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EX-23 - EXHIBIT 23 - Sooner Holdings, Inc. | c14091exv23.htm |
EX-21 - EXHIBIT 21 - Sooner Holdings, Inc. | c14091exv21.htm |
EX-31.2 - EXHIBIT 31.2 - Sooner Holdings, Inc. | c14091exv31w2.htm |
EX-31.1 - EXHIBIT 31.1 - Sooner Holdings, Inc. | c14091exv31w1.htm |
EX-32.1 - EXHIBIT 32.1 - Sooner Holdings, Inc. | c14091exv32w1.htm |
EX-99.3 - EXHIBIT 99.3 - Sooner Holdings, Inc. | c14091exv99w3.htm |
EX-32.2 - EXHIBIT 32.2 - Sooner Holdings, Inc. | c14091exv32w2.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, 2010.
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 | 73-1565725 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | 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
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 o
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. þ
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
At June 30, 2010, the aggregate market value of the registrants common stock held by
non-affiliates of the registrant was approximately $107,000,000 based on the closing price of such
stock on such date of $1.64 per share (assuming solely for this purpose that all of the
registrants directors, executive officers and 10 percent stockholders are its affiliates).
At March 11, 2011, the number of outstanding shares of the registrants common stock was
81,901,346.
TABLE OF CONTENTS
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Part I |
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Part II |
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23 | ||||||||
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Part III |
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Part IV |
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39 | ||||||||
Exhibit 99.3 | ||||||||
Exhibit 21 | ||||||||
Exhibit 23 | ||||||||
Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32.1 | ||||||||
Exhibit 32.2 |
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K 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, plants based on the Syntroleum® Process and/or Bio-Synfining, anticipated costs to
design, construct and operate these plants, the timing of commencement and completion of the design
and construction of these plants, expected production of fuel, obtaining required financing for
these plants and our other activities, the economic construction and operation of Fischer-Tropsch
(FT) and/or Bio-Synfining plants, the value and markets for products, testing, certification,
characteristics and use of plant products, the continued development of the Syntroleum® Process
and Bio-Synfining Technology and the anticipated capital expenditures, expense reductions, cash
outflows, expenses, use of proceeds from our equity offerings, anticipated revenues, availability
of 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 (the Company or Syntroleum) 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 the Company and subsidiaries is the commercialization of our technologies to
produce synthetic liquid hydrocarbons substantially free of contaminants normally found in
conventional hydrocarbon products. Our technologies include second and third generation renewable
fuels technology.
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 coal-to-liquids or CTL technology via China Petroleum and Chemical Corporation (Sinopec) and
commercializing our Bio-Synfining technology through the Dynamic Fuels, LLC joint venture.
Our Bio-Synfining Technology is a second generation renewable fuels technology that is
feedstock flexible including the use of vegetable oils, fats, fatty acids and greases. The
technology allows us to process these feedstocks utilizing heat, hydrogen and proprietary catalysts
to make renewable synthetic fuels, such as ASTM D-975 quality graded diesel, jet fuel (HRJ, 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.
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, 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.
Bio-Synfining Projects Dynamic Fuels
On June 22, 2007, we entered into definitive agreements with Tyson Foods, Inc (Tyson) to
form a joint venture, Dynamic Fuels, LLC, a Delaware limited liability company (Dynamic Fuels),
to construct multiple facilities in the United States using our Bio-Synfining Technology. The
first facility of its kind in the United States began commercial operations in November of 2010.
Diesel meets ASTM D975 standards, including higher cetane levels, near zero sulfur and superior
stability. The unblended diesel fuel can be used in existing conventional fuel infrastructure and
engines. The synthetic fuel can also be blended with petroleum diesel to help those fuels achieve
superior environmental and performance characteristics.
Feedstock can also be processed into HRJ. Our HRJ meets all petroleum based jet fuel
specifications. We are awaiting certification of HRJ as a 50/50 blend for use in aviation engines.
We expect it to occur in the first half of 2011, thus allowing us to market our jet fuel
production capabilities to interested parties.
The plant also produces renewable naphtha, propane and can produce specialty chemical
products. The renewable distillate produced from our plant can be separated into its component
parts for use in higher margin applications and substitute for existing petroleum-based products as
a drop-in renewable biodegradable product. These markets include, base stock for detergent
production, dry cleaning fluids, metal cleaning solvents, polishes and air fresheners, drilling
fluids for oil and gas wells, liquid printer toner, agricultural and environmental solvents and
phase change material.
The plant has been in start-up mode since commercial operations began in November of 2010. As
of February 28, 2011, the plant has produced and sold 3.8 million gallons of renewable products.
The plant also produced 40,000 gallons of renewable jet fuel, which is being tested by the U.S.
military. Full rate capacity for the plant is 5,000 barrels per day. We have not yet achieved
full rate capacity on a continuous basis but expect to do so in the second quarter of 2011.
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The Energy Independence Act and Energy Policy Act of 2005 (EPACT) designates a tax credit of
$1.00 per gallon for the production of renewable diesel and $0.50 per gallon for the production of
renewable naphtha, for which our Bio-Synfined products are eligible. All of our 2010 production and
future production in 2011 are eligible for this credit.
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. Obligated parties must acquire 800 million gallons of biomass-based diesel, which
includes renewable diesel, for 2011 or acquire 1.2 billion Renewable Identification Numbers, or
RINs. Our diesel fuel generates 1.7 RINs per gallon. At December 31, 2010, D4 RIN prices were
$0.75 per gallon and therefore worth $1.25 per gallon with the 1.7 multiplier. As of March 1,
2011, RIN prices are $1.10 per gallon and therefore worth $1.87 per gallon with the 1.7 multiplier.
Dynamic Fuels intends to apply to the EPA to register the naphtha it produces for D Code 5 RINs.
D 5 RINS were $0.52 on March 11, 2011.
Business Strategy
Our objective is to be the leading independent provider of our 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 envision to be several production facilities in the business model.
Transfer the Syntroleum® Process. We executed a transfer of our technology to Sinopec in
2009. Sinopec is reconstructing our Catoosa Demonstration Facility (CDF) in China for further
research and development. The demonstration plant is expected to be operating in the first
quarter of 2011.
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 technical support.
The Syntroleum® Process
The Syntroleum® Process produces synthetic liquid hydrocarbons that are substantially free of
contaminants normally found in refined 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 reciprocating and jet/turbine engines (HRJ, subject to
certification); and
Specialty products, such as synthetic lubricants, process oils, high melting point waxes,
liquid normal paraffins, and chemical feedstocks.
We believe the key advantages of the Syntroleum® Process over other GTL technologies are our
(1) proprietary attrition-resistant slurry catalyst, (2) FT catalyst regeneration technology, and
(3) capability to operate with both dilute and non-dilute syngas.
Based on our research, we believe that our single-train design of 17,000 barrels per day
(b/d) facility can be economically developed subject to market conditions.
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-derived syngas into hydrocarbons over our proprietary Fischer-Tropsch catalyst. These
reactions are expressed in the following equations:
Step 1
Conversion of Carbon Feedstock to Synthesis Gas
Conversion of Carbon Feedstock to Synthesis Gas
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Step 2
Fischer Tropsch Synthesis
Fischer Tropsch Synthesis
Syngas may be generated from various carbon-bearing feedstocks by means of several commercial
processes. Coal gasifiers are commercially available from licensors. Biomass gasification
technologies are also available today that can be 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 which are
removed from the process stream.
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, jet fuels (HRJ,
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), the Department of
Defense (DOD), U.S. Department of Transportation (DOT) and manufacturers in the United States
and Japan.
The Bio-Synfining® Process
We have also adapted our Synfining® Process to accommodate animal fats, greases, fatty acids
and similar substances as feedstocks in the production of 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 is currently used in
our Dynamic Fuels Bio-Synfining facility in Geismar, Louisiana for the production of diesel,
naphtha, LPG, and jet fuels. HRJ was produced in the fourth quarter for testing by the DOD in
2010. We are awaiting the commercial certification of HRJ to be used as a 50/50 blend in aviation
fuels. Phase change material is also produced by this facility and is currently being tested for
commercial application, which is funded by the DOE.
Syntroleum Advantage
We believe the Syntroleum® Technologies will be attractive for companies reviewing methods of
commercializing their natural gas or coal reserves as well as bio-mass 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. Our diesel fuel is drop-in ASTM D975 fungible diesel fuel. The life
cycle greenhouse gas emissions for our fuels are on average 75% less than for petroleum diesel.
Another key differential in our process is the use of lower quality, low cost fats, oils and
greases as feedstock.
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. Approximately 19.46 billion
pounds of soybean oil were produced in the U.S. during
the 2009/2010 crop year according to the U.S. Department of Agriculture. Other vegetable oil
feedstocks include rapeseed, which is most common in Europe, in addition to palm, cottonseed, corn
and many other oils.
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Animal Fats. Approximately 3.4 billion pounds of inedible tallow and 1.4 billion pounds of
poultry fat were produced in the U.S. during calendar year 2009 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. Approximately 2.8 billion pounds of grease were produced in the U.S. during
calendar year 2009, of which 1.6 billion pounds was yellow grease 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.
FT Feedstocks
Natural Gas. According to the BP Statistical Review of World Energy, 2010, proved global
natural gas reserves at the end of 2009 were 187.49 trillion cubic meters (Tcm) (6,621 trillion
cubic feet (Tcf)), up from 148.55 Tcm (5,246 Tcf) at the end of 1999. In the United States,
according to BP, proved gas reserves were 6.93 Tcm (244.7 Tcf) at the end of 2009, compared to 4.74
Tcm (167 Tcf) at the end of 1999. In addition, shale gas, which is natural gas extracted from
shale formations, has had a significant impact on the outlook for natural gas supply in the United
States. The Potential Gas Committee, a nonprofit organization that studies natural gas, issued its
biennial assessment of the United States gas resources in June 2009. This study indicates that the
United States possesses a resource base of 1,836 Tcf of natural gas, which is 39% higher than its
previous evaluation at the end of 2006. Of this amount, shale gas is 616 Tcf. This resource base,
when combined with proved U.S. natural gas reserves, indicates potential future gas reserves of
over 2,000 Tcf.
Biomass. In 2005, The US Department of Energy (DOE) and the US Department of Agriculture
jointly published a study entitled Biomass as Feedstock for a Bioenergy and Bioproducts Industry:
the Technical Feasibility of a Billion-Ton Annual Supply. This study estimated that the United
States had the capability of supplying 1.3 billion dry tons of biomass per year for energy and
other products, of which 368 million dry tons of sustainably removable biomass could be produced on
forestlands and approximately 998 million dry tons could come from agricultural lands. This study
did not address potential biomass supply from municipal solid waste. According to the US
Environmental Protection Agency study Municipal Solid Waste in the United States, 2009 Facts and
Figures, 243 million tons of municipal solid waste were generated in the US in 2009, of which 82
million tons were recovered through recycling and composting, 29 million tons were combusted for
energy and 131.9 million tons were sent to landfill.
Coal. According to the BP Statistical Review of World Energy, 2010, global coal reserves were
826,001 million metric tons at the end of 2009. Of this total, 238,308 million metric tons were in
the United States, 157,010 million metric tons were in the Russian Federation and 114,500 million
metric tons were in China.
Market Demand
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 is set to expire at the end of 2011
unless extended by Congress. Typically, Congress may renew the tax subsidy annually in what is
known as tax extenders legislation. We hope to receive continued support from Congress for
renewable fuel development, but have no certainty the subsidy will be extended to 2012.
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.
Obligated parties must acquire 800 million gallons of biomass-based diesel, which includes
renewable diesel, for 2011 or acquire 1.2 billion Renewable Identification Numbers, or RINs. Our
diesel fuel generates 1.7 RINs per gallon. At December 31, 2010, D4 RIN prices were $0.75 per
gallon and therefore worth $1.25 per gallon with the 1.7
multiplier. As of March 1, 2011, RIN prices are $1.10 per gallon and therefore worth $1.87
per gallon with the 1.7 multiplier. Dynamic Fuels intends to apply to the EPA to register the
naphtha it produces for D Code 5 RINs. D 5 RINS were $0.52 on March 1, 2011.
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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 54 active patents, and are actively prosecuting
52 patent applications, in the United States and various foreign countries that relate to one or
more embodiments of Syntroleum technology. Three patents were granted to Syntroleum during the past
quarter. Among these is a U.S. patent for production of Hydrotreated Renewable Jet (HRJ) fuel.
This is the only HRJ patent granted in the U.S. that we are aware of, and is expected to attract
more attention when ASTM completes its ongoing certification and approval process for this fuel,
which is expected to occur in 2011. The other recent additions are a U.S. patent for production of
synthetic petroleum jelly, and a Chinese patent for coproduction of FT lubes and diesel. Most of
our patents have been issued since the late 1990s and will not expire until 2017. Patent rights
are granted for a term of 20 years in the United States and 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 March 11, 2011, 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.
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.
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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.
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. Our Dynamic Fuels
plant is the first commercial scale plant operating to date and it is based on our Bio-Synfining
Technology. No commercial-scale plant based on the Synfining® Processes has been operational to
date. A commercial-scale plant based on the Synfining® Processes may never be successfully built
either by us or by our licensees. Success depends on our licensees ability to economically design,
construct and operate commercial-scale plants based on the Syntroleum® Technologies which depends
on a variety of factors, many of which are outside our control.
Our licensees will determine whether we issue any plant site licenses to them and, as a
result, whether we receive any license fees, royalties or equity distributions under our license
agreements. To date, no licensee of the Syntroleum® Technologies has exercised its right to obtain
a site license, although the Geismar Facility is operational and utilizing our technology. 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.
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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:
| Synthesis gas catalyst activity less than design basis which would require an increase the amount of catalyst, and/or number of reactors required to produce the design synthesis gas rate and increase capital and operating costs; |
| lower Fischer-Tropsch catalyst activity 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; |
| 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; |
| 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 basis, which would lower the amount of liquid hydrocarbons produced, reduce revenues, and reduce margins; |
| 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. |
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, we have encountered and future plants could experience mechanical difficulties
related or unrelated to elements of the Syntroleum® Technologies.
Many of our competitors have significantly more resources than we do, and technologies
developed by competitors could become more commercially successful than ours or render our
technologies obsolete.
Development and commercialization of FT and renewable fuels technologies is highly
competitive, and other technologies could become more commercially successful than ours. 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.
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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. |
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 is set to expire on December 31, 2011. 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 is set to expire on December 31,
2011. 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.
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Risks Relating to Our Business
We will need to obtain funds from additional financings or other sources for our business
activities. If we do not receive these funds, we would need to reduce, delay or eliminate some of
our expenditures.
In the past we have sustained recurring losses and negative cash flows from operations. As of
December 31, 2010, we had approximately $12.5 million of cash and cash equivalents and $1.3 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 through debt or equity financing, joint ventures, license agreements, sale
of assets, as well as various other financing arrangements. If we obtain additional funds by
issuing equity securities, dilution to stockholders may occur. In addition, preferred stock could
be issued without stockholder approval and the terms could include dividend, liquidation,
conversion, voting and other rights more favorable than the rights of the holders of our common
stock. There can be no assurance as to the availability or terms upon which such financing and
capital might be available.
Our agreement with Tyson concerning Dynamic Fuels allows the participants to elect not to
invest in a plant or to cease making capital contributions in the construction of a plant under
certain circumstances. Should a participant in a project elect not to invest or to cease investing
in the construction of the plant the other participants in the project will need to raise
additional capital from third parties or to take on additional interest in the project and fund the
additional capital internally. There can be no assurances that we would be able to raise the
additional capital from third parties on terms acceptable to us or to fund the additional capital
requirements internally. See discussion of our capital commitments at Item 7. Managements
Discussion and Analysis of Financial Condition and Results of Operation Contractual Obligations.
