Risks Relating to Our Technology
We might not successfully commercialize our
technology, and commercial-scale plants based on the Syntroleum® Process or
our Technology
may never be successfully constructed or operated.
We do not have significant experience managing the financing, design,
construction or operation of commercial-scale plants, and we
may not be successful in doing so. No commercial-scale plant based on the
Syntroleum® and Synfining® Processes or our Bio-Synfining™ Technology has been constructed to date. A commercial-scale plant based on the Syntroleum®
and Synfining® Processes or our Bio-Synfining™ Technology may never be successfully built
either by us or by our licensees. Success depends on our ability and/or the ability of our
licensees to economically design, construct and operate commercial-scale plants
based on the Syntroleum® and Synfining® Processes
or our Bio-Synfining™ Technology. Successful commercial
construction and operation of a plant based on the Syntroleum®
Process or our Bio-Synfining™ Technology depends on a variety of factors, many of
which are outside our control.
Commercial-scale plants based on the
Syntroleum®
and Synfining® Processes or our Bio-Synfining™ Technology 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®
and Synfining® Processes
or our Bio-Synfining™ Technology
could fail to occur at a commercial plant, including reactions successfully
tested on a laboratory, pilot plant or demonstration plant basis. Results that could cause
commercial-scale plants based on the Syntroleum®
and Synfining® Processes to be unsuccessful include:
·
lower reaction activity than demonstrated
in the pilot plant and demonstration plan operations which would decrease the conversion
of natural gas into synthesis gas and increase the amount of catalyst, and/or number
of reactors required to produce the design synthesis gas rate;
·
lower reaction activity than that demonstrated in laboratory, pilot plant and demonstration
plant operations, which would increase the amount of catalyst or number of reactors
required to convert synthesis gas into liquid hydrocarbons and increase capital
and operating costs;
·
shorter than anticipated catalyst life, which would require more frequent
catalyst regeneration, catalyst purchases, or both, thereby increasing operating
costs;
·
excessive production of gaseous light hydrocarbons from the FT
reaction compared to design conditions, which would lower the anticipated amount
of liquid hydrocarbons produced and would lower revenues and margins from plant
operations;
·
lower reaction activity than that demonstrated
in laboratory, pilot plant and demonstration plant operations, which would increase
the amount of catalyst or number of reactors required to convert FT products into
finished, marketable fuels;
·
inability of the gas turbines or heaters integrated into the Syntroleum®
Process to burn the low-heating-value tail gas produced by the Process,
which would result in the need to incorporate other methods to generate
horsepower for the compression process that may increase capital and
operating costs;
·
inability of third-party gasification and synthesis gas clean-up technology
integrated into the Syntroleum® Process to produce quantities of quality
synthesis gas adequate for economic operation of a CTL or BTL plant; and
·
higher than anticipated capital and operating costs to design, construct and operate
a commercial scale plant.
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 to design, construct and operate
a commercial scale plant.
In addition, these plants could experience mechanical difficulties related or
unrelated to elements of the Syntroleum®
and Synfining® Processes or our Bio-Synfining™ Technology.
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 of FT and renewable fuels
technologies is highly competitive, and other technologies could become more commercially successful than ours. The
Syntroleum®
and Synfining® Processes
is 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 that have developed or are
developing competing GTL, CTL, BTL or renewable fuels technologies, including BP, ConocoPhillips, ExxonMobil,
Sasol (including its participation in a joint venture with Chevron) and Shell.
Each of these companies has significantly more financial and other resources
than we do to spend for research and development of their technologies and for
funding construction and operation of commercial-scale plants. In addition
to using their own GTL, CTL, BTL or renewable fuels technologies in competition with us, these
competitors could also offer to license their technology to others.
Additionally, several smaller companies have developed and are continuing to
develop competing GTL, CTL, BTL or renewable fuels technologies. The DOE has also sponsored a number
of research programs relating to GTL, CTL, BTL and renewable fuels technologies
that could potentially
lower the cost of competitive processes.
