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;

·         actions of the Organization of Petroleum Exporting Countries;

·         political conditions in countries producing feedstocks for fuels plants;

·         supply of crude oil, natural gas, coal, biomass fats, greases and vegetable oils;

·         location of GTL plants relative to natural gas reserves and pipelines;

·         location of CTL plants relative to coal reserves and transportation systems;

·         location of BTL plants relative to biomass reserves and transportation systems;

·         capacities of pipelines;

·         fluctuations in seasonal demand;

·         crop yields;

·         farmer planting decisions;

·         output and proximity of crush facilities that convert the crops to oils;

·         alternative uses for fats;

·         number of animals slaughtered and rendered;

·         price and availability of alternative fuels; and

·         overall economic conditions. 

We cannot predict the future markets and prices for oil, natural gas, coal or other materials used in the Syntroleum® and Synfining® Processes and Bio-Synfining™ Technology or refined products.

We believe that the Syntroleum® and Synfining® Processes can be cost effective for GTL plants with capacities from 17,000 to over 100,000 b/d depending upon the amount of oil, condensate, and LPG that is produced along with the natural gas. We believe that the Syntroleum® and Synfining® Processes can be economic for GTL, BTL and CTL plants given the current world crude oil prices. However, the markets for oil and natural gas have historically been volatile and are likely to continue to be volatile in the future. Although world crude oil prices were approximately $92 per barrel in December 2007, crude oil prices could return to such low levels (i.e., $10 per barrel) in the future.

Adverse effect of seasonal fluctuations could impact operating results.

Operating results could be influenced by seasonal fluctuations in the price of fats, greases, or vegetable oils and the price of crude oil and diesel. The spot prices of vegetable oils tend to rise during the spring planting season in May and June and tend to decrease during the fall harvest in October and November. In addition, we expect our renewable diesel prices to be substantially correlated with the price of crude oil and diesel. The price of crude oil and diesel tends to rise both in summer, due to the summer driving season, and in winter, due to home heating needs. Given the limited history of the industry, the unknown effects of these seasonal fluctuations may affect financial results over time.

Adverse operating conditions could prevent plants based on the Syntroleum® Process or Bio-Synfining™ technology from operating economically.

The economic application of Syntroleum® and Synfining® Processes and Bio-Synfining™ technologies depends on favorable plant operating conditions. Among operating conditions that impact plant economics are the site location, infrastructure, weather conditions, size of equipment, quality of the feedstock, type of plant products and, in the case of GTL plants, whether the natural gas converted by the plant is associated with oil reserves. For example, if a plant were located in an area that requires construction of substantial infrastructure, plant economics would be adversely affected. Additionally, plants that are not designed to produce specialty products or other high margin products, and plants that are not used to convert natural gas that is associated with oil reserves, will be more dependent on favorable natural gas and oil prices than plants designed for those uses.

Plants will depend on the availability of the feedstock used at the plant at economic prices, and alternative uses of the feedstock could be preferred in many circumstances.

Operation of GTL plants will depend on availability of natural gas at economic prices. The market for natural gas is highly competitive in many areas of the world and, in many circumstances, the sale of natural gas for use as a feedstock in a GTL plant will not be the highest value market for the owner of the natural gas. Cryogenic conversion of natural gas to liquefied natural gas may compete with our GTL plants for use of natural gas as feedstocks in many locations. Local commercial, residential and industrial consumer markets, power generation, ammonia, methanol and petrochemicals are also alternative markets for natural gas. Unlike us, many of our competitors also produce or have access to large volumes of natural gas, which may be used in connection with their GTL operations. The availability of natural gas at economic prices for use as a feedstock for GTL plants may also depend on the production costs for the gas and whether natural gas pipelines are located in the areas where these plants are located. New pipelines may be built or existing pipelines may be expanded into areas where GTL plants are built, and this may affect operating margins of these plants as other markets compete for available natural gas.