If adequate funds are not available, we may be required to reduce, delay or eliminate
expenditures for our future plant development and other activities, or seek to enter into a
business combination transaction with or sell assets to another company. We could also be forced to
license to third parties the rights to commercialize additional products or technologies that we
would otherwise seek to develop ourselves. The transactions outlined above may not be available to
us when needed or on terms acceptable or favorable to us.
Construction and operations of plants based on the Syntroleum® Technologies will be subject to
risks of delay and cost overruns.
The construction and operation of plants based on the Syntroleum® Technologies will be subject
to the risks of delay or cost overruns resulting from numerous factors. Delays in construction or
operation of the plant could directly impact the capital expenditure budget or working capital
budget. Increases in these costs could result in increased equity payments from parent companies.
We need to remain listed on the NASDAQ stock market to be able to access adequate funding from
time to time. We could face de-listing issues that would impair the liquidity of our stock and our
availability to access the capital markets.
We are required to maintain standards for listing of our common stock on the NASDAQ Stock
Market, and we cannot assure you that we will be able to do so. We can make no assurance that we
will be able to remain listed on the NASDAQ Stock Market.
We have incurred losses.
As of December 31, 2010, we had an accumulated deficit of $342.4 million. Because we do not
have an operating history upon which an evaluation of our prospects can be based, our prospects
must be considered in light of the risks, expenses and difficulties frequently encountered by small
companies seeking to develop new and rapidly evolving technologies. To address these risks we
must, among other things, continue to attract investment capital, respond to competitive factors,
continue to attract, retain and motivate qualified personnel and commercialize our technologies. We
may not be successful in addressing these risks, and we may not achieve or sustain profitability.
Our anticipated expense levels are based in part on our expectations as to future operating
activities and 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.
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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 products from plants utilizing the Syntroleum® Technologies are expected to
compete in markets with conventional petroleum products, an increase in alternative feedstock
prices relative to prices for oil, or a decrease in prices for oil relative to alternative
feedstock prices, could adversely affect the operating results of these plants. Higher than
anticipated costs for the catalysts and other materials used in these plants could also adversely affect
operating results. Factors that could cause changes in the prices and availability of oil,
natural gas, coal, biomass, fats, vegetable oils and refined products include:
| changes in supply and demand balance of feedstocks and refined products; |
| weather conditions; |
| domestic and foreign government regulation; |
| actions of the Organization of Petroleum Exporting Countries; |
| political conditions in countries producing feedstocks; |
| 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; |
| 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. |
Our success depends on the performance of our executive officers and key personnel, the loss
of who would disrupt our business operations.
We depend to a large extent on the performance of our executive officers, Edward G. Roth, our
Chief Executive Officer, Karen L. Gallagher, our Senior Vice President of Finance and Principal
Financial Officer, and certain key personnel. Our ability to implement our business strategy may be
constrained and the timing of implementation may be impacted if we are unable to attract and retain
sufficient personnel. At December 31, 2010, 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 our licensees or 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.
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Our operating results may be volatile due to a variety of factors and are not a meaningful
indicator of future performance.
We expect to experience significant fluctuations in future annual and quarterly operating
results because of the unpredictability of many factors that impact our business. These factors
include:
| 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; |
| volatile price of commodities used and produced; |
| introduction or enhancement of FT and renewable fuels technologies by us and our competitors; |
| market acceptance of new technologies; and |
| general economic conditions. |
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 expanded to cover countries
where we may wish to operate in the future. These developments could subject the operations of our
company to increased risks and, depending on their magnitude, could have a material adverse effect
on our business.
We may not have enough insurance to cover all of the risks we face.
In accordance with customary industry practices, we maintain insurance coverage against some,
but not all, potential losses in order to protect against the risks we face. We 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.
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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 2014 with an option to
renew and provides for payments of approximately $85,500 annually, with escalation amounts
occurring 2012 and 2013.
Item 3. | Legal Proceedings |
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. The arbitration between Syntroleum Corporation and Ziad Ghandours styled Ziad
Ghandour v. Syntroleum Corporation, Case No. 50 166 T 00048 10, pending before the American
Arbitration Association, was settled on January 17, 2011, and the arbitration was dismissed with
prejudice on January 18, 2011. The parties exchanged mutual releases. The settlement has been
recorded in our year ended December 31, 2010 Statement of Operations.
Item 4. | Removed and Reserved. |
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 2010 and 2009.
Sales Price | ||||||||
High | Low | |||||||
Year Ended December 31, 2010: |
||||||||
First Quarter |
$ | 2.95 | $ | 2.12 | ||||
Second Quarter |
$ | 2.30 | $ | 1.64 | ||||
Third Quarter |
$ | 2.14 | $ | 1.50 | ||||
Fourth Quarter |
$ | 2.02 | $ | 1.70 | ||||
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 |
Record Holders. The 81,901,346 shares of our common stock outstanding at March 11, 2011, were
held by approximately 1,108 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 as a result of internal and external events. This volatility has often been unrelated
to the operating performance of the Company. These broad market fluctuations may adversely affect
the market price of our common stock.
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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 6% percent of the outstanding shares of our common
stock as of March 11, 2011. We cannot predict if future sales of our common stock, or the
availability of our common stock for sale, will impact 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, 2010.
Equity Compensation Plans
The following table provides information concerning securities authorized for issuance under
our equity compensation plans as of December 31, 2010.
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) |
7,378,798 | $ | 2.05 | 4,637,846 | ||||||||
Equity Compensation
Plans Not Approved
by Security Holders
(3)(4)(5)(6) |
10,926,871 | $ | 2.97 | 4,240,256 | ||||||||
Total |
18,305,669 | $ | 2.60 | 8,878,102 | ||||||||
(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, 2010, we have issued 509,744 shares under this Plan. | |
(6) | Includes up to 5,676,871 shares to be issued upon exercise of warrants issued to Fletcher International Ltd. (Fletcher). The warrants were issued in 2009 and 2010. The warrants have an exercise price of $3.30 per share and expire six years from the dates the warrants were issued. |
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Use of Proceeds
The Company received total proceeds net of commission equal to $4.9 million from sales of
2,890,173 shares of its common stock at a price of $1.73 per share pursuant to an offering
completed during December, 2010, under its shelf Registration Statement on Form S-3 (No.
333-157879). These sales were made to Energy Opportunity, Ltd., a statutory underwriter, under the
terms of a common stock purchase agreement dated as of July 14, 2010. We currently intend to use
the net proceeds from the sale of the securities for general corporate purposes. These general
purposes may include capital expenditures and/or working capital for us or our joint ventures.
Performance Graph
The following performance graph compares the performance of our common stock during the period
beginning on December 31, 2005 and ending on December 31, 2010 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, 2005, AND AT THE END OF EVERY FISCAL
YEAR, AND THROUGH DECEMBER 31, 2010
ASSUMING REINVESTMENT OF DIVIDENDS AT DECEMBER 31, 2005, AND AT THE END OF EVERY FISCAL
YEAR, AND THROUGH DECEMBER 31, 2010
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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, | ||||||||||||||||||||
2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
(in thousands, except per share data) | ||||||||||||||||||||
Statement of Operations Data: |
||||||||||||||||||||
Total revenues |
$ | 8,410 | $ | 27,432 | $ | 4,890 | $ | 16,472 | $ | 2,700 | ||||||||||
Operating income (loss) |
(2,252 | ) | 12,469 | (8,381 | ) | (10,362 | ) | (28,506 | ) | |||||||||||
Income (loss) from continuing operations |
(9,633 | ) | 5,160 | (5,448 | ) | (10,550 | ) | (28,070 | ) | |||||||||||
Income (loss) from discontinued operations |
97 | (122 | ) | 1,310 | 13,595 | (26,555 | ) | |||||||||||||
Net income (loss) |
$ | (9,536 | ) | $ | 5,038 | $ | (4,138 | ) | $ | 3,751 | $ | (54,625 | ) | |||||||
Basic and diluted per share amounts - |
||||||||||||||||||||
Income (loss) from continuing operations |
$ | (0.12 | ) | $ | 0.07 | $ | (0.09 | ) | $ | (0.17 | ) | $ | (0.50 | ) | ||||||
Income (loss) from discontinued operations |
$ | (0.00 | ) | $ | 0.00 | $ | 0.02 | $ | 0.23 | $ | (0.48 | ) | ||||||||
Net income (loss) |
$ | (0.12 | ) | $ | 0.07 | $ | (0.07 | ) | $ | 0.06 | $ | (0.98 | ) |
As of December 31, | ||||||||||||||||||||
2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
Balance Sheet Data: |
||||||||||||||||||||
Working capital |
$ | 12,950 | $ | 27,307 | $ | 7,709 | $ | 22,401 | $ | 29,199 | ||||||||||
Total assets |
59,396 | 58,861 | 38,838 | 32,291 | 43,937 | |||||||||||||||
Convertible debt |
| | | | 27,641 | |||||||||||||||
Deferred revenue |
24,300 | 25,668 | 22,613 | 22,578 | 21,840 |
Item 7. | Managements Discussion and Analysis of Financial Condition and Results of Operation |
Overview
Our focus is the commercialization of our technologies to produce synthetic liquid
hydrocarbons. 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, such as diesel, jet fuel (HRJ, subject to certification),
kerosene, naphtha, propane and other renewable chemical products.
Our Bio-Synfining Technology is a renewable fuels application of our Synfining® Technology.
This technology is applied commercially via our Dynamic Fuels, LLC joint venture with Tyson Foods,
Inc. The technology processes renewable feedstocks such as triglycerides and/or fatty acids to
make renewable synthetic products.
Operating Revenues
During the periods discussed below, our revenues were primarily generated from the sale or
transfer of our technology, technical services revenue from engineering 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 full rate commercial operation of Dynamic Fuels, we expect that cash
flow relating to our Syntroleum® Technologies will consist primarily of revenues associated with
technical services and sales and licensing of our technology. Upon full rate commercial operations
of the Dynamic Fuels facility and adequate working capital, we may receive royalty fees based on
the production of the facility. We expect to achieve full rate operations in the second quarter of
2011. We also 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 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 increase (decrease), there could be a corresponding increase (decrease) in operating
revenues.
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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 2011.
Operating Expenses
Our operating expenses historically have consisted primarily of engineering, including third
party engineering 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 and amortization expense related to office and computer
equipment, 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 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.
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 and
outside contract services for initial engineering, design, and development, are included in
engineering costs in our consolidated statements of operations.
We have invested $40.5 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. We have incurred 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.
Commercial and Licensee Projects
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. 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 and loans to Dynamic Fuels LLC in our Consolidated Balance Sheets. As of December
31, 2010, Syntroleums total estimate of maximum exposure to loss as a result of its relationships
with this entity was approximately $43,523,000, which represents our equity investment in and loans
to this entity.
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 $36.25 million in capital contributions by December 31, 2010. Each
member contributed an additional $5.0 million in the form of a working capital loan to the entity.
The $5.0 loan will be repaid to each member upon Dynamic Fuels generating sufficient working
capital from fuel sales.
Dynamic Fuels began commercial operations in November of 2010. The plant has achieved full
rate production levels, but not on a continuous basis. As of February 28, 2011, the plant has
produced and sold 3.1 million gallons of renewable diesel and 0.7 million gallons of renewable
naphtha. The plant also produced 40,000 gallons of renewable jet fuel, which is being tested by
the U.S. military. Full rate capacity for the plant is 5,000 barrels per day. We expect to
achieve full rate capacity on a continuous basis in the second quarter of 2011.
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Diesel is quality tested and meets ASTM D975 standards for diesel. The renewable products
have low emissions and nearly no aromatics. Our jet fuel HRJ, meets all petroleum based jet fuel
specifications. We are awaiting certification of HRJ jet fuel for a 50/50 blend for use in
aviation. We expect it to occur in the first half of 2011, thus allowing us to market our jet fuel
production capabilities to interested parties. The production of our fuel is eligible for the
$1.00 tax credit per gallon of renewable diesel and $0.50 per gallon of renewable naphtha under the
Energy Independence Act and Energy Policy Act of 2005. Our fuel also generates 1.7 RINs per
gallon. RIN prices have increased in recent months due to the government mandated demand for 800
million gallons of biomass-based diesel to be consumed by refiners in 2011. As of March 1, 2011,
RIN prices are $1.10 per gallon and therefore worth $1.87 per gallon with the 1.7 multiplier. Our
fuel can be sold with the RIN premium included in our price of fuel. We have the ability to
produce various renewable specialty chemical products with higher margins that are not dependent on
government subsidies or mandates. We are actively researching and marketing to these specialty
chemical markets.
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 as
collateral for Dynamic Fuels obligations under the Bonds. Tyson agreed under the terms of the
Warrant Agreement to provide credit support for the entire $100 million Bond issue. The interest
rate for the Bonds is a daily floating interest rate and may change significantly from this amount.
In the fourth quarter of 2008, Dynamic Fuels entered into an interest rate swap, which had the
effect of locking in the interest rate at 2.19% for a period of 5 years with declining swap
coverage. This debt funding is in addition to the equity contributions and loans provided by each
member.
Discontinued Operations
Research and Development
In 2007, we determined we had completed the research and development activities necessary to
validate our technology. All of these research and development expenses were associated with the
development of our Syntroleum® Process. We decided to focus on the commercialization of our
technologies to produce synthetic liquid hydrocarbons.
Results of Operations
Consolidated Results for the Years Ended December 31
Revenues | 2010 | 2009 | 2008 | |||||||||
(in thousands) | ||||||||||||
Technology Revenue |
$ | 3,600 | $ | 22,503 | $ | | ||||||
Technical Services Revenue |
2,805 | 1,940 | 576 | |||||||||
Technical Services Revenue from Dynamic Fuels |
2,005 | 2,767 | 2,592 | |||||||||
Other Revenue |
| 222 | 1,722 | |||||||||
Total Revenues |
$ | 8,410 | $ | 27,432 | $ | 4,890 | ||||||
Technology Revenue. Technology Revenue was $3,600,000 for the year ended December 31, 2010 and
relates to the delivery of technology equipment related to our transfer of technology sale that
occurred in 2009. 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.
Technical Services Revenue. Revenues from engineering services for Dynamic and other engineering
services remained relatively the same in 2010 as compared to 2009. It increased in 2009 compared
to 2008 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
2011 as the project is complete and the plant is operational and will need limited licensor work.
We expect to continue to earn revenues for engineering services provided to other customers on an
individual contract basis in 2011.
Other Revenue. There were no other revenues in the year ended December 31, 2010. The 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 with the DOD in the
amount of $1,012,000 in 2008. We do not expect to recognize future revenues from this revenue
source.
Operating Costs and Expenses | 2010 | 2009 | 2008 | |||||||||
(in thousands) | ||||||||||||
Engineering |
$ | 2,871 | $ | 3,416 | $ | 3,803 | ||||||
Depreciation and amortization |
217 | 339 | 620 | |||||||||
Non-cash equity compensation |
1,719 | 4,180 | 2,418 | |||||||||
General and administrative and other |
5,855 | 7,028 | 6,430 | |||||||||
Total Operating Costs and Expenses |
$ | 10,662 | $ | 14,963 | $ | 13,271 | ||||||
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Engineering Expense. The decrease in expenditures in 2010 compared to 2009 and 2008 is a
result of decreased engineering headcount and increased bonus compensation granted and expensed in
2009 for the execution and delivery of technology document agreements.
Non-Cash Equity Compensation. Equity compensation expense for the vesting of stock compensation
awards to employees decreased in 2010 compared to 2009 and 2008. These changes in expense
primarily relate to the vesting schedule of performance based awards granted to all employees in
2008. The vesting of these awards is based on achieving certain milestones associated with the
Bio-Synfining Technology project. A majority of the expense associated with these awards was
recognized in 2009 and we expect to recognize the remaining amount of equity compensation for the
milestone based awards in 2011, but we do not expect such additional equity compensation expense to
be significant and will not have significant equity compensation expense for the remainder of 2011,
unless new awards are granted.
