million gallons.
Animal Fats. Approximately 3.3 billion pounds of inedible tallow and 1.4 billion pounds of poultry fat were produced in the U.S. during calendar year 2011 according to the National Renderers
Association.
Recycled Greases. Approximately 2.7 billion pounds of grease were produced in the U.S.
during calendar year 2011, of which 1.3 billion pounds was yellow grease according to the National Renderers Association. Our Bio-Synfining
®
process can process high FFA feedstocks allowing us to utilize lower valued feedstock to create a high quality product.
During 2012, approximately 128 million pounds of yellow grease and 49 million pounds of corn oil were processed by the Dynamic
Fuels plant in Geismar, Louisiana.
Fischer-Tropsch Feedstocks
Natural Gas. According to the BP Statistical Review of World Energy, 2012, proved global natural gas reserves at the end of 2011 were 7,357 trillion cubic feet (Tcf). In the United States,
according to BP, proved gas reserves were 300.05 Tcf at the end of 2011 compared to 272.5 Tcf and 244.7 Tcf at the end of 2010 and 2009 respectively. Shale gas, has impacted the outlook for natural gas supply in the United States. The Potential Gas
Committee, a nonprofit organization that studies natural gas, issued its biennial assessment of the United States gas resources in April 2011. This study indicates that the United States possesses a resource base of 1,898 Tcf of natural gas.
This is the highest resource evaluation in the Committees 46-year history. Most of the increase arose from reevaluation of shale-gas plays in the Gulf Coast, Mid-Continent and Rocky Mountain areas. Of this amount, shale gas is 687 Tcf. This
resource base, when combined with proved U.S. natural gas reserves, indicates potential future gas reserves of over 2,170 Tcf.
Market
Demand
EPAct also provided for the United States Environmental Protection Agency (EPA) to establish the Renewable Fuels
Standard (RFS2) to set the volumes of renewable fuels that must be sold in the United States. Under the program, obligated parties, including petroleum refiners and fuel importers, must show compliance with these standards. Currently, Dynamic Fuels
renewable diesel meets two categories of an obligated partys required volume obligationbiomass-based diesel and advanced biofuel. Consistent with the RFS program, the Environmental Protection Agency, or EPA, announced it would require
the domestic use of 800 million gallons of renewable or biodiesel in 2011, one billion gallons in 2012 and 1.28 billion in 2013.
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Many other factors influence the demand for our products, including those discussed at
Item 1A. Risks Relating to Our Business, such as prices and availability of alternative products.
Intellectual Property
The success of our intellectual property portfolio depends on our ability to foster, invent, and
develop new ideas, in addition to our ability to effectively obtain, protect, and enforce our intellectual property rights against third parties. We regard the protection of our proprietary technologies as critical to our future success, and
therefore rely on a combination of patent, copyright, trademark, trade secret and other laws and contractual restrictions to protect our proprietary rights. We protect the Syntroleum
®
Process and the Synfining
®
Process primarily through patents and trade secrets. It is our policy to seek protection for our proprietary products and processes by filing patent applications, when appropriate, in the United States and selected foreign countries and to encourage
or further the efforts of others who have licensed technology to us to protect and perfect any intellectual property rights. Our ability to protect and enforce these valuable intellectual property rights involves complex legal, scientific and
factual questions and uncertainties.
Syntroleum has a policy to honor the valid, enforceable intellectual property rights of
others. However, we acknowledge that the commercialization of our technologies may give rise to claims that our technologies infringe upon the patents or other proprietary rights of others. In that regard, Syntroleum is involved in three suits with
Neste Oil, wherein the parties have asserted their respective patents against the other.
In May 2012, Neste Oil Oyj sued
Syntroleum for alleged infringement of Nestes U.S. Patent No. 8,187,344. On January 31, 2013, the United States District Court for the District of Delaware granted Syntroleums motion to stay Nestes lawsuit pending
reexamination of the 344 patent by the U.S. Patent & Trademark Office (USPTO). Previously, the USPTO had granted Syntroleums
inter partes
reexamination request and issued a September 14, 2012 Office Action initially
rejecting all claims of the 344 patent as obvious in view of the prior art. The 344 patent is related to and shares the same inventors as a prior Neste patent (U.S. Patent No. 7,279,018), and both are directed to a fuel composition
for diesel engines. The USPTOs recent Order is consistent with a prior finding on March 22, 2012 by the USPTOs Board of Patent Appeals and Interferences affirming the Examiners rejection of the 018 patents claims.
