Attached files
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EX-21 - EXHIBIT 21 - Sooner Holdings, Inc. | c96795exv21.htm |
EX-23 - EXHIBIT 23 - Sooner Holdings, Inc. | c96795exv23.htm |
EX-32.1 - EXHIBIT 32.1 - Sooner Holdings, Inc. | c96795exv32w1.htm |
EX-32.2 - EXHIBIT 32.2 - Sooner Holdings, Inc. | c96795exv32w2.htm |
EX-31.1 - EXHIBIT 31.1 - Sooner Holdings, Inc. | c96795exv31w1.htm |
EX-31.2 - EXHIBIT 31.2 - Sooner Holdings, Inc. | c96795exv31w2.htm |
EX-4.1.1 - EXHIBIT 4.1.1 - Sooner Holdings, Inc. | c96795exv4w1w1.htm |
EX-99.2 - EXHIBIT 99.2 - Sooner Holdings, Inc. | c96795exv99w2.htm |
EX-3.3.2 - EXHIBIT 3.3.2 - Sooner Holdings, Inc. | c96795exv3w3w2.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2009.
o | TRANSITION REPORTING PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR
THE TRANSITION PERIOD FROM
TO .
COMMISSION FILE NO. 001-34490
SYNTROLEUM CORPORATION
(Exact name of registrant as specified in its charter)
Delaware (State or other jurisdiction of incorporation or organization) |
73-1565725 (I.R.S. Employer Identification No.) |
5416 S. Yale Suite 400
Tulsa, Oklahoma 74135
(Address of principal executive offices) (Zip Code)
Tulsa, Oklahoma 74135
(Address of principal executive offices) (Zip Code)
Registrants telephone number, including area code: (918) 592-7900
Securities registered pursuant to Section 12(b) of the Act:
Warrants to Purchase Common Stock, par value $.01 per share
Warrants to Purchase Common Stock, par value $.01 per share
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
and
Preferred Share Purchase Rights
Common Stock, par value $.01 per share
and
Preferred Share Purchase Rights
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act.
Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports) and (2) has been subject
to such filing requirements for the past 90 days.
Yes þ No o
Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate website, if any, every interactive data file required to be submitted and posted pursuant
to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post
such files).
Yes o No þ
Yes o No þ
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and small reporting company in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer o | Accelerated filer þ | Smaller reporting company o | Non-accelerated filer o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act).
Yes o No þ
Yes o No þ
At June 30, 2009, the aggregate market value of the registrants common stock held by
non-affiliates of the registrant was approximately $135,000,000 based on the closing price of such
stock on such date of $2.23 per share (assuming solely for this purpose that all of the
registrants directors, executive officers and 10 percent stockholders are its affiliates).
At February 19, 2010, the number of outstanding shares of the registrants common stock was
76,214,577.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrants definitive proxy statement to be filed with the Securities and
Exchange Commission (SEC) within 120 days of December 31, 2009 for its 2010 annual meeting of
stockholders are incorporated by reference into Part III of this Form 10-K.
TABLE OF CONTENTS
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Exhibit 3.3.2 | ||||||||
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Exhibit 31.1 | ||||||||
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Exhibit 32.1 | ||||||||
Exhibit 32.2 | ||||||||
Exhibit 99.2 |
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K Q includes forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995, as well as historical facts. These
forward-looking statements include statements relating to the Fischer-Tropsch (FT) process,
Syntroleum® Process, Synfining® Process, and related technologies including, gas-to-liquids
(GTL), coal-to-liquids (CTL) and biomass-to-liquids (BTL), our renewable fuels Bio-Synfining
Technology, anticipated costs and schedules to design, construct and operate these plants,
expected production of ultra-clean fuel, financing activities (debt and equity), the value and
markets for plant products, certification, characteristics and use of plant products, the
continued development of Syntroleums technologies (alone or with co-venturers), anticipated
expenses and expense reductions, anticipated cash outflows, anticipated revenues, availability of
catalyst materials, and finished catalyst, our support of and relationship with our licensees, and
any other forward-looking statements including future growth, cash needs, capital availability,
operations, business plans and financial results. When used in this document, the words
anticipate, believe, estimate, expect, intend, may, plan, project, should and
similar expressions are intended to be among the statements that identify forward-looking
statements. Although we believe that the expectations reflected in these forward-looking statements
are reasonable, these kinds of statements involve risks and uncertainties. Actual results may not
be consistent with these forward-looking statements. Syntroleum undertakes no obligation to update
or revise forward-looking statements to reflect changed assumptions, the occurrence of
unanticipated events or changes to future operating results over time. Important factors that
could cause actual results to differ from these forward-looking statements are described under
Item 1A. Risk Factors in this Annual Report on Form 10-K.
As used in this Annual Report on Form 10-K, the terms Syntroleum, we, our or us mean
Syntroleum Corporation, a Delaware corporation, and its predecessors and subsidiaries, unless the
context indicates otherwise.
Table of Contents
PART I
Item 1. | Business |
Overview
We began business as GTG, Inc. on November 15, 1984. On April 25, 1994, GTG, Inc. changed its
name to Syntroleum Corporation. On August 7, 1998, Syntroleum Corporation merged into SLH
Corporation. SLH Corporation was the surviving entity in the merger and was renamed Syntroleum
Corporation. Syntroleum Corporation was later re-incorporated in Delaware on June 17, 1999 through
its merger into a Delaware corporation that was organized on April 23, 1999.
The focus of Syntroleum Corporation and subsidiaries (the Company or Syntroleum) is the
commercialization of our innovative technology to produce synthetic liquid hydrocarbons that are
substantially free of contaminants normally found in conventional hydrocarbon products. Our
technologies include second and third generation renewable fuels technology. We also focus on
military grade fuels development, including setting the military synthetic fuel standard and
project development of plants in equity ventures.
Our Syntroleum® Technologies consist of three core technologies, gasification, Fischer-Tropsch
(FT), and hydro-processing, Synfining or Bio-Synfining. We are currently commercializing our
FT technology via China Petroleum and Chemical Corporation (Sinopec) and commercializing our
Bio-Synfining technology via Dynamic Fuels, LLC.
Our Bio-Synfining Technology or second generation renewable fuels technology, processes
triglycerides and/or fatty acids from fats and vegetable oils with heat (thermal depolymerization),
hydrogen and proprietary catalysts to make renewable synthetic fuels, such as diesel, jet fuel
(subject to certification), kerosene, naphtha and propane. Syntroleum has quantified in excess of
100 different fats and oils, which cover the spectrum of both cost and quality, for conversion to
synthetic fuels via the Bio-Synfining Technology.
Bio-Synfining is a flexible feedstock/flexible synthetic fuel technology. A Bio-Synfining
facility is designed to process a wide range of feedstocks including vegetable oils, fats, fatty
acids and greases into synthetic ultra-clean middle distillate fuels, including summer grade to
arctic grade diesel fuel, heating oil, jet fuel (subject to certification), naphtha and propane.
We believe the fuels produced from our Bio-Synfining Technology offer several advantages
(much like FT fuels) over other renewable and petroleum-based diesel fuels, including higher cetane
levels, near zero sulfur and superior thermal stability. The unblended diesel fuel can be used in
existing diesel engines with no modifications. The feedstock can also be upgraded into ultra-clean,
high quality synthetic jet fuel (subject to certification). Further, the synthetic fuel produced by
Bio-Synfining facilities may be blended with petroleum based diesel to help those fuels achieve
superior environmental and performance characteristics. We believe the fuel will be compatible with
existing conventional fuel infrastructures.
The past operations of the Company consisted of the research and development of a proprietary
process (the Syntroleum® Process) designed to convert natural gas into synthetic liquid
hydrocarbons (gas-to-liquids or GTL) and activities related to the commercialization of the
Syntroleum® Process or 3rd generation renewable fuels technology. Synthetic liquid
hydrocarbons produced by the Syntroleum® Process can be further processed using the Syntroleum
Synfining® Process into high quality liquid fuels. Our Bio-Synfining Technology is a renewable
fuels application of our Synfining® product upgrading technology. We are also applying our
technology to convert synthesis gas derived from coal (coal-to-liquids or CTL) or
bio-feedstocks (biomass-to-liquids or BTL) into these same high quality products. We are
centered on being a recognized provider of the Bio-Synfining Technology, Syntroleum® Process and
Synfining® product upgrading technology (Syntroleum® Technologies) to the energy industry through
strategic relationships and sales and licensing of our technology.
We also are a partner in a joint venture and continue to seek to form other joint ventures for
projects that utilize our Syntroleum® Technologies. We license or sell our Syntroleum®
Technologies, (which we refer to as the Syntroleum® Process the Synfining® Process and our
Bio-Synfining Technology) to others.
Bio-Synfining Projects Dynamic Fuels
On June 22, 2007, we entered into definitive agreements with Tyson Foods, Inc (Tyson) to
form a joint venture Limited Liability Company, Dynamic Fuels, LLC, a Delaware limited liability
company (Dynamic Fuels), to construct facilities in the United States using our Bio-Synfining
Technology. The purpose of Dynamic Fuels is to construct multiple stand-alone commercial plants in
the United States. The first facility is being constructed in Geismar, Louisiana and, based on
current estimates, will produce approximately 75 million gallons per year of renewable synthetic
products beginning in 2010. The LLC Agreement provides for management and control of Dynamic Fuels
to be exercised jointly by representatives of the Company and Tyson equally with no LLC member
exercising control. It was initially capitalized on July 13, 2007 with $4.25 million in capital
contributed from Tyson and $4.25 million in capital contributions from Syntroleum.
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The capital and working capital budget for Dynamic Fuels financing, construction and initial
operations of the first plant to use our Bio-Synfining Technology is estimated to equal $170.0
million in total. Dynamic Fuels received approval from the Louisiana State Bond Commission to sell
$100 million in Gulf Opportunity Tax Exempt Bonds to partially finance the plant. These bonds were
sold on October 21, 2008, in the amount of $100 million and are due October 1, 2033. Syntroleum
and Tyson have made capital contributions in the amount of $20.0 million each in 2008 and 2009. The
remaining estimated $30.0 million in total will be required to be funded in the first half of 2010.
Proceeds Debt and Equity Contributions (in Millions) | Dynamic Fuels | Synm Portion | ||||||
Funded Proceeds from Debt Issuance* |
$ | 100.0 | | |||||
Funded Equity Contributions from Members |
$ | 40.0 | $ | 20.0 | ||||
Committed Equity Contributions from Members 2010 |
$ | 30.0 | $ | 15.0 | ||||
Total Proceeds Debt and Equity Contributions |
$ | 170.0 | $ | 35.0 | ||||
* | Interest during construction is calculated based on the daily interest rate stated at closing of 1.30 percent for 15 months. The interest rate for the bonds is a daily floating interest rate and may change significantly from this amount. The interest rate as of December 31, 2009 was 0.20%. Dynamic Fuels entered into an interest rate swap whereby it fixed its interest rate at 2.19% for a period of 5 years with declining swap coverage in the fourth quarter of 2008. The bond indenture requires that the bond principal be backed by a stand-by letter of credit. Tyson provided a letter of credit guaranteeing the full amount of bonds for Dynamic Fuels. We granted Tyson warrants in lieu of payment for the guarantee for our portion of the letter of credit. Monthly fees for this letter of credit are paid by Tyson. Dynamic Fuels reimburses Tyson for these monthly fees and are an additional financing cost to Dynamic. |
This project continues to progress forward. Plant start up is scheduled for the first half of
2010 and full rate operations are expected during the third quarter of 2010. All major pieces of
equipment and reactors have been installed, but the project has encountered construction delays.
The primary construction delay has been the installation of piping to connect the installed plant
equipment. The cash impact of the delay has resulted in an additional $20 million in costs to the
total project, of which Syntroleum must contribute 50%. This includes increased working capital
for operations staff and financing costs that were previously expected to be funded by operations.
Both parties have committed to funding the cost overrun in the second quarter of 2010.
Tyson is responsible for supplying feedstock to the plant, either from its own internal
sources or from supplies it procures in the open market. The feedstock supply agreement provides a
pricing formula for the feedstock, which is generally equivalent to the market price. The Tyson fat
blend feedstock is expected to provide us with a notable cost advantage due to the types of fats to
be utilized. The feedstock slate will be subject to change based upon market availability and other
factors. We currently expect that the first facility will produce approximately 75% diesel, 16%
naphtha and 9% liquefied petroleum gases. We expect that Dynamic Fuels will be eligible for a
federal excise tax credit (if extended) of $1.00 per gallon for diesel produced and $0.50 per
gallon for naphtha and liquefied petroleum gases produced.
Business Strategy
Our objective is to be the leading independent provider of our Syntroleum® Technologies for
the production of synthetic fuels. Our business strategy to achieve this objective involves the
following key elements:
Focus on commercialization through project development. The Dynamic Fuels facility is the
first of what we plan to be several production facilities envisioned in the business model.
Transfer the Syntroleum® Process. We successfully executed a transfer of our technology to
Sinopec in 2009. Sinopec is also dismantling and relocating our Catoosa Demonstration Facility
(CDF) to China for further research and development. This relocation is expected to be
completed in the first quarter of 2010. We continue to support our existing and future licensees
in their efforts to develop new BTL, GTL and CTL technologies through our engineering support
activities and catalyst supply agreements. Our license agreements obligate us to apprise licensees
of upgrades and improvements in the Syntroleum® Process.
Provide Support and Process Design Packages through Engineering Services. We continue to
provide support to our licensees and prospective licensees through engineering services.
Engineering services consist of process design packages, or (PDPs), project management,
technology design application and other support for our Syntroleum® Technologies.
Cost structure improvement. We continue to operate with 19 employees, of which 13 are
engineers.
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Table of Contents
The Syntroleum® Process
The Syntroleum® Process produces synthetic liquid hydrocarbons that are substantially free of
contaminants normally found in conventional products made from crude oil. These synthetic liquid
hydrocarbons can be further processed into fungible products through our Synfining® Process. These
products include:
Ultra-clean liquid fuels for use in internal combustion engines, jet/turbine engines
(subject to certification), diesel engines and fuel oil; 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 at high catalyst productivities with both dilute and un-dilute
syngas.
Based on demonstrated research, including the advancement of our technology from the
laboratory to pilot plant and demonstration facility scales and current market conditions, we
believe that our single-train design of 17,000 barrels per day (b/d) facility can be economically
developed.
We believe the advantages afforded by the Syntroleum® Process together with the worldwide
resource base of natural gas; coal and biomass provide market opportunities for the use of this
technology by us and our licensees in the development of commercial plants.
The Syntroleum® Process involves two catalytic reactions: (1) conversion of carbon containing
material into synthesis gas and (2) conversion of the synthesis gas or coal-derived or biomass
dervied syngas into hydrocarbons over our proprietary Fischer-Tropsch catalyst. These reactions are
expressed in the following equations:
Syngas may be generated from various carbon-bearing feedstocks by means of several commercial
and developmental processes. Coal gasifiers, for example, have been available commercially from
licensors for many years. Biomass gasification technologies are also available today that can be
efficiently integrated into FT plants for production of third generation biofuels (BTL).
Syntroleum offers an air-based autothermal reforming technology for producing syngas from
natural gas. This flameless autothermal reformer (ATR) is similar to units used for over 30
years in the ammonia industry. The nitrogen in the gas entering the ATR passes through the reactor
essentially unchanged, although very low levels of other nitrogen compounds are produced. As with
syngas from any feedstock and process, trace contaminants may be removed from the process stream
and are not incorporated into the finished products.
The Synfining® Process
We have also developed hydroprocessing technology the Synfining® Process for conversion
of the Fischer-Tropsch wax into a variety of products including diesel fuels, heating oil, jet
fuels (subject to certification), lubricants, naphtha and other materials. This refining
technology has been used to produce fuels for testing by the Department of Energy (DOE) in its
Ultra-Clean Fuels Program, automobile manufacturers in the United States and Japan, the Department
of Defense (DOD) and U.S. Department of Transportation (DOT).
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The Bio-Synfining® Process
We have also developed an adaptation of Synfining® Process to accommodate animal fats,
greases, fatty acids and similar substances as feedstocks in the production of ultra-clean
renewable fuels. These feedstocks are similar in chemical structure to the paraffins produced from
the FT process. This refining technology was used to produce jet fuels for testing by the
DOD in 2008 and will be used in our Dynamic Fuels Bio-Synfining facility in Geismar, Louisiana for
the production of diesel, naphtha, and LPG.
Syntroleum Advantage
We believe that our Syntroleum® Technologies will be attractive technologies for companies
reviewing methods of producing their natural gas, coal reserves or bio-mass using non-traditional
methods. We believe the Syntroleum® Process will enable owners of non-traditional natural gas or
coal reserves to monetize a portion of these resources by converting them into synthetic liquid
hydrocarbons in the form of ultra-clean fuels, based on our belief that these products can be:
produced substantially free of undesirable products normally found in fuels;
used as blending stock to upgrade conventional fuels and specialty products made from crude
oil;
used blended or unblended in traditional internal combustion engines to reduce emissions; and
transported through existing distribution infrastructures for refined products.
Bio-Synfined fuel compared to Biodiesel
Unlike conventional biodiesel and ethanol fuels, our Bio-Synfined fuel products can be
used as a finished product and do not require blending to be used in existing engines. Our
products can also be blended with petroleum-based fuels in any ratio. Our products can be
transported through existing distribution infrastructures and used in existing automotive diesel
engines and jet engines without modification. The life cycle greenhouse gas emissions for our
fuels are on average 75% less than for petroleum diesel.
Resource Base
Bio-Feedstocks
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. The Free Fatty Acid (FFA)
content is less than or equal to 1%, simplifying the biodiesel production process compared to
high-FFA feedstocks. Approximately 19.4 billion pounds of soybean oil were produced in the U.S. in
2009 according to the U.S. Census Bureau. Other vegetable oil feedstocks include rapeseed, which
is most common in Europe, in addition to palm, cottonseed, corn and many other oils.
Animal Fats. Edible tallow has a FFA content of up to 0.75%, and inedible tallow has a FFA
content of up to 10%. Approximately 3.6 billion pounds of inedible tallow and 1.4 billion pounds
of poultry fat were produced in the U.S. in 2008 according to the U.S. Census Bureau. Other animal
fat feedstocks include fish oil, pork, as well as other fats and lards with high FFA content.
Recycled greases. Yellow grease has a FFA content of up to 15% and brown grease has an FFA
content of more than 15%, greatly reducing its use and subsequent demand for biodiesel production.
Approximately 1.7 billion pounds of yellow grease were produced in the U.S. in 2008 according to
the U.S. Census Bureau. Our Bio-Synfining process can completely deoxygenate FFAs and allows us
to utilize a much lower valued feedstock to create a high quality product.
Market Demand
We believe market potential exists for the Syntroleum® Technologies and products because of
steadily increasing demand for transportation fuels, the anticipated increased demand for
ultra-clean fuels for internal combustion engines, and the existing demand for high-quality
specialty productsunderpinned by the natural gas, coal, biomass and biofeedstocks worldwide. We
expect demand for products created via Syntroleum® Technologies to result from government
legislation.
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Government Legislation. In 2007, the U.S. government enacted the Energy Independence Act of
2007, and in 2005, the U.S. government enacted two other significant pieces of legislation, the
Energy Policy Act of 2005 (EPACT) and the Safe, Accountable, Flexible, Efficient Transportation
Equity Act: A Legacy for Users (SAFETEA-LU), aimed at addressing a new, comprehensive national
energy policy to promote domestic energy security. The Energy Independence Act and Energy Policy
Act of 2005 designates a tax credit of $1.00 per gallon for the production of renewable diesel,
which is defined as diesel derived from any organic material other than oil, natural gas or coal.
Our Bio-Synfined products are eligible for the $1.00 per gallon credit. The $1.00 tax credit
applies to both pure and mixed renewable diesel, with the credit calculated according to the
percentage of renewable diesel present in the mixture. This credit applies to fuels derived
from both virgin and non-virgin feedstocks.
The renewable fuels tax credit legislated in the EPACT was set to expire at the end of 2008
unless extended by Congress. Typically, Congress renews tax subsidies annually in what is known as
tax extenders legislation. It was extended one year in the tax extenders bill at the end of 2008
to the end of 2009. The House passed a tax extenders bill in December 2009 that included the $1.00
per gallon tax credit, but the Senate failed to address tax extenders As a result, the renewable
fuels tax credit expired at the end of fiscal year 2009; however the credit may be extended
retroactively to January 1, 2010 by Congress when it addresses tax extenders legislation in the new
year in order to continue support of renewable fuel development, and to meet mandated production
levels.
EPACT also provided for the United States Environmental Protection Agency (EPA) to establish
the Renewable Fuels Standard (RFS) to set the volumes of renewable fuels that must be sold in the
United States. The RFS was originally set for biofuels to increase from 4 billion gallons in 2006
and to 7.5 billion gallons on 2012. In May, 2009, the EPA proposed rules for RFS2, which would
expand mandates to 36 billion gallons of renewable fuels to be used by petroleum refiners by 2022,
of which 1 billion gallons must be biomass based diesel by 2012 (biodiesel, renewable diesel and
biomass to liquids based diesel) and 21 billion gallons must be advanced biofuel (excludes
conventional corn ethanol) by 2022. The EPA issued final rules related to RFS2 in February 2010.
Intellectual Property
The success of our intellectual property portfolio depends on our ability to foster, invent
and develop new ideas, to obtain, protect, and enforce our intellectual property rights, to
successfully avoid infringing the intellectual property rights of others and, if necessary, to
defend against any alleged infringements. We regard the protection of our proprietary technologies
as critical to our future success, so we rely on a combination of patent, copyright, trademark and
trade secret law 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 file patent
applications. Our ability to protect and enforce these rights involves complex legal, scientific
and factual questions and uncertainties. Our policy is to honor the valid, enforceable
intellectual property rights of others. While we have made efforts to avoid any such infringement,
we acknowledge that commercialization of our technologies may give rise to claims that the
technologies infringe upon the patents or other proprietary rights of others. We have not been
notified of any claim that our technologies infringes on the proprietary rights of any third party.
However, we can provide no assurance that third parties will not claim infringement by us with
respect to our technologies; past, present or future.
We currently own, or have licensed rights to 51 active patents, and are actively prosecuting
59 patent applications, in the United States and various foreign countries that relate to one or
more embodiments of Syntroleum technology. Two of Syntroleums initial patents expired in 2009.
However most of Syntroleums 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 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.
Employees
As of February 19, 2010, we had 19 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.
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Government Regulation
We are 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, as well as to
employee health and safety. Additionally, our GTL, BTL and CTL plants will be subject to
environmental, health and safety laws and regulations of any foreign countries in which these
plants are located.
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.
Environmental laws and regulations often require acquisition of a permit or other
authorization before activities may be conducted, and compliance with laws, regulations and any
requisite permits can increase the costs of designing, installing and operating our GTL, BTL and
CTL plants. GTL, BTL and CTL plants generally will be required to obtain permits under applicable
environmental laws of the country in which it is situated, as well as various permits for
industrial siting and construction. Emissions from a GTL, BTL or CTL plant may require the
installation of abatement equipment in order to meet applicable 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 our GTL BTL and CTL plants will involve a risk of incidents involving personal
injury and property damage due to the operation of machinery in close proximity to individuals and
the highly flammable nature of natural gas and the materials produced at these plants. 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.