General and Administrative and Other. General and administrative expenses decreased significantly
in 2010 compared to 2009 and 2008. The decrease primarily relates to bonus compensation granted in
2009 for the execution and delivery of technology document agreements and decreased legal fees due
to settlement of litigation, offset by the non-cash expense of legal fees from prior years on
abandoned patents and cash settlements. In 2008 expenses were higher due to legal fees associated
with litigation.
Other Income and Expenses | 2010 | 2009 | 2008 | |||||||||
(in thousands) | ||||||||||||
Interest Income |
$ | 31 | $ | 96 | $ | 542 | ||||||
Other Income |
64 | 70 | 25 | |||||||||
Loss in equity of Dynamic Fuels, LLC |
(5,628 | ) | (4,158 | ) | (424 | ) | ||||||
Foreign Currency Exchange |
(1,848 | ) | (3,036 | ) | 2,790 | |||||||
Income taxes |
| (281 | ) | | ||||||||
Income (Loss) From Discontinued Operations |
97 | (122 | ) | 1,310 |
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. Our 50% share of Dynamic Fuels loss for its year ended
September 30, 2010 increased due to initial start-up operating expenditures. Expenditures incurred
for Dynamics year ended September 30, 2010 includes site rent, project development, equipment
evaluation and labor expenditures for operations staff for 12 months. In anticipation of plant
operation in 2010, operating expenditures incurred for Dynamic Fuels total approximately
$12,042,000 for the twelve months ended September 30, 2010. We expect to see income from this
investment in 2011 upon full rate 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.
Income (Loss) from Discontinued Operations. Changes in income from discontinued operation primarily
resulted from lower than expected dismantlement costs in 2010 resulting in a gain from reducing our
asset retirement liability associated with the Catoosa Demonstration Facility to $0. The increase
in 2008 results from proceeds received in the amount of $1,500,000 from the settlement of future
payments associated with our international oil and gas assets in 2008.
We will not incur further expenses related to our oil and gas activities in the future.
Liquidity and Capital Resources
General
As of December 31, 2010, we had $12,513,000 in cash and cash equivalents. At December 31,
2010 we had $1,285,000 in accounts receivable outstanding relating to our Technical Services
Revenue, $729,000 of which is due from Dynamic Fuels. We believe that all of the receivables
currently outstanding will be collected and have not established a reserve for bad debts.
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Our current liabilities totaled $1,693,000 as of December 31, 2010.
Our business plan over the next several years includes potential investments in additional
plants and we will need to raise capital to accomplish this plan. We expect to obtain funding
through debt or equity financing, joint ventures, license agreements and other strategic alliances.
If we obtain additional funds by issuing equity, dilution to stockholders may occur. In addition,
preferred stock could be issued 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.
If we are unable to generate funds from operations, our need to obtain funds through financing
activities will be increased.
Cash Flows
2010 vs. 2009
Cash flows used in operations was $1,112,000 during the year ended December 31, 2010 compared
to cash flows provided by operations of $12,646,000 during the year ended December 31, 2009. The
increase in cash flows provided by operations in 2009 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 $21,264,000 during the year ended December 31,
2010 compared to $6,218,000 during the year ended December 31, 2009. We invested $16,250,000 in
and loaned $5,000,000 to Dynamic Fuels in 2010. We have no further commitments to fund Dynamic
Fuels, but additional commitments could arise based on the cash flow needs of the entity. The cash
used in investing activities in 2009 included a $6,000,000 investment into Dynamic Fuels.
Cash flows provided by financing activities during the year ended December 31, 2010 was
$9,877,000 compared to $8,483,000 in 2009. The cash flows provided by financing activities are
primarily due to net proceeds received from our Stock Purchase Agreement with Fletcher and Energy
Opportunity Ltd (Energy). Fletcher purchased a total of 4,541,497 shares of our common stock at
a stock price of approximately $2.64 in 2009 and 2010. Energy purchased a total of 3,948,374
shares of our common stock at a stock price of approximately $1.77 in 2010.
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. 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.
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.
Contractual Obligations
The following table sets forth our contractual obligations as of December 31, 2010:
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 |
$ | 478 | $ | 181 | $ | 232 | $ | 18 | $ | 47 | ||||||||||
Asset Retirement Obligations |
603 | | 603 | | | |||||||||||||||
Total |
$ | 1,081 | $ | 181 | $ | 835 | $ | 18 | $ | 47 | ||||||||||
Our operating leases include leases for corporate headquarters, demonstration plants and
software.
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,
2010. Expense is not recognized until an employee is severed.
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We entered into a Bio-Synfining Master License Agreement on June 22, 2007 with Dynamic Fuels,
LLC. Under this license agreement, we at the request of the licensee must execute a Site License
Agreement in favor of licensee for licensees use of our Bio-Synfining Technology. The form of
the Site License Agreement is included in the agreement as Exhibit B. The form of the Site License
Agreement includes process guarantees if the plant fails to pass a performance test as defined in
the Site License Agreement. If the plant fails to meet the Process Guarantee during the
Performance Test and such failure is due in whole or in part to the Process Design Package, then we
and Dynamic Fuels shall mutually agree whether or not remedial measures are reasonably likely to
cause the plant to satisfy the Process Guarantee. The actual cost of the remedial measures will be
reimbursed to licensee through application of any future royalties owed to us, not to exceed
$9,800,000. If the remedial measures are not effective, we shall pay to Dynamic Fuels an
additional amount for liquidated damages in an amount not to exceed $9,800,000. As of the date of
this filing the Site License Agreement has not been executed by Dynamic Fuels and we cannot be
certain the document that will be executed will have this same language and amounts. Dynamic Fuels
has not met all conditions required for the Performance Test to occur in order to pass the
Performance Guarantee at this time.
We may need to fund future short-term working capital needs of Dynamic Fuels on an as needed
basis.
Equity Issuances
We and Fletcher entered into a Securities Purchase Agreement (the Securities Purchase
Agreement) dated October 14, 2009 whereby Fletcher could purchase up to $12,000,000 of our common
stock at a price of approximately $2.6423 per share. With each common stock purchase, Fletcher
also received 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, with an exercise price of $3.30. On October 14, 2009, December 30, 2009 and April 20,
2010 Fletcher purchased a total of 4,541,497 shares of our common stock. Warrants were issued with
each stock purchase to purchase a total of 5,676,871 shares of our common stock at an exercise
price of $3.3029 per share. The warrants expire between October 14, 2015 and April 20, 2016. The
warrants were deemed to have a fair value of approximately $10.1 million at the date of issuance
and were recorded as additional paid-in capital. The Company received net proceeds of
approximately $11.6 million, after deducting fees and expenses of the offering payable by us.
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 July 14, 2010, we entered into a Common Stock Purchase Agreement with Energy that provides
that Energy is committed at our option to purchase up to $10,000,000 of our common stock over the
24-month term of the agreement. On August 5, 2010 we sold 1,058,201 shares of our common stock
under the Purchase Agreement at a negotiated purchase price of $1.89 per share, based on current
market prices. On December 29, 2010, we sold 2,890,173 shares of our common stock under the
Purchase Agreement at a negotiated purchase price of $1.73 per share, based on current market
prices. We have received $6,900,000 in net proceeds from this Purchase Agreement. An additional
$3,000,000 remains under the Purchase Agreement.
As an incentive to Tyson for entering into 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 letter of credit required under the GO Zone Bonds. 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.
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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.
New Accounting Pronouncements
In October of 2009 the FASB issued guidance that addresses the accounting for
multiple-deliverable arrangements (complex contract or related contracts that require the separate
delivery of multiple goods and/or services) by expanding the circumstances in which vendors may
account for deliverables separately rather than as a combined unit. This update clarifies the
guidance on how to separate such deliverables and how to measure and allocate consideration for
these arrangements to one or more units of accounting. The existing guidance requires a vendor to
use vendor-specific objective evidence or third-party evidence of selling price to separate
deliverables in multiple-deliverable arrangements. In addition to retaining this guidance, in
situations where vendor-specific objective evidence or third-party evidence is not available, the
guidance will require a vendor to allocate arrangement consideration to each deliverable in
multiple-deliverable arrangements based on each deliverables relative selling price. This update
also expands disclosure requirements for multiple deliverable arrangements, can be applied either
prospectively or retrospectively, and is effective for fiscal years beginning on or after June 15,
2010, with early adoption permitted. We do not expect the adoption of this guidance to have a
material impact on our financial position and results of operations.
In July of 2009 the FASB issued guidance that addresses additional required disclosures about
recurring and nonrecurring fair value measurements under Topic 820, Fair Value Measurements. The
ASU requires certain new disclosures and clarifies two existing disclosure requirements. The new
disclosures and clarifications of existing disclosures are effective for interim and annual
reporting periods beginning after December 15, 2009, except for the disclosures about purchases,
sales, issuances, and settlements in the roll forward activity in Level 3 fair value measurements.
Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim
periods within those fiscal years. We do not expect the adoption of this guidance to have a
material impact on our financial positions and results of operations.
In April of 2010 the FASB issued guidance on defining a milestone under Topic 605 and
determining when it may be appropriate to apply the milestone method of revenue recognition for
research and development transactions. Consideration that is contingent on achievement of a
milestone in its entirety may be recognized as revenue in the period in which the milestone is
achieved only if the milestone is judged to meet certain criteria to be considered substantive.
Milestones should be considered substantive in their entirety and may not be bifurcated. This
update is effective on a prospective basis for milestones achieved in fiscal years beginning on or
after June 15, 2010, with early adoption permitted. We do not expect the adoption of this guidance
to have a material impact on our financial position and results of operations.
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 as 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.
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.
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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, if applicable, 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.
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.
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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. $15,245,000 at December 31, 2010. 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 $1.02 and
$0.89 at December 31, 2010 and December 31, 2009, 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 March 15, 2011, are set forth on pages F-1 through F-17 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, 2010 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, 2010 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, 2010 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, 2010.
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.
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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, 2010, 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, 2010, 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, 2010 and 2009, 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, 2010 and our report dated March 15, 2011, expressed an unqualified opinion.
/s/ HOGANTAYLOR LLP
Tulsa, Oklahoma
March 15, 2011
March 15, 2011
Item 9B. | Other Information |
None.
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PART III
Item 10. | Directors, Executive Officers and Corporate Governance |
Our certificate of incorporation divides the board of directors into three classes with the
number of directors in each class to be fixed as provided in our bylaws. Our bylaws provide for a
board of not less than three and no more than 11 directors with the exact number of directors in
each class to be fixed by our board. Our board has determined that the total number of directors
on the board at this time shall be six and that two directors shall be in each of Class A, Class B
and Class C. Directors hold office for staggered terms of three years (or less if they were
appointed to the board between annual meetings to fill a vacancy). One of three classes is elected
at each years annual meeting to succeed the directors of that class whose terms are expiring. The
terms for the directors of Classes C, A and B expire at the annual meeting of stockholders in 2011,
2012 and 2013, respectively. The 2011 annual meeting of stockholders is expected to be held in the
third quarter of 2011.
2011 Class C Directors
Name and Business Experience | Age | |||
Alvin R. Albe, Jr. |
57 | |||
Mr. Albe has served as a director since December 1988. Mr. Albe is currently a Senior
Advisor to TCW Group, Inc. (TCW), an investment management firm. Prior to joining TCW in
1991, Mr. Albe was President of Oakmont Corporation, a family office that administers and
manages assets for high net worth individuals and their families. Mr. Albe was associated
with Oakmont Corporation from 1982 to 1991. Prior to 1982, Mr. Albe was Manager of
Accounting at McMoRan Oil and Gas Co., and a Certified Public Accountant with Arthur
Andersen & Co. in New Orleans. Mr. Albe graduated from the University of New Orleans with a
B.S. in Accounting. The board selected Mr. Albe to serve as a director because of his
extensive financial background in investments and accounting standards. |
||||
Edward G. Roth |
54 | |||
Mr. Roth has been our President and Chief Executive Officer since November 19, 2007 and a
director since March 16, 2007. Mr. Roth joined Syntroleum in July 2004 as our Senior Vice
President of Projects. In April 2005, Mr. Roth was named our Executive Vice President of
Engineering and Chief Technology Officer and in March 2007 was appointed as our President.
Prior to joining Syntroleum in July 2004, Mr. Roth was employed by Petrofac Resources
International, serving in varying positions from December 1997 to July 2004. In July 2003,
Mr. Roth served as President and Chief Operating Officer of Petrofac LLC, a company involved
in all facets of turnkey engineering, procurement and construction in refining and gas
processing. From February 1994 to December 1997, Mr. Roth was Vice President of Engineering
& Operations at Zilkha Energy. From December 1979 to February 1994, he was employed by ARCO
in various capacities, including drilling production operations and business development
both domestically and internationally. Mr. Roth has a B.S. in Petroleum Engineering from
Texas A&M University and a M.B.A. in Finance from the University of Chicago. Mr. Roth is a
certified professional engineer. Mr. Roth was selected by the board for his extensive
background in the energy industry in engineering, procurement and construction in refining
and gas processing as well as for his engineering technical expertise and executive
experience. |
2012 Class A Directors
Name and Business Experience | Age | |||
Frank M. Bumstead |
69 | |||
Mr. Bumstead has been a director since May 1993. He has served as the Chairman of Flood,
Bumstead, McCready & McCarthy, Inc., a financial and business management firm, since 1989
and as a managing member of FBM Consults, LLC since January 1, 2001. Mr. Bumstead presently
serves as a director and Chairman of the Compensation Committee of Brookdale Senior Living,
Inc.; a New York Stock Exchange listed company, director of United Supermarkets, Inc.;
director of Nashville Wire Products, Inc.; a trustee of The Memorial Foundation and chairman
of audit, finance and investment committees for the Country Music Association, Inc. Mr.
Bumstead holds a B.S. in Business Administration from Southern Methodist University and a
Masters of Business Management from Vanderbilt Owen Graduate School of Management. The
board selected Mr. Bumstead to serve as a director because of his experience in financial
management and his board experience with other public companies. |
||||
Robert B. Rosene, Jr. |
57 | |||
Mr. Rosene has been our Chairman of the board since November 19, 2007 and a director since
March 1985. Mr. Rosene has been President of Seminole Energy Services, L.L.C., a natural
gas marketing and gathering company, since 1998. From 1984 to August 1998, he was Vice
President of Boyd Rosene and Associates, Inc., a natural gas consulting and marketing firm
which he co-founded. From 1976 to 1984, he was employed with Transok Pipeline Company, where
he served in various positions, including Manager of Rates and Contract Administration and
director of Gas Acquisitions. In 1987, Mr. Rosene co-founded MBR Resources, an oil and gas
production company with operations in Arkansas, New Mexico, Oklahoma and Texas. Mr. Rosene
holds a B.A. in Accounting from Oklahoma Baptist University. The board selected Mr. Rosene
for his expansive knowledge of the oil and gas industry and macro-economic global conditions
and his ability to bring a unique and valuable perspective to the board. |
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2013 Class B Directors
Name and Business Experience | Age | |||
P. Anthony Jacobs |
69 | |||
Mr. Jacobs has served as a director since November 1995. Mr. Jacobs also served as the
Chairman of the board of SLH Corporation, a predecessor to the company, from December 1996
through the closing date of the merger of Syntroleum Corporation into SLH Corporation in
August 1998. Mr. Jacobs retired in 1998. Previously he served as President and Chief
Executive Officer of Lab Holdings, Inc., a company principally engaged in the laboratory
testing business, from September 1997 until August of 1999 when Lab Holdings merged with Lab
One, Inc. From 1990 to 1993, he served as Executive Vice President and Chief Operating
Officer of Seafield Capital Corporation, and from May 1993 to September 1997, he served as
President and Chief Operating Officer of Seafield Capital Corporation. Mr. Jacobs holds a
B.A. and an M.B.A. from the University of Kansas and is also a Chartered Financial Analyst.