Construction and operation of CTL plants will depend on the availability of coal or other carbon-based materials such as pet-coke or vacuum resin at economic prices. The cost of coal varies depending upon the energy value per ton of different types of coal and the type of mining operations. The markets for these feedstocks are highly dependent upon the source, location and availability of transportation systems that are generally tied to the power generation sector. Higher coal prices are generally found closer to major population centers where power plants may have a competitive advantage in converting coal to power for transmission in the local region.

Construction and operation of BTL plants will depend on the availability of biomass or other carbon-based materials, such as tree and wood residues, crop residues, switchgrass or corn stovers, at economic prices. The price of biomass feedstock is influenced by market demand for wood and wood by-products, cost to aggregate and transport biomass to a central facility, weather conditions, forestry decisions, factors affecting crop yields, farmer planting decisions and general economic, market and regulatory factors. These factors include government policies and subsidies with respect to agriculture and international trade, and global and local demand and supply. The significance and relative impact of these factors on the price of biomass feedstock is difficult to predict. Any events that tend to negatively impact the supply of biomass feedstock will tend to increase prices and harm our business.

Our Bio-Synfining™ renewable fuels production is dependant on feedstock fats and vegetable oils, which are derived from fats, yellow and brown greases and agricultural commodities such as soybeans. The price of feedstock is influenced by market demand, weather conditions, processing and rendering plant decisions, factors affecting crop yields, farmer planting decisions and general economic, market and regulatory factors. These factors include government policies and subsidies with respect to agriculture and international trade, and global and local demand and supply. A significant reduction in the supply of these commodities could result in increased feedstock fat or vegetable oil costs, which would thus increase our cost to produce renewable fuels. The significance and relative impact of these factors on the price of these feedstock fat or vegetable oil commodities is difficult to predict. Any events that tend to negatively impact the supply of feedstock fat or vegetable oil commodities will tend to increase prices and harm our business.

Rising feedstock prices produce lower profit margins for the production of renewable fuels and, therefore, represent unfavorable market conditions. This is especially true when market conditions do not allow us to pass along increased feedstock costs to our customers. The price of fats and greases and other feedstock commodities has fluctuated significantly in the past and may fluctuate significantly in the future. We cannot assure you that we will be able to offset any increase in the price of feedstock by increasing the price of our product. If we cannot offset increases in the price of feedstock oil, our financial performance may be materially and adversely affected.

Our receipt of license fees depends on substantial efforts by our licensees, and our licensees could choose not to construct a plant based on the Syntroleum® and Synfining® Processes or Bio-Synfining™ Technology or to pursue alternative technologies.

Our licensees will determine whether we issue any plant site licenses to them and, as a result, whether we receive any additional license fees under our license agreements. To date, no licensee of the Syntroleum® and Synfining® Processes or Bio-Synfining™ Technology has exercised its right to obtain a site license. Under most circumstances, a licensee will need to undertake substantial activities and investments before we issue any plant site licenses and receive license fees. These activities may include performing feasibility studies, obtaining regulatory approvals and permits, obtaining preliminary cost estimates and final design and engineering for the plant, obtaining a sufficient dedicated supply of feedstock, obtaining adequate commitments for the purchase of the plant’s products and obtaining financing for construction of the plant. A licensee will control the amount and timing of resources devoted to these activities. Whether licensees are willing to expend the resources necessary to construct plants based on the Syntroleum® and Synfining® Processes or Bio-Synfining™ Technology will depend on a variety of factors outside our control, including the prevailing view of 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 Tyson in the limited liability company agreement relating to Dynamic.

Our success depends on the performance of our executive officers and key personnel, the loss of who would disrupt our business operations.

We depend to a large extent on the performance of our executive officers, including Edward G. Roth, our Chief Executive Officer, Karen L. Gallagher, our Senior Vice President of Finance and Principal Financial Officer. Our ability to implement our business strategy may be constrained and the timing of implementation may be impacted if we are unable to attract and retain sufficient personnel. As such, retention agreements with key employees were put in place in December, 2006.  At December 31, 2007, we had 27 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 ability to identify and enter into commercial arrangements with feedstock suppliers, construction contractors, site owners, manufacturing and engineering companies, and customers will depend on developing and maintaining close working relationships with industry participants.  Our success in this area will also depend on our ability to select and evaluate suitable projects, as well as to consummate transactions in a highly competitive environment.  These relationships may take the form of joint ventures with other private parties or local government bodies, contractual arrangements with other companies, including those that supply feedstock that we will use in our business, or minority investments from third parties. There can be no assurances that we will be able to establish these strategic relationships, or, if established, that the relationships will be maintained. In addition, the dynamics of our relationships with strategic participants may require us to incur expenses or undertake activities we would not otherwise be inclined to incur or undertake in order to fulfill our obligations to these partners or maintain these relationships. If we do not successfully establish or maintain strategic relationships, our business may be negatively affected.