We have adopted a written Code of Ethics that is applicable to our directors, chief executive
officer, principal financial officer, controller and other executive officers. A copy of our Code
of Ethics, Audit Committee Charter, and Nominating and Compensation Committee Charters is available
on our website at www.syntroleum.com. Investors may request a copy of any of these documents at no
charge by writing to Karen L. Gallagher, Senior Vice President, Principal Financial Officer and
Corporate Secretary, Syntroleum Corporation, 5416 S. Yale, Suite 400, Tulsa, OK 74135. We will
disclose any amendments to the Code of Ethics and any waivers to the Code of Ethics for directors
and executive officers by posting such information on our website or in a current report on Form
8-K filed with the SEC.
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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.
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. No commercial-scale
plant based on the Syntroleum® and Synfining® Processes has been operational to date. A
commercial-scale plant based on the Syntroleum® and 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 and, as a
result, whether we receive any license fees under our license agreements. To date, no licensee of
the Syntroleum® Technologies has exercised its right to obtain a site license. Whether licensees
are willing to expend the resources necessary to construct plants based on the Syntroleum®
Technologies will depend on a variety of factors outside our control, including the prevailing view
regarding the price outlook for crude oil, natural gas, coal, biomass, fats, vegetable oils and
refined products. 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 FT or renewable fuels 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 successfully tested on a laboratory, pilot
plant or demonstration plant basis. Results that could cause commercial-scale plants based on the
Syntroleum® and Synfining® Processes to be unsuccessful include:
| lower reaction activity than demonstrated in the pilot plant and demonstration plant operations which would decrease the conversion of natural gas into synthesis gas and increase the amount of catalyst, and/or number of reactors required to produce the design synthesis gas rate; | ||
| lower reaction activity than that demonstrated in laboratory, pilot plant and demonstration plant operations, which would increase the amount of catalyst or number of reactors required to convert synthesis gas into liquid hydrocarbons and increase capital and operating costs; | ||
| shorter than anticipated catalyst life, which would require more frequent catalyst regeneration, catalyst purchases, or both, thereby increasing operating costs; | ||
| excessive production of gaseous light hydrocarbons from the FT reaction compared to design conditions, which would lower the anticipated amount of liquid hydrocarbons produced and would lower revenues and margins from plant operations; | ||
| lower reaction activity than that demonstrated in laboratory, pilot plant and demonstration plant operations, which would increase the amount of catalyst or number of reactors required to convert FT products into finished, marketable fuels; | ||
| 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 GTL, CTL or BTL plant; and | ||
| higher than anticipated capital and operating costs. |
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Results that could cause commercial-scale plants based on our Bio-Synfining Technology to be
unsuccessful include:
| higher than anticipated catalyst or hydrogen consumption; | ||
| inadequate removal of feedstock impurities in pre-treatment; | ||
| lower process yields than that demonstrated in laboratory operations; and | ||
| higher than anticipated capital and operating costs. |
In addition, these 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. The
Syntroleum® 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 FT or renewable fuels technologies. These companies typically have significantly more
resources than we do.
As our competitors continue to develop FT and renewable fuels 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.
Our ability to protect our intellectual property rights involves complexities and
uncertainties and commercialization of our Syntroleum® 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, which involves
complex legal, scientific and factual questions and uncertainties. We rely on a combination of
patents, copyrights, trademarks, trade secrets and contractual restrictions to protect our
proprietary rights. Additional 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. In addition, 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 GTL, CTL, BTL or Bio-Synfining 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 the Syntroleum® Technologies may give rise to claims that our
technologies infringe upon the patents or proprietary rights of others. We may not become aware of
patents or rights that may have applicability in the GTL, BTL, CTL or renewable fuels industry
until after we have made a substantial investment in the development and commercialization of those
technologies. Third parties may claim that we have infringed upon past, present or future GTL, BTL,
and CTL or renewable fuels technologies. 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 from testing, marketing or commercializing 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 or may be developing proprietary GTL, CTL, BTL or renewable fuels technologies
competitive with the Syntroleum® and Synfining® Processes and Bio-Synfining Technology, 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 Syntroleum® 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 the Syntroleum® and Synfining® Processes or our Bio-Synfining Technology were to fail to
operate as designed. Generally our license agreements require us to indemnify the licensee, subject
to certain limitations against specified losses relating to, among other things:
| use of patent rights and technical information relating to the Syntroleum® Technologies; | ||
| acts or omissions by us in connection with our preparation of process design packages (PDP) for plants; and | ||
| performance guarantees that we may provide. |
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Risks Relating to Products of the Syntroleum® Technologies
The U.S. renewable fuels industry is highly dependent on a mix of federal and state
legislation and regulation and any changes in legislation or regulation could harm our business and
financial condition.
Federal tax incentives make the cost of renewable diesel production significantly more
competitive with the price of diesel. Currently, under the Energy Independence Act and the Energy
Policy Act of 2005, or EPACT, the tax credit for producers of diesel/renewable diesel blends of up
to a $1.00 tax credit per gallon expired on December 31, 2009. There can be no assurance that it
will be renewed on similar terms, if at all. Additionally, the credit for producers of naphtha and
liquid petroleum gases of $0.50 per gallon tax credit expired on December 31, 2009. There can be no
assurance of this credits continued existence, and its elimination would be harmful to our
business and financial condition. Finally, these credits and other federal and state programs that
benefit renewable diesel generally are subject to U.S. government obligations under international
trade agreements, including those under the World Trade Organization Agreement on Subsidies and
Countervailing Measures, which might in the future be the subject of challenges. The elimination or
significant reduction in the renewable diesel tax credit or other programs could harm our results
of operations and financial condition.
The Energy Independence Act and EPAct established minimum nationwide levels of renewable
fuels, which include biodiesel, ethanol and any liquid fuel produced from biomass or biogas, 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, the U.S. Department of Energy, in
consultation with the Secretary of Agriculture and the Secretary of Energy, may waive the renewable
fuels mandate with respect to one or more states if the Administrator of the U.S. Environmental
Protection Agency, or EPA, determines that implementing the requirements would severely harm the
economy or the environment of a state, a region or the U.S., or that there is inadequate supply to
meet the requirement. 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 2009, we generated cash flow from operations from the deployment of our technology and
other engineering services. In the past we have sustained recurring losses and negative cash flows
from operations. As of December 31, 2009, we had approximately $25.0 million of cash and cash
equivalents and $3.3 million of accounts receivable to fund operations and investing activities.
We review cash flow forecasts and budgets periodically.
We expect that we will need to raise additional capital to accomplish our business plan over
the next several years. We expect to seek to obtain additional funding through debt or equity
financing in the capital markets, joint ventures, license agreements, sale of assets and other
strategic alliances, 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 in the future without stockholder approval, and the terms of our preferred stock
could include dividend, liquidation, conversion, voting and other rights that are 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.
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.
Our stock price has remained above $1.00 per share since March, 2009. NASDAQ rules call for
the potential de-listing of a company if its stock trades under $1.00 per share for 30 consecutive
days. If our stock price declines to below $1.00 per share again, we can make no assurance that we
will be able to remain listed on the NASDAQ Stock Market.
Construction and operations of plants based on the Syntroleum® Technologies will be subject to
risks of delay and cost overruns.
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The construction and operation of plants based on the Syntroleum® Technologies will be subject
to the risks of delay or cost overruns resulting from numerous factors, including the following:
| shortages of equipment, materials or skilled labor; | ||
| unscheduled delays in the delivery of ordered materials and equipment; | ||
| engineering problems, including those relating to the commissioning of newly designed equipment; | ||
| work stoppages; | ||
| weather interference; | ||
| unanticipated cost increases; and | ||
| difficulty in obtaining necessary permits or approvals. |
We have incurred losses.
As of December 31, 2009, we had an accumulated deficit of $332.9 million. We achieved
profitability from continuing operations in 2009 for the first time. 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 and continue to
upgrade the Syntroleum® and Synfining® Processes and Bio-Synfining 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 not on historical financial data. We plan to continue funding project development
activities. 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 oils and fats and other
commodities are unfavorable, plants based on the Syntroleum® Technologies may not be economical.
Because the synthetic crude oil, liquid fuels and specialty products that plants utilizing the
Syntroleum® Technologies are expected to produce will compete in markets with oil and refined
petroleum products, and because natural gas, coal, biomass, fats or vegetable oils will be used as
the feedstock for these plants, an increase in feedstock prices relative to prices for oil or
refined products, or a decrease in prices for oil or refined products relative to 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. Prices for oil, natural gas, coal, biomass, fats, greases, vegetable oils and refined
products are subject to wide fluctuation in response to relatively minor changes in the supply and
demand, market uncertainty and a variety of additional factors that are beyond our control. Factors
that could cause changes in the prices and availability of oil, natural gas, coal, biomass, fats,
vegetable oils and refined products include:
| level of consumer product demand; | ||
| weather conditions; | ||
| domestic and foreign government regulation; | ||
| actions of the Organization of Petroleum Exporting Countries; | ||
| political conditions in countries producing feedstocks for fuels plants; | ||
| supply of crude oil, natural gas, coal, biomass fats, greases and vegetable oils; | ||
| location of GTL plants relative to natural gas reserves and pipelines; | ||
| location of CTL plants relative to coal reserves and transportation systems; | ||
| location of BTL plants relative to biomass reserves and transportation systems; | ||
| capacities of pipelines; |
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| fluctuations in seasonal demand; | ||
| crop yields; | ||
| seasonality of prices for feedstocks and refined products; | ||
| farmer planting decisions; | ||
| output and proximity of crush facilities that convert the crops to oils; | ||
| alternative uses for fats; | ||
| number of animals slaughtered and rendered; | ||
| price and availability of alternative fuels; and | ||
| overall economic conditions. |
We cannot predict the future markets and prices for oil, natural gas, coal or other materials
used in the Syntroleum® Technologies or refined products.
We believe that the Syntroleum® and Synfining® Processes can be economic for GTL, BTL and CTL
plants given the current world crude oil prices. However, the markets for oil and natural gas have
historically been volatile and are likely to continue to be volatile in the future. Crude oil
prices could return to such low levels in the future.
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, including Edward G.
Roth, our Chief Executive Officer, Karen L. Gallagher, our Senior Vice President of Finance and
Principal Financial Officer. 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, 2009, 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, construction contractors, site
owners, manufacturing and 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 or our licensees ability to identify and enter into commercial arrangements with
feedstock suppliers, construction contractors, engineering service companies, site owners,
manufacturing and engineering companies, and customers will depend on developing and maintaining
close working relationships with industry participants. Our success in this area will also depend
on our ability to select and evaluate suitable projects, as well as to consummate transactions in a
highly competitive environment. These relationships may take the form of joint ventures with other
private parties or local government bodies, contractual arrangements with other companies,
including those that supply feedstock that we will use in our business, or minority investments
from third parties. There can be no assurances that we will be able to establish these strategic
relationships, or, if established, that the relationships will be maintained. In addition, the
dynamics of our relationships with strategic participants may require us to incur expenses or
undertake activities we would not otherwise be inclined to incur or undertake in order to fulfill
our obligations to these partners or maintain these relationships. If we do not successfully
establish or maintain strategic relationships, our business may be negatively affected.
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:
| timing of any construction by us or our licensees of plants; | ||
| demand for licenses or other technology transfer agreements of the Syntroleum® Technologies and receipt and revenue recognition of license fees; | ||
| feedstock prices; | ||
| prices for refined products; | ||
| demand for synthetic fuels and specialty products; | ||
| introduction or enhancement of FT and renewable fuels technologies by us and our competitors; | ||
| market acceptance of new technologies; and | ||
| 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 all of 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 the Syntroleum®
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, in some extreme cases, curtail
operations. Our FT and renewable fuels plants will generally be required to obtain permits under
applicable environmental laws and various permits for industrial siting and construction.
Compliance with environmental laws and regulations, as well as with any requisite environmental or
construction permits, may increase the costs of designing, constructing and operating our plants.
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 any changes may have a
material adverse effect on our results of operations, competitive position, or financial condition.
For instance, in response to studies suggesting that emissions of certain gases, commonly referred
to as greenhouse gases and including carbon dioxide and methane, may be contributing to warming of
the Earths atmosphere, the U.S. Congress is actively considering legislation, and more than a
dozen states have already taken legal measures to reduce emission of these gases, primarily through
the planned development of greenhouse gas emission inventories and/or regional greenhouse gas cap
and trade programs. New legislation or regulatory programs that restrict emissions of greenhouse
gases could have an adverse affect on our operations.
Terrorist threats and U.S. military actions could result in a material adverse effect on our
business.
Further acts of terrorism in the United States or elsewhere could occur. These developments
and similar future events may cause instability in the worlds financial and insurance markets and
could significantly 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 and to
successfully implement projects currently under development.
United States government regulations effectively preclude us from actively engaging in
business activities in certain countries. These regulations could be amended 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 do not carry a
significant amount of business interruption insurance. 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.
Item 1B. | Unresolved Staff Comments |
None.
Item 2. | Properties |
We own a nominal two b/d pilot plant located on approximately three acres leased in Tulsa,
Oklahoma. This lease expires in May 2022, and annual lease payments total approximately $9,000.
We lease a corporate facility in Tulsa, Oklahoma. The lease expires in 2011 with an option to
renew and provides for payments of approximately $85,500 annually.
We lease approximately 10 acres of land at the Port of Catoosa near Tulsa, on which we have
constructed a nominal 70 b/d GTL demonstration plant as part of our clean fuels project with the
DOE known as the DOE Catoosa Project. This lease runs through May 2011 and the rent expense is
approximately $47,000 annually. This demonstration plant was mothballed in 2006 and dismantlement
and relocation to China began in 2009 and will be completed in 2010.
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Item 3. | Legal Proceedings |
On October 14, 2009, we entered into a Settlement Agreement with Fletcher International, Ltd.
(Fletcher) to settle all legal claims arising in connection with the Investment Agreement (the
Investment Agreement) dated November 18, 2007, between us and Fletcher. Pursuant to the terms of
the Investment Agreement, under which a maximum of 12.4 million shares could be issued, Fletcher
agreed to purchase $12 million worth of our stock at floating per share prices over a twenty-four
month period. The purchase was divided into an Initial Investment of $3 million (at a premium to
the trading price of our stock) and Later Investments totaling $9 million (at a discount to the
trading price of our stock). Fletcher refused to close on the Initial Investment at $1.39 per
share, asserting that all of the conditions precedent had not been satisfied, and subsequently
attempted to make a Later Investment of $0.44 per share. We refused to close on the grounds that,
because Fletcher failed to make the Initial Investment, Fletcher was not entitled to go forward
with the Later Investments. Each party subsequently filed legal claims against one another, with
Syntroleum claiming unspecified damages against Fletcher and Fletcher claiming damages, excluding
legal fees, of $14 million.
Pursuant to the terms of the Settlement Agreement, we and Fletcher entered into a Securities
Purchase Agreement (the Securities Purchase Agreement) dated October 14, 2009 whereby Fletcher
purchased 1,513,833 shares of our common stock at a price of approximately $2.64 per share and was
issued a warrant, exercisable until October 14, 2015, to purchase 1,892,291 shares of our common
stock at an exercise price of $3.30 per share. The net proceeds to the Company were $3.8 million,
after deducting fees and expenses of the offering payable by us. Under the terms of the Securities
Purchase Agreement, Fletcher also has the option to purchase, on or before June 30, 2010, an
additional 3,027,665 shares of our common stock, at a price of $2.64 per share, in up to two
subsequent closings. Fletcher initiated the initial subsequent closing on December 30, 2009
whereby Fletcher purchased 1,892,290 shares of our common stock at a price of approximately $2.64
per share and was issued a warrant, exercisable until December 30, 2015, to purchase 2,365,362
shares of our common stock at an exercise price of $3.30 per share. The Company received net
proceeds of approximately $4.9 million, after deducting fees and expenses of the offering payable
by us. Fletcher may purchase up to 1,135,375 in a final subsequent closing and will receive a
warrant, exercisable for a period of six years, to purchase the number of shares of our common
stock equal to the product of 1.25 times the number of shares of our common stock purchased in such
subsequent closing, with an exercise price of $3.30 per share.
Fletcher is subject to an ownership limitation of 4.95% of the outstanding shares of common
stock (Ownership Limitation), under which Fletcher is prohibited from consummating any subsequent
closing or exercising any warrant where such closing or exercise would cause Fletcher to exceed the
Ownership Limitation, or from otherwise exceeding the Ownership Limitation through other avenues,
including the purchase of shares in the public market.
On August 17, 2007, we entered into a Resignation and Compromise Agreement (Compromise
Agreement) with Mr. Ziad Ghandour, a former director, employee and consultant to Syntroleum.
Under the Compromise Agreement, Mr. Ghandour has the right to receive additional compensation until
December 31, 2011 for five potential commercial projects, as defined in the Compromise Agreement.
Mr. Ghandour claims he is entitled to additional compensation as a result of a business transaction
with SINOPEC. We determined that no additional compensation was warranted as a result of the
transaction. Mr. Ghandour invoked the independent auditor review process under the Compromise
Agreement. Mr. Ghandour selected the independent auditor and we agreed to the selection. The
independent auditor found that no additional compensation was warranted under the Compromise
Agreement. On January 11, 2010, Mr. Ghandour filed a demand for arbitration. We responded to
Ghandours arbitration demand, denying that he is entitled to any additional compensation. No
hearing dates have been established. We believe we have valid defenses to the claims and we intend
to vigorously defend this matter, as such we have not recorded any liability with regard to this
litigation.
Item 4. | Submission of Matters to a Vote of Security Holders |
None.
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Part II
Item 5. | Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
Stock Prices. Our common stock is traded on the NASDAQ Stock Market under the symbol SYNM.
The table below reflects the high and low closing sales prices for our common stock for each
quarter during 2009 and 2008.
Sales Price | ||||||||
High | Low | |||||||
Year Ended December 31, 2009: |
||||||||
First Quarter |
$ | 1.46 | $ | 0.61 | ||||
Second Quarter |
$ | 2.58 | $ | 1.34 | ||||
Third Quarter |
$ | 3.13 | $ | 1.97 | ||||
Fourth Quarter |
$ | 2.76 | $ | 2.02 | ||||
Year Ended December 31, 2008: |
||||||||
First Quarter |
$ | 0.99 | $ | 0.46 | ||||
Second Quarter |
$ | 2.73 | $ | 0.66 | ||||
Third Quarter |
$ | 2.24 | $ | 0.97 | ||||
Fourth Quarter |
$ | 1.09 | $ | 0.54 |
Record Holders. The 76,214,577 shares of our common stock outstanding at February 19, 2010,
were held by approximately 1,200 record holders (including brokerage firms and other nominees).
Dividends. Cash dividends have not been paid since our inception. We currently intend to
retain any earnings for the future operation and development of our business and do not currently
anticipate paying any dividends in the foreseeable future. Any future determination as to dividend
policy will be made, subject to Delaware law, at the discretion of our board of directors and will
depend on a number of factors, including our future earnings, capital requirements, financial
condition, business prospects and other factors that our board of directors may deem relevant.
Our stock price may continue to be volatile and could decline in the future. Historically,
the market price of our common stock has been very volatile. The trading price of our common stock
is expected to continue to be subject to substantial volatility in response to numerous factors,
including publicity regarding actual or potential results with respect to development of the
Syntroleum® Technologies and the design, construction and commercial operation of plants using our
process, announcements of technological innovations by others with competing processes,
developments concerning intellectual property rights, including claims of infringement, annual and
quarterly variances in operating results, changes in energy prices, competition, changes in
financial estimates by securities analysts, any differences in actual results and results expected
by investors and analysts, investor perception of our favorable or unfavorable prospects and other
events or factors. In addition, the stock market has experienced and continues to experience
significant price and volume volatility that has affected the market price of equity securities of
many companies. This volatility has often been unrelated to the operating performance of those
companies. These broad market fluctuations may adversely affect the market price of our common
stock.
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. We can make no assurance that we
will be able to remain listed on the NASDAQ Stock Market.
Future sales of our common stock could adversely affect our stock price. Substantial sales of
our common stock in the public market, or the perception by the market that those sales could
occur, could lower our stock price or make it difficult for us to raise additional equity capital
in the future. These sales could include sales of shares of our common stock by our directors and
officers, who beneficially owned approximately 5% percent of the outstanding shares of our common
stock as of February 19, 2010. We cannot predict if future sales of our common stock, or the
availability of our common stock for sale, will harm the market price for our common stock or our
ability to raise capital by offering equity securities.
Issuer Repurchases of Equity Securities
Neither we nor anyone acting on our behalf or that of an affiliated purchaser purchased shares
of our common stock during the three months ended December 31, 2009.
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Equity Compensation Plans
The following table provides information concerning securities authorized for issuance under
our equity compensation plans as of December 31, 2009.
Equity Compensation Plan Information
Number of Securities | ||||||||||||
Remaining Available for | ||||||||||||
Number of Securities to | Weighted-average Exercise | Future Issuance Under | ||||||||||
be Issued Upon Exercise | Price of Outstanding | Equity Compensation Plans | ||||||||||
of Outstanding Options, | Options, Warrants and | (excluding securities | ||||||||||
Warrants and Rights | Rights | reflected in column (a)) | ||||||||||
Plan Category | (a) | (b) | (c) | |||||||||
Equity Compensation
Plans Approved by
Security Holders
(1)(2) |
8,501,811 | $ | 3.12 | 4,034,394 | ||||||||
Equity Compensation
Plans Not Approved by Security Holders (3)(4)(5) |
5,250,000 | $ | 2.62 | 4,307,096 | ||||||||
Total |
13,751,811 | $ | 2.93 | 8,341,490 | ||||||||
(1) | Includes the 1993 Stock Option and Incentive Plan, the 1997 Stock Incentive Plan, the 2005 Stock Incentive Plan, as amended, including the Stock Option Plan for Outside Directors. | |
(2) | Includes up to 75,000 shares to be issued upon exercise of warrants issued to Sovereign Oil & Gas Company II, LLC, a consulting firm that we previously have retained to assist us in acquiring stranded natural gas fields worldwide, which were approved by our stockholders. The warrants are issuable in varying amounts upon the acquisition of properties of the achievement of third-party participation in a project, and have an exercise price of between $6.40 and $7.98 per share for warrants issued since October 2004. | |
(3) | On August 31, 2002, we granted options to purchase 1,000,000 shares of our common stock at an exercise price of $1.55 to our previous Chief Executive Officer, John B. Holmes, Jr., as an inducement to his employment with Syntroleum. The ability to exercise the options will terminate upon the tenth anniversary of the date of the grant. | |
(4) | Includes up to 4,250,000 shares to be issued upon exercise of warrants issued to Tyson. The warrants are issuable upon Tyson remaining at least a 10% equity owner in Dynamic and upon commercial operation of the plant. The warrants have an exercise price of $2.87 per share. An additional 4,000,000 shares remain available to issue to Tyson upon Tyson remaining an equity partner and commercial operations of plants in the future. | |
(5) | We have registered via S-8 750,000 shares of common stock issuable as matching pursuant to the terms of the Syntroleum 401 (k) Plan. As of December 31, 2009, we have issued 442,904 shares under this Plan. |
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Performance Graph
The following performance graph compares the performance of our common stock during the period
beginning on December 31, 2004 and ending on December 31, 2009 to the NASDAQ Stock Market index
consisting of United States companies (the NASDAQ Composite) and an index consisting of all U.S.
and Foreign publicly traded companies listed as non-financial stocks with Standard Industrial Codes
1100-5999, 7000-9999 for the same period. The graph assumes a $100 investment in our common stock
and in each of the indexes at the beginning of the period and a reinvestment of dividends paid on
such investments throughout the period.