The board selected Mr. Jacobs to serve as a director because he brings extensive financial
expertise in both the public and private markets. |
||||
James R. Seward |
58 | |||
Mr. Seward has served as a director since December 1988. Mr. Seward also served as the
President, Chief Executive Officer and director of SLH Corporation from February 1997
through the closing date of the merger of Syntroleum Corporation into SLH Corporation in
August 1998. Mr. Seward is currently a private investor. Mr. Seward presently serves as a
director of Brookdale Senior Living, Inc, a company traded on the New York Stock Exchange
and RBC Funds, a family of publicly traded mutual funds. From 1990 to September 1997, Mr.
Seward served as Chief Financial Officer and a director of Seafield Capital Corporation.
From 1990 to May 1993, he served as Senior Vice President of Seafield Capital Corporation,
and from May 1993 to September 1997, he served as Executive Vice President. Mr. Seward
holds a B.A. from Baker University and an M.B.A. in Finance and a M.P.A. from the University
of Kansas and is also a Chartered Financial Analyst. The board selected Mr. Seward to serve
as a director because it believes he possesses valuable financial expertise, including
extensive experience with capital markets transactions and investments in both public and
private companies. |
There are no family relationships, of first cousin or closer, among our directors and
executive officers, by blood, marriage or adoption.
Director Meetings and Compensation
During 2010, the board of directors held a total of 12 regular meetings and four special
meetings and took action by unanimous written consent on six occasions. No director attended fewer
than 75 percent of the aggregate of board meetings and meetings of any committee on which he served
in 2010.
We do not pay our directors a cash retainer. All directors are reimbursed for their travel
and other expenses involved in attendance at board and committee meetings.
Under the 2005 Stock Incentive Plan, non-employee directors are eligible to receive grants of
options to purchase shares of our common stock or awards of common stock or restricted stock. On
January 1 of each year, non-employee directors received annual grants of a number of shares of our
common stock determined by dividing $50,000 by the closing price of our common stock on the last
trading day of the previous year. We granted 18,797 shares to each of our directors on January 1,
2010 at a grant date stock price of $2.66 and expect to continue the annual grant of common stock
to non-employee directors as part of their compensation for service on the board. Mr. Robert B.
Rosene, Jr., Chairman of the board, received an additional grant of 35,088 shares of common stock
at a grant date price of $2.85 in recognition of his additional services as Chairman of the board.
Employees who are directors are not paid any fees or additional remuneration for their
services as members of the board or any committee of the board.
At December 31, 2010 our non-employee directors held unexercised options to purchase common
stock as follows: Alvin R. Albe, Jr.20,406; Frank M. Bumstead20,406; P. Anthony Jacobs10,002;
Robert B. Rosene, Jr.20,406; James R. Seward3,301.
Stock Ownership Guidelines for Directors
We do not have a set guideline for director stock ownership. We do, however, encourage stock
ownership by our directors and all compensation for services as a director is paid by us in shares
of our common stock. As of December 31, 2010 board members beneficially owned approximately 5.3%
of our issued and outstanding common stock.
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Corporate Governance
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.
Executive Officers of the Company
The following are our executive officers as of March 11, 2011.
Name | Age | Position | ||
Edward G. Roth |
54 | Chief Executive Officer, President and Director | ||
Karen L. Gallagher |
59 | Senior Vice President of Finance and Principal Financial Officer |
For biographical information on Mr. Roth, please see, Class C Directors.
Karen L. Gallagher is a Senior Vice President and our Principal Financial Officer, having
joined our company in June 2007. Ms. Gallagher was previously Executive Vice President, Chief
Financial Officer and Cashier for Summit Bank from 2001 to 2007, Senior Vice President, Chief
Financial Officer and Cashier for Federal BankCentre from 1998-2001, Vice President and Chief
Financial Officer for Community Care HMO, Inc. from 1994-1997, and Senior Vice President and Chief
Financial Officer for Western National Bank from 1984-1994. Prior to 1984 Ms. Gallagher served in
various tax positions with Arthur Andersen & Co., GRA, Inc. and Commerce Bank. Ms. Gallagher is a
certified public accountant and received her Bachelor of Science in Business Administration from
the University of Missouri-Kansas City, Missouri.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires our directors, executive
officers and owners of 10% or more of our common stock to file with the SEC and the Nasdaq Stock
Market initial reports of ownership and reports of changes in ownership of common stock. Based
solely on a review of the copies of reports furnished to us and representations that no other
reports were required, we believe that all of our directors, executive officers and 10% or more
stockholders during the fiscal year ended December 31, 2010 complied on a timely basis with all
applicable filing requirements under Section 16(a) of the Exchange Act.
Audit Committee Expert
Mr. Albe is the audit committee financial expert under SEC rules and meets the Nasdaqs
professional experience requirements.
Each other member of the Audit Committee believes that he also meets the requirements for
being considered an Audit Committee financial expert under applicable rules and regulations.
Item 11. | Executive Compensation |
COMPENSATION DISCUSSION AND ANALYSIS
Executive Compensation Philosophy and Objectives
The objective of Syntroleums executive compensation policy is to attract, retain and motivate
highly qualified individuals and to align their interests with our shareholders. We do this by
offering competitive, interrelated compensation components that are designed to reward them for
results that have been identified as important factors in enhancing shareholder value. The tables
that you find in this Annual Report on Form 10-K contain specific information about the
compensation earned or paid in 2010, 2009 and 2008 to Edward G. Roth and Karen L. Gallagher, whom
we refer to as our named executive officers as of December 31, 2010.
Role of the Nominating and Compensation Committee and Management
The Nominating and Compensation Committee determines cash bonuses and stock option and
restricted stock awards and changes in remuneration to our executive officers. Bonuses and grants
of stock options and restricted stock are individually determined and administered by the
nominating and compensation committee. The Chief Executive Officer works with the Nominating and
Compensation Committee in the design of the plans and makes recommendations to the committee
regarding the salaries and bonuses of executive officers that report directly to him as well as the
salaries and bonuses and the award of options and restricted stock to other employees.
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Our executive compensation guidelines, as established by the Nominating and Compensation
Committee, are designed to pay a base salary generally measured below the 50th
percentile of base salaries paid by other peer group companies, as adjusted to take into account
differences in revenue size and for individual performance. Our peer group companies have similar
low current sales with high market to sales ratios. This is an indicator that the peer group is in
a similar pre-commercialization stage in their business life cycle. The Nominating and
Compensation Committee has determined Syntroleums peer group to include Andersons Inc., Aventine
Renewable Energy Holdings, Inc., Ballard Power Systems, Inc., BioFuel Energy Corporations,
Evergreen Energy, Inc., FuelCell Energy Inc., Fuel-Tech, Inc., Global Energy Holdings Group,
Headwaters Inc., Pacific Ethanol, Rentech Inc., Synthesis Energy Systems, and Verenium
Corporations. As the Company is in the pre-commercialization stage of business life and cash is a
key performance indicator to the Company, the Nominating and Compensation Committee deems it
appropriate to pay a base salary below average at this point in the Companys business life. Based
on compensation data for 2008, the chief executive officer was paid in the 11th
percentile compared to the peer group listed above. Mr. Roths salary is paid under the terms of
an employment agreement described below.
Incentive compensation takes the form of equity and cash. As part of this process, the
Nominating and Compensation Committee recommends the Chief Executive Officers incentive
compensation award to the board for approval and reviews and approves the awards recommended by the
Chief Executive Officer with respect to the other executive officer. Such awards reward
participants for achieving established cost targets and prosecuting the business of the company,
reward execution of the business plan and success in execution beyond budgeted or expected values,
and reward performance related to specific commercialization projects. These awards can take the
form of cash or Syntroleum Corporation restricted stock or options with performance vesting
schedules. In 2009 and 2010, these awards took the form of cash and in 2008 Syntroleum Corporation
restricted stock or options with vesting aligned with certain company based performance objectives.
All cash or equity grants to named executive officers are approved by the Nominating and
Compensation Committee.
Typically, increases in base compensation occur upon significant changes in job responsibility
or notable changes in the job market. Normally, previous compensation actions do not influence
current years awards or grants except in the case of awards intended to cover multi-year periods.
Elements of Compensation Plan
Our compensation plan for key executives includes long-term milestone based incentives. We
believe that by making milestone based incentives the basis for incentive awards provides the board
with a means to emphasize and monitor managements progress towards our key strategic goals. Based
on the Nominating and Compensation Committees reviews of executive compensation, it was determined
that the plan would be primarily comprised of base pay, incentive compensation and long-term
incentive compensation. Base pay would be comprised of an executives salary, while incentive
compensation consists of cash bonuses or immediately vested stock awards and would reward the
executive for cost target performance during the year as measured against individual performance
and reward execution of the business plan. Long-term incentive compensation is meant to reward
multi-year achievements with awards given in stock options and restricted stock with vesting based
on the occurrence of Company project related intermediate milestones. Long-term incentive
compensation will take the form of stock and be performance based. By providing these three pieces
of compensation it was determined that incentives would be in place to achieve strategic short-term
milestones, while the long-term incentive compensation would be used to reinforce the sense of
shared purpose, overall shareholder returns and focus executives on key longer term strategic and
financial milestones. From time to time, individual or corporate achievements or market pressures
may merit additional discretionary grants being given throughout the year. It is not our practice
to time these grants prior to the release of material information but rather to provide these
grants during the normal course of business. These would be granted at the Nominating and
Compensation Committees discretion.
The allocation among these compensation elements depends on performance objectives and market
pressures. Generally more emphasis is placed on incentive compensation than base salary. Grants
of incentive and long-term incentive compensation were generally at least 50% of the named
executive compensation package.
Base Pay
Base salary is generally measured below the 50th percentile of base salaries paid by
other peer group companies, as adjusted to take into account differences in market capitalization
and for individual performance. Base pay is designed to be competitive with salary levels for
comparable executive positions at other peer group companies engaged in the development of
new technologies. The Nominating and Compensation Committee reviews such comparable salary
information as one factor to be considered in determining the base pay for our executive officers.
The Nominating and Compensation Committee also considers other factors, including that officers
responsibilities, experience, leadership, potential future contribution and demonstrated individual
performance measured against strategic business objectives. As the Company is in the
pre-commercialization stage of business, the Nominating and Compensation Committee considers the
liquidity of the Company when factoring base pay into management salaries and therefore pays base
salaries below average for named executive officers. Our philosophy and practice is to place a
significant emphasis on incentive and long-term incentive compensation. The Nominating and
Compensation Committee also considers internal pay equity among the executive officers and
employees generally. The types and relative importance of the strategic business objectives and
financial objectives vary among our executives depending on their positions and the particular
operations and functions for which they are responsible. The compensation committee reviews base
salaries annually. These salaries are reviewed at the first board meeting of each year and were
not increased in 2010. Annual base salaries for Edward G. Roth and Karen L. Gallagher are
currently $260,000 and $175,000, respectively.
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Incentive Compensation
Incentive compensation takes the form of annual cash or equity bonuses paid at specific
targets ranging from 25% to 50% of salary for key executives based on our compensation plan
structure. These payouts are based on the Nominating and Compensation Committees review of
individual performance related to cost targets and prosecution of the business of the Company. The
annual bonus is not typically dependent on macroeconomic conditions. Annual bonuses are paid to
our executive officers pursuant to our Syntroleum Incentive Compensation Plan, which provides for
cash bonuses based on achievement over the course of the year of performance objectives. The amount
each executive officer receives is determined by the Nominating and Compensation Committee and the
board of directors and depends on the individuals performance and level of responsibility.
Typically executive officers may receive cash bonuses of 25% to 50% of their annual salary
depending on the achievement of individual and company goals during the year. There is no
limitation on the annual bonus if individual achievement and company goals are exceeded during the
year. Competitive market factors for employee retention are taken into account as well as corporate
performance when making these determinations. Successful achievement of all goals and objectives
is not required for bonuses to be paid out. However, the amount of bonus paid is significantly
impacted by lack of goal achievement. A minimum bonus threshold is included in Edward G. Roths
employment agreement requiring bonuses of at least 50% of annual salary each year. Increases to
this amount are based on the factors described above.
Incentive compensation may also take the form of a performance cash bonus paid at specific
targets. These payouts are based on the Nominating and Compensation Committees review of execution
of the business plan and success in that execution beyond budgeted or expected values. These
bonuses are dependent on project related profitability and collections of profits. All business
development, legal and final execution costs of a project are considered when determining
profitability of a project. The amount each executive officer receives is determined by the
Nominating and Compensation Committee and the board of directors and depends on the individuals
performance and level of responsibility related to the execution of the business plan and
individual project.
In March of 2009, upon the successful execution of technology transfer revenue contracts, the
Nominating and Compensation Committee approved performance cash bonuses to be paid out upon
collection of receivables from these contracts. In 2009, the Company paid $1,144,456 and $240,625
to Edward G. Roth and Karen L. Gallagher, respectively for the execution and collection of funds
from the revenue contracts and for the return of certain equity awards. At the time of such
payment, Mr. Roth forfeited his rights to stock options granting him the right to purchase 785,000
shares of common stock.
At the end of 2010 individual performance ratings were determined for executives and it was
determined that individual performance was in line with expectations, cash bonuses related to 2010
individual performance were paid on December 24, 2010 to Edward G. Roth and Karen L. Gallagher in
the amounts of $200,000 and $35,000, respectively. These bonuses were 77% and 20% of 2010 annual
salaries, respectively.
The nomination and compensation committee expectations for 2010 included fiscal
responsibility, expansion or engineering services, and execution of key projects, including
collection of receivables from these projects. The Company was under budget on all capital
expenditures and expenses and exceeded budgeted revenues. The engineering team performed
engineering work and provided licensor assistance throughout 2010 on the Dynamic Fuels Plant as
well as worked on additional studies for other clients. Key projects for the Company for 2010
included, leased pilot plant operations for a client with successful data collected, dismantlement
of our Catoosa Demonstration Facility for shipment to China to be reconstructed and operated by our
client and licensor assistance and construction activities for our Dynamic Fuels Plant. Ms.
Gallagher and Mr. Roth played key roles in leading all of these activities for the Company and
managing the staff and Company funds to achieve each of these goals. Given the committees view of
their contributions to key roles in the Company the decision was made to make these payments in
cash.
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Performance Based Long-Term Equity Incentive Compensation
Long-term incentive compensation is tied directly to Company project related milestones that
if achieved, are expected to increase stockholder return. Long-term incentive compensation consists
of stock options and restricted stock, which generally vest based on specified performance measures
such as company milestones. The specific milestones are listed below. The vesting amounts differ
upon each milestone. Vesting of 60% or more of the award occurs upon the final milestone,
successful project completion and operation. The exercise price of stock options is generally
equal to the fair market value of the common stock on the date of grant. Accordingly, executives
receiving stock options and restricted stock are rewarded only if the market price of the common
stock appreciates. Stock options and restricted stock are thus designed to align the interests of
our executive officers and other employees with those of our stockholders by encouraging executives
to enhance our value and, hence, the price of the common stock and stockholder return. In
determining whether to grant stock options or restricted stock to executive officers, the
Nominating and Compensation Committee considers a variety of factors, including that executives
current ownership stake in our company, the degree to which increasing that ownership stake would
provide the executive with additional incentives for future performance, the likelihood that the
grant of those options or restricted stock would encourage the executive to remain with our
company, prior option grants (including the size of previous grants and the number of options and
shares of restricted stock held), peer group analysis of similar positions and the value of the
executives service to our company. Historical grants of long-term incentive compensation have
been in line with peer group analysis. The compensation committee also considers these factors
when determining whether to grant stock options or restricted stock to other employees. Stock
option grants were previously granted annually with time vesting. Performance based grants are
given out less frequently and timed to changes in our long-term performance measures.