As our competitors continue to develop
GTL, CTL, BTL 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, and
competitive pressures may force 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 new technology.
Our ability to protect our intellectual property rights involves complexities
and uncertainties and commercialization of the Syntroleum®
and Synfining® Processes
or our Bio-Synfining™ Technology could give
rise to claims that our technology infringes upon the rights of others.
Our success depends on our ability to protect our intellectual property rights,
which involves complex legal, scientific and factual questions and uncertainties.
We rely on a combination of patents, copyrights, trademarks, trade secrets and
contractual restrictions to protect our proprietary rights. Additional patents
may not be granted, and our existing patents might not provide us with commercial
benefit or might be infringed upon, invalidated or circumvented by others.
In addition, the availability of patents in foreign markets, and the nature
of any protection against competition that may be afforded by those patents, is often difficult to predict and vary significantly from country to country.
We, our licensors, or our licensees may choose not to seek, or may be unable to
obtain, patent protection in a country that could potentially be an important
market for our GTL, CTL, BTL or Bio-Synfining™ Technologies. The confidentiality agreements that are
designed to protect our trade secrets could be breached, and we might not have
adequate remedies for the breach. Additionally, our trade secrets and proprietary
know-how might otherwise become known or be independently discovered by others.
Commercialization of the Syntroleum® and Synfining® Processes or our Bio-Synfining™ Technology 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 the Syntroleum® and Synfining® Processes
or our Bio-Synfining™
Technology 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 a cap of 50 percent of the license
fees we receive, against specified losses relating to, among other things:
·
use of patent rights and technical information relating to the Syntroleum® and Synfining®
Processes or our Bio-Synfining™ Technology;
·
acts or omissions by us in connection with our preparation of Process design packages for plants; and
·
performance guarantees that we may provide.
Industry rejection of our technology would make the construction of plants based on the Syntroleum® and Synfining®
Processes or our Bio-Synfining™ Technology more difficult or impossible and
would adversely affect our ability to receive future license fees, product revenue or other economic
value.
Demand and industry acceptance for our GTL, CTL, BTL or Bio-Synfining™ Technology are subject to
uncertainty. Failure by the industry to accept our technology would make
construction of our plants more difficult or impossible, adversely
affecting our ability to receive future license fees, product
revenue, or other economic value. If any commercial plant based on the Syntroleum® and Synfining® Processes or our Bio-Synfining™ Technology were to fail to achieve success, other industry participants’
perception of the Syntroleum®
and Synfining® Processes or our Bio-Synfining™ Technology could be adversely affected.
Risks Relating to Products of the
Syntroleum® and Synfining® Processes
or Bio-Synfining™ Technology
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, producers of diesel/renewable
diesel blends can claim up to a $1.00 tax credit per gallon. This credit is currently
scheduled to terminate on December 31, 2009, and there can be no assurance that
it will be renewed on similar terms, if at all. Additionally, producers of naphtha
and liquid petroleum gases can claim a separate $0.50 per gallon tax credit. There
can be no assurance of this credit’s 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.
Sufficient markets for the synthetic
products of the
Syntroleum® and Synfining® Processes
or Bio-Synfining™ Technology
or products that utilize these synthetic products, including fuel cells, may never
develop or may take longer to develop than we anticipate.
Sufficient markets may never develop
for the synthetic products of the Syntroleum® and
Synfining® Processes or
Bio-Synfining™ Technology, or may develop more slowly than we anticipate. The development
of sufficient markets for the synthetic products of the
Syntroleum® and Synfining® Processes or Bio-Synfining™ Technology may be
affected by many factors, some of which are out of our control, including:
·
cost competitiveness of the synthetic products
of the
Syntroleum® and Synfining® Processes
or Bio-Synfining™ Technology;
·
consumer reluctance to try a new product;
·
environmental, safety and regulatory requirements; and
·
emergence of more competitive products.