VALUE OF $100 INVESTMENT
ASSUMING REINVESTMENT OF DIVIDENDS AT DECEMBER 31, 2004, AND AT THE END OF EVERY FISCAL YEAR, AND
THROUGH DECEMBER 31, 2009
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Item 6. | Selected Financial Data |
The following selected financial information should be read in conjunction with Managements
Discussion and Analysis of Financial Condition and Results of Operation in Item 7 of this Annual
Report on Form 10-K and our consolidated financial statements and the related notes thereto
included in Item 8 of this Annual Report on Form 10-K.
For the Year Ended December 31, | ||||||||||||||||||||
2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
(in thousands, except per share data) | ||||||||||||||||||||
Statement of Operations Data: |
||||||||||||||||||||
Total revenues |
$ | 27,432 | $ | 4,890 | $ | 16,472 | $ | 2,700 | $ | 464 | ||||||||||
Income (loss) from continuing operations |
12,469 | (8,381 | ) | (10,362 | ) | (28,506 | ) | (25,310 | ) | |||||||||||
Investment, interest, other income (expense),
foreign currency, taxes and minority interest |
(7,309 | ) | 2,933 | 518 | 436 | 3,473 | ||||||||||||||
Income (loss) from discontinued operations |
(122 | ) | 1,310 | 13,595 | (26,555 | ) | (19,557 | ) | ||||||||||||
Net income (loss) |
$ | 5,038 | $ | (4,138 | ) | $ | 3,751 | $ | (54,625 | ) | $ | (41,394 | ) | |||||||
Basic and diluted per share amounts |
||||||||||||||||||||
Income (loss) from continuing operations |
$ | 0.07 | $ | (0.09 | ) | $ | (0.17 | ) | $ | (0.50 | ) | $ | (0.41 | ) | ||||||
Income (loss) from discontinued operations |
$ | 0.00 | $ | 0.02 | $ | 0.23 | $ | (0.48 | ) | $ | (0.36 | ) | ||||||||
Net income (loss) |
$ | 0.07 | $ | (0.07 | ) | $ | 0.06 | $ | (0.98 | ) | $ | (0.77 | ) | |||||||
As of December 31, | ||||||||||||||||||||
2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
Balance Sheet Data: |
||||||||||||||||||||
Working capital |
$ | 27,307 | $ | 7,709 | $ | 22,401 | $ | 29,199 | $ | 46,095 | ||||||||||
Total assets |
58,861 | 38,838 | 32,291 | 43,937 | 89,705 | |||||||||||||||
Convertible debt |
| | | 27,641 | 25,925 | |||||||||||||||
Deferred revenue |
25,668 | 22,613 | 22,578 | 21,840 | 20,952 |
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Item 7. | Managements Discussion and Analysis of Financial Condition and Results of Operation |
Overview
Our focus is the commercialization of innovative technology to produce synthetic liquid
hydrocarbons. Our Bio-Synfining Technology processes triglycerides and/or fatty acids from fats
and vegetable oils with heat, hydrogen and proprietary catalysts to make renewable synthetic fuels,
such as diesel, heating oil, jet fuel (subject to certification), kerosene, naphtha and propane.
Syntroleum has quantified in excess of 100 different fats and oils, which cover the spectrum of
both cost and quality, for conversion to synthetic fuels via the Bio-Synfining Technology.
Operations to date have consisted of activities related to the commercialization of a
proprietary process (the Syntroleum® Process) and previously consisted of research and
development of the Syntroleum® Process designed to convert carbonaceous material (biomass, coal,
natural gas and petroleum coke) into synthetic liquid hydrocarbons. Synthetic hydrocarbons
produced by the Syntroleum® Process can be further processed using the Syntroleum Synfining®
Process into high quality liquid fuels. Our Bio-Synfining Technology is a renewable fuels
application of our Synfining® technology. We are centered on being a recognized provider of the
Bio-Synfining Technology, Syntroleum® Process and Synfining® product upgrading technology to the
energy industry through strategic relationships and deployment of our technology.
Operating Revenues
During the periods discussed below, our revenues were primarily generated from the sale or
transfer of our technology with certain restrictions, technical services revenue from engineering
service rendered to Dynamic Fuels for the PDP as well as other engineering services, licensing
revenue from Marathon, reimbursement for research and development activities associated with the
Syntroleum® Process and sales of products for testing purposes. In the future, we expect to receive
revenue from engineering technical services, royalties and other income from our jointly owned
subsidiary Dynamic Fuels, sales and licensing of our technologies and product sales or royalties
for the use of GTL, BTL and CTL plants in which we will own an equity interest.
Until the commencement of commercial operation of our Dynamic Fuels facility located in
Geismar, Louisiana, we expect that cash flow relating to our Syntroleum® Technologies will consist
primarily of revenues associated with technical services provided by our engineers and sales and
licensing of our technology. Upon commercial operations of our Dynamic Fuels facility we will
receive royalty fees based on the production of the facility. Commercial operations are expected
to begin in the second half of 2010. We expect to receive additional profits from the operations
of the facility based on our proportionate equity ownership of the plant. We may receive revenues
associated with the sale of the use of our technology to certain customers with limited rights in
certain geographic areas. Our future operating revenues and investments in projects will depend on
the successful commercial construction and operation of the Dynamic Fuels facility or other GTL,
BTL or CTL plants based on the Syntroleum® Process, the success of competing GTL technologies, and
other competing uses for natural gas, biomass or coal. We expect our results of operations and
cash flows to be affected by changing crude oil, natural gas, oils, animal fats, fuel and specialty
product prices and trends in environmental regulations. If the price of these products increases
(decreases), there could be a corresponding increase (decrease) in operating revenues.
We continue to incur operating expenses with respect to commercializing our Syntroleum®
Technologies and do not anticipate recognizing any significant revenue production from the Dynamic
Fuels Bio-Synfining facility until the second half of 2010.
Operating Expenses
Our operating expenses historically have consisted primarily of engineering, including third
party engineering, the construction and operation of the Catoosa Demonstration Facility, pilot
plant, research and development expenses and general and administrative expenses, which include
costs associated with general corporate overhead, compensation expense, legal and accounting
expenses and expenses associated with other related administrative functions.
We have also recognized depreciation, depletion and amortization expense related to office and
computer equipment, buildings and leasehold improvements and patents. We have reduced our costs
and expenses over the past three years with the completion of our research and development efforts
related to running the CDF and Pilot Plant, operating costs declined as a result of suspending
operations at both plants, reducing our workforce and focusing on cost minimization. Our current
workforce consists of engineers and general and administrative employees. The implementation of
these cost saving measures had a significant favorable impact on our operating expenses and we
expect to continue to focus on these cost saving measures on a go-forward basis. We do not expect
to rehire any of the employees included in the reductions. Our operating expenses are not expected
to increase further within the near future.
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We have incurred costs related specifically to the development and design of the
Bio-Synfining and Syntroleum® Process. These costs, which relate primarily to engineers, outside
contract services for initial engineering, design, and development are included in engineering
costs in our consolidated statements of operations.
We have invested $24.25 million of cash into our Dynamic Fuels Bio-Synfining plant in which
we own an interest for our portion of start-up and capital expenditures, including working capital
for our share of the engineering design, construction and start-up of the plant. Upon the
commencement of commercial operations of a plant, we will incur our share of initial working
capital which includes expenses relating primarily to the cost of feedstocks for the plant and
operating expenses relating to the plant, including labor, consumables and product marketing costs.
Due to the substantial capital expenditures associated with the construction of a Bio-Synfining
plant, we expect the plant will incur significant depreciation and amortization expense in the
future.
Commercial and Licensee Projects
On June 22, 2007, we entered into definitive agreements with Tyson Foods, Inc (Tyson) to
form a joint venture Limited Liability Company, Dynamic Fuels, LLC, a Delaware limited liability
company (Dynamic Fuels), to construct facilities in the United States using our Bio-Synfining
Technology. The purpose of Dynamic Fuels is to construct multiple stand-alone commercial plants in
the United States. The first facility is being constructed in Geismar, Louisiana and, based on
current estimates, will produce approximately 75 million gallons per year of renewable synthetic
products beginning in 2010. The LLC Agreement provides for management and control of Dynamic Fuels
to be exercised jointly by representatives of the Company and Tyson equally with no LLC member
exercising control. It was initially capitalized on July 13, 2007 with $4.25 million in capital
contributed from Tyson and $4.25 million in capital contributions from Syntroleum.
The capital and working capital budget for Dynamic Fuels financing, construction and initial
operations of the first plant to use our Bio-Synfining Technology is estimated to equal $170.0
million in total. Dynamic Fuels received approval from the Louisiana State Bond Commission to sell
$100 million in Gulf Opportunity Tax Exempt Bonds to partially finance the plant. These bonds were
sold on October 21, 2008, in the amount of $100 million and are due October 1, 2033. Syntroleum
and Tyson have made capital contributions in the amount of $20.0 million each in 2008 and 2009. The
remaining estimated $30.0 million in total will be required to be funded in the first half of 2010.
Proceeds Debt and Equity Contributions (in Millions) | Dynamic Fuels | Synm Portion | ||||||
Funded Proceeds from Debt Issuance* |
$ | 100.0 | | |||||
Funded Equity Contributions from Members |
$ | 40.0 | $ | 20.0 | ||||
Committed Equity Contributions from Members 2010 |
$ | 30.0 | $ | 15.0 | ||||
Total Proceeds Debt and Equity Contributions |
$ | 170.0 | $ | 35.0 | ||||
* | Interest during construction is calculated based on the daily interest rate stated at closing of 1.30 percent for 15 months. The interest rate for the bonds is a daily floating interest rate and may change significantly from this amount. The interest rate as of December 31, 2009 was 0.20%. Dynamic Fuels entered into an interest rate swap whereby it fixed its interest rate at 2.19% for a period of 5 years with declining swap coverage in the fourth quarter of 2008. The bond indenture requires that the bond principal be backed by a stand-by letter of credit. Tyson provided a letter of credit guaranteeing the full amount of bonds for Dynamic Fuels. We granted Tyson warrants in lieu of payment for the guarantee for our portion of the letter of credit. Monthly fees for this letter of credit are paid by Tyson. Dynamic Fuels reimburses Tyson for these monthly fees and are an additional financing cost to Dynamic. |
This project continues to progress forward. Plant start up is scheduled for the first half of
2010 and full rate operations are expected during the third quarter of 2010. All major pieces of
equipment and reactors have been installed, but the project has encountered construction delays.
The primary reason construction delay has been the installation of piping to connect the installed
plant equipment. The cash impact of the delay has resulted in an additional $20 million in costs
to the total project, of which Syntroleum must contribute 50%. This includes increased working
capital for operations staff and financing costs that were previously expected to be funded by
operations. Both parties have committed to funding the cost overrun in the second quarter of 2010.
Tyson is responsible for supplying feedstock to the plant, either from its own internal
sources or from supplies it procures in the open market. The feedstock supply agreement provides a
pricing formula for the feedstock, which is generally equivalent to the market price. The Tyson fat
blend feedstock is expected to provide us with a notable cost advantage due to the types of fats to
be utilized. The feedstock slate will be subject to change based upon market availability and other
factors. We currently expect that the first facility will produce approximately 77% diesel, 13%
naphtha and 10% liquefied petroleum gases. We expect that Dynamic Fuels will be eligible for a federal excise tax credit (if extended) of
$1.00 per gallon for diesel produced and $0.50 per gallon for naphtha and liquefied petroleum gases
produced.
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Discontinued Operations
Research and Development
Our policy is to expense costs associated with the Catoosa Demonstration Facility and pilot
plant, and research and development costs as incurred in accordance with the Financial Accounting
Standards Board Accounting Standards Codification (FASB ASC) Topic 730 Research and Development.
All of these research and development expenses were associated with the development of our
Syntroleum® Process. The Catoosa Demonstration Facility expenses previously included costs to
maintain and operate the facility for further research and development as well as for
demonstrations for licensees and other customers. The expenses associated with the facility in
2009 include certain expenses associated with the mothball state of the facility, primarily rent
and utilities associated with the office space. Research and development expenses previously
included costs to operate our laboratory and technology center, salaries and wages associated with
these operations, research and development services performed by universities, consultants and
third parties and additional supplies and equipment for these facilities. Our policy is to expense
costs associated with the development of GTL plants or other projects until we begin our PDP and
front-end engineering and design program on the respective projects. We have incurred costs
related specifically to the development of the Syntroleum® Process.
International Oil and Gas
We previously pursued international oil and gas activities, which primarily included the
leasehold acquisition, geological and geophysical work covering various areas in Nigeria, and
drilling costs for the Aje-3 discovery well (Aje-3) in Oil Mining Lease 113 (OML) offshore
Nigeria. In the fourth quarter of 2006, we decided to exit our international oil and gas
activities due to limited access to capital requirements. We sold all the stock of various
subsidiaries, including Syntroleum Nigeria Limited which held our interests in the Ajapa and Aje
fields offshore Nigeria to African Energy Equity Resources Limited (AEERL), a direct wholly
owned subsidiary of Energy Equity Resources (Norway) Limited (EERNL) for a total of $12,172,000.
Results of Operations
Consolidated Results for the Years Ended December 31,
Revenues | 2009 | 2008 | 2007 | |||||||||
(in thousands) | ||||||||||||
Technology Revenue |
$ | 22,503 | $ | | $ | | ||||||
Licensing Revenue from Marathon |
| | 13,665 | |||||||||
Technical Services Revenue |
1,940 | 576 | 394 | |||||||||
Technical Services Revenue from Dynamic Fuels |
2,767 | 2,592 | 1,554 | |||||||||
Other Revenue |
222 | 1,722 | 859 | |||||||||
Total Revenues |
$ | 27,432 | $ | 4,890 | $ | 16,472 | ||||||
Technology Revenue. Technology Revenue was $22,503,000 for the year ended December 31,
2009 and relates to the delivery of technology documents, transference of technology and the sale
of certain technology equipment. Technology Agreements will be unique to individual customers.
Revenue recognition will be determined on an individual contract basis. We are actively pursuing
other agreements. Due to the complexity and due diligence requirements of these agreements, the
business development requirements typically span current year timing.
Licensing Revenue from Marathon. Licensing revenue of $13,665,000 for the year ended December 31,
2007 related to the Consolidation and License Agreement granted to Marathon in January 2007 of
$12,665,000 and the recognition of previously deferred license fee credits of $1,000,000. The new
Licensing Agreement was entered into to settle a convertible debt obligation to Marathon for
funding a portion of our Catoosa Demonstration Facility. We do not anticipate receiving additional
licensing revenue from Marathon in the near term.
Technical Services Revenue. Revenues from engineering services for a PDP for Dynamic and other
engineering services increased in 2009 compared to 2008 and 2007 revenues. This increase is
attributable to increased technical services contracts related to certain Technology Revenue
Agreements and continued work on the engineering design and project management of Dynamic Fuels.
Revenue from Dynamic Fuels is expected to be significantly less in 2010 as the project is nearly
completed and the plant is expected to be operational in the second half of 2010. We expect to
continue to earn revenues for engineering services to other customers on an individual contract
basis in 2010.
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Other Revenue. Other revenues decreased in the year ended December 31, 2009 compared to the
same periods last year. The increased revenue in 2008 consisted of GTL fuel sales and recognition
of revenue for the completion of the second and third milestone for our work with testing 600
gallons of renewable jet fuel in the amount of $1,012,000 in 2008 and $220,000 in 2007. Revenue in
2007 also consisted of fuel sales to the Department of Transportation of approximately $144,000.
We have sold all of our FT fuel from our demonstration facility and do not expect to recognize
future revenues from this revenue source.
Operating Costs and Expenses | 2009 | 2008 | 2007 | |||||||||
(in thousands) | ||||||||||||
Engineering |
3,416 | 3,803 | 5,753 | |||||||||
Depreciation, depletion, amortization |
339 | 620 | 745 | |||||||||
Non-cash equity compensation |
4,180 | 2,418 | 4,980 | |||||||||
General and administrative and other |
7,028 | 6,430 | 15,356 | |||||||||
Total Operating Costs and Expenses |
$ | 14,963 | $ | 13,271 | $ | 26,834 | ||||||
Engineering Expense. The decrease in expenditures in 2009 compared to 2008 and 2007 consists of
decreased salaries due to a lower number of engineers and decreased expenditures associated with
outside engineering firms for work on mechanical reactor designs.
Non-Cash Equity Compensation. Equity compensation expense for the vesting of stock compensation
awards to employees increased in 2009 compared to 2008 and decreased from expense recognized in
2007. These changes in expense primarily relate to a reduction in work force resulting in
cancellation of awards and new awards granted in the fourth quarter of 2008 and valued on the grant
date based on underlying stock prices. The new awards granted to all employees in 2008 are
performance related and are based on achieving certain milestones associated with the
Bio-Synfining Technology project. Previously granted awards were also valued at higher prices
based on the underlying stock prices of the company at the time of grant and were recognized in
2007. Most of these awards have been cancelled due to termination of employees or expired. We
expect to recognize the remaining amount of equity compensation for the milestone based awards by
June 30, 2010 and will not have significant equity compensation expense for the remainder of the
year, unless new awards are granted.
General and Administrative and Other. General and administrative expenses decreased significantly
in 2008 compared to 2007 from our cost reduction plan which included decreased expenditures
associated with overhead personnel, professional consultants, accountant fees, travel and insurance
expenditures. The company has not increased expenditures for any of these items in 2009 compared
to 2008. The increase in general and administrative expenses in 2009 primarily related to legal
fees from ongoing litigation with Fletcher and for bonus compensation for the execution and
delivery of technology document agreements. The litigation with Fletcher was settled in the fourth
quarter of 2009 and we expect to see a decrease in legal fees from the conclusion of this
litigation and decreased general and administrative fees in 2010.
Other Income and Expenses | 2009 | 2008 | 2007 | |||||||||
(in thousands) | ||||||||||||
Interest Income |
$ | 96 | $ | 542 | $ | 1,454 | ||||||
Other Income (Expense) |
70 | 25 | 1 | |||||||||
Loss in equity of Dynamic Fuels, LLC |
(4,158 | ) | (424 | ) | (340 | ) | ||||||
Foreign Currency Exchange |
(3,036 | ) | 2,790 | (1,315 | ) | |||||||
Minority Interest |
| | 706 | |||||||||
Income taxes |
(281 | ) | | | ||||||||
Income (Loss) From Discontinued Operations |
(122 | ) | 1,310 | 13,595 |
Interest Income. The decrease in interest income over the years is due to declining
interest rates on money market funds. A majority of interest income is generated from money market
accounts with our current cash balances.
Loss in equity of Dynamic Fuels, LLC. Loss from our investment in Dynamic Fuels increased due to
initial start-up operating expenditures. Expenditures incurred for the year ended September 30,
2009 include site rent, project development, site selection, equipment evaluation and labor
expenditures for operations staff. In anticipation of plant operation in 2010, expenditures
incurred for Dynamic Fuels total approximately $8,317,000 for the twelve months ended September 30,
2009. Approximately $3,679,000 is attributable to the expense associated with marking the Dynamic
Fuels interest rate swap to market. The swap is discussed in Commercial and Licensee Projects.
The joint venture capitalizes costs associated with the construction of the plant and we expect to
see income from this investment in 2010 upon the start up of commercial operations. We report our
50 percent share of Dynamic Fuels results of operations on a three month lag basis.
Foreign Currency Exchange. Changes in the foreign currency exchange are due to fluctuation in
the value of the Australian dollar compared to the U.S. Dollar. The foreign currency changes
result from translation adjustments from our license with the Commonwealth of Australia which is
denominated in Australian dollars. These changes have no current cash impact on us.
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Income (Loss) from Discontinued Operations. Changes in Income from discontinued operation primarily
resulted from:
Oil and Gas |
| proceeds received in the amount of $1,500,000 from the settlement of future payments that would have been calculated on first gross revenues from our international oil and gas assets in 2008; and | ||
| international oil and gas gains of $10,078,000 recognized for the sale of stock in our Nigerian subsidiary for our interests in Aje and Ajapa assets in 2007. |
Research and Development |
| decrease in expenditures for research and development activities associated with the demonstration plants due to mothballing of plants or leasing agreements in 2009 and 2008. The large increase in 2007 is with laboratory facilities, personnel and termination expenditures in 2007, as well as operations of demonstration plants in 2007; and | ||
| a onetime gain in 2007 resulting from the extinguishment of debt related to the Marathon note for the construction of the demonstration facility in the amount of $11,793,000 contributed to the income recognized in 2007; |
We will not incur further expenses related to our oil and gas activities in the future. We
will not incur significant expenses related to our research and development activities in the
future as all liabilities associated with the discontinuance of activities have been incurred in
2007.
Liquidity and Capital Resources
General
As of December 31, 2009, we had $25,012,000 in cash and cash equivalents. At December 31,
2009 we had $3,315,000 in accounts receivable outstanding relating to our Technology Transfer
Agreements and our Technical Services Revenue provided to Dynamic Fuels and other revenue. We
believe that all of the receivables currently outstanding will be collected and have not
established a reserve for bad debts.
Our current liabilities totaled $1,847,000 as of December 31, 2009.
Our business plan over the next several years includes potential investments in additional
plants and we will need to raise additional capital to accomplish this plan. We expect to obtain
additional funding through debt or equity financing in the capital markets, joint ventures, license
agreements and other strategic alliances, 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 in the future without stockholder approval, and the terms
of our preferred stock could include dividend, liquidation, conversion, voting and other rights
that are 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 might be available.
Assuming the commercial success of the plants based on the Syntroleum® Process, we expect that
license fees, catalyst sales and sales of products from plants in which we own an interest will be
a source of revenues. In addition, we could receive revenues from other commercial projects we are
pursuing. If we are unable to generate funds from operations, our need to obtain funds through
financing activities will be increased.
Cash Flows
2009 vs. 2008
Cash flows provided by operations was $12,646,000 during the year ended December 31, 2009
compared to cash flows used in operations of $2,772,000 during the year ended December 31, 2008.
The increase in cash flows provided by operations primarily results from the collection of revenues
from technology transfer agreements of $19,000,000 and engineering technical services.
Cash flows used in investing activities were $6,218,000 during the year ended December 31,
2009 compared to $5,532,000 during the year ended December 31, 2008. We invested $6,000,000 in
Dynamic Fuels in April of 2009 and have committed to an additional $15,000,000 investment in the
first half of 2010. We expect to utilize cash flows provided by operations for this investment.
The cash used in investing activities in 2008 included a $14,000,000 investment into Dynamic Fuels.
This investment was offset by the sale of assets associated with our discontinued operations such
as, receipt of payments from AAERL of $7,266,000 and the proceeds from the sale of the Technology
Center of $1,100,000. We do not have any other assets for sale related to our discontinued
operations.
Cash flows provided by financing activities during the year ended December 31, 2009 was
$8,483,000 compared to $0 in 2008. The increase in cash flows provided by financing activities is
primarily due to net proceeds received from our Stock Purchase Agreement with Fletcher. Fletcher
purchased 3,406,123 shares of our common stock at a stock price of approximately
$2.64 in the fourth quarter of 2009.
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2008 vs. 2007
Cash flows used in operations were $2,772,000 during the year ended December 31, 2008,
compared to cash flows used in operations of $23,078,000 during the year ended December 31, 2007.
The decrease in cash flows used in operations primarily results from lower cash used in continuing
operations based on the new cost structure implemented by our management team in 2007, increased
cash revenues and the receipt of a non-refundable advance payment of $3,000,000 recorded as
deferred revenue. We also decreased our cash used in discontinued operations of research and
development activities in 2008 when compared to 2007.