In November of 2008, the board approved performance based grants of stock or option awards to
all employees, including officers. These grants pertain to milestones listed below and additional
grants will not be granted annually. The Nominating and Compensation Committee reviewed the amount
of awards to each officer and employee and considered contributions to company milestones and
comparable compensation packages for officers within the same industry. Upon completion of this
analysis the Nominating and Compensation Committee granted an additional award of restricted stock
to Mr. Roth of 1,000,000 shares. Ms. Gallagher received options in the amount of 485,000 at an
exercise price of $0.66. In exchange for this award, Ms. Gallagher turned back her previous
unvested stock award of 150,000 shares. These awards vest as follows:
| Approximately 12% total vesting, upon the date of closing of the financing for
the construction of a commercial Bio-Synfining Plant (the Plant); and |
| Approximately 12% total vesting, upon the date of the groundbreaking of the
above Plants construction; and |
| Approximately 15% total vesting, upon the date of completion start-up
operations and commencement of the Plants commercial operations; and |
| Approximately 61% total vesting, upon the successful completion of the
performance testing on the Plant. |
These awards were granted pursuant to the Companys 2005 Stock Incentive Plan. The first
three milestones have been achieved and the corresponding options and shares have vested. The
Awards also vest upon death, disability, retirement, resignation for good reason and a change in
control.
Benefits
Benefits are part of the overall competitive compensation program designed to attract and
retain employees including executive officers. The named executive officers participate in the
same benefit programs as our general employee population.
Severance and Retirement
We have severance agreements with all of our named executive officers who remained employed by
us following the 2007 restructure of our work force. Our severance agreements provide for the
payment of salary for periods after the date of termination of employment that vary depending
primarily upon the position held by the employee and the event giving rise to the termination of
employment. The payment of severance is intended to provide financial security to the executive
at competitive levels to attract and retain executive officers.
Stock Ownership Guidelines
Syntroleum does not have specific equity or other security ownership requirements or
guidelines for management. However, management is encouraged to take an ownership stake in the
company and is specifically compensated with a trend towards equity compensation for both cash
conservancy and long-term growth opportunities. Margin accounts of our common stock held by
executive officers and trading in derivatives of our common stock by executive officers are
discouraged but not
specifically disallowed by corporate policy. Under our Code of Ethics and Conduct all insiders
are bound by the rules of insider trading and speculation in Syntroleum stock is discouraged.
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Compliance with Internal Revenue Code Section 162(m)
Section 162(m) of the Internal Revenue Code generally disallows a deduction to public
companies to the extent of excess annual compensation over one million dollars paid to the chief
executive officer or to any of the four other most highly compensated executive officers, except
for qualified performance-based compensation. While the board considers all compensation paid to
the Chief Executive Officer and the named executive officers to be performance-based, it does not
meet all the definitions of performance based compensation in Section 162(m). The compensation
committee strongly believes that retaining discretion in determining awards within the parameters
of the performance goals is essential for long-term success. In the past, the effect of the
amounts paid in excess of the deductibility amount has been immaterial to our tax return. We plan
to review executive compensation as appropriate and take action as may be necessary to preserve the
deductibility of compensation payments to the extent reasonably practical and consistent with our
compensation objectives.
EXECUTIVE COMPENSATION
The following Summary Compensation Table provides information regarding the compensation
awarded to or earned during the years ended December 31, 2010, 2009 and 2008 by the persons named
in the table, who we refer to in this Annual Report on Form 10-K as our named executive
officers. The tables following the Summary Compensation Table provide additional detail with
respect to grants of plan-based awards, the value of outstanding equity awards as of December 31,
2010, the value of options exercised and stock awards that vested during 2010 and estimates of
changes of control and post-employment benefits.
Summary Compensation Table
Change in | ||||||||||||||||||||||||||||||||||||
Pension Value | ||||||||||||||||||||||||||||||||||||
Non- | & | |||||||||||||||||||||||||||||||||||
Equity | Nonqualified | |||||||||||||||||||||||||||||||||||
Incentive | Deferred | |||||||||||||||||||||||||||||||||||
Stock | Option | Plan | Compensation | All Other | ||||||||||||||||||||||||||||||||
Name and Principal | Salary | Bonus | Awards | Awards | Compensation | Earnings | Compensation | Total | ||||||||||||||||||||||||||||
Position | Year | ($) | ($) | ($) | ($) | ($) | ($) | ($) | ($) | |||||||||||||||||||||||||||
(a) | (b) | (c) | (d) | (e)(1) | (f)(1) | (g)(2) | (h) | (i)(3) | (j) | |||||||||||||||||||||||||||
Edward G. Roth; President and Chief Executive Officer |
2010 |
260,000 | | | | 200,000 | | 11,000 | 471,000 | |||||||||||||||||||||||||||
2009 | 260,000 | | | | 1,324,456 | | 11,000 | 1,595,456 | ||||||||||||||||||||||||||||
2008 | 260,000 | 160,000 | 330,000 | | 130,000 | | 10,250 | 890,250 | ||||||||||||||||||||||||||||
Karen L. Gallagher; Senior Vice President Finance and Principal Financial Officer |
2010 |
175,000 | | | | 35,000 | | 11,000 | 221,000 | |||||||||||||||||||||||||||
2009 | 175,000 | | | | 287,875 | | 11,000 | 473,875 | ||||||||||||||||||||||||||||
2008 | 175,000 | 87,500 | | 126,350 | 54,688 | | 10,250 | 453,788 |
(1) | The amounts in columns (e) and (f) reflect the grant date fair value of awards during
the covered year. Grant date fair value is determined in accordance with the applicable
Accounting Standard Codification 718, Stock Compensation. These amounts do not reflect
whether the named executive officers have actually realized a financial benefit from the
awards. For information on the assumptions used to calculate the value of the awards,
refer to Note 8 to our consolidated financial statements in this Annual Report on Form
10-K for the fiscal year ended December 31, 2010. The awards listed above are all
performance based awards. The grant date fair value listed is based on the probable
outcome of the performance conditions. The Company has disclosed the maximum performance
value based on the probability of achieving these goals. |
|
(2) | The amounts in column (g) reflect the cash awards to the named executive officers
under the Syntroleum compensation plan, which is discussed in further detail under
Compensation Discussion and Analysis-Incentive Compensation. |
|
(3) | Amounts shown in column (i) represent a Company match of 401(k) contributions paid in
the form of Company stock. |
We have entered into employment agreements with our two executive officers and 10 of our
employees. These agreements provide for annual base salaries that we may increase from time to
time. In addition, each employment agreement entitles the employee to participate in employee
benefit plans that we may offer to our employees from time to time.
Under each agreement, employment may be terminated as follows: by us upon the employees
death, disability or retirement; by us upon the dissolution and liquidation of our company (unless
our business is thereafter continued); by us for just cause; by the mutual agreement of the
employee and us; and by either us or the employee upon 15 days written notice.
For a description of our severance and change of control arrangements with the named executive
officers see 2010 Potential Payments upon Termination or a Change in Control Table.
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All agreements prohibit the employee from disclosing to third parties, directly or indirectly,
our trade secrets, either during or after the employees employment with our company, other than as
required in the performance of the employees duties. The agreement also provides that the
employee will not have or claim any right, title or interest in any trademark, service mark or
trade name that we own or use. The employee agrees to irrevocably assign to us all of the
employees right, title and interest in and to any and all inventions and works of authorship made,
generated or conceived by the employee during his or her period of employment with us and which
related to our business or which were not developed on the employees own time. Each employee
further agrees that during the period of employment with us and for a period of two years following
the termination of employment, the employee will not engage in certain activities related to our
business.
Mr. Roths employment agreement, dated as of April 24, 2007, has a 48 month initial term and
is automatically renewed for successive 12 month terms. The agreement provides for a $260,000
annual salary and a minimum annual bonus equal to 50% of base salary. Our board may in its
discretion increase these amounts.
Mr. Gallaghers employment agreement, dated as of June 13, 2007, has an initial term of 12
months and is automatically renewed for successive 12 month terms. The agreement provides for a
$175,000 annual salary subject to increase in our discretion.
2010 Grants of Plan-Based Awards
The following table provides information regarding the individual grants of plan-based awards
during the last completed fiscal year to the named executive officers.
All | All Other | |||||||||||||||||||||||||||||||||||||||||||
Other | Option | |||||||||||||||||||||||||||||||||||||||||||
Stock | Awards: | |||||||||||||||||||||||||||||||||||||||||||
Awards: | Number | |||||||||||||||||||||||||||||||||||||||||||
Number | of | Exercise | ||||||||||||||||||||||||||||||||||||||||||
Estimated Future Payouts | Estimated Future Payouts | of | Securities | or Base | Grant Date | |||||||||||||||||||||||||||||||||||||||
Under Non-Equity Incentive | Under Equity Incentive | Shares | Under- | Price of | Fair Value | |||||||||||||||||||||||||||||||||||||||
Plan Awards | Plan Awards | of Stock | lying | Option | of Stock and | |||||||||||||||||||||||||||||||||||||||
Grant | Threshold | Target | Maximum | Threshold | Target | Maximum | or Units | Options | Awards | Option | ||||||||||||||||||||||||||||||||||
Name | Date | ($) | ($) | ($) | (#) | (#) | (#) | (#) | (#) | ($/Sh) | Awards | |||||||||||||||||||||||||||||||||
(a) | (b) | (c) | (d)(2) | (e) | (f) | (g) | (h) | (i) | (j) | (k) | (l)(1) | |||||||||||||||||||||||||||||||||
Edward G. Roth; President and Chief Operating Officer |
12/24/10 | 200,000 | ||||||||||||||||||||||||||||||||||||||||||
Karen L. Gallagher; Senior Vice President of Finance and Principal Financial Officer |
12/24/10 | 35,000 |
(1) | The amounts in column (l) reflect the fair value on the date of grant for options and
stock issued during 2010 that fall within the scope of guidance issued on Stock Based
Compensation by the financial accounting standards board. Assumptions used in the
calculation of these amounts are included in note 8 to the our audited financial statements
for the fiscal year ended December 31, 2010, included in this Annual Report on Form 10-K. |
|
(2) | The amounts in column (d) reflect the cash awards to the named executive officers,
which is discussed in further detail under Compensation Discussion and Analysis-Incentive
Compensation. |
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2010 Outstanding Equity Awards at Fiscal Year-End
The following table provides information on the current holdings of stock options and stock
awards by the named executive officers which includes unexercised and unvested stock options and
unvested restricted stock as of December 31, 2010.
Option Awards | Stock Awards | |||||||||||||||||||||||||||||||||||
Equity | ||||||||||||||||||||||||||||||||||||
Equity | Incentive | |||||||||||||||||||||||||||||||||||
Incentive | Plan | |||||||||||||||||||||||||||||||||||
Plan | Awards: | |||||||||||||||||||||||||||||||||||
Awards: | Market or | |||||||||||||||||||||||||||||||||||
Number | Payout | |||||||||||||||||||||||||||||||||||
Equity | of | Value of | ||||||||||||||||||||||||||||||||||
Incentive | Unearned | Unearned | ||||||||||||||||||||||||||||||||||
Number | Plan Awards: | Number | Market | Shares, | Shares, | |||||||||||||||||||||||||||||||
of | Number of | Number of | of Shares | Value of | Units or | Units or | ||||||||||||||||||||||||||||||
Securities | Securities | Securities | or Units | Shares or | Other | Other | ||||||||||||||||||||||||||||||
Underlying | Underlying | Underlying | of Stock | Units of | Rights | Rights | ||||||||||||||||||||||||||||||
Unexercised | Unexercised | Unexercised | Option | That | Stock That | That Have | That Have | |||||||||||||||||||||||||||||
Options | Options | Unearned | Exercise | Option | Have Not | Have Not | Not | Not | ||||||||||||||||||||||||||||
(#) | (#) | Options | Price | Expiration | Vested | Vested | Vested | Vested | ||||||||||||||||||||||||||||
Name | Exercisable | Unexercisable | (#) | ($) | Date | (#) | ($) | (#) | ($) | |||||||||||||||||||||||||||
(a) | (b) | (c) | (d)(3) | (e) | (f) | (g) | (h) | (i)(1) | (j)(2) | |||||||||||||||||||||||||||
Edward G. Roth; President and |
| | 900,000 | 1,665,000 | ||||||||||||||||||||||||||||||||
Chief Operating Officer |
150,000 | | | 2.89 | 12/8/16 | | | | | |||||||||||||||||||||||||||
Karen L. Gallagher; Senior Vice President of Finance and Principal Financial Officer |
| | 365,000 | 0.66 | 11/21/18 | | | | |
(1) | The amounts in column (i) reflect performance based restricted stock awards granted
during 2008 for Mr. Roth. For detailed information on these grants refer to Compensation
Discussion and Analysis-Performance Based Long-Term Equity Incentive Compensation. |
|
(2) | The amounts in column (j) reflect the fair value on December 31, 2010 based on a
closing market price of $1.85 per share. |
|
(3) | The amounts in column (d) reflect performance based options granted during 2008 for
Ms. Gallagher. For detailed information on these grants refer to Compensation Discussion
and Analysis-Performance Based Long-Term Equity Incentive Compensation. |
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Table of Contents
2010 Option Exercises and Stock Vested
The following table provides information on the exercise of stock options and the vesting of
restricted stock for the named executive officers during 2010.
Option Awards | Stock Awards | |||||||||||||||
Number of | Number of | |||||||||||||||
Shares | Shares | |||||||||||||||
Acquired | Value Realized | Acquired | Value Realized | |||||||||||||
on Exercise | on Exercise | on Vesting | on Vesting | |||||||||||||
Name | (#) | ($) | (#) | ($) | ||||||||||||
(a) | (b) | (c) | (d) | (e)(1) | ||||||||||||
Edward G. Roth; President and Chief Operating Officer |
| | 175,000 | 313,250 | ||||||||||||
Karen L. Gallagher;
Senior Vice President of Finance and Principal Financial Officer |
| |
(1) | The value realized in column (e) is equal to the number of vesting shares multiplied
by the closing stock price on the vest date. |
Post Employment Benefits/Change of Control Arrangement
Each of our employment agreements with our executive officers and key employees may be
terminated as follows: (i) by us upon the employees death, disability or retirement; (ii) by us
upon the dissolution and liquidation of our company (unless our business is thereafter continued);
(iii) by us for just cause; (iv) by the mutual agreement of the employee and us; and (v) by either
us or the employee upon 15 days written notice.
If we terminate Mr. Roths employment for any reason other than as noted in (i) or (iii)
above, Mr. Roth is entitled to receive the greater of (a) an amount equal to 300% of his annual
salary payable over 24 months or (b) an amount equal to 150% of his monthly salary for the number
of months remaining in the stated term of his agreement. As of December 31, 2010, three months
remained in the term of Mr. Roths agreement. The employment agreement of Ms. Gallagher provides
for severance equal to three months of her full base salary as in effect on the date of her
termination of employment.
In the event of a change in control of our company and a termination in the executives
employment within one year period immediately following the change of control, the employee is
entitled to receive substantially the same amounts as the severance amounts provided above payable
over the same periods as described above and will receive a vested right to all shares and options
outstanding.
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2010 POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE IN CONTROL TABLE
Our executives are entitled to receive payments upon termination of their employment as
described below. The following table summarizes these payments under different termination of
employment scenarios and reflects the estimated value of those payments had the termination
occurred effective December 31, 2010.
The plans and agreements under which the payments summarized in the following table would be
made are described above.