In addition, a new market may fail to develop for products that utilize our
synthetic products. For example, the establishment of a market for the use of
these products as fuel for fuel cells is uncertain, in part because fuel cells
represent an emerging market and we do not know if distributors will want to sell
them or if end-users will want to use them.
If sufficient markets fail to develop or develop more slowly than we anticipate,
we may be unable to recover the losses we will have incurred in the development of
our technology and may never achieve profitability.
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.
We have sustained recurring losses and
negative cash flows from operations. Over the periods presented in the accompanying
financial statements, our activities have been funded through a combination of equity
and convertible debt financings and the sale of certain assets. As of December 31,
2007, we had approximately $18.4 million of cash and cash equivalents available to fund
operations. We review cash flow forecasts and budgets periodically. We believe that
we currently have sufficient cash and financing capabilities to meet our funding
requirements until the end of 2009. However we will need to obtain additional funding
for capital investment related to construction of plants utilizing the
Syntroleum® and Synfining® Processes or Bio-Synfining™ Technology. In addition, we have experienced, and continue
to experience, negative operating margins and negative cash flows from operations.
We expect that we will need to raise
substantial additional capital to accomplish our business plan over the next several
years. In addition, we may wish to selectively pursue equity partnerships in certain
gas or coal monetization projects in order to achieve operating efficiencies. We
expect to seek to obtain additional funding through debt or equity financing in
the capital markets, joint ventures, license agreements and other strategic alliances,
as well as various other financing arrangements. If we obtain additional
funds by issuing equity securities, dilution to stockholders may occur. In
addition, preferred stock could be issued in the future without stockholder
approval, and the terms of our preferred stock could include dividend, liquidation,
conversion, voting and other rights that are more favorable than the rights of the
holders of our common stock. There can be no assurance as to the availability or terms upon which such
financing and capital might be available.
Our agreement with Tyson concerning
Dynamic 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.
If adequate funds are not available,
we may be required to reduce, delay or eliminate expenditures for our plant development and other activities,
or seek to enter
into a business combination transaction with or sell assets to another company.
We could also be forced to license to third parties the rights to commercialize
additional products or technologies that we would otherwise seek to develop
ourselves. The transactions outlined above may not be available to us
when needed or on terms
acceptable or favorable to us.
We need to remain listed on the NASDAQ stock market to be able to access adequate
funding from time to time. We face
de-listing issues that would impair the liquidity of our stock and our availability
to access the capital markets.
On January 25, 2008 we received
from The NASDAQ Stock
Mark
et a letter indicating that we were not in compliance with the market value minimum
requirement for its common stock as set forth in
Mark
etplace Rule 4450(b)(1)(A). We were provided 30
calendar days, or until February 25, 2008, to regain compliance. We were unable
to meet this requirement and have requested a hearing to appeal the delisting determination
to a Listing Qualifications Panel. Pending this decision, we may apply to transfer
our common stock to the NASDAQ Capital
Mark
et if it satisfies the requirements for continued listing.
We also received a NASDAQ Staff Deficiency Letter on February 1, 2008, indicating
our common stock had closed below the minimum $1.00 per share requirement for continued
inclusion under
Mark
etplace Rule 4450(a)(5). We are provided 180 calendar days, or until July 30, 2008,
to regain compliance. During this 180-day
period, our shares will continue to trade on The NASDAQ Stock
Mark
et assuming our stock is not de-listed for failure to comply with the market value
minimum requirement described above. The NASDAQ Stock
Mark
et has indicated that if at any time before July 30, 2008, the bid price of our
common stock closes at $1.00 per share or more for a minimum of 10 consecutive business
days, the Staff will determine if we have achieved compliance with the rule. We can make no assurance that we will
be able to remain listed on the NASDAQ Stock
Mark
et.
Construction of plants based
on the
Syntroleum® and Synfining® Processes
or Bio-Synfining™ Technology will be
subject to risks of delay and cost overruns.