Cash flows used in investing activities were $5,532,000 during the year ended December 31,
2008, compared to cash flows provided by investing activities of $1,484,000 during the year ended
December 31, 2007. The change was primarily related to the capital contribution to our joint
venture, Dynamic Fuels for initial construction costs in the amount of $14,000,000. This
investment is offset by the sale of assets associated with our discontinued operations as stated
above of $8,366,000.
Cash flows used in financing activities during the year ended December 31, 2008 was $0
compared to $6,534,000 provided by financing activities during the year ended December 31, 2007.
The change in cash flows was primarily due to net proceeds received from a draw-down of $12,800,000
under our Common Stock Purchase Agreement offset by the payment of liabilities associated with our
international oil and gas assets.
Contractual Obligations
The following table sets forth our contractual obligations as of December 31, 2009:
Payments Due by Period | ||||||||||||||||||||
(In thousands) | ||||||||||||||||||||
Less than 1 | After 5 | |||||||||||||||||||
Contractual Obligations | Total | year | 1-3 years | 4-5 years | years | |||||||||||||||
Operating Lease Obligations |
535 | 310 | 151 | 18 | 56 | |||||||||||||||
Capital Investments |
15,000 | 15,000 | | | | |||||||||||||||
Asset Retirement Obligations |
1,020 | 1,020 | | | | |||||||||||||||
Total |
$ | 16,555 | $ | 16,330 | $ | 151 | $ | 18 | $ | 56 | ||||||||||
Our operating leases include leases for corporate headquarters and copiers.
We have entered into employment agreements, which provide severance cash benefits to several
key employees. Commitments under these agreements totaled approximately $2,139,000 at December 31,
2009. Expense is not recognized until an employee is severed.
The capital and working capital budget for Dynamic Fuels financing, construction and initial
operations of the first plant to use the Companys Bio-Synfining Technology is estimated to equal
$170.0 million. Dynamic Fuels received approval from the Louisiana State Bond Commission to sell
$100 million in Gulf Opportunity Zone Tax Exempt Bonds to partially finance the plant. These bonds
were sold on October 21, 2008, in the amount of $100 million. Syntroleum and Tyson have made
capital contributions in the amount of $20.0 million each in 2008 and 2009. The remaining
estimated $15.0 million each will be required to be funded in the first half of 2010. We expect to
fund the remaining 2010 commitment from available cash. The plant is expected to begin commercial
operations by the third quarter of 2010.
Equity Issuances
On October 14, 2009, we and Fletcher entered into a Securities Purchase Agreement (the
Securities Purchase Agreement) whereby Fletcher purchased 1,513,833 shares of our common stock at
a price of approximately $2.64 per share and was issued a warrant, exercisable until October 14,
2015, to purchase 1,892,291 shares of our common stock at an exercise price of $3.30 per share.
Fletcher initiated the initial subsequent closing on December 30, 2009 whereby Fletcher purchased
1,892,290 shares of our common stock at a price of approximately $2.64 per share and was issued a
warrant, exercisable until December 30, 2015, to purchase 2,365,362 shares of our common stock at
an exercise price of approximately $3.30 per share. The Company received net proceeds of
approximately $4.9 million, after deducting fees and expenses of the offering payable by us.
Fletcher may purchase up to 1,135,375 in a final subsequent closing and will receive a warrant,
exercisable for a period of six years, to purchase the number of shares of our common stock equal
to the product of 1.25 times the number of shares of our common stock purchased in such subsequent
closing, with an exercise price of approximately $3.30 per share.
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As an incentive to Tyson for entering the Dynamic Fuels Limited Liability Company Agreement,
Tyson received warrants to buy our common stock. The warrants are allocated in three tranches. The
first tranche of 4.25 million shares was awarded upon signing of the LLC Agreement, Feedstock and
Master License Agreements in June 2007. The Warrant Agreement provides that the second tranche of
2.5 million shares will be issued upon sanctioning of the second plant and the third tranche of
1.5 million shares will be issued upon sanctioning of the third plant, provided that Tyson has at
least a 10% interest in Dynamic Fuels. The exercise price of the first tranche of 4.25 million
warrants is $2.87 per share, which was the ten-day average closing price prior to the signing of
the above referenced agreements on June 22, 2007. The exercise price of the second and third
tranches of warrants will be the ten-day average closing price prior to the sanctioning of plants 2
or 3. Vesting requires that Tyson remain at least a 10% equity owner in Dynamic Fuels (in the case
of the first tranche) and in the applicable plant (in the case of the second and third tranches),
and that each plant has commenced commercial operation. Maturity of each tranche of warrants will
be on the third anniversary of each respective plants start-up date of commercial operations. If
25% or more of the project cost for the third plant is debt financed, then the third warrant
tranche will not vest. In the event that Tyson owns a 90% or greater interest in Dynamic Fuels the
number of shares subject to the second and third warrant tranche doubles subject to a limitation
that Tyson will not receive pursuant to all tranches, warrants for stock equal to or more than 20%
of the outstanding shares of Syntroleum common stock. In the event Tyson defaults by not paying its
capital contributions to the plant, Tyson loses the warrants for such plant.
On June 30, 2008, we and Tyson entered into a Warrant Agreement providing for the issuance of
warrants to Tyson to purchase shares of our common stock in exchange for credit support relating to
the obligations of Dynamic Fuels under the Gulf Opportunity Zone Tax Exempt Bonds, (GO Zone
Bonds). Tyson agreed under the terms of the Warrant Agreement to provide credit support for our
50% share of the guarantee. Tyson received 8.0 million fully vested warrants to purchase the
Companys common stock at an exercise price of $0.01 on October 21, 2008 upon providing the credit
support upon the issuance of the GO Zone Bonds. The warrants were exercised on April 16, 2009.
Pursuant to two registration rights agreements, we have granted Tyson demand and piggyback
registration rights with respect to the shares of common stock issuable pursuant to the warrants.
New Accounting Pronouncements
In June 2009, the FASB issued accounting guidance which addresses the accounting and
disclosure requirements for transfers of financial assets. The guidance requires entities to
provide more information about sales of securitized financial assets and similar transactions,
particularly if the seller retains some risk to the assets. The guidance eliminates the concept of
a qualifying special-purpose entity, changes the requirements for the de-recognition of financial
assets, and calls upon sellers of the assets to make additional disclosures about them. The
guidance is effective for new transfers of financial assets occurring in fiscal years beginning
after November 15, 2009, and interim periods within those years. The implementation of this
guidance will not have a material impact on our financial position and results of operations.
In June 2009, the FASB issued new guidance that amended the existing criteria for
consolidating variable interest entities (VIEs). The new consolidation criteria will require an
ongoing qualitative assessment of which entity has the power to direct matters that most
significantly impact the activities of a VIE and has the obligation to absorb losses or benefits
that could be potentially significant to the VIE. The new guidance is effective for fiscal years
beginning after November 15, 2009. The implementation of this guidance will not have a material
impact on our financial position and results of operations.
In September 2009, we adopted the FASB statement on Generally Accepted Accounting Principles
(GAAP) relating to the FASB Accounting Standards Codification. This standard establishes the
Codification as the source of authoritative accounting principles recognized by the FASB to be
applied by nongovernmental entities in the preparation of financial statements in conformity with
U.S. GAAP. Rules and interpretive releases of the Securities and Exchange Commission (SEC) under
authority of federal securities laws are also sources of authoritative GAAP for SEC registrants.
The FASB will no longer issue new standards in the form of Statements.
Critical Accounting Policies and Estimates
The preparation of financial statements in accordance with generally accepted accounting
principles requires management to make estimates and use assumptions that affect reported amounts.
We believe that the following items represent our critical accounting policies and estimates:
Revenue Recognition. We recognize revenues from technical services provided as time and
expenses for services or support associated with a contract or license are incurred. The license
agreements require us to develop a technology design and other technical services in accordance
with licensee specifications; this design package is called the process design package or PDP.
Technical service revenues primarily resulted from the preparation of our PDP to Dynamic Fuels in
2009, 2008 and 2007. The preparation of our PDP includes engineering labor and necessary materials
for completion of the package.
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We recognize revenues from the transfer of technology documentation to customers or through
licensing structures.
Any deposits or advance payments for the technology documentation is recorded as deferred
revenue in the consolidated balance sheets until recognized as revenue in the consolidated
statement of operations. The Company recognizes revenue on the transfer of technology
documentation upon the physical transfer of the technology documentation by the Company to the
customer pursuant to the terms of the specific agreement.
License fee deposits received as cash upon the sale of master volume or regional license
agreements are recorded as deferred revenue in the consolidated balance sheets until recognized as
revenue in the consolidated statements of operations. We recognize revenue on the sale of license
agreements by recording 50 percent of the license fee deposit as revenue when: (1) a site license
agreement has been formally executed, (2) the license fee deposit has been paid in cash and (3)
delivery to the licensee the PDP for the licensees initial plant. Since 50 percent of the license
fee deposit is subject to our indemnity obligation with respect to the performance guarantee on the
related plant, the remaining license fee deposit will be recognized as revenue in the consolidated
statement of operations after the related plant has passed certain performance tests. Option fees,
which provide licensees the right to include additional geographic areas in its license agreement
territory, are deferred until the earlier of the option being exercised or lapsing. The license
agreements currently allow us to use our own engineering staff or to work with outside engineering
contractors to develop a site specific plant design in accordance with licensee specifications;
this design package is called the PDP. To date, we have not delivered any PDPs for initial
licensed plants, except for the Dynamic Fuels Plant, which we are part owner of and no initial
license fee deposits are required. We are under no obligation to return these deferred revenues
except in the case when a licensee builds a plant and the plant does not pass certain performance
tests. In this situation, the licensee would be able to receive a refund of 50 percent of the
license fees paid. The license agreements have a 15 year life and, after this time, the deferred
revenue will be recorded as license revenue in the statements of operations unless a site license
has been executed. Our current licenses generally begin to expire in 2012 and the initial deposits
will be recognized as licensing revenue as the licenses expire should the licensee not purchase a
site license and begin construction of a plant prior to expiration of the license. We have not
received additional funds under these license agreements during the license period and do not
expect to receive additional funds under these license agreements. We are currently pursuing
different avenues for the sale of technology rights, via equity ownership or sale or transfer of
technology, and have not entered into this type of license agreement since 2007.
Preparation of the PDP can take varying amounts of time depending on the size of the project
and could take a period of time; ranging six months to two years from notice to proceed.
Construction time will depend on the size of the project, site location conditions and the
availability of construction services, necessary materials and labor. Current estimates for
construction times for large capital projects in excess of one billion dollars in costs are from
three to five years from completion of the front end engineering design.
We expect to recognize revenue for royalty fees associated with our licensees plants or our
own equity owned plants. The royalties will be recognized upon production of finished product by
the licensee.
Stock-Based Compensation. We account for stock-based compensation in accordance with FASB
ASC Topic 718, Compensation Stock Compensation. Under the fair value recognition provisions of
this statement, share-based compensation cost is measured at the grant date based on the fair value
of the award and is recognized as expense over the applicable vesting period of the stock award
(generally three years) using the straight line method.
Non-Employee Stock-Based Compensation. We also grant stock-based incentives to certain
non-employees. These stock based incentives are accounted for in accordance with FASB ASC Topic
718, Compensation Stock Compensation. Stock awards that are tied to performance criteria are
expensed at the time the performance goals are met.
Asset Retirement Obligations. We follow FASB ASC Topic 410, Asset Retirement and Environmental
Obligations, which requires entities to record the fair value of a liability for an asset
retirement obligation in the period in which it is incurred and a corresponding increase in the
carrying amount of the related long-lived asset. The standard requires that we record the
discounted fair value of the retirement obligation as a liability at the time the plants are
constructed. The asset retirement obligations consist primarily of costs associated with the
future plant dismantlement of our pilot plants. As the pilot plants are directly related to
research and development activities and have been expensed accordingly, no corresponding amount is
capitalized as part of the related propertys carrying amount. The liability accretes over time
with a charge to accretion expense.
Critical Estimates. The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Some of the more significant estimates made
by management include, but are not limited to, the valuation of stock-based compensation, estimates
for accrued liabilities and estimates for asset retirement obligations. Actual results could
differ from these estimates.
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Item 7A. | Quantitative and Qualitative Disclosures about Market Risk. |
Margins for crude oil, natural gas, coal, vegetable oils and fats and other commodities create
a market risk for economics associated with our Syntroleum® Technologies. Because the synthetic
crude oil, liquid fuels and specialty products that plants utilizing the Syntroleum® Technologies
are expected to produce will compete in markets with oil and refined petroleum products, and
because natural gas, coal, biomass, fats or vegetable oils will be used as the feedstock for these
plants, an increase in feedstock prices relative to prices for oil or refined products, or a
decrease in prices for oil or refined products relative to 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. Prices for oil,
natural gas, coal, biomass, fats, greases, vegetable oils and refined products are subject to wide
fluctuation in response to relatively minor changes in the supply and demand, market uncertainty
and a variety of additional factors that are beyond our control.
We expect that we will need to raise substantial additional capital to accomplish our business
plan over the next several years. We expect to obtain additional funding through debt or equity
financing in the capital markets, joint ventures, license agreements, sale of assets and other
strategic alliances, 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 in the future without stockholder approval, and the terms of our preferred stock
could include dividend, liquidation, conversion, voting and other rights that are 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.
Foreign exchange risk currently relates to deferred revenue, a portion of which is denominated
in Australian dollars. Financial statement assets and liabilities may be translated at prevailing
exchange rate and may result in gains or losses in current income. Monetary assets and liabilities
are translated into United States dollars at the rate of exchange in effect at the balance sheet
date. Transaction gains and losses that arise from exchange rate fluctuations applicable to
transactions denominated in a currency other than the United States dollar are included in the
results of operations as incurred. The portion of deferred revenue denominated in Australian
currency was U.S. $13,397,000 at December 31, 2009. The deferred revenue is converted to U.S.
dollars for financial reporting purposes at the end of every reporting period. To the extent that
conversion results in gains or losses, such gains or losses will be reflected in our statements of
operations. The exchange rate of the Australian dollar to the United States dollar was $0.89 and
$0.69 at December 31, 2009 and December 31, 2008, respectively.
We do not have any purchased futures contracts or any derivative financial instruments, other
than warrants issued to purchase common stock at a fixed price in connection with consulting
agreements, private placements and other equity offerings.
Item 8. | Financial Statements and Supplementary Data |
Our consolidated financial statements, together with the report thereon of HoganTaylor LLP
dated February 26, 2010, are set forth on pages F-1 through F-19 hereof. See Item 15 for an index
to our consolidated financial statements.
Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
None.
Item 9A. | Controls and Procedures |
Evaluation of Disclosure Controls and Procedures. In accordance with Exchange Act Rules
13a-15 and 15d-15, we carried out an evaluation, under the supervision and with the participation
of management, including our Chief Executive Officer and Principal Financial Officer, of the
effectiveness of our disclosure controls and procedures as of the end of the period covered by this
report. Based on that evaluation, our Chief Executive Officer and Principal Financial Officer
concluded that our disclosure controls and procedures were effective as of December 31, 2009 to
provide reasonable assurance that information required to be disclosed in our reports filed or
submitted under the Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the SEC rules and forms.
Changes in Internal Controls. There has been no change in our internal control over financial
reporting that occurred during the three months ended December 31, 2009 that has materially
affected, or is reasonably likely to materially affect, our internal controls over financial
reporting.
Managements Report on Internal Control Over Financial Reporting. Our management is
responsible for establishing and maintaining adequate internal control over financial reporting, as
such term is defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f). Under the supervision and
with the participation of our management, including our Chief Executive Officer and Principal
Financial Officer, we conducted an evaluation of the effectiveness of our internal control over
financial reporting as of December 31, 2009 based on the framework in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on
our evaluation under the criteria set forth in Internal Control-Integrated Framework, our
management believes that our internal control over financial reporting was effective as of December
31, 2009.
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Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
HoganTaylor LLP, an independent registered public accounting firm that audited our financial
statements included in this Annual Report on Form 10-K, has issued an attestation report of our
internal control over financial reporting. Such attestation is included below.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Syntroleum Corporation
Syntroleum Corporation
We have audited Syntroleum Corporations (a Delaware Corporation) internal control over financial
reporting as of December 31, 2009, based on criteria established in Internal ControlIntegrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Syntroleum Corporations management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying Managements Report on Internal Control Over Financial
Reporting. Our responsibility is to express an opinion on Syntroleum Corporations internal control
over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, and testing
and evaluating the design and operating effectiveness of internal control based on the assessed
risk. Our audit also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that (a)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (b) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (c) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Syntroleum Corporation maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2009, based on criteria established in Internal
ControlIntegrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheets of Syntroleum Corporation and subsidiaries
as of December 31, 2009 and 2008, and the related consolidated statements of operations,
stockholders equity (deficit) and cash flows for each of the three years in the period ended
December 31, 2009 and our report dated February 26, 2010, expressed an unqualified opinion.
/s/ HOGANTAYLOR LLP
Tulsa, Oklahoma
February 26, 2010
February 26, 2010
Item 9B. | Other Information |
None.
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PART III
Item 10. | Directors, Executive Officers and Corporate Governance |
The information required by Item 10 is incorporated herein by reference to the section
entitled Proposal 1Election of Directors in our definitive proxy statement for our 2010 annual
meeting of stockholders, which will be filed with the SEC pursuant to Regulation 14A under the
Securities Exchange Act of 1934 within 120 days of December 31, 2009.
Item 11. | Executive Compensation |
The information required by Item 11 is incorporated herein by reference to the section
entitled Executive Compensation in our definitive proxy statement for our 2010 annual meeting of
stockholders, which will be filed with the SEC pursuant to Regulation 14A under the Securities
Exchange Act of 1934 within 120 days of December 31, 2009.
Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
The information required by Item 12 is incorporated herein by reference to the section
entitled Security Ownership of Management and Certain Beneficial Owners in our definitive proxy
statement for our 2010 annual meeting of stockholders, which will be filed with the SEC pursuant to
Regulation 14A under the Securities Exchange Act of 1934 within 120 days of December 31, 2009.
Information required by Item 201(d) of Regulation S-K is set forth in Item 5 of this Annual Report
on Form 10-K.
Item 13. | Certain Relationships and Related Transactions, and Director Independence |
The information required by Item 13 is incorporated herein by reference to the section
entitled Certain Transactions in our definitive proxy statement for our 2010 annual meeting of
stockholders, which will be filed with the SEC pursuant to Regulation 14A under the Securities
Exchange Act of 1934 within 120 days of December 31, 2009.
Item 14. | Principal Accountant Fees and Services |
The information required by Item 14 is incorporated herein by reference to the sections
entitled Independent Public Accountant Fees in our definitive proxy statement for our 2010 annual
meeting of stockholders, which will be filed with the SEC pursuant to Regulation 14A under the
Securities Exchange Act of 1934 within 120 days of December 31, 2009.
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PART IV
Item 15. | Exhibits and Financial Statement Schedules |
(a)(1) Financial Statements
Consolidated Financial Statements for the Three Years Ended December 31, 2009:
F-1 | ||||
F-2 | ||||
F-3 | ||||
F-4 | ||||
F-5 | ||||
F-6 | ||||
(a)(2) Financial Statement Schedules
All schedules and other statements for which provision is made in the applicable regulations
of the SEC have been omitted because they are not required under the relevant instructions or are
inapplicable.
(a)(3) Index of Exhibits
Exhibit | ||
No. | Description of Exhibit | |
*3.1 | Certificate of Incorporation of the Company (incorporated by reference to Appendix B to the Companys Proxy Statement filed with the Securities and
Exchange Commission on May 12, 1999 (File No. 0-21911)). |
|
*3.2 | Amended and Restated Certificate of Designations of Series A Junior Participating Preferred Stock of the Company dated October 24, 2004 (incorporated by
reference to Exhibit 4.5 to Amendment No. 2 to the Companys Current Report on Form 8-K dated June 17, 1999 and filed with the Securities and Exchange
Commission on October 28, 2004 (File No. 0-21911)). |
|
*3.3 | Bylaws of the Company (incorporated by reference to Exhibit 3.3 to the Companys Annual Report on form 10-K for the year ended December 31, 2005 filed
with the Securities and Exchange Commission on March 7, 2006 (File No. 0-21911)). |
|
*3.3.1 | Amendment to the Bylaws of the Company (incorporated by reference to Exhibit 3.3.1 to the Companys Annual Report on Form 10-K for the year ended
December 31, 2005 filed with the Securities and Exchange Commission on March 7, 2006 (File No. 0-21911)). |
|
**3.3.2 | Amendment to the Bylaws of the Company adopted on April 22, 2008. |
|
*4.1 | Second Amended and Restated Rights Agreement dated as of October 28, 2004 (incorporated by reference to Exhibit 4.1 to the Companys Current Report on
Form 8-K filed with the Securities and Exchange Commission on October 29, 2004 (File No. 0-21911)). |
|
**4.1.1 | Amendment dated as of November 15, 2007, to Second Amended and Restated Rights Agreement |
|
*4.2 | Warrant Agreement, dated as of November 4, 2003, between the Company and American Stock Transfer and Trust Company, as warrant agent (including form of
warrant certificate) (incorporated by reference to Exhibit 4.1 to the Companys Quarterly Report on Form 10-Q for the period ended September 30, 2003
filed with the Securities and Exchange Commission on November 14, 2003 (File No. 0-21911)). |
|
*4.3 | Warrant Agreement, dated as of May 26, 2004, between the Company and American Stock Transfer and Trust Company, as warrant agent (including form of
warrant certificate) (incorporated by reference to Exhibit 4.1 to the Companys Current Report on Form 8-K filed with the Securities and Exchange
Commission on May 25, 2004 (File No. 0-21911)). |
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Exhibit | ||
No. | Description of Exhibit | |
*4.4 | Warrant Agreement, dated as of June 22, 2007, between the Company and Tyson Foods, Inc. a Delaware
Corporation (incorporated by reference to Exhibit 4.4 to the Companys Quarterly Report on Form 10-Q
for the period ended June 30, 2007 filed with the Securities and Exchange Commission on May 10, 2007
(File No. 0-21911)). |
|
*4.5 | Registration Rights Agreement dated as of June 22, 2007, between the Company and Tyson Foods, Inc. a
Delaware Corporation (incorporated by reference to Exhibit 4.5 to the Companys Quarterly Report on
Form 10-Q for the period ended June 30, 2007 filed with the Securities and Exchange Commission on May
10, 2007 (File No. 0-21911)). |
|
*4.6 | Warrant Agreement with Tyson Foods, Inc dated as of June 30, 2008 (incorporated by reference to
Exhibit 10.1 to the Companys Quarterly Report on Form 10-Q for the period ended June 30, 2008 filed
with the Securities and Exchange Commission on August 4, 2008 (File No. 0-21911). |
|
*4.7 | Warrants to Purchase 8,000,000 Shares of Common Stock Dated as of October 21, 2008 (incorporated by
reference to Exhibit 4.1 to the Companys Quarterly Report on Form 10-Q for the period ended September
30, 2008 filed with the Securities and Exchange Commission on October 31, 2008 (File No. 0-21911). |
|
*4.8 | Common Stock Purchase Warrant Dated October 14, 2009 between the Company and Fletcher International,
Ltd. (incorporated by reference to Exhibit 10.89 to the Companys Current Report on Form 8-K filed
with the Securities and Exchange Commission on October 14, 2009 (File No. 001-34490)). |
|
*4.9 | Common Stock Purchase Warrant Dated December 30, 2009 between the Company and Fletcher International,
Ltd. (incorporated by reference to Exhibit 10.90 to the Companys Current Report on Form 8-K filed
with the Securities and Exchange Commission on December 30, 2009 (File No. 001-34490)). |
|
+*10.3 | Form of Option Agreement under the Stock Option Plan for Outside Directors of the Company
(incorporated by reference to Exhibit 10.2 to the Companys Annual Report on Form 10-K for the year
ended December 31, 2004 filed with the Securities and Exchange Commission on March 16, 2005 (File No.