Before Change in | After Change in | |||||||||||||||||||||||||||
Control | Control | |||||||||||||||||||||||||||
Termination | Termination | |||||||||||||||||||||||||||
w/o Cause or for | w/o Cause or | Voluntary | Change in | |||||||||||||||||||||||||
Name | Benefit | Good Reason | for Good Reason | Termination | Death | Disability | Control | |||||||||||||||||||||
Edward G. Roth; President and Chief Operating Officer |
Severance pay | 780,000 | 780,000 | | | | 780,000 | |||||||||||||||||||||
Equity(1) | 1,665,000 | 1,665,000 | | 1,665,000 | 1,665,000 | 1,665,000 | ||||||||||||||||||||||
Total | 2,445,000 | 2,445,000 | | 1,665,000 | 1,665,000 | 2,445,000 | ||||||||||||||||||||||
Karen L. Gallagher; Senior Vice President of
Finance and Principal Financial Officer |
Severance pay | 43,749 | 43,749 | | | | 43,749 | |||||||||||||||||||||
Equity(1) | 434,350 | 434,350 | | 434,350 | 434,350 | 434,350 | ||||||||||||||||||||||
Total | 478,099 | 478,099 | | 478,099 | 478,099 | 478,099 |
(1) | Equity values assume December 31, 2010 stock price of $1.85 and immediate exercise or sale
at termination. |
Compensation Committee Report
The Nominating and Compensation Committee has reviewed and discussed the compensation
discussion and analysis with management and has recommended to the board that the Compensation
Discussion and Analysis be included in this Annual Report on Form 10-K for the year ended December
31, 2010.
Nominating and Compensation Committee
Alvin R. Albe, Jr.
Frank M. Bumstead
P. Anthony Jacobs
Robert B. Rosene, Jr. (Chairman)
James R. Seward
Alvin R. Albe, Jr.
Frank M. Bumstead
P. Anthony Jacobs
Robert B. Rosene, Jr. (Chairman)
James R. Seward
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Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters |
Unless otherwise stated, the following table sets forth the number of shares of our
common stock beneficially owned as of March 11, 2011, by (1) each director and nominee for
director, (2) each of the executive officers named in the Summary Compensation Table in this proxy
statement, (3) all directors and executive officers as a group; and (4) all persons known by us to
be the beneficial owners of at least five percent (5%) of our
outstanding common stock. As of March 11, 2011, there were 81,901,346 shares of our common
stock issued and outstanding.
Percentage | ||||||||
Name (1)(2) | Shares | of Class | ||||||
Current Executive Officers |
||||||||
Edward G. Roth |
1,843,256 | 2.2 | % | |||||
Karen L. Gallagher |
247,416 | * | ||||||
Directors |
||||||||
Alvin R. Albe, Jr. |
457,318 | * | ||||||
Frank M. Bumstead(3) |
326,564 | * | ||||||
P. Anthony Jacobs(4) |
782,838 | * | ||||||
Robert B. Rosene, Jr.(5) |
555,046 | * | ||||||
James R. Seward |
525,571 | * | ||||||
All directors and executive officers as a
group (7 persons) |
4,738,009 | 5.8 | % | |||||
BlackRock, Inc. 40 East 52nd Street New York, NY 10022 |
4,168,844 | 5.1 | % | |||||
Tyson Foods, Inc.
2200 Don Tyson Parkway Springdale, Arkansas 72762-6999 |
8,000,000 | 9.8 | % |
* | Represents ownership of less than 1%. |
|
(1) | Except as otherwise noted and subject to applicable community property laws, each
stockholder has sole voting and investment power with respect to the shares beneficially
owned. The business address of each director and executive officer is c/o Syntroleum
Corporation, 5416 S Yale Ave., Ste 400, Tulsa, OK, 74135. |
|
(2) | Shares of common stock subject to options and warrants that are exercisable within 60
days of the date of this proxy statement are deemed outstanding for purposes of determining
beneficial ownership and computing the percentage ownership of such person, but are not
deemed outstanding for purposes of computing the percentage ownership of any other person.
Accordingly, the following shares of common stock subject to stock options or warrants are
included in the table: Edward G. Roth 150,000; Karen L. Gallagher 65,000; Alvin R.
Albe, Jr. 19,347; Frank M. Bumstead 19,347; P. Anthony Jacobs 8,943; Robert B.
Rosene, Jr. 19,347; James R. Seward 2,242; and all directors and executive officers
as a group 284,226. Restricted Stock awards granted but not vested as of March 11, 2011
are deemed outstanding for purposes of determining beneficial ownership and computing the
percentage ownership of such persons. Accordingly, the following restricted shares of
common stock subject to vesting based on milestone achievements by the Company are included
in the table: Edward G. Roth 900,000.
Under the Company 401K Plan, the Company matches employee contributions with shares of
common stock. Shares of common stock held by individuals in their 401K Plan are: Edward G.
Roth 31,372 and Karen L. Gallagher 6,416. |
(3) | Includes 13,847 shares of common stock held by Mr. Bumsteads wife, as to which he
disclaims beneficial ownership. |
(4) | Includes 125,000 shares of common stock held by Mr. Jacobs wife, as to which he
disclaims beneficial ownership, and 648,895 shares held by the P. Anthony Jacobs Trust. |
(5) | Includes 10,200 shares of common stock owned by trusts the beneficiaries of which are
Mr. Rosenes children, as to which Mr. Rosene disclaims beneficial ownership.
|
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Item 13. | Certain Relationships and Related Transactions, and Director Independence |
Affirmative Determinations Regarding Director Independence and Other Matters
Our board of directors has determined that each of the following directors is an independent
director as such term is defined in Rule 5605(a)(2) of the Nasdaq Stock Market (Nasdaq) Listing
Rules: Alvin R. Albe, Jr., Frank M. Bumstead, P. Anthony Jacobs, Robert B. Rosene, Jr. and James
R. Seward.
These five directors are each referred to individually as an independent director and
collectively as the independent directors.
The board of directors has also determined that each member of the two committees of the board
meets the independence requirements applicable to those committees prescribed by Nasdaq, the
Securities and Exchange Commission (SEC) and the Internal Revenue Service.
The Nominating and Compensation Committee reviewed the applicable legal standards for board
member and board committee independence. On the basis of this review, the Nominating and
Compensation Committee disclosed no change to the full board of directors and the board made its
independent director determinations based upon the Nominating and Compensation Committees
disclosure and each directors review of the information made available to the Nominating and
Compensation Committee.
Certain Relationships and Related Person Transactions and Code of Ethics
We have a written Code of Ethics and Conduct pursuant to which we evaluate all transactions
required to be reported under Item 404 of Regulation S-K promulgated under the Securities Act and
the Exchange Act. The Code of Ethics is accessible on our website, www.syntroleum.com. This
policy provides for the transaction to be brought to the attention of the CEO, PFO or Audit
Committee for approval. If approval is obtained, our practice is to take the matter to our board
of directors and, in certain circumstances involving equity transactions, to our stockholders.
Tyson Foods, a greater than 9% shareholder, is our partner in the Dynamic Fuels venture which
is discussed at length in our SEC filings. We provide technical engineering, licensing and other
services to Dynamic Fuels and Tyson will provide feedstock.
Item 14. | Principal Accountant Fees and Services |
Independent Registered Public Accounting Firms Fees
HoganTaylor LLP billed us fees in fiscal year 2010 and 2009 as set forth in the table below
for (i) the audit of our annual financial statements, the audit of effectiveness of internal
controls over financial reporting, the reviews of our quarterly financial statements and services
related to certain SEC registration statements, (ii) assurance and related services that are
reasonably related to the performance of the audit or review of financial statements not included
in (i), (iii) professional services relating to tax compliance and preparation, tax advice and tax
planning, and (iv) all other services rendered.
2010 | 2009 | |||||||
Audit Fees |
$ | 140,000 | $ | 137,000 | ||||
Audit-Related Fees* |
22,500 | 25,865 | ||||||
Tax Fees |
15,000 | 10,400 | ||||||
Total |
$ | 177,500 | $ | 173,265 |
* | Represents fees for professional services rendered for review of filings in 2010 and 2009. |
The Audit Committee has considered whether the provision of services rendered in 2010, other
than the audit of our financial statements, the 2010 audit of effectiveness of internal controls
over financial reporting, and the reviews of our quarterly financial statements, was compatible
with maintaining the independence of HoganTaylor LLP and determined that the provision of such
services was compatible with maintaining such independence.
The Audit Committee is responsible for appointing, setting compensation for and overseeing the
work of the independent auditor. The Audit Committees amended and restated charter allows the
Audit Committee to delegate to subcommittees consisting of one or more members the authority to
grant pre-approvals of audit and permitted non-audit services between Audit Committee meetings,
provided that the subcommittee reports any pre-approval decisions to the full Audit Committee at
the committees next scheduled meeting. The Audit Committee has adopted policies and procedures
for pre-approving all audit and non-audit services performed by the independent registered public
accounting firm. The policy requires advance approval by the Audit Committee of all audit and
non-audit work. Unless the specific service has been previously pre-approved with respect to the
12-month period following the advance approval, the Audit Committee must approve a service before
the independent registered public accounting firm is engaged to perform the service. The Audit
Committee has given advance approval for specified audit, audit-related and tax services for 2011.
Requests for services that have received this pre-approval are subject to specified fee or budget
restrictions as well as internal management controls. All of the 2010 audit and non-audit services
described above were pre-approved by the Audit Committee in accordance with its charter, its
policies and procedures, and pursuant to applicable rules of the SEC.
38
Table of Contents
PART IV
Item 15. | Exhibits and Financial Statement Schedules |
(a)(1) Financial Statements
Consolidated Financial Statements for the Three Years Ended December 31, 2010:
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.
(incorporated by reference to Exhibit 3.3.2 to the Companys Annual Report on form 10-K for the year ended December 31, 2009 filed with the
Securities & Exchange Commission on February 26, 2010 (File No. 001-34490)). |
||
*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 (incorporated by reference to Exhibit 4.1.1 to the Companys Annual Report on form 10-K for the
year ended December 31, 2009 filed with the Securities & Exchange Commission on February 26, 2010 (File No. 001-34490)). |
||
*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). |
39
Table of Contents
Exhibit | |||
No. | Description of Exhibit | ||
*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)). |
||
*4.9 | Common Stock Purchase Warrant Dated April 20, 2010 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 April 20, 2010 (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 | 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)). |
||
+ *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). |
40
Table of Contents
Exhibit | |||
No. | Description of Exhibit | ||
*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)). |
||
+*10.23 | 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). |
||
+*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)). |
||
+*10.40 | 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)). |
41
Table of Contents
Exhibit | |||
No. | Description of Exhibit | ||
+*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)). |
||
+*10.50 | 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)). |
||
+*10.52 | 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). |
||
*10.60 | 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). |
||
*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). |
||
*10.66 | 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). |
||
*10.69 | 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)). |
||
*10.76 | 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). |
42
Table of Contents
Exhibit | |||
No. | Description of Exhibit | ||
*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). |
||
*10.89 | Common Stock Purchase Agreement dated July 14, 2010, between the Company and Energy Opportunity, 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 July 14, 2010). (File No. 0-34490). |
||
*99.1 | Dynamic Fuels, LLC Audited Financial Statements, year ended September 30, 2008.
(incorporated by reference to Exhibit 99.1 to the Companys Annual Report on Form 10-K for the year ended December 31, 2008
filed with the Securities & Exchange Commission on March 2, 2009 File No. 0-21911)). |
||
*99.2 | Dynamic Fuels, LLC Audited Financial Statements, year ended September 30, 2009.
(incorporated by reference to Exhibit 99.2 to the Companys Annual Report on Form 10-K for the year ended December 31, 2009
filed with the Securities & Exchange Commission on
February 26, 2010 File No. 001-34490)). |
||
**99.3 | Dynamic Fuels, LLC Audited Financial Statements, year ended September 30, 2010. |
||
**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 THERE TO 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. |
43
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: March 15, 2011 | 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) | March 15, 2011 | ||
/s/ Karen L. Gallagher
|
Senior Vice President of Finance and Principal Financial Officer (Principal Financial Officer) | March 15, 2011 | ||
/s/ Robert B. Rosene, Jr.
|
Chairman of the Board | March 15, 2011 | ||
/s/ Alvin R. Albe, Jr.
|
Director | March 15, 2011 | ||
/s/ Frank M. Bumstead
|
Director | March 15, 2011 | ||
/s/ P. Anthony Jacobs
|
Director | March 15, 2011 | ||
/s/ James R. Seward
|
Director | March 15, 2011 |
44
Table of Contents
Index to Exhibits
99.3 | Dynamic Fuels, LLC Audited Financial Statements, year ended September 30, 2010 |
|||
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 |
45
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Syntroleum Corporation
Syntroleum Corporation
We have audited the accompanying consolidated balance sheets of Syntroleum Corporation (a Delaware
corporation) and subsidiaries as of December 31, 2010 and 2009, 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, 2010. 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, 2010 and 2009, and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 2010 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, 2010, based on criteria established in Internal ControlIntegrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated
March 15, 2011 expressed an unqualified opinion on the effectiveness of Syntroleum Corporations
internal control over financial reporting.
/s/ HOGANTAYLOR LLP
Tulsa, Oklahoma
March 15, 2011
March 15, 2011
F-1
Table of Contents
SYNTROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
December 31, | December 31, | |||||||
2010 | 2009 | |||||||
ASSETS |
||||||||
CURRENT ASSETS: |
||||||||
Cash and cash equivalents |
$ | 12,513 | $ | 25,012 | ||||
Restricted cash |
484 | 449 | ||||||
Accounts receivable |
556 | 3,165 | ||||||
Accounts receivable from Dynamic Fuels, LLC |
729 | 150 | ||||||
Other current assets |
361 | 378 | ||||||
Total current assets |
14,643 | 29,154 | ||||||
PROPERTY AND EQUIPMENT at cost, net |
97 | 156 | ||||||
INVESTMENT IN AND LOANS TO DYNAMIC FUELS, LLC |
43,523 | 27,900 | ||||||
OTHER ASSETS, net |
1,133 | 1,651 | ||||||
$ | 59,396 | $ | 58,861 | |||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
CURRENT LIABILITIES: |
||||||||
Accounts payable |
$ | 1,090 | $ | 361 | ||||
Accrued employee costs |
119 | 339 | ||||||
Deposits |
484 | 449 | ||||||
Income tax payable |
| 281 | ||||||
Current liabilities of discontinued operations |
| 417 | ||||||
Total current liabilities |
1,693 | 1,847 | ||||||
NONCURRENT LIABILITIES OF DISCONTINUED OPERATIONS |
603 | 603 | ||||||
DEFERRED REVENUE |
24,300 | 25,668 | ||||||
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, 81,683 and
76,014 shares issued and outstanding at December 31, 2010 and 2009,
respectively |
817 | 760 | ||||||
Additional paid-in capital |
374,397 | 362,861 | ||||||
Accumulated deficit |
(342,414 | ) | (332,878 | ) | ||||
Total stockholders equity |
32,800 | 30,743 | ||||||
$ | 59,396 | $ | 58,861 | |||||
The accompanying notes are an integral part of these consolidated financial statements.