The construction of plants based
on the Syntroleum® and Synfining® Processes or Bio-Synfining™ Technology will
be subject to the risks of delay or cost overruns resulting from numerous
factors, including the following:
·
shortages of equipment, materials or skilled labor;
·
unscheduled delays in the delivery of ordered materials and equipment;
·
engineering problems, including those relating to the commissioning of
newly designed equipment;
·
work stoppages;
·
weather interference;
·
unanticipated cost increases; and
·
difficulty in obtaining necessary permits or approvals.
We have a capital commitment
to our joint venture, Dynamic, that requires us to fund our portion of the capital
obligation for the plant. This amount
is estimated to be $75 million.
We together with our partner, Tyson,
must demonstrate in 2008 that we each have the financial resources to complete the
first plant, which includes the capital budget for construction and initial operations,
estimated to equal $150,000,000 in total.
If either party elects not to proceed with the construction of the first plant,
then their interest reverts to the other party, who is then free to build the plant.
If a member fails to make a capital contribution, it is in default, and its interest
is diluted by $1.50 per $1.00 not contributed. The other member(s) can make a loan
to the defaulting member at a rate of LIBOR +10% and there is a 40 day cure period.
The defaulting member can make a full or partial loan repayment and a pro rata portion
of lost interest will be restored. If the loan is not repaid, it will be converted
into ownership interest for the member making the loan, diluting the defaulting
member at the same rate of $1.00 per $1.00 of the loan.
We can not make assurances that will be able to secure financial resources
in the time frame allowed by our agreement with Tyson.
We have incurred losses and anticipate continued losses.
As of December 31, 2007, we had an accumulated deficit of $339.5 million. Although we generated net income for 2007,
we have
not yet achieved profitability from continuing operations and we expect to continue incurring net losses
until we recognize sufficient revenues from licensing activities, plants utilizing the Syntroleum® and
Synfining® Processes or
Bio-Synfining™Technology or other sources. Because we do not have an operating history upon which
an evaluation of our prospects can be based, our prospects must be considered in
light of the risks, expenses and difficulties frequently encountered by small
companies seeking to develop new and rapidly evolving technologies. To address
these risks we must, among other things, continue to attract investment capital,
respond to competitive factors, continue to attract, retain and motivate qualified
personnel and commercialize and continue to upgrade the Syntroleum®
and Synfining® Processes
and Bio-Synfining™ technologies.
We may not be successful in addressing these risks, and we may not achieve or
sustain profitability.
Our anticipated expense levels are based in part on our expectations as to future
operating activities and not on historical financial data. We plan to continue
funding project development activities. Capital
expenditures will depend on progress we make in developing various projects on
which we are currently working. Increased revenues or cash flows may not result
from these expenses.
If prices for crude oil, natural gas,
coal, vegetable oils and fats and other commodities are unfavorable, plants based
on the
Syntroleum® and Synfining® Processes
or Bio-Synfining™ Technology may not be economical.
Because the synthetic crude oil,
liquid fuels and specialty products that plants utilizing the
Syntroleum® and Synfining® Processes
or Bio-Synfining™ Technology are expected to produce will compete in markets
with oil and refined petroleum products, and because natural gas, coal, biomass,
fats or vegetable oils will be used as the feedstock for these plants, an increase
in feedstock prices relative to prices for oil or refined products, or a decrease
in prices for oil or refined products relative to feedstock prices, could adversely affect the operating
results of these plants.
Higher than anticipated costs for the catalysts and
other materials used in these plants could also adversely affect operating
results. Prices for oil, natural gas, coal, biomass, fats, greases, vegetable
oils and refined products are subject to wide fluctuation in response to
relatively minor changes in the supply and demand, market
uncertainty and a variety of additional factors that are beyond our control. Factors that could cause changes in the prices
and availability of oil, natural gas, coal, biomass, fats, vegetable oils and refined
products include:
·
level of consumer product demand;
·
weather conditions;
·
domestic and foreign government regulation;