0-21911)). |
|
*10.4 | Master Preferred License Agreement dated March 7, 1997 between the Company and Marathon Oil Company
(incorporated by reference to Exhibit 10.23 to the Companys Registration Statement on Form S-4/A
(Registration No. 333-50253) filed with the Securities and Exchange Commission on June 8, 1998). |
|
*10.5 | Master Preferred License Agreement dated April 10, 1997 between the Company and Atlantic Richfield
Company (incorporated by reference to Exhibit 10.24 to the Companys Registration Statement on Form
S-4/A (Registration No. 333-50253) filed with the Securities and Exchange Commission on June 8,
1998). |
|
*10.6 | Volume License Agreement dated August 1, 1997 between the Company and YPF International, Ltd.
(incorporated by reference to Exhibit 10.25 to the Companys Registration Statement on Form S-4/A
(Registration No. 333-50253) filed with the Securities and Exchange Commission on June 8, 1998). |
|
*10.7 | Volume License Agreement dated February 4, 1998 between the Company and Kerr-McGee Corporation
(incorporated by reference to Exhibit 10.26 to the Companys Registration Statement on Form S-4/A
(Registration No. 333-50253) filed with the Securities and Exchange Commission on June 8, 1998). |
|
*10.8 | Consolidation and License Agreement dated as of January 16, 2007 between the Company and Marathon Oil
Company (incorporated by reference to Exhibit 10.8 to the Companys Annual Report on Form 10-K for the
year ended December 31, 2006 filed with the Securities and Exchange Commission on March 16, 2007 (File
No. 0-21911)). |
|
+ *10.9.1 | SLH Corporation 1997 Stock Incentive Plan (incorporated by reference to Exhibit 10(c) to Amendment
No. 1 to the Companys Annual Report on Form 10-K/A for the year ended December 31, 1997 filed with
the Securities and Exchange Commission on April 13, 1998 (File No. 0-21911)). |
|
+ *10.9.2 | Form of Option Agreement with certain executive officers under the SLH Corporation 1997 Stock
Incentive Plan (incorporated by reference to Exhibit 10(e) to Amendment No. 1 to the Companys Annual
Report on Form 10-K/A for the year ended December 31, 1997 filed with the Securities and Exchange
Commission on April 13, 1998 (File No. 0-21911)). |
|
+ *10.9.3 | Form of Option Agreement with directors under the SLH Corporation 1997 Stock Incentive Plan
(incorporated by reference to Exhibit 10(f) to Amendment No. 1 to the Companys Annual Report on Form
10-K/A for the year ended December 31, 1997 filed with the Securities and Exchange Commission on April
13, 1998 (File No. 0-21911)). |
31
Table of Contents
Exhibit | ||
No. | Description of Exhibit | |
+ *10.10 | Form of Consent to Adjustment to Option Agreements called for by Section 2.1(c) of the Agreement and
Plan of Merger dated as of March 30, 1998 by and between SLH and the Company (incorporated by
reference to Exhibit 10.8 to the Companys Registration Statement on Form S-4 (Registration No.
333-50253) filed with the Securities and Exchange Commission on April 16, 1998). |
|
*10.11 | License Agreement dated April 26, 2000 between the Company and Ivanhoe Energy Inc. (incorporated by
reference to Exhibit 10.1 of the Companys Quarterly Report on Form 10-Q for the quarter ended March
31, 2000 filed with the Securities and Exchange Commission on May 12, 2000 (File No. 0-21911)). |
|
*10.12 | License Agreement dated August 2, 2000 between the Company and Syntroleum Australia Licensing
Corporation (incorporated by reference to Exhibit 10.1 of the Companys Quarterly Report on Form 10-Q
for the quarter ended June 30, 2000 filed with the Securities and Exchange Commission on August 14,
2000 (File No. 0-21911)). |
|
*10.13 | License Agreement dated August 3, 2000 between Syntroleum Australia Licensing Corporation and the
Commonwealth of Australia (incorporated by reference to Exhibit 10.2 of the Companys Quarterly Report
on Form 10-Q for the quarter ended June 30, 2000 filed with the Securities and Exchange Commission on
August 14, 2000 (File No. 0-21911)). |
|
*10.14.1 | Amendment No. 1 to Volume License Agreement dated October 11, 2000 between the Company and Ivanhoe
Energy Inc. (incorporated by reference to Exhibit 10.1 of the Companys Quarterly Report on Form 10-Q
for the quarter ended September 30, 2000 filed with the Securities and Exchange Commission on November
14, 2000 (File No. 0-21911)). |
|
*10.14.2 | Amendment No 3 to Volume License Agreement dated July 1, 2003 between the Company and Ivanhoe Energy,
Inc. (incorporated by reference to Exhibit 10.8 to the Companys Annual Report on Form 10-K for the
year ended December 31, 2006 filed with the Securities and Exchange Commission on March 16, 2007 (File
No. 0-21911)). |
|
*10.15 | Transfer of Participating Interest in Oil Mining Lease 113 from Syntroleum Nigeria Limited to Energy
Equity Resources Oil and Gas Limited, a subsidiary of Energy Equity Resources Limited. (incorporated
by reference to Exhibit 10.8 to the Companys Annual Report on Form 10-K for the year ended December
31, 2006 filed with the Securities and Exchange Commission on March 16, 2008 (File No. 0-21911)). |
|
+*10.23 | Employment Agreement dated September 17, 2002 between the Company and Jeffrey M. Bigger (incorporated
by reference to Exhibit 10.7 to the Companys Quarterly Report on Form 10-Q for the period ended
September 30, 2002 filed with the Securities and Exchange Commission on November 14, 2002 (File No.
0-21911)). |
|
+*10.24 | Indemnification Agreement dated September 16, 2002 between the Company and Jeffrey M. Bigger
(incorporated by reference to Exhibit 10.8 to the Companys Quarterly Report on Form 10-Q for the
period ended September 30, 2002 filed with the Securities and Exchange Commission on November 14, 2002
(File No., 0-21911)). |
|
+*10.25 | Indemnification Agreement dated as of March 13, 2003 between the Company and Ronald E. Stinebaugh
(incorporated by reference to Exhibit 10.42 to the Companys Annual Report on Form 10-K for the year
ended December 31, 2002 filed with the Securities and Exchange Commission on March 31, 2003 (File No.
0-21911)). |
|
+*10.16 | Employment Agreement dated February 17, 2003 between the Company and Ronald E. Stinebaugh
(incorporated by reference to Exhibit 10.43 to the Companys Annual Report on Form 10-K for the year
ended December 31, 2002 filed with the Securities and Exchange Commission on March 31, 2003 (File No.
0-21911)). |
|
+*10.27 | Stock Option Agreement dated October 1, 2002 between the Company and John B. Holmes, Jr. (incorporated
by reference to Exhibit 10.44 to the Companys Annual Report on Form 10-K for the year ended December
31, 2002 filed with the Securities and Exchange Commission on March 31, 2003 (File No. 0-21911)). |
|
*10.33 | Warrant Agreement dated as of November 28, 2005 between the Company and Sovereign Oil and Gas Company
II, LLC (incorporated by reference to Exhibit 10.3 to the Companys Registration Statement on Form S-3
(Registration No. 333-138487) filed with the Securities and Exchange Commission on November 7, 2006). |
|
*10.34 | Warrant Agreement dated as of July 26, 2006 between the Company and Sovereign Oil and Gas Company II.
LLC (incorporated by reference to Exhibit 10.4 to the Companys Registration Statement on Form S-3
(Registration No. 333-138487) filed with the Securities and Exchange Commission on November 7, 2006). |
32
Table of Contents
Exhibit | ||
No. | Description of Exhibit | |
+*10.35 | Director Stock Option Agreement dated December 20, 2002 between the Company and James R. Seward
(incorporated by reference to Annex D to the Companys proxy statement filed with the Securities and
Exchange Commission on March 29, 2004 (File No. 0-21911)). |
|
*10.39 | Amendment to Option Deed dated July 26, 2006, entered into August 10, 2006, between Syntroleum Nigeria
Limited and Energy Equity Resources Oil and Gas Limited (incorporated by reference to Exhibit 10.8 to
the Companys Annual Report on Form 10-K for the year ended December 31, 2006 filed with the
Securities and Exchange Commission on March 16, 2007 (File No. 0-21911)). |
|
+*10.40 | Employment Agreement dated as of July 6, 2004 between the Company and Edward G. Roth (incorporated by
reference to Exhibit 10.4 to the Companys Quarterly Report on Form 10-Q for the period ended June 30,
2004 filed with the Securities and Exchange Commission on August 13, 2004 (File No. 0-21911)). |
|
+*10.41 | Indemnification Agreement dated as of July 6, 2004 between the Company and Edward G. Roth
(incorporated by reference to Exhibit 10.5 to the Companys Quarterly Report on Form 10-Q for the
period ended June 30, 2004 filed with the Securities and Exchange Commission on August 13, 2004 (File
No. 0-21911)). |
|
*10.48 | Common Stock Purchase Agreement dated November 20, 2006 by and between Syntroleum Corporation and
Azimuth Opportunity Ltd. (incorporated by reference to Exhibit 10.1 to the Companys Current Report on
Form 8-K filed with the Securities and Exchange Commission on November 21, 2006 (File No. 0-21911)). |
|
*10.49 | Share Sale and Purchase Agreement dated January 19, 2007 between Syntroleum International Corporation,
Syntroleum Corporation, African Energy Equity Resources Limited and Energy Equity Resources (Norway)
Limited ((incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K filed
with the Securities and Exchange Commission on January 23, 2007 (File No. 0-21911)). |
|
+*10.50 | Syntroleum Corporation 2005 Stock Incentive Plan, effective as of April 25, 2005 (incorporated by
reference to
Exhibit 10.1 to the Companys Current Report on Form 8-K filed with the Securities and Exchange
Commission
on April 28, 2005 (File No. 0-21911)). |
|
+*10.51 | Summary of Performance Objectives and Target Payouts under the Syntroleum Corporation Annual Incentive
Plan (incorporated by reference to Exhibit 10.12 to the Companys Quarterly Report on Form 10-Q for the
period ended March 31, 2005 filed with the Securities and Exchange Commission on May 10, 2005 (File
No. 0-
21911)). |
|
+*10.52 | Form of Performance Vested Non-Qualified Option Award Agreement (incorporated by reference to Exhibit
10.1 to the Companys Current Report on Form 8-K filed with the Securities and Exchange Commission on
July
5, 2005 (File No. 0-21911)). |
|
+*10.53 | Form of Stock Option Agreement (incorporated by reference to Exhibit 10.3 to the Companys Registration
Statement on Form S-8 filed with the Securities and Exchange Commission on July 8, 2005 (Registration
No.
333-126427)). |
|
+*10.54 | Form of Employee Restricted Stock Award Agreement (incorporated by reference to Exhibit 10.4 to the
Companys Registration Statement on Form S-8 filed with the Securities and Exchange Commission on July
6,
2005 (Registration No. 333-126427)). |
|
+*10.58 | Form of Service Vested Incentive Stock Option Award Agreement (incorporated by reference to Exhibit
10.1 to
the Companys Current Report on Form 8-K filed with the Securities and Exchange Commission on January
27,
2006 (File No. 0-21911). |
|
*10.59 | Syntroleum Corporation Retention Incentive Agreement dated December 8, 2006 (incorporated by reference
to Exhibit 10.8 to the Companys Annual Report on Form 10-K for the year ended December 31, 2006 filed
with the Securities and Exchange Commission on March 16, 2007 (File No. 0-21911)). |
|
*10.60 | Dynamic Fuels Limited Liability Company Agreement dated June 22, 2007 (incorporated by
reference to Exhibit 10.60 to the Companys Quarterly Report on Form 10-Q for the period ended June
30, 2007 filed with the Securities and Exchange Commission on August 9, 2007 (File No. 0-21911). |
|
*10.61 | Syntroleum Corporation Bio-Synfining Master License Agreement with Dynamic Fuels dated June 22, 2007.
(incorporated by reference to Exhibit 10.61 to the Companys Quarterly Report on Form 10-Q for the
period ended June 30, 2007 filed with the Securities and Exchange Commission on August 9, 2007 (File
No. 0-21911). |
|
*10.62 | Syntroleum Corporation Participation Agreement with Tyson Foods, Inc. dated June 22, 2007
(incorporated by reference to Exhibit 10.62 to the Companys Quarterly Report on Form 10-Q for the
period ended June 30, 2007 filed with the Securities and Exchange Commission on August 9, 2007 (File
No. 0-21911). |
33
Table of Contents
Exhibit | ||
No. | Description of Exhibit | |
*10.63 | Resignation and Compromise Agreement dated as of August 6, 2007 between the Company and Mr. Ziad
Ghandour and TI Capital Management (incorporated by reference to Exhibit 10.63 to the Companys
Quarterly Report on Form 10-Q for the period ended September 30, 2007 filed with the Securities and
Exchange Commission on November 8, 2007 (File No. 0-21911). |
|
*10.64 | Restricted Stock Agreement dated April 24, 2007 between the Company and Mr. Edward G. Roth
(incorporated by reference to Exhibit 10.64 to the Companys Quarterly Report on Form 10-Q for the
period ended September 30, 2007 filed with the Securities and Exchange Commission on November 8, 2007
(File No. 0-21911). |
|
*10.65 | Restricted Stock Agreement dated March 19, 2007 between the Company and Mr. John B. Holmes, Jr.
(incorporated by reference to Exhibit 10.65 to the Companys Quarterly Report on Form 10-Q for the
period ended September 30, 2007 filed with the Securities and Exchange Commission on November 8, 2007
(File No. 0-21911). |
|
*10.66 | Employment Agreement dated June 13, 2007 between the Company and Ms. Karen L. Gallagher (incorporated
by reference to Exhibit 10.66 to the Companys Quarterly Report on Form 10-Q for the period ended
September 30, 2007 filed with the Securities and Exchange Commission on November 8, 2007 (File No.
0-21911). |
|
*10.67 | Restricted Stock Agreement dated July 12, 2007 between the Company and Ms. Karen L. Gallagher
(incorporated by reference to Exhibit 10.67 to the Companys Quarterly Report on Form 10-Q for the
period ended September 30, 2007 filed with the Securities and Exchange Commission on November 8, 2007
(File No. 0-21911). |
|
*10.68 | Amendment to Option Deed dated August 13, 2007, between Syntroleum Corporation, Syntroleum
International Corporation, African Energy Equity Resources Limited and Energy Equity Resources
Limited (incorporated by reference to Exhibit 10.67 to the Companys Quarterly Report on Form 10-Q for
the period ended September 30, 2007 filed with the Securities and Exchange Commission on November 8,
2007 (File No. 0-21911). |
|
*10.69 | Syntroleum Corporation Stock Purchase and Sale of Common Stock with Fletcher International Ltd. Dated
November 18, 2007 (incorporated by reference to Exhibit 10.68 to the Companys Form 8-K filed with the
Securities and Exchange Commission on November 21, 2007 (File No. 0-21911)). |
|
*10.70 | Syntroleum Corporation and Marathon Oil Corporation Settlement of Consolidation and License Agreement
dated December 20, 2007 (incorporated by reference to Exhibit 10.70 to the Companys Form 8-K filed
with the Securities and Exchange Commission on December 27, 2007 (File No. 0-21911)). |
|
*10.71 | Separation Agreement dated December 20, 2007 between the Company and Richard L. Edmonson (incorporated
by reference to Exhibit 10.71 to the Companys Form 8-K filed with the Securities and Exchange
Commission on December 27, 2007 (File No. 0-21911)). |
|
*10.72 | Restricted Stock Agreement dated December 20, 2007 between the Company and Mr. Richard L. Edmonson
(incorporated by reference to Exhibit 10.72 to the Companys Form 8-K filed with the Securities and
Exchange Commission on December 27, 2007 (File No. 0-21911)). |
|
*10.73 | Syntroleum Corporation Asset Lease and Purchase Agreement with Emerging Fuels Technology, LLC dated
January 10, 2008 (incorporated by reference to Exhibit 10.73 to the Companys Form 8-K filed with the
Securities and Exchange Commission on January 16, 2007 (File No. 0-21911)). |
|
*10.74 | Amendment Deed between Syntroleum Corporation, Syntroleum International, African Energy Equity
Resources, Ltd, and Energy Equity Resources (Norway) Ltd dated March 30, 2007 (incorporated by
reference to Exhibit 10.2 to the Companys Quarterly Report on Form 10-Q for the period ended March
31, 2007 filed with the Securities and Exchange Commission on May 10, 2007 (File No. 0-21911). |
|
*10.75 | Termination Agreement between Syntroleum International Corporation and Sovereign Oil and Gas Company
II, LLC dated March 29, 2007 (incorporated by reference to Exhibit 10.3 to the Companys Quarterly
Report on Form 10-Q for the period ended March 31, 2007 filed with the Securities and Exchange
Commission on May 10, 2007 (File No. 0-21911). |
|
*10.76 | Employment Agreement dated April 24, 2007 between the Company and Mr. Edward G. Roth (incorporated by
reference to Exhibit 10.4 to the Companys Quarterly Report on Form 10-Q for the period ended March
31, 2007 filed with the Securities and Exchange Commission on May 10, 2007 (File No. 0-21911). |
|
*10.77 | Retirement Agreement dated April 30, 2007 between the Company and Mr. Greg Jenkins (incorporated by
reference to Exhibit 10.5 to the Companys Quarterly Report on Form 10-Q for the period ended March
31, 2007 filed with the Securities and Exchange Commission on May 10, 2007 (File No. 0-21911). |
34
Table of Contents
Exhibit | ||
No. | Description of Exhibit | |
*10.78 | Retirement Agreement dated November 15, 2007 between the Company and Jack B. Holmes, Jr. (incorporated
by reference to Exhibit 10.79 to the Companys Annual Report on Form 10-K for the year ended December
31, 2008 filed with the Securities and Exchange Commission on March 17, 2008 (File No. 0-21911). |
|
*10.79 |
Retirement Agreement dated November 16, 2007 between the Company and Ken Agee. (incorporated by
reference to Exhibit 10.78 to the Companys Annual Report on Form 10-K for the year ended December 31,
2008 filed with the Securities and Exchange Commission on March 17, 2008 (File No. 0-21911). |
|
*10.80 | Restricted Stock Agreement dated November 16, 2007 between the Company and Ken Agee. (incorporated by
reference to Exhibit 10.80 to the Companys Annual Report on Form 10-K for the year ended December 31,
2008 filed with the Securities and Exchange Commission on March 17, 2008 (File No. 0-21911). |
|
*10.81 | Amendment to Syntroleum Corporation 2005 Incentive Plan (incorporated by reference to Exhibit 10.1 to
the Companys 8-K filed with the Securities and Exchange Commission on June 18, 2008 (File No.
0-21911). |
|
*10.82 | Stock Option Agreement Dated November 21, 2008 between the Company and Karen Gallagher (incorporated
by reference to Exhibit 10.82 to the Companys Annual Report on Form 10-K for the year ended December
31, 2008, filed with the Securities and Exchange Commission on March 2, 2009. (File No. 0-21911). |
|
*10.83 | Restricted Stock Agreement Dated November 21, 2008 between the Company and Edward G. Roth
(incorporated by reference to Exhibit 10.83 to the Companys Annual Report on Form 10-K for the year
ended December 31, 2008, filed with the Securities and Exchange Commission on March 2, 2009. (File
No. 0-21911). |
|
*10.84 | Settlement Agreement and Release of Claims Dated October 14, 2009 between the Company and Fletcher
International, Ltd. (incorporated by reference to Exhibit 10.87 to the Companys Current Report on
Form 8-K filed with the Securities and Exchange Commission on October 14, 2009 (File No. 001-34490)). |
|
*10.85 | Securities Purchase Agreement Dated October 14, 2009 between the Company and Fletcher International,
Ltd. (incorporated by reference to Exhibit 10.88 to the Companys Current Report on Form 8-K filed
with the Securities and Exchange Commission on October 14, 2009 (File No. 001-34490)). |
|
*10.86 | Technology Transfer Agreement dated December 15, 2008 but effective as of February 20, 2009, between
the Company and Sinopec Corp. (incorporated by reference to Exhibit 10.85 to the Companys Current
Report on Form 8-K filed with the Securities and Exchange Commission on February 25, 2009) (File No.
0-21911)*** |
|
*10.87 | CDF Equipment and Material Transfer Agreement dated December 15, 2008 but effective as of February 20,
2009, between the Company and Sinopec Corp. (incorporated by reference to Exhibit 10.86 to the
Companys Current Report on Form 8-K filed with the Securities and Exchange Commission on February 25,
2009.) (File No. 0-21911)*** |
|
*10.88 | Amendment to Syntroleum Corporation 2005 Incentive Plan (incorporated by reference to Exhibit B to the
Companys definitive proxy statement filed with the Securities and Exchange Commission on April 13,
2009). (File No. 0-21911). |
|
*99.1 | Dynamic Fuels, LLC Audited Financial Statements, year ended September 30, 2008. |
|
**99.2 | Dynamic Fuels, LLC Audited Financial Statements, year ended September 30, 2009. |
|
**21 | Subsidiaries of Syntroleum |
|
**23 | Consent of HoganTaylor, LLP |
|
**31.1 | Section 302 Certification of Chief Executive Officer |
|
**31.2 | Section 302 Certification of Chief Financial Officer |
|
**32.1 | Section 906 Certification of Chief Executive Officer |
|
**32.2 | Section 906 Certification of Chief Financial Officer |
* | Incorporated by reference as indicated. | |
** | Filed herewith | |
+ | Compensatory plan or arrangement. | |
*** | CERTAIN PORTIONS OF THIS EXHIBIT AND THE ANNEXES THERETO WHICH ARE INDICATED BY XXX HAVE BEEN OMITTED BASED UPON A REQUEST FOR CONFIDENTIAL TREATMENT WHICH HAS BEEN GRANTED BY THE SECURITIES AND EXCHANGE COMMISSION. SUCH OMITTED PORTIONS HAVE BEEN FILED SEPARATELY WITH THE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES AND EXCHANGE ACT OF 1934. |
35
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
SYNTROLEUM CORPORATION |
||||
Dated: February 26, 2010 | By: | /s/ Edward G. Roth | ||
Edward G. Roth | ||||
Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the capacities and on the
dates indicated.