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SYNTROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
For the Year Ended December 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
REVENUES: |
||||||||||||
Technology |
$ | 3,600 | $ | 22,503 | $ | | ||||||
Technical services |
2,805 | 1,940 | 576 | |||||||||
Technical services from Dynamic Fuels, LLC |
2,005 | 2,767 | 2,592 | |||||||||
Other |
| 222 | 1,722 | |||||||||
Total revenues |
8,410 | 27,432 | 4,890 | |||||||||
COSTS AND EXPENSES: |
||||||||||||
Engineering |
2,871 | 3,416 | 3,803 | |||||||||
Depreciation and amortization |
217 | 339 | 620 | |||||||||
General, administrative and other (including
non-cash
equity compensation of $1,719, $4,180 and
$2,418
for the years ended December 31, 2010, 2009 and
2008, respectively.) |
7,574 | 11,208 | 8,848 | |||||||||
OPERATING INCOME (LOSS) |
(2,252 | ) | 12,469 | (8,381 | ) | |||||||
INTEREST INCOME |
31 | 96 | 542 | |||||||||
OTHER INCOME |
64 | 70 | 25 | |||||||||
LOSS IN EQUITY OF DYNAMIC FUELS, LLC |
(5,628 | ) | (4,158 | ) | (424 | ) | ||||||
FOREIGN CURRENCY EXCHANGE |
(1,848 | ) | (3,036 | ) | 2,790 | |||||||
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES |
(9,633 | ) | 5,441 | (5,448 | ) | |||||||
INCOME TAXES |
| (281 | ) | | ||||||||
INCOME (LOSS) FROM CONTINUING OPERATIONS |
(9,633 | ) | 5,160 | (5,448 | ) | |||||||
INCOME (LOSS) FROM DISCONTINUED OPERATIONS |
97 | (122 | ) | 1,310 | ||||||||
NET INCOME (LOSS) |
$ | (9,536 | ) | $ | 5,038 | $ | (4,138 | ) | ||||
BASIC AND DILUTED NET INCOME (LOSS) PER SHARE: |
||||||||||||
Income (loss) from continuing operations |
$ | (0.12 | ) | $ | 0.07 | $ | (0.09 | ) | ||||
Income (loss) from discontinued operations |
0.00 | 0.00 | 0.02 | |||||||||
Net income (loss) |
$ | (0.12 | ) | $ | 0.07 | $ | (0.07 | ) | ||||
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: |
||||||||||||
Basic |
77,608 | 70,355 | 62,725 | |||||||||
Diluted |
77,608 | 73,018 | 62,725 | |||||||||
The accompanying notes are an integral part of these consolidated financial 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, 2008 |
62,253 | $ | 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 | ||||||||||
Stock options exercised |
351 | 4 | 228 | | 232 | |||||||||||||||
Issuance of shares and warrants under
common stock purchase agreement |
5,084 | 51 | 9,594 | | 9,645 | |||||||||||||||
Vesting of awards granted |
38 | | 1,230 | | 1,230 | |||||||||||||||
Stock-based bonuses and match to 401(k) |
196 | 2 | 484 | | 486 | |||||||||||||||
Net loss |
| | | (9,536 | ) | (9,536 | ) | |||||||||||||
Balance, December 31, 2010 |
81,683 | $ | 817 | $ | 374,397 | $ | (342,414 | ) | $ | 32,800 | ||||||||||
The accompanying notes are an integral part of these consolidated statements.
F-4
Table of Contents
SYNTROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the Year Ended December 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||||||
Net income (loss) |
$ | (9,536 | ) | $ | 5,038 | $ | (4,138 | ) | ||||
Income (loss) from discontinued operations |
97 | (122 | ) | 1,310 | ||||||||
Income (loss) from continuing operations |
(9,633 | ) | 5,160 | (5,448 | ) | |||||||
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities: |
||||||||||||
Depreciation and amortization |
217 | 339 | 620 | |||||||||
Abandoned patent write-off |
466 | | | |||||||||
Foreign currency exchange |
1,848 | 3,036 | (2,790 | ) | ||||||||
Non-cash compensation expense |
1,719 | 4,180 | 2,418 | |||||||||
Loss on sale of assets |
| 84 | | |||||||||
Non-cash loss in equity method investee |
5,628 | 4,158 | 424 | |||||||||
Changes in assets and liabilities: |
||||||||||||
Accounts receivable |
2,609 | (2,854 | ) | (142 | ) | |||||||
Accounts receivable from Dynamic Fuels, LLC |
(579 | ) | 56 | 45 | ||||||||
Other assets |
(79 | ) | (230 | ) | (14 | ) | ||||||
Accounts payable |
729 | (301 | ) | 37 | ||||||||
Accrued liabilities and other |
(501 | ) | (238 | ) | (296 | ) | ||||||
Deferred revenue |
(3,216 | ) | (112 | ) | 2,825 | |||||||
Net cash provided by (used in) continuing operations |
(792 | ) | 13,278 | (2,321 | ) | |||||||
Net cash used in discontinued operations |
(320 | ) | (632 | ) | (451 | ) | ||||||
Net cash provided by (used in) operating activities |
(1,112 | ) | 12,646 | (2,772 | ) | |||||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||||||
Purchase of property and equipment |
(14 | ) | (723 | ) | (202 | ) | ||||||
Proceeds from disposal of property and equipment |
| 505 | | |||||||||
Investment in and loans to Dynamic Fuels |
(21,250 | ) | (6,000 | ) | (14,000 | ) | ||||||
Net cash (used in) continuing operations |
(21,264 | ) | (6,218 | ) | (14,202 | ) | ||||||
Net cash provided by discontinued operations |
| | 8,670 | |||||||||
Net cash used in investing activities |
(21,264 | ) | (6,218 | ) | (5,532 | ) | ||||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||||||
Proceeds from sale of common stock, warrants and option exercises |
232 | 428 | | |||||||||
Proceeds from common stock purchase agreement |
9,645 | 9,000 | | |||||||||
Repurchase of stock option awards |
| (945 | ) | | ||||||||
Net cash provided by financing activities |
9,877 | 8,483 | | |||||||||
NET CHANGE IN CASH AND CASH EQUIVALENTS |
(12,499 | ) | 14,911 | (8,304 | ) | |||||||
CASH AND CASH EQUIVALENTS, beginning of year |
25,012 | 10,101 | 18,405 | |||||||||
CASH AND CASH EQUIVALENTS, end of year |
$ | 12,513 | $ | 25,012 | $ | 10,101 | ||||||
NON-CASH INVESTING AND FINANCING ACTIVITIES |
||||||||||||
Issuance of Common stock warrants for Dynamic Fuels Credit Enhancement |
$ | | $ | 8,640 | $ | | ||||||
SUPPLEMENTAL DISCLOSURE |
||||||||||||
Income taxes paid |
$ | 281 | $ | | $ | | ||||||
The accompanying notes are an integral part of these consolidated financial 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 is the commercialization of our
technologies to produce synthetic liquid hydrocarbons. 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, such as diesel, jet fuel
(HRJ subject to certification), kerosene, naphtha, propane and other renewable chemical products.
Our Bio-Synfining Technology is a renewable fuels application of our Synfining® Technology.
This technology is applied commercially via our Dynamic Fuels, LLC joint venture with Tyson Foods,
Inc. The technology processes renewable feedstocks such as triglycerides and/or fatty acids to
make renewable synthetic products.
Consolidation
The consolidated financial statements include the accounts of Syntroleum Corporation and our
majority-owned subsidiaries. All significant inter-company accounts and transactions have been
eliminated. Companies in which we own a 20 percent to 50 percent interest, but 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, LLC (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 Dynamic Fuels results of operations activities is reflected in the Consolidated
Statements of Operations and the subsidiarys summarized financial information is reported in Note
4, Investment in and Loans to Dynamic. The carrying value of our investment in Dynamic Fuels is
reflected in Investment in and Loans to 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 as 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 and
2008. 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.
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.
F-6
Table of Contents
We expect to recognize revenue for royalty fees associated with our licensees plants or our
own equity owned plants. The royalties, if applicable, 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. The Company
places its temporary cash investments with high credit quality financial institutions. At times
such investments may be in excess of the Federal Deposit Insurance Corporation (FDIC) insurance
limit.
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, 2010 and 2009.
Accounts Receivable
The majority of our accounts receivable is due from 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, 2010 and 2009 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. 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, | |||||||
2010 | 2009 | |||||||
Furniture and office equipment |
$ | 372 | $ | 914 | ||||
Leasehold improvements |
5 | 37 | ||||||
377 | 951 | |||||||
Less accumulated depreciation |
(280 | ) | (795 | ) | ||||
$ | 97 | $ | 156 | |||||
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.
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 was fully dismantled in 2010. We reduced our liability with expenditures
incurred with the dismantlement and 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, 2010 and 2009 (in thousands).
F-7
Table of Contents
December 31, 2010 | December 31, 2009 | |||||||
Beginning Balance |
$ | 1,020 | $ | 1,661 | ||||
Liabilities Settled |
(417 | ) | (641 | ) | ||||
Accretion Expense |
| | ||||||
Ending Balance |
$ | 603 | $ | 1,020 | ||||
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, 2010, 2009 and 2008 was $147,000, $175,000 and $159,000, 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, 2011 is estimated to be
$142,000 per year through 2019. Patent costs consist of the following (in thousands):
December 31, | December 31, | |||||||
2010 | 2009 | |||||||
Patents |
$ | 2,057 | $ | 2,704 | ||||
Less accumulated amortization |
(924 | ) | (1,053 | ) | ||||
$ | 1,133 | $ | 1,651 | |||||
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.
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, 2010 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, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
(in thousands) | ||||||||||||
Basic weighted-average shares |
77,608 | 70,355 | 62,725 | |||||||||
Effect of dilutive securities: |
||||||||||||
Unvested restricted stock units |
| 44 | | |||||||||
Stock options |
| 2,619 | | |||||||||
Dilutive weighted-average shares |
77,608 | 73,018 | 62,725 | |||||||||
F-8
Table of Contents
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 | December | December | ||||||||||
31, 2010 | 31, 2009 | 31, 2008 | ||||||||||
Options and warrants (in thousands) |
18,306 | 12,600 | 24,110 | |||||||||
Restricted stock excluded |
| | 80 | |||||||||
Weighted-average exercise prices
of options and warrants |
$ | 2.60 | $ | 4.11 | $ | 2.22 | ||||||
Weighted average market price |
$ | 2.02 | $ | 1.96 | $ | 1.17 |
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 $136,000, $141,000 and $143,000 from issuing 74,960, 90,529 and
163,576 shares of Syntroleum Stock for the years ended December 31, 2010, 2009 and 2008,
respectively, of which 22,044 shares were issued in January 2011.
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.
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 October of 2009 the FASB issued guidance that addresses the accounting for
multiple-deliverable arrangements (complex contract or related contracts that require the separate
delivery of multiple goods and/or services) by expanding the circumstances in which vendors may
account for deliverables separately rather than as a combined unit. This update clarifies the
guidance on how to separate such deliverables and how to measure and allocate consideration for
these arrangements to one or more units of accounting. The existing guidance requires a vendor to
use vendor-specific objective evidence or third-party evidence of selling price to separate
deliverables in multiple-deliverable arrangements. In addition to retaining this guidance, in
situations where vendor-specific objective evidence or third-party evidence is not available, the
guidance will require a vendor to allocate arrangement consideration to each deliverable in
multiple-deliverable arrangements based on each deliverables relative selling price. This update
also expands disclosure requirements for multiple deliverable arrangements, can be applied either
prospectively or retrospectively, and is effective for fiscal years beginning on or after June 15,
2010, with early adoption permitted. We do not expect the adoption of this guidance to have a
material impact on our financial position and results of operations.
In July of 2009 the FASB issued guidance that addresses additional required disclosures about
recurring and nonrecurring fair value measurements under Topic 820, Fair Value Measurements. The
ASU requires certain new disclosures and clarifies two existing disclosure requirements. The new
disclosures and clarifications of existing disclosures are effective for interim and annual
reporting periods beginning after December 15, 2009, except for the disclosures about purchases,
sales, issuances, and settlements in the roll forward activity in Level 3 fair value measurements.
Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim
periods within those fiscal years. We do not expect the adoption of this guidance to have a
material impact on our financial positions and results of operations.
F-9
Table of Contents
In April of 2010 the FASB issued guidance on defining a milestone under Topic 605 and
determining when it may be appropriate to apply the milestone method of revenue recognition for
research and development transactions. Consideration that is contingent on achievement of a
milestone in its entirety may be recognized as revenue in the period in which the milestone is
achieved only if the milestone is judged to meet certain criteria to be considered substantive.
Milestones should be considered substantive in their entirety and may not be bifurcated. This
update is effective on a prospective basis for milestones achieved in
fiscal years beginning on or after June 15, 2010, with early adoption permitted. We do not
expect the adoption of this guidance to have a material impact on our financial position and
results of operations.
2. OPERATIONS AND LIQUIDITY
In the past we have sustained recurring losses and negative cash flows from operations. As of
December 31, 2010, we had approximately $12.5 million of cash and cash equivalents and $1.3 million
of accounts receivable available to fund operations and investing activities. We review cash flow
forecasts and budgets periodically. Upon successful full rate operations of our Dynamic Fuels
plant and based on working capital and capital expenditures requirements for the plant, we expect
to receive partner distributions from the entity in 2011.
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. In the fourth
quarter of 2006, we exited our international oil and gas activities due to capital restraints. We
sold all the stock of various subsidiaries 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. 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 year ended December 31, 2008 of $1,500,000 which is reflected in Income (loss) on discontinued
operations in the Consolidated Statement of Operations for the year ended December 31, 2008.
The entity incurred additional costs of $80,000 in legal fees and closing costs. These costs are
netted against the total gain in the Consolidated Statement of Operations. As of December 31,
2010 and 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 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 year ended December 31, 2008 in accordance with FASB ASC Topic 360, Property,
Plant and Equipment. As of December 31, 2010 and 2009 there were no assets associated with the
activities and all obligations associated with the international oil and gas operations have been
fulfilled.
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, dismantlement of 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 income or
(loss) of research and development activities totaled $97,000, ($122,000) and ($326,000) for the
years ended December 31, 2010, 2009 and 2008, respectively. The gain in 2010 resulted from lower
actual dismantlement costs than estimated for the asset retirement obligation associated with the
Catoosa Demonstration Facility.
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A summary of the research and development segment recorded in discontinued operations is as
follows for the three-year period ended December 31, 2010 (in thousands):
December 31, | ||||||||||||
RESEARCH AND DEVELOPMENT | 2010 | 2009 | 2008 | |||||||||
Costs and Expenses: |
||||||||||||
Research and Development |
97 | (122 | ) | (171 | ) | |||||||
Depreciation, depletion amortization and impairment |
| | (155 | ) | ||||||||
Operating Loss |
$ | 97 | $ | (122 | ) | $ | (326 | ) | ||||
Other Income |
| | 17 | |||||||||
Income (Loss) before income taxes |
97 | (122 | ) | (309 | ) | |||||||
Income (Loss) from Discontinued Operations |
$ | 97 | $ | (122 | ) | $ | (309 | ) | ||||
4. INVESTMENT IN AND LOANS TO 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. 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 and Loans to Dynamic Fuels LLC in our Consolidated Balance Sheets. As of December
31, 2010, Syntroleums total estimate of maximum exposure to loss as a result of its relationships
with this entity was approximately $43,523,000, which represents our equity investment in and loans
to this entity.
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 $36.25 million in capital contributions by December 31, 2010. Each
member contributed an additional $5.0 million in the form of a working capital loan to the entity.
The $5.0 will be returned to each partner upon Dynamic Fuels generating sufficient working capital
from fuel sales. We may need to fund future short-term working capital needs of Dynamic Fuels on
an as needed basis.
Dynamic Fuels began commercial operations in November of 2010. The plant has been in start-up
mode since commercial operations began in November of 2010. As of February 28, 2011, the plant has
produced and sold, 3.1 million gallons of renewable diesel and 0.7 million gallons of renewable
naphtha. The plant also produced 40,000 gallons of renewable jet fuel, which is being tested by
the U.S. military. Full rate capacity for the plant is 5,000 barrels per day. We expect to
achieve full rate capacity on a continuous basis in the second quarter of 2011.