Neste declined to appeal that ruling and on July 31, 2012, the USPTO issued a Reexamination Certificate canceling all claims of the 018 patent. The reexamination proceedings involving the 344 patent remain pending.
Syntroleum continues to defend a second suit filed by Neste Oil Oyj on December 20, 2012 in the District of Delaware alleging patent
infringement of Nestes U.S. Patent No. 8,212,094. Syntroleums response to Nestes complaint was filed on February 25, 2013. The 094 patent covers similar subject matter and shares a common inventor with Nestes
018 and 344 patents. Syntroleum has not infringed any of Nestes alleged patent rights and Syntroleum will continue to vigorously defend against Nestes allegations. The 094 patent, like the 018 and 344
patents, adds nothing new to the field of diesel fuels or methods for making same.
On February 7, 2013, Syntroleum filed
suit against Neste Oil Singapore Pte Ltd with the High Court of Singapore asserting its Singapore Patent No. 172,045 entitled Even Carbon Number Paraffin Composition And Method of Manufacturing Same. In the court filing, Syntroleum
alleges that Nestes operation at its renewable diesel refinery in Singapore involves the processing of a bio-renewable feedstock to produce a hydrocarbon composition having at least 75 wt % even carbon number paraffins which
Syntroleum alleges is claimed at the very least, in claim 22 of the Patent. Syntroleums 045 patent issued on November 15, 2012, and expires on December 10, 2028.
Syntroleum currently owns, or has licensed rights to 65 active patents, and are actively prosecuting 21 patent applications, in the
United States and various foreign countries that relate to one or more embodiments of Syntroleum technology. Three patents were granted to Syntroleum during the past year. Most of our patents have been issued since the late 1990s and will not
expire until 2017. Patent rights are granted for a term of 20 years in the United States and for similar terms in foreign jurisdictions, subject to paying required fees to maintain the patent holders rights. The cost of maintaining our patents in
the United States and foreign jurisdictions is included in our general and administrative expenses.
In any potential
intellectual property dispute involving us, our licensees could also become the target of litigation. Generally, our license agreements require us to indemnify the licensees against specified losses, including the losses resulting from patent and
trade secret infringement claims, subject to certain limitations. Our indemnification and support obligations could result in substantial expenses and liabilities to us which could have a material adverse effect on our business, operating results
and financial condition. See Item 1A. Risk Factors-Risks Relating to Our Technology.
6
Employees
As of March 1, 2013, we had 19 full-time employees, none of which is represented by a labor union. We have experienced no work stoppages. We believe our relationship with our employees is good.
Government Regulation
We are subject to specific government legislation under EPAct and RFS2, as previously discussed.
In addition, we are subject to extensive international and domestic 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, as well as to employee health and safety.
Our operations in the United States are also subject to the federal Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), also known as the Superfund law,
and similar state laws, which can impose joint and several liability for site cleanup, regardless of fault, upon statutory classes of persons with respect to the release into the environment of substances designated under CERCLA as hazardous
substances (Hazardous Substances). These classes of persons, or so-called potentially responsible parties (PRPs), include the current and certain past owners and operators of a facility where there has been a release or
threat of release of a Hazardous Substance and persons who disposed of or arranged for the disposal of Hazardous Substances found at a site. CERCLA also authorizes the EPA and, in some cases, third parties to take actions in response to threats to
the public health or the environment and to seek to recover from the PRPs the costs of such action. In the course of our operations, we have generated and will generate wastes that may fall within CERCLAs definition of Hazardous Substance. We
may also be the owner or operator of sites on which Hazardous Substances have been released. To our knowledge, neither we nor our predecessors have been designated as a PRP by the EPA under CERCLA. We also do not know of any prior owners or
operators of our properties that are named as PRPs related to their ownership or operation of such properties.
International
and domestic environmental laws and regulations often require grant of a permit or other authorization before activities may be conducted, and compliance with laws, regulations and any permit requirements can increase the costs of designing,
installing and operating a plant designed with our Technology. Emissions from a plant using our technology may require the installation of abatement equipment to meet permit requirements.