Name | Capacity | Date | ||
/s/ Edward G. Roth
|
Chief Executive
Officer and Director (Principal Executive Officer) |
February 26, 2010 | ||
/s/ Karen L. Gallagher
|
Senior Vice President
of Finance and
Principal Financial
Officer (Principal Financial Officer) |
February 26, 2010 | ||
/s/ Robert B. Rosene, Jr.
|
Chairman of the Board | February 26, 2010 | ||
/s/ Alvin R. Albe, Jr.
|
Director | February 26, 2010 | ||
/s/ Frank M. Bumstead
|
Director | February 26, 2010 | ||
/s/ P. Anthony Jacobs
|
Director | February 26, 2010 | ||
/s/ James R. Seward
|
Director | February 26, 2010 |
36
Table of Contents
Index to Exhibits
**3.3.2 | Amendment to the Bylaws of the Company adopted on April 22, 2008 |
|
**4.1.1 | Amendment dated as of November 17, 2007, to Second Amended and Restated Rights Agreement |
|
**99.2 | Dynamic Fuels, LLC Audited Financial Statements, year ended September 30, 2009 |
|
**21 | Subsidiaries of Syntroleum |
|
**23 | Consent of HoganTaylor LLP |
|
**31.1 | Section 302 Certification of Chief Executive Officer |
|
**31.2 | Section 302 Certification of Chief Financial Officer |
|
**32.1 | Section 906 Certification of Chief Executive Officer |
|
**32.2 | Section 906 Certification of Chief Financial Officer |
37
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Syntroleum Corporation
Syntroleum Corporation
We have audited the accompanying consolidated balance sheets of Syntroleum Corporation (a Delaware
corporation) and subsidiaries as of December 31, 2009 and 2008, and the related consolidated
statements of operations, stockholders equity (deficit), and cash flows for each of the three
years in the period ended December 31, 2009. These financial statements are the responsibility of
the Companys management. Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). 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, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Syntroleum Corporation and subsidiaries as of December
31, 2009 and 2008, and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 2009 in conformity with accounting principles generally
accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), Syntroleum Corporations internal control over financial reporting as of
December 31, 2009, based on criteria established in Internal ControlIntegrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated
February 26, 2010 expressed an unqualified opinion on the effectiveness of Syntroleum Corporations
internal control over financial reporting.
/s/ HOGANTAYLOR LLP
Tulsa, Oklahoma
February 26, 2010
February 26, 2010
F-1
Table of Contents
SYNTROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
December 31, | December 31, | |||||||||||
2009 | 2008 | |||||||||||
ASSETS |
||||||||||||
CURRENT ASSETS: |
||||||||||||
Cash and cash equivalents |
$ | 25,012 | $ | 10,101 | ||||||||
Restricted cash |
449 | | ||||||||||
Accounts receivable |
3,315 | 517 | ||||||||||
Other current assets |
378 | 272 | ||||||||||
Total current assets |
29,154 | 10,890 | ||||||||||
PROPERTY AND EQUIPMENT at cost, net |
156 | 187 | ||||||||||
INVESTMENT IN DYNAMIC FUELS, LLC |
27,900 | 26,059 | ||||||||||
OTHER ASSETS, net |
1,651 | 1,702 | ||||||||||
$ | 58,861 | $ | 38,838 | |||||||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||||||
CURRENT LIABILITIES: |
||||||||||||
Accounts payable |
$ | 361 | $ | 662 | ||||||||
Accrued employee costs |
339 | 858 | ||||||||||
Deposits |
449 | | ||||||||||
Income tax payable |
281 | | ||||||||||
Current liabilities of discontinued operations |
417 | 1,661 | ||||||||||
Total current liabilities |
1,847 | 3,181 | ||||||||||
NONCURRENT LIABILITIES OF DISCONTINUED OPERATIONS |
603 | | ||||||||||
DEFERRED REVENUE |
25,668 | 22,613 | ||||||||||
COMMITMENTS AND CONTINGENCIES |
||||||||||||
STOCKHOLDERS EQUITY: |
||||||||||||
Preferred stock, $0.01 par value, 5,000 shares authorized, no shares issued |
| | ||||||||||
Common stock, $0.01 par value, 150,000 shares authorized, 76,014 and
63,529 shares issued and outstanding at December 31, 2009 and 2008,
respectively |
760 | 635 | ||||||||||
Additional paid-in capital |
362,861 | 350,325 | ||||||||||
Accumulated deficit |
(332,878 | ) | (337,916 | ) | ||||||||
Total stockholders equity |
30,743 | 13,044 | ||||||||||
$ | 58,861 | $ | 38,838 | |||||||||
The accompanying notes are an integral part of these consolidated statements.
F-2
Table of Contents
SYNTROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
For the Year Ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
REVENUES: |
||||||||||||
Technology revenue |
$ | 22,503 | $ | | $ | | ||||||
Licensing revenue from Marathon |
| | 13,665 | |||||||||
Technical services revenue |
1,940 | 576 | 394 | |||||||||
Technical services revenue from Dynamic Fuels, LLC |
2,767 | 2,592 | 1,554 | |||||||||
Other revenues |
222 | 1,722 | 859 | |||||||||
Total revenues |
27,432 | 4,890 | 16,472 | |||||||||
COSTS AND EXPENSES: |
||||||||||||
Engineering |
3,416 | 3,803 | 5,753 | |||||||||
Depreciation and amortization |
339 | 620 | 745 | |||||||||
General, administrative and other (including
non-cash
equity compensation of $4,180, $2,418 and
$4,980
for the years ended December 31, 2009, 2008 and
2007, respectively.) |
11,208 | 8,848 | 20,336 | |||||||||
OPERATING INCOME (LOSS) |
12,469 | (8,381 | ) | (10,362 | ) | |||||||
INTEREST INCOME |
96 | 542 | 1,454 | |||||||||
OTHER INCOME |
70 | 25 | 13 | |||||||||
LOSS IN EQUITY OF DYNAMIC FUELS, LLC |
(4,158 | ) | (424 | ) | (340 | ) | ||||||
FOREIGN CURRENCY EXCHANGE |
(3,036 | ) | 2,790 | (1,315 | ) | |||||||
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES |
5,441 | (5,448 | ) | (10,550 | ) | |||||||
INCOME TAXES |
(281 | ) | | | ||||||||
INCOME (LOSS) FROM CONTINUING OPERATIONS |
5,160 | (5,448 | ) | (10,550 | ) | |||||||
INCOME (LOSS) FROM DISCONTINUED OPERATIONS |
(122 | ) | 1,310 | 13,595 | ||||||||
NET INCOME (LOSS) |
$ | 5,038 | $ | (4,138 | ) | $ | 3,045 | |||||
LESS: NET INCOME ATTRIBUTABLE TO THE
NONCONTROLLING INTEREST |
| | 706 | |||||||||
NET INCOME (LOSS) ATTRIBUTABLE TO
SYNTROLEUM CORPORATION |
$ | 5,038 | $ | (4,138 | ) | $ | 3,751 | |||||
BASIC AND DILUTED NET INCOME (LOSS) PER SHARE: |
||||||||||||
Income (loss) from continuing operations |
$ | 0.07 | $ | (0.09 | ) | $ | (0.17 | ) | ||||
Income (loss) from discontinued operations |
0.00 | 0.02 | 0.23 | |||||||||
Net income (loss) |
$ | 0.07 | $ | (0.07 | ) | $ | 0.06 | |||||
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: |
||||||||||||
Basic |
70,355 | 62,725 | 59,731 | |||||||||
Diluted |
73,018 | 62,725 | 60,383 | |||||||||
The accompanying notes are an integral part of these consolidated statements.
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SYNTROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIT)
(in thousands)
Common Stock | Additional | |||||||||||||||||||
Number | Paid-in | Accumulated | Stockholders | |||||||||||||||||
of Shares | Amount | Capital | Deficit | Equity (Deficit) | ||||||||||||||||
Balance, January 1, 2007 |
56,020 | $ | 560 | $ | 322,411 | $ | (337,529 | ) | $ | (14,558 | ) | |||||||||
Stock options exercised |
22 | | 36 | | 36 | |||||||||||||||
Draw-down under common stock purchase agreement |
4,496 | 45 | 12,755 | | 12,800 | |||||||||||||||
Vesting of awards granted |
646 | 6 | 4,369 | | 4,375 | |||||||||||||||
Stock-based bonuses and match to 401(k) |
1,735 | 17 | 855 | | 872 | |||||||||||||||
Cancellation of restricted shares |
(100 | ) | | (267 | ) | | (267 | ) | ||||||||||||
Retirement of treasury stock |
(296 | ) | (3 | ) | (882 | ) | | (885 | ) | |||||||||||
Net income |
| | | 3,751 | 3,751 | |||||||||||||||
Balance, December 31, 2007 |
62,523 | $ | 625 | $ | 339,277 | $ | (333,778 | ) | $ | 6,124 | ||||||||||
Vesting of warrants granted |
| | 8,640 | | 8,640 | |||||||||||||||
Vesting of awards granted |
| | 2,275 | | 2,275 | |||||||||||||||
Stock-based bonuses and match to 401(k) |
1,316 | 13 | 130 | | 143 | |||||||||||||||
Cancellation of restricted shares |
(310 | ) | (3 | ) | 3 | | | |||||||||||||
Net loss |
| | | (4,138 | ) | (4,138 | ) | |||||||||||||
Balance, December 31, 2008 |
63,529 | $ | 635 | $ | 350,325 | $ | (337,916 | ) | $ | 13,044 | ||||||||||
Stock options exercised |
526 | 6 | 342 | | 348 | |||||||||||||||
Issuance of shares and warrants under common
stock purchase agreement |
3,406 | 34 | 8,966 | | 9,000 | |||||||||||||||
Warrants exercised |
8,000 | 80 | | | 80 | |||||||||||||||
Vesting of awards granted |
128 | 1 | 3,783 | | 3,784 | |||||||||||||||
Stock-based bonuses and match to 401(k) |
425 | 4 | 390 | | 394 | |||||||||||||||
Cancellation of option awards |
| | (945 | ) | | (945 | ) | |||||||||||||
Net income |
| | | 5,038 | 5,038 | |||||||||||||||
Balance, December 31, 2009 |
76,014 | $ | 760 | $ | 362,861 | $ | (332,878 | ) | $ | 30,743 | ||||||||||
The accompanying notes are an integral part of these consolidated statements.
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Table of Contents
SYNTROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the Year Ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||||||
Net income (loss) |
$ | 5,038 | $ | (4,138 | ) | $ | 3,751 | |||||
Income (loss) from discontinued operations |
(122 | ) | 1,310 | 13,595 | ||||||||
(Loss) income from continuing operations |
5,160 | (5,448 | ) | (9,844 | ) | |||||||
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities: |
||||||||||||
Depreciation, depletion and amortization |
339 | 620 | 745 | |||||||||
Foreign currency exchange |
3,036 | (2,790 | ) | 1,311 | ||||||||
Non-cash compensation expense |
4,180 | 2,418 | 4,980 | |||||||||
Loss on sale of assets |
84 | | 14 | |||||||||
Minority interest release of project equity contribution |
| | (706 | ) | ||||||||
Non-cash loss in equity method investee |
4,158 | 424 | 340 | |||||||||
Non-cash licensing revenue |
| | (13,665 | ) | ||||||||
Changes in assets and liabilities: |
||||||||||||
Accounts receivable |
(2,798 | ) | (97 | ) | 80 | |||||||
Other assets |
(230 | ) | (14 | ) | 928 | |||||||
Accounts payable |
(301 | ) | 37 | (1,467 | ) | |||||||
Accrued liabilities and other |
(238 | ) | (296 | ) | (1,159 | ) | ||||||
Deferred revenue |
(112 | ) | 2,825 | 372 | ||||||||
Net cash provided by (used in) continuing operations |
13,278 | (2,321 | ) | (18,071 | ) | |||||||
Net cash used in discontinued operations |
(632 | ) | (451 | ) | (5,007 | ) | ||||||
Net cash provided by (used in) operating activities |
12,646 | (2,772 | ) | (23,078 | ) | |||||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||||||
Purchase of property and equipment |
(723 | ) | (202 | ) | (162 | ) | ||||||
Proceeds from disposal of property and equipment |
505 | | | |||||||||
Investment in Dynamic Fuels |
(6,000 | ) | (14,000 | ) | (4,250 | ) | ||||||
Decrease in restricted cash |
| | 166 | |||||||||
Net cash (used in) continuing operations |
(6,218 | ) | (14,202 | ) | (4,246 | ) | ||||||
Net cash provided by discontinued operations |
| 8,670 | 5,730 | |||||||||
Net cash (used in) provided by investing activities |
(6,218 | ) | (5,532 | ) | 1,484 | |||||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||||||
Proceeds from sale of common stock, warrants and option exercises |
428 | | 36 | |||||||||
Proceeds from common stock purchase agreement |
9,000 | | 12,800 | |||||||||
Payment of debt |
| | (3,750 | ) | ||||||||
Repurchase of stock option awards |
(945 | ) | | | ||||||||
Purchase and retirement of treasury stock |
| | (885 | ) | ||||||||
Net cash provided by continuing operations |
8,483 | | 8,201 | |||||||||
Net cash (used in) discontinued operations |
| | (1,667 | ) | ||||||||
Net cash provided by financing activities |
8,483 | | 6,534 | |||||||||
FOREIGN EXCHANGE EFFECT ON CASH |
| | (4 | ) | ||||||||
NET CHANGE IN CASH AND CASH EQUIVALENTS |
14,911 | (8,304 | ) | (15,064 | ) | |||||||
CASH AND CASH EQUIVALENTS, beginning of year |
10,101 | 18,405 | 33,469 | |||||||||
CASH AND CASH EQUIVALENTS, end of year |
$ | 25,012 | $ | 10,101 | $ | 18,405 | ||||||
NON-CASH INVESTING AND FINANCING ACTIVITIES |
||||||||||||
Issuance of Common stock warrants for Dynamic Fuels Credit Enhancement |
$ | | $ | 8,640 | $ | | ||||||
The accompanying notes are an integral part of these consolidated statements.
F-5
Table of Contents
SYNTROLEUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Nature of Operations
The focus of Syntroleum Corporation and subsidiaries (the Company, Syntroleum, we,
our, or us) is the commercialization of our technologies to produce synthetic liquid
hydrocarbons. Our Bio-Synfining Technology processes triglycerides and/or fatty acids from fats
and vegetable oils with heat, hydrogen and proprietary catalysts to make renewable synthetic
products such as diesel, jet fuel (subject to certification), kerosene, naphtha and propane.
Syntroleum has quantified in excess of 100 different fats and oils, which cover the spectrum of
both cost and quality, for conversion to synthetic fuels via the Bio-Synfining Technology.
Operations to date have consisted of activities related to the commercialization of a
proprietary process (the Syntroleum® Process) and previously consisted of research and
development of the Syntroleum® Process designed to convert carbonaceous material (biomass, coal,
natural gas and petroleum coke) into synthetic liquid hydrocarbons. Synthetic hydrocarbons
produced by the Syntroleum® Process can be further processed using the Syntroleum Synfining®
Process into high quality liquid fuels. Our Bio-Synfining Technology is a renewable fuels
application of our Synfining® Technology. We are centered on being a recognized provider of the
Bio-Synfining Technology, Syntroleum® Process and Synfining® product upgrading technology to the
energy industry through strategic relationships and deployment of our technology.
Consolidation
The consolidated financial statements include the accounts of the Company and our
majority-owned subsidiaries. All significant inter-company accounts and transactions have been
eliminated. Investments in affiliated companies of 20 percent to 50 percent in which we do not
have a controlling interest are accounted for by the equity method. We own 50 percent and have a
non-controlling interest in Dynamic Fuels. The entity is accounted for under the equity method and
is not required to be consolidated in our financial statements; however, our share of the
activities is reflected in Other Income (Expense) in the Consolidated Statements of Operations
and the subsidiarys summarized financial information in note 4, Investment in Dynamic Fuels.
Our carrying value in Dynamic Fuels is reflected in Investment in Dynamic Fuels LLC in our
Consolidated Balance Sheets.
Revenue Recognition
We recognize revenues from technical services provided as time and expenses for services or
support associated with a contract or license are incurred. The license agreements require us to
develop a technology design and other technical services in accordance with licensee
specifications; this design package is called the Process Design Package, or PDP. Technical
service revenues primarily resulted from the preparation of our PDP to Dynamic Fuels in 2009, 2008
and 2007. The preparation of our PDP includes engineering labor and necessary materials for
completion of the package.
We recognized revenues from the transfer of technology documentation to customers or through
licensing structures. Any deposits or advance payments for the technology documentation is
recorded as deferred revenue in the consolidated balance sheets until recognized as revenue in the
consolidated statement of operations. The Company recognizes revenue on the transfer of technology
documentation upon the physical transfer of the technology documentation by the Company to the
customer pursuant to the terms of the specific agreement.
License fee deposits received as cash upon the sale of master volume or regional license
agreements are recorded as deferred revenue in the consolidated balance sheets until recognized as
revenue in the consolidated statements of operations. We recognize revenue on the sale of license
agreements by recording 50 percent of the license fee deposit as revenue when: (1) a site license
agreement has been formally executed, (2) the license fee deposit has been paid in cash and (3)
delivery to the licensee the PDP for the licensees initial plant. Since 50 percent of the license
fee deposit is subject to our indemnity obligation with respect to the performance guarantee on the
related plant, the remaining license fee deposit will be recognized as revenue in the consolidated
statement of operations after the related plant has passed certain performance tests. Option fees,
which provide licensees the right to include additional geographic areas in its license agreement
territory, are deferred until the earlier of the option being exercised or lapsing. The license
agreements currently allow us to use our own engineering staff or to work with outside engineering
contractors to develop a site specific plant design in accordance with licensee specifications;
this design package is called the PDP. To date, we have not delivered any PDPs for initial
licensed plants, except for the Dynamic Fuels Plant, which we are part owner of and no initial
license fee deposits are required. We are under no obligation to return these deferred revenues
except in the case when a licensee builds a plant and the plant does not pass certain performance
tests. In this situation, the licensee would be able to receive a refund of 50 percent of the
license fees paid. The license agreements have a 15 year life and, after this time, the deferred
revenue will be recorded as license revenue in the statements of operations unless a site license
has been executed. Our current licenses generally begin to expire in 2012 and the initial deposits
will be recognized as licensing revenue as the licenses expire should the licensee not purchase a
site license and begin construction of a plant prior to expiration of the license. We have not
received additional funds under these license agreements during the license period and do
not expect to receive additional funds under these license agreements. We are currently
pursuing different avenues for the sale of technology rights, via equity ownership or sale or
transfer of technology, and have not entered into this type of license agreement since 2007.
F-6
Table of Contents
Preparation of the PDP can take varying amounts of time depending on the size of the project
and could take a period of time; ranging six months to two years from notice to proceed.
Construction time will depend on the size of the project, site location conditions and the
availability of construction services, necessary materials and labor. Current estimates for
construction times for large capital projects in excess of one billion dollars in costs are from
three to five years from completion of the front end engineering design.
We expect to recognize revenue for royalty fees associated with our licensees plants or our
own equity owned plants. The royalties will be recognized upon production of finished product by
the licensee.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and highly liquid investments with an original
maturity of three months or less, primarily in the form of money market instruments. Our cash and
cash equivalents are held in a few financial institutions; however, we believe that our
counter-party risks are minimal based on the reputation and history of the institutions selected.
Restricted Cash
Restricted cash consists of cash held in an escrow account for the prepayment of operations
and invoices for an ongoing contractual project. The account has also been recorded as a liability
in current deposits on the consolidated balance sheet at December 31, 2009.
Accounts Receivable
The majority of our accounts receivable is due from the sale of our Catoosa Demonstration
Facility equipment and manuals. We expect to collect this receivable in the first quarter of 2010
based on the terms and timeline of the contract. The remaining amounts pertain to technical
service agreements. These accounts are typically due within 30 days and are stated as amounts due
from customers. Accounts outstanding longer than the contractual payment terms are considered past
due. We write off accounts receivable when they become uncollectible. Management determines
accounts to be uncollectible when we have used all reasonable means of collection and settlement.
Management believes that all amounts included in accounts receivable at December 31, 2009 and 2008
will be collected and therefore no allowance for uncollectible accounts has been recorded.
Property and Equipment
Property and equipment is stated at cost less accumulated depreciation. Maintenance, repairs
and replacement of minor items are expensed and major additions, expansions and betterments to
physical properties are capitalized, except those related to research and development activities,
including the Catoosa Demonstration Facility and the Tulsa Pilot Plant, which were expensed and
reported as discontinued operations. When assets are sold or retired, the cost and accumulated
depreciation related to those assets are removed from the accounts and any gain or loss is
recognized. Depreciation of property and equipment is computed on the straight-line method over
the estimated useful lives of three to seven years. Property and equipment consists of the
following (in thousands):
December 31, | December 31, | |||||||
2009 | 2008 | |||||||
Furniture and office equipment |
$ | 914 | $ | 1,306 | ||||
Leasehold improvements |
37 | 34 | ||||||
951 | 1,340 | |||||||
Less accumulated depreciation |
(795 | ) | (1,153 | ) | ||||
$ | 156 | $ | 187 | |||||
Income Taxes
Income taxes are accounted for using the asset and liability method of accounting for income
taxes. Under this method, deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and of net operating loss
carry-forwards. Deferred tax assets and liabilities are measured using the enacted tax rates and
laws in effect or that will be in effect when the differences are expected to reverse. The Company
records a valuation allowance if it is more likely than not that some portion or all of the
deferred tax asset will not be realized.
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Asset Retirement Obligations
We follow FASB ASC Topic 410, Asset Retirement and Environmental Obligations, which
requires entities to record the fair value of a liability for an asset retirement obligation in the
period in which it is incurred and a corresponding increase in the carrying amount of the related
long-lived asset. The standard requires that we record the discounted fair value of the retirement
obligation as a liability at the time the plants are constructed. The asset retirement obligations
consist primarily of costs associated with the future plant dismantlement of our pilot plants. As the pilot plants are
directly related to research and development activities and have been expensed accordingly, no
corresponding amount is capitalized as part of the related propertys carrying amount. The
liability accretes over time with a charge to accretion expense. Our Catoosa Demonstration
Facility is currently being dismantled and we have reduced our liability with expenditures incurred
with the dismantlement. We expect to complete the dismantlement in the first half of 2010 and will
no longer have a liability associated with this plant. Below is a reconciliation of the changes
in our asset retirement obligation for the years ended December 31, 2009 and 2008 (in thousands).
December 31, | December 31, | |||||||
2009 | 2008 | |||||||
Beginning Balance |
$ | 1,661 | $ | 1,504 | ||||
Liabilities Settled |
(641 | ) | | |||||
Accretion Expense |
| 157 | ||||||
Ending Balance |
$ | 1,020 | $ | 1,661 | ||||
Other Assets
Other assets include costs associated with patents and are amortized using the straight-line
method over their estimated period of benefit, ranging from fifteen to seventeen years. All costs
are capitalized and amortization begins upon initial costs incurred. Amortization expense for the
years ended December 31, 2009, 2008 and 2007 was $175,000, $159,000 and $136,000, respectively. We
periodically evaluate the recoverability of intangible assets and take into account events or
circumstances that warrant revised estimates of useful lives or that indicate that impairment
exists. Future amortization expense for patents as of December 31, 2010 is estimated to be
$113,000 per year through 2019. Patent costs consist of the following (in thousands):
December 31, | December 31, | |||||||
2009 | 2008 | |||||||
Patents |
$ | 2,704 | $ | 2,581 | ||||
Less accumulated amortization |
(1,053 | ) | (879 | ) | ||||
$ | 1,651 | $ | 1,702 | |||||
Impairment of Assets
We follow the provisions of FASB ASC Topic 360, Property, Plant and Equipment, for assets.
Management reviews assets for impairment when certain events have occurred or changes in
circumstances indicate that the asset may be impaired. An asset is considered to be impaired when
the estimated undiscounted future cash flows are less than the carrying value of the asset. The
impairment provision is based on the excess of carrying value over fair value.