Diesel is quality tested and meets ASTM D975 standards for diesel. The renewable products
have low emissions and nearly no aromatics. Our jet fuel HRJ, meets all petroleum based jet fuel
specifications. We are awaiting certification of HRJ jet fuel for a 50/50 blend for use in
aviation. We expect it to occur in the first half of 2011, thus allowing us to market our jet fuel
production capabilities to interested parties.
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 as
collateral for Dynamic Fuels obligations under the Bonds. Tyson agreed under the terms of the
Warrant Agreement to provide credit support for the entire $100 million Bond issue, see Note 7
Stockholders Equity Tyson. The interest rate for the Bonds is a daily floating interest rate
and may change significantly from this amount. In the fourth quarter of 2008, Dynamic Fuels
entered into an interest rate swap which had the effect of locking in the interest rate at 2.19%
for a period of 5 years with declining swap coverage. This debt funding is in addition to the
equity contributions provided by each member.
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Table of Contents
Dynamic Fuels, LLC (A Development Stage Company) 2010 and 2009 Audited Financials (in
thousands):
September 30, | ||||||||
Balance Sheet | 2010 | 2009 | ||||||
Total Current Assets |
10,074 | 77,014 | ||||||
Property, Plant and Equipment and Other Assets |
147,803 | 77,624 | ||||||
Total Assets |
$ | 157,877 | $ | 154,638 | ||||
Current Liabilities |
$ | 10,328 | $ | 15,967 | ||||
Long-Term Liabilities |
100,035 | 100,016 | ||||||
Total Liabilities |
110,363 | 115,983 | ||||||
Total Members Equity |
47,515 | 38,655 | ||||||
Total Liabilities and Members Equity |
$ | 157,877 | $ | 154,638 | ||||
Period from | ||||||||||||
June 22, 2007, | ||||||||||||
Date of | ||||||||||||
Year Ended | Year Ended | Inception, to | ||||||||||
September 30, | September 30, | September 30, | ||||||||||
Statements of Operations | 2010 | 2009 | 2010 | |||||||||
Costs and Expenses |
$ | (12,042 | ) | $ | (5,260 | ) | $ | (19,085 | ) | |||
Net Income (Loss) |
$ | (11,140 | ) | $ | (8,317 | ) | $ | (20,985 | ) | |||
During 2010, 2009 and 2008, we prepared a PDP for Dynamic Fuels in accordance with the
technical services agreement between us and Dynamic Fuels and provided additional licensor
services. We recognized revenue associated with this work in the amount of $2,005,000, $2,767,000
and $2,592,000 for the years ended December 31, 2010, 2009 and 2008. This revenue is reported in
Technical services revenue from Dynamic Fuels, LLC in the Consolidated Statement of Operations.
We had a receivable from Dynamic of $729,000 and $150,000 as of December 31, 2010 and 2009,
respectively.
5. DEFERRED REVENUE
License fees received for which the criteria for revenue recognition have not been met totaled
$24,300,000 and $22,452,000 at December 31, 2010 and 2009, 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, 2010 and 2009, 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 $15,000,000.
This license has been recorded as deferred revenue of US $15,245,000 and US $13,400,000 as of
December 31, 2010 and 2009, 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, 2010, 2009 and 2008, the foreign currency effect on our deferred revenues was a
change of $(1,848,000), $(3,036,000) and $2,790,000, respectively, as a result of changes in the
exchange rate between the United States and Australian dollars.
6. COMMON STOCK PURCHASE AGREEMENTS
Fletcher International Ltd. We and Fletcher entered into a Securities Purchase Agreement (the
Securities Purchase Agreement) dated October 14, 2009 whereby Fletcher could purchase up to
$12,000,000 of our common stock at a price of approximately $2.6423 per share. With each common
stock purchase, Fletcher also received 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, with an exercise price of $3.30. On October 14, 2009,
December 30, 2009 and April 20, 2010 Fletcher purchased a total of 4,541,497 shares of our common
stock. Warrants were issued with each stock purchase to purchase a total of 5,676,871 shares of
our common stock at an exercise price of $3.3029 per share. The warrants expire between October 14,
2015 and April 20, 2016. The warrants were deemed to have a fair value of approximately $10.2
million at the date of issuance and were recorded as additional paid-in capital. The Company
received net proceeds of approximately $11.6 million, after deducting fees and expenses of the
offering payable by us.
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 July 14, 2010, we entered into a Common Stock Purchase Agreement with Energy Opportunity
Ltd. (Energy) that provides that Energy is committed at our option to purchase up to $10,000,000
of our common stock over the 24-month term of
the agreement. On August 5, 2010 we sold 1,058,201 shares of our common stock under the
Purchase Agreement at a negotiated purchase price of $1.89 per share, based on current market
prices. On December 29, 2010, we sold 2,890,173 shares of our common stock under the Purchase
Agreement at a negotiated purchase price of $1.73 per share, based on current market prices. We
have received $6,900,000 in net proceeds from this Purchase Agreement. An additional $3,000,000
remains under the Purchase Agreement.
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7. 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 as collateral for Dynamic Fuels obligations under the Bonds. Tyson agreed under the terms
of the Warrant Agreement to provide credit support for the entire $100 million Bond issue. 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 and Loans to Dynamic Fuels on our Consolidated Balance Sheets. This additional cost
in our investment results in a difference between our cost and our share of the underlying equity
of Dynamic Fuels. We amortize the basis difference to Earnings or Loss From Dynamic Investment in
our Consolidated Statement of Operations over the life of the Bonds, 25 years.
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.
8. 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 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, 2010, approximately 4,637,846 shares of common stock were available for
grant under our current plan. We are authorized to issue up to approximately 12,941,444 plan
equivalent shares of common stock in relation to stock options or restricted shares outstanding or
available for grant under the plans.
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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, 2009 |
9,384,311 | $ | 2.94 | |||||
Granted at market price |
245,000 | $ | 0.66 | |||||
Exercised |
(351,250 | ) | $ | 0.66 | ||||
Expired or forfeited |
(994,475 | ) | $ | 11.38 | ||||
OUTSTANDING AT DECEMBER 31, 2010 |
8,283,586 | $ | 2.94 | |||||
The following table summarizes information about stock options outstanding at December 31,
2010:
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 |
5,010,631 | $ | 0.66 | 7.53 | 1,352,681 | $ | 0.66 | |||||||||||||
$1.49 $1.55 |
1,010,666 | 1.55 | 1.75 | 1,010,666 | 1.55 | |||||||||||||||
$1.62 $2.89 |
1,140,195 | 2.33 | 3.71 | 1,140,195 | 2.33 | |||||||||||||||
$3.19 $6.88 |
769,277 | 6.32 | 3.50 | 769,277 | 6.32 | |||||||||||||||
$7.10 $10.14 |
240,904 | 9.28 | 4.63 | 240,904 | 9.28 | |||||||||||||||
$10.51 $18.88 |
111,913 | 13.80 | 1.12 | 111,913 | 13.80 | |||||||||||||||
8,283,586 | $ | 1.95 | 4,625,636 | $ | 2.97 | |||||||||||||||
A total of 3,657,950, 4,952,450 and 6,586,701 stock options with a weighted average exercise
price of $0.66, $2.23 and $2.55 were outstanding at December 31, 2010, 2009 and 2008, respectively,
which had not vested.
The fair value of options granted during the years ended December 31, 2010, 2009 and 2008 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, 2010, 2009 and 2008. Estimates of fair value are not intended to predict
actual future events or the value ultimately realized by persons who receive equity awards.
There were no stock options granted for the years ended December 31, 2010 and 2009. During
2010, an award granted in 2008 was reinstated based on an arbitration ruling. The weighted
average grant date fair value of stock options granted during the year ended December 31, 2008 was
approximately $0.49 per stock option (total grant date fair value of $3,265,458). The fair value
of these options was estimated with the following weighted average assumptions:
Year Ended | ||||
December 31, 2008 | ||||
Expected dividend yield |
0 | % | ||
Expected volatility |
90 | % | ||
Risk-free interest rate |
2.02 | % | ||
Expected life |
5.50 yrs. |
Non-cash compensation cost related to stock and stock options and restricted stock recognized
during the years ended December 31, 2010, 2009 and 2008 was $1,719,000, $4,180,000 and $2,418,000,
respectively.
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, 2010, 2009 and 2008 was $476,000, $645,000 and $0, respectively. The total
amount of cash received in 2010, 2009 and 2008 by the Company from the exercise of these options
was $232,000, $347,000, and $0, respectively. As of December 31, 2010 there was $6,323,000 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 4.47 years.
In addition, as of December 31, 2010, unrecognized compensation cost
related to non-vested stock options was $77,000 which will be fully amortized using the
straight-line basis over the vesting period of the options, which is expected to occur in 2011.
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Table of Contents
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, 2010, 2009, and 2008 was $2.59
per share (total grant date fair value of $379,000), $0.84 per share (total grant date fair value
of $253,000) and $0.66 per share (total grant date fair value of $759,000), respectively. As of
December 31, 2010, the aggregrate intrinsic value of restricted stock units that are expected to
vest was approximately $1,854,000. In addition, as of December 31, 2010, unrecognized compensation
cost related to non-vested restricted stock units was $29,000, which is expected to be recognized
in 2011. The total fair value of restricted stock units vested during December 31, 2010, 2009 and
2008 was $1,584,000, $1,274,000 and $390,150, respectively. The following summary reflects
restricted stock unit activity and related information.
Weighted-Average | ||||||||
Grant Date Fair | ||||||||
Shares / Units | Value | |||||||
NONVESTED AT DECEMBER, 31, 2009 |
1,466,500 | $ | 1.12 | |||||
Granted |
146,023 | $ | 2.59 | |||||
Vested or Exercised |
(557,311 | ) | $ | 2.84 | ||||
Expired or forfeited |
| $ | | |||||
NONVESTED AT DECEMBER 31, 2010 |
1,055,212 | $ | 0.41 | |||||
9. INCOME TAXES
We had federal income tax net operating loss (NOL) carry-forwards of approximately $315
million at December 31, 2010. Our NOLs generally begin to expire as follows:
Year | Amount | |||
(in thousands) | ||||
2011 |
| |||
2012 |
| |||
2013 |
| |||
2014 |
| |||
2015 |
| |||
Thereafter |
311,449 |
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 not recorded an income tax provision for the year ended December 31, 2010. 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 year ended December 31, 2008. 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 $3,411,000 ($5,568,000) and $250,000 for the years ended
December 31, 2010, 2009 and 2008, respectively. Deferred taxes arise primarily from NOL
carry-forwards and the recognition of revenues and expenses in different periods for financial and
tax purposes.
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Deferred taxes consist of the following (in thousands):
December 31, | ||||||||
2010 | 2009 | |||||||
Deferred tax assets: |
||||||||
NOL carry-forwards |
$ | 118,320 | $ | 117,765 | ||||
Research and development credit |
8,085 | 8,207 | ||||||
Deferred revenue |
7,227 | 7,259 | ||||||
Investments |
4,111 | 1,951 | ||||||
Stock-based compensation |
3,118 | 3,023 | ||||||
Other |
2,264 | 1,705 | ||||||
143,125 | 139,910 | |||||||
Deferred tax liabilities: |
||||||||
Other |
(431 | ) | (627 | ) | ||||
Net deferred tax asset before valuation allowance |
142,694 | 139,283 | ||||||
Valuation allowance |
(142,694 | ) | (139,283 | ) | ||||
Net deferred tax assets |
$ | | $ | | ||||
Open tax years are December 31, 2007 forward for both federal and state jurisdictions, except
for years in which net operating losses originated and are subsequently utilized.
10. COMMITMENTS AND CONTINGENCIES:
We have entered into various, non-cancelable operating leases for office space, equipment,
land and buildings that expire between 2011 and 2023. Rental expense was $325,000, in 2010,
$308,000 in 2009 and $405,000 in 2008. Total future minimum lease payments under these agreements
as of December 31, 2010 are as follows:
Year | Amount | |||
(in thousands) | ||||
2011 |
$ | 181 | ||
2012 |
98 | |||
2013 |
101 | |||
2014 |
32 | |||
2015 |
9 | |||
Thereafter |
57 | |||
$ | 478 | |||
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. 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, 2010 was 0.30%. In the fourth quarter of 2008, Dynamic Fuels entered into an
interest rate swap of 2.19% for a period of 5 years with declining swap coverage. 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 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 entered into a Bio-Synfining Master License Agreement on June 22, 2007 with Dynamic Fuels,
LLC. Under this license agreement, we at the request of the licensee must execute a Site License
Agreement in favor of licensee for licensees use of our Bio-Synfining Technology. The form of
the Site License Agreement is included in the agreement as Exhibit B. The form of the Site License
Agreement includes process guarantees if the plant fails to pass a performance test as defined in
the Site License Agreement. If the plant fails to meet the Process Guarantee during the
Performance Test and such failure is due in whole or in part to the PDP, then we and Dynamic Fuels
shall mutually agree whether or not remedial measures are reasonably likely to cause the plant to
satisfy the Process Guarantee. The actual cost of the remedial measures will be reimbursed to
licensee through application of any future royalties owed to us, not to exceed $9,800,000. If the
remedial measures are not effective, we shall pay to Dynamic Fuels an additional amount in
liquidated damages in an amount not to exceed $9,800,000. As of the date of this filing the Site
License Agreement has not been executed by Dynamic Fuels and we cannot be certain the document that
will be executed will have this same language and amounts. Dynamic Fuels has not met all
conditions required for the Performance Test to occur in order to pass the Performance Guarantee at
this time, therefore no liability has been recorded at this time.
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,
2010. Expense is not recognized until an employee is severed.
F-16
Table of Contents
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. The arbitration between Syntroleum Corporation and Ziad Ghandours styled Ziad
Ghandour v. Syntroleum Corporation, Case No. 50 166 T 00048 10, pending before the American
Arbitration Association, was settled on January 17, 2011, and the arbitration was dismissed with
prejudice on January 18, 2011. The parties exchanged mutual releases. The settlement has been
recorded in our year ended December 31, 2010 Statement of Operations.
11. SIGNIFICANT CUSTOMERS
The Companys revenue is derived from significant customers. Three customers made up 93%, 96%
and 84% of revenues in 2010, 2009 and 2008, respectively. See Note 4, Investment in and Loans to
Dynamic Fuels and Note 5, Deferred Revenue for further information regarding revenue
transactions with specific customers.
12. FAIR VALUE DISCLOSURES
The Companys short-term financial instruments consist of cash, accounts receivable, 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.
13. 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, 2010, 2009 and 2008. We now operate only one reportable segment.
14. QUARTERLY DATA
(UNAUDITED)
Quarter Ended | ||||||||||||||||
March 31, | June 30, | September 30, | December 31, | |||||||||||||
(in thousands, except per share data) | ||||||||||||||||
2010 |
||||||||||||||||
Revenues |
$ | 4,238 | $ | 1,290 | $ | 1,262 | $ | 1,620 | ||||||||
Operating income (loss) |
1,527 | (1,066 | ) | (1,193 | ) | (1,520 | ) | |||||||||
Net income (loss) from
continuing operations |
425 | (1,207 | ) | (3,859 | ) | (4,992 | ) | |||||||||
Net income (loss) from
discontinued business |
(22 | ) | 182 | (24 | ) | (39 | ) | |||||||||
Net income (loss) |
403 | (1,025 | ) | (3,883 | ) | (5,031 | ) | |||||||||
Basic and diluted EPS: |
||||||||||||||||
Continuing operations |
$ | 0.01 | $ | (0.01 | ) | $ | (0.05 | ) | $ | (0.06 | ) | |||||
Discontinued operations |
$ | 0.00 | $ | 0.00 | $ | 0.00 | $ | 0.00 | ||||||||
Net income (loss) |
$ | 0.01 | $ | (0.01 | ) | $ | (0.05 | ) | $ | (0.06 | ) |
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 operations |
(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 | ) |
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-17