Although we do not believe that compliance with environmental and health and safety laws in connection with our current operations will
have a material adverse effect on us, we cannot predict with certainty the future costs of complying with environmental laws and regulations and containing or remediating contamination. In the future we could incur material liabilities or costs
related to environmental matters, and these environmental liabilities or costs (including fines or other sanctions) could have a material adverse effect on our business, operating results and financial condition.
Operating Hazards
Operations at a facility using our Technology will involve a risk of incidents involving personal injury and property damage. An incident
could affect our operating costs, insurability and relationships with customers, employees and regulators.
Available Information
Our website address is www.syntroleum.com. We make our website content available for information purposes only. It should
not be relied upon for investment purposes, nor is it incorporated by reference in this Annual Report on Form 10-K. We make available on this website under Investor Relations-Financial Information Filings, free of charge, our
annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports as soon as reasonably practicable after we electronically file those materials with, or furnish those materials to, the SEC. The
SEC also maintains a website at www.sec.gov that contains reports, proxy statements and other information regarding SEC registrants, including us. Additionally, the public may read and copy any materials filed with the SEC at the SECs Public
Reference Room at 100 F Street, NE, Washington, D.C. 20549.
Item 1A. Risk Factors
You should carefully consider the risks described below. The risks and uncertainties described below encompass many of the risks that
could affect our company. Not all risks and uncertainties are described below. Risks that we do not know about could arrive and issues we now view as minor could become more important. If any of the following risks actually occur, our business,
financial condition or results of operations could be materially and adversely affected. In that case, the trading price of our common stock could decline and you may lose all or part of your investment in us.
7
Risks Relating to Our Technology
We might not successfully commercialize our technology, and commercial-scale plants based on the Syntroleum
®
Process may never be successfully constructed or operated by ourselves or our licensees.
We do not have significant experience managing the financing, design, construction or operation of commercial-scale
plants, and we may not be successful in doing so. Our Dynamic Fuels plant is the first commercial scale plant operating to date and it is based on our Bio-Synfining
®
Technology. The plant has been operating since November 2010, but has not yet achieved profitability or operated at full design capacity on a continuous basis for an
extended length of time.
No commercial-scale plant based on the Synfining
®
Processes has been operational to date. A commercial-scale plant based on the Synfining
®
Processes may never be successfully built either by us or by our licensees. Success depends on our licensees
ability to economically design, construct and operate commercial-scale plants based on the Syntroleum
®
Technologies which depends on a variety of factors, many of which are outside our control.
Our licensees will determine
whether we issue any plant site licenses to them. On June 27, 2012 Dynamic Fuels LLC exercised its right to obtain a site license. In addition, our license agreements may be terminated by the licensee, with or without cause and without penalty,
upon 90 days notice to us. If we do not receive payments under our license agreements, we may not have sufficient resources to implement our business strategy. Our licensees are not restricted from pursuing alternative technologies on their
own or in collaboration with others, including our competitors, with the exception of those restrictions agreed to by Tyson in the limited liability company agreement relating to Dynamic Fuels.
Commercial-scale plants based on the
Syntroleum
®
Technologies might not produce results necessary for success, including results demonstrated on a laboratory, pilot plant and demonstration basis.
A variety of results necessary for successful operation of the Syntroleum
®
Technologies could fail to occur at a commercial plant, including reactions demonstrated in research and
development. Results that could cause commercial-scale plants based on our Technologies to be unsuccessful include:
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feedstocks that are not on specification and or have adulterants requiring additional pretreatment, resulting in plant modifications and/or supply modifications
increasing capital and operating expense and causing schedule delays;
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feedstock supply interruptions;
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failure of third party suppliers, contractors or technologies to deliver feedstocks, goods and/or services on specification;
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catalyst activity (of all types) that are less than design basis which would require an increase in the amount of catalyst, and/or number of reactors required to
produce at the design rate resulting in increased capital and operating costs;
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shorter than anticipated catalyst life, which would require more frequent catalyst regeneration, catalyst replacements, or both, thereby increasing operating costs;
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excessive production of gaseous or light hydrocarbons compared to design basis, which would lower the amount of desirable hydrocarbons produced, and reduce revenues and
margins;
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inability of third-party gasification and synthesis gas clean-up technology integrated into the Syntroleum
®
Process to produce on specification synthesis gas adequate for economic operation of a FT plant; and
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longer project cycles and/or higher than anticipated capital and operating costs including feedstock costs.