Accounting for Guarantees
We follow the provisions of FASB ASC Topic 460, Guarantees for any guarantees entered into
after December 2002. Under ASC Topic 460, we are required to record a liability for the fair
value of the obligation undertaken in issuing the guarantees. No liabilities have been recognized
for any guarantees.
Stock-Based Compensation
Employee Stock-Based Compensation. We account for stock-based compensation in accordance with
FASB ASC Topic 718, Compensation Stock Based. Under the fair value recognition provisions of
this statement, share-based compensation cost is measured at the grant date based on the fair value
of the award and is recognized as expense over the applicable vesting period of the stock award
(generally three years) using the straight line method.
Non-Employee Stock-Based Compensation. We also grant stock-based incentives to certain
non-employees. These stock based incentives are accounted for in accordance with FASB ASC Topic
718, Compensation Stock Based. Stock awards that are tied to performance criteria are expensed
at the time the performance goals are met.
Earnings Per Share
Basic earnings (losses) per common share were computed by dividing net income (loss) by the
weighted average number of shares of common stock outstanding during the reporting period. Diluted
earnings per common share for each of the three years ended December 31, 2009 are calculated by
dividing net income by weighted-average common shares outstanding during the period plus dilutive
potential common shares, which are determined as follows:
Year ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
(in thousands) | ||||||||||||
Basic weighted-average shares |
70,355 | 62,725 | 59,731 | |||||||||
Effect of dilutive securities: |
||||||||||||
Unvested restricted stock units (1) |
44 | | 100 | |||||||||
Stock options |
2,619 | | 552 | |||||||||
Dilutive weighted-average shares |
73,018 | 62,725 | 60,383 | |||||||||
(1) | The unvested restricted stock units outstanding at December 31, 2009 are expected to vest over the twelve months ended December 31, 2010. |
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The table below includes information related to stock options, warrants and restricted stock
that were outstanding at December 31 of each respective year, but have been excluded from the
computation of weighted-average stock options due to (i) the option exercise price exceeding the
twelve-month weighted-average market price of our common shares or (ii) their inclusion would have
been anti-dilutive to our earnings/(loss) per share.
Year Ended, | ||||||||||||
December 31, | December 31, | December 31, | ||||||||||
2009 | 2008 | 2007 | ||||||||||
Options and warrants (in thousands) |
12,600 | 24,110 | 10,713 | |||||||||
Restricted stock excluded |
| 80 | 1,082 | |||||||||
Weighted-average exercise prices
of options and warrants |
$ | 4.11 | $ | 2.22 | $ | 5.49 | ||||||
Weighted average market price |
$ | 1.96 | $ | 1.17 | $ | 2.46 |
Defined Contribution Plan 401(k)
We sponsor a defined contribution plan, named the Syntroleum 401(k) Plan (the 401(k) Plan),
covering virtually all of our employees who have met the eligibility requirements. Our employees
may participate in the 401(k) Plan upon employment. Participants become eligible for matching and
profit sharing contributions upon employment on the last day of the 401(k) Plan quarter.
We contribute a matching contribution equal to 50 percent of employees contributions
quarterly in the form of shares of our common stock. No employee purchase of our stock is
permitted. We recorded expense of $141,000, $143,000 and $252,000 from issuing 124,545, 163,576
and 130,307 shares of Syntroleum Stock for the year ended December 31, 2009, 2008 and 2007,
respectively, of which 13,924 shares were issued in January 2010.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Some of the more significant estimates made by management
include, but are not limited to, the valuation of stock-based compensation, estimates for accrued
liabilities and estimates for asset retirement obligations. Actual results could differ from these
estimates.
Reclassifications
Certain reclassifications have been made to the December 31, 2008 balance sheet and the
December 31, 2008 and 2007 statements of operations to conform to the December 31, 2009
presentation. These reclassifications had no impact on net income (loss).
Foreign Currency Transactions
All of our subsidiaries use the U.S. dollar for their functional currency. Assets and
liabilities denominated in other currencies are translated into U.S. dollars at the rate of
exchange in effect at the balance sheet date. Transaction gains and losses that arise from
exchange rate fluctuations applicable to transactions denominated in a currency other than the U.S.
dollar are included in the consolidated results of operations as incurred.
New Accounting Pronouncements
In June 2009, the FASB issued accounting guidance which addresses the accounting and
disclosure requirements for transfers of financial assets. The guidance requires entities to
provide more information about sales of securitized financial assets and similar transactions,
particularly if the seller retains some risk to the assets. The guidance eliminates the concept of
a qualifying special-purpose entity, changes the requirements for the de-recognition of financial
assets, and calls upon sellers of the assets to make additional disclosures about them. The
guidance is effective for new transfers of financial assets occurring in fiscal years beginning
after November 15, 2009, and interim periods within those years. The implementation of this
guidance will not have a material impact on our financial position and results of operations.
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Table of Contents
In June 2009, the FASB issued new guidance that amended the existing criteria for
consolidating variable interest entities (VIEs). The new consolidation criteria will require an
ongoing qualitative assessment of which entity has the power to direct matters that most
significantly impact the activities of a VIE and has the obligation to absorb losses or benefits
that could be potentially significant to the VIE. The new guidance is effective for fiscal years
beginning after November 15, 2009. The implementation of this guidance will not have a material
impact on our financial position and results of operations.
In September 2009, we adopted the FASB statement on Generally Accepted Accounting Principles
(GAAP) relating to the FASB Accounting Standards Codification. This standard establishes the
Codification as the source of authoritative accounting principles recognized by the FASB to be
applied by nongovernmental entities in the preparation of financial statements in conformity with
U.S. GAAP. Rules and interpretive releases of the Securities and Exchange Commission (SEC) under
authority of federal securities laws are also sources of authoritative GAAP for SEC registrants.
The FASB will no longer issue new standards in the form of Statements.
2. OPERATIONS AND LIQUIDITY
In 2009 we generated cash flow from operations from the transfer of our technology and other
engineering services. In the past we have sustained recurring losses and negative cash flows from
operations. As of December 31, 2009, we had approximately $25.0 million of cash and cash
equivalents and $3.3 million of accounts receivable available to fund operations and investing
activities. We review cash flow forecasts and budgets periodically.
Our business plan over the next several years includes potential investments in additional
plants and we will need to raise additional capital to accomplish this plan. We expect to obtain
additional funding through debt or equity financing in the capital markets, joint ventures, license
agreements and other strategic alliances, 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 in the future without stockholder approval, and the terms
of our preferred stock could include dividend, liquidation, conversion, voting and other rights
that are 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.
3. DISCONTINUED OPERATIONS AND ASSETS HELD FOR SALE
International Oil and Gas
We were pursuing international oil and gas activities, which primarily included the leasehold
acquisition, geological and geophysical work covering various areas in Nigeria, and drilling costs
for the Aje-3 discovery well (Aje-3) in Oil Mining Lease 113 (OML) offshore Nigeria. In the
fourth quarter of 2006, we decided to exit our international oil and gas activities due to limited
access to capital requirements. We sold all the stock of various subsidiaries, including Syntroleum
Nigeria Limited which held our interests in the Ajapa and Aje fields offshore Nigeria to African
Energy Equity Resources Limited (AEERL), a direct wholly owned subsidiary of Energy Equity
Resources (Norway) Limited (EERNL). We received $14,266,000 in total from the sale of these
interests including the collection of interest and reimbursement of legal fees. Collection of this
amount occurred between 2006 and 2008. The results of international oil and gas operations are
presented as discontinued operations in the accompanying consolidated financial statements and
prior periods have been reclassified for comparability in accordance with FASB ASC Topic 360,
Property, Plant and Equipment.
Based on the total proceeds received, we recognized a gain on the sale of these entities for
the years ended December 31, 2008 and 2007 of $1,500,000 and $10,078,000 which is reflected in
Gain (loss) on discontinued operations in the Consolidated Statement of Operations for the years
ended December 31, 2008 and 2007. Certain other costs associated with the closing of the entity
have been incurred and is netted against the total gain in the Consolidated Statement of
Operations. As of December 31, 2009 there were no assets associated with the activities and all
obligations associated with the international oil and gas operations have been fulfilled.
Domestic Oil and Gas
We were pursuing gas monetization projects in which we were directly involved in gas field
development using available gas processing technologies from third parties. We completed an
evaluation of potential reserves related to drilled properties in the United States and decided to
discontinue further expenditures in the Central Kansas Uplift area based on the results of this
evaluation. The remaining leasehold acreage, including the wells and equipment, was sold for
$522,000 in 2006. We recorded an impairment expense of $610,000 in 2007 related to our gas
processing plant and related equipment. We sold our gas processing plant and related equipment in
February 2008 for $95,000. The results of operations of the domestic oil and gas segment are
presented as discontinued operations in the financial statements for the years ended December 31,
2009, 2008 and 2007 in accordance with FASB ASC Topic 360, Property, Plant and Equipment.
Research and Development
We have completed the necessary testing and demonstration associated with our pilot plants
as well as completion of catalyst formulation and deactivation studies. Analytical testing of
finished fuels has supported conclusions with regards to lower emissions and higher cetane ratings.
We have documented the conclusions from all of these activities and do not intend
to further fund other research and development activities. All revenues and costs associated
with these activities such as; facilities, overhead associated with the facilities, personnel,
equipment and outside testing and analytical work have been reported in Income (Loss) from
Discontinued Operations in the Consolidated Statement of Operations. The total cost of research
and development activities, including the operation and construction of the Catoosa Demonstration
Facility totaled $122,000, $232,000 and $6,813,000 for the years ended December 31, 2009, 2008 and
2007, respectively. Joint Development Revenues with licensees and the U.S. Government have been
reported in Income (Loss) from Discontinued Operations in the Consolidated Statement of
Operations. Other costs associated with the construction of the Catoosa Demonstration Facility
include the funding provided by Marathon (see Note 5) are also included in discontinued operations,
this includes interest expense and gain on extinguishment of debt.
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We sold our Technology facility for $1,250,000 in March of 2008. We impaired the building to
the contract price less closing transaction costs in 2007 resulting in a $453,000 impairment
expense for the year ended December 31, 2007.
A summary by segment of the results of discontinued operations is as follows for the
three-year period ended December 31, 2009 (in thousands):
December 31, | ||||||||||||
INTERNATIONAL OIL AND GAS | 2009 | 2008 | 2007 | |||||||||
Revenues |
| | | |||||||||
Costs and Expenses: |
||||||||||||
Depreciation, depletion, amortization and impairment |
| | | |||||||||
General, administrative and other |
| 80 | 241 | |||||||||
Operating Loss |
$ | | $ | (80 | ) | $ | (241 | ) | ||||
Interest Expense |
| | | |||||||||
Other Income (Expense) |
| 1,604 | 10,078 | |||||||||
Income (Loss) before income taxes |
| 1,524 | 9,837 | |||||||||
Income (Loss) from Discontinued Operations |
$ | | $ | 1,524 | $ | 9,837 | ||||||
December 31, | ||||||||||||
DOMESTIC OIL AND GAS | 2009 | 2008 | 2007 | |||||||||
Costs and Expenses: |
||||||||||||
Depreciation, depletion, amortization and impairment |
| | 610 | |||||||||
General, administrative and other |
| | | |||||||||
Operating Loss |
$ | | $ | | $ | (610 | ) | |||||
Other Income (Expense) |
| 95 | 5 | |||||||||
Income (Loss) before income taxes |
| 95 | (605 | ) | ||||||||
Income (Loss) from Discontinued Operations |
$ | | $ | 95 | $ | (605 | ) | |||||
December 31, | ||||||||||||
RESEARCH AND DEVELOPMENT | 2009 | 2008 | 2007 | |||||||||
Revenues |
| | 498 | |||||||||
Costs and Expenses: |
||||||||||||
Research and Development |
122 | 171 | 6,813 | |||||||||
Depreciation, depletion amortization and impairment |
| 155 | 492 | |||||||||
General, administrative and other |
| | | |||||||||
Operating Loss |
$ | (122 | ) | $ | (326 | ) | $ | (6,807 | ) | |||
Interest Expense |
| | (622 | ) | ||||||||
Other Income (Expense) |
| 17 | | |||||||||
Gain on Extinguishment of Debt |
| | 11,792 | |||||||||
Income (Loss) before income taxes |
(122 | ) | (309 | ) | (4,363 | ) | ||||||
Income (Loss) from Discontinued Operations |
$ | (122 | ) | $ | (309 | ) | $ | (4,363 | ) | |||
4. INVESTMENT IN DYNAMIC FUELS
On June 22, 2007, we entered into definitive agreements with Tyson to form Dynamic Fuels, to
construct and operate facilities in the United States using our Bio-Synfining Technology,
converting bio-feedstocks into diesel, jet fuel (subject to certification), kerosene, naphtha and
propane. Dynamic Fuels is organized and operated pursuant to the provisions of its Limited
Liability Company Agreement between the Company and Tyson (the LLC Agreement).
The LLC Agreement provides for management and control of Dynamic Fuels to be exercised
jointly by representatives of the Company and Tyson equally with no LLC member exercising control.
This entity is accounted for under the equity method and is not required to be consolidated in our
financial statements; however, our share of the Dynamic Fuels net income or
loss is reflected in the Consolidated Statements of Operations. Dynamic Fuels has a different
fiscal year than us. The Dynamic Fuels fiscal year ends on September 30 and we report our share of
Dynamic Fuels results of operations on a three month lag basis. Our carrying value in Dynamic
Fuels is reflected in Investment in Dynamic Fuels LLC in our Consolidated Balance Sheets. As of
December 31, 2009, Syntroleums total estimate of maximum exposure to loss as a result of its
relationships with this entity was approximately $27,900,000, which represents our equity
investment in this entity.
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Dynamic Fuels was initially capitalized on July 13, 2007 with $4.25 million in capital
contributions from Tyson and $4.25 million in capital contributions from us. Each member
contributed an additional $14.0 million in capital contributions by July 11, 2008. Each member
contributed an additional $6.0 million in equity contributions in 2009 and committed to additional
contributions of $15.0 million each to be funded in 2010.
On October 21, 2008, Dynamic Fuels issued tax exempt bonds through the Louisiana Public
Facilities Authority in the amount of $100 million at an initial interest rate of 1.3% to fund
construction of the plant. The Bonds required a letter of credit in the amount of $100 million to
guarantee Dynamic Fuels obligations under the Bonds. Tyson agreed under the terms of the Warrant
Agreement to provide credit support for our 50% share of the guarantee, see Note 8 Stockholders
Equity Tyson. The interest rate for the bonds is a daily floating interest rate and may change
significantly from this amount. Dynamic Fuels entered into an interest rate swap of 2.19% for a
period of 5 years with declining swap coverage in the fourth quarter of 2008. This debt funding
is in addition to the equity contributions provided by each member.
Dynamic Fuels, LLC (A Development Stage Company) 2009 and 2008 Audited and 2007 Unaudited
Summarized Financials (in thousands):
September 30, | ||||||||
Balance Sheet | 2009 | 2008 | ||||||
Cash |
$ | 32,322 | $ | 25,489 | ||||
Restricted Cash |
42,775 | | ||||||
Other Current Assets |
1,917 | 3,685 | ||||||
Total Current Assets |
77,014 | 29,174 | ||||||
Property, Plant and Equipment and Other Assets |
77,624 | 7,229 | ||||||
Total Assets |
$ | 154,638 | $ | 36,403 | ||||
Current Liabilities |
$ | 15,967 | $ | 1,431 | ||||
Long-Term Liabilities |
100,016 | | ||||||
Total Liabilities |
115,983 | 1,431 | ||||||
Members Capital Contributions |
48,500 | 36,500 | ||||||
Deficit accumulated during the development stage |
(9,845 | ) | (1,528 | ) | ||||
Total Members Equity |
38,655 | 34,972 | ||||||
Total Liabilities and Members Equity |
$ | 154,638 | $ | 36,403 | ||||
Unaudited | ||||||||||||
Period from | ||||||||||||
June 22, 2007, | ||||||||||||
Audited | Audited | Date of | ||||||||||
Year Ended | Year Ended | Inception, to | ||||||||||
September 30, | September 30, | September 30, | ||||||||||
Statements of Operations | 2009 | 2008 | 2009 | |||||||||
Costs and Expenses: |
||||||||||||
Depreciation, depletion amortization and impairment |
$ | 57 | $ | | $ | 57 | ||||||
General, administrative and other |
5,203 | 1,471 | 6,986 | |||||||||
Operating Income (Loss) |
$ | (5,260 | ) | $ | (1,471 | ) | $ | (7,043 | ) | |||
Interest Rate Swap Valuation Adjustment |
(3,679 | ) | | (3,679 | ) | |||||||
Other Income (Expense) |
622 | 177 | 877 | |||||||||
Income (Loss) before income taxes |
(8,317 | ) | (1,294 | ) | (9,845 | ) | ||||||
Net Income (Loss) |
$ | (8,317 | ) | $ | (1,294 | ) | $ | (9,845 | ) | |||
During 2009, 2008 and 2007, we prepared a PDP for Dynamic Fuels in accordance with the
technical services agreement between us and Dynamic Fuels. We recognized revenue associated with
this work in the amount of $2,767,000, $2,592,000 and $1,554,000 for the year ended December 31,
2009, 2008 and 2007. This revenue is reported in Technical services revenue from Dynamic Fuels
in the Consolidated Statement of Operations. We had a receivable from Dynamic of $150,000 and
$206,000 as of December 31, 2009 and 2008, respectively.
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5. MARATHON PARTICIPATION AND LOAN AGREEMENT
Marathon Oil Corporation (Marathon) provided project funding in connection with the
Catoosa Demonstration Facility pursuant to advances under two secured, convertible promissory notes
totaling $21.3 million (collectively, the Note) with the Company. The Note bore interest at a
rate of eight percent per year and the balance owed under this agreement, including accrued
interest was $27.6 million as of December 31, 2006. The maturity date was extended to December 15,
2006 with a notification period extending to January 18, 2007.
On January 16, 2007, we entered into a Consolidation and License Agreement which grants
Marathon the non-exclusive right to use its FT process to produce synthetic crude. Under this new
Master License Agreement certain restrictions were removed that previously existed in the Master
License Agreement with Marathon executed in 1997. The new Master License Agreement no longer
includes restrictions on the geographic area Marathon can do a GTL project, except for China and
India. Marathon has the ability to pursue other FT technology. Marathon may contract directly
with reactor vendors selected at their sole discretion; in addition they are not required to
utilize Syntroleum for a PDP. Marathon also has the right to conduct research and development on
FT technology and is not obligated to share any improvements it identifies with Syntroleum.
Revenue to the Company under this agreement would be in the form of royalties based upon actual
production volumes from any licensed plants constructed and operated by Marathon. The royalties
were reduced under the new agreement from 35 cents a barrel to 25 cents a barrel. Syntroleum has
no additional support or indemnification obligations to Marathon from this new license agreement.
As part of this agreement, Marathon terminated and eliminated all of its rights under the Note
in the amount of $27.6 million. In exchange, we agreed to pay Marathon $3.0 million in both
December 2008 and December 2009. The Note had a minimum conversion rate of $6.00 per common share
and would have resulted in Marathon obtaining 4,600,000 shares. Based on our closing price on
January 16, 2007 of $3.68 per share, Marathon would have paid a $2.32 per share premium, or $10.67
million in total. Marathon agreed to cash payments of $6.0 million and a revised Master License
Agreement with reduced restrictions and royalties instead of acquiring shares at a 63% premium. On
December 21, 2008, we and Marathon agreed to a modification of the Consolidation and License
Agreement. The modification required us to make a payment of $3.75 million in immediately
available funds to Marathon on or before December 28, 2007 in lieu of the total $6.0 million
payment in 2008 and 2009.
As a result of the Consolidation and License Agreement and modification to the Agreement, we
recognized a non-cash gain on extinguishment of the debt under the Note of $11.8 million. We
determined the $10.67 million expected premium was the cost to Marathon to settle the debt
initially and recorded the additional $1.13 million gain as the difference between the $3.75
million paid and the carrying amount of $4.88 million recorded as the present value of the current
debt. We accounted for the extinguishment of debt in accordance with EITF 96-16, Accounting for
Modification or Exchange of Debt Instruments, by recognizing the difference between the
reacquisition price and the net carrying amount of the extinguished debt as a gain for the year
ended December 31, 2007. Marathon was willing to incur a cost of debt settlement transaction
beyond $10.67 million; therefore the remaining value of $12.7 million is directly attributable to
the new Master License Agreement. We recorded non-cash licensing revenue of $12.7 million in the
consolidated statement of operations for the year ended December 31, 2007. License fee credits of
$1.0 million previously recorded in deferred revenue were also recognized as licensing revenue.
Unlike previous license agreements where up-front proceeds are deferred until certain milestones
are achieved, revenue attributable to the new Master License Agreement was recognized upon the
execution of the Master License Agreement because no future indemnification obligations exist to
Marathon and we have therefore performed all required services on this license agreement. We
recorded deferred revenue of $55,000 related to a specific performance obligation to Marathon under
the agreement.
6. DEFERRED REVENUE
License fees received for which the criteria for revenue recognition have not been met totaled
$22.54 million and $19.42 million at December 31, 2009 and 2008, respectively.
In August 2000, we signed a non-exclusive license agreement with the Commonwealth of
Australia, granting the Commonwealth the right to utilize the Syntroleum® Process. As of December
31, 2009 and 2008, we had a remaining license agreement with the Commonwealth of Australia that
includes credits against future license fees earned in Australia in the amount of AUD $15 million.
This license has been recorded as deferred revenue of $13.4 and $10.4 million as of December 31,
2009 and 2008, respectively. This license expires in 2019. The license agreement is denominated in
Australian dollars and is subject to changes in foreign currency. During the years ended December
31, 2009, 2008 and 2007, the foreign currency effect on our deferred revenues was a change of
$(3,036,000), $2,790,000 and ($1,311,000), respectively, as a result of changes in the exchange
rate between the United States and Australian dollars.
We recorded deferred revenue of $3,000,000 in 2009 for the remaining amount of the total
purchase price for the sale of certain facilities with China Petroleum and Chemical Corporation
(Sinopec). A partial payment of $3,000,000 and an advance payment previously recorded in
deferred revenue for the transfer of certain technology documents and sale of equipment, subject to
certain limitations has been recognized in technology revenue and portions of the remaining
purchase price in accordance with ASC 605, Revenue Recognition. The partial payment for the sale
of equipment to Sinopec was received in October, 2009.
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7. COMMON STOCK PURCHASE AGREEMENTS
Fletcher International Ltd. On October 14, 2009, we entered into a Settlement Agreement
with Fletcher International, Ltd.
(Fletcher) to settle all legal claims arising in connection with the Investment Agreement
(the Investment Agreement) dated November 18, 2007, between us and Fletcher. Pursuant to the
terms of the Investment Agreement, under which a maximum of 12.4 million shares could be issued,
Fletcher agreed to purchase $12.0 million worth of our stock at floating per share prices over a
twenty-four month period. The purchase was divided into an Initial Investment of $3 million (at a
premium to the trading price of our stock) and Later Investments totaling $9 million (at a discount
to the trading price of our stock). Fletcher refused to close on the Initial Investment at $1.39
per share, asserting that all of the conditions precedent had not been satisfied, and subsequently
attempted to make a Later Investment at $0.44 per share. We refused to close on the grounds that,
because Fletcher failed to make the Initial Investment, Fletcher was not entitled to go forward
with the Later Investments. Each party subsequently filed legal claims against one another, with
Syntroleum claiming unspecified damages against Fletcher and Fletcher claiming damages, excluding
legal fees, of $14.0 million.