We intend to, and believe our licensees will, utilize third-party component manufacturers in the design and construction of plants based on the Syntroleum® and Synfining® Processes or Bio-Synfining™ Technology. If any third-party manufacturer is unable to acquire raw materials or provide components of plants based on the Syntroleum® and Synfining® Processes or Bio-Synfining™ Technology in commercial quantities in a timely manner and within specifications, we or our licensees could experience material delays or construction or development plans could be canceled while alternative suppliers or manufacturers are identified. We have no experience in manufacturing and do not have any manufacturing facilities. Consequently, we will depend on third parties to manufacture components for plants based on the Syntroleum® and Synfining® Processes or Bio-Synfining™ Technology. We have conducted development activities with third parties for our proprietary catalysts and other equipment, including turbines that may be used in the Syntroleum® Process and Bio-Synfining™ Technology, and other manufacturing companies may not have the same expertise as these companies.

We also intend to utilize third parties to provide engineering services in connection with our efforts to commercialize the Syntroleum® and Synfining® Processes and Bio-Synfining™ Technology. If these engineering firms are unable to provide requisite services or performance guarantees, we or our licensees could experience material delays or construction plans could be canceled while alternative engineering firms are identified and become familiar with the Syntroleum® and Synfining® Processes or Bio-Synfining™ Technology. We have limited experience in providing engineering services and have a limited engineering staff.  Consequently, we will depend on third parties to provide necessary engineering services, and these firms may be asked by licensees or financial participants in plants to provide performance guarantees in connection with the design and construction of plants based on the Syntroleum® and Synfining® Processes or Bio-Synfining™ Technology.

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 of the Syntroleum® and Synfining® Processes or Bio-Synfining™ Technology and receipt and revenue recognition of license fees;

·         oil and gas prices;

·         coal prices;

·         fat and vegetable oil prices;

·         timing and amount of research and development expenditures;

·         demand for synthetic fuels and specialty products;

·         introduction or enhancement of FT and renewable fuels technologies by us and our competitors;

·         availability of insurance;

·         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® Processes or our Bio-Synfining™ Technology 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 Earth’s 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. Moreover, the U.S. Supreme Court only recently held in a case, Massachusetts, et al. v. EPA, that greenhouse gases fall within the federal Clean Air Act’s definition of “air pollutant,” which could result in the regulation of greenhouse gas emissions from stationary sources under certain Clean Air Act 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 world’s 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 and natural gas. In addition, these developments could adversely affect our ability to access capital and to successfully implement projects currently under development.

Following the terrorist attacks on September 11, 2001, insurance underwriters increased insurance premiums charged for many coverages and issued general notices of cancellations to their customers for war risk, terrorism and political risk insurance with respect to a variety of insurance coverages. Insurance premiums could be increased further or coverages may be unavailable in the future.

United States government regulations effectively preclude us from actively engaging in business activities in certain countries. These regulations could be amended to cover countries where we may wish to operate in the future. These developments could subject the operations of our company to increased risks and, depending on their magnitude, could have a material adverse effect on our business.

We may not have enough insurance to cover all of the risks we face.

In accordance with customary industry practices, we maintain insurance coverage against some, but not all, potential losses in order to protect against the risks we face. We do not carry a significant amount of business interruption insurance. We may elect not to carry insurance if our management believes that the cost of available insurance is excessive relative to the risks presented. In addition, we cannot insure fully against pollution and environmental risks. The occurrence of an event not fully covered by insurance, such as a leak, fire or explosion could have a material adverse effect on our financial condition and results of operations.