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In addition, we have encountered, and future plants could experience, mechanical difficulties related or unrelated
to elements of the Syntroleum
®
Technologies.
Many of our competitors have significantly more resources than we do, and technologies developed by competitors could become more
commercially successful than ours or render our technologies obsolete.
Development and commercialization of FT and
renewable fuels technologies is highly competitive, and other technologies could become more commercially successful than ours. Our Technologies are based on chemistry that has been used by several companies in synthetic fuel projects over the past
60 years. Our competitors include major integrated oil companies as well as independent technology providers that have developed or are developing competing technologies. These companies typically have significantly more resources than we do.
As our competitors continue to develop competing technologies, one or more of our current technologies could become obsolete.
Our ability to create and maintain technological advantages is critical to our future success. As new technologies develop, we may be placed at a competitive disadvantage forcing us to implement new technologies at a substantial cost. We may not be
able to successfully develop or expend the financial resources necessary to acquire or develop new technology.
8
Our ability to protect our intellectual property rights involves complexities and
uncertainties and commercialization of our Technologies could give rise to claims that our technology infringes upon the rights of others.
Our success depends on our ability to protect our intellectual property rights and open art rights, which involves complex legal and scientific uncertainties. We rely on a combination of patents,
copyrights, trademarks, trade secrets and contractual restrictions to protect our proprietary rights. Patents may not be granted, and our existing patents might not provide us with commercial benefit or might be infringed upon, invalidated or
circumvented by others. The availability of patents in foreign markets, and the nature of any protection against competition that may be afforded by those patents, is often difficult to predict and vary significantly from country to country. We, our
licensors, or our licensees may choose not to seek, or may be unable to obtain, patent protection in a country that could potentially be an important market for our Technologies. The confidentiality agreements that are designed to protect our trade
secrets could be breached, and we might not have adequate remedies for the breach. Additionally, our trade secrets and proprietary know-how might otherwise become known or be independently discovered by others.
Commercialization of our Technologies may give rise to claims that our technologies infringe upon the patents or proprietary rights of
others. As previously discussed, we are currently involved in litigation concerning alleged infringement claims. We may not become aware of patents or rights that may have applicability until after we have made a substantial investment in the
development and commercialization of our Technology. Third parties may claim infringement. Legal actions could be brought against us, our co-venturers or our licensees claiming damages and seeking an injunction that would prevent us, our
co-venturers or our licensees utilizing the affected technologies. If an infringement action were successful, in addition to potential liability for damages, our co-venturers, our licensees or we could be required to obtain a license in order to
continue to test, market or commercialize the affected Technologies. Any required license might not be made available or, if available, might not be available on acceptable terms, and we could be prevented entirely from testing, marketing or
commercializing the affected technology. We may have to expend substantial resources in litigation, either in enforcing our patents, defending against the infringement claims of others, or both. Many possible claimants, such as the major energy
companies that have competing technologies competitive with our Technologies, have significantly more resources to spend on litigation.
We could have potential indemnification liabilities to licensees relating to the operation of plants based on our Technologies or intellectual property disputes.
Our indemnification obligations could result in substantial expenses and liabilities to us if intellectual property rights claims were to
be made against us or our licensees, or if plants based on our Technology were to fail to operate as designed. Generally our license agreements require us to indemnify the licensee, sometimes subject to certain limitations against specified losses
relating to, among other things:
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use of patent rights and technical information relating to the Syntroleum
®
Technologies;
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acts or omissions by us in connection with our preparation of process design packages (PDP) for plants; and
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performance guarantees that we may provide.
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Risks Relating to Renewable Fuels Industry
The U.S. renewable fuels industry is highly dependent on a mix of international, federal and state legislation and regulation and any changes could harm our business and financial condition.
The Energy Independence Act and EPAct established minimum nationwide levels of renewable fuels, which include biomass
based diesel, ethanol and other liquid fuel produced from biomass to be blended into the fuel supply. By the year 2022, these standards require that the national volume of renewable fuels to be blended into the fuel supply equal or exceed 36 billion
gallons. While these renewable fuel standards should stimulate demand for renewable fuels generally, there can be no assurance of specific demand for renewable diesel. Additionally this legislation has waiver provisions. Any waiver of the renewable
fuel standards could adversely impact the demand for renewable diesel and may have a material adverse effect on our financial condition and results of operations.
Risks Relating to Our Business
We will need to obtain funds from
additional financings or other sources for our business activities. If we do not receive these funds, we would need to reduce, delay or eliminate some of our expenditures.
In the past we have sustained recurring losses and negative cash flows from operations. As of December 31, 2012, we had approximately $15.9 million of cash and cash equivalents to fund operations and
investing activities. We review cash flow forecasts and budgets periodically.
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We expect that we may need to raise additional capital to accomplish our business plan over
the next several years through debt or equity financing, joint ventures, license agreements, sale of assets, as well as various other financing arrangements. If we obtain additional funds by issuing equity securities, dilution to stockholders may
occur. In addition, preferred stock could be issued without stockholder approval and the terms could include dividend, liquidation, conversion, voting and other rights more favorable than the rights of the holders of our common stock. There can be
no assurance as to the availability or terms upon which such financing and capital might be available.
Our agreement with
Tyson concerning Dynamic Fuels allows the participants to elect not to invest in a plant or to cease making capital contributions in the construction of a plant under certain circumstances. Should a participant in a project elect not to invest or to
cease investing in the construction of the plant the other participants in the project will need to raise additional capital from third parties or to take on additional interest in the project and fund the additional capital internally. There can be
no assurances that we would be able to raise the additional capital from third parties on terms acceptable to us or to fund the additional capital requirements internally. See discussion of our capital commitments at Item 7. Managements
Discussion and Analysis of Financial Condition and Results of Operation Contractual Obligations.
If adequate funds are
not available, we may be required to reduce, delay or eliminate expenditures for our future plant development and other activities, or seek to enter into a business combination transaction with or sell assets to another company. We could also be
forced to license to third parties the rights to commercialize additional products or technologies that we would otherwise seek to develop ourselves. The transactions outlined above may not be available to us when needed or on terms acceptable or
favorable to us.
The decline in our stock price makes the cost of obtaining additional equity capital more expensive to our
shareholders by reason of the attendant dilution. Further, our stock price decline and related decline in market capitalization has limited our ability to sell shares of common stock from our shelf registration statement in order to obtain capital.
Construction and operations of plants based on the Syntroleum
®
Technologies will be subject to risks of delay and cost overruns.
The construction and operation of plants based on our Technologies will be subject to the risks of delay or cost overruns. Delays in construction or operation of the plant could directly impact the
capital expenditures or working capital. Increases in costs could result in increased equity payments from parent companies.
Dynamic Fuels plant being shut down for an extended period could adversely affect Syntroleum financial position.
The Dynamic Fuels plant is operated at a single facility in Geismar Louisiana. Any natural disaster or other serious disruption to this
facility due to flooding, hurricane, fire or other extreme factors beyond our control could damage our capital equipment or supporting infrastructure and materially impair the ability of the plant to operate. Such a disruption could result in lost
revenues, increased costs and /or reduced profits.
If the Plant is shut down, it may experience a prolonged start-up period,
regardless of the reason for the shutdown. Such start-up periods could range from several days to several months, depending on the reason for the shutdown and other factors. The shutdown of the Plant for a substantial period of time for any reason
could have a material adverse effect on our financial position and results of operations.
The Dynamic Fuels plant has
remained shut down and in standby mode, primarily because of adverse economic conditions, since completion of a maintenance turnaround in December, 2012. We have not yet agreed with Tyson on the economic conditions for plant start-up.
We could experience disagreements with our joint venture partners which could adversely affect the operations or financial condition
of our plants.
The operation of Dynamic Fuels is to be exercised jointly by representatives of the Company and Tyson
equally, with no member exercising control. Decisions surrounding operation and financing of the Plant generally require both members to agree. Disagreements between the members or a modification in the level of participation from one of the members
could significantly impact the Plant and have a material adverse effect on our financial position and results of operations.
We are significantly dependent on significant customers and the loss of one or more of such significant customers could adversely
affect our operations and financial condition.
Our revenue in 2012 and 2011 was derived almost entirely from the
provision of technical services to two customers, Dynamic Fuels and Sasol. The agreement pursuant to which we provide technical services to Dynamic Fuels is effective through the service life of the Dynamic Fuels plant; however, Dynamic Fuels is not
obligated to issue any work orders to us nor are we obligated to accept any work orders issued by Dynamic Fuels. We have also had historical disagreements with Dynamic Fuels and Tyson regarding payment for the technical services that we performed
for Dynamic Fuels. The agreement pursuant to which we historically provided technical services to Sasol terminated on March 1, 2013 upon the sale of our pilot plant to Sasol (USA) Corporation (Sasol USA), an affiliate of Sasol. We
continue to provide technical services to Sasol USA pursuant to an agreement that terminates on March 1, 2014, subject to Sasol USAs right to extend the term of the agreement for up to two additional one-year terms. The loss of either of these
significant customers, or our inability to collect revenue for technical services that we perform for these customers, could have a material adverse effect on our operations and financial condition.
We need to remain listed on the NASDAQ stock market to be able to access adequate funding from time to time. We could face de-listing
issues that would impair the liquidity of our stock and our availability to access the capital markets.
We are required
to maintain standards for listing of our common stock on the NASDAQ Stock Market and we cannot assure you that we will be able to do so. One of those standards is that our common stock maintains a minimum price of at least $1.00 per share. On
June 8, 2012 we received a Nasdaq Staff Deficiency Letter, indicating our common stock had closed below the minimum $1.00 per share requirement for continued inclusion under the marketplace Rule 5500(a)(2). We were provided 180 calendar days,
or until December 5, 2012 to regain compliance. On December 6, 2012 we received a Nasdaq notification indicating we were eligible for an additional 180 calendar day compliance period or until June 3, 2013 to regain compliance. Their
determination was based on our meeting the continued listing requirement for market value of publicly held shares and all other applicable requirements for initial listing on the Capital market with the exception of the bid price requirement, and
our written notice of our intention to cure the deficiency during the second compliance period by effecting a reverse stock split, if necessary. We can make no assurance that we will be able to remain listed on the NASDAQ Stock Market.
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We have incurred losses.
As of December 31, 2012 we had an accumulated deficit of $360.5 million. Because we do not have an operating history upon which an
evaluation of our prospects can be based, our prospects must be considered in light of the risks, expenses and difficulties frequently encountered by small companies seeking to develop new and rapidly evolving technologies. To address these risks we
must, among other things, continue to attract investment capital, respond to competitive factors, continue to attract, retain and motivate qualified personnel and commercialize our technologies. We may not be successful in addressing these risks,
and we may not achieve or sustain profitability.
Our anticipated expense levels are based in part on our expectations as to
future operating activities and on historical financial data. Capital expenditures will depend on progress we make in developing various projects on which we are currently working. Increased revenues or cash flows may not result from these expenses.
If prices or margins for crude oil, natural gas, coal, vegetable oil, biomass and fats and other
commodities are unfavorable, plants based on the Syntroleum
®
Technologies may not be economical.
Because the products from plants utilizing our Technologies are expected to compete in markets with conventional petroleum products, an
increase in alternative feedstock prices relative to prices for oil, or a decrease in prices for oil relative to alternative feedstock prices, could adversely affect the operating results of these plants. Higher than anticipated costs for the
catalysts and other materials used in these plants could also adversely affect operating results. Factors that could cause changes in the prices and availability of oil, natural gas, coal, biomass, fats, oils and refined products include:
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changes in supply and demand balance of petroleum feedstocks, refined petroleum products, agricultural commodities variances impacted by crop yields, planting
decisions, protein complex variances;
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domestic and foreign government regulation;
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actions of the Organization of Petroleum Exporting Countries;
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political conditions in countries producing feedstocks;
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supply of crude oil, natural gas, coal, biomass fats, greases and oils;
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fuel switching between various sources of energy (natural gas, coal, solar, fats, oils and greases, biomass, or other renewable or non-renewable);
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capacities of pipelines;
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price and availability of alternative fuels; and
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overall economic conditions.
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Our success depends on the performance of our executive officers and key personnel, the loss of who would disrupt our business
operations.
We depend to a large extent on the performance of our executive officers, Edward G. Roth, our Chief Executive
Officer, Karen L. Power, our Senior Vice President and Principal Financial Officer, and certain key personnel. Our ability to implement our business strategy may be constrained and the timing of implementation may be impacted if we are unable to
attract and retain sufficient personnel. At December 31, 2012, we had 19 full-time employees. We do not maintain key person life insurance policies on any of our employees. We have entered into employment agreements with several key
employees.
We depend on strategic relationships with feedstock suppliers, site owners engineering companies, and
customers. If we are not successful in entering into and achieving the benefits of these relationships, this could negatively impact our business.
Our licensees typically enter into commercial arrangements with feedstock suppliers, construction contractors, engineering service companies, site owners, equipment manufacturers, and customers.
These relationships may take the form of joint ventures with other private parties or local government bodies, contractual arrangements with other companies, or minority investments from third parties. There can be no assurances that we or our
licensees will be able to establish and maintain these strategic relationships. In addition, the dynamics of our relationships with strategic participants may require us to incur expenses or undertake activities we would not otherwise incur in order
to fulfill our obligations. If we do not successfully establish or maintain strategic relationships, our business may be negatively affected.
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Our operating results may be volatile due to a variety of factors and are not a
meaningful indicator of future performance.
We expect to experience significant fluctuations in future annual and
quarterly operating results because of the unpredictability of many factors that impact our business. These factors include:
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government legislation, subsidies on renewable product, and varying regulatory quotas;
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volatile price of commodities used and produced;
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overcapacity in the renewable fuels industry;
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demand for licenses or other technology transfer agreements for our Technologies and receipt and revenue recognition of license fees;
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timing of any construction by us or our licensees of plants;
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introduction or enhancement of FT and renewable fuels technologies by us and our competitors;
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market acceptance of new technologies; and
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general economic conditions.
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As a result, we believe that period-to-period comparisons of our results of operations are not meaningful and should not be relied upon
as any indication of future performance. Due to the foregoing factors, it may be that in some future year or quarter our operating results will be below the expectations of public market analysts and investors. In that event, the price of our common
stock would likely be materially adversely affected.
We are subject to extensive laws relating to the protection of the
environment, and these laws may increase the cost of designing, constructing and operating our plants based on our Technologies or affect demand for the products of these plants.
If we violate any of the laws and regulations relating to the protection of the environment, we may be subject to substantial fines,
criminal sanctions or third party lawsuits and may be required to install costly pollution control equipment or curtail operations. Plants built with our Technologies will generally be required to obtain environmental, industrial siting,
construction and numerous other permits. Compliance with these permits may increase the costs of designing, constructing and operating our plants or delay plant development. New legislation or regulatory programs that restrict emissions of
greenhouse gases could have an adverse effect on our operations. We may also face exposure to actual or potential claims and lawsuits involving environmental matters with respect to our previously owned real estate. Changes in environmental laws and
regulations occur frequently, and changes may have a material adverse effect on our results of operations, competitive position, or financial condition.
Terrorist threats and U.S. military actions could result in a material adverse effect on our business.
Acts of terrorism in the United States or elsewhere could occur. These and like developments could cause instability in the worlds financial and insurance markets and increase political and economic
instability in the geographic areas in which we may wish to operate. These developments could also lead to increased volatility in prices for crude oil, natural gas and the feedstocks for our plants and the cost and availability of insurance. In
addition, these developments could adversely affect our ability to access capital.
United States government regulations
effectively preclude us from actively engaging in business activities in certain countries. These regulations could be expanded to cover countries where we may wish to operate in the future. These developments could subject the operations of our
company to increased risks and, depending on their magnitude, could have a material adverse effect on our business.
We may
not have enough insurance to cover all of the risks we face.
In accordance with customary industry practices, we maintain
insurance coverage against some, but not all, potential losses in order to protect against the risks we face. We may elect not to carry insurance if our management believes that the cost of available insurance is excessive relative to the risks
presented. In addition, we cannot insure fully against pollution and environmental risks. The occurrence of an event not fully covered by insurance, such as a leak, fire or explosion could have a material adverse effect on our financial condition
and results of operations.
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