Pursuant to the terms of the Settlement Agreement, we and Fletcher entered into a Securities
Purchase Agreement (the Securities Purchase Agreement) dated October 14, 2009 whereby Fletcher
purchased 1,513,833 shares of our common stock at a price of approximately $2.64 per share and was
issued a warrant, exercisable until October 14, 2015, to purchase 1,892,291 shares of our common
stock at an exercise price of $3.30 per share. The warrant was deemed to have a fair market value
of approximately $3.9 million at the date of issuance and was recorded as additional paid-in
capital. The Company received net proceeds of approximately $3.8 million, after deducting fees and
expenses of the offering payable by us. Under the terms of the Securities Purchase Agreement,
Fletcher also has the option to purchase, on or before June 30, 2010, an additional 3,027,665
shares of our common stock, at a price of $2.64 per share, in up to two subsequent closings.
Fletcher initiated the initial subsequent closing on December 30, 2009 whereby Fletcher purchased
1,892,290 shares of our common stock at a price of approximately $2.64 per share and was issued a
warrant, exercisable until December 30, 2015, to purchase 2,365,362 shares or our common stock at
an exercise price of $3.30 per share. The warrant was deemed to have a fair market value of
approximately $4.5 million at the date of issuance and was recorded as additional paid in capital.
The Company received net proceeds of approximately $4.9 million, after deducting fees and expenses
of the offering payable by us. Fletcher may purchase up to 1,135,375 in a final subsequent closing
and will receive a warrant, exercisable for a period of six years, to purchase the number of shares
of our common stock equal to the product of 1.25 times the number of shares of our common stock
purchased in such subsequent closing, with an exercise price of $3.30 per share.
Fletcher is subject to an ownership limitation of 4.95% of the outstanding shares of common
stock (Ownership Limitation), under which Fletcher is prohibited from consummating any subsequent
closing or exercising any warrant where such closing or exercise would cause Fletcher to exceed the
Ownership Limitation, or from otherwise exceeding the Ownership Limitation through other avenues,
including the purchase of shares in the public market.
8. STOCKHOLDERS EQUITY
Tyson. As an incentive to Tyson for entering into the Dynamic Fuels joint venture, Tyson
received warrants to buy the Companys common stock. The warrants are allocated in three tranches.
The first tranche of 4.25 million shares was awarded upon signing of the LLC Agreement, Feedstock
and Master License Agreements in June 2007. The Warrant Agreement provides that the second tranche
of 2.5 million shares will be issued upon sanctioning of the second plant and the third tranche of
1.5 million shares will be issued upon sanctioning of the third plant, provided that Tyson has at
least a 10% interest in Dynamic Fuels. The exercise price of the first tranche of 4.25 million
warrants is $2.87 per share, which was the ten-day average closing price prior to the signing of
the above referenced agreements on June 22, 2007. The exercise price of the second and third
tranches of warrants will be the ten-day average closing price prior to the sanctioning of plants 2
or 3. Vesting requires that Tyson remain at least a 10% equity owner in Dynamic Fuels (in the case
of the first tranche) and in the applicable plant (in the case of the second and third tranches),
and that each plant has commenced commercial operation. Maturity of each tranche of warrants will
be on the third anniversary of each respective plants start-up date of commercial operations. If
25% or more of the project cost for the third plant is debt financed, then the third warrant
tranche will not vest. In the event that Tyson owns a 90% or greater interest in Dynamic Fuels the
number of shares subject to the second and third warrant tranche doubles subject to a limitation
that Tyson will not receive pursuant to all tranches warrants for stock equal to or more than 20%
of the outstanding shares of Syntroleum common stock. In the event Tyson defaults by not paying its
capital contributions to the plant, Tyson loses the warrants for such plant. These warrants are
accounted for in accordance with FASB ASC Topic 718 Compensation Stock Compensation. Warrants
that are granted to non-employees that are tied to performance criteria are expensed at the time
the performance goals are met.
On June 30, 2008, the Company and Tyson entered into a Warrant Agreement providing for the
issuance of warrants to Tyson to purchase shares of the Companys common stock in exchange for
credit support relating to the obligations of Dynamic Fuels. Dynamic Fuels received approval from
the Louisiana State Bond Commission to issue up to $100 million of certain Gulf Opportunity Tax
Exempt Bonds originated by the Louisiana Public Facilities Authority (the Bonds). On October 21,
2008 the issuance of the Bonds occurred and required a letter of credit in the amount of $100
million to guarantee Dynamic Fuels obligations under the Bonds. Tyson agreed under the terms of
the Warrant Agreement to provide credit support for our 50% share of the guarantee. Tyson received
8.0 million warrants to purchase the Companys common stock. The warrants are 100% vested upon
issuance. The exercise price of the warrants is $0.01 per share. The warrants were exercised on
April 16, 2009. These warrants are accounted for in accordance with FASB ASC Topic 718
Compensation Stock Compensation. The measurement date is the date of issuance, October 21, 2008.
We valued the warrants at $8.6 million and have recorded them as an additional cost of our
Investment in Dynamic Fuels on our Consolidated Balance Sheets, incurred on its behalf. This
additional cost in our investment results in a difference between our cost and the underlying
equity of the investee. This basis difference will be accounted for as if the investee were a
consolidated subsidiary in accordance with FASB ASC Topic 323-10-
35-13, Investments Equity Method and Joint Ventures. We will amortize the basis difference
to Earnings or Loss From Dynamic Investment in our Consolidated Statement of Operations over the
life of the Go Zone Bonds, 25 years.
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Pursuant to two registration rights agreements, we have granted Tyson demand and piggyback
registration rights with respect to the shares of common stock issuable pursuant to the warrants.
Retirement of Treasury Stock. We previously offered our employees the option to tender shares
of common stock issued for compensation to settle the employees tax liability. The shares that
are tendered are subsequently cancelled by us. We repurchased and cancelled no shares in 2009 and
2008 and 296,930 shares for $885,000 during the year ended December 31, 2007 at the then current
market prices.
9. STOCK-BASED COMPENSATION
Our share-based incentive plans permit us to grant restricted stock units, restricted stock,
incentive or non-qualified stock options, and certain other instruments to employees, directors,
consultants and advisors of the Company. Certain stock options and restricted stock units vest in
accordance with the achievement of specific company objectives. The exercise price of options
granted under the plan must be at least equal to the fair market value of our common stock on the
date of grant. All options granted vest at a rate determined by the Nominating and Compensation
Committee of our Board of Directors and are exercisable for varying periods, not to exceed ten
years. Shares issued under the plans upon option exercise or stock unit conversion are generally
issued from authorized, but previously unissued shares.
As of December 31, 2009, approximately 4,034,394 shares of common stock were available for
grant under our current plan. We are authorized to issue up to approximately 13,461,205 plan
equivalent shares of common stock in relation to stock options or restricted shares outstanding or
available for grant under the plans.
Stock Options
The number and weighted average exercise price of stock options outstanding are as follows:
Shares | Weighted | |||||||
Under | Average Price | |||||||
Stock Options | Per Share | |||||||
OUTSTANDING AT DECEMBER 31, 2008 |
11,638,504 | $ | 3.40 | |||||
Granted at market price |
| $ | | |||||
Exercised |
(526,069 | ) | $ | 0.66 | ||||
Expired or forfeited |
(1,728,124 | ) | $ | 6.76 | ||||
OUTSTANDING AT DECEMBER 31, 2009 |
9,384,311 | $ | 2.94 | |||||
The following table summarizes information about stock options outstanding at December 31,
2009:
Options Outstanding | Options Exercisable | |||||||||||||||||||
Weighted | ||||||||||||||||||||
Weighted | Weighted Average | Average | ||||||||||||||||||
Range of | Options | Average | Remaining | Options | Exercise Price | |||||||||||||||
Exercise Price | Outstanding | Exercise Price | Contractual Life | Exercisable | Per Share | |||||||||||||||
$0.66 $0.66 |
5,116,881 | $ | 0.66 | 8.89 | 964,431 | $ | 0.66 | |||||||||||||
$1.49 $1.55 |
1,010,666 | 1.55 | 2.75 | 1,010,666 | 1.55 | |||||||||||||||
$1.62 $2.89 |
1,140,195 | 2.33 | 4.71 | 1,140,195 | 2.33 | |||||||||||||||
$3.19 $6.88 |
769,277 | 6.32 | 4.50 | 769,277 | 6.32 | |||||||||||||||
$7.10 $10.14 |
551,974 | 9.73 | 5.49 | 251,974 | 9.23 | |||||||||||||||
$10.51 $19.88 |
795,318 | 12.23 | 3.93 | 295,318 | 15.12 | |||||||||||||||
9,384,311 | $ | 2.94 | 4,431,861 | $ | 3.73 | |||||||||||||||
A total of 4,952,450, 6,586,701 and 1,744,807 stock options with a weighted average exercise
price of $2.23, $2.55 and $9.18 were outstanding at December 31, 2009, 2008 and 2007, respectively,
which had not vested.
The fair value of options granted during the year ended December 31, 2009, 2008 and 2007
was estimated on the grant date using the Black-Scholes option pricing model. The model utilizes
certain information, such as the interest rate on a risk-free security maturing generally at the
same time as the option being valued, and requires certain assumptions, such as the expected amount
of time an option will be outstanding until it is exercised or it expires and the volatility
associated with the price of the underlying shares of common stock, to calculate the fair value of
stock options granted. Expected volatilities are based on historical stock prices. We use
historical data to estimate option exercise and employee termination within the valuation model;
separate groups of employees that have similar historical exercise behavior are considered
separately for valuation purposes. A forfeiture rate of five percent has been estimated to reduce
the expense for awards expected to not be exercised because of termination or expiration. We
believe that this valuation technique and the approach utilized to develop the underlying
assumptions are appropriate in calculating the fair values of our stock options granted in the
years ended December 31, 2009, 2008 and 2007. Estimates of fair value are not intended to predict
actual future events or the value ultimately realized by persons who receive equity awards.
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There were no stock options granted for the year ended December 31, 2009. The weighted
average grant date fair value of stock options granted during the years ended December 31, 2008 and
2007 was approximately $0.49 per stock option (total grant date fair value of $3,265,458) and $1.90
per stock option (total grant date fair value of $64,000), respectively. The fair value of these
options was estimated with the following weighted average assumptions:
Year Ended | Year Ended | |||||||
December 31, 2008 | December 31, 2007 | |||||||
Expected dividend yield |
0 | % | 0 | % | ||||
Expected volatility |
90 | % | 73 | % | ||||
Risk-free interest rate |
2.02 | % | 4.54 | % | ||||
Expected life |
5.50 yrs. | 4.38 yrs. |
Non-cash compensation cost related to stock and stock options and restricted stock recognized
during the year ended December 31, 2009, 2008 and 2007 was $4,180,000, $2,418,000 and $4,980,000,
respectively. Amounts decreased in the year ended December 31, 2008 due to a lower number of
employees and the lower estimated fair value of options granted in 2008.
The total intrinsic value of options exercised (i.e. the difference between the market price
on the exercicse date and the price paid by the employee to exercise the options) during the years
ended December 31, 2009, 2008 and 2007 was $645,000, $0 and $38,000, respectively. The total
amount of cash received in 2009, 2008 and 2007 by the Company from the exercise of these options
was $347,000, $0, and $36,000, respectively. As of December 31, 2009 there was $11.3 million in
aggregrate intrinisic value of stock options that were fully vested or were expected to vest. The
remaining weighted average contractual term for options exercisable is approximately 4.95 years.
In addition, as of December 31, 2009, unrecognized compensation cost related to non-vested stock
options was $417,000 which will be fully amortized using the straight-line basis over the vesting
period of the options, which is expected to end in the second quarter of 2010.
Restricted Stock
We also grant common stock and restricted common stock units to employees. These awards are
recorded at their fair values on the date of grant and compensation cost is recorded using graded
vesting over the expected term. The weighted average grant date fair value of common stock and
restricted stock units granted during the years ended December 31, 2009, 2008, and 2007 was $0.84
per share (total grant date fair value of $253,000), $0.66 per share (total grant date fair value
of $759,000) and $2.73 per share (total grant date fair value of $5,795,000), respectively. As
of December 31, 2009, the aggregrate intrinsic value of restricted stock units that are expected to
vest was approximately $3,706,000. In addition, as of December 31, 2009, unrecognized compensation
cost related to non-vested restricted stock units was $205,000, net of forfeitures, which is
expected to be recognized over a remaining period of six months. The total fair value of
restricted stock units vested during December 31, 2009, 2008 and 2007 was $1,274,000, $390,150 and
$3,753,000, respectively. The following summary reflects restricted stock unit activity and
related information.
Weighted-Average | ||||||||
Grant Date Fair | ||||||||
Shares / Units | Value | |||||||
NONVESTED AT DECEMBER, 31, 2008 |
1,842,000 | $ | 2.96 | |||||
Granted |
300,000 | $ | 0.84 | |||||
Vested or Exercised |
(665,500 | ) | $ | 1.91 | ||||
Expired or forfeited |
(10,000 | ) | $ | 10.14 | ||||
NONVESTED AT DECEMBER 31, 2009 |
1,466,500 | $ | 1.12 | |||||
10. INCOME TAXES
We had federal income tax net operating loss (NOL) carry-forwards of approximately $311
million at December 31, 2009. Our NOLs generally begin to expire as follows:
Year | Amount | |||
(in thousands) | ||||
2010 |
| |||
2011 |
| |||
2012 |
| |||
2013 |
| |||
2014 |
| |||
Thereafter |
310,588 |
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We recognize the tax benefit of NOL carry-forwards as assets to the extent that management
concludes that the realization of the NOL carry-forwards is more likely than not. Realization of
the future tax benefits is dependent on the Companys ability to generate taxable income within the
carry-forward period. The Companys management has concluded that, based on the historical results
of the Company, a valuation allowance should be provided for the entire balance of the net deferred
tax asset.
We have recorded an income tax provision for the year ended December 31, 2009. The limitation
on the net operating loss deduction in 2009 resulted in an alternative minimum tax liability of
$281,000 for the year ended December 31, 2009. We did not record an income tax provision or
benefit for the years ended December 31, 2008 2007. This differs from the amount of income tax
benefit that would result from applying the 35 percent statutory federal income tax rate to the
pretax loss due to the increase in the valuation allowance in each period. The valuation allowance
increased (decreased) by approximately ($5,568,000), $250,000 and $(2,401,000) for the years ended
December 31, 2009, 2008 and 2007, respectively. Deferred taxes arise primarily from NOL
carry-forwards and the recognition of revenues and expenses in different periods for financial and
tax purposes.
Deferred taxes consist of the following (in thousands):
December 31, | ||||||||
2009 | 2008 | |||||||
Deferred tax assets: |
||||||||
NOL carry-forwards |
$ | 117,765 | $ | 124,403 | ||||
Capital loss carry-forwards |
| 151 | ||||||
Research and development credit |
8,207 | 8,164 | ||||||
Deferred revenue |
7,259 | 6,968 | ||||||
Investments |
1,951 | 326 | ||||||
Stock-based compensation |
3,023 | 4,924 | ||||||
Other |
1,705 | 1,567 | ||||||
139,910 | 146,503 | |||||||
Deferred tax liabilities: |
||||||||
Oil and gas properties |
| (1,026 | ) | |||||
Other |
(627 | ) | (626 | ) | ||||
Net deferred tax asset before valuation allowance |
139,283 | 144,851 | ||||||
Valuation allowance |
(139,283 | ) | (144,851 | ) | ||||
Net deferred tax assets |
$ | | $ | | ||||
Our capital loss carry-forwards expired in 2009. Open tax years are December 31, 2006 forward
for both federal and state jurisdictions, except for years in which net operating losses originated
and are subsequently utilized.
11. COMMITMENTS AND CONTINGENCIES:
We have entered into various, non-cancelable operating leases for office space, equipment,
land and buildings that expire between 2009 and 2023. Rental expense was $308,000, in 2009,
$405,000 in 2008 and $695,000 in 2007. Total future minimum lease payments under these agreements
as of December 31, 2009 are as follows:
Year | Amount | |||
(in thousands) | ||||
2010 |
$ | 310 | ||
2011 |
133 | |||
2012 |
9 | |||
2013 |
9 | |||
2014 |
9 | |||
Thereafter |
65 | |||
$ | 535 | |||
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The capital and working capital budget for Dynamic Fuels financing, construction and
initial operations of the first plant to use our Bio-Synfining Technology is estimated to equal
$170.0 million in total. Dynamic Fuels received approval from the Louisiana State Bond Commission
to sell $100 million in Gulf Opportunity Zone Tax Exempt Bonds to partially finance the plant.
These bonds were sold on October 21, 2008, in the amount of $100 million. Syntroleum and
Tyson have made a total of $20.0 million each in capital contributions to satisfy current funding
requirements for capital expenditures relating to procurement of long lead equipment and
construction of the plant. The remaining estimated $15.0 million of contributions by each party
will be required to be funded in the first half of 2010.
Proceeds Debt and Equity Contributions (in Millions) | Dynamic Fuels | Synm Portion | ||||||
Funded Proceeds from Debt Issuance* |
$ | 100.0 | | |||||
Funded Equity Contributions from Members July 2008 |
$ | 40.0 | $ | 20.0 | ||||
Committed Equity Contributions from Members 2009 |
$ | 30.0 | $ | 15.0 | ||||
Total Proceeds Debt and Equity Contributions |
$ | 170.0 | $ | 35.0 | ||||
* | Interest during construction is calculated based on the daily interest rate stated at closing of 1.30 percent for 15 months. The interest rate for the bonds is a daily floating interest rate and may change significantly from this amount. The interest rate as of December 31, 2009 was 0.20%. Dynamic Fuels entered into an interest rate swap whereby it fixed its interest rate at 2.19% for a period of 5 years with declining swap coverage in the fourth quarter of 2008. The bond indenture requires that the bond principal be backed by a stand-by letter of credit. Tyson provided a letter of credit guaranteeing the full amount of bonds for Dynamic Fuels. We granted Tyson warrants in lieu of payment for the guarantee for our portion of the letter of credit. Monthly fees for this letter of credit are paid by Tyson. Dynamic Fuels reimburses Tyson for these monthly fees and are an additional financing cost to Dynamic. |
We have entered into employment agreements, which provide severance benefits to several key
employees. Commitments under these agreements totaled approximately $2,139,000 at December 31,
2009. Expense is not recognized until an employee is severed.
On August 17, 2007, we entered into a Resignation and Compromise Agreement (Compromise
Agreement) with Mr. Ziad Ghandour, a former director, employee and consultant to Syntroleum.
Under the Compromise Agreement, Mr. Ghandour has the right to receive additional compensation until
December 31, 2011 for five potential commercial projects, as defined in the Compromise Agreement.
Mr. Ghandour claims he is entitled to additional compensation as a result of a business transaction
with SINOPEC. We determined that no additional compensation was warranted as a result of the
transaction. Mr. Ghandour invoked the independent auditor review process under the Compromise
Agreement. Mr. Ghandour selected the independent auditor and we agreed to the selection. The
independent auditor found that no additional compensation was warranted under the Compromise
Agreement. On January 11, 2010, Mr. Ghandour filed a demand for arbitration. We responded to
Ghandours arbitration demand, denying that he is entitled to any additional compensation. No
hearing dates have been established. We believe we have valid defenses to the claims and we intend
to vigorously defend this matter, as such we have not recorded any liability with regard to this
litigation.
12. SIGNIFICANT CUSTOMERS
The Companys revenue is derived from significant customers. Three customers made up 96% and
84% of revenues in 2009 and 2008, respectively and one customer made up 81 percent of revenues in
2007. See Note 4, Investment in Dynamic Fuels and Note 6, Deferred Revenue for further
information regarding revenue transactions with specific customers.
13. FAIR VALUE DISCLOSURES
The Companys short-term financial instruments consist of cash, accounts payable and accrued
expenses. The carrying amounts of these financial instruments approximate fair value because of
their short-term maturities. The Company does not hold or issue financial instruments for trading
purposes nor does it hold or issue interest rate or leveraged derivative financial instruments.
14. SEGMENT INFORMATION
We apply FASB ASC Topic 280, Segment Reporting. Previously, our reportable business segments
have been identified based on the differences in products or services provided. Segments
previously identified were Technology, General, Administrative and Other; Domestic Oil and Gas and
International Oil and Gas. As discussed in Note 3, we classified the Domestic and International
Oil and Gas segments and research and development component as discontinued operations for the
years ended December 31, 2009, 2008 and 2007. We now operate only one reportable segment.
15. SUBSEQUENT EVENTS
We have evaluated subsequent events through the time that we filed our financial statements on
February 26, 2010 and have no other events to disclose.
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16. QUARTERLY DATA (UNAUDITED)
Quarter Ended | ||||||||||||||||
March 31, | June 30, | September 30, | December 31, | |||||||||||||
(in thousands, except per share data) | ||||||||||||||||
2009 |
||||||||||||||||
Revenues |
$ | 20,190 | $ | 1,694 | $ | 4,411 | $ | 1,137 | ||||||||
Operating income (loss) |
13,346 | (1,093 | ) | 1,553 | (1,337 | ) | ||||||||||
Net income (loss) from
continuing operations |
11,222 | (3,779 | ) | (242 | ) | (2,041 | ) | |||||||||
Net income (loss) from
discontinued business |
(39 | ) | (31 | ) | (28 | ) | (24 | ) | ||||||||
Net income (loss) |
11,183 | (3,810 | ) | (270 | ) | (2,065 | ) | |||||||||
Basic and diluted EPS: |
||||||||||||||||
Continuing operations |
$ | 0.18 | $ | (0.05 | ) | $ | 0.00 | $ | (0.02 | ) | ||||||
Discontinued operations |
$ | 0.00 | $ | 0.00 | $ | 0.00 | $ | 0.00 | ||||||||
Net income (loss) |
$ | 0.18 | $ | (0.05 | ) | $ | 0.00 | $ | (0.02 | ) |
Quarter Ended | ||||||||||||||||
March 31, | June 30, | September 30, | December 31, | |||||||||||||
(in thousands, except per share data) | ||||||||||||||||
2008 |
||||||||||||||||
Revenues |
$ | 1,562 | $ | 887 | $ | 1,447 | $ | 994 | ||||||||
Operating income (loss) |
(1,582 | ) | (2,681 | ) | (1,316 | ) | (2,802 | ) | ||||||||
Net income (loss) from
continuing operations |
(2,165 | ) | (3,425 | ) | 918 | (776 | ) | |||||||||
Net income (loss) from
discontinued operations |
(66 | ) | 1,533 | (80 | ) | (77 | ) | |||||||||
Net income (loss) |
(2,231 | ) | (1,892 | ) | 838 | (853 | ) | |||||||||
Basic and diluted EPS |
||||||||||||||||
Continuing operations |
$ | (0.03 | ) | $ | (0.05 | ) | $ | 0.01 | $ | (0.01 | ) | |||||
Discontinued operations |
$ | 0.00 | $ | 0.02 | $ | 0.00 | $ | 0.00 | ||||||||
Net income (loss) |
$ | (0.04 | ) | $ | (0.03 | ) | $ | 0.02 | $ | 0.00 |
Our revenues and costs are the result of projects described in these financial statements and
are not from a mature, more predictable business. These projects may affect the comparability of
the periods presented.